As filed with the Securities and Exchange Commission on September 5,
1996 Registration No. 333-
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------
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>
========================================================================================
Proposed Maximum
Title of Each Class Aggregate Amount of
of Securities to be Registered Offering Price (1) (2) Registration Fee (3)
<S> <C> <C>
- ------------------------------- ----------------------- --------------------
Class A Common Stock $24,750,000 $8,534.48
========================================================================================
</TABLE>
(1) Includes shares which may be purchased by the Underwriters solely to
cover over-allotments, if any.
(2) Estimated solely for purposes of calculating the registration fee.
(3) Calculated pursuant to Rule 457(o).
-------------------------------------------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933, as amended, or until the
Registration Statement shall become effective on such date as the Securities
and Exchange Commission, acting pursuant to said Section 8(a), may determine.
==============================================================================
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securitiesmay not be sold nor may
offers to buy be accepted prior to the time the registration statement
becomes effective. This Prospectus shall not constitute an offer to sell or
the solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of
any such State.
SUBJECT TO COMPLETION, DATED SEPTEMBER 5, 1996
Shares
U.S. Franchise Systems, Inc.
Class A Common Stock
($ par value)
All of the shares of Class A Common Stock offered hereby are being sold by
the Company. 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 $ and $ . 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 rights of holders of Class A Common Stock
and holders of Class B Common Stock are substantially identical, except that
holders of 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, and
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". Upon
completion of the Offering, certain members of management will control the
voting of all of the outstanding shares of Class B Common Stock, which will
represent approximately % of the combined voting power of the Class A
Common Stock and the Class B Common Stock.
Application has been made for the quotation of the Class A Common Stock 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
Price to Discounts and Proceeds to
Public Commissions (1) Company (2)
<S> <C> <C> <C>
-------- ---------------- -----------
Per Share $ $ $
Total (3) $ $ $
</TABLE>
===============================================================================
(1) See "Underwriting" for indemnification arrangements.
(2) Before deducting estimated expenses of $ payable by the Company.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to an additional shares of Class A Common Stock solely to cover
over-allotments. If this option is exercised in full, total Price to
Public, Underwriting Discounts and Commissions and Proceeds to Company 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>
[Pictures/Map of Locations - to come]
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 $ 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 shares of Class A Common Stock, and to the exchange of
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 $ 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(R) budget brand ("Microtel") and the Hawthorn Suites(R) 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 Inns
Worldwide (1990-95) and President of Days Inn of America, Inc. (1985-90), the
two largest lodging brand franchisors in the world. The Company has hired and
trained a staff of 60 employees, including a 25-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 2,000 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 105 franchise agreements and
accepted applications for an additional 65 hotels as of August 28, 1996,
expanding the number of states in which Microtels are or may be located from
10 to 39. 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 one franchise agreement for a 284-room hotel
and accepted applications for 13 additional hotel sites as of August 28,
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(R) 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(R) 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
over three times, significantly higher than comparable ratios for any other
segment in the lodging industry during this 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 the Microtel system is the only brand 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 the safest, most consistent and highest quality brand
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 over competing brands. 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 relative to hotels in other chains in the
limited-service segment. 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(R) 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, in the United States in 1995 the market for extended-stay
rooms accounted for over 30% of all hotel room nights sold. 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 per room
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".
4
<PAGE>
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 (as defined
herein)). See "Business--Acquisition of the Microtel and Hawthorn Suites
Systems".
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(SM) 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 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 shares of Class A Common Stock
Common Stock to be outstanding after shares of Class A Common Stock
the Offering
shares of Class B Common Stock
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 Microtel Acquisition Agreement
(as defined herein), (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 1.48 3.63
Average number of common shares (1) 1,112,245 1,112,245
Pro forma net loss per share (2)
Pro forma average number of common shares (2)
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) Includes 329,503 shares of Old Common Stock that 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) Based upon shares of Class A Common Stock and Class B Common Stock assumed
to be outstanding after the Reclassification but before the Offering
of shares of Class A Common Stock.
7
<PAGE>
Franchised Hotels
<TABLE>
<CAPTION>
Microtel (1) Hawthorn Suites (2)
------------------------------------- --------------------------------------
As of As of As of As of
December 31, 1995 June 30, 1996 December 31, 1995 June 30, 1996
----------------- ------------- ----------------- -------------
<S> <C> <C> <C> <C>
Properties Open 23 26 17 18
Properties Under Construction 0 1 0 0
Executed Franchise Agreements 3 93 0 0
Franchise Applications Accepted (3) 10 63 0 1
</TABLE>
- -------------
(1) The Company will not receive royalties from the 23 Microtels open as of
December 31, 1995 and the 26 Microtels open as of June 30, 1996, but does
receive reservation and 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
June 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*
<TABLE>
<CAPTION>
Microtel Hawthorn Suites
------------------------------------------------- -------------------------------------------------
For the Six Months Ended For the Six Months Ended
For the Year Ended ----------------------------- For the Year ended -----------------------------
December 31, 1995 June 30, 1995 June 30, 1996 December 31, 1995 June 30, 1995 June 30, 1996
------------------ -------------- ------------- ------------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Average Daily Room
Rate ("ADR") $35.75 $34.32 $35.40 $78.27 $77.50 $82.02
Average Occupancy 69.3% 66.1% 66.6% 78.1% 77.8% 80.6%
Average Revenue Per
Available Room $24.77 $22.68 $23.57 $61.13 $60.29 $66.11
Number of Hotels 15 15 15 15 15 15
</TABLE>
- -------------
* 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
In addition to the other information in this Prospectus, the following
factors should be carefully considered in evaluating the Company and its
business before purchasing the Class A Common Stock offered by this
Prospectus. The following is not intended as, and should not be considered,
an exhaustive list of relevant factors.
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.
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 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 Michael A. Leven, Chairman, President and Chief Executive
Officer, Neal K. Aronson, 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. See
"Management".
The terms of the Company's Redeemable Preferred Stock (as defined herein)
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
9
<PAGE>
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".
Risks Relating to Microtel Acquisition Agreement
The agreement pursuant to which the Company acquired the Microtel brand
(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 agreement pursuant to which the Company acquired the exclusive
rights to franchise the Hawthorn Suites brand of hotels (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.
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 Hawthorn Brand Saturation (as
defined herein) has been achieved. 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 there are 175 new Hawthorn Suites with a minimum aggregate total
of 11,375 rooms ("Hawthorn Brand Saturation") 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".
10
<PAGE>
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(R), Days Inn(R), Econo Lodge(R),
Fairfield Inn(R), Sleep Inn(R), Red Roof Inn(R), Budgetel Inn(R), Super 8(R),
Ramada Limited(R), Motel 6(R), Jameson Inns(R), Travelodge(R), Thriftlodge(R),
Knights Inn(R), Red Carpet Inn(R) and Scottish Inns(R). In the upscale,
extended-stay sector, Hawthorn Suites hotels compete for consumers and
potential franchisees with Residence Inn(R), Homewood Suites(R), Summerfield
Suites(R) and Woodfin Suites(R). 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(R),
Hampton Inn and Suites(R), Fairfield Suites(SM), MainStay(SM), Candlewood(SM),
Wingate Inn(SM), Towne Place(SM) and Courtyard by Marriott(R), 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 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
11
<PAGE>
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 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 (as defined herein). 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 defined
herein), 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 10%
Cumulative Redeemable Exchangeable Preferred Stock ("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 (i) the sale of all or substantially all of the Company's
assets, (ii) 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 (iii) the termination of the employment of Mr. Leven for any
reason by the Company (including
12
<PAGE>
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".
Control by Management and Anti-Takeover Effect of Dual Classes of Stock
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 % 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. See
"Description of Capital Stock" and "Principal Stockholders".
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 $ 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 $ 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".
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
13
<PAGE>
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 and (iv) 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. 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 shares of
Class A Common Stock outstanding and shares of Class B Common Stock
outstanding. Of these shares, the 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, shares of Class A Common Stock
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 shares of Class A
Common Stock and shares of Class B Common Stock) will have
"piggyback" registration rights permitting such holders to include 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. 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 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 current stockholders have agreed with the Underwriters
not to sell or otherwise dispose of any of their shares of 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 $ million
($ million if the Underwriters' over-allotment option is exercised in
full), based on an initial public offering price of $ 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, the 1996 Amendment (as defined in "Principal Stockholders--
Management's Shares of Common Stock") and the Offering (including the
application of the proceeds therefrom), assuming an initial public offering
price per share of $ (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" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations".
<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 Old Common Stock, par value $.10 per
share; 329,503 shares issued and outstanding as of June
30, 1996 (1) 330,000
Redeemable shares of Class A Common Stock, par value $
per share; shares issued and outstanding
after the Reclassification, the 1996 Amendment and the
Offering (2)
Stockholders' Equity (Deficit)
Old Common Stock, par value $.10 per share; 782,742
shares of Old Common Stock issued and outstanding as of
June 30, 1996 78,000
Common Stock, par value $ per share; shares of
Class A Common Stock and shares of Class B
Common Stock authorized; shares of Class A Common
Stock and shares of Class B Common Stock issued
and outstanding after the Reclassification, the 1996
Amendment and the Offering (3)
Capital in excess of par
Accumulated Deficit (4,970,000)
----------- -----------
Total Stockholders' Equity (Deficit) (4,892,000)
----------- -----------
Total Capitalization $13,766,000 $
=========== ===========
</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) Includes shares of Class A Common Stock that 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".
(3) Excludes shares of Class A Common Stock reserved for issuance under
the Option Plan (as defined herein) and shares of Class A Common
Stock reserved for issuance under the Directors Plan (as defined herein).
16
<PAGE>
DILUTION
At June 30, 1996, the net tangible book value of the Company was a deficit
of $9,569,000 or $ per share of outstanding Common Stock (taking into
account the Reclassification). After giving effect to the Reclassification
and to the sale of the shares of Class A Common Stock being offered
by the Company hereby at an assumed initial offering price of $ 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 $ , or $ per share, representing an immediate
increase in net tangible book value of $ per share to existing
stockholders and an immediate dilution of $ per share to persons
purchasing shares of Class A Common Stock in the Offering. The following
table illustrates this per share dilution:
Assumed initial public offering price per share (1) $
Net tangible book value per share of
Common Stock at June 30, 1996
(adjusted for the Reclassification
but excluding the Offering)
Increase in net tangible book value per
share of Common Stock attributable to
new investors in the Offering
Pro forma net tangible book value per share
of Common Stock after the Offering
Dilution per share to purchasers of Class A
Common Stock in the Offering
- -------------
(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 $ 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 % $ % $
New Investors $
------ ------- ------ ------- ---------
% $ %
====== ======= ====== =======
</TABLE>
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 1.48 3.63
Average number of common shares (1) 1,112,245 1,112,245
Pro forma net loss per share (2)
Pro forma average number of common shares (2)
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) Includes 329,503 shares of Old Common Stock that 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) Based upon shares of Class A Common Stock and Class B Common Stock assumed
to be outstanding after the Reclassification but before the Offering of
shares of Class A 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 growth through
the sale of franchises to third-party owners and 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 60 employees, including a franchise sales force of 25,
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 the Microtel Acquisition (as defined
herein) 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 the Hawthorn
Acquisition (as defined herein) 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.
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
Hawthorn Suites
---------------
June 30, 1996 0 1 0
</TABLE>
- -------------
(1) Represents franchise applications as to which the Company has approved
the proposed site and prospective franchisees but 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. The Company 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. 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. 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. 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 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 .
20
<PAGE>
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(R) budget hotel brand ("Microtel") and the Hawthorn Suites(R)
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 Inns
Worldwide (1990-95) and President of Days Inn of America, Inc. (1985-90), the
two largest lodging brand franchisors in the world. The Company has hired and
trained a staff of 60 employees, including a 25-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 2,000 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 105 franchise agreements and
accepted applications for an additional 65 hotels as of August 28, 1996,
expanding the number of states in which Microtels are or may be located from
10 to 39. 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 one franchise agreement for a 284-room hotel and
accepted applications for 13 additional hotel sites as of August 28, 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 25-person sales force (which the Company believes is the
third largest in the lodging industry) whose members have sold 106 franchises
and secured an additional 78 franchise applications on behalf of the Company
since its inception. The Company also benefits from the extensive experience
of Michael Leven, who has served as President of two of the lodging
industry's largest franchisors. The sales force targets a broad pool of
potential franchisees,
22
<PAGE>
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 th 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 105 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 August 28, 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 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.
Ratio of Change in Room Demand to
Change in Room Supply
<TABLE>
<CAPTION>
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 per room 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 the only brand 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 the
safest, most consistent and highest quality brand in the budget segment.
The Company believes that Microtels offer franchisees financial advantages
over competing brands. 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 relative to hotels in other chains in the
limited-service segment. 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 June 30, 1996
------------------ --------------
<S> <C> <C>
Microtel Franchise Data*
Properties Open 23 26
Properties Under Construction 0 1
Executed Franchise Agreements 3 93
Franchise Applications Accepted 10 63
</TABLE>
- -------------
* The Company will not receive royalties from the 23 Microtels open as of
December 31, 1995 and the 26 Microtels open as of June 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), approximately
25% to 75% lower than the new construction costs for hotels of certain other
limited-service brands. 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 Company believes that the result is a shorter
construction period (estimated at a total of 120 to 151 days) compared to
other hotels in the limited-service segment, 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 compared to
other hotels.
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 than other hotel reservations systems. 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, compared to
the reservation systems maintained by many other hotel chains, 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 room rate competitive within the
limited-service segment, 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 the only 100% interior corridor, new
construction brand 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 the most consistent chain 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 that fees paid by Hawthorn Suites for use of the Spirit
system under the agreement with Regency, which in 1995 were 0.9% of total
revenue, are below the cost of competitors' reservation systems. 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 25 people who, collectively with Mr. Leven, have sold over
2,000 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,
Crittenden/Hotel & Motel Real Estate News 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 of $35,000 (or
$350 per room, if greater) for a Microtel and $40,000 (or $400 per room, if
greater) for a Hawthorn Suites hotel. Franchise application fees are
non-refundable and are generally collected from potential franchisees by the
time the franchise agreement is executed. In some cases, the franchise
application fee is less than the stated fee and in some cases, application
fees are accepted, either in whole or in part, in the form of short-term
promissory notes.
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 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>
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 growth of the Microtel system by
permitting those who otherwise could not afford to build a Microtel an
opportunity to become a hotel owner.
The Company has reached an understanding in principle with ,
pursuant to which one of its affiliates will be the exclusive developer,
franchisee and owner-lessor of properties for the American Dream Program.
29
<PAGE>
owns and operates more than 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 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, 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".
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<PAGE>
Acquisition of the Microtel and Hawthorn Suites Systems
Microtel Acquisition. On September 7, 1995, the Company entered into an
agreement (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 "Microtel Acquisition"). 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 27
Microtels, of which 21 were then operating, three were under construction and
three were in the development stage. 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*
- ---- --------------------
<S> <C>
1996 0
1997 50
1998 100
1999 175
2000 250
</TABLE>
- --------------
* 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 (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. See
"Summary Financial and Other Data".
31
<PAGE>
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* 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>
- -------------
* 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 *
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>
* Not applicable
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(R), Days Inn(R), Econo Lodge(R),
Fairfield Inn(R), Sleep Inn(R), Red Roof Inn(R), Budgetel Inn(R), Super 8(R),
Ramada Limited(R), Motel 6(R), Jameson Inns(R), Travelodge(R), Thriftlodge(R),
Knights Inn(R), Red Carpet Inn(R) and Scottish Inns(R). In the upscale,
extended-stay sector, Hawthorn Suites hotels compete for consumers and potential
franchisees with Residence Inn(R), Homewood Suites(R), Summerfield Suites(R) and
Woodfin Suites(R). 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(R), Hampton Inn and
Suites(R), Fairfield Suites(SM), MainStay(SM), Candlewood(SM), Wingate Inn(SM),
Towne Place(SM) and Courtyard(R) 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 BY MICROTEL, "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 August 1, 1996, the Company had 60 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 August
15, 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 have been elected to the Board of Directors, 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 Inns 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, Chief Financial
Officer and a Director 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 Inns 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 Inns
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, Kloster Cruise Limited, 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 has 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. 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
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
---------------------------------
1995 Awards Payouts
Annual Compensation ----------------------- -------
---------------------------------------------- Restricted
Name and Other Annual Stock Options/ LTIP All Other
Principal Position Salary Bonus Compensation Awards SARs Payouts Compensation
------------------ -------- ----------------- ------------ ----------- -------- ------- ------------
Michael A. Leven
<S> <C> <C> <C> <C> <C> <C> <C>
Chairman, President and
Chief Executive Officer $93,750 $153,000(1)(2) 0 0 0 0
Neal K. Aronson
Executive Vice President
and Chief Financial
Officer $50,000 $151,500(1)(2) 0 0 0 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.
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.
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 , 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
, 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; (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" (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 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
39
<PAGE>
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 . 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 , 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 ,
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 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 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 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.
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.
40
<PAGE>
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.
41
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Transactions Entered into in Connection with the Offering
Reclassification. Prior to the Offering, the Company intends to effect the
Reclassification. Pursuant to the Reclassification, each share of Old Common
Stock will be converted into 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 all shares of Class A Common
Stock held directly by them (other than 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.
Immediately following the Offering, Messrs. Leven and Aronson will have
the right to vote a total of shares of Class A Common Stock and
shares of Class B Common Stock, which will represent approximately % 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--Control by Management and Anti-Takeover Effect of Dual Classes
of Stock" 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.
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.
42
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth (i) as of August 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 Beneficial Ownership Subsequent
to the Offering and 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% (2) (3) % %
Neal K. Aronson
13 Corporate Square
Suite 250
Atlanta, Georgia 30329 233,223 (4) 21.0% (5) (6) % %
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% 0 % *
Richard D. Goldstein (8)
c/o Alpine Microtel LLC
1285 Avenue of the
Americas
New York, NY 10019 16,500 1.5% 0 % *
Jeffrey A. Sonnenfeld
1602 Mizell Drive
Room 310
Atlanta, Georgia 30322 0 * 0 0 * *
Barry Sternlicht (9)
c/o Starwood Capital Group
3 Pickwick Plaza
Greenwich, CT 06830 31,000 2.8% 0 % *
All officers and
directors as a group
(9 persons)** 526,340 47.3%
</TABLE>
- ------------------
* Represents less than 1% of the outstanding Common Stock, both in number
and in terms of voting power.
** Duplications eliminated.
(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
43
<PAGE>
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) 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) shares held by Mr.
Leven's wife, with respect to which Mr. Leven shares voting power, (iii)
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) 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) Restricted Shares owned by Mr.
Aronson, which are voted by Mr. Leven.
(3) Consists of (i) Unrestricted Shares, as to which Mr. Leven has
sole voting power (ii) shares held by Mr. Leven's wife as
Unrestricted Shares, as to which Mr. Leven shares voting power and (iii)
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) 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) 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) 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.
(6) Consists of shares designated as Unrestricted Shares, of which
Mr. Aronson has sole voting power as to shares and has
transferred voting power to Mr. Leven as to 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 G2 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, 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.
(9) 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
44
<PAGE>
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 51% of the then
outstanding Old Common Stock for an aggregate purchase price of $567,245 or
$1.00 per share (the "Original Issue Price") (equal to approximately $. per
share, as adjusted for the Reclassification). Twenty-five percent (25%) of
the then outstanding Old 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 were reallocable 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 Old Common Stock
in the form of Unrestricted Shares.
The remaining shares of Old Common Stock acquired by Messrs. Leven and
Aronson, representing 26% of the then outstanding Old 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 Old 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 , 1996, the Board of Directors voted to amend the
respective Employee Stock Purchase Agreements pursuant to which Messrs. Leven
and Aronson purchased the Old 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
Old 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.
Reallocation of Shares. The Old Stock Purchase Agreements provide that
Unrestricted Shares representing 5% of the Old Common Stock then outstanding
and Restricted Shares representing 6% of the Old Common Stock then
outstanding are reallocable to other members of the Company's management.
Such agreements further provide for the appointment of a Compensation
Committee (which has subsequently been renamed the Stock Allocation
Committee) to determine the exact allocation of shares 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 further
reallocations will be made.
To date, the Stock Allocation Committee has allocated shares of Old Common
Stock representing a total of approximately 7.7% of the pre-Offering
outstanding Old Common Stock (approximately 3.6% from the Unrestricted Shares
and approximately 4.1% from the Restricted Shares) to other members of
management. By virtue of the 1996 Amendment, the holders of such shares are
required to vote all of such shares (including Restricted Shares), on a one
vote per share basis, in the same manner as Unrestricted Shares held by Mr.
Leven are voted (although such members of management were required, prior to
the 1996 Amendment, to vote those reallocated shares that are
45
<PAGE>
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 Old Common Stock). The Company's right to cause the redemption and
reallocation of the remaining reallocable shares (approximately 3.3% of the
pre-Offering Old Common Stock) was eliminated by the 1996 Amendment. All
shares which have been reallocated 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. Upon such resale, the shares 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 will not be subject
to the risk of reallocation.
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".
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 Old 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
46
<PAGE>
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 Earned 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).
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 Old Common
Stock outstanding before the Offering) will be deemed to be Earned 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 Old 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 Earned 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 Earned 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 subject to reallocation 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 Earned Shares. Such
shares, representing approximately 2% of the Old Common Stock outstanding
before the Offering, will be shares of Class A Common Stock and will be voted
by the management holders thereof in the same manner that Mr. Leven votes his
shares, as will any Restricted Shares still held by such management holders.
47
<PAGE>
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.
48
<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 shares of
Common Stock, par value $ per share, of which shares have been
designated as Class A Common Stock and 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, shares of Class A Common Stock will be outstanding and
shares of Class B Common Stock will be outstanding. In addition,
shares of Class A Common Stock will be reserved for issuance under the Option
Plans and 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.
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, (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 or (iii) certain affiliates of such holder.] 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.
Application has been made for quotation of the Class A Common Stock,
subject to official notice of issuance, on the National Market System of The
Nasdaq Stock Market ("Nasdaq") 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.
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
49
<PAGE>
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 ( shares of Class A Common Stock, including Class A Common
Stock into which their Class B Common Stock is convertible (the "piggyback
shares")) 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. 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 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
50
<PAGE>
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.
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.
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 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.
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
51
<PAGE>
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.
52
<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 an aggregate of 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
===========
</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 that no sales of Class A Common Stock will be confirmed
to discretionary accounts.
The Company has 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.
The Company has granted to the Underwriters an option exercisable for 30
days after the date of this Prospectus to purchase up to an aggregate of
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
stockholders who will beneficially own an aggregate of shares of
the Common Stock outstanding after the Offering 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 Common Stock or any rights to purchase
shares of Common Stock (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 has 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 between the Company 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.
53
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, shares of Class A Common Stock will
be outstanding and shares of Class B Common Stock will be outstanding. Of
these shares, the 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. shares of Class A Common
Stock and 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,
shares of Class A Common Stock and shares of Class B Common Stock 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 shares of Class A Common Stock and
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 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, options to purchase shares of Class A Common
Stock will be outstanding 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.
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
54
<PAGE>
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.
55
<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>
The accompanying financial statements reflect footnote disclosure of
proposed changes to the type and number of common shares authorized and a
conversion of previously outstanding common stock into newly created classes
of common stock, all of which is to be effected prior to or simultaneously
with the effective date of the Registration Statement. The following opinion
is in the form which will be signed by Deloitte & Touche LLP upon
consummation of the above events, which are described in Note 11 of Notes to
Consolidated Financial Statements and assuming that from August 9, 1996 to
the date of such events, no other events have occurred which would affect the
accompanying financial statements and notes thereto.
By: /s/ Deloitte & Touche LLP
-------------------------
Deloitte & Touche LLP
Atlanta, Georgia
September 5, 1996
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.
August 9, 1996
( , 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 $0.10 per share; issued and
outstanding 329,503 shares 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 $0.10 per share; authorized 2,000,000
shares; issued and outstanding 782,742 shares 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 1,112,245 1,112,245
========== ==========
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS PER
SHARE $ 1.48 $ 3.63
========== ==========
</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 782,742 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 782,742 78,000 228,000 (1,168,000) (862,000)
Redemption of capital stock (33,368) (3,000) (33,000) (36,000)
Issuance of capital stock 33,368 3,000 36,000 39,000
Undeclared dividends on
redeemable preferred stock (231,000) (607,000) (838,000)
Net loss (3,195,000) (3,195,000)
------- ------- ----------- ----------- -----------
BALANCE--June 30, 1996 782,742 $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 36,000
Redemption of capital stock (33,000)
----------- -----------
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.
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.
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--Cash and temporary cash investments
include short-term interest- bearing securities with maturities of less than
three months.
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.
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.
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.
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
4. EQUIPMENT
Equipment 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>
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>
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
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 567,245
shares of common stock (51% of the total issued) pursuant to "Stock Purchase
Agreements." Of such Shares, 278,061 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 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, which were reallocable
to other members of the Company's management at the discretion of a committee
of the Board of Directors called the Stock Allocation Committee. During the
six month period ended June 30, 1996, shares representing 7.7% of the then
outstanding common stock (3.6% from the Unrestricted Shares and 4.1% from the
Restricted Shares) were reallocated to other members of management. All
reallocated shares are subject to a vesting schedule, so that reallocated
Unrestricted Shares vest over a five-year period and reallocated Restricted
Shares vest over a ten-year period, in each case provided that the recipient
remains employed by the Company. Any reallocated shares which are forfeited
are repurchased by the Company and reoffered to the Original Management
Investors at $1.00 per share. Restricted Shares are earned using a formula
based upon increases in 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 by the Company and reissued to the
original stockholders of the Company pro rata based on their original
holdings of common stock. Restricted Shares held by the two officers and all
reallocated 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 of $1.00 (or $1.10 in certain cases), no compensation has been
recorded. The Stock Purchase Agreements were amended in 1996 (see Note 11).
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
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% 34%
Statutory state rate less federal effect 4% 4%
Other --% (1)%
Change in valuation allowance (38)% (37)%
---- ---
Effective tax rate --% --%
---- ---
</TABLE>
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.
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 (Continued)
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>
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:
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)
<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
Prior to or simultaneously with the completion of a proposed public
offering by the Company, the Company will create two classes of common stock:
Class A Common Stock and Class B Common Stock. The Company will then
reclassify its common stock (the "Reclassification") by effecting a split of
its existing common stock, par value $.10 per share (the "Old Common Stock"),
at a ratio of to 1 into shares of Class A Common Stock, par value
$. per share. In connection with the Reclassification, certain members of
management holding 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 Stock at the option of the holder and, with limited
exceptions, upon the transfer thereof. Following the Reclassification, there
will be shares of Class A Common Stock and shares of Class B Common
Stock authorized for issuance. No effect has been given to the
Reclassification in the historical financial statements. However, on a pro
forma basis, the effect of the proposed stock split on the calculation of
historical earnings per share is to reduce the net loss applicable to Common
Stockholders per share for the period ended December 31, 1995 to $. and to
a net loss applicable to Common Stockholders per share of $. for the period
ended June 30, 1996.
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.
F-13
<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
The Company 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 43
Description of Capital Stock 49
Underwriting 53
Shares Eligible for Future Sale 54
Validity of Class A Common Stock 54
Experts 54
Available Information 54
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.
===============================================================================
===============================================================================
Shares
[LOGO]
U.S. Franchise
Systems, Inc.
Class A Common Stock
($ 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 $ 8,534.48
NASD filing fee 2,975.00
Nasdaq National Market listing fee $50,000.00
Printing and engraving expenses *
Legal fees and expenses *
Accounting fees and expenses *
Blue Sky fees and expenses (including counsel fees and expenses) *
Transfer Agent and Registrar fees and expenses *
Miscellaneous *
----------
Total $ *
==========
</TABLE>
- --------
* To be supplied by amendment.
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, the
Company has issued a total of 152,240 shares of Old Common Stock for an
aggregate consideration of $155,576.80. Such shares were first purchased by
the Company from Messrs. Leven and Aronson pursuant to the Old Stock Purchase
Agreements and then reallocated and reissued to other members of management
pursuant to the terms thereof. 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.
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.
II-2
<PAGE>
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
, 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 on , 1996.
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 on , 1996.
10.8 Employment Agreement by and between U.S. Franchise Systems, Inc. and Michael A. Leven, dated as of
October 1, 1995.
10.9* Amendment No. 1 to Employment Agreement by and between U.S. Franchise Systems, Inc. and Michael A.
Leven, dated as of , 1996.
10.10 Employment Agreement by and between U.S. Franchise Systems, Inc. and Neal K. Aronson, dated as of
October 1, 1995.
10.11* Amendment No. 1 to Employment Agreement by and between U.S. Franchise Systems, Inc. and Neal K.
Aronson, dated as of , 1996.
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.
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>
- -----------
* To be filed by amendment.
(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 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.
II-3
<PAGE>
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 September 5, 1996.
By: /s/ Michael A. Leven
-----------------------------
Michael A. Leven
Chairman, President and
Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature
appears below hereby constitutes and appoints Michael A. Leven and Neal K.
Aronson, and each of them, his or her true and lawful agent, proxy and
attorney-in-fact, each acting alone, with full power of substitution and
resubstitution, for him or her and in his or her name, place and stead, in
any and all capacities, to (i) act on, sign and file with the Securities and
Exchange Commission any and all amendments (including post-effective
amendments) to this registration statement together with all schedules and
exhibits thereto and any subsequent registration statement filed pursuant to
Rule 462(b) under the Securities Act of 1933, as amended, together with all
schedules and exhibits thereto, (ii) act on, sign and file such certificates,
instruments, agreements and other documents as may be necessary or
appropriate in connection therewith, (iii) act on and file any supplement to
any prospectus included in this registration statement or any such amendment
or any subsequent registration statement filed pursuant to Rule 462(b) under
the Securities Act of 1933, as amended, and (iv) take any and all actions
which may be necessary or appropriate in connection therewith, granting unto
such agents, proxies and attorneys-in-fact, and each of them, full power and
authority to do and perform each and every act and thing necessary or
appropriate to be done, as fully for all intents and purposes as he or she
might or could do in person, hereby approving, ratifying and confirming all
that such agents, proxies and attorneys-in-fact, any of them or any of his or
her or their substitutes may lawfully do or cause to be done by virtue
thereof.
II-5
<PAGE>
Pursuant to the requirements of the Securities Act of 1933, as amended,
this registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title or Capacities Date
----------- ------------------- -----
<S> <C> <C>
/s/ Michael A. Leven Chairman, President, Chief
-------------------------- Executive Officer and
Michael A. Leven Director (Principal Executive
Officer) September 5, 1996
/s/ Neal K. Aronson Executive Vice President,
-------------------------- Chief Financial Officer and
Neal K. Aronson Director (Principal Financial
and Accounting Officer) September 5, 1996
/s/ Irwin Chafetz
--------------------------
Irwin Chafetz Director September 5, 1996
/s/ Richard D. Goldstein
--------------------------
Richard D. Goldstein Director September 5, 1996
/s/ Barry Sternlicht
--------------------------
Barry Sternlicht Director September 5, 1996
</TABLE>
II-6
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
<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. 80
10.2 Form of License Agreement for Hawthorn Suites hotels. 105
10.3 Joint Venture Agreement between Microtel Franchise and Development
Corporation and U.S. Franchise Systems, Inc., dated as of September 7, 130
1995.
10.4 Master Franchise Agreement between HSA Properties, L.L.C. and U.S.
Franchise Systems, Inc., dated as of March 27, 1996. 211
10.5* Amended and Restated Stockholders' Agreement, dated as of
September 29, 1995, as amended on _______________ __, 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 on _____________ __, 1996.
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 on ________________ __, 1996.
10.8 Employment Agreement by and between U.S. Franchise Systems, Inc. and
Michael A. Leven, dated as of October 1, 1995. 307
10.9* Amendment No. 1 to Employment Agreement by and between U.S.
Franchise Systems, Inc. and Michael A. Leven, dated as of ____________
__, 1996.
10.10 Employment Agreement by and between U.S. Franchise Systems, Inc. and
Neal K. Aronson, dated as of October 1, 1995. 317
10.11* Amendment No. 1 to Employment Agreement by and between U.S.
Franchise Systems, Inc. and Neal K. Aronson, dated as of ___________ __,
1996.
10.12 Office Lease Agreement between Hallwood Real Estate Investors Fund XV
and U.S. Franchise Systems, Inc., dated September 25, 1995. 327
10.13 First Amendment to Office Lease between Hallwood 95, L.P. and U.S.
Franchise Systems, Inc., dated May 20, 1996. 359
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.
21.1 List of Subsidiaries of U.S. Franchise Systems, Inc. 364
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. 365
23.4 Consent of Jeffrey A. Sonnenfeld. 366
24.1 Power of Attorney from officers and directors (contained on signature
page).
27.1 Financial Data Schedule. 367
- ----------------
* To be filed by amendment.
</TABLE>
Location: {{HOTELADDRESS1}}
{{HOTELADDRESS2}}
ID Number: {{IDNUMBER}}
Date:
MICROTEL INN LICENSE AGREEMENT
BETWEEN
MICROTEL INNS AND SUITES FRANCHISING, INC.
AND
{{ENTITYNAMECAPS}}
<PAGE>
TABLE OF CONTENTS
PAGE
1. THE LICENSE .......................................................... 1
2. GRANT OF LICENSE ..................................................... 2
3. LICENSEE'S RESPONSIBILITIES .......................................... 2
4. LICENSOR'S RESPONSIBILITIES .......................................... 5
5. PROPRIETARY RIGHTS ................................................... 6
6. RECORDS AND AUDITS ................................................... 7
7. INDEMNITY AND INSURANCE .............................................. 8
8. TRANSFER ............................................................. 9
9. CONDEMNATION AND CASUALTY ............................................ 12
10. TERMINATION .......................................................... 12
11. AGREEMENT IS NON-RENEWABLE ........................................... 15
12. RELATIONSHIP OF PARTIES .............................................. 15
13. MISCELLANEOUS ......................................................... 15
GUARANTY
ATTACHMENT A
ATTACHMENT B
ATTACHMENT C
<PAGE>
LICENSE AGREEMENT
License Agreement dated , ("Agreement") between
Microtel Inns & Suites Franchising, Inc., a Georgia corporation ("Licensor")
and {{ENTITYNAMECAPS}}, a {{ENTITYTYPE}} ("you or Licensee"), whose address
is {{ENTITYADDRESS}}.
PARTIES AGREE AS FOLLOWS:
1. The License.
Licensor has been licensed the exclusive right to license a unique concept
and system (hereinafter "Hotel System") relating to the establishment and
operation of economy-budget hotels offering minimal amenities, that are
intended to compete directly with the hotels in each target market, that are
considered "super economy" or "hard budget" hotels within the lodging
industry, and that operate under the name "MICROTEL", "MICROTEL INN",
"MICROTEL INN & SUITES", OR "MICROTEL SUITES" (collectively referred to
herein as "Microtel Hotels"). Microtel Hotels feature modern up-scale
accommodations, and down-sized standard guest rooms or one (1) room suites.
You have independently investigated the risks of the business to be operated
hereunder, including current and potential market conditions, competitive
factors and risks, have read Licensor's "Offering Circular for Prospective
Franchisees", and have made an independent evaluation of all such facts.
Aware of the relevant facts, you desire to enter into this Agreement in order
to obtain a license to use the Hotel System in the operation of a {{BRAND}}
hotel located at {{HOTELADDRESS1}}, {{HOTELADDRESS2}} (the "Hotel").
A. The Hotel. The Hotel comprises all structures, facilities,
appurtenances, furniture, fixtures, equipment, and entry, exit, parking and
other areas from time to time located on the land identified on the plot plan
most recently submitted to and acknowledged by Licensor in anticipation of
the execution of this Agreement, or located on any land from time to time
approved by Licensor for additions, signs or other facilities. The Hotel
currently includes the facilities listed on Attachment A hereto. No change in
the number of approved standard guest rooms or suites (which are hereinafter
referred to collectively as "Guest Rooms") and no other significant change in
the Hotel shall be made without Licensor's approval. Redecoration and minor
structural changes that comply with Licensor's standards and specifications
shall not be considered significant. You represent that you are entitled to
possession of the Hotel during the entire License Term, as defined in
Paragraph 10 hereof, without restrictions that would interfere with any of
your obligations under this Agreement.
B. The Hotel System. The Hotel System is composed of elements, as
designated from time to time by Licensor, designed to identify Microtel
Hotels to the consuming public and/or to contribute to such identification
and its association with quality standards. The Hotel System at present
includes, without limitation, the tradenames, trademarks, and service marks,
"MICROTEL", "MICROTEL INN", "MICROTEL INN & SUITES", "MICROTEL SUITES" and
such other tradenames, trademarks, and service marks as are now designated
(and may hereafter be designated by Licensor in writing) as part of the Hotel
System (hereinafter the "Proprietary Marks"); prototypical architectural
plans, designs, and layouts, including, without limitation, site plan, floor
plan, roof plan, plumbing plan, lobby plan, electrical plan, and landscape
plan; a national "800" number system for reservation referrals (the "MRS"); a
national Microtel directory (the "National Directory"); management and
personnel training, and training programs and materials; management and
operational procedures and techniques as prescribed in the Confidential
Manual (hereinafter the "Manual"); standards and specifications for
construction, equipment, and furnishings, as described in the Manual;
advertising, marketing, and promotional programs; and such other improvements
that Licensor may make from time to time.
<PAGE>
2. Grant of License. Licensor hereby grants to you a license (the "License")
to use the Hotel System only at the Hotel, only in connection with the
operation of the Hotel, and only in accordance with this Agreement, beginning
with the date hereof and terminating as provided in Paragraph 10 hereof (the
"License Term"). During the License Term, neither Licensor nor any affiliate
of Licensor nor any franchisee, shall develop or license any Microtel Hotel
within the territorial boundaries as defined in Attachment B hereto (the
"Exclusive Territory"). Your rights to the Exclusive Territory shall
automatically terminate if the Hotel's Quality Assurance Score (defined in
Paragraph 4.C. hereof) falls below 425, or its then-current equivalent, and
you are unable to increase the score to 425 within thirty (30) days of the
inspection, or if this Agreement is otherwise terminated in accordance with
Section 10 hereof. This Agreement does not limit Licensor's right, or the
rights of any parent, subsidiary, division or affiliate of Licensor, to use
or license to others the Hotel System or any part thereof at any location
outside of the Exclusive Territory. Further, Licensor, or its parent,
subsidiary, division or affiliate may conduct any business activity or
license other hospitality concepts under brands other than the Proprietary
Marks outside and within the Exclusive Territory. You acknowledge that
Licensor, its parent, subsidiaries, divisions and affiliates are and may in
the future be engaged in other business activities including activities
related to transient lodging, which may be or may be deemed to be competitive
with the Hotel System; that facilities, programs, services and/or personnel
used in connection with the Hotel System may also be used in connection with
such other business activities of Licensor, its parent, subsidiaries,
divisions or affiliates; and that you are acquiring no rights hereunder other
than the right to use the Hotel System in connection with the Hotel as
specifically defined herein in accordance with the terms of this Agreement.
3. Licensee's Responsibilities.
A. Operational and Other Requirements. During the License Term, you shall:
(1) maintain a high moral and ethical standard and atmosphere at the
Hotel;
(2) maintain the Hotel in a clean, safe and orderly manner and in first
class condition;
(3) provide efficient, courteous, and high-quality service to the
public;
(4) operate the Hotel twenty four (24) hours a day, every day;
(5) strictly comply in all respects with the Hotel System and the
Manual and with all other policies, procedures and requirements of
Licensor which may be from time to time communicated to you;
(6) strictly comply with Licensor's reasonable requirements to use only
reliable sources of supplies for the Hotel including any suppliers
approved by Licensor;
(7) strictly comply with Licensor's requirements as to:
(a) the types of services, products, and amenities that may be
used, promoted or offered at the Hotel;
(b) use of the Proprietary Marks, and display, style and type of
signage;
(c) directory and reservation service listings of the Hotel,
including any computerization thereof;
(d) training of persons to be involved in the operation of the
Hotel, including all expenses incurred by you associated
therewith;
(e) participation in all marketing, reservation service,
advertising, training and operating programs designated by
Licensor as System-wide (or area-wide) programs in the best
interests of hotels using the Hotel System;
(f) maintenance, appearance and condition of the Hotel; and
(g) quality and type of service offered to customers at the Hotel.
(8) use such automated equipment as may be necessary to connect to the
MRS;
2
<PAGE>
(9) participate in and use the MRS, including any additions,
enhancements, supplements or variants thereof which may be
developed during the term hereof;
(10) adopt improvements or standard changes to the Hotel System as may
be from time to time designated by Licensor, which improvements
are not intended to cause undue hardship;
(11) strictly comply with all governmental requirements including the
filing and maintenance of any required trade name or fictitious
name registrations, pay all taxes, and maintain all governmental
licenses and permits necessary to operate the Hotel in accordance
with the Hotel System;
(12) permit inspection of the Hotel by Licensor's representatives at
any time and give them free lodging for such time as may be
reasonably necessary to complete their inspections;
(13) insure that no part of the Hotel or the Hotel System is used to
further or promote a competing business or other lodging facility,
except as Licensor may approve for those competing businesses or
lodging facilities owned, licensed, operated or otherwise approved
by Licensor or its parent, divisions, subsidiaries and/or
affiliates;
(14) in all respects use your best efforts to reflect credit upon and
create favorable public response to the name "Microtel";
(15) promptly pay to Licensor all amounts due Licensor, its parent,
divisions, subsidiaries and/or affiliates as royalties or fees or
for goods or services purchased by you;
(16) comply with Licensor's requirements concerning confidentiality of
information, and, specifically: treat the Manual and all
supplements and revisions as confidential; use all reasonable
efforts to keep the information confidential; not copy the Manual
in any way, nor make it available to any unauthorized person;
disclose information contained in the Manual only to persons who
must have access to it in connection with their employment with
you; and obtain each such person's agreement in writing to keep
such information confidential; and
(17) conduct your advertising in a dignified manner and conform to the
standards and requirements as Licensor may specify from time to
time in writing; submit samples of all advertising and promotional
materials to Licensor for approval; and discontinue use of any
disapproved material upon receipt of such written notice.
B. Performance of the Work. You agree to perform the construction and
renovation work including, without limitation, the purchase of furniture,
fixtures, and equipment set forth on Attachment C hereto and incorporated
herein by reference (the "Work"). You acknowledge that your agreement to
perform the Work is an essential element of the consideration relied upon by
Licensor in entering into this Agreement. Your failure to perform the Work in
accordance with Licensor's requirements and specifications (including the
progress, milestone, completion and other dates specified in Attachment "C")
shall constitute a material breach of your obligations under this License.
C. Upgrading of the Hotel. Licensor shall review the Quality Assurance
Scores of the Hotel upon each five (5) year anniversary of the opening of the
Hotel. If over the previous five (5) year period, the Hotel has failed to
maintain an average score of four hundred fifty (450) or greater out of a
possible five hundred (500) (or its then-current equivalent), Licensor may
require modernization of the Hotel, softgood rehabilitation (including but
not limited to carpet, drapes, bedspreads) or other upgrading of the Hotel.
If the upgrading requirements contained in this Paragraph 3.C. cause you
undue hardship, you may terminate this Agreement by paying a fee computed
according to Paragraph l0.E.
D. Fees.
(1) For each month (or part of a month) during the License Term, you
shall pay to Licensor
3
<PAGE>
by the tenth (10th) of the following month:
(a) a royalty fee equal to four percent (4%) of the Gross Room
Revenues of the Hotel during the first twelve (12) month period
following the Opening Date ("Year 1"); five percent (5%) of
Gross Room Revenues during the twelve (12) months period
thereafter ("Year 2"); and six percent (6%) of Gross Room
Revenues thereafter until the expiration or termination of this
License ("Years 3-20");
(b) a "Marketing/Reservation Contribution" of three percent (3%) of
the Gross Revenues during Year 1; two and one half percent
(2.5%) during Year 2; and two percent (2%) in Years 3-20.
Beginning in Year 3, Licensor may, in its sole discretion and
at any time, increase the Marketing or Reservation Contribution
amount above by no more than ten percent (10%) per year;
provided that your Marketing & Reservation Contributions shall
not exceed a maximum of two and one half percent (2.5%). You
hereby acknowledge that each such increase, if any, shall not
be imposed unless Licensor imposes a similar increase on all
licensees operating under the Hotel System according to license
agreements that contain provisions similar to this Paragraph
3(D)(1)(b) that provides for such increased contributions by
licensees; and
(c) an amount equal to any sales, gross receipts, or similar tax
imposed on Licensor and calculated solely on payment required
hereunder, unless the tax is an optional alternative to an
income tax otherwise payable by Licensor.
(2) "Gross Room Revenues" shall mean the gross receipts attributable to
or payable for the rental of guest rooms at the Hotel, including,
without limitation, the net proceeds (after deduction of the
expenses of adjustment and collection) of use and occupancy, or for
business interruption, rent loss, or similar insurance with respect
to the Hotel (provided that insurance proceeds shall be included in
Gross Room Revenues only to the extent actually received). Gross
Room Revenues shall not include gratuities to employees or service
charges levied in lieu of such gratuities, which, in either case,
are payable to employees, or federal, state, and local taxes or
fees collected by you for transmittal to the appropriate taxing
authorities.
(3) All monthly payments required by this Agreement shall be submitted
to Licensor together with all reports required under this
Agreement. Licensor may require that all monthly payments required
under this Agreement shall be made by telegraphic transfer,
automatic debit arrangement, or other means as Licensor may specify
from time to time, to a bank account designated by Licensor. In the
event such arrangements are made, Licensor shall be responsible for
the cost of connection to such service and you shall maintain
sufficient funds in your bank account to pay all such debited
obligations. Any payment or report not actually received by
Licensor on or before such date shall be deemed overdue, or, if an
automatic debit or similar arrangement is utilized and funds are
insufficient to cover your payment obligation, any amounts unpaid
on or before such date shall be deemed overdue. If any payment is
overdue, you shall pay to Licensor, in addition to the amount
overdue, interest on such amount from the day it was due until paid
at one and a half percent (1.5%) per month or the maximum rate
permitted by law, whichever is less. Entitlement to such interest
shall be in addition to any of the remedies Licensor may have.
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(4) A standard initial fee for additional guest rooms equal to the
higher of a) Three Hundred and Fifty Dollars ($350) per room or b)
the then-current per room charge for the Application Fee per
additional room shall be paid by you to Licensor on your submission
of an application to add any Guest Rooms to the Hotel. As a
condition to Licensor granting its approval of such application,
Licensor may require you to upgrade the Hotel, subject to Paragraph
3.C.
(5) Local and regional marketing programs and related activities may be
conducted by you, but only at your expense and subject to
Licensor's requirements. Reasonable charges may be made by Licensor
for optional advertising materials ordered or used by you for such
programs and activities.
(6) Presently Licensor is not connected to any global distribution
systems (e.g, Sabre or Apollo, or other on-line distribution
system), and has no central commission payment program to travel
agents. However, in the event such systems and programs are
implemented, you shall pay all commissions and fees for
reservations you accept through these and any other source, whether
processed through Licensor, Licensor's MRS, third party reservation
systems, or directly to you. You shall also be responsible for any
telephone line charges and the cost of equipment related to the
MRS.
4. Licensor's Responsibilities.
A. Training. During the License Term, Licensor shall continue to specify
and provide required and optional training programs at various locations that
Licensor shall designate. Reasonable charges may be made for required
training materials. Travel, lodging and other expenses incurred by you and
your employees shall be borne by you. If such training is held at your Hotel,
you must provide Licensor's representatives lodging at the Hotel at no cost
to Licensor.
B. Reservation Services. During the License Term, so long as you are in
full compliance with your material obligations hereunder, Licensor shall
afford you access to the MRS.
C. Consultation on Operations, Facilities and Marketing. Licensor shall
provide you with a set of confidential prototypical plans and specifications,
which must be adapted by your architects and engineers. We will review your
site layout and working drawings prepared by your architects, and any other
related plans and specifications. In addition Licensor shall, from time to
time at Licensor's sole discretion, make available to you consultation and
advice in connection with operations, facilities and marketing, including
lists of suppliers for Hotel fixtures, furnishings, signs, and other
equipment. Licensor shall also periodically evaluate the performance of the
Hotel, but in any case at least once each year, by assessing the quality of
the Hotel's facility and services according to certain criteria developed by
Licensor (the "Quality Assurance Score").
D. Use of Marketing/Reservation Contribution. The Marketing/Reservation
Contribution shall be used by Licensor for costs associated with advertising,
promotion, publicity, market research and other marketing programs and
related activities, cost of maintaining and producing a National Directory,
as well as the MRS, services and overhead for individuals directly related to
national and local marketing and reservations. For the purpose of this
Paragraph 4.D., overhead shall be limited to individuals directly related to
the Reservation or Marketing departments such as the Vice President of
Marketing and costs related to the financial management of the fund. Licensor
shall not use any of the funds in the Marketing and Reservation Contributions
to pay for marketing directly related to the sale of franchises. Licensor is
not obligated to expend funds for marketing or reservation services in excess
of the amounts received from licensees using the Hotel System. In the event
excess amounts remain at the end of any taxable year, all expenditures in the
following taxable year(s) shall be made first out of accumulated earnings
from previous years, next out of earnings in the current year, and finally
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from contributions. Marketing and Reservation Contributions shall not be an
asset of Licensor, and an audit of the operation of the Marketing and
Reservation Contributions shall be prepared annually by an independent
certified public accountant selected by Licensor and shall be made available
to you on request. Licensor shall maintain the National Directory, listing
the address and telephone number of all Microtel Hotels.
E. Application of Manual. Licensor shall provide you, on loan, one (1)
copy of the Manual. All hotels operated within the Hotel System shall be
subject to the Manual, as it may from time to time be modified or revised by
Licensor, including limited exceptions which may be made by Licensor based on
local conditions or special circumstances. Each change in the Manual must be
explained in writing to you at least thirty (30) days before it goes into
effect.
F. Other Arrangements for Marketing Etc. Licensor may enter into
arrangements for development, marketing, operations, administrative,
technical and support functions, facilities, programs, services and/or
personnel with any other entity and may use any facilities, programs,
services and/or personnel used in connection with the Hotel System in
connection with any business activities of its parent, subsidiaries,
divisions or affiliates.
G. Inspections/Compliance Assistance. Licensor has the right to inspect
the Hotel at any time, with or without notice to you, to determine if the
Hotel is in compliance with the standards and rules of operation set forth in
the Manual. If the Hotel fails to comply with such standards and rules of
operation, Licensor may, at its option and at your cost, require an action
plan to correct the deficiencies. You shall then take all steps necessary to
correct any deficiencies within the times established by Licensor. Licensor's
approval of an action plan does not waive any rights it has or may have under
this Agreement, nor does it relieve you of any obligations under this
Agreement.
5. Proprietary Rights.
A. Ownership of the Hotel System and Proprietary Marks. You acknowledge
and shall not contest, either directly or indirectly, Licensor's exclusive
license to use the Hotel System and any element(s) or component(s) thereof,
and you acknowledge it is Licensor's right to grant licenses to use all or
any element(s) or component(s) of the Hotel System. You specifically agree
and acknowledge that Licensor is the exclusive licensee of all right, title
and interest in and to the Proprietary Marks together with the goodwill
symbolized thereby. You shall not contest directly or indirectly the validity
or ownership of the marks either during the term of this Agreement or at any
time thereafter. All improvements and additions whenever made to or
associated with the Hotel System by the parties to this Agreement or anyone
else, and all Proprietary Marks, and all goodwill arising from your use of
the Proprietary Marks shall inure to the benefit of and become the property
of Licensor. Upon expiration or termination of this Agreement, no monetary
amount shall be assigned as attributable to any goodwill associated with your
use of the Hotel System or any element(s) or component(s) of the Hotel System
including the name or marks.
B. Trademark Disputes. Licensor shall have the sole right and
responsibility to handle disputes with third parties concerning use of all or
any part of the Hotel System, and you shall, at your reasonable expense,
extend your full cooperation to Licensor in all such matters. All recoveries
made as a result of disputes with third parties regarding use of the Hotel
System or any part thereof shall be for the account of Licensor. Licensor
need not initiate suit against alleged imitators or infringers and may settle
any dispute by grant of a license or otherwise. You shall not initiate any
suit or proceeding against alleged imitators or infringers or any other suit
or proceeding to enforce or protect the Hotel System.
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C. Protection of Name and Marks. Both parties shall make every effort
consistent with the foregoing to protect and maintain the Proprietary Marks
and their distinguishing characteristics. You agree to execute any documents
deemed necessary by Licensor or its counsel to obtain protection for the
Proprietary Marks or to maintain their continued validity and enforceability.
You agree to use the Proprietary Marks only in connection with the operation
of the Hotel and in the manner authorized by Licensor and you acknowledge
that any unauthorized use thereof shall constitute infringement of Licensor's
rights. You must notify Licensor immediately, in writing, of any infringement
or challenge to your use of the Proprietary Marks or of any unauthorized use
or possible misuse of Proprietary Marks or Licensor's proprietary
information.
6. Records and Audits.
A. Monthly Reports. At least monthly, you shall prepare a statement which
shall include all information concerning Gross Rooms Revenue, other revenues
generated at the Hotel, room occupancy rates, reservation data and other
information required by Licensor that may be useful in connection with
marketing and other functions of Licensor, its parent, subsidiaries,
divisions or affiliates (the "Data"). The Data shall be the property of
Licensor. By the tenth (10th) day of each month, you shall submit to Licensor
a statement setting forth the Data for the previous month and reflecting the
computation of the amounts then due under Paragraph 3.D hereof. The statement
shall be in such form and detail as Licensor may reasonably request from time
to time, and may be used by Licensor for its reasonable purposes. Licensor
shall not willingly or knowingly provide Data on your property as an
inducement to develop other hotel brands in your market area.
B. Preparation and Maintenance of Records. You shall, in a manner and form
satisfactory to, Licensor and utilizing accounting and reporting standards as
reasonably required by Licensor, prepare on a current basis (and preserve for
no less than four (4) years), complete and accurate records concerning Gross
Rooms Revenue and all financial, operating, marketing and other aspects of
the Hotel, and maintain an accounting system which fully and accurately
reflects all financial aspects of the Hotel and its business. Such records
shall include but not be limited to books of account, tax returns,
governmental reports, register tapes, daily reports, and complete quarterly
and annual financial statements (profit and loss statements, balance sheets
and cash flow statements).
C. Audit. Licensor or its designated agents shall have the right at any
time to examine and copy, at its expense, all books, records, and your tax
returns related to the Hotel and, at its option, to have an independent audit
made. If an inspection or audit should reveal that payments have been
understated in any report to Licensor, then you shall immediately pay to
Licensor the amount understated upon demand, in addition to interest from the
date such amount was due until paid, at one and one half percent (1.5%) per
month or the maximum rate permitted by law, whichever is less. In such event,
Licensor shall also have the right to require that all your future financial
statements related to the Hotel be audited at your expense for each fiscal
year by an independent certified public accounting firm selected by you and
approved by Licensor. If an inspection discloses an underpayment to Licensor
of five percent (5%) or more of the total amount that should have been paid
to Licensor during any six (6) month period, you shall, in addition to
repayment of such understated amount, with interest, reimburse Licensor for
any and all costs and expenses incurred in connection with the inspection or
audit (including, without limitation, reasonable accounting and attorneys'
fees). The foregoing remedies shall be in addition to any other remedies
Licensor may have, including, without limitation the remedies for default.
D. Annual Financial Statements. At Licensor's request, you shall submit to
Licensor as soon as available but not later than ninety (90) days after the
end of your fiscal year, complete financial statements for such year. You
shall certify them to be true and correct and to have been prepared in
accordance with generally accepted accounting principles consistently
applied, and any false certification shall be a breach of this
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Agreement. Licensor may also request, from time to time, gross operating
profits percentages and certain operating statistics (i.e. energy and repairs
costs) which you must provide.
7. Indemnity and Insurance.
A. Indemnity. It is understood and agreed that nothing in this Agreement
authorizes either party to make any contract, agreement, warranty or
representation on the other's behalf, or to incur any debt or other
obligation in the other's name, and that neither party shall in any event
assume liability for, or be deemed liable hereunder as a result of, any such
action, or by reason of any act or omission of the other party or any claim
or judgement arising therefrom. You shall indemnify and hold Licensor and its
parent, affiliates, subsidiaries, officers, directors, agents, and employees
harmless against any and all claims arising directly or indirectly from, as a
result of, or in connection with, your operation of the Hotel, including
claims of intentional or negligent conduct by you, and any claims of acts or
omissions by Licensor relating to the operation of the Hotel System (even
though Licensor is not actively involved in the operation or supervision of
the Hotels), as well as the costs, including reasonable attorneys' fees, of
defending against them. You agree that all of the obligations of Licensor
under this Agreement are to you, and no other party is entitled to rely on,
enforce, or obtain relief for breach of such obligations either directly or
indirectly or by subrogation. Licensor shall not indemnify or hold you
harmless against any action or claim by any third party based upon Licensor's
exercise of any of its rights in accordance with the terms of this Agreement.
B. Insurance. During the License Term, you shall comply with all insurance
requirements of any lease or mortgage covering the Hotel, and Licensor's
specifications for insurance as to amount and type of coverage as may be
reasonably specified by Licensor from time to time in writing, and shall in
any event maintain as a minimum the following insurance underwritten by an
insurer approved by Licensor:
(1) employer's liability and workers' compensation insurance as
prescribed by applicable law; and
(2) comprehensive general liability insurance (with products,
completed operations and independent contractors coverage) and
comprehensive automobile liability insurance, all on an occurrence
basis naming Licensor and its then current parent, subsidiaries,
divisions, affiliates and their successors and assigns as
additional insureds and underwritten by an insurer approved by
Licensor, with single-limit coverage for personal and bodily
injury and property damage of at least Five Million Dollars
($5,000,000) for each occurrence. In connection with all
significant construction at the Hotel during the License Term, you
shall cause the general contractor to maintain with an insurer
approved by Licensor comprehensive general liability insurance
(with products, completed operations and independent contractors
coverage) in at least the amount of Five Million Dollars
($5,000,000) for each occurrence with Licensor and its then
current parent, subsidiaries, divisions, affiliates and their
successors and assigns named as additional insureds.
C. Changes in Insurance. Simultaneously herewith, annually hereafter, and
each time a change is made in any insurance or insurance carrier, you shall
furnish to Licensor certificates of insurance including the term and coverage
of the insurance in force, the persons insured, and the fact that the
coverage may not be cancelled, altered or permitted to lapse or expire
without thirty (30) days' advance written notice to Licensor.
8. Transfer.
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A. Transfer by Licensor. Licensor shall have the right to transfer or
assign all or any part of its rights or obligations in this Agreement to any
person or legal entity, and you hereby consent to such transfer.
B. Transfer by Licensee.
(1) You understand and acknowledge that the rights and duties set forth
in this Agreement are personal to you, and that Licensor has
granted this license in reliance on your business skill, financial
capacity, and character, and that of your partners or shareholders.
Accordingly, neither you nor any immediate or remote successor to
any part of your interest in this license, nor any individual,
partnership, corporation, or other legal entity which directly or
indirectly owns any interest in this license or in you shall sell,
assign, transfer, convey, give away, or otherwise encumber any
direct or indirect interest in this License (including any
ownership interest in you), the Hotel, or a substantial portion of
the assets (including building and real estate) of the Hotel
without the prior written consent of Licensor. Licensor's written
consent shall not be required to mortgage the Hotel premises to a
bank or other financial institution, provided that you remain the
mortgagor of the Hotel.
(2) If the transfer is equal to less than a fifty percent (50%) equity
interest in you and does not have the affect of transferring
control (as described in Paragraphs (3) and (4) below), the
transfer shall not require the prior approval of Licensor, provided
that you notify Licensor in writing of such transfer within thirty
(30) days following such transfer.
(3) If a transfer, alone or together with other previous, simultaneous,
or proposed transfers, would have the affect of transferring a
controlling interest in the License, you, the Hotel, or greater
than fifty percent (50%) of the assets (including building and real
estate) of the Hotel, such transfer shall require Licensor's prior
approval, and Licensor may, in its sole discretion, require any or
all of the following as conditions of its approval, which approval
shall not be unreasonably withheld:
(a) all of your accrued monetary obligations to Licensor and its
subsidiaries and affiliates and all other outstanding
obligations related to the Hotel shall have been satisfied and
you are not otherwise in default of such obligations;
(b) the transferee, and all shareholders in the transferee, shall
demonstrate to Licensor's satisfaction that the transferee and
its shareholders or general partners, as appropriate, meet
Licensor's then-current qualifications being applied to new
applicants including, business standards, ability to conduct
the Hotel (as may be evidenced by prior related business
experience or otherwise), and have adequate financial resources
and capital to operate the Hotel;
(c) transferee and the shareholders or general partners in the
transferee shall execute the standard form license agreement
then being offered to new Hotel System licensees (provided,
however, that the royalty fee and the Marketing/Reservation
Contribution shall be the greater of (i) the then-current fees
or (ii) the same as the amount being paid by the transferee on
the date of the transfer, which amount shall thereafter be
adjusted in accordance with the terms of the license agreement
executed) and such other ancillary agreements as Licensor may
require for the Hotel, and the general manager shall complete
the initial training program then in effect for new licensees;
(d) the Hotel shall be upgraded to conform to the then-current
standards and specifications for hotels operating under the
Hotel System if the most recent
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(e) Quality Assurance Score was below four hundred and fifty (450).
In any event, all deficiencies noted on the most recent
inspection must be remedied by the transferee within ninety
(90) days of such transfer. You shall complete any upgrade
required under this Paragraph 8.B(3)(d) within the time
specified by Licensor;
(e) you shall pay a transfer fee equal to Two Thousand Five Hundred
Dollars ($2,500.00), for a term equal to the balance of the
original term of this Agreement. No fee shall be required for
transfers to the spouse, issue, parent, or sibling of a partner
or shareholder in you, or from one partner or shareholder to
another. If the transferee requests approval of a term greater
than the remaining term of this Agreement, the then-current
standard minimum application fee, prorated according to the
period of time requested which exceeds the original term of
this Agreement, shall be paid to Licensor;
(f) the transferor shall have executed a general release, in a form
satisfactory to Licensor, of any and all claims against
Licensor and its officers, directors, shareholders, and
employees, in their corporate and individual capacities,
including, without limitation, claims arising under federal,
state, and local laws, rules, and ordinances;
(g) the transferee, and all shareholders or general partners in the
transferee, shall enter into a written assignment, in a form
satisfactory to Licensor, assuming and agreeing to discharge
all of your obligations under this Agreement;
(h) you shall remain liable for all obligations to Licensor and its
subsidiaries and affiliates in connection with the Hotel prior
to the effective date of the transfer and shall execute any and
all instruments reasonably requested by Licensor to evidence
such liability.
(4) For the purposes of this Agreement, "control" shall mean the
possession, direct or indirect, of the power to direct or cause the
direction of the management and policies of a person, corporation
or other business entity, whether through the ownership of voting
securities, by contract, or otherwise.
(5) Any purported assignment or transfer, by operation of law or
otherwise, not having the prior written consent of Licensor shall
be null and void and shall constitute a material breach of this
Agreement, for which Licensor may then terminate without
opportunity to cure pursuant to Paragraph 10.C. of this Agreement,
and seek injunctive relief as well as monetary damages.
C. Transfers of the License or Equity Interest in Licensee Upon Death.
Upon the death or mental incompetency of you or a person owning all or any
interest in you, the executor, administrator, or personal representative of
such person shall transfer within three (3) months after such death or mental
incompetency his interest to a third party approved by Licensor. Such
transfers, including, without limitation, transfers by devise or inheritance,
shall be subject to the same conditions as any inter vivos transfer. However,
in the case of transfer by devise or inheritance, if the heirs or
beneficiaries of any such person are unable to meet the conditions in this
Paragraph 8, the personal representative of the deceased shareholder shall
have reasonable time to dispose of the deceased's interest in you, which
disposition shall be subject to all the terms and conditions for transfers
contained in this Agreement. If the interest is not disposed of within nine
(9) months, Licensor may terminate this Agreement.
D. Registration of a Proposed Transfer of Equity Interests. Securities in
you may be offered to the public only with the prior written consent of
Licensor, which consent shall not be unreasonably withheld. All materials
required by federal or state law for the sale of any interest in you shall be
submitted to Licensor for
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review prior to filing with any government agency; and any materials to be
used and any exempt offering shall be submitted to Licensor for review prior
to their use. No offering by you shall imply (by use of the Proprietary Marks
or otherwise) that Licensor is participating as an underwriter, issuer, or
offcer of you or Licensor's securities; and Licensor's review of any offering
shall be limited solely to the subject of the relationship between you and
Licensor. You and other participants in the offering must fully indemnify
Licensor in connection with the offering. For each proposed offering, you
shall pay to Licensor a non-refundable fee of Five Thousand Dollars
($5,000.00), or such greater amount as is necessary to reimburse Licensor for
its reasonable cost and expenses associated with reviewing the proposed
offering, including, without limitation, legal and accounting fees.
E. Non-Waiver of Claims. Licensor's consent to a transfer of any interest
in the license granted herein shall not constitute a waiver of any claims it
may have against the transferring party, nor shall it be deemed a waiver of
Licensor's right to demand exact compliance with any of the terms of this
Agreement by the transferee.
F. Licensor's Right of First Refusal. If in the event, any party holding
any direct or indirect interest in this Agreement, in you, or in all or
substantially all of the assets of the Hotel desires to accept any bona fide
offer from a third party to purchase such interest, you shall notify Licensor
as provided in Paragraph 13.F. hereof, and shall provide such information and
documentation relating to the offer as Licensor may require. Licensor shall
have the right and option, provided the third party wishes to remove the
Hotel from the Hotel System, exercisable within thirty (30) days after
receipt of such written notification, to send written notice to the seller
that Licensor intends to purchase the seller's interest on the same terms and
conditions offered by the third party. If Licensor elects to purchase the
seller's interest, closing on such purchase shall occur within ninety (90)
days from the date of notice to the seller of the election to purchase by
Franchisor. If Licensor elects not to purchase the seller's interest, any
material change thereafter in the terms of the offer from a third party shall
constitute a new offer subject to the same rights of first refusal by
Licensor as in the case of the third party's initial offer (minor changes to
the offer shall not constitute a new offer and shall be subject to the notice
period of the initial offer). Failure of Licensor to exercise the option
afforded by this Paragraph 8.F. shall not constitute a waiver of any other
provision of this Agreement, including all of the requirements of this
Paragraph 8.F., with respect to a proposed transfer. In the event the
consideration, terms, and/or conditions offered by a third party are such
that Licensor may not reasonably be required to furnish the same
consideration, terms, and/or conditions, then Licensor may purchase the
interest proposed to be sold for the reasonable equivalent in cash. If the
parties cannot agree within thirty (30) days on the reasonable equivalent in
cash of the consideration, terms, and/or conditions offered by the third
party, an independent appraiser shall be designated by Licensor at Licensor's
expense, and the appraiser's determination shall be binding.
G. No Right of First Refusal. In the event that you receive an offer from
a third party to purchase the Hotel and the third party wishes to keep the
Hotel in the Hotel System, Licensor shall have no right of first refusal
provided the third party meets the qualifications set forth in Paragraph 8.
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9. Condemnation and Casualty.
A. Condemnation. You shall, at the earliest possible time, give Licensor
full notice of any proposed taking of the Hotel by eminent domain. In the
event the Hotel is taken by eminent domain, Licensor shall give due and
prompt consideration, without any obligation, to transferring this Agreement
to a nearby location selected by you and approved by Licensor as promptly as
reasonably possible, and in any event within four (4) months of the taking.
If the new location is approved by Licensor and the transfer authorized by
Licensor, and if you open a new hotel at the new location in accordance with
Licensor's specifications within two (2) years of the closing of the Hotel,
the new hotel shall thenceforth be deemed to be the Hotel licensed under this
Agreement. If a condemnation takes place and a new hotel does not, for
whatever reason, become the Hotel under this Agreement in strict accordance
with this Paragraph 9.A. (or if it is reasonably evident to Licensor that
such shall be the case), this Agreement will terminate forthwith upon notice
thereof by Licensor to you, without the payment of liquidated damages
hereunder.
B. Casualty. If the Hotel is damaged by fire or other casualty, you shall
expeditiously repair the damage. If the damage or repair requires closing the
Hotel, you shall immediately notify Licensor, shall repair or rebuild the
Hotel in accordance with Licensor's standards, shall commence reconstruction
within four (4) months after closing, and shall reopen the Hotel for
continuous business operations as soon as practicable (but in any event
within twenty four (24) months after closing of the Hotel), giving Licensor
ample advance notice of the date of reopening. If the Hotel is not reopened
in accordance with this Paragraph 9.B., this Agreement shall forthwith
terminate upon notice thereof by Licensor to you, with the payment of
liquidated damages calculated in the manner set forth in Paragraph 10.E.
C. No Extensions of Term. Nothing in this Paragraph 9 shall extend the
License Term, but you shall not be required to make any payments pursuant to
Paragraphs 3.D. for periods during which the Hotel is closed by reason of
condemnation or casualty.
10. Termination.
A. Expiration of Term. This Agreement shall expire without notice
effective 20 years from the authorized opening date, subject to earlier
termination as set forth herein. The parties recognize the difficulty of
ascertaining damages to Licensor resulting from premature termination of this
Agreement, and have provided for liquidated damages in Paragraph 10.E. below,
which liquidated damages represent the parties' best estimate as to the
damages arising from the circumstances in which they are provided.
B. Default with Opportunity to Cure.
(1) Except as provided in Paragraphs 10.C. hereof, you shall have
thirty (30) days (unless otherwise specified herein or in the
notice by Licensor) from receipt of written notice of a default
within which to remedy such default. If any such default is not
cured within that time, or such longer period as applicable law may
require (or such longer period as may be reasonably required by you
to cure any non-monetary default if you immediately commence,
diligently and in good faith pursues, and cures such default), this
Agreement shall terminate without further notice to you effective
immediately upon the expiration of the thirty (30) day period,
expiration of any extended period as described above, or such
longer period as applicable law may require. Alternatively,
Licensor may, at its option, suspend your access to the MRS until
such default has been cured to Licensor's satisfaction. You shall
be in default hereunder for any failure to comply with any of the
requirements imposed by this Agreement, as it may from time to
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time reasonably be supplemented by the Manual, or to carry out the
terms of this Agreement in good faith.
(2) If during the twelve (12) months preceding a notice of default in
(1) above you shall have engaged in a violation of this Agreement
for which a notice of default was given and such default was
remedied, the period given to remedy defaults thereafter shall, if
and to the extent permitted by law, be ten (10) days instead of
thirty (30).
(3) In any judicial proceeding in which the validity of termination is
at issue, Licensor shall not be limited to the reasons set forth in
any notice sent under this Paragraph l0.B.
(4) Licensor's notice of termination or suspension of services as
described in Section l0.B(1) shall not relieve you of your
obligations hereunder.
C. Immediate Termination by Licensor. This Agreement shall immediately
terminate without notice to you if:
(1)(a) you, or any guarantor of your obligations hereunder (a
"Guarantor"), shall generally not pay its debts as they become
due or shall admit in writing its inability to pay its debts,
or shall make a general assignment for the benefit of
creditors; or
(b) you, or any Guarantor, shall commence or consent to any case,
proceeding or other action seeking reorganization, arrangement,
adjustment, liquidation, dissolution or composition of you or
your debts under any law relating to bankruptcy, insolvency,
reorganization or relief of debtors, or seeking appointment of
a receiver, trustee, custodian or other similar official for it
or for all or any substantial part of its property; or
(c) you, or any Guarantor, shall take any corporate or other action
to authorize any of the actions set forth above in Paragraphs
(a) or (b); or
(d) any case, proceeding, or other action against you or any such
guarantor shall be commenced seeking to have an order for
relief entered against it as debtor, or seeking reorganization,
arrangement, adjustment, liquidation, dissolution or
composition of it or its debts under any law relating to
bankruptcy, insolvency, reorganization or relief of debtors, or
seeking appointment of a receiver, trustee, custodian or other
similar official for it or for all or any substantial part of
its property, and such case, proceeding or other action (i)
results in the entry of an order for relief against it which is
not fully stayed within seven (7) business days after the entry
thereof, or (ii) remains undismissed for a period of forty-
five (45) days; or
(e) an attachment remaining on all or a substantial part of the
Hotel or of your or any Guarantor's assets for thirty (30)
days; or
(f) you or any Guarantor fails, within sixty (60) days of the entry
of a final judgment against you in any amount exceeding Fifty
Thousand Dollars ($50,000), to discharge, vacate or reverse the
judgment, or to stay execution of it, or if appealed, to
discharge the judgment within thirty (30) days after a final
adverse decision in the appeal; or
(2) you cease to operate the Hotel at the Location or under the
Proprietary Marks, or lose possession or the right to possession of
all or a significant part of the Hotel, except as otherwise
provided in Paragraph 9 hereof; or
(3) you contest in any court or proceeding Licensor's ownership of the
Hotel System or any part of it, or the validity of any of the
Proprietary Marks; or
(4) a breach of Paragraph 8 hereof occurs; or
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(5) you fail to continue to identify the Hotel to the public as a
Microtel Hotel; or
(6) any action is taken toward dissolving or liquidating you or any
Guarantor, if it is a corporation or partnership, except for death
of a partner; or
(7) you or any of your principals is, or is discovered to have been,
convicted of a felony (or any other offense if it is likely to
adversely reflect upon or affect the Hotel, the Hotel System, the
Proprietary Marks and the goodwill associated therewith, the
Licensor, the Licensor's parent or your affiliates or subsidiaries
in any way); or
(8) you knowingly maintain false books and records of account or
knowingly submit false reports or information to Licensor; or
(9) you intentionally disclose or divulge the contents of the Manual or
other trade secrets or confidential information provided to you by
Licensor to any unauthorized person or fail to exercise reasonable
care to prevent such disclosure; or
(10) you intentionally or negligently make any material false
statements or omissions to Licensor in connection with your
Application.
D. De-identification of Hotel Upon Termination. You shall take whatever
action is necessary to assure that no use is made of any part of the Hotel
System at or in connection with the Hotel or otherwise after the License Term
ends. This shall involve, among other things, returning to Licensor the
Manual and all other materials proprietary to Licensor, removal of all
distinctive signs, changing the telephone listing and removal of all items
bearing the Proprietary Marks. Further, until all modifications required by
this Paragraph l0.D. are completed, you shall (i) maintain a conspicuous sign
at the registration desk in a form specified by Licensor stating that the
Hotel is no longer associated with the Hotel System, and (ii) advise all
customers or prospective customers telephoning the Hotel that it is no longer
associated with the Hotel System. Anything not done by you within thirty (30)
days after the License Term ends, may be done at your expense by Licensor or
its agents, who may enter upon the premises of the Hotel for that purpose.
E. Payment of Liquidated Damages. If this Agreement terminates pursuant to
Paragraphs 3.C., 9.B., 10.B. or l0.C. above at any time after the first
twenty four (24) months of operation, you shall promptly pay Licensor (in
addition to any amounts then due to Licensor, and only as liquidated damages
for the premature termination of this Agreement, and not as a penalty or as
damages for breaching this Agreement or in lieu of any other payment) a lump
sum based on the average occupancy rate for the twelve (12) months preceding
the termination as follows:
(1) if the occupancy rate was less than fifty percent (50%) then you
shall pay no liquidated damages;
(2) if the occupancy rate was fifty percent (50%) to fifty nine and
nine tenths percent (59.9%) then you shall pay an amount equal to
twelve (12) months of fees required under Paragraph 3.D(l)(a)-(b);
(3) if the occupancy rate was sixty percent (60%) to sixty nine and
nine tenths percent (69.9%) then you shall pay an amount equal to
twenty four (24) months of fees required under Paragraph
3.D(l)(a)-(b);
(4) if the occupancy rate was seventy percent (70%) or greater then you
shall pay an amount equal to thirty six (36) months of fees
required under Paragraph 3.D(l)(a)-(b);
If this Agreement terminates at any time during the first twenty four (24)
months of operation, you shall promptly pay to Licensor liquidated damages
equal to thirty six (36) times the average monthly fees paid under Paragraph
3.D(l)(a)-(b).
11. Agreement is Non-Renewable. This Agreement is non-renewable.
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<PAGE>
12. Relationship of Parties.
A. No Agency Relationship. You are an independent contractor. Neither
party is the legal representative or agent of, or has the power to obligate
(or has the right to direct or supervise the daily affairs of) the other for
any purpose whatsoever. Licensor and you expressly acknowledge that the
relationship intended by them is a business relationship based entirely on,
and defined by, the express provisions of this Agreement and that no
partnership, joint venture, affiliate, agency, fiduciary or employment
relationship is intended or created by reason of this Agreement.
B. Licensee's Notices to Public Concerning Independent Status. You shall
take such steps as are necessary and such steps as Licensor may from time to
time reasonably request to minimize the chance of a claim being made against
Licensor for anything that occurs at the Hotel, or for acts, omissions or
obligations of you or anyone associated or affliated with you or the Hotel.
Such steps may, for example, include giving notice in private rooms, public
rooms and advertisements, on business forms and stationery, and any other
materials, making clear to the public that Licensor is not the owner or
operator of the Hotel and is not accountable for what happens at the Hotel.
Unless required by law, you shall not use the word "Microtel" or any similar
words in your corporate, partnership, or trade name, nor authorize or permit
such use by anyone else. You shall not use the word "Microtel" or any other
name or mark associated with the Hotel System to incur any obligation or
indebtedness on behalf of Licensor.
13. Miscellaneous.
A. Severability and Interpretation. The remedies provided in this
Agreement are not exclusive. In the event any provision of this Agreement is
held to be unenforceable, void or voidable as being contrary to the law or
public policy of the United States or any other jurisdiction entitled to
exercise authority hereunder, all remaining provisions shall nevertheless
continue in full force and effect unless deletion of the provision(s) deemed
unenforceable, void or voidable impairs the consideration for this Agreement
in a manner which frustrates the purpose of the parties or makes performance
commercially impracticable. In the event any provision of this Agreement
requires interpretation, such interpretation shall be based on the reasonable
intention of the parties in the context of this transaction without
interpreting any provision in favor of or against any party hereto by reason
of the drafting of the party or its position relative to the other party. Any
covenant, term or provision of this Agreement which, in order to effect the
intent of the parties, must survive the termination of this Agreement, shall
survive any such termination.
B. Binding Effect. This Agreement shall become valid when executed and
accepted by Licensor at Atlanta, Georgia. It shall be deemed made and entered
into in the state of Georgia and shall be governed and construed under and in
accordance with the laws of the state of Georgia. In entering into this
Agreement, you acknowledge that you have sought, voluntarily accepted, and
become associated with Licensor who is headquartered in Atlanta, Georgia and
that this Agreement contemplates and shall result in business relationships
with Licensor's headquarter's personnel. The choice of law designation
permits, but does not require that all suits concerning this Agreement be
filed in the state of Georgia.
C. Exclusive Benefit. This Agreement is exclusively for the benefit of the
parties hereto and it shall not give rise to liability to a third party,
except as otherwise specifically set forth herein. No agreement between
Licensor and anyone else is for the benefit of you.
D. Entire Agreement. This is the entire Agreement (and supersedes all
previous agreements including without limitation, any commitment agreement
between the parties concerning the Hotel) between the parties
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<PAGE>
relating to the Hotel. Neither Licensor nor any other person on Licensor's
behalf has made any representation to you concerning this Agreement or
relating to the Hotel System, which representation is not fully set forth
herein or in Licensor's "Offering Circular for Prospective Franchisees."
No change in this Agreement shall be valid unless in writing signed by
both parties. No failure to require strict performance or to exercise any
right or remedy hereunder shall preclude requiring strict performance or
exercising any right or remedy in the future.
E. Licensor's Withholding of Consent. Licensor's consent, wherever
required, may be withheld if any default by you exists under this
Agreement. Approvals and consents by Licensor shall not be effective
unless evidenced by a writing duly executed on behalf of Licensor.
F. Notices. Any and all notices required or permitted under this
Agreement shall be in writing and shall be delivered by any means which
shall provide evidence of the date received, to the respective parties at
the following addresses unless and until a different address has been
designated by written notice to the other party:
Notices to LICENSOR: Microtel Inns & Suites Franchising, Inc.,
13 Corporate Square, Suite 250
Atlanta, Georgia 30329
(404) 321-4045
Notices to you: {{ENTITYNAMECAPS}}
{{PCADDRESS1}}
{{PCADDRESS2}}
Attn: {{PCNAME}}
Any notice shall be deemed to have been given at the date and time it
is evidenced to have been received.
G. Descriptive Headings. The descriptive headings in this Agreement are
for convenience only and shall not control or affect the meaning or
construction of any provision in this Agreement.
H. Management of the Hotel. You must at all times retain and exercise
direct management control over the Hotel's business. You shall not enter
into any lease, management agreement or other similar arrangement for the
operation of the Hotel or any part thereof (including without limitation,
food and/or beverage service facilities), with any independent entity
without the prior consent of Licensor.
I. Conversion of other Properties. Due to the unique nature of both the
interior and exterior of Microtel Hotels, it is Licensor's intent not to
accept conversion of other properties in the Hotel System. In the event
that Licensor violates this clause, you may at your option terminate this
Agreement upon notice to Licensor, and in such case you shall not be
required to pay liquidated damages required under Section 10.E hereof if
all fees owing to Licensor and its affiliates are paid in full upon
termination and you perform all post termination obligations specified in
Paragraph 10. Alternatively, in the event that Licensor violates this
clause, you may at your option remain in the Hotel System and cease to pay
royalties required under Section 3.D(l)(a) hereof; however, you shall
still pay the Marketing/Reservation Contribution required under Section
3.D(l)(b) hereof.
J. Guest Room Rates. You acknowledge that the Hotel System is designed
to emphasize a value oriented concept and to compete directly in the true
value lodging segment. However it is your responsibility to establish room
rates for the Hotel. Rates must be submitted to Licensor prior to the
deadline for the upcoming National Directory and you may not charge a rate
in excess of the rate published in the National Directory for a particular
time period.
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<PAGE>
(signatures on the following page)
17
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first stated above.
LICENSEE:
{{ENTITYNAMECAPS}}
By:
By: {{SIGNEENAME}}
By: {{SIGNEETITLE}}
Attest:
Attest: Secretary
LICENSOR:
MICROTEL INNS & SUITES FRANCHISING, INC.,
By:
By: Jon Leven
Vice President Franchise Administration
and Reservations
Attest:
Asst. Secretary
18
<PAGE>
GUARANTY
As an inducement to Microtel Inns & Suites Franchising, Inc., ("Licensor")
to execute the above License Agreement, the undersigned, jointly and
severally, hereby unconditionally warrant to Licensor and its successors and
assigns that all of licensee's representations in the License Agreement and
the application submitted by the licensee to obtain the License Agreement are
true and guarantee that all of the licensee's obligations under the above
License Agreement, including any amendments thereto whenever made (the
"Agreement"), shall be punctually paid and performed.
Upon default by the licensee or notice from Licensor, the undersigned
shall immediately make each payment and perform each obligation required of
the licensee under the Agreement. Without affecting the obligations of the
undersigned under this Guaranty, Licensor may without notice to the
undersigned extend, modify or release any indebtedness or obligation of the
licensee, or settle, adjust or compromise any claims against the licensee.
The undersigned waive notice of amendment of the Agreement and notice of
demand for payment or performance by the licensee.
Upon the death of an individual guarantor, the estate of such guarantor
shall be bound by this Guaranty but only for defaults and obligations
hereunder existing at the time of death, and the obligations of the other
guarantors shall continue in full force and effect.
The Guaranty constitutes a guaranty of payment and performance and not of
collection, and each of the guarantors specifically waives any obligation of
Licensor to proceed against the licensee on any money or property held by the
licensee or by any other person or entity as collateral security, by way of
set off or otherwise. The undersigned further agree that this Guaranty shall
continue to be effective or be reinstated as the case may be, if at any time
payment or any of the guaranteed obligations is rescinded or must otherwise
be restored or returned by Licensor upon the insolvency, bankruptcy or
reorganization of the licensee or any of the undersigned, all as though such
payment has not been made.
IN WITNESS WHEREOF, each of the undersigned has signed this Guaranty as of
the date of the above Agreement.
Witnesses: Guarantors:
{{GUARANTOR1}}, Legal Signature
{{GUARANTOR2}}, Legal Signature
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<PAGE>
ATTACHMENT A
THE HOTEL
Facilities (Paragraph 1):
Site--Area and general description: A {{BRAND\w hotel to be located at
{{HOTELADDRESS1}},
{{HOTELADDRESS2}}
Number of approved Guest Rooms: {{ROOMS}}
Number of Suites included: None
Ownership of Licensee (Paragraph 8):
{{ENTITYNAMECAPS}} 100%
20
<PAGE>
ATTACHMENT B
EXCLUSIVE TERRITORY
The Exclusive Territory is defined as that area bordered by:
21
<PAGE>
ATTACHMENT C
THE WORK
You acknowledge that every detail of the Hotel System is important to
Licensor and other licensees operating under the Hotel System in order to
develop and maintain the standards and public image of the Hotel System. You
agree to comply with the details of the Hotel System as specified by Licensor
in the Manual, or otherwise in writing, and not to deviate therefrom.
Specifically, you acknowledge that the Hotel is intended to offer minimal
amenities and to compete directly with hotels offering the lowest average
room rate in each target market. You therefore agree that it shall offer or
install only those amenities that are approved in advance by Licensor.
The dates below set forth the development schedule for the Hotel.
1) You shall submit preliminary plans, including site layout and outline
specifications adapting Licensor's then-prototypical plans on or before a
date 3 months from the date of this License.
2) You shall submit complete working drawings and specifications for the
Hotel and Hotel premises, including its proposed equipment, furnishings,
facilities and signs with such detail and containing such information as
Licensor may request on or before a date 5 months from the date of this
License.
The Plans as submitted to Licensor shall conform to then prevailing Hotel
System standards, including the construction standards set forth in the
Manual. Construction shall not begin unless and until Licensor has approved
the Plans. Thereafter, no change shall be made to the Plans without the
advance consent of Licensor. Notwithstanding the foregoing, after the Plans
have been approved, if in the course of actual construction any change in the
Plans occurs, you shall notify Licensor promptly. Licensor shall determine
whether construction has been completed in accordance with the Plans.
3) Construction of the Hotel shall commence on or before on or before a date
7 months from the date of this License.
Commencement of construction shall mean excavation and poured footings
with a finished building slab. Once the construction has commenced, it shall
continue uninterrupted (except for interruption by reason of events
constituting force majeure) until construction is completed. You shall,
within five (5) days of the commencement of construction, provide written
notice to Licensor that construction has begun. As used in this License,
"force majeure" means an act of God, war, civil disturbance, government
action, fire, flood, accident, hurricane, earthquake or other calamity,
strike or other labor dispute, or other action beyond the control of you.
4) The Hotel shall be furnished, equipped and shall otherwise be made ready
to open for business in accordance with the License on or before a date 13
months from the date of this License ("Completion Date").
You shall, within ten (10) days of the Completion Date, submit a written
request to Licensor for Licensor to conduct a final inspection. Upon receipt
of such request, Licensor shall promptly conduct such final inspection. You
shall open for business within ten (10) days after receipt of Licensor's
authorization to do so. The date upon which you receive authorization to open
for business shall be the "Opening Date". You shall not open for business
until Licensor provides final approval and authorization in writing.
The Hotel shall not be opened for business as a Microtel Inn, Microtel
Suites or a Microtel Inn & Suites unless and until:
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<PAGE>
(i) Licensor has approved and accepted, in advance, in writing the
construction of the Hotel in accordance with the Plans; the
installation of all items of equipment, furniture, signs, computer
terminals and related supplies; and the hiring and training of staff
necessary to operate the Hotel in accordance with Licensor's
requirements;
(ii) no accounts are past due to Licensor, its parent, divisions,
subsidiaries or affiliated companies by you;
(iii) you are in full compliance with all of the terms of this License
Notwithstanding anything else herein to the contrary, Licensor may authorize
License to open and operate the Hotel even though you have not fully complied
with the terms of this License, provided that you agree to fulfill all
remaining terms of this License on or before the dates designated by
Licensor.
23
Location: {{HOTELADDRESS1}}
{{HOTELADDRESS2}}
ID Number: {{IDNUMBER}}
Date: ___________________________
HAWTHORNE SUITES LICENSE AGREEMENT
BETWEEN
HAWTHORN SUITES FRANCHISING, INC.
AND
{{ENTITYNAMECAPS}}
<PAGE>
TABLE OF CONTENTS
RECITALS PAGE
1. THE LICENSE ..................................................1
2. GRANT OF LICENSE ..............................................2
3. LICENSEE'S RESPONSIBILITIES ...................................2
4. LICENSOR'S RESPONSIBILITIES ...................................5
5. PROPRIETARY RIGHTS ............................................7
6. RECORDS AND AUDITS ............................................7
7. INDEMNITY AND INSURANCE ......................................8
8. TRANSFER .....................................................9
9. CONDEMNATION AND CASUALTY ....................................12
10. TERMINATION .................................................13
11. AGREEMENT IS RENEWABLE .......................................16
12. RELATIONSHIP OF PARTIES .....................................16
13. MISCELLANEOUS ................................................17
GUARANTY
ATTACHMENT A
ATTACHMENT B
ATTACHMENT C
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<PAGE>
LICENSE AGREEMENT
Dated , between Hawthorn Suites Franchising, Inc. ("Licensor" or
"HFI") and {{ENTITYNAMECAPS}}, a {{ENTITYTYPE}} ("Licensee"), whose address is
{{ENTITYADDRESS}}.
PARTIES AGREE AS FOLLOWS:
1. The License.
Licensor has been licensed by Hawthorn Suites Associates ("HSA"), under the
terms of an agreement dated March 26, 1996 (the "HSA Agreement"), the right to
use and license others to use a unique concept and system relating to the
establishment and operation of certain hotels that operate under the name
"HAWTHORN SUITES" ("Hawthorn Hotels" or the "Hotel System"). Hawthorn Hotels
are all-suites hotels in which the lodging units each contain sleeping
quarters, bath, living room, and kitchen. You have independently investigated
the risks of the business to be operated hereunder, including current and
potential market conditions, competitive factors and risks, and have read
Licensor's "Offering Circular for Prospective Franchisees", and have made an
independent evaluation of all such facts. Aware of the relevant facts, you
desire to enter into this agreement ("Agreement") in order to obtain a license
to use the Hotel System in the operation of a Hawthorn Suites hotel located
at {{HOTELADDRESS1}}, {{HOTELADDRESS2}} (the "Hotel").
A. The Hotel. The Hotel comprises all structures, facilities,
appurtenances, furniture, fixtures, equipment, and entry, exit, parking and
other areas from time to time located on the land identified on the plot plan
most recently submitted to and acknowledged by Licensor in anticipation of
the execution of this Agreement, or located on any land from time to time
approved by Licensor for additions, signs or other facilities. The Hotel
currently includes the facilities listed on Attachment A hereto. No change in
the number of approved standard suites or guest rooms (which are hereinafter
referred to collectively as "Suites") and no other significant change in the
Hotel shall be made without Licensor's approval. Redecoration and minor
structural changes that comply with Licensor's standards and specifications
shall not be considered significant. You represent that you are entitled to
possession of the Hotel during the entire License Term, as defined in
Paragraph 2 hereof, without restrictions that would interfere with any of
your obligations under this Agreement.
B. The Hotel System. The Hotel System is composed of elements, as
designated from time to time by Licensor, designed to identify Hawthorn
Suites hotels to the consuming public and/or to contribute to such
identification and its association with quality standards. The Hotel System
at present includes, without limitation, the trade names, trademarks, and
service marks, "HAWTHORN SUITES" and such other trade names, trademarks, and
service marks as are now designated (and may hereafter be designated by
Licensor in writing) as part of the Hotel System (hereinafter "Proprietary
Marks"); prototypical architectural plans, designs, and layouts, including,
without limitation, site plan, floor plan, and lobby plan; access to a
centralized reservation system; a national Hawthorn Suites directory (the
"National Directory"); management and personnel training, and training
programs and materials; management and operational procedures and techniques
as prescribed in the Confidential Manual (hereinafter the "Manual"); standards
and specifications for construction, equipment, and furnishings, as described
in the Manual; advertising, marketing, and promotional programs; and such
other improvements that Licensor may make from time to time.
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<PAGE>
2. Grant of License. Licensor hereby grants to you a license (the "License")
to use the Hotel System only at the Hotel, only in connection with the
operation of the Hotel and, only in accordance with this Agreement, beginning
with the date hereof and terminating as provided in Paragraph 10 hereof (the
"License Term"). During the License Term, neither Licensor nor any affliate of
Licensor nor any franchisee, shall develop, license, or permit any authorized
Hawthorn Hotel within the territorial boundaries as defined in Attachment B
hereto (the "Territory"). Your rights to the Territory shall automatically
terminate if the Hotel's Quality Assurance Score (defined in Paragraph 4.C.
hereof) falls below 425, or its then-current equivalent, and you are unable
to increase the score to 425 within sixty (60) days of the inspection, or if
this Agreement is otherwise terminated in accordance with Section 10 hereof.
This Agreement does not limit Licensor's right, or the rights of any parent,
subsidiary, division or affiliate of Licensor, to use or license to others
the Hotel System or any part thereof at any location outside of the
Territory. Further, Licensor, or its parent, subsidiary, division or
affiliate may conduct any business activity or license other hospitality
concepts under brands other than the Proprietary Marks outside and within the
Territory. You acknowledge that Licensor, its parent, subsidiaries, divisions
and affiliates are and may in the future be engaged in other business
activities including activities related to transient lodging, which may be or
may be deemed to be competitive with the Hotel System; that facilities,
programs, services and/or personnel used in connection with the Hotel System
may also be used in connection with such other business activities of
Licensor, its parent, subsidiaries, divisions or affiliates; and that you are
acquiring no rights hereunder other than the right to use the Hotel System in
connection with a Hawthorn Suites Hotel as specifically defined herein in
accordance with the terms of this Agreement.
3. Licensee's Responsibilities.
A. Operational and Other Requirements. During the License Term, you shall:
(1) maintain a high moral and ethical standard and atmosphere at the
Hotel;
(2) maintain the Hotel in a clean, safe and orderly manner and in first
class condition;
(3) provide efficient, courteous, and high-quality service to the public;
(4) operate the Hotel twenty four (24) hours a day, every day;
(5) strictly comply in all respects of the Hotel System and the Manual and
with all other policies, procedures and requirements of Licensor which
may be from time to time communicated to you;
(6) strictly comply with Licensor's reasonable requirements to use only
reliable sources of supplies for the Hotel including any suppliers
approved by Licensor;
(7) strictly comply with Licensor's requirements as to:
(a) the types of services, products, and amenities that may be used,
promoted or offered at the Hotel;
(b) use, display, style and type of signage;
(c) directory and reservation service listings of the Hotel;
(d) training of persons to be involved in the operation of the Hotel,
including all expenses incurred by you associated therewith;
(e) participation in all marketing, reservation service, advertising,
training and operating programs designated by Licensor as
System-wide (or area-wide) programs in the best interests of
hotels using the Hotel System;
(f) maintenance, appearance and condition of the Hotel; and
(g) quality and type of service offered to customers at the Hotel.
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<PAGE>
(8) use such automated guest service and/or hotel management and/or
telephone system(s) as Licensor shall specify, including any
additions, enhancements, supplements or variants developed during the
term hereof;
(9) participate in and use the those reservation services as Licensor
shall specify, including any additions, enhancements, supplements or
variants thereof which may be developed during the term hereof;
(10) adopt improvements or standard changes to the Hotel System as may be
from time to time designated by Licensor, which improvements are not
intended to cause undue hardship;
(11) strictly comply with all governmental requirements including the
filing and maintenance of any required trade name or fictitious name
registrations, pay all taxes, and maintain all governmental licenses
and permits necessary to operate the Hotel in accordance with the
Hotel System;
(12) permit inspection of the Hotel by Licensor's representatives at any
time and give them free lodging for such time as may be reasonably
necessary to complete their inspections;
(13) insure that no part of the Hotel or the Hotel System is used to
further or promote a competing business or other lodging facility,
except as Licensor may approve for those competing businesses or
lodging facilities owned, licensed, operated or otherwise approved by
Licensor or its parent, divisions, subsidiaries and/or affiliates;
(14) in all respects use your best efforts to reflect credit upon and
create favorable public response to the Proprietary Marks;
(15) promptly pay to Licensor all amounts due Licensor, its parent,
divisions, subsidiaries and/or affiliates as royalties or fees or for
goods or services purchased by you;
(16) comply with Licensor's requirements concerning confidentiality of
information, and, specifically: treat the Manual and all supplements
and revisions as confidential; use all reasonable efforts to keep the
information confidential; not copy the Manual in any way, nor make it
available to any unauthorized person; disclose information contained
in the Manual only to persons who must have access to it in
connection with their employment with you; and obtain each such
person's agreement to keep such information confidential; and
(17) conduct your advertising in a dignified manner and conform to the
standards and requirements as Licensor may specify from time to time
in writing; submit samples of all advertising and promotional
materials to Licensor for approval; and discontinue use of any
disapproved material upon receipt of such written notice.
B. Performance of the Work. You agree to perform the construction and
renovation and/or conversion work on the property including, without
limitation, the purchase of furniture, fixtures, and equipment set forth on
Attachment C hereto and incorporated herein by reference (the "Work"). You
acknowledge that your agreement to perform the Work is an essential element
of the consideration relied upon by Licensor in entering into the Agreement.
Your failure to perform the Work in accordance with Licensor's requirements
and specifications (including the progress, milestone completion and other
dates specified in Attachment "C") shall constitute a material breach of your
obligations under this License. Licensee may not commence operation of the
Hotel as a Hawthorn Hotel without Licensor's written authorization.
Notwithstanding any consent by Licensor to the authorized conditional opening
of the Hotel, all upgrading shall be completed and the Hotel shall otherwise
be in compliance with the Agreement no later than the date contained in
Attachment C.
C. Upgrading of the Hotel. Licensor shall review the Quality Assurance
Scores (as defined in Paragraph 4.C. hereof) of the Hotel upon each five (5)
year anniversary of the opening of the Hotel. If over the previous five (5)
year period, the Hotel has failed to maintain an average score of four
hundred fifty
3
<PAGE>
(450) or greater out of a possible five hundred (500) (or its then-current
equivalent), Licensor may require modernization of the Hotel, softgood
rehabilitation (including but not limited to carpet, drapes, bedspreads) or
other upgrading of the Hotel. If the upgrading requirements contained in this
Paragraph 3.C. cause you undue hardship, you may terminate this Agreement by
paying a fee computed according to Paragraph l0.E
D. Fees.
(1) For each month (or part of a month) during the License Term, you shall
pay to Licensor by the tenth (10th) of the following month:
(a) a royalty fee equal to five percent (5%) of the Gross Room
Revenues of the Hotel, with deductions for sales and room taxes
only ("Gross Room Revenues");
(b) an "Advertising Fund Contribution" of 2.5 percent of Gross Rooms
Revenue. The Advertising Fund Contribution payments do not include
the cost, installation or maintenance of reservation services
equipment or training. Licensor may, in its sole discretion and at
any time, increase the Advertising Fund Contribution amount above
by no more than ten percent (10%) per year provided that
Licensee's Advertising Fund Contributions shall not exceed a
maximum of three percent (3.0%). Licensee hereby acknowledges any
such increase shall not be imposed unless a similar increase is
imposed on all licensees operating under the Hotel System
according to license agreements that contain provisions similar to
this Paragraph 3(D)(l)(b) providing for such increased
contributions by licensees; and
(c) an amount equal to any sales, gross receipts, or similar tax
imposed on Licensor and calculated solely on payment required
hereunder, unless the tax is an optional alternative to an income
tax otherwise payable by Licensor.
(2) "Gross Room Revenues" shall mean the gross receipts attributable to or
payable for the rental of Suites at the Hotel, including, without
limitation, the net proceeds (after deduction of the expenses of
adjustment and collection) of use and occupancy, or for business
interruption, rent loss, or similar insurance with respect to the
Hotel (provided that insurance proceeds shall be included in Gross
Room Revenues only when and to the extent actually received). Gross
Room Revenues shall not include gratuities to employees or service
charges levied in lieu of such gratuities, which, in either case, are
payable to employees, or federal, state, and local taxes or fees
collected by you for transmittal to the appropriate taxing
authorities.
(3) All monthly payments required by this Agreement shall be submitted to
Licensor together with all reports required under this Agreement.
Licensor may require that all monthly payments required under this
Agreement shall be made by telegraphic transfer, automatic debit
arrangement, or other means as Licensor may specify from time to time,
to a bank account designated by Licensor. In the event such
arrangements are made, Licensor shall be responsible for the cost of
connection to such service and you shall maintain sufficient funds in
your bank account to pay all such debited obligations. Any payment or
report not actually received by Licensor on or before such date shall
be deemed overdue, or, if an automatic debit or similar arrangement is
utilized and funds are insufficient to cover your payment obligation,
any amounts unpaid on or before such date shall be deemed overdue. If
any payment is overdue, you shall pay to Licensor, in addition to the
amount overdue, interest on such amount from the day it was due until
paid at one and a half percent (1.5%) per month or the maximum rate
permitted by law, whichever is less. Entitlement to such interest
shall be in addition to any of the remedies Licensor may have.
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(4) A standard initial fee for additional Suites equal to the higher of
(a) Four Hundred Dollars ($400) per room; or (b) the then-current per
room charge for the Application Fee per room, shall be paid by you to
Licensor on your submission of an application to add any Suites to the
Hotel. As a condition to Licensor granting its approval of such
application, Licensor may require you to upgrade the Hotel, subject to
Paragraph 3.C.
(5) Local and regional marketing programs and related activities may be
conducted by you, but only at your expense and subject to Licensor's
requirements. Reasonable charges may be made by Licensor for optional
advertising materials ordered or used by you for such programs and
activities.
(6) Licensee shall pay all fees for travel agent commissions and global
distribution systems (e.g., Sabre, Apollo, or other online
distribution system, whether processed through Licensor, Licensor's
reservation system, third party reservation systems, or directly to
Licensee).
4. Licensor's Responsibilities.
A. Training. During the License Term, Licensor shall continue to specify
and provide required and optional training programs at various locations that
Licensor shall designate. Reasonable charges may be made for required
training materials. Travel, lodging and other expenses of you and your
employees shall be borne by you. If such training is held at your Hotel, you
must provide Licensor's representatives lodging at the Hotel at no cost to
Licensor.
B. Reservation Services. Provided that Licensee is in full compliance with
its material obligations under this Agreement, Licensor will afford Licensee
access to reservation services for the Hotel.
C. Consultation on Operations, Facilities and Marketing. If a new
development, Licensor shall provide you with a set a confidential
prototypical plans and specifications, which must be adapted by your
architects and engineers. Licensor will review your site layout and working
drawings prepared by your architects, and any other related plans and
specifications. In addition Licensor shall, from time to time at Licensor's
sole discretion, make available to you consultation and advice in connection
with operations, facilities and marketing, including lists of suppliers for
Hotel fixtures, furnishings, signs, and other equipment. Licensor shall also
periodically evaluate the performance of the Hotel, but in any case at least
once each year, by assessing the quality of the Hotel's facility and services
according to certain criteria developed by Licensor (the "Quality Assurance
Score").
D. Use of Advertising Fund Contribution. The Advertising Fund Contribution
shall be used by Licensor for costs associated with advertising, promotion,
publicity, market research and other marketing programs and related
activities, cost of maintaining and producing a National Directory, as well
as reservations programs, services and overhead for individuals directly
related to national and local marketing and reservations. For the purpose of
this Paragraph, overhead shall be limited to individuals directly related to
the Reservation or Marketing departments such as the Vice President of
Marketing and costs related to the financial management of the fund. Licensor
shall not use any of the funds in the Advertising Fund Contribution to pay
for marketing directly related to the sale of franchises. Licensor is not
obligated to expend funds for marketing or reservation services in excess of
the amounts received from licensees using the Hotel System. In the event
excess amounts remain at the end of any taxable year, all expenditures in the
following taxable year(s) shall be made first out of accumulated earnings
from previous years, next out of earnings in the current year, and finally
from contributions. Advertising Fund Contribution shall not be an asset of
Licensor, and an audit of the operation of the Advertising Fund Contribution
shall be prepared
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annually by an independent certified public accountant selected by Licensor
and shall be made available to you on request. Licensor shall maintain the
National Directory, listing the address and telephone number of all Hawthorn
Suites operating under the Hotel System.
E. Application of Manual. Licensor shall provide you, on loan, one (1)
copy of the Manual. All hotels operated within the Hotel System shall be
subject to the Manual, as it may from time to time be modified or revised by
Licensor, including limited exceptions which may be made by Licensor based on
local conditions or special circumstances. Each change in the Manual must be
explained in writing to you at least thirty (30) days before it goes into
effect.
F. Other Arrangements for Marketing Etc. Licensor may enter into
arrangements for development, marketing, operations, administrative,
technical and support functions, facilities, programs, services and/or
personnel with any other entity and may use any facilities, programs,
services and/or personnel used in connection with the Hotel System in
connection with any business activities of its parent, subsidiaries,
divisions or affiliates.
G. Inspections/Compliance Assistance. Licensor has the right to inspect
the Hotel at any time, with or without notice to you, to determine if the
Hotel is in compliance with the standards and rules of operation set forth in
the Manual. If the Hotel fails to comply with such standards and rules of
operation, Licensor may, at its option and at your cost, require an action
plan to correct the deficiencies. You must then take all steps necessary to
correct any deficiencies within the times established by Licensor. Licensor's
approval of an action plan does not waive any rights it has or may have under
this Agreement nor does it relieve you of any obligations under this
Agreement.
5. Proprietary Rights.
A. Ownership of the Hotel System and Proprietary Marks. You acknowledge
and shall not contest, either directly or indirectly, Licensor's unrestricted
and exclusive right to license the Hotel System and any element(s) or
component(s) thereof, and acknowledge that Licensor has the sole right to
grant licenses to use all or any element(s) or component(s) of the Hotel
System. You specifically agree and acknowledge that HSA is the owner of all
right, title and interest in and to the Proprietary Marks together with the
goodwill symbolized thereby and that you shall not contest directly or
indirectly the validity or ownership of the marks either during the term of
this Agreement or at any time thereafter. All improvements and additions
whenever made to or associated with the Hotel System by the parties to this
Agreement or anyone else, and all Proprietary Marks, and all goodwill arising
from your use of Licensor's marks shall inure to the benefit of and become
the property of HSA. Upon expiration or termination of this Agreement, no
monetary amount shall be assigned as attributable to any goodwill associated
with your use of the Hotel System or any element(s) or component(s) of the
Hotel System including the name or marks.
B. Trademark Disputes. Licensor and/or HSA shall have the sole right and
responsibility to handle disputes with third parties concerning use of all or
any part of the Hotel System, and you shall, at your reasonable expense,
extend your full cooperation to Licensor and/or HSA in all such matters. All
recoveries made as a result of disputes with third parties regarding use of
the Hotel System or any part thereof shall be for the account of Licensor
and/or HSA. Neither Licensor nor HSA need initiate suit against alleged
imitators or infringers and may settle any dispute by grant of a license or
otherwise. You shall not initiate any suit or proceeding against alleged
imitators or infringers or any other suit or proceeding to enforce or protect
the Hotel System.
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C. Protection of Name and Marks. Both parties shall make every effort
consistent with the foregoing to protect and maintain the Proprietary Marks
and their distinguishing characteristics. You agree to execute any documents
deemed necessary by Licensor, HSA or their respective counsel to obtain
protection for Licensor's marks or to maintain their continued validity and
enforceability. You agree to use the names and marks associated with the
Hotel System only in connection with the operation of a Hawthorn Hotel and in
the manner authorized by Licensor and you acknowledge that any unauthorized
use thereof shall constitute infringement of Licensor's and HSA's rights. You
must notify Licensor immediately, in writing, of any infringement or
challenge to your use of Licensor's marks or of any unauthorized use or
possible misuse of Licensor's marks or Licensor's proprietary information.
6. Records and Audits.
A. Monthly Reports. At least monthly, you shall prepare a statement which
shall include all information concerning Gross Rooms Revenue, other revenues
generated at the Hotel, room occupancy rates, reservation data and other
information required by Licensor that may be useful in connection with
marketing and other functions of Licensor, its parent, subsidiaries,
divisions or affiliates (the "Data"). The Data shall be the property of
Licensor. By the tenth (10th) of each month, you shall submit to Licensor a
statement setting forth the Data for the previous month and reflecting the
computation of the amounts then due under Paragraph 3.D hereof. The statement
shall be in such form and detail as Licensor may reasonably request from time
to time, and may be used by Licensor for its reasonable purposes. Licensor
shall not willingly or knowingly provide Data on your property as an
inducement to develop other hotel brands in your market area.
B. Preparation and Maintenance of Records. You shall, in a manner and form
satisfactory to Licensor and utilizing accounting and reporting standards as
reasonably required by Licensor, prepare on a current basis (and preserve for
no less than four (4) years), complete and accurate records concerning Gross
Rooms Revenue and all financial, operating, marketing and other aspects of
the Hotel, and maintain an accounting system which fully and accurately
reflects all financial aspects of the Hotel and its business. Such records
shall include but not be limited to books of account, tax returns,
governmental reports, register tapes, daily reports, and complete quarterly
and annual financial statements (profit and loss statements, balance sheets
and cash flow statements).
C. Audit. Licensor or its designated agents shall have the right at any
time to examine and copy, at its expense, all books, records, and your tax
returns related to the Hotel and, at its option, to have an independent audit
made. If an inspection or audit should reveal that payments have been
understated in any report to Licensor, then you shall immediately pay to
Licensor the amount understated upon demand, in addition to interest from the
date such amount was due until paid, at one and one half percent (1.5%) per
month or the maximum rate permitted by law, whichever is less. In such event,
Licensor shall also have the right to require that all your future financial
statements related to the Hotel be audited at your expense for each fiscal
year by an independent certified public accounting firm selected by you and
approved by Licensor. If an inspection discloses an underpayment to Licensor
of five percent (5%) or more of the total amount that should have been paid
to Licensor during any six (6) month period, you shall, in addition to
repayment of such understated amount, with interest, reimburse Licensor for
any and all costs and expenses incurred in connection with the inspection or
audit (including, without limitation, reasonable accounting and attorneys'
fees). The foregoing remedies shall be in addition to any other remedies
Licensor may have, including, without limitation the remedies for default.
D. Annual Financial Statements. At Licensor's request, you shall submit to
Licensor as soon as available but not later than ninety (90) days after the
end of your fiscal year, complete financial
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statements for such year. You shall certify them to be true and correct and
to have been prepared in accordance with generally accepted accounting
principles consistently applied, and any false certification shall be a
breach of this Agreement. Licensor may also request, from time to time, gross
operating profits percentages and certain operating statistics (i.e. energy
and repairs costs) which you must provide.
7. Indemnity and Insurance.
A. Indemnity. It is understood and agreed that nothing in this Agreement
authorizes either party to make any contract, agreement, warranty or
representation on the other's behalf, or to incur any debt or other
obligation in the other's name, and that neither party shall in any event
assume liability for, or be deemed liable hereunder as a result of, any such
action, or by reason of any act or omission of the other party or any claim
or judgement arising therefrom. You shall indemnify and hold Licensor and
HSA, their parents, affiliates, subsidiaries, officers, directors, agents,
and employees, harmless against any and all claims arising directly or
indirectly from, as a result of, or in connection with, your operation of the
Hotel, including claims of intentional or negligent conduct by you, and any
claims of acts or omissions by Licensor or HSA relating to the operation of
the Hotel System (even though Neither HSA nor Licensor is actively involved
in the operation or supervision of the Hotels), as well as the costs,
including reasonable attorneys' fees, of defending against them. You agree
that all of the obligations of Licensor under this Agreement are to you, and
no other party is entitled to rely on, enforce, or obtain relief for breach
of such obligations either directly or indirectly or by subrogation. Licensor
shall not indemnify or hold you harmless against any action or claim by any
third party based upon Licensor's exercise of any of its rights in accordance
with the terms of this Agreement.
B. Insurance. During the License Term, you shall comply with all insurance
requirements of any lease or mortgage covering the Hotel, and Licensor's
specifications for insurance as to amount and type of coverage as may be
reasonably specified by Licensor from time to time in writing, and shall in
any event maintain as a minimum the following insurance underwritten by an
insurer approved by Licensor:
(1) employer's liability and workers' compensation insurance as
prescribed by applicable law; and
(2) comprehensive general liability insurance (with products, completed
operations and independent contractors coverage) and comprehensive
automobile liability insurance, all on an occurrence basis naming
Licensor and its then current parent, subsidiaries, divisions,
affiliates and their successors and assigns as additional insureds
and underwritten by an insurer approved by Licensor, with
single-limit coverage for personal and bodily injury and property
damage of at least Ten Million Dollars ($10,000,000) for each
occurrence. In addition, Dram Shop/Liquor Liability insurance shall
also be provided for the same named insureds and under the same
limits and coverage amounts. In connection with all significant
construction at the Hotel during the License Term, you shall cause
the general contractor to maintain with an insurer approved by
Licensor comprehensive general liability insurance (with products,
completed operations and independent contractors coverage) in at
least the amount of Ten Million Dollars ($10,000,000) for each
occurrence with Licensor and its then current parent, subsidiaries,
divisions, affiliates and their successors and assigns named as
additional insureds.
C. Changes in Insurance. Simultaneously herewith, annually hereafter and
each time a change is made in any insurance or insurance carrier, you shall
furnish to Licensor certificates of insurance including the term and coverage
of the insurance in force, the persons insured, and the fact that the
coverage
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may not be cancelled, altered or permitted to lapse or expire without thirty
(30) days' advance written notice to Licensor.
8. Transfer.
A. Transfer by Licensor. Licensor shall have the right to transfer or
assign all or any part of its rights or obligations in this Agreement to any
person or legal entity, and you hereby consent to such transfer.
B. Transfer by Licensee.
(1) You understand and acknowledge that the rights and duties set forth
in this Agreement are personal to you, and that Licensor has
entered into this Agreement in reliance on your business skill,
financial capacity, and character, and that of your partners or
shareholders. Accordingly, neither you nor any immediate or remote
successor to any part of your interest in this Agreement, nor any
individual, partnership, corporation, or other legal entity which
directly or indirectly owns any interest in this Agreement or in
you shall sell, sign, transfer, convey, give away, mortgage, or
otherwise encumber any direct or indirect interest in this
Agreement (including any ownership interest in you), the Hotel, or
a substantial portion of the assets (including building and real
estate) of the Hotel without the prior written consent of Licensor.
Licensor's written consent shall not be required to mortgage the
building and real estate on the site of the Hotel premises to a
bank or other financial institution, provided that you remain the
mortgagor.
(2) If the transfer is equal to less than a fifty percent (50%) equity
interest in you and does not have the effect of transferring
control (as described in Paragraphs (3) and (4) below), the
transfer shall not require the prior approval of Licensor, provided
that you notify Licensor in writing of such transfer within thirty
(30) days following such transfer.
(3) If a transfer, alone or together with other previous, simultaneous,
or proposed transfers, would have the effect of transferring a
controlling interest in this Agreement, you, the Hotel, or greater
than fifty percent (50%) of the assets (including building and real
estate) of the Hotel, such transfer shall require Licensor's prior
approval, and Licensor may, in its sole discretion, require any or
all of the following as conditions of its approval, which approval
shall not be unreasonably withheld:
(a) all of your accrued monetary obligations to Licensor and its
subsidiaries and affiliates and all other outstanding
obligations related to the Hotel shall have been satisfied and
you are not otherwise in default;
(b) the transferee, and all shareholders in the transferee, shall
demonstrate to Licensor's satisfaction that the transferee and
its shareholders or general partners, as appropriate, meet
Licensor's then current qualifications being applied to new
applicants including, business standards, ability to conduct
the Hotel (as may be evidenced by prior related business
experience or otherwise), and have adequate financial resources
and capital to operate the Hotel;
(c) transferee and the shareholders or general partners in the
transferee shall execute the standard form license agreement
then being offered to new Hotel System licensees and such other
ancillary agreements as Licensor may require for the Hotel and
the general manager shall complete the initial training program
then in effect for new licensees;
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(d) the Hotel shall be upgraded to conform to the then-current
standards and specifications for hotels operating under the
Hotel System if the most recent Quality Assurance Score was
below four hundred and fifty (450). In any event, all
deficiencies noted on the most recent inspection must be
remedied by the transferee within ninety (90) days of such
transfer. You shall complete any upgrade required under this
Paragraph within the time specified by Licensor;
(e) You shall pay a transfer fee equal to Two Thousand Five Hundred
Dollars ($2,500.00), for a term equal to the balance of the
original term of this License. No fee shall be required for
transfers to the spouse, issue, parent, or sibling of a partner
or shareholder in you, or from one partner or shareholder to
another. If the transferee requests approval of a term greater
than the remaining term of this License, the then-current
standard minimum application fee, prorated according to the
period of time requested which exceeds the original term of
this License, shall be paid to Licensor;
(f) the transferor shall have executed a general release, in a form
satisfactory to Licensor, of any and all claims against
Licensor and its officers, directors, shareholders, and
employees, in their corporate and individual capacities,
including, without limitation, claims arising under federal,
state, and local laws, rules, and ordinances;
(g) the transferee, and all shareholders or general partners in the
transferee, shall enter into a written assignment, in a form
satisfactory to Licensor, assuming and agreeing to discharge
all of your obligations under this Agreement;
(h) you shall remain liable for all obligations to Licensor and its
subsidiaries and affiliates in connection with the Hotel prior
to the effective date of the transfer and shall execute any and
all instruments reasonably requested by Licensor to evidence
such liability.
(4) For the purposes of this Agreement, "control" shall mean the
possession, direct or indirect, of the power to direct or cause the
direction of the management and policies of a person, corporation
or other business entity, whether through the ownership of voting
securities, by contract, or otherwise.
(5) Any purported assignment or transfer, by operation of law or
otherwise, not having the prior written consent of Licensor shall
be null and void and shall constitute a material breach of this
Agreement, for which Licensor may then terminate without
opportunity to cure pursuant to Paragraph 10.C. of this Agreement,
and seek injunctive relief as well as monetary damages.
C. Transfers of the License or Equity Interest in Licensee Upon Death.
Upon your death or mental incompetency or of a person owning all or any
interest in you, the executor, administrator, or personal representative of
such person shall transfer within three (3) months after such death or mental
incompetency his interest to a third party approved by Licensor. Such
transfers, including, without limitation, transfers by devise or inheritance,
shall be subject to the same conditions as any inter vivos transfer. However,
in the case of transfer by devise or inheritance, if the heirs or
beneficiaries of any such person are unable to meet the conditions in this
Paragraph 8, the personal representative of the deceased shareholder shall
have reasonable time to dispose of the deceased's interest in you, which
disposition shall be subject to all the terms and conditions for transfers
contained in this Agreement. If the interest is not disposed of within nine
(9) months, Licensor may terminate this Agreement.
D. Registration of a Proposed Transfer of Equity Interests. Securities in
you may be offered to the public only with the prior written consent of
Licensor, which consent shall not be unreasonably
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withheld. All materials required by federal or state law for the sale of any
interest in you shall be submitted to Licensor for review prior to filing
with any government agency; and any materials to be used and any exempt
offering shall be submitted to Licensor for review prior to their use. No
offering by you shall imply (by use of the Proprietary Marks or otherwise)
that Licensor is participating as an underwriter, issuer, or officer of you
or Licensor's securities; and Licensor's review of any offering shall be
limited solely to the subject of the relationship between you and Licensor.
You and other participants in the offering must fully indemnify Licensor in
connection with the offering. For each proposed offering, you shall pay to
Licensor a non-refundable fee of Five Thousand Dollars ($5,000.00), or such
greater amount as is necessary to reimburse Licensor for its reasonable cost
and expenses associated with reviewing the proposed offering, including,
without limitation, legal and accounting fees.
E. Non-Waiver of Claims. Licensor's consent to a transfer of any interest
in the license granted herein shall not constitute a waiver of any claims it
may have against the transferring party, nor shall it be deemed a waiver of
Licensor's right to demand exact compliance with any of the terms of this
Agreement by the transferee.
F. Licensor's Right of First Refusal. If in the event that any party
holding any direct or indirect interest in this License, in you, or in all or
substantially all of the assets of the Hotel desires to accept any bonafide
offer from a third party to purchase such interest, you shall notify Licensor
as provided in Paragraph 13.F. hereof, and shall provide such information and
documentation relating to the offer as Licensor may require. Licensor shall
have the right and option, provided the third party wishes to remove the
Hotel from the Hotel System, exercisable within thirty (30) days after
receipt of such written notification, to send written notice to the seller
that Licensor intends to purchase the seller's interest on the same terms and
conditions offered by the third party. If Licensor elects to purchase the
seller's interest, closing on such purchase shall occur within ninety (90)
days from the date of notice to the seller of the election to purchase by
Franchisor. If Licensor elects not to purchase the seller's interest, any
material change thereafter in the terms of the offer from a third party shall
constitute a new offer subject to the same rights of first refusal by
Licensor as in the case of the third party's initial offer (minor changes to
the offer shall not constitute a new offer and shall be subject to the notice
period of the initial offer). Failure of Licensor to exercise the option
afforded by this Paragraph 8.F. shall not constitute a waiver of any other
provision of this Agreement, including all of the requirements of this
Paragraph 8.F., with respect to a proposed transfer. In the event the
consideration, terms, and/or conditions offered by a third party are such
that Licensor may not reasonably be required to furnish the same
consideration, terms, and/or conditions, then Licensor may purchase the
interest proposed to be sold for the reasonable equivalent in cash. If the
parties cannot agree within thirty (30) days on the reasonable equivalent in
cash of the consideration, terms, and/or conditions offered by the third
party, an independent appraiser shall be designated by Licensor at Licensor's
expense, and the appraiser's determination shall be binding.
G. No Right of First Refusal. In the event that you receive an offer from
a third party to purchase the Hotel and the third party wishes to keep the
Hotel in the Hotel System, Licensor shall have no right of first refusal
provided the third party meets the qualifications set forth in Paragraph 8.
9. Condemnation and Casualty.
A. Condemnation. You shall, at the earliest possible time, give Licensor
full notice of any proposed taking of the Hotel by eminent domain. In the
event the Hotel is taken by eminent domain, Licensor shall give due and
prompt consideration, without any obligation, to transferring this Agreement
to a nearby location selected by you and approved by Licensor as promptly as
reasonably possible, and in any event within four (4) months of the taking.
If the new location is approved by Licensor and the transfer
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authorized by Licensor and if you open a new hotel at the new location in
accordance with Licensor's specifications within two (2) years of the closing
of the Hotel, the new hotel shall thenceforth be deemed to be the Hotel
licensed under this Agreement. If a condemnation takes place and a new hotel
does not, for whatever reason, become the Hotel under this Agreement in
strict accordance with this Paragraph (or if it is reasonably evident to
Licensor that such shall be the case), this Agreement will terminate
forthwith upon notice thereof by Licensor to you, without the payment of
liquidated damages hereunder.
B. Casualty. If the Hotel is damaged by fire or other casualty, you shall
expeditiously repair the damage. If the damage or repair requires closing the
Hotel, you shall immediately notify Licensor, shall repair or rebuild the
Hotel in accordance with Licensor's standards, shall commence reconstruction
within four (4) months after closing, and shall reopen the Hotel for
continuous business operations as soon as practicable (but in any event
within twenty four (24) months after closing of the Hotel), giving Licensor
ample advance notice of the date of reopening. If the Hotel is not reopened
in accordance with this Paragraph 9.B., this Agreement shall forthwith
terminate upon notice thereof by Licensor to you, with the payment of
liquidated damages calculated in the manner set forth in Paragraph 10.E.
C. No Extensions of Term. Nothing in this Paragraph 9 shall extend the
License Term but you shall not be required to make any payments pursuant to
Paragraphs 3.D. (1), (2) or (3) for periods during which the Hotel is closed
by reason of condemnation or casualty.
10. Termination.
A. Expiration of Term.
(1) If this Agreement is for a new Development, rather than a Conversion
from another type of existing lodging facility, then the term of this
Agreement shall expire without notice effective 20 years from the
authorized opening date, subject to earlier termination as set forth
herein. The parties shall initial the agreement here is the Agreement
is for a new Development: [if a New Development: initial here] ______.
(2) If this Agreement is for a Hotel to be converted to a Hawthorn Suites
Hotel from another type of existing lodging facility, then the term of
this Agreement shall expire without notice effective 10 years from the
authorized opening date, subject to earlier termination as set forth
herein. The parties shall initial the agreement here is the Agreement
is for a Conversion: [if a Conversion: initial here] ________.
(3) Liquidated Damages. The parties recognize the difficulty of
ascertaining damages to Licensor resulting from premature termination
of this Agreement, and have provided for liquidated damages in
Paragraph 10.E. below, which liquidated damages represent the parties'
best estimate as to the damages arising from the circumstances in
which they are provided.
B. Default with Opportunity to Cure.
(1) Except as provided in Paragraphs 10.C. hereof, you shall have thirty
(30) days (unless otherwise specified herein or in the notice by
Licensor) from receipt of written notice of a default within which to
remedy such default. If any such default is not cured within that
time, or such longer period as applicable law may require (or such
longer period as may be reasonably required by you to cure any
non-monetary default if you immediately commence, diligently and in
good faith pursue, and cure such default), this Agreement shall
terminate without further notice to you effective immediately upon the
expiration of
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the thirty (30) day period, expiration of any extended period as
described above, or such longer period as applicable law may require.
Alternatively, Licensor may, at its option, suspend your access to the
reservation system until such default has been cured to Licensor's
satisfaction. You shall be in default hereunder for any failure to
comply with any of the requirements imposed by this Agreement, as it
may from time to time reasonably be supplemented by the Manual, or to
carry out the terms of this Agreement in good faith.
(2) If during the twelve (12) months preceding a notice of default in (1)
above you shall have engaged in a violation of this Agreement for
which a notice of default was given and such default was remedied, the
period given to remedy defaults thereafter shall, if and to the extent
permitted by law, be ten (10) days instead of thirty (30).
(3) In any judicial proceeding in which the validity of termination is at
issue, Licensor shall not be limited to the reasons set forth in any
notice sent under this Paragraph.
(4) Licensor's notice of termination or suspension of services as
described in Section 10(B)(1) shall not relieve you of your
obligations hereunder.
C. Immediate Termination by Licensor. This Agreement shall immediately
terminate without notice to you if:
(1) (a) you, or any Guarantor of your obligations hereunder (a
"Guarantor"), shall generally not pay your debts as they become due
or shall admit in writing an inability to pay your debts, or shall
make a general assignment for the benefit of creditors; or
(b) you, or any Guarantor, shall commence or consent to any case,
proceeding or other action seeking reorganization, arrangement,
adjustment, liquidation, dissolution or composition of you or your
debts under any law relating to bankruptcy, insolvency,
reorganization or relief of debtors, or seeking appointment of a
receiver, trustee, custodian or other similar official for it or
for all or any substantial part of its property; or
(c) you, or any Guarantor, shall take any corporate or other action to
authorize any of the actions set forth above in Paragraphs (a) or
(b); or
(d) any case, proceeding or other action against you or any such
guarantor shall be commenced seeking to have an order for relief
entered against it as debtor, or seeking reorganization,
arrangement, adjustment, liquidation, dissolution or composition
of it or its debts under any law relating to bankruptcy,
insolvency, reorganization or relief of debtors, or seeking
appointment of a receiver, trustee, custodian or other similar
official for it or for all or any substantial part of its
property, and such case, proceeding or other action (i) results in
the entry of an order for relief against it which is not fully
stayed within seven (7) business days after the entry thereof or
(ii) remains undismissed for a period of forty-five (45) days; or
(e) an attachment remaining on all or a substantial part of the Hotel
or of your or any Guarantor's assets for thirty (30) days; or
(f) you or any Guarantor fails, within sixty (60) days of the entry of
a final judgment against you in any amount exceeding Fifty
Thousand Dollars ($50,000), to discharge, vacate or reverse the
judgment, or to stay execution of it, or if appealed, to discharge
the judgment within thirty (30) days after a final adverse
decision in the appeal; or
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<PAGE>
(2) you cease to operate the Hotel at the Location or under the
Proprietary Marks, or loses possession or the right to possession of
all or a significant part of the Hotel, except as otherwise provided
in Paragraph 9 hereof; or
(3) you contest in any court or proceeding Licensor's ownership of the
Hotel System or any part of it, or the validity of any of the
Proprietary Marks; or
(4) a breach of Paragraph 8 hereof occurs; or
(5) you fail to continue to identify the Hotel to the public as a Hawthorn
Hotel; or
(6) any action is taken toward dissolving or liquidating you or any
Guarantor, if it is a corporation or partnership, except for death of
a partner; or
(7) you or any of your principals is, or is discovered to have been,
convicted of a felony (or any other offense if it is likely to
adversely reflect upon or affect the Hotel, the Hotel System, the
Proprietary Marks and the goodwill associated therewith, the Licensor,
the Licensor's parent or your affiliates or subsidiaries in any way);
or
(8) you knowingly maintain false books and records of account or knowingly
submits false reports or information to Licensor; or
(9) if you intentionally disclose or divulge the contents of the Manual or
other trade secrets or confidential information provided to you by
Licensor to any unauthorized person or fail to exercise reasonable
care to prevent such disclosure; or
(10) if you intentionally or negligently make any material false
statements or omissions to Licensor in connection with your
Application.
D. De-identification of Hotel Upon Termination. You shall take whatever
action is necessary to assure that no use is made of any part of the Hotel
system at or in connection with the Hotel or otherwise after the license term
ends. This shall involve, among other things, returning to Licensor the
Manual and all other materials proprietary to Licensor, removal of all
distinctive signs, changing the telephone listing and removal of all items
bearing the Hawthorn Hotel logo, name, trademarks and/or service marks.
Further, until all modifications required by this Paragraph 10.D. are
completed, you shall (i) maintain a conspicuous sign at the registration desk
in a form specified by Licensor stating that the Hotel is no longer
associated with the Hotel System, and (ii) advise all customers or
prospective customers telephoning the Hotel that it is no longer associated
with the Hotel System. Anything not done by you within thirty (30) days after
the license term ends, may be done at your expense by Licensor or its agents,
who may enter upon the premises of the Hotel for that purpose.
E. Payment of Liquidated Damages. If this Agreement terminates pursuant to
Paragraphs 3.B., 9.B., 10.C. or 10.D. above at any time after the first
twenty four (24) months of operation, you shall promptly pay Licensor (in
addition to any amounts then due to Licensor, and only as liquidated damages
for the premature termination of this Agreement, and not as a penalty or as
damages for breaching this Agreement or in lieu of any other payment) a lump
sum based on the average occupancy rate for the twelve (12) months preceding
the termination as follows:
1. if the occupancy rate was less than fifty percent (50%) then you shall
pay no liquidated damages;
2. if the occupancy rate was fifty percent (50%) to fifty nine and nine
tenths percent (59.9%) then you shall pay an amount equal to twelve
(12) months of fees required under Paragraph 3.D.1;
3. if the occupancy rate was sixty percent (60%) to sixty nine and nine
tenths percent (69.9%) then you shall pay an amount equal to twenty
four (24) months of fees required under Paragraph 3.D.1;
14
<PAGE>
4. if the occupancy rate was seventy percent (70%) or greater then you
shall pay an amount equal to thirty six (36) months of fees required
under Paragraph 3.D.1;
5. if this Agreement terminates at any time during the first twenty four
(24) months of operation, you shall promptly pay to Licensor liquidated
damages equal to thirty six (36) times the average monthly payment
under Paragraph 3.D.1.
11. Renewal. Licensee may apply to renew this Agreement for a term of ten
years. Licensor will require submission of a completed application on
Licensor's then current form, submission of an application fee in the amount
equal to the then current fee charged to new licensees, and Licensor's
approval of the application. Licensor's approval of the application will be
granted or denied in Licensor's sole discretion, and may be conditionally
granted based upon satisfaction of certain conditions such as Licensee's
renovation and/or upgrading of the Hotel to then-applicable Hotel System
standards.
12. Relationship of Parties.
A. No Agency Relationship. You are an independent contractor. Neither
party is the legal representative or agent of, or has the power to obligate
(or has the right to direct or supervise the daily affairs of) the other for
any purpose whatsoever. Licensor and you expressly acknowledge that the
relationship intended by them is a business relationship based entirely on,
and defined by, the express provisions of this Agreement and that no
partnership, joint venture, agency, fiduciary or employment relationship is
intended or created by reason of this Agreement.
B. Licensee's Notices to Public Concerning Independent Status. You shall
take such steps as are necessary and such steps as Licensor may from time to
time reasonably request to minimize the chance of a claim being made against
Licensor for anything that occurs at the Hotel, or for acts, omissions or
obligations of you or anyone associated or affiliated with you or the Hotel.
Such steps may, for example, include giving notice in private rooms, public
rooms and advertisements, on business forms and stationery, and any other
materials, making clear to the public that Licensor is not the owner or
operator of the Hotel and is not accountable for what happens at the Hotel.
Unless required by law, you shall not use the word "Hawthorn" or any similar
words in your corporate, partnership, or trade name, nor authorize or permit
such use by anyone else. You shall not use the word "Hawthorn" or any other
name or mark associated with the Hotel System to incur any obligation or
indebtedness on behalf of Licensor.
C. Third Party Beneficiary. You hereby acknowledge that HSA is a third
party beneficiary under this Agreement, with the independent right to enforce
your obligations hereunder and to obtain such remedies for any failure on
your part to perform your obligations to the full extent permitted by this
Agreement and in the place of the Licensor.
13. Miscellaneous.
A. Severability and Interpretation. The remedies provided in this
Agreement are not exclusive. In the event any provision of this Agreement is
held to be unenforceable, void or voidable as being contrary to the law or
public policy of the United States or any other jurisdiction entitled to
exercise authority hereunder, all remaining provisions shall nevertheless
continue in full force and effect unless deletion of the provision(s) deemed
unenforceable, void or voidable impairs the consideration for this Agreement
in a manner which frustrates the purpose of the parties or makes performance
commercially impracticable. In the event any provision of this Agreement
requires interpretation, such interpretation shall be based on the reasonable
intention of the parties in the context of this transaction without
interpreting any provision in favor of or against any party hereto by reason
of the drafting of the party or its position relative
15
<PAGE>
to the other party. Any covenant, term or provision of this Agreement which,
in order to effect the intent of the parties, must survive the termination of
this Agreement, shall survive any such termination.
B. Binding Effect. This Agreement shall become valid when executed and
accepted by Licensor at Atlanta, Georgia. It shall be deemed made and entered
into in the state of Georgia and shall be governed and construed under and in
accordance with the laws of the state of Georgia. In entering into this
Agreement, you acknowledge that it has been sought, voluntarily accepted and
become associated with Licensor who is headquartered in Atlanta, Georgia, and
that this Agreement contemplates and shall result in business relationships
with Licensor's headquarter's personnel. The choice of law designation
permits, but does not require that all suits concerning this Agreement be
filed in the state of Georgia.
C. Exclusive Benefit. This Agreement is exclusively for the benefit of the
parties hereto and it shall not give rise to liability to a third party,
except as otherwise specifically set forth herein. No agreement between
Licensor and anyone else is for the benefit of you.
D. Entire Agreement. This is the entire Agreement (and supersedes all
previous agreements including without limitation, any commitment agreement
between the parties concerning the Hotel) between the parties relating to the
Hotel. Neither Licensor nor any other person on Licensor's behalf has made
any representation to you concerning this Agreement or relating to the Hotel
System, which representation is not fully set forth herein or in Licensor's
"Offering Circular for Prospective Franchisees." No change in this Agreement
shall be valid unless in writing signed by both parties. No failure to
require strict performance or to exercise any right or remedy hereunder shall
preclude requiring strict performance or exercising any right or remedy in
the future.
E. Licensor's Withholding of Consent. Licensor's consent, wherever
required, may be withheld if any default by you exists under this Agreement.
Approvals and consents by Licensor shall not be effective unless evidenced by
a writing duly executed on behalf of Licensor.
F. Notices. Any and all notices required or permitted under this Agreement
shall be in writing and shall be delivered by any means which shall provide
evidence of the date received, to the respective parties at the following
addresses unless and until a different address has been designated by written
notice to the other party:
Notices to LICENSOR: Hawthorn Suites Franchising, Inc.
13 Corporate Square, Suite 250
Atlanta, Georgia 30329
(404) 321-4045
Notices to you: {{ENTITYNAMECAPS}}
{{PCADDRESS1}}
{{PCADDRESS2}}
Atten: {{PCNAME}}
Any notice shall be deemed to have been given at the date and time it is
evidenced to have been received.
G. Descriptive Headings. The descriptive headings in this Agreement are
for convenience only and shall not control or affect the meaning or
construction of any provision in this Agreement.
16
<PAGE>
H. Management of the Hotel. You must at all times retain and exercise
direct management control over the Hotel's business. You shall not enter into
any lease, management agreement or other similar arrangement for the
operation of the Hotel or any part thereof (including without limitation,
food and/or beverage service facilities), with any independent entity without
the prior consent of Licensor.
17
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first stated above.
LICENSEE:
{{ENTITYNAMECAPS}}
By:
{{SIGNEENAME}}
{{SIGNEETITLE}}
Attest:
Secretary
LICENSOR:
HAWTHORN SUITES FRANCHISING, INC.
By:
Jon Leven
Vice President Franchise Sales and
Development
Attest:
Asst. Secretary
18
<PAGE>
GUARANTY
As an inducement to Hawthorn Suites Franchising, Inc. ("Licensor") to
execute the above License Agreement, the undersigned, jointly and severally,
hereby unconditionally warrant to Licensor and its successors and assigns
that all of Licensee's representations in the License Agreement and the
application submitted by Licensee to obtain the License Agreement are true
and guarantee that all of Licensee's obligations under the above License
Agreement, including any amendments thereto whenever made (the "Agreement"),
shall be punctually paid and performed.
Upon default by Licensee or notice from Licensor, the undersigned shall
immediately make each payment and perform each obligation required of
Licensee under the Agreement. Without affecting the obligations of the
undersigned under this Guaranty, Licensor may without notice to the
undersigned extend, modify or release any indebtedness or obligation of
Licensee, or settle, adjust or compromise any claims against Licensee. The
undersigned waive notice of amendment of the Agreement and notice of demand
for payment or performance by Licensee.
Upon the death of an individual guarantor, the estate of such guarantor
will be bound by this Guaranty but only for defaults and obligations
hereunder existing at the time of death, and the obligations of the other
guarantors shall continue in full force and effect.
The Guaranty constitutes a guaranty of payment and performance and not of
collection, and each of the guarantors specifically waives any obligation of
Licensor to proceed against Licensee on any money or property held by
Licensee or by any other person or entity as collateral security, by way of
set off or otherwise. The undersigned further agree that this Guaranty shall
continue to be effective or be reinstated as the case may be, if at any time
payment or any of the guaranteed obligations is rescinded or must otherwise
be restored or returned by Licensor upon the insolvency, bankruptcy or
reorganization of Licensee or any of the undersigned, all as though such
payment has not been made.
IN WITNESS WHEREOF, each of the undersigned has signed this Guaranty as of
the date of the above Agreement.
Witnesses: Guarantors:
{{GUARANTOR1}}, Legal Signature
{{GUARANTOR2}}, Legal Signature
19
<PAGE>
ATTACHMENT A
Facilities (Paragraph 1):
Site-Area and general description: A Hawthorn Suites hotel located at
{{HOTELADDRESS1}},
{{HOTELADDRESS2}}
Number of approved Suites: {{ROOMS}}
Ownership of Licensee (Paragraph 8):
{{ENTITYNAMECAPS}} 100%
20
<PAGE>
ATTACHMENT B
TERRITORY
The Territory is defined as that area bordered by:
21
<PAGE>
ATTACHMENT C
You acknowledge that every detail of the Hotel System is important to
Licensor and other licensees operating under the Hotel System in order to
develop and maintain the standards and public image of the Hotel System. You
agree to comply with the details of the Hotel System as specified by Licensor
in the Manual, or otherwise in writing, and not to deviate therefrom.
The dates below set forth the development schedule for the Hotel, whether
new development or upgrading an existing facility.
1) You shall submit preliminary plans, including site layout and outline
specifications adapting Licensor's then-prototypical plans on or before
a date 3 months from the date of this License Agreement.
2) You shall submit complete working drawings and specifications for the
Hotel and Hotel premises, including its proposed equipment,
furnishings, facilities and signs with such detail and containing such
information as Licensor may request on or before a date 6 months from
the date of this License Agreement.
The Plans as submitted to Licensor shall conform to then prevailing Hotel
System standards, including the construction standards set forth in the
Manual. Construction shall not begin unless and until Licensor has approved
the Plans. Thereafter, no change shall be made to the Plans without the
advance consent of Licensor. Notwithstanding the foregoing, after the Plans
have been approved, if in the course of actual construction any change in the
Plans occurs, you shall notify Licensor promptly. Licensor shall determine
whether construction has been completed in accordance with the Plans.
3) Construction of the Hotel shall commence on or before a date 9 months
from the date of this License Agreement. Commencement of construction
shall mean excavation and poured footings with a finished building
slab. Once the construction has commenced, it shall continue
uninterrupted (except for interruption by reason of events constituting
force majeure) until construction is completed. You shall, within five
(5) days of the commencement of construction, provide written notice to
Licensor that construction has begun. As used in this License, "force
majeure" means an act of God, war, civil disturbance, government
action, fire, flood, accident, hurricane, earthquake or other calamity,
strike or other labor dispute, or other action beyond the control of
you.
4) The Hotel shall be furnished, equipped and shall otherwise be made
ready to open for business in accordance with the License not later
than a date 15 months from the date of this License Agreement
("Completion Date").
5) If the Hotel shall be a Conversion from an existing lodging facility to
a Hawthorn Suites hotel, following is a required timetable for certain
required changes/upgrades. All Work shall be completed no later than 9
months from the date of this License.
Requirements By (date):
22
<PAGE>
You shall, within ten (10) days of the Completion Date, submit a written
request to Licensor for Licensor to conduct a final inspection. Upon receipt
of such request, Licensor shall promptly conduct such final inspection. You
shall open for business within ten (10) days after receipt of Licensor's
authorization to do so. The date upon which you receive authorization to open
for business shall be the "Opening Date". You shall not open for business
until Licensor provides final approval and authorization in writing.
The Hotel shall not be opened for business as a Hawthorn Hotel unless and
until:
(i) Licensor has approved and accepted, in advance, in writing the
construction of the Hotel in accordance with the Plans; the
installation of all items of equipment, furniture, signs, computer
terminals and related supplies; and the hiring and training of staff
necessary to operate the Hotel in accordance with Licensor's
requirements;
(ii) no accounts are past due to Licensor, its parent, divisions,
subsidiaries or affiliated companies by you;
(iii) you are in full compliance with all of the terms of this License
Notwithstanding anything else herein to the contrary, Licensor may authorize
License to open and operate the Hotel even though you have not fully complied
with the terms of this License, provided that you agree to fulfill all
remaining terms of this License on or before the dates designated by
Licensor.
23
9/5/95
7:00 pm
JOINT VENTURE AGREEMENT
between
MICROTEL FRANCHISE AND DEVELOPMENT CORPORATION
(as The Company)
and
U.S. FRANCHISE SYSTEMS, INC.
(as Newco)
RELATING TO THE WORLD-WIDE
FRANCHISING OF THE
MICROTEL SYSTEM
<PAGE>
TABLE OF CONTENTS
PAGE
RECITALS
1. TRANSFER OF ASSETS ................................................. 2
2. TERM ............................................................... 4
3. POST CLOSING OBLIGATIONS OF NEWCO .................................. 5
4. THE COMPANY'S RETAINED PROPERTIES .................................. 5
5. CONSULTING BY THE COMPANY .......................................... 8
6. FEES ............................................................... 9
7. CLOSING ............................................................ 10
8. RIGHTS AND OBLIGATIONS PENDING THE CLOSING ......................... 14
9. DEFAULT PENDING CLOSING ............................................ 16
10. REPRESENTATIONS AND WARRANTIES ..................................... 17
11. CONFIDENTIAL INFORMATION ........................................... 24
12. ACCOUNTING AND RECORDS ............................................. 25
13. INSURANCE .......................................................... 25
14. TRANSFERABILITY OF INTEREST ........................................ 26
15. DEFAULT BY NEWCO AFTER CLOSING ..................................... 27
16. OBLIGATIONS DUE TO POST CLOSING DEFAULT BY NEWCO ................... 28
17. DEFAULT BY THE COMPANY AFTER CLOSING ............................... 29
18. OBLIGATIONS DUE TO POST CLOSING DEFAULT BY THE COMPANY ............. 30
19. POST CLOSING COVENANTS OF THE COMPANY .............................. 30
20. NOTICES ............................................................ 31
21. SURVIVAL OF REPRESENTATIONS AND WARRANTIES ......................... 32
22. INDEMNIFICATION .................................................... 32
i
<PAGE>
23. RIGHT TO SET-OFF ................................................... 35
24. SEVERABILITY AND CONSTRUCTION ...................................... 35
25. APPLICABLE LAW ..................................................... 36
26. ENTIRE AGREEMENT ................................................... 36
27. MISCELLANEOUS BUSINESS TERMS ....................................... 36
28. MISCELLANEOUS ...................................................... 37
ii
<PAGE>
DEFINED TERMS
"Company" ...................................................... 1
"Newco" ........................................................ 1
"Suites" ....................................................... 1
"Suites Hotel" ................................................. 1
"Business", the "System" ....................................... 1
"Microtel System" .............................................. 1
"Proprietary Marks" ............................................ 1
"Manual" ....................................................... 1
"Assets" ....................................................... 2
"Existing Franchise Agreements" ................................ 2
"Existing Franchisees" ......................................... 2
"Existing Franchises" .......................................... 2
"New Microtel Franchises" ...................................... 3
"New Microtel Franchisees" ..................................... 3
"Microtel Hotels" .............................................. 3
"New Franchise Agreement" ...................................... 3
"Current Agreement Form" ....................................... 3
"Development Schedule" ......................................... 3
"Scheduled Microtels" .......................................... 3
"under development" ............................................ 3
"Commencement Date" ............................................ 3
"Cure Payment" ................................................. 4
"Retained Properties" .......................................... 5
"Franchise Royalties" .......................................... 6
"Additional Hotel Franchises" .................................. 6
"Additional Suite Hotel Franchises" ............................ 6
"Supplemental Hotel Franchises" ................................ 6
"Substitute Hotel Franchise" ................................... 7
"Supplemental Suites Franchises" ............................... 7
"Impact Issues" ................................................ 8
"Encroachment Issues" .......................................... 8
"Trademark Royalty" ............................................ 9
"Operating Properties" ......................................... 9
"Revenues Subject to Royalties" ................................ 9
"Closing" ...................................................... 10
"EMILI Agreement" .............................................. 11
"UFOC" ......................................................... 17
"FTC" .......................................................... 17
"Company's Employees" .......................................... 22
"knowledge" or "awareness" .................................... 24
"control" ...................................................... 26
"Reversion of Microtel Rights" ................................. 29
"Indemnified Party" ............................................ 34
iii
<PAGE>
"Asserted Liability" ........................................... 34
"Claims Notice" ................................................ 34
"Indemnifying Party" ........................................... 34
"Contest Notice" ............................................... 34
"Loss" ......................................................... 35
"Expiration Time and Date" ..................................... 37
iv
<PAGE>
STATE OF GEORGIA
COUNTY OF FULTON
JOINT VENTURE AGREEMENT
THIS AGREEMENT is made and entered into as of September 7, 1995, by and
between MICROTEL FRANCHISE AND DEVELOPMENT CORPORATION, a New York
corporation, with its principal place of business at One Airport Way, Suite
200, Rochester International Airport, Rochester, New York, 14624, U.S.A. (the
"Company"); and U.S. FRANCHISE SYSTEMS, INC., a Delaware corporation, with its
principal place of business at 1800 Peachtree Street, Suite 615, Atlanta,
Georgia 30309 ("Newco").
WITNESSETH:
WHEREAS, the Company, as a result of the expenditure of time, skill,
effort, and money has developed a distinctive concept, system and business
relating to the establishment, operation and franchising of super budget or
hard budget hotels (including without limitation, an all-suites hotel
product, hereinafter referred to as "Suites" or "Suites Hotel") which operate
under the name "Microtel" (hereinafter referred to as the "Business", the
"System" or the "Microtel System"), as is more particularly described in
Exhibit "A" attached hereto;
WHEREAS, the components of the System and Business include, without
limitation:
A. Any and all trade names, trademarks, service marks or other types or
items of intellectual property used in the operation of or developed in
connection with the Business, including, without limitation, "MICROTEL"
and the other service marks listed on Exhibit "A-1" attached hereto
(hereinafter "Proprietary Marks");
B. All of the prototypical architectural plans, designs, and layouts used
in the operation of or developed in connection with the Business,
including, without limitation, all site plans, floor plans, roof plans,
plumbing plans, lobby plans, electrical plans, landscape plans and any
copyrights in connection therewith;
C. All reservation referral systems used in the operation of or developed
in connection with the Business;
D. All directories of Microtel hotels;
E. All management and personnel training programs and materials used in
the operation of or developed in connection with the Business;
F. All management and operational procedures and techniques used in the
operation of or developed in connection with the Business including
without limitation as prescribed in confidential manuals (hereinafter
the "Manual");
G. All standards and specifications for construction, equipment, and
furnishings used in the operation of or developed in connection with
the Business, including without limitation as described in the Manual;
H. All advertising, marketing, and promotional programs, layouts and
materials used in the operation of or developed in connection with the
Business;
<PAGE>
I. Any and all related intellectual property which may be necessary for
full and complete operation of the System or Business;
J. All rights to develop any and all hotel products based upon or derived
in whole or in part from the Microtel System (whether or not utilizing
the name "Microtel"), including without limitation, Suites Hotels.
K. Any and all business records used by the Company or necessary to
operate the Business; and
L. Any and all other assets related to an necessary for the Company's
operation of the System (all of the foregoing, including without
limitation, the items set forth on Exhibit "A", being sometimes
hereinafter collectively referred to as the "Assets").
WHEREAS, the Company has previously entered into or has committed to enter
into franchise agreements (the "Existing Franchise Agreements"), with various
parties (some of which may be affiliates of the Company) ("Existing
Franchisees") relating to a total of twenty-seven (27) Microtel properties, of
which twenty-one (21) are currently open and under operation, three (3) are
currently under construction, and three (3) are under development (the
"Existing Franchises");
WHEREAS, the Company desires to transfer all rights and interest in and to
the System and the Assets to a party who will utilize its best efforts to
provide the resources necessary to exploit the System on a world-wide basis;
WHEREAS, Newco has proposed to raise capital, establish an organization
consisting of key executive and management personnel, and enter into an
agreement with the Company, to the end that Newco shall exclusively undertake
the world-wide sale and maintenance of franchises under the System; and
WHEREAS, Newco understands the importance of and fully intends to continue
the sales and maintenance of franchises under the Microtel System;
NOW, THEREFORE, the parties, in consideration of the undertakings and
commitments of each party to the other party set forth herein, hereby agree
as follows:
1. TRANSFER OF ASSETS.
1.1 Subject to terms, covenants and conditions of this Agreement, Newco
agrees to undertake the world-wide franchising of properties using the System
based upon the Microtel concept. It is agreed that Newco shall be the sole
entity with the authority, right and power to act as franchisor for the
System. The respective rights and obligations of the parties hereto shall be
as established in this Agreement, which shall survive and shall govern the
ongoing rights of the parties inter se.
1.2 To permit Newco to fulfill its obligations hereunder, the Company
shall transfer to Newco at Closing (as defined herein) any and all right,
title and interest in and to: (i) all of the Assets; and (ii) the Existing
Franchise Agreements.
1.3 At Closing, Newco shall assume the obligations of the Company as
franchisor under the Existing Franchise Agreements. Except as specifically
set forth herein, Newco shall not assume any other liability or obligation of
the Company whatsoever.
2
<PAGE>
1.4 To further enable Newco to fully exploit the sale of franchises under
the System, and to avoid confusion, the Company shall, no later than one year
after the Closing Date, change its corporate name to a name which does not
contain the words "Microtel," or "U.S. Franchise Systems," or any words
confusingly similar, and will require any and all of its affiliated
companies, subsidiaries, or other related entities under common control or
management to similarly change their legal names, or to execute a name
license agreement acceptable to Newco in is sole discretion, and will use its
best efforts to have any other entity not under control of the Company to
take similar steps. Following Closing, Microtel agrees that Microtel will
operate its business under the name "Hudson Hotels" or some other assumed name
which does not contain the words "Microtel" or "U.S. Franchise Systems" or any
words confusingly similar.
1.5 The Company further shall transfer, assign and convey to Newco any and
all of its rights to the Suites Hotel concept and all future franchise rights
thereto.
1.6 Without limitation Newco shall have the right to and will undertake
the following as determined by Newco in its sole discretion: (i) to undertake
on an exclusive world-wide basis, the offering and sale of franchises or
licenses under the Microtel System utilizing the Proprietary Marks ("New
Microtel Franchises") to individuals or entities ("New Microtel Franchisees"),
which may or may not be affiliated with Newco and which may include Newco,
(ii) to establish and operate Microtel hotels and Microtel Suites using the
Microtel System and the Proprietary Marks ("Microtel Hotels") throughout the
world; (iii) to fulfill the obligations of franchisor under all New Microtel
Franchises which may be sold by Newco; and (iv) to fulfill the obligation of
franchisor under the Existing Franchises.
1.6.1 The term "New Microtel Franchises" shall mean and shall include: (i)
any franchise issued by Newco using any of the Proprietary Marks;
and (ii) any franchise issued by Newco in the Hard Budget or Super
Budget category, whether or not using the Proprietary Marks, other
than franchises issued pursuant to registered trademarks or other
proprietary marks acquired by Newco from another entity. For
purposes hereof, the terms "Hard Budget" or "Super Budget" shall mean
an economy based hotel or motel facility with minimal amenities,
intended to be, or compete directly with, the lowest average daily
room rate in each target market.
1.7 Newco shall have all right, title and interest in and to the Assets,
the Business and the System. Accordingly, Newco shall have the right in its
sole discretion to use the Assets and the System, including, without
limitation, operating Microtel Hotels, changing, modifying or improving the
System, approving hotel sites, determining, modifying or amending any and all
terms and conditions of agreements with franchisees, including Existing
Franchisees (to the extent permitted pursuant to the Existing Franchise
Agreements), determining any and all fees to be paid by franchisees, and
accepting New Microtel Franchisees.
1.8 Each new Microtel Hotel shall be established and operated pursuant to
a standard form of franchise agreement to be developed by Newco and revised
or amended from time to time (the "New Franchise Agreement") and entered into
between Newco and such New Franchisee. Without limitation, Newco shall have
the right to establish the various fees and terms and conditions under each
New Franchise Agreement. The current form of standard franchise agreement
utilized by the Company throughout the United States is attached hereto as
Exhibit "B" (the "Current Agreement Form").
1.9 Newco and the Company hereby agree on a schedule for the future
development of Microtel Hotels or Suites by Newco or through its New Microtel
Franchisees (the "Development Schedule"). The Development Schedule is attached
as Exhibit "C" to this Agreement and requires Newco, subject to the
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provisions of Section 1.10 below, to execute New Franchise Agreements for,
and have open or under development, the number of Microtel Hotels by the date
set forth on the Development Schedule ("Scheduled Microtels"). For purposes of
this Agreement, the term "under development" shall mean that: (i) a site for
the Microtel Hotel has been acquired by purchase or otherwise by the New
Franchisee; (ii) the New Franchisee has executed a New Franchise Agreement;
and (iii) the New Franchisee has commenced construction of the hotel by
breaking ground. For purposes of this Section 1.9, the term New Franchisee
may include Newco or an affiliate of Newco. For the purposes of this
Agreement, "Commencement Date" shall mean the earlier of: (i) the date on
which Newco shall be able to offer franchises to prospective franchisees in
all fifty (50) states within the United States of America, or (ii) ninety
(90) days following Closing. Newco shall comply in all material respects with
the Development Schedule.
1.10 The Company and Newco agree that the failure by Newco to satisfy the
Development Schedule for two consecutive periods, excluding delays caused by
events beyond Newco's control, including, without limitation, strikes, civil,
or political unrest, labor and/or material shortages, acts of God, and war,
shall constitute a default under this Agreement. Notwithstanding the language
of Section 1.9 and Section 15 hereof, if, at the date which is the end of
such second consecutive period Newco shall have open, or under development,
in the aggregate, at least seventy-five percent (75%) of the Scheduled
Microtels required at the date which is the end of any such second
consecutive period, Newco may cure such default and be deemed to have opened,
or have under development, the number of Scheduled Microtels then required at
the end of such second consecutive period (for purposes of determining
compliance with the Development Schedule at the end of such second
consecutive period and in all subsequent periods during the term of this
Agreement) by paying to the Company the amount of One Million Dollars
($1,000,000) (such payment being hereinafter referred to as the "Cure
Payment"), within thirty (30) days of written notice by the Company to Newco
of such default. By the way of example and not limitation, if at the end of
Period Number 3 (three years after Commencement Date) if Newco shall have
open or under development 80 Microtel Hotels and shall pay the Cure Payment,
Newco will be deemed to have open or under development 100 Microtel Hotels.
Therefore, in order to meet the subsequent Development Schedule, Newco would
have to open or have under development during Periods 4 and 5 the number of
Microtel Hotels required pursuant to the Development Schedule assuming the
actual number of Microtel Hotels open or under development at the end of
Period Number 3 was 100 (instead of 80). Further, under this example, Newco
could not be in default pursuant to Section 1.9 (subject to cure) for the
purposes of this Agreement before the end of Period Number 5, if at all.
Further, under this example, assuming Newco has paid the cure payment at the
end of Period Number 3, and if (i) during Periods 4 and 5, Newco opens or has
under development at least eighty-eight (88) additional Microtel Hotels; and
(ii) Newco shall pay an additional cure payment at the end of Period 5, Newco
shall be deemed to have satisfied forever the Development Schedule.
1.11 Once Newco has under Development within the term of the Development
Schedule at any time a cumulative number of Microtel Hotels equal to the
number of Microtel Hotels required by the Development Schedule, then Newco
will be deemed to have complied in full with the requirement of the
Development Schedule and no further obligations or conditions for sale or
placement of franchises shall apply.
1.12 Except for payment of the royalties and other fees provided for
herein, the Warrants, and other specific obligations of the parties hereto,
neither party shall have any rights or interest in the assets or the business
of the other. No joint venture or partnership shall be created hereby, and
neither party shall have any authority to speak for or bind the assets or
property of the other.
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2. TERM.
This Agreement shall commence on the date of execution hereof. The term of
this Agreement shall continue unless terminated as provided herein.
3. POST CLOSING OBLIGATIONS OF NEWCO.
Following Closing:
3.1 Newco will use its best efforts to register or take other appropriate
action as soon as practicable after Closing to be able to offer franchises of
Microtel Hotels in all fifty (50) states within the United States of America.
Newco shall register as a franchisor in all jurisdictions, which now require
or from time to time during the term hereof may require such registration, in
which Newco shall be actively pursuing the sale of franchises and shall
otherwise conduct its Business and deal with Franchisees and prospective
franchisees so as to materially comply in all respects with all applicable
federal, state and local laws, rules and regulations, now in effect or
hereafter enacted, affecting or governing the advertising or sale of
franchises, or the relationship and dealings between franchisors and
franchisees.
3.2 Newco (either directly or through an operating subsidiary or affiliate)
shall execute a New Franchise Agreement as franchisor or licensor for each
New Franchisee and each new Microtel Hotel (subject to approval of each New
Microtel Franchisee and New Microtel Franchise location, and satisfaction of
all other regular conditions). Newco (either directly or through an operating
subsidiary or affiliate) shall assume, undertake and discharge the
obligations of the Company as franchisor under the Existing Franchise
Agreements.
3.3 Recognizing the value of advertising and the importance of the
standardization of advertising programs to the furtherance of the goodwill
and public image of the System, Newco may develop or cause to be developed a
national advertising program designed to promote the knowledge of the System
and the advantages of Microtel Hotels in the minds of the consuming public.
3.4 Newco will during the term of this Agreement develop and implement a
reservation system, in which all Microtel Hotels (including New Franchises
and Existing Franchises) who pay to Newco the appropriate fee established by
Newco and who install the appropriate equipment and software as determined by
Newco shall be eligible to participate.
3.5 Newco shall use its best efforts and consistent with sound business
practices, to vigorously enforce its rights under all franchise agreements
with Franchisees and to promptly and vigorously pursue its rights with
respect to any alleged infringement or unlawful or improper use of any
Proprietary Mark(s) or of the "trade dress" associated with Microtel.
4. THE COMPANY'S RETAINED PROPERTIES.
Following Closing, the Company shall have or retain the following rights as
to the Existing Franchises, as well as to certain Additional Hotel Franchises
(including, if and when developed, Additional Suite Hotel Franchises), as
well as to certain Supplemental Franchises, if and when opened or developed
by the Company (hereinafter collectively referred to as the "Retained
Properties"):
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4.1 Existing Franchises. The Company shall assign and transfer to Newco at
Closing any and all rights, and Newco shall accept and agree to perform and
shall have the sole authority to perform the obligations of Company, as
franchisor, related to the Existing Franchise Agreements. To the extent that
the prospective Franchisees for any of the Existing Franchises have not
executed Franchise Agreements at the time of Closing (specifically, the three
franchise locations identified as under development), the Company shall use
its best efforts to cause such Franchisees to execute, when available, the
New Franchise Agreement. However, with respect to each such Existing
Franchise, the Company shall retain all rights to receive from the fees
generated from such Existing Franchise Agreements, an amount equal to: (i)
all Franchise Royalties (as hereinafter defined), plus (ii) any renewal
franchise fees paid by the Existing Franchisee pursuant to the applicable
Existing Franchise Agreement. The Company will use best efforts to persuade
all of the Existing Franchisees with whom the Company has an ongoing
contractual relationship to comply with the franchisee standards as may
hereafter be established or required pursuant to the New Franchise Agreement
as may be developed by Newco.
4.1.1 For purposes hereof, the term "Franchise Royalties" shall mean all
amounts payable by each respective Franchisee to the Franchisor under the
terms of the respective Franchise Agreement then in effect, based on or
calculated as a percentage of the gross receipts collected by such Franchisee
for the rental of guest rooms or otherwise, provided, however, the term
Franchise Royalties shall specifically exclude for purposes hereof any
amounts designated as reservation, advertising, or marketing fees and shall
also exclude any other amounts payable which are designated or described as
one time or non-recurring fees or charges other than regular monthly royalty
fees, such as fees for renewal, placement, substitution, amendment,
organization, initial placement, termination, or transfer.
4.2 The Company's Additional Hotel Franchises. Subject to Newco's authority
as Franchisor with respect to operation of the System, the Company shall have
the right to acquire from Newco after Closing, an additional number of
franchises (the "Additional Hotel Franchises") for the purposes of developing
and operating additional Microtel Hotels (not including any Suites) such that
the total number of Existing Franchises plus Additional Hotel Franchises
shall equal fifty (50). Each of the Additional Hotel Franchises shall be
entered into upon the New Franchise Agreement as may be developed by Newco.
With respect to each such Additional Hotel Franchise, the Company shall
retain the right to collect or receive from such New Franchisee (i) the
initial franchise placement fee paid or payable by such New Franchisee; and
(ii) all Franchise Royalties. Franchisees or potential Franchisees eligible
for consideration as an Additional Franchisee can include only (i) an entity
in which the Company has a material ownership and management interest; or
(ii) an entity in which one of the individuals or entities set forth in
Schedule 19.1.3 shall have a material ownership and management interest.
4.3 The Company's Suites. Subject to Newco's authority as Franchisor with
respect to operation of the System, the Company shall have the additional
right to acquire franchises from Newco for the purposes of developing and
operating ten (10) Suites Hotels ("Additional Suite Hotel Franchises"), so
long as the Company shall have such Additional Suite Hotel Franchises open or
under development within five (5) years following the date Newco first
registers (in any state) an offering of a franchise of Suites. Each such New
Franchise shall be entered into using a New Franchise Agreement for Microtel
Suites Hotels as may be developed by Newco and used as its standard form of
franchise agreement for Suites Hotels. With respect to each such Additional
Suites Hotel Franchise, the Company shall retain the right to collect or
receive from such New Franchisee (i) the initial franchise placement fees and
(ii) all Franchise Royalties.
4.4 Supplemental Franchises.
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4.4.1 At any time the sum of the number of Existing Franchises plus the
number of Additional Hotel Franchises actually open and operational equals
fifty (50), subject to Newco's authority as Franchisor with respect to the
operation of the System, the Company shall have the right to acquire
additional hotel franchises ("Supplemental Hotel Franchises") from Newco for
the purposes of developing and operating additional Microtel Hotels (but not
including Suites), on the terms hereinafter set forth. In order for the
Company to obtain a Supplemental Hotel Franchise, the Company shall transfer
to Newco and Newco shall accept one (1) of the following: (i) an Existing
Franchise or (ii) an Additional Hotel Franchise (the Existing Franchise or
the Additional Hotel Franchise being transferred, as applicable, being
designated as a "Substitute Hotel Franchise") (but not including Suites) from
the retained rights set forth above for each such additional property
franchised. In order to be eligible for consideration as a Substitute Hotel
Franchise such franchisee must agree to execute a New Franchise Agreement
with Newco, must be current on payment of all fees and royalties payable, and
must otherwise meet then applicable franchise standards. In addition thereto,
the Company (or the franchisee) shall pay to Newco a fee ("Substitution Fee")
equivalent in amount to the fee payable to Newco pursuant to the terms of the
New Franchise Agreement upon any transfer of the franchise.
4.4.2 The Company shall also have the right to acquire additional
franchises from Newco for the purposes of developing and operating Suites
("Supplemental Suites Franchises"), so long as the Company shall transfer to
Newco and Newco shall accept one (1) of the Additional Suites Franchises (the
Additional Suites Franchise being transferred being designated as a
"Substitute Suites Franchise") from the retained rights set forth above for
each such additional Suites property franchise. In order to be eligible for
consideration as a Substitute Suite Franchise, such franchisee must agree to
execute a New Franchise Agreement with Newco, must be current on payment of
all fees and royalties payable, and must otherwise meet then applicable
franchise standards. In addition thereto, the Company (or the franchisee)
shall pay to Newco the Substitution Fee.
4.4.3 Subject to Newco's rights hereunder, each Supplemental Hotel
Franchise and each Supplemental Suites Franchise shall thereafter be deemed a
Retained Property, and the Company shall be entitled to collect or receive
from such franchisee (i) an amount equal to fifty percent (50%) of the
initial franchise placement fee as provided for in the New Franchise
Agreement and (ii) all Franchise Royalties payable under the New Franchise
Agreement.
4.4.4 For each Substitute Hotel Franchise and each Substitute Suites
Franchise transferred to Newco hereunder, Newco shall be entitled to receive
all of the Franchise Royalties plus any other fees, expenses, or other
compensation or remuneration payable thereunder (including, without
limitation the Substitution Fee), and the Company shall relinquish and
transfer to Newco all of such rights.
4.5 The Company and Newco hereby agree that the Company may accept payment
of any amounts due to the Company pursuant to this Section 4 hereunder (but
only such amounts) directly from the franchisees of Retained Properties, and
Newco shall cooperate with such direct payment, however, Newco shall have no
liability to the Company for failure of the franchisees of the Retained
Properties to remit payments due. However, the Company shall be required to
account to Newco (in such form, manner, and time as determined by Newco from
time to time) for any such amounts paid to the Company. To the extent
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any of such fees, payments or other amounts are remitted to Newco, Newco
shall promptly transfer, assign, or pay over such amounts to the Company.
4.6 Notwithstanding any other provision to the contrary contained herein
with respect to Retained Properties, the Company agrees that Newco shall not
be required to pay to the Company any fees or compensation paid to or payable
to Newco by Franchisees relating to reservation, advertising, or marketing
fees with respect to Retained Properties, the Supplemental Hotel Franchises,
the Supplemental Suites Franchises, the Additional Hotel Franchises or the
Additional Suites Hotel Franchises. The Company shall also immediately pay to
Newco any such fees relating to reservation or marketing which the Company
receives from the franchisees of any Retained Property, Supplemental Hotel
Franchises, the Supplemental Suites Hotel Franchises, or Additional Hotel
Franchises or the Additional Suites Hotel Franchises. The Company agrees to
take those actions requested by Newco to assist, implement, maintain and
collect such fees.
4.7 With respect to the Company's retained rights pursuant to this Section
4, the judgment of the Company as to the viability of a site for the
development of a Microtel Hotel shall be conclusive, provided, however, Newco
shall have the right, in its sole discretion, to reject such proposed site as
a Microtel location if Newco should determine upon review of all Encroachment
Issues or Impact Issues (as hereinafter defined) that development of the
potential site would have a material negative impact upon the gross room
revenue generated or anticipated to be generated by an Existing Microtel
Franchise facility.
4.7.1 For purposes hereof, "Impact Issues" or "Encroachment Issues" shall
refer to all issues or matters which in the sole discretion of Newco, as
Franchisor, should be considered in evaluating the impact which the
development of a new Microtel Franchise on a prospective site would have upon
the gross guest room revenues generated or anticipated to be generated by an
existing Microtel franchise facility, including but not limited to any
specific geographic or territorial restriction contained in the franchise
agreement for the existing Microtel franchise facility, traffic patterns and
volume, anticipated growth patterns, development patterns in the same
geographic area, and general business conditions.
4.8 Newco agrees that any agreement it may enter into after Closing for any
future development of unspecified franchise locations on an exclusive
territorial basis will reflect and will be subject to the rights of the
Company hereunder for development of additional franchise locations and such
exclusive territorial rights will not affect the Company as to any of the
Retained Properties Additional Hotel Franchises, Additional Suites Hotel
Franchises, or any Supplemental Franchises. The foregoing notwithstanding,
Newco and the Company agree that, without limitation, the New Franchise
Agreements or similar franchise agreements entered into with New Microtel
Franchisees for specified franchise locations may contain exclusive franchise
territory agreements related to hotel market Impact Issues, and that the
Company shall not have the right to develop a property or obtain a franchise
within any such restricted geographic area. Newco represents and warrants to
the Company that Newco has not entered into and is not now negotiating any
such agreement with any party.
5. CONSULTING BY THE COMPANY.
5.1 To ensure the ultimate successful operation of the System, the Company
shall, for a period of three (3) years following the Closing Date of this
Agreement, consult with and assist Newco as may be required or as reasonably
requested by Newco, to establish Newco as an operating entity in the business
of selling and administering franchises utilizing the System, which
consulting and assistance may be expected to include, without limitation,
some or all of the following:
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5.1.1 Consulting and advice regarding the general outlines, parameters and
philosophy of the System and the Microtel concept;
5.1.2 Assistance in the preparation of Newco's UFOC and compliance with
applicable federal and state franchising laws;
5.1.3 Identification of and contacts with franchising prospects known to
the Company;
5.1.4 Consulting regarding prototypical plans and specifications;
5.1.5 Review of existing manuals, training programs and other elements of
the System;
5.1.6 Consultation regarding the desirability or feasibility of proposed
sites for franchise development; and
5.1.7 Ongoing compliance with regulatory requirements, including federal,
state and international franchising laws.
5.2 After the date which is one (1) year after the Closing Date, any
required consultation and assistance shall be provided as reasonably
requested by Newco and shall be scheduled subject to the workloads of the
personnel of the Company.
6. FEES.
6.1 The Company shall retain the rights to collect fees and royalties from
the Existing Franchisees designated as Retained Properties, as provided for
in Section 4 hereinabove. Newco shall assist the Company with direct
collection of such amounts and shall, to the extent such funds are
transmitted or paid to Newco, promptly remit such funds to the Company,
provided, however, Newco shall have no liability to the Company for failure
of the franchisees of the Retained Properties to remit payment due.
6.2 In consideration for the transfer of the Proprietary Marks to Newco
pursuant to Section 1 hereof, Newco shall pay or cause to be paid to the
Company from the Franchise Royalties collected from each New Microtel
Franchisee after Closing, as royalties with respect to each New Microtel
Franchise (excluding any franchises designated as Retained Properties), a
continuing monthly royalty fee (the "Trademark Royalty") in an amount equal
to the sum of: (i) one percent (1%) of the Revenues Subject To Royalties (as
hereinafter defined), for the applicable month for each New Microtel
Franchise on the first 100 operating properties (other than Retained
Properties) opened by Newco ("Operating Properties"); plus (ii) seventy-five
hundredths of one percent (0.75%) of the Revenues Subject to Royalties for
the applicable month for each New Microtel Franchise on the next 150
Operating Properties; plus (iii) one half of one percent (0.5%) of the
Revenues Subject to Royalties for each New Microtel Franchise after the first
250 Operating Properties. Payment of the Trademark Royalty shall be deferred
until the month in which Newco actually receives its Franchise Royalties from
each respective Franchisee and shall be paid to the Company not later than
the twentieth (20th) day of the month following such receipt by Newco.
6.2.1 For purposes hereof, "Revenues Subject to Royalties" shall mean the
gross receipts collected by Franchisees for the rental of guest rooms at a
Microtel Hotel or Microtel Suite, whichever is applicable, as well as any
other revenues which are subject to royalty payments by Franchisee to Newco
as set forth in the applicable franchise agreement.
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6.2.2 In addition to Trademark Royalty payable hereunder, Newco shall pay
to the Company a portion of any termination fee received by Newco upon
termination of any New Microtel Franchise, such portion to be calculated as
(i) the total amount of the termination fee actually received by Newco, (ii)
less any direct expenses incurred by Newco in connection with collecting and
receiving such fee and terminating such franchise (including but not limited
to attorney's fees) with the remainder (iii) multiplied by a fraction, (aa)
the numerator of which shall be the lowest marginal percentage rate then
applicable for purposes of calculating the Trademark Royalty set forth
herein, and (bb) the denominator of which shall be the percentage rate set
forth in the applicable Franchise Agreement which is used for calculation of
the Franchise Royalties payable by such franchisee to Newco.
6.2.3 The parties acknowledge and agree that Newco, as franchisor, may
waive the requirement for a specific Franchisee to pay Franchise Royalties
for a specified period of time (not to exceed 120 days) from the date when a
New Franchise Agreement is effective and the Franchise facility is
operational, and that no Trademark Royalty shall accrue or be due or payable
by Newco for such period during which the obligation to pay Franchise Royalty
is actually waived.
6.3 In consideration of the performance by the Company of its consulting
obligations set forth in Section 5 hereof, the transfer of the Assets (other
than the Proprietary Marks) and rights under the Existing Franchise
Agreements, and all of the Company's other obligations hereunder, Newco
shall pay to the Company the amount of Three Million Seven Hundred
Thirty-Seven Thousand Six Hundred Forty-One and NO/100ths Dollars U.S.
(U.S. $3,737,641.00), plus simple interest at the rate of ten percent (10%)
per annum as reflected on Exhibit "F" attached hereto, due and payable as
follows: Two Million Dollars U.S. (U.S. $2,000,000) upon Closing; One Million
Dollars U.S. (U.S. $1,000,000) on the date one (1) year from the Closing Date
hereof; Five Hundred Thousand Dollars U.S. (U.S. $500,000) on the date two
(2) years from the Closing Date hereof; and Five Hundred Thousand Dollars
U.S. (U.S. $500,000) on the date three (3) years from the Closing Date
hereof.
6.4 The Company shall be responsible for any and all taxes or similar
charges relating to payments by Newco (or on Newco's behalf) to the Company,
including but not limited to value-added taxes, goods and services taxes,
consumption taxes, gross receipts taxes and sales taxes, (but excluding taxes
based upon Newco's income), which may be imposed now or in the future, and
the Company shall transmit such taxes to the appropriate fiscal authorities.
6.5 If any payment owed by Newco to the Company under this Agreement or
under any other agreement with the Company is finally determined to be
overdue pursuant to Sections 15 and 16 below, Newco shall pay the Company, in
addition to the overdue amount, interest on such amount from the date it was
due until paid, at a rate which is one percent (1%) above the interest rate
the Company pays on its operational line of credit from its principal bank,
or if the Company has no line of credit, two percent (2%) above the prime
rate of interest as reported in The Wall Street Journal on the day such
amount was due, or the maximum rate permitted by law, whichever is less. In
the event any amount is finally determined to be overdue and intentionally
unpaid by Newco pursuant to Sections 15 and 16 below for more than ninety
(90) days, then the interest payable by Newco under this section shall be
computed at a rate of eighteen percent (18%) per annum, computed on a daily
basis, or the maximum amount permitted by law, whichever is less. Entitlement
to such interest shall be in addition to any other remedies the Company may
have.
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6.6 Except for the amounts specifically payable to the Company as set
forth in this Section, all revenues generated by the conduct of the Business
or otherwise by Newco after Closing shall belong to Newco.
7. CLOSING.
7.1 Time and Place. Closing shall take place at the offices of Boylan,
Brown, Code, Fowler, Vigdor & Wilson, L.L.P., 900 Midtown Tower, Rochester,
New York 14604, at 9:00 a.m. or at such other mutually determined location
and time within two (2) business days following the date of the last to be
satisfied of the conditions below, but in no event later than Monday, October
9, 1995, or such other date and place as the parties hereto shall mutually
agree upon ("Closing").
7.2 Conditions of Closing.
7.2.1 Closing of the transactions contemplated hereunder shall be
conditioned upon, at Newco's option:
7.2.1.1 All of the covenants to be performed or complied with by the
Company and all required deliveries by the Company or on the
Company's behalf contained in this Agreement will have been
performed, complied with, or delivered on or before Closing.
7.2.1.2 All of the representations and warranties made by the Company
to Newco shall be and remain true, accurate and complete as
of the Closing Date.
7.2.1.3 The approvals of the transactions contemplated hereby and of
this Agreement by the Board of Directors and, if required,
the Stockholders of the Company shall have been obtained.
7.2.1.4 The approvals of the transactions contemplated hereby and of
this Agreement by the Board of Directors and, if required,
the Stockholders of Newco shall have been obtained.
7.2.1.5 The Company shall have obtained all third party consents or
approvals as shall be necessary or appropriate to the
completion of the transaction in all respects or as may be
required by law or regulation.
7.2.1.6 The Company shall have executed any and all assignments
required to transfer to Newco any and all rights in the
Proprietary Marks and any other intellectual property. Such
assignments shall be in a form acceptable to Newco for
recording with the U.S. Patent and Trademark Office and any
other state, county or local governmental department agency,
domestic or foreign.
7.2.1.7 The Company shall have effected the termination of the Master
Franchise Agreement by and between the Company and Essex
Microtel International Lodging, Inc. (the "EMILI Agreement").
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7.2.1.8 The Company shall obtain final execution of Franchise
Agreements from all of the Existing Franchisees using either
the Current Agreement Form or the New Franchise Agreement.
7.2.1.9 Michael A. Levin ("CEO Candidate") shall have resigned from
his current position and agreed to become Chief Executive
Officer of Newco.
7.2.1.10 At the Closing Date: (a) there shall be no effective
injunction, restraining order, or order of any nature issued
by any court of competent jurisdiction which directs or has
the effect of directing that this Agreement or any material
transactions contemplated hereby shall not be consummated as
herein provided; (b) there shall be no investigation,
action, or other proceeding pending before any court or
governmental authority or threatened against the Company or
Newco or any of the directors or officers of the Company or
Newco in connection with this Agreement or the consummation
of the transactions contemplated by this Agreement which is
likely, in the opinion of Newco's counsel (after
consideration of any defense), to result in such substantial
damages or other substantial relief being obtained, as to
materially and adversely affect the Business on or after the
Closing Date; and (c) none of the parties hereto shall have
received from any governmental authority any notice (oral or
written) of any potential litigation, civil, criminal, or
administrative, against the Company or Newco for a violation
alleged to arise out of the consummation of the transactions
contemplated hereby.
7.2.2.11 Newco shall have secured the minimum offering of $12,400,000
as provided for in Newco's initial private placement dated
August 19, 1995;
7.2.2 Closing of the transactions contemplated hereunder shall be
conditioned upon, at the Company's option:
7.2.2.1 All of the covenants to be performed or complied with by
Newco and all required deliveries by Newco or on Newco's
behalf contained in this Agreement will have been performed,
complied with, or delivered on or before Closing.
7.2.2.2 All of the representations and warranties made by Newco to
the Company shall be and remain true, accurate and complete
as of the Closing Date.
7.2.2.3 The individual who has been identified as the CEO Candidate
of Newco shall have resigned from his current position and
agreed to become Chief Executive Officer of Newco.
7.2.2.4 Newco shall have secured the minimum offering of $12,400,000
as provided for in Newco's initial private placement dated
August 19, 1995;
7.2.2.5 The approvals of the transactions contemplated hereby and of
this Agreement by the Board of Directors and, if required,
the Stockholders of Newco shall have been obtained.
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7.2.2.6 The Company shall have received the documents or information
described in Exhibit "D" hereof.
7.2.2.7 At the Closing Date: (a) there shall be no effective
injunction, restraining order, or order of any nature issued
by any court of competent jurisdiction which directs or has
the effect of directing that this Agreement or any material
transactions contemplated hereby shall not be consummated as
herein provided; (b) there shall be no investigation, action,
or other proceeding pending before any court or governmental
authority or threatened against the Company or Newco or any
of the directors or officers of the Company or Newco in
connection with this Agreement or the consummation of the
transactions contemplated by this Agreement which is likely,
in the opinion of the Company's counsel (after consideration
of any defense), to result in such substantial damages or
other substantial relief being obtained, as to materially and
adversely affect the Business on or after the Closing Date;
and (c) none of the parties hereto shall have received from
any governmental authority any notice (oral or written) of
any potential litigation, civil, criminal, or administrative,
against Company or Newco for a violation alleged to arise out
of the consummation of the transactions contemplated hereby.
7.2.2.8 Newco shall have prepared and available for distribution to
potential offerees a current UFOC disclosure document.
7.3 Deliveries at Closing.
7.3.1 The Company shall deliver to Newco at Closing:
7.3.1.1 An executed Secretarial Certificate of the Company
satisfactory to Newco;
7.3.1.2 All of the appropriate assignments or other transfer
documents of all of the Assets, Proprietary Marks and other
intellectual property as described herein satisfactory to
Newco;
7.3.1.3 The Warrant relating to the purchase of shares of the
Company, fully executed in the form attached hereto as
Exhibit "E";
7.3.1.4 An opinion of Boylan, Brown, Code, Fowler, Vigdor & Wilson,
L.L.P., corporate and intellectual property counsel to the
Company, in a form satisfactory to Newco;
7.3.1.5 All assignments or other transfer documents required to
transfer to Newco any and all rights in the Proprietary Marks
and any other intellectual property. Such assignments shall
be in a form acceptable to Newco for recording with the U.S.
Patent and Trademark Office and any other state, county or
local governmental department or agency, domestic or foreign.
7.3.2 Newco shall deliver to the Company at Closing:
7.3.2.1 An executed Secretarial Certificate of Newco satisfactory to
the Company;
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7.3.2.2 $2,000,000 in cash, certified check or wire transfer at
Newco's option;
7.3.2.3 An instrument or instruments reflecting Newco's assumption of
the obligations of franchisor under the Existing Franchise
Agreements; and
7.3.2.4 An opinion of Bodker, Ramsey & Andrews, a Professional
Corporation, counsel to Newco, in a form satisfactory to the
Company.
7.4 Allocation of Consideration.
7.4.1 At the Closing, the Company and Newco shall execute an allocation
of all payments hereunder pursuant to Section 1060 of the Internal
Revenue Code of 1986, as amended, substantially in the form of
Exhibit "F" hereto. The Company and Newco hereby agree to prepare
their respective tax and other returns and to take and pursue any
and all other actions (including without limitation, in connection
with tax examinations) to reflect and retain such allocation.
7.4.2 The Company and Newco hereby acknowledge and agree that (i) the
Company intends to treat the payments received by the Company
pursuant to Section 6.2 hereof as amounts received on account of a
transfer, sale or other disposition of a franchise, trademark or
trade name which are contingent on the productivity, use or
disposition of the franchise, trademark or trade name transferred
and thus as amounts received from the sale or other disposition of
property which is not a capital asset pursuant to Internal Revenue
Code Section 1253(c), as amended, and (ii) Newco intends to treat
the payments made by the Company pursuant to Section 6.2 hereof as
amounts paid on account of a transfer, sale or other disposition of
a franchise, trademark or trade name which are contingent on the
productivity, use or disposition of the franchise, trademark or
trade name which are paid as a part of a series of payments which
are payable not less frequently than annually and which are
substantially equal in amount (or payable under a fixed formula)
and thus allowed as a deduction as paid or accrued under Internal
Revenue Code Section 162(a), all pursuant to Internal Revenue Code
Section 1253(d)(1) as amended, or other similar tax principles
which provide for such payments to be deductible as paid or
accrued. The Company and Newco acknowledge the importance of such
intended treatment by the Company and Newco and accordingly agree
to prepare their respective tax and other returns and to take and
pursue any and all other actions (including without limitation, in
connection with audit examinations) to retain and reflect such
intended tax treatment.
8. RIGHTS AND OBLIGATIONS PENDING THE CLOSING.
During the period commencing on the date hereof and ending on the Closing
Date:
8.1 In order to allow Newco to perform its due diligence investigation,
the Company will or will cause its agents to give to Newco its
representatives, auditors, and attorneys, access, during normal business
hours, to the facilities of the Company and to the books, records, contracts,
and documents of the Company and to furnish to Newco such information as
Newco may reasonably request from time to time.
8.2 The Business and Assets and properties of the Company will continue to
be operated, used, and employed by the Company in the ordinary course of
business. Specifically without limiting the
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foregoing, the Company will continue to pursue and support new business;
faithfully perform in all material respects all the obligations required to
be performed under existing contracts, Existing Franchise Agreements, and
commitments; and use its best efforts and take all reasonable steps to retain
the patronage of all customers and Franchisees (whether existing business or
business obtained after the date hereof). The foregoing notwithstanding, the
parties acknowledge and agree that the Company will not enter into new
franchise agreements from the date of the agreement through Closing but with
the prior written consent of Newco.
8.3 Not in limitation of Section 8.2, the Company will not take the
following actions, without the written consent of Newco:
8.3.1 make any material change in the Current Agreement Form, any Existing
Franchise Agreements, or the UFOC, or to any existing contracts or
commitments pertaining to the Business, except as such changes occur
in the ordinary course of business;
8.3.2 enter into any new contract pertaining to the Business.
8.4 The Company will promptly supply counsel for Newco with copies of
all litigation or legal proceedings against the Company which may arise after
the date of this Agreement and will also notify counsel for Newco of any
litigation or other legal proceeding which to the actual knowledge of the
officers or directors of the Company is threatened against Newco or the
Company.
8.5 Newco will promptly supply counsel for the Company with copies of
all litigation or legal proceedings against Newco which arise after the date
hereof and will also notify counsel for Company of any litigation or other
legal proceeding which to the actual knowledge of the officers or directors
of Newco is threatened against Newco or the Company.
8.6 The Company will promptly notify Newco of any matters with respect
to Franchisees or other parties which could materially adversely affect any
Existing Franchise Agreement, the Business, the System, results of operations
or financial condition of the Company or its Franchisees or adversely affect
the ability of the Company to perform its obligations hereunder.
8.7 Newco will keep the provisions of this Agreement strictly
confidential and will not without the prior consent of the Company, which
shall not be unreasonably withheld, disclose such provisions to any third
party, except for (a) disclosure to employees, directors, potential
investors, offerees, stockholders, officers, lawyers, and financial advisors
of Newco on a "need-to-know" basis; (b) such disclosures as may reasonably be
required pursuant to applicable state and federal laws, for securities,
franchise and business opportunity law purposes; (c) such other disclosures
as may reasonably be required for Newco to comply with its pre-closing
obligations hereunder; and (c) such other disclosures as may be required by
law, without the prior consent of the Company, which shall not be
unreasonably withheld.
8.8 The Company will keep the provisions of this Agreement strictly
confidential and will not, without the prior consent of Newco, which shall
not be unreasonably withheld, disclose such provisions to any third party,
except for (a) disclosure to employees, directors, officers, lawyers, and
financial advisors of the Company on a "need-to-know" basis; (b) such other
disclosures as may reasonably be required for the Company to comply with its
pre-closing obligations hereunder; and (c) disclosures as may be required by
law.
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8.9 Upon final acceptance of this Agreement, Newco and the Company will
issue in writing a mutually agreeable public announcement as to the
transaction contemplated herein.
8.10 Until the Closing, or the date of termination of this Agreement
pursuant to the terms hereof, whichever first occurs, the Company will not
solicit, encourage, or conduct, directly or indirectly, any discussions or
negotiations with, or provide any information to, any entity or person other
than Newco with respect to the sale of the rights to the System and its
component parts or the transactions contemplated herein or any transactions
similar to any of those contemplated herein. The Company shall immediately
notify Newco of any solicitation or offer by a third party with respect to
the sale or transfer of the rights to the System or its component parts.
8.11 The Company will obtain any and all required consents of third
parties prior to the Closing.
8.12 The Company and Newco will fully cooperate with each other and their
respective counsel and accountants in connection with all steps to be taken
as part of their respective obligations under this Agreement. The Company and
Newco will use their best efforts to cause the conditions to the other
party's obligation to close to be fulfilled on or prior to the Closing Date.
8.13 The Company shall take all necessary and appropriate steps including
changing its assumed name as provided for in this Agreement to assure that
all rights to the "Microtel" name will inure to Newco.
8.14 Notwithstanding any provision in this Agreement to the contrary, and
in addition to (and without waiving) any other rights Newco may have pursuant
to this Agreement or otherwise, regardless of whether the transactions
contemplated by this Agreement are consummated, each party shall be
responsible for and bear all of its own expenses and fees, including attorney
and accountant fees, incurred by it in connection with the transactions
contemplated herein; provided, however, if the transactions contemplated
herein are not consummated for any reason except due to Newco's default under
this Agreement, the Company agrees to pay Newco's legal fees and related
expenses incurred in the drafting of this Agreement in an amount not to
exceed $15,000.00
8.15 Newco shall utilize its best efforts to prepare a uniform franchise
offering circular to be used for filing or registration at or near the
Closing Date.
8.16 Prior to Closing, the Company shall in accordance with the
limitations set forth herein, continue to conduct its business in the
ordinary course (except that the Company will not enter into new franchise
agreements with potential new franchisees, but with the prior written Consent
of Newco), preserving its rights to franchise the System and taking
reasonable steps to protect the Proprietary Marks and other intellectual
property which constitutes the System.
9. DEFAULT PENDING CLOSING.
9.1 Default by Company: In the event of any default by Company in any of
its closing obligations hereunder or agreements to be performed prior to
Closing, or in the event any of the representations and warranties of Company
shall be discovered prior to Closing to be untrue or false in any material
respect, Newco shall provide written notice to Company and, should such
default, untruthfulness, or falsity not immediately be cured, Newco, at the
sole option of Newco, shall have the right to either: (i) waive compliance
with such obligation or lack of performance and proceed with Closing; (ii)
proceed to Closing and reserving to Newco all rights and remedies provided
for hereunder or otherwise available at law or in
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equity, including but not limited to the right to seek specific performance,
or the right to indemnification pursuant to Section 22 and to setoff amounts
payable to Company all costs and expenses incurred in connection therewith in
accordance with the provisions of Section 23 hereof; (iii) postpone Closing
upon written notice to Company for a reasonable period of time and take such
remedial action as may reasonably be necessary or appropriate to cure such
default or to make the representation and warranty not untrue or false, and
to deduct the reasonable costs, expenses, and attorney's fees thereof from
the consideration to be paid to Company at Closing; (iv) terminate this
Agreement upon written notice to the Company, whereupon Company shall
immediately pay or reimburse to Newco all fees, costs, expenses, or other
costs or claims of any kind or nature whatsoever incurred by Newco, the CEO
Candidate, or its principals (including but not limited to reasonable
attorney's fees, any consequential damages or damages for loss of economic
opportunity or profits) arising out of or related to the negotiation and
entering into of this Agreement and related activities in connection with
preparation for Closing.
9.2 Default by Newco: In the event of any default by Newco in any of its
closing obligations hereunder, or in the event any of the representations are
warranties of Newco shall be discovered prior to Closing to be untrue or
false in any material respect, the Company shall provide written notice of
such default, untruthfulness or falsity and the Company, at the sole option
of the Company, shall have the right to either: (i) waive compliance with
such obligation or lack of performance and proceed with Closing; (ii) proceed
to Closing and reserving to the Company all rights or remedies provided for
hereunder or otherwise available at law or in equity, including but not
limited to the right to seek specific performance, or the right to seek
indemnification pursuant to Section 22 hereof; or (iii) terminate this
Agreement upon written notice to Newco, whereupon Newco shall immediately pay
or reimburse to the Company all fees, costs, expenses, or other costs or
claims of any kind or nature whatsoever incurred by the Company (including
but not limited to reasonable attorney's fees, any consequential damages or
damages for loss of economic opportunity or profits) arising out of or
related to the negotiation and entering into of this Agreement and related
activities in connection with preparation for Closing.
10. REPRESENTATIONS AND WARRANTIES
10.1 The Company represents, warrants and agrees to and with Newco as of
the date hereof and through the date of Closing as follows:
10.1.1 The Company (a) is a corporation duly organized, validly
existing and in good standing under the laws of the State of New
York; (b) is qualified to licensed to do business and is in good
standing in all jurisdictions in which the nature of its
business or its properties makes such qualification or licensing
necessary, except as set forth on Schedule 10.1.1; and (c) has
all requisite legal and corporate power and authority to own,
operate or lease its properties and assets and to carry on its
business as now conducted.
10.1.2 (a) The Company has registered the Uniform Franchise Offering
Circular ("UFOC") in every jurisdiction in which the UFOC is
required to be registered including any federal, state, county,
municipal or other governmental agency, department, commission,
board, bureau or instrumentality, both domestic and foreign.
Schedule 10.1.2(a) is a list of all such agencies with which the
UFOC has been registered, the date of such registration, and the
renewal date, if any, for such registration. The most recent
UFOC registered is dated June 27, 1995, and the UFOC has not
been updated or modified since June 27, 1995, except as provided
in Schedule 10.1.2(b). Except as provided in Schedule 10.1.2(c),
the Company is not aware of, nor received any notice of any
proceedings, revocation,
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termination or other action or threat of action against or with
respect to any registration or its UFOC or otherwise which would
affect the Company's ability to transact or conduct its business
or operations in any jurisdiction.
(b) The most recent UFOC dated June 27, 1995, and all prior
UFOC's issued, used and/or relied upon by the Company were
prepared, maintained and distributed in compliance with all
applicable statutes, rules and regulations, including but not
limited to the United States Federal Trade Commission ("FTC")
and applicable status regulatory authorities.
10.1.3 This Agreement has been duly and validly executed and delivered
by the Company. The execution and delivery by the Company of
this Agreement, and the consummation of the transactions
contemplated hereby, have been duly and validly authorized and
approved by all necessary and proper action on the part of the
Board of Directors. No shareholder action or approval, or
consents of any third parties or of any governmental agencies
are required for Closing except as set forth on Schedule 10.1.3
attached (which consents the Company is required to obtain prior
to Closing), and no further action is required to be taken or
obtained by the Company in connection with authorization and
approval of the execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby. The
Company has all requisite legal and corporate power and
authority to enter into, perform and carry out this Agreement.
The representatives of the Company who have executed this
Agreement have been duly authorized to do so by the Company, and
no law, ordinance, judicial decree, order or regulation
prohibits the Company from executing this Agreement or
performing any of its obligations hereunder.
10.1.4 Neither the execution and delivery of this Agreement not the
consummation of the transactions contemplated hereby will
constitute or, with the giving of notice or the passage of time
or both, would constitute a violation of or a default under or
conflict with any term or provision of the Certificate of
Incorporation or By-Laws of the Company, or any of the terms,
conditions or provisions of any agreement, contract, lease,
instrument, indenture, license or franchise to which the Company
is a party, or by which it or any of its properties or assets is
of may be bound, or result in the creation or imposition of any
lien, claim, charge or encumbrance of any nature whatsoever upon
any of its properties or assets, or constitute a violation of
any statute, law or ordinance or any rule, regulation, order of
any governmental authority, including, without limitation, any
franchise law, rule, regulation or order, and any securities
law, rule, regulation or order, or any judicial decree, or
require the consent or approval of any governmental authority,
lending institution or other third party.
10.1.5 Schedule 10.1.5(a) is a list of all actions, suits,
investigations, claims or proceedings pending or threatened in
the last five (5) years against the Company (or to the knowledge
of the Company, against any of the Existing Franchisees) at law
or in equity or before or by any federal, state, municipal or
other governmental court, department, commission board, bureau,
agency or instrumentality, domestic or foreign, whether or not
any such claims have been litigated, settled, or otherwise
decided. Except as provided in Schedule 10.1.5(b) there is no
action, suit, investigation, claim or proceeding pending or
threatened against the Company (or, to the knowledge of the
Company against any of the Existing Franchisees) at law or in
equity or before or by any federal, state, county, municipal or
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other governmental court, department, commission, board, bureau,
agency or instrumentality, domestic or foreign, or any
arbitrator or panel of arbitrators which individually or in the
aggregate either (a) questions the validity of this Agreement or
of any action taken or to be taken in connection herewith, or
(b) if determined adversely to the Company or any Existing
Franchisee might have a material adverse effect upon the
Business, the Assets, the System, results of operations or
financial condition of the Existing Franchisees or adversely
affect the ability of the Company to perform its obligations
hereunder. The Company is not in violation, in any material
respect, of any laws, statutes, ordinances, regulations, orders,
writs, injunctions, decisions, awards or decrees or any court or
federal, state, county, municipal or other governmental
department, commission, board, bureau, agency, or
instrumentality, domestic or foreign, or any arbitrator or panel
of arbitrators, relating to the Business, the Assets, or the
System and the Company has no knowledge or any basis for any
claim for compensation or damage or otherwise from any violation
of the foregoing.
10.1.6 Schedule 10.1.6 sets forth a list of all defaults, actions,
suits, or claims pending or threatened by the Company against
any Existing Franchisee, or other third party as relates to the
Business, the Assets, or the System, at law or in equity or
before any arbitrator or federal, state, county, municipal or
other governmental court, domestic or foreign.
10.1.7 This Agreement constitutes a legal, valid and binding obligation
of the Company, enforceable against the Company in accordance
with its terms.
10.1.8 Except for such liens shown on Schedule 10.1.8 which will be
released prior to or at Closing, the Company shall have good,
marketable, and indefeasible title to all of the Assets, free
and clear of all liabilities, mortgages, conditional sales
agreements, security interests, liens, pledges, encumbrances,
restrictions, charges, claims, tax liens, or any other
imperfections of title whatsoever.
10.1.9 Except as set forth on Schedule 10.1.9(a), the Company (a) has
all right, title and interest in and to the Proprietary Marks;
(b) all such Proprietary Marks are valid and enforceable; (c)
the Company's ownership of such Proprietary Marks has been duly
recorded in the U.S. Patent and Trademark Office; (d) all such
Proprietary Marks have been maintained and all fees have been
paid to maintain their validity, enforceability, and to ensure
the issuance of any necessary registrations or certificates; (e)
the Company is unaware of any infringement or misappropriation
of any proprietary property rights of others by the Company; (f)
there is no action, suit, claim or proceeding pending or
threatened against the Company alleging or involving any state
of facts that the Company has infringed or misappropriated any
proprietary property rights of others; (g) there has been no
infringement or misappropriation of any of the Proprietary
Marks; (h) the Company has no knowledge of any current
infringement or misappropriation of the Proprietary Marks, or
any actions, suits or proceedings pending or threatened against
any party for actual or alleged infringement or misappropriation
of the Proprietary Marks; and (i) the Company has no knowledge
of any potential or future infringement or misappropriation of
(1) the Proprietary Marks by any party, or (2) any proprietary
property rights by the Company, which would affect the ability
to use the Proprietary Marks or to develop and franchise the
Microtel concept and System. Exhibit "A-1" is a complete and
accurate list of the
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Proprietary Marks showing with whom each mark is registered, the
registration number and the date registered.
10.1.10 The Company is the owner of and has authority to assign and
transfer to Newco the Assets, the exclusive rights, Proprietary
Marks and System which are the subject of this Agreement. Each
of the Proprietary Marks, the System and all of Microtel's
rights therein are valid and are in good standing and
uncontested. The Company has not received any notice and has no
knowledge with respect to any alleged infringement or unlawful
or improper use of any Proprietary Mark or the System. The
Company has not granted any licenses or other rights to use any
of the Proprietary Marks or to develop, build, establish or
operate the Business except as expressly set forth on Schedule
10.1.10 hereto.
10.1.11 Schedule 10.1.11(a) identifies all confidential and proprietary
property, other than the Proprietary Marks, with respect to the
franchising and operation of the Business and the System which
the Company has maintained as confidential in nature. Except as
provided in Schedule 10.1.11(b), the Company is unaware of any
infringement, misappropriation or public disclosure of any of
the property included in Schedule 10.1.11(a), and has no
knowledge of any current infringement, misappropriation or
public disclosure or any actions, suits or proceedings pending
or threatened against any party for actual or alleged
infringement, misappropriation or public disclosure of such
property.
10.1.12 Schedule 10.1.12 is a list of all franchise agreements which
the Company has executed and is true and complete list
indicating for each such franchise agreement (a) the location
of such Franchise; (b) whether the Company has a management
agreement with the Franchisee; (c) if the Franchisee is a
related party, the nature of such relationship to the Company.
Except as provided on Schedule 10.1.12, all franchise
agreements (a) are in full force and effect; (b) have not been
amended; (c) are not in default; and (d) may be transferred or
assigned without the consent of the Franchisee or any other
party other than the Company. There are no such franchise
agreements other than the Existing Franchise Agreements for the
Existing Franchises. Except as provided on Schedule 10.1.12,
there has not been any waiver, amendment, or other reduction of
any royalties, management fees, or other payments of any kind
with respect to the franchise agreements, below the level of
such fees as set forth in the respective disclosure documents
for such Franchise. A true, correct and complete copy of each
of the Existing Franchise Agreements set forth on Schedule
10.1.12 has been provided to Newco.
10.1.13 Except as provided on Schedule 10.1.13, since March 31, 1995
(a) the operations of the Business have been carried on only in
the ordinary course consistent with past practice, and (b)
there has been no material adverse change, and there has been
no event or circumstance which is reasonably anticipated to
result in a material adverse change with respect to the
Business, the Existing Franchises, or the System or its
component parts.
10.1.14 Except as provided on Schedule 10.1.14, the Company has timely
filed or otherwise timely secured extensions for filing with
the appropriate federal, state, local and foreign governmental
authorities all tax returns and information returns required by
it to be filed, and there will remain on the date of Closing no
unpaid taxes, assessments or public charges of any type or
nature whatsoever due and payable to any governmental agency or
authority, whether federal, state, local or foreign, including,
without limitation, any
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income, intangible property, social security, unemployment
insurance, Worker's Compensation premiums, other employment
sales, use and other taxes, assessments or charges and any
deposits required to be made with respect thereto, which are or
could become a lien or charge against or otherwise affect any
of the assets of the Company or the System or its component
parts of the Assets transferred hereunder. The Company has not
been delinquent in the payment of any taxes, assessment,
deposit, or other charge by any governmental authority and no
liability, obligation, deficiency, or other claim is pending or
has been assessed, asserted or threatened against the Company,
the Assets, or the System or its component parts in connection
with any tax and, to the Company's knowledge, there is no basis
for any such liability. The Company has not received any notice
of assessment or proposed assessment in connection with any tax
returns and there are no pending tax examinations of or tax
claims asserted against the Company, the Assets, or the System
or any of its component parts, including without limitation,
any claim by any governmental authority in any jurisdiction
where the Company did not file tax returns, that the Company is
or may be subject to or liable for taxes imposed by that
governmental authority or jurisdiction. There are no liens,
security interests, pledges, or other encumbrances for any
taxes (other than any lien for current real property or ad
valorem taxes not yet due and payable) on the Assets, or System
or any of its component parts. No tax is required to be
withheld pursuant to Section 1445 of the Internal Revenue Code
of 1986, as amended, as a result of any of the transfers
contemplated by this Agreement and the Company will provide any
certificate required by Newco as Closing with respect thereto.
The Company has provided to Newco true, correct and complete
copies of the Company's corporate income tax return for the
fiscal year ended March 31, 1994 filed with the Internal
Revenue Service and most recent franchise/net worth tax returns
filed with each state or jurisdiction in which such returns are
required to be filed.
10.1.15 Schedule 10.1.15 is a true and complete list of all oral or
written contracts which the Company has executed which relate
to the development and operation of the System, indicating for
each such contract whether such contract is with a related
party, the nature of such relationship to the Company and the
principal terms of such contracts. Except as provided on
Schedule 10.1.15, all such contracts (a) are in full force and
effect; (b) have not been amended; (c) are not in default; and
(d) may be transferred or assigned without the consent of the
other parties to the Contract or any other third parties.
10.1.16 The Company has not employed any finder, agent, broker or other
person to act for it with respect to the transactions
contemplated by this Agreement, and the Company agrees to
indemnify, defend and save Newco harmless from and against any
claims of the finder, agent, broker or other person resulting
from its actions with respect to the transactions contemplated
hereby.
10.1.17 All of the assets and the operations of the Business of an
insurable nature and of a character usually insured by
companies of similar size and in similar businesses are insured
by the Company in such amounts and against such losses,
casualties or risks as is (a) usual in such companies and for
such assets, operations and businesses, (b) required by law,
ordinance, regulation, rule or other statute applicable to the
Company or its operations, or (c) required by any contract,
agreement, lease, commitment or other arrangement of the
Company relating to the System or its component parts and the
Company's franchising operations. Schedule 10.1.7 contains a
complete and accurate list
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of all insurance policies held or owned by the Company relating
to the Assets, the System and its component parts and the
Company's franchising operations and now in force. All such
policies are in full force and effect and enforceable in
accordance with their terms. The Company is not now in default
regarding the provisions of any such policy, including, without
limitation, failure to make timely payment of all premiums due
thereon, and has not failed to give any notice or present any
claim thereunder in due and timely fashion. Except as set forth
in Schedule 10.1.7, the Company has not been refused, or denied
renewal of, any insurance coverage in connection with the
ownership or use of its assets or operations. In addition to
the deductibles set forth on Schedule 10.1.7, such Schedule
discloses all risks that are self-insured by the Company that
in the ordinary course of business could be insured.
10.1.18 Termination of the EMILI Agreement will not constitute or, with
the giving of notice or the passage of time or both, would not
constitute a violation of or a default under or a conflict with
any term or provision of the Certificate of Incorporation or
By-Laws of the Company, or any of the terms, conditions or
provisions of any agreement, contract, lease, instrument,
indenture, license, or franchise to which the Company is a
party, or by which it or any of its properties or assets is or
may be bound, or result in the creation of imposition of any
lien, claim, charge or encumbrance of any nature whatsoever
upon any of its properties or assets, or constitute a violation
of any statute, law or ordinance or any rule, regulation, order
of any governmental authority, including, without limitation,
any franchise law, rule, regulation, or order, and any
securities law, rule, regulation or order, or any judicial
decree, or require the consent or approval of any governmental
authority, lending institution or other third party. Upon
termination of the EMILI Agreement the Company will have no
further obligations or liabilities thereunder (except
obligations arising under the warrants to purchase common stock
of the Company issued in connection with the original execution
of the EMILI Agreements). The Company has heretofore provided
to Newco a true, correct and complete copy of such EMILI
Agreement. Such termination will not in any manner prohibit or
materially adversely affect Newco's prospective operations or
development of the franchise business in Canada or elsewhere.
10.1.19 Except as provided in Schedule 10.1.19, the Company has not
executed nor is it actively negotiating or considering
negotiating a master franchise development, area development,
multiple franchise or similar agreement with any other entity
other than the EMILI Franchise Agreement covering any
jurisdiction, city, state, country or other geographical area.
10.1.20 The Company is not, and will not be, on the date of Closing, a
party to any union, collective bargaining or similar agreement
relating to the Business.
10.1.21 The Company has not used any business names, trade names and
other names to conduct or carry out the Business in the last
five (5) years.
10.1.22 No representation or warranty made by the Company or any
statement, certificate or instrument furnished or to be
furnished to Newco pursuant to this Agreement or any other
document, agreement or instrument referred to herein or therein
contains or will contain any untrue material statement of fact
or omit or will omit to state a material fact necessary to make
the statements contained therein not misleading.
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10.1.23 Except as provided in Schedule 10.1.23, the consummation of the
transactions contemplated by this Agreement will not give rise
to any liability for any employee benefits, including, without
limitation, liability for severance pay, unemployment
compensation, termination pay or withdrawal liability, or
accelerate the time of payment or vesting or increase the
amount of compensation or benefits due to any of the Company's
Employees. As used in this Agreement, the term the "Company's
Employees" means (i) all active or former employees or
directors of the Company, (ii) all employees of the Company
who, as of the Closing, are on workers' compensation, military
leave, other approved leaves of absences, long-term or
short-term disability, non-occupational disability and
employees on layoff with recall rights, (iii) all individuals
who are covered under any employee benefit plan as a result of
previously being described in (i) or (ii) above, and (iv)
beneficiaries or dependents under any employee benefit plan or
anyone described in (i) through (iii) above.
10.1.24 that the Company has not issued or given any written consent
permission or authorization to any of the Existing Franchisees
to use the term "Microtel" or any other of the Proprietary
Marks as part of the corporate or other legal name of such
Franchisee.
10.1.25 No provision of the Existing Franchise Agreements restricts or
prohibits the right of Newco, as franchisor, to collect and
administer in its sole discretion (but in accordance with
applicable law) any amounts designated as reservation,
advertising, or marketing fees.
10.2 Newco represents and warrants to the Company as follows:
10.2.1 Newco (a) is a corporation duly organized, validly existing and
in good standing under the laws of the State of Delaware; (b) is
qualified and licensed to do business and is in good standing in
all jurisdictions in which the nature of its business or its
properties makes such qualification or licensing necessary,
except as set forth on Schedule 10.2.1 and (c) has all requisite
legal power and authority to own or lease its properties and
assets and to carry on its business as now conducted.
10.2.2 This Agreement has been duly and validly executed and delivered
by Newco. The execution and delivery by Newco of this Agreement,
and the consummation of the transactions contemplated hereby,
shall be duly and validly authorized and approved at the time of
Closing by all necessary and proper action on the part of the
board of directors of Newco. Newco has all requisite legal and
corporate power and authority to enter into, perform and carry
out this Agreement. No consent of any third parties or
governmental agencies is required to be taken or obtained by
Newco in connection with the authorization and approval of the
execution and delivery of this Agreement. The representatives of
Newco who have executed this Agreement have been duly authorized
to do so by Newco, and no law, ordinance, judicial decree, order
or regulation prohibits Newco from executing this Agreement or
performing any of its obligations hereunder.
10.2.3 Neither the execution and delivery of this Agreement nor the
consummation of the transactions contemplated hereby will
constitute or, with the giving of notice or the passage of time
or both, would constitute a violation of or a default under or
conflict with any term or provision of the Certificate of
Incorporation or By-Laws of Newco, or any
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of the terms, conditions or provisions of any agreement,
contract, lease, instrument, indenture, license or franchise to
which Newco is a party, or by which it or any of its properties
or assets is or may be bound, or result in the creation or
imposition of any lien, claim, charge or encumbrance of any
nature whatsoever upon the properties or assets of Newco, or
constitute a violation on the part of Newco of any statute, law
or ordinance or any rule, regulation, order of any governmental
authority or any judicial decree, or require Newco to obtain the
consent or approval of any governmental authority, lending
institution or other third party.
10.2.4 This Agreement constitutes a legal, valid and binding obligation
of Newco, enforceable against Newco in accordance with its
terms.
10.2.5 Except as provided on Schedule 10.2.5, there are no actions,
suits or proceedings pending or, to the knowledge of Newco,
threatened against Newco before or by any court or federal,
state, county, municipal or other governmental department,
commission, board, bureau, agency or instrumentality, domestic
or foreign, or any arbitrator or panel of arbitrators. Newco is
not in violation of any laws, statutes, ordinances, regulations,
orders, writs, injunctions, decisions, awards or decrees of any
court or federal, state, county, municipal or other governmental
department, commission, board, bureau, agency, court or
instrumentality, domestic or foreign, or any arbitrator or panel
of arbitrators, relating to Newco or its business and Newco has
no knowledge of any basis for any claim for compensation or
damage or otherwise from any violation of the foregoing.
10.2.6 Newco has not taken any action or failed to take any action for
purposes of compliance with applicable state or federal
securities laws which would materially limit the ability of
Newco to carry out its obligations hereunder.
10.2.7 Except as provided on Schedule 10.2.7, there are no material
restrictions in the existing employment contract of the
individual identified as the Chief Executive Officer candidate
of Newco such that such individual could not be employed by
Newco.
10.2.8 No representation or warranty made by Newco or any statement,
certificate or instrument furnished or to be furnished to the
Company pursuant to this Agreement or any other document,
agreement or instrument referred to herein or therein contains
or will contain any untrue material statement of fact or omit or
will omit to state a material fact necessary to make the
statements contained therein not misleading.
10.3 For purposes of this Section 10 the terms "knowledge" or "awareness"
or words of similar comport mean facts, circumstances or conditions known to
or, which by reason of job function, responsibility or circumstances, and
after such inquiry as such person or entity should have reasonably conducted
under the circumstances, should have been known by, any person or entity or,
if such person or entity is a corporation, any officer or director of such
corporation.
11. CONFIDENTIAL INFORMATION.
11.1 The Company shall not, during the term of this Agreement and prior to
a Reversion of Microtel Rights (as defined hereinafter) communicate, divulge,
or use for the benefit of any other person, partnership, association,
corporation or other entity other than Newco any confidential information,
knowledge, or know-
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how concerning the methods of operation of the System and the Microtel Hotels
or Suites; and further the Company shall not, during the term of this
Agreement or following any Reversion of Microtel Rights communicate, divulge,
or use any confidential information, knowledge or know-how relating to Newco
(including for purposes of this section the affiliates and subsidiaries of
Newco), or the business of Newco which may be known or communicated in
writing, verbally or otherwise to the Company, or which the Company may be
apprised by virtue of Newco's operation hereunder. The Company shall divulge
such confidential information only to such employees of the Company as must
have access to it in order to exercise the Company's rights or perform the
Company's obligations hereunder. Without limitation, any and all information,
knowledge, know-how, and techniques which Newco reasonably designates as
confidential shall be deemed confidential for purposes of this Agreement.
11.2 "Confidential information, knowledge, or know-how relating to Newco
or the business of Newco" shall not include any information, knowledge or
know-how disclosed or made known to the Company provided that: (i) the source
of such information is not known by the Company to be subject to a
confidentiality agreement; (ii) such information has been or is independently
acquired or developed by the Company without reference to any other
confidential information; or (iii) such information was or becomes generally
available to the public on a non-confidential basis.
11.3 Subject to and not in limitation of any and all of Newco's rights
hereunder (including without limitation those relating to the representations
and warranties given by the Company hereunder and relating to the terms,
covenants and conditions contained herein), Newco acknowledges that all
information furnished under this Agreement is provided without a specific
representation, warranty, or guarantee by the Company as to its successful
and profitable use, and acknowledges in that specific respect that the
Company does not guarantee the success or profitability of Newco's business
in any manner whatsoever.
12. ACCOUNTING AND RECORDS.
12.1 During the term of this Agreement from and after Closing, Newco shall
maintain, and preserve for the purposes of accounting for payments to be made
to the Company hereunder for a period of five (5) years from the dates of
their preparation, full, complete, and accurate books, records, and accounts
pertaining to the royalties and other fees paid by Franchisees to Newco in
accordance with the Uniform System of Hotel Accounts (8th Rev.Ed. 1986), as
it may be amended or supplemented from time to time, or such other system of
accounting as may be designated by the Company and agreed to by Newco, and in
the form and manner reasonably prescribed by the Company and agreed to by
Newco from time to time in writing. The Company or its designated agents
shall have the right, upon seven (7) days notice and without material
interruption to Newco's business, to examine, copy, and inspect, at Newco's
place of business, at the Company's expense, such books, records, and
accounts. The Company shall also have the right, upon reasonable notice
agreed to by Newco and without material interruption to Newco's business, to
have an independent audit made of such books, records, and accounts of Newco,
at the Company's expense. Subject to the notice and cure provisions of
Sections 15 and 16 hereof, if such an inspection or audit of Newco discloses
an intentional underpayment by Newco to the Company of five percent (5%) or
more of the total amount that should have been paid to the Company during any
six (6) month period, Newco shall, in addition to repayment of such
understated amount with such interest at the rate calculated pursuant to
Section 6.5 hereof, reimburse the Company for any and all reasonable costs
and expenses incurred in connection with the inspection or audit (including,
without limitation, reasonable accounting and attorneys' fees). In addition
to any rights Newco may have pursuant to this Agreement, Newco shall have the
right to review all records and documents related to any such independent
audit by the Company.
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12.2 During the term of this Agreement from and after Closing, Newco shall,
at its expense, submit to the Company no later than (i) the twentieth day of
each month; (ii) within forty-five (45) days after the end of each fiscal
quarter of Newco; and (iii) within one hundred twenty (120) days after the end
of each fiscal year of Newco, periodic reports accurately reflecting occupancy
data and Revenues Subject to Royalties for each Microtel Hotel during the
applicable prior period, and all continuing monthly royalty fees and all other
fees paid by Franchisees to Newco during such periods. The Company reserves the
right to require submission as received by Newco of audited annual financial
statements, prepared at Newco's expense, by an independent certified public
accountant regularly selected by Newco. All audited annual financial statements
shall be prepared according to generally accepted accounting principles.
13. INSURANCE
13.1 During the term of this Agreement, Newco shall procure as soon as is
reasonably practicable after Closing, and, following Closing, Newco and the
Company shall maintain in full force and effect at all times during the term
of this Agreement, at each party's respective expense, an insurance policy or
policies determined by each respective party in its reasonable business
judgment to be necessary to protect Newco and the Company, and their
respective officers, directors, partners, employees, agents, and
shareholders, against those certain demands, claims, losses, liabilities, or
expenses determined by each respective party in its reasonable business
judgment to be necessary in an amount reasonably determined by each party to
be necessary. Such insurance policy or policies shall be consistent with
industry standards. Newco shall have the right to use self insurance upon
completion of the Development Schedule.
13.2 Each party's obligation to obtain and maintain the foregoing policy
or policies shall not be limited in any way by reason of any insurance which
may be maintained by the other party, nor shall each party's performance of
such obligation relieve it of liability under the indemnity provisions set
forth in this Agreement.
13.3 Prior to the commencement of any operations by Newco under this
Agreement, and thereafter at least thirty (30) days prior to the expiration
of any policy, each party shall deliver to the other party certificates or
other evidence of insurance demonstrating the proper coverage as required
hereunder.
14. TRANSFERABILITY OF INTEREST
14.1 Subject to the prior written consent of Newco (and subject to any
applicable restrictions on transfer set forth in the applicable franchise
agreement), the Company shall have the right to transfer, sell, assign, or
otherwise encumber all or any part of its rights or obligations under this
Agreement to any person or legal entity. Newco's prior written consent shall
be required to such transfer, sale, assignment or other encumbrance, but
Newco's discretion shall be limited to considerations based on whether the
party (or future party) to whom such rights or obligations are transferred,
sold, assigned or otherwise encumbered would qualify as a franchisee of
Newco. Any permitted transfer and assignment of such rights or obligations
pursuant to this Agreement by the Company shall not constitute a novation of
this Agreement.
14.2 In the event that the Company shall propose to sell, transfer or
assign either directly or indirectly, through a transfer of control or
otherwise, any or all of its rights hereunder to any third party or entity or
any third party shall propose to purchase or acquire such rights, the Company
shall give notice of such intention to Newco, and the Company shall in good
faith give Newco the opportunity to bid and negotiate to purchase or acquire
such rights. For the purposes of this Agreement, "control" shall mean the
possession, direct or indirect, of the power to direct or cause the direction
of the management and policies
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of a person, corporation or other business entity, whether through the
ownership of voting securities, by contract, or otherwise.
14.3 Subject to the provision of Section 14.6 hereof, in the event that
Newco shall propose to sell transfer or assign, either directly or
indirectly, through a transfer of control or otherwise, all or substantially
all the Assets acquired hereunder to any unrelated third party or entity
pursuant to a bona fide offer to purchase or acquire such Assets, Newco shall
give notice of such intention to the Company, setting forth the terms of the
offer. The Company shall have the right of first refusal, to be exercised by
written notice to Newco within twenty (20) days, to purchase such Assets on
terms and conditions that are economically equivalent in all material
respects, including relative economic strength of the Purchaser and all
future economic consideration to be received. Should the Company not agree
with the decision of Newco as to whether such terms and conditions are
economically equivalent, then the Company shall have the right within ten
(10) days of notice of such decision to demand that such issue be arbitrated
within ten (10) days by an independent and nationally recognized investment
banking firm to be mutually agreed upon (with neither party unreasonably
withholding its consent as to choice of such investment banking firm),
provided, however, any such demand or arbitration must be final and concluded
within thirty (30) days of the date of notice of the decision of Newco. In
the event that the Company shall fail or decline to exercise its right of
first refusal, Newco may proceed with the sale upon the proposed terms;
provided, that any amounts not yet paid under Section 6.3 hereof shall be due
and payable upon transfer. If Newco shall subsequently fail to close or
transfer in accordance with the terms disclosed to the Company, then the
right of first refusal shall apply to any future proposal.
14.4 Notwithstanding any other contrary provision contained herein, Newco
may sell, transfer or assign any part or all of the Assets or any of its
rights or obligations acquired hereunder without notice to or consent of
Company, to any related or affiliated party where such entity has a net book
value of at least $5.0 million dollars. In addition, prior to Closing, Newco
may assign all or any portion of its rights to a wholly owned operating
subsidiary or to a separate legal entity (including but not limited to a
limited liability company) having similar management, ownership and
capitalization as Newco which subsidiary or other legal entity satisfies the
conditions to Closing, and Newco may sell shares (or other interests) to its
subscribers.
14.5 Notwithstanding any other provision of this Agreement, the Company's
right of first refusal shall not apply to the assignment, transfer, pledge,
or hypothecation by Newco of this Agreement, or any of the Assets acquired in
this Agreement, or all and any part of Newco, to a creditor as collateral
security for loans made directly to or for the benefit of Newco's business
hereunder; provided however, that Newco shall use its best efforts to have
such creditor agree that if such creditor exercises its rights under its
agreement(s) with Newco, and intends to sell, assign, transfer, or otherwise
dispose of the pledged collateral, the secured creditor will give the Company
not less than thirty (30) days notice of any public sale or proposed
disposition, and the secured creditor shall first offer to the Company the
right to acquire such pledged collateral on the same terms and conditions
under which the secured creditor intends to dispose of it.
14.6 All limitations (either expressly set forth or implied herein) on the
ability of Newco to freely sell, transfer, or assign all or any part of the
Assets, stock, ownership, interests, or any of its rights hereunder, and all
other rights of the Company under this Section 14, including but not limited
to the Company's right of first refusal pursuant to Sections 14.3 or 14.5,
shall terminate upon the occurrence of the earlier of (i) the execution by
Newco and its underwriters of a firm (and not a best efforts) underwriting
agreement underwriting an offering of Newco securities; or (ii) the
completion by Newco of the Development Schedule.
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14.7 The consent of the Company or of Newco to a transfer of any interest in
the rights granted herein shall not constitute a waiver of any claims such party
may have against the transferring party, nor shall it be deemed a waiver of the
right of the Company or Newco, as applicable, to demand exact compliance with
any of the terms of this Agreement by the transferee.
15. DEFAULT BY NEWCO AFTER CLOSING.
15.1 An Event of Default shall have occurred if from or after the date of
Closing, (i) Newco fails to maintain its registrations which materially
affects Newco's ability to sell or maintain franchises; (ii) subject to the
cure provisions of Section 1.10 hereof, Newco fails to open or have under
construction the minimum number of Microtel Hotels pursuant to Section 1.9
hereof; (iii) Newco fails to pay to the Company any amounts determined to be
due hereunder; or (iv) Newco otherwise fails to fulfill its material
obligations hereunder.
15.2 The foregoing notwithstanding, Newco shall not be deemed to be in
default and there shall be no Event of Default hereunder unless or until
Newco shall have received written notice of the alleged default and shall
have had thirty (30) days to cure such alleged default or to take such
actions to initiate a cure of such default pursuant to reasonable efforts by
Newco to be substantially completed or performed within a reasonable time.
Upon cure, substantial completion or performance by Newco, this Agreement
shall remain in full force and effect as if no such breach or default or
alleged breach or default shall have existed.
16. OBLIGATIONS DUE TO POST CLOSING DEFAULT BY NEWCO.
16.1 Until the time of occurrence of either of the events set forth in
Section 14.6, upon the occurrence of an Event of Default pursuant to Section
15 from and after the date of Closing and failure by Newco to cure within the
applicable notice and cure period therein:
16.1.1 Newco shall immediately cease to operate the Microtel Business
operated pursuant to this Agreement and shall not thereafter,
directly or indirectly, represent to the public or hold itself out
as a present franchisor of Microtel Hotels, and shall have no right
or obligation to franchise or license any other party to establish
or operate any Microtel Hotel for which a franchise agreement has
not been executed by Newco at the time of termination.
16.1.2 Newco shall immediately execute and deliver to the Company
assignments and transfers of the Proprietary Marks and such other
assignments as may be required to vest in the Company all rights in
and to the intellectual property then constituting the Microtel
System.
16.1.3 Subject to the provisions of Section 16.2 hereof, Newco shall
immediately transfer and assign all Newco's rights and obligations
in all of the Microtel franchise agreements to the Company, and the
Company shall assume such rights and obligations; and Newco shall
immediately provide to the Company all records in Newco's
possession prepared or retained in connection with Newco's
obligations under Section 12 hereof, and all records relating to
the Microtel Hotels operating under this Agreement.
16.1.4 Newco shall immediately and permanently cease to use the
Proprietary Marks and distinctive logos, slogans, signs, symbols,
and forms associated with the System.
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16.1.5 Newco shall immediately execute and deliver to the appropriate state
and international authorities documents evidencing the termination of
its registration to sell Microtel Hotel franchises.
16.1.6 To the extent Newco continues or subsequently begins to operate any
other business, Newco shall not use any reproduction, counterfeit,
copy, or colorable imitation of the Proprietary Marks, either in
connection with such other business or the promotion thereof, which
is likely to cause confusion, mistake, or deception, and shall not
utilize any designation of origin or description or presentation
which falsely suggests or represents an association or connection
with the Company.
16.1.7 Newco shall immediately pay all sums owing to the Company and its
affiliates pursuant to this Agreement including all damages, costs,
and expenses, including but not limited to reasonable attorney's
fees and expenses incurred by the Company as a result of the
default and the enforcement of the Company's rights hereunder.
16.1.8 Newco shall not have the right to claim any indemnity,
reimbursement, or compensation for alleged loss of clientele or
goodwill, loss of profits or anticipated sales, or any other
reimbursement for losses or damages resulting from such expiration
or termination.
16.1.9 Notwithstanding any other contrary provision contained herein,
Newco or its affiliates shall continue to operate any Microtel
Hotel pursuant to a franchise agreement.
16.2 Following the reversion to the Company of certain rights to the
System and Assets as specifically set forth in Section 16.1 hereof (the
"Reversion of Microtel Rights"), the Company shall pay to Newco (less the
amount to be paid to the Company pursuant to Section 6.2 hereof), on a
monthly basis, all Franchise Royalties received from each New Franchisee so
long as such New Franchisee (or its successor assign) remains a Franchisee,
including, without limitation, by renewal, amendment, execution or a new
Franchise Agreement, or otherwise, less the following: (i) a servicing fee
equal to seventy-five one hundredths of one percent (0.75%) of all Revenues
Subject To Royalties; and less, (ii) any reservation or marketing fees
collected by the Company (but only if the Company continues to operate a
central reservation system). Newco shall have and retain the right to collect
directly for its own account any amounts owing to Newco hereunder following
any such Reversion of Microtel Rights. The Company shall also provide to
Newco accounting and records similar to those provided to the Company
pursuant to Section 12 hereof, as well as all other rights or remedies
otherwise available to the Company in connection with collection of any
amounts owing hereunder.
16.3 Notwithstanding any other provision to the contrary contained in this
Agreement, no Reversion of Microtel Rights shall result from the occurrence
of an Event of Default by Newco after the occurrence of the earlier of the
events described in Section 14.6 herein.
16.4 Notwithstanding any other provision to the contrary contained herein,
no Reversion of Microtel Rights shall be effective until a court of competent
jurisdiction shall have finally determined that an Event of Default which
could result in a Reversion of Microtel Rights shall have occurred and until
Newco shall have had the opportunity to cure such default following such
final determination by payment of any amounts so finally determined to be
owed by Newco to the Company or by taking such actions necessary to cure such
default and unless Newco shall not so cure within thirty (30) days of such
final determination such default or take such actions to initiate a cure of
such default pursuant to reasonable efforts by Newco to be
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substantially completed or performed within a reasonable time. Upon cure,
substantial completion or performance by Newco, this Agreement shall remain
in full force and effect as if no such breach or default or alleged breach or
default shall have existed as provided for in this Section 16.4.
16.5 Notwithstanding any other provision to the contrary contained herein,
if a Reversion of Microtel Rights shall occur, any and all of Newco's other
rights under and interest in this Agreement including but not limited to
Newco's right of indemnification under Section 22 shall survive such
termination.
17. DEFAULT BY THE COMPANY AFTER CLOSING.
17.1 Following Closing, an Event of Default shall have occurred if from or
after the date of Closing, (i) the Company shall fail to pay to Newco any
amounts determined to be due hereunder after written notice; or (ii) the
Company shall otherwise fail to fulfill its material obligations hereunder.
17.2 Provided, however, the Company shall not be deemed to be in default
and there shall be no Event of Default hereunder unless or until the Company
shall have received written notice of the alleged default and shall have had
thirty (30) days to cure such alleged default pursuant to reasonable efforts
by the Company to be substantially completed or performed within a reasonable
time. Upon cure, substantial completion or performance by the Company, this
Agreement shall remain in full force and effect as if no such breach or
default or alleged breach or default shall have existed.
18. OBLIGATIONS DUE TO POST CLOSING DEFAULT BY THE COMPANY.
18.1 Upon occurrence of an Event of Default pursuant to Section 17 from
and after the date of Closing and failure by the Company to cure within the
applicable notice and cure period therein, Newco, at the sole option of
Newco, shall have the right to exercise any one or more of the following
rights and remedies: (i) exercise its rights to indemnification pursuant to
the provision of Section 22 hereof and to set off from amounts payable to the
Company all losses, costs and expenses incurred in connection therewith in
accordance with the provisions of Section 23 hereof; (ii) to cease the
entering into of any agreements with the Company as franchisee, or to accept
the tender or offer by the Company of any of the Existing Retained Properties
or Substitute Retained Properties; (iii) to declare the right of the Company
to acquire any Additional Franchises (including by not limited to franchises
for Suites) terminated and of no further force and effect; (iv) to seek
injunctive relief where applicable; or (v) to take such other action or seek
such other remedy as may otherwise be available to Newco under the terms
hereof or otherwise available at law or in equity.
19. POST CLOSING COVENANTS OF THE COMPANY.
19.1 The Company hereby covenants and agrees with Newco:
19.1.1 Immediately after the Closing, the Company shall terminate all
registrations or filings relating to the offering and sale of
franchises under the System.
19.1.2 During the term of this Agreement, following Closing and until the
occurrence of a Reversion of Microtel Rights, the Company, its
directors, its officers or any of its affiliates (directly or
indirectly) shall not enter into or operate any business which
develops or offers or sells franchises for a hospitality or hotel
product (including a Suites Hotel type concept) in the super budget
or hard budget category. This provision shall not be
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construed to restrict the Company from developing, owning or
managing individual properties of any other category, brand or
type.
19.1.3 During the term of this Agreement, following Closing and until the
occurrence of a Reversion of Microtel Rights, the Company shall not
solicit as a potential venture partner, investor, co-developer,
owner, or other participant in any new hotel development or
property utilizing the Microtel concept, or as a customer of the
Company, any Existing Franchisee, or any new Franchisee, or any
party who Newco is actively pursuing as a prospective franchisee
for a Microtel Hotel other than for those parties set forth on
Schedule 19.1.3 attached hereto.
19.1.4 During the term of this Agreement, following Closing and until the
occurrence of a Reversion of Microtel Rights, the Company as part
of its ongoing Hotel development activities: (i) shall comply at
all times with the limitations and restrictions of applicable law
regarding the solicitation of any potential venture partner,
investor, co-developer, owner, or other participant in any new
hotel development or property utilizing the Microtel concept; (ii)
shall not act as a franchise salesperson or broker on behalf of or
in the name of Newco, or hold itself out as a salesperson, broker,
or representative of Newco; (iii) shall make no representations or
warranties regarding a potential Microtel franchise to any
potential venture partner, investor, co-developer, or other
participant in any new Microtel hotel development; (iv) shall
promptly report to Newco any such potential venture partner,
investor, co-developer, owner, or other participant who could be
classified as a potential offeree or franchisee, so that Newco may
properly register each person or entity and provide to such person
or entity a current UFOC disclosure package; and (v) shall promptly
refer to Newco all leads for potential franchisees made known to
the Company or other inquiries regarding acquiring a franchise.
20. NOTICES.
All notices to either of the parties hereto desired or required to be
given hereunder shall be in writing, addressed to recipient as specified
below, and shall be deemed delivered upon the earlier of: (i) the time and
date of actual delivery by hand, mail, or express delivery; or (ii) three (3)
days following deposit thereof in the United States Mail, postage prepaid,
certified, returned receipt requested. All such notices shall be addressed as
follows:
To the Company: Microtel Franchise and
Development Corporation
One Airport Way, Suite 200
Rochester, New York 14624
Attn: Bruce A. Sahs
Telephone: 716-436-6000
Facsimile: 716-436-1865
31
<PAGE>
and the Company's counsel:
Boylan, Brown, Code, Fowler,
Vigdor & Wilson, L.L.P.
900 Midtown Tower
Rochester, New York 14604
Attn: Alan S. Lockwood, Esq.
Telephone: 716-232-5300
Facsimile: 716-232-3528
To Newco: U.S. Franchise Systems, Inc.
196 East 75th Street
Apt. 19-C
New York, New York 10021
Attn: Neal K. Aronson
Telephone: 212-772-6741
Facsimile: 212-772-0574
and Newco's counsel: Bodker, Ramsey & Andrews
A Professional Corporation
1800 Peachtree Street, N.W.
Suite 615
Atlanta, Georgia 30309
Attn: Brian D. Bodker
Telephone: 404-351-1615
Facsimile: 404-352-1285
The address specified for notice to any party may be changed pursuant to
written notice by such party delivered in accordance herewith. Specifically
for purposes of Section 29 hereof, written notice may be given by facsimile
and shall be deemed delivered at the time of transmission.
21. SURVIVAL OF REPRESENTATIONS AND WARRANTIES.
21.1 All representations, warranties, agreements and covenants made or
undertaken by the parties in this Agreement are material, have been relied
upon by each party hereto, shall survive the Closing hereunder and the
termination of this Agreement, unless specifically provided to the contrary
herein, and shall not merge in the performance of any obligation by any party
hereto.
21.2 The representations and warranties made by the Company and contained
in Section 10.1 of this Agreement and the representations and warranties made
by Newco and contained in Section 10.2 of this Agreement are deemed by the
parties hereto to have been made by the Company and Newco, as the case may
be, on and as of both the date hereof and the Closing Date with the same
force and effect as if this Agreement were executed by the Company and Newco
on each of the date hereof and the Closing Date. The Company acknowledges and
agrees that prior to the Closing Date, Newco intends to perform such
investigation of the Company, its business operations and assets as it may
deem necessary or appropriate; however, no such investigation by Newco will
diminish or obviate any of the representations, warranties, covenants or
agreements made or to be performed by the Company pursuant to this Agreement
or Newco's right to fully rely upon such representations, warranties,
covenants and agreements.
32
<PAGE>
INDEMNIFICATION.
22.1 Obligation of the Company to Indemnify. The Company hereby covenants
and agrees to indemnify, defend and hold Newco (for purposes of this section,
Newco to be deemed to include the officers, directors, stockholders,
employees, agents, attorneys, and affiliates of Newco) harmless from and
against all Losses (as hereinafter defined) asserted against, imposed upon or
incurred by Newco by reason of, resulting from, arising out of, based upon or
otherwise in respect of the following:
22.1.1 any action or inaction of the Company or any other matter, thing
or occurrence related to the subject of this Agreement that
accrued, occurred, or arose prior the Closing Date;
22.1.2 any breach or inaccuracy in any representation or warranty made
by the Company pursuant to this Agreement;
22.1.3 any breach of any covenant or agreement made or to be performed
by the Company pursuant to this Agreement;
22.1.4 any and all liabilities, indebtedness or other obligations not
expressly assumed by Newco pursuant to this Agreement;
22.1.5 any claim by any broker, finder, agent or other person employed
or allegedly employed by the Company in connection with the
transactions contemplated by this Agreement;
22.1.6 the conduct by the Company of the Business or System, or
ownership of the Assets prior to the Closing Date;
22.1.7 the conduct by the Company of any business or activity other
than the Business, either before or after Closing.
22.1.8 the operation of the Company's ongoing business subsequent to
the Closing Date, including without limitation with respect to
any Loss related to the operation or ownership by the Company of
Retained Properties (but not including any Loss solely caused by
Newco's breach of those obligations as franchisor under the
Existing Franchise Agreements which are specifically to be
assumed by Newco hereunder).
22.2 Obligation of Newco to Indemnify. Newco agrees to indemnify, defend
and hold the Company (for purposes of this Section, Company to be deemed to
include the officers, directors, stockholders, employees, agents, attorneys,
and affiliates of Company) harmless from and against all Losses asserted
against, imposed upon or incurred by the Company by reason of, resulting
from, arising out of, based upon or otherwise in respect of the following:
22.2.1 any breach or inaccuracy in any representation or warranty made
by Newco pursuant to this Agreement;
22.2.2 any breach of any covenant or agreement made or to be performed
by Newco pursuant to this Agreement;
33
<PAGE>
22.2.3 any claim by any broker, finder, agent or other person employed
or allegedly employed by Newco in connection with the
transactions contemplated by this Agreement; and
22.2.4 any claim, demand, damage or cause or chose in action of any
kind or nature incurred by or asserted against the Company as a
result of or arising out of the operation of the Business by
Newco that accrues, occurs or arises for or with respect to any
period subsequent to the Closing Date, except for any claim,
demand, damage or cause or chose in action of any kind or nature
incurred by or asserted against the Company as a result of or
arising out of the operation of the Business by Newco for which
Newco shall be entitled to indemnification or the right of
set-off under any other provision of this Agreement.
22.2.5 the conduct by Newco of any other business or activity other
than the Business, either before or after the Closing.
22.2.6 the private offering conducted by Newco, provided, however, that
said Loss is not caused by any default or breach by the Company
of this Agreement.
22.3 Notice of Loss or Asserted Liability. Promptly after (a) becoming
aware of circumstances that have resulted or might result in a Loss for which
any person or persons entitled to indemnification pursuant to Section 22.1 or
Section 22.2 hereof intends to seek indemnification under such Section (the
"Indemnified Party") or (b) receipt by the Indemnified Party of written
notice of any demand, claim or circumstances which, with the lapse of time,
the giving of notice or both, would give rise to a claim or the commencement
(or threatened commencement) of any lawsuit, arbitration, proceeding or other
action that may result in a Loss (an "Asserted Liability"), the Indemnified
Party shall give notice thereof (the "Claims Notice") to any party obligated
to provide indemnification pursuant to Section 22.1 or Section 22.2 hereof
(the "Indemnifying Party"). The Claims Notice shall describe the Loss or the
Asserted Liability in reasonable detail, and shall indicate the amount
(estimated, if necessary) of the Loss that has been or may be suffered by the
Indemnified Party. The Claims Notice may be amended on one or more occasions
with respect to the amount of the Asserted Liability or the Loss at any time
prior to final resolution of the obligation to indemnify relating to the
Asserted Liability or the Loss. If a Claims Notice is not provided promptly
as required by this Section 22.3, the Indemnified Party nonetheless shall be
entitled to indemnification by the Indemnifying Party to the extent that the
Indemnifying Party has not established that it has been prejudiced by such
late receipt of the Claims Notice. Notwithstanding the foregoing sentence,
however, if the Claims Notice is not provided prior to compromise or payment
of any Asserted Liability by the Indemnified Party, the Indemnified Party
shall only be entitled to indemnification by the Indemnifying Party to the
extent that the Indemnified Party has established that the Indemnifying Party
has not been prejudiced by either such late receipt of the Claims Notice or
by the making of such compromise or payment prior to the making of the Claims
Notice.
22.4 Opportunity to Contest. Subject to the provisions of Section 22.5
hereof, the Indemnifying Party may elect to compromise or contest, at its own
expense and with counsel reasonably acceptable to the Indemnified Party, any
Asserted Liability. If the Indemnifying Party elects to compromise or contest
such Asserted Liability, it shall, within twenty (20) days (or sooner, if the
nature of the Asserted Liability so requires), notify the Indemnified Party
of its intent to do so by sending a notice to the Indemnified Party (the
"Contest Notice"), and the Indemnified Party shall cooperate, at the expense
of the Indemnifying Party, in the compromise or contest of such Asserted
Liability. If the Indemnifying Party either (i) elects not to compromise or
contest the Asserted Liability, (ii) fails to notify the Indemnified Party of
its election as herein provided, or (iii) contests its obligation to
indemnify under this Agreement, then in any such case the
34
<PAGE>
Indemnified Party shall have the right to pay, compromise or contest such
Asserted Liability on behalf of and for the account and risk of the
Indemnifying Party. Anything in this Section 22.4 to the contrary
notwithstanding, the Indemnified Party shall (i) have the right, at its own
cost and for its own account (except as provided in Section 22.5) hereof, to
compromise or contest any Asserted Liability, and (ii) not, without the
Indemnified Party's written consent, settle or compromise any Asserted
Liability or consent to entry of any judgment which does not include an
unconditional term releasing the Indemnified Party from all Liability in
respect of such Asserted Liability. In any event, the Indemnified Party and
the Indemnifying Party may participate, at their own expense, in the contest
of such Asserted Liability. Each of the Company and Newco shall cooperate
fully with the other as to all Asserted Liabilities, shall make available to
the other as reasonably requested all information, records, and documents
relating to all Asserted Liabilities and shall preserve all such information,
records, and documents until the termination of any Asserted Liability. Each
of the Company and Newco also shall make available to the other, as
reasonably requested, its personnel, agents and other representatives who are
responsible for preparing or maintaining information, records, or other
documents, or who may have particular knowledge with respect to any Asserted
Liability.
22.5 Subrogation Rights. In the event that the Indemnifying Party shall be
obligated to indemnify the Indemnified Party pursuant to this Section 22, the
Indemnifying Party shall, upon payment of such indemnity in full, be
subrogated to all rights of the Indemnified Party with respect to the Loss to
which such indemnification relates; provided, however, that the Indemnifying
Party shall only be subrogated to the extent of any amount paid by it
pursuant to this Section 22 in connection with such Loss.
22.6 Indemnification Payments. Unless a Loss is contested pursuant to
Section 22.4 hereof or otherwise subject to insurance reimbursement from any
insurer, an Indemnifying Party shall pay to the Indemnified Party the full
amount of any such Loss within ten (10) days after the receipt by the
Indemnifying Party of notice of such Loss. With respect to any Asserted
Liability that has been contested, the Indemnifying Party shall pay the full
amount of any Loss resulting therefrom within ten (10) days of the date the
contest has been settled, compromised or terminated or the date a final
judgment or award is rendered and no appeal is taken, and thereafter the
amount of such Loss shall bear interest at a rate equal to the lesser of two
percent (2%) per month or the maximum amount permitted by law. Newco shall be
entitled to offset from any payments due to the Company for any reason
whatsoever any amount due and owing to Newco by way of indemnification
pursuant to Section 22.1 hereof, or any other provision herein, and Newco
shall not be liable for any amounts so offset. Likewise, the Company is
entitled to offset from any payments due to Newco for any reason whatsoever
any amount due and owing to the Company by way of indemnification pursuant to
Section 22.2 hereof, and the Company shall not be liable for any amounts so
offset.
22.7 For purposes of this Section 22 the term "Loss" means any and all
direct or indirect demands, claims, payments, obligations, recoveries,
deficiencies, fines, penalties, interest, assessments, actions, causes of
action, suits, losses, damages, liabilities, costs, expenses (including
without limitation (i) interest, penalties and reasonable attorneys' fees and
expenses, (ii) attorneys' fees and expenses necessary to enforce rights to
indemnification hereunder, and (iii) consultant's fees and other costs of
defense or investigation), and interest on any amount payable to a third
party as a result of the foregoing, whether accrued, absolute, contingent,
known, unknown, or otherwise as of the Closing Date or thereafter.
23. RIGHT TO SET-OFF.
If (i) a Claims Notice is given by Newco to the Company, pursuant to
Section 22, or (ii) Newco reasonably believes Newco is owed any sum under any
provision of this Agreement or otherwise by the
35
<PAGE>
Company and the Company shall fail to pay any such sum within thirty (30)
days after demand therefor has been made by Newco, Newco may (without in any
way limiting or compromising any rights to which it may be entitled at law
for additional damages or compensation) prior to expiration of the applicable
notice and cure provision of Section 17.2 set-off against or withhold from
any sums which Newco may then owe or which Newco may later owe to the Company
up to the amount (estimated, if necessary) (i) of Loss indicated in the
Claims Notice as having been or may be suffered by Newco, or (ii) which the
Company has failed to pay Newco, and, upon demand of the Company, pay such
funds into an applicable registry of court or to any third party commercial
escrow agent to be held pending expiration of such cure period.
24. SEVERABILITY AND CONSTRUCTION.
24.1 Except as expressly provided to the contrary herein, each portion,
section, part, term, and provision of this Agreement shall be considered
severable. If, for any reason, any term or provision herein is determined to
be invalid and contrary to, or in conflict with, any existing or future law
or regulation by a court or agency having valid jurisdiction, such shall not
impair the operation, or have any other effect upon, such other portions,
sections, parts, terms, and provisions of this Agreement as may remain
otherwise intelligible, and the latter shall continue to be given full force
and effect to bind the parties, and said invalid terms or provisions shall be
deemed not to be part of this Agreement.
24.2 Except as has been expressly provided to the contrary herein, nothing
in this Agreement is intended, nor shall be deemed to confer any rights or
remedies created or granted by this Agreement upon any person or legal entity
other than Newco, the Company, the officers, directors, and employees of
Newco and the Company, and such respective successors and assigns of Newco
and of the Company as may be contemplated by Section 14 hereof.
24.3 Any provision or covenant of this Agreement which expressly or by its
nature imposes obligations beyond the expiration or termination of this
Agreement shall survive such expiration or termination.
25. APPLICABLE LAW.
25.1 This Agreement shall be interpreted and construed under the laws of
the State of Georgia and shall be treated in all respects as a Georgia
contract. In the event of any conflict of law, the laws of the State of
Georgia shall prevail, without regard to the application of conflict-of-law
rules.
25.2 No right or remedy conferred upon or reserved to the Company or Newco
by this Agreement is intended to be, nor shall be deemed, exclusive of any
other right or remedy herein or by law or equity provided or permitted, but
each shall be cumulative of every other right or remedy.
25.3 Nothing herein contained shall bar the Company's or Newco's right to
seek and obtain injunctive relief in any court of competent jurisdiction
against threatened conduct that will cause the Company or Newco loss or
damages, under the applicable rules for obtaining specific performance,
restraining orders, preliminary injunctions, and any other injunctive relief.
The non-prevailing party shall pay all court costs and reasonable attorneys'
fees and expenses incurred by the prevailing party in obtaining such relief.
26. ENTIRE AGREEMENT.
This Agreement, the documents referred to herein or related to this
Agreement, and the Schedules and Exhibits hereto, constitute the entire,
full, and complete agreement between the Company and Newco
36
<PAGE>
concerning the subject matter hereof and supersede any and all prior
agreements. No amendment, change, or variance from this Agreement shall be
binding on either party unless mutually agreed to by the parties and executed
by their authorized officers or agents in writing.
27. MISCELLANEOUS BUSINESS TERMS.
27.1 At Closing the Company will issue to Newco warrants to purchase
100,000 shares of the Company's common stock at an exercise price equal to
the closing price on July 16, 1995. The form of warrant is attached hereto as
Exhibit "E".
27.2 Subject to the Company providing complete Directors and Officers
liability insurance satisfactory to Newco and subject to the Company
providing satisfactory contractual indemnification, Newco shall use its best
efforts to have, during the term of this Agreement from and after the date of
Closing, the Chief Executive Officer candidate of Newco agree to serve on the
Board of Directors of the Company.
27.3 During the term of this Agreement from and after the date of Closing,
E. Anthony Wilson, or a Company designee, will be offered a permanent seat on
Newco's Franchisee Advisory Board.
27.4 During the term of this Agreement from and after the date of Closing,
the Company shall have the right to purchase key man insurance upon the life
of the Chief Executive Officer of Newco in an amount mutually determined by
Newco and the Company, and Newco shall cooperate in all respects to enable
the Company to obtain such insurance.
28. MISCELLANEOUS.
28.1 Cooperation of Parties. Newco and the Company will fully cooperate
with each other and their respective counsel and accountants in connection
with all steps to be taken as part of their obligations under this Agreement.
Newco and the Company will use their best efforts to cause the conditions to
the other party's obligation to close to be fulfilled on or prior to the
Closing Date.
28.2 Transfer Documents. The parties hereto will at the Closing or at any
time thereafter deliver and/or execute such further instruments as may
reasonably be requested by the other party which are necessary to or
appropriate with respect to the consummation of the transactions described
herein. None of the documents or instruments requested hereunder shall be
required to contain an undertaking or representation not contained in this
Agreement or be required if inconsistent with the understandings and
representations contained in this Agreement.
28.3 Headings. The headings of the articles and sections of this Agreement
are inserted for convenience only and shall not constitute a part hereof.
28.4 Waiver. There can be no waiver of any term, provision, or condition
of this Agreement which is not in writing signed by both parties hereto.
28.5 Counterparts. This Agreement may be executed simultaneously in two or
more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
28.6 Time. Time is and shall be of the essence of this Agreement.
37
<PAGE>
29. OFFER TO ACCEPT.
29.1 This Agreement has been executed by the Company as a continuing and
irrevocable offer to Newco to remain open for acceptance by Newco no later
than 5:00 p.m. Eastern Daylight Time on Monday, September 11, 1995 (the
"Expiration Time and Date"). The Company acknowledges and agrees that Newco,
the officers, directors and stockholders of Newco, and the Chief Executive
Officer candidate of Newco, intend to undertake material and significant
actions based upon and in reliance on such offer and accordingly, that such
offer shall be irrevocable by the Company until the Expiration Time and Date
shall have passed. Newco may accept this offer by delivery of written notice
of acceptance to the Company as provided for herein prior to passing of the
Expiration Time and Date. Should the Expiration Time and Date pass without
the delivery of such acceptance, such offer shall be deemed withdrawn and
this Agreement of no further force and effect. Should such offer be accepted
by Newco, the parties shall cooperate to fully execute multiple counterparts
of this Agreement as soon as is reasonably practicable and provide a fully
executed counterpart to each party, and shall jointly issue a mutually agreed
upon public announcement of the entering into of this Agreement.
WHEREOF, the parties hereto have duly executed and delivered this
Agreement on the date first above-written.
COMPANY:
MICROTEL FRANCHISE AND DEVELOPMENT CORPORATION,
a New York corporation
/s/ E. Anthony Wilson
By:_________________________
E. Anthony Wilson, Chairman
NEWCO:
U.S. FRANCHISE SYSTEMS, INC., a Delaware
corporation
/s/ Neal K. Aronson
By: ____________________
Neal K. Aronson, Initial Director
jv-egt.901/4270
38
<PAGE>
Exhibit "A"
The Microtel "System"
The Microtel system includes the following:
I. Architectural and design
A. Prototypical plans
1. two-story
2. three-story
(in varying footprints as available from master architect based on
existing constructed "Microtels" to fit site location and
circumstances)
B. Specification manual.
C. Design standards manual.
D. List of fixture and equipment requirements.
E. Listing of potential vendors with negotiated prices.
II. Trademarks and service marks
A. MICROTEL (word mark)
B. MICROTEL (stylized logo)
C. "Don't sleep with Amenity Creep" (word mark)
D. "First the Hotel, Then the Motel, Now Microtel." (word mark)
E. "Savings you can Sleep on." (word mark)
F. Microtel Suites (word mark)
G. Microtel & Suites (word mark)
III. Reservation Referral System
A. "800" national referral telephone number
(800-365-MTEL) (800-365-6835)
B. Existing National directories of operating Microtel units
C. Rights and obligations of "800" referral system, directory design and
distribution
IV. Operational Property & Philosophy
A. Manager/owner training-orientation program
B. Operations manual
C. Advertising, promotional material and layouts
D. Philosophy
1. Provide consistent clean, safe, contemporary guest rooms without
unnecessary amenities (including upscale decor and furnishings with
strong curb appeal).
2. Provide excellent price value to the customer at rates competitive
with other nationally franchised brands.
3. Provide a product with low turnkey construction costs and operating
costs lower than the competition.
4. Orient the franchiser to realize that quality accommodations and
pleasant, efficient service will provide a satisfied Microtel guest.
<PAGE>
V. Other
A. Microtel investment analysis
B. Microtel newsletter
C. Prospective Franchisee sales packages
<PAGE>
MICROTEL FRANCHISE AND DEVELOPMENT CORPORATION
FRANCHISE AGREEMENT
THIS AGREEMENT, made and entered into , 19, by and between
Microtel Franchise & Development Corporation, a New York Corporation, (the
"Franchisor"), and , (the "Franchisee").
WITNESSETH:
WHEREAS, Franchisor, as the result of the expenditure of time, skill, effort,
and money has developed and owns a unique concept and system (hereinafter
"System") relating to the establishment and operation of hotels which operate
under the name "MICROTEL", "MICROTEL & SUITES", OR "MICROTEL SUITES", and
which feature modern up-scale accommodations, down-sized standard guest rooms
or two-room suites, and economy room rates;
WHEREAS, the distinguishing characteristics of the System, all of which may
be changed, improved, or further developed by Franchisor from time to time,
include, without limitation:
A. Tradenames, trademarks, and service marks, including, without
limitation, "MICROTEL", "MICROTEL & SUITES", "MICROTEL SUITES",
"SAVINGS YOU CAN SLEEP ON", and such other tradenames, trademarks, and
service marks as are now designated (and may hereafter be designated by
Franchisor in writing) as part of the System (hereinafter "Proprietary
Marks");
B. Prototypical architectural plans, designs, and layouts, including,
without limitation, site plan, floor plan, roof plan, plumbing plan,
lobby plan, electrical plan, and landscape plan;
C. A national "800" number for reservation referrals;
D. A national Microtel directory;
E. Management and personnel training, and training programs and materials;
F. Management and operational procedures and techniques as prescribed in
the Confidential Manuals (hereinafter the "Manuals");
G. Standards and specifications for construction, equipment, and
furnishings, as described in the Manuals; and
H. Advertising, marketing, and promotional programs
WHEREAS, Franchisee desires to establish and operate a Microtel hotel,
Microtel & Suites hotel, or Microtel Suites hotel, as defined in Attachment
A, under the System, at the location specified herein, and wishes to obtain a
Franchise from the Franchisor for that purpose, as well as to receive the
training and other assistance provided by Franchisor in connection therewith;
and
WHEREAS, Franchisee understands and acknowledges the importance of the
standards of quality and service developed by Franchisor and the necessity of
operating the Microtel hotel, Microtel & Suites hotel, or Microtel Suites
hotel franchised hereunder in conformity with them.
<PAGE>
EXHIBIT A-1
REGISTERED SERVICEMARKS
Principal Register of the U.S. Patent and Trademark Office:
<TABLE>
<CAPTION>
Mark Registration Date Registration Number Class
<S> <C> <C> <C>
MICROTEL (word mark) December 31, 1991 1,670,688 35 & 42
MICROTEL (stylized) February 25, 1992 1,677,179 35 & 42
"Don't Sleep With Amenity Creep" August 22, 1989 1,553,217 35
"First the Hotel.
Then the Motel.
Now Microtel." December 31, 1991 1,670,687 42
"Savings You Can Sleep On" March 3, 1992 1,678,009 42
Microtel Suites Application filed 12/22/94 35
Microtel & Suites Application filed 12/22/94 35
Florida
Microtel and Design T10310 January 5, 1989
Georgia
Microtel and Design S-8721 October 28, 1988
Microtel S-8722 October 28, 1988
Louisiana
Microtel and Design October 17, 1988
Microtel October 17, 1988
Maine
Microtel and Design 19890086M October 14, 1988
South Carolina
Microtel and Design October 24, 1988
Utah
Microtel and Design 29,480 October 17, 1988
Microtel 29,481 October 17, 1988
<PAGE>
Mark Registration Date Registration Number Class
Canada
Applications for Proposed Use filed with the Canadian Trademark Office:
Microtel (word mark) 2/11/91 675,754 42
(Extension filed 5/23/95)
Microtel and Design 3/8/91 381,158 35
Microtel and Design 2/11/91 675,853 42
(Extension filed 5/15/95)
"First the Hotel . . ." 2/8/91 676,203 42
(Extension filed 7/28/95)
"Savings You Can Sleep On" 2/8/91 675,205 42
(Extension filed 5/8/95)
United Kingdom
Microtel (word mark) 3/27/90 1423166 35
Microtel and Design 6/4/93-withdrawn 1423167 42
Logo only 5/26/93 1536884 42
Logo only 5/26/93 1536883 35
Mexico
Microtel and Design 2/3/95 478,447 42
Microtel** )
"Don't Sleep With Amenity Creep"**) Renewal applications pending
"Savings You Can Sleep On"** )
</TABLE>
Note: International Class 35-Franchise Services
International Class 42-Hotel/Motel Services
<PAGE>
EXHIBIT "B"
Current standard form of Franchise Agreement utilized by the Company
throughout the United States.
<PAGE>
EXHIBIT C
MICROTEL FRANCHISE AND DEVELOPMENT CORPORATION
FRANCHISE AGREEMENT
<PAGE>
MICROTEL FRANCHISE AND DEVELOPMENT CORPORATION
FRANCHISE AGREEMENT
TABLE OF CONTENTS
RECITALS PAGE
1. GRANT ................................................................... 2
2. TERM AND RENEWAL ........................................................ 2
3. DUTIES OF FRANCHISOR .................................................... 2
4. FEES .................................................................... 3
5. DUTIES OF FRANCHISEE .................................................... 4
6. PROPRIETARY MARKS ....................................................... 7
7. CONFIDENTIAL MANUALS .................................................... 8
8. CONFIDENTIAL INFORMATION ................................................ 9
9. ACCOUNTING AND RECORDS .................................................. 9
10. ADVERTISING ............................................................ 10
11. INSURANCE .............................................................. 11
12. TRANSFER OF INTEREST ................................................... 13
13. DEFAULT AND TERMINATION ................................................ 15
14. OBLIGATIONS UPON TERMINATION ........................................... 17
15. COVENANTS .............................................................. 19
16. CORPORATE OR PARTNERSHIP FRANCHISEE .................................... 19
17. TAXES, PERMITS, AND INDEBTEDNESS ....................................... 20
18. INDEPENDENT CONTRACTOR AND INDEMNIFICATION ............................. 20
<PAGE>
MICROTEL FRANCHISE AND DEVELOPMENT CORPORATION
FRANCHISE AGREEMENT
TABLE OF CONTENTS
(Continued)
19. APPROVALS AND WAIVERS ................................................ 21
20. NOTICES .............................................................. 21
21. ENTIRE AGREEMENT ...................................................... 22
22. SEVERABILITY AND CONSTRUCTION ......................................... 22
23. APPLICABLE LAW ........................................................ 22
24. ACKNOWLEDGEMENTS ...................................................... 23
GUARANTEE ............................................................. 24
ATTACHMENT A ......................................................... 25
ATTACHMENT B ......................................................... 26
<PAGE>
MICROTEL FRANCHISE AND DEVELOPMENT CORPORATION
FRANCHISE AGREEMENT
THIS AGREEMENT, made and entered into , 19, by and between
Microtel Franchise & Development Corporation, a New York Corporation, (The
"Franchisor"), and, (the "Franchisee").
WITNESSETH:
WHEREAS, Franchisor, as the result of the expenditure of time, skill, effort,
and money has developed and owns a unique concept and system (hereinafter
"System") relating to the establishment and operation of hotels which operate
under the name "MICROTEL", "MICROTEL & SUITES", OR "MICROTEL SUITES", and
which feature modern up-scale accommodations, down-sized standard guest rooms
or two-room suites, and economy room rates;
WHEREAS, the distinguishing characteristics of the System, all of which may
be changed, improved, or further developed by Franchisor from time to time;
include, without limitation:
A. Tradenames, trademarks, and service marks, including, without
limitation, "MICROTEL", "MICROTEL & SUITES", "MICROTEL SUITES",
"SAVINGS YOU CAN SLEEP ON", and such other tradenames, trademarks,
and service marks as are now designated (and may hereafter be
designated by Franchisor in writing) as part of the System
(hereinafter "Proprietary Marks");
B. Prototypical architectural plans, designs, and layouts, including,
without limitation, site plan, floor plan, roof plan, plumbing plan,
lobby plan, electrical plan, and landscape plan;
C. A national "800" number for reservation referrals;
D. A national Microtel directory;
E. Management and personnel training, and training programs and
materials;
F. Management and operational procedures and techniques as prescribed
in the Confidential Manuals (hereinafter the "Manuals");
G. Standards and specifications for construction, equipment, and
furnishings, as described in the Manuals; and
H. Advertising, marketing, and promotional programs
WHEREAS, Franchisee desires to establish and operate a Microtel hotel,
Microtel & Suites hotel, or Microtel Suites Hotel, as defined in Attachment
A, under the System, at the location specified herein, and wishes to obtain a
Franchise from the Franchisor for that purpose, as well as to receive the
training and other assistance provided by Franchisor in connection therewith;
and
WHEREAS, Franchisee understands and acknowledges the importance of the
standards of quality and service developed by Franchisor and the necessity of
operating the Microtel hotel, Microtel & Suites hotel, or Microtel Suites
hotel franchised hereunder in conformity with them.
<PAGE>
NOW THEREFORE, the parties, in consideration of the undertakings and commitments
of each party to the other party set forth herein, hereby mutually agree as
follows:
1. GRANT
Franchisor hereby grants to Franchisee, upon the terms and conditions herein
contained, the right and franchise, and Franchisee undertakes the obligation,
to develop, construct, and operate a Microtel hotel, Microtel & Suites hotel,
or Microtel Suites hotel (the "Franchised Business"), as defined in
Attachment A, and to use solely in connection therewith, Franchisor's System,
as it may be changed, improved, and further developed from time to time, at
and only at the location specified in Attachment A hereto (hereinafter
"Approved Location"). By approving the location and configuration of a
Microtel hotel, Microtel & Suites hotel, or Microtel Suites hotel, the
Franchisor does not explicitly or implicitly represent or warrant that the
Franchisee's location will be successful.
2. TERM AND RENEWAL
2.1 Except as otherwise provided in this Agreement, the term of this
franchise shall commence on the date of this Agreemnt, and unless sooner
terminated in accordance with the provisions hereof, shall expire ten years
from the "Opening Date", as specified in Section 5.6.
2.2 Franchisee may, at Franchisee's opton, renew this Franchise for one
additional period of ten years, upon compliance with the following terms and
conditions:
2.2.1 Franchisee shall not be in default of any provision of this
Agreement, or any other agreement between the parties, and shall have
substantially complied with all the terms and conditions of all such
agreemnts during the terms thereof;
2.2.2 Franchisee shall present satisfactory evidence that Franchisee
has the right to remain in possession of the Approved Location during
the entire renewal term;
2.2.3 Franchisee shall have satisfied all monetary obligations owed by
Franchisee to Franchisor and its subsidiaries and affiliates, and shall
have timely met these obligations throughout the term of this
Agreement;
2.2.4 Franchisee shall submit a renewal application to Franchisor not
less than six months nor more than twelve months prior to the end of
the initial term, and shall pay with its renewal application a renewal
fee in an amount equal to twenty-five perent of the then-current
franchisee fee being charged by Franchisor, computed on a per-room
basis;
2.2.5 Franchisee's managers and other employees shall comply with
Franchisor's then-current training requirements, and Franchisee shall,
at Franchisee's expense, upgrade the Franchised Business to conform to
the then-current standards standards and specifications of Franchisor
as may be specified in the Manuals or otherwise in writing; and
2.2.6 Franchisee and Franchisor shall execute mutual general releases,
in a form prescribed by Franchisor, of any and all claims of each party
against the other, and their respective subsidiaries, affiliates,
officers, directors, agents and employees.
3. DUTIES OF FRANCHISOR
3.1 Franchisor shall provide continuing consultation and advisory assistance
to Franchisee, in the manner at at such times as Franchisor deems advisable,
concerning the management, construction, development, operation, and
marketing of the Franchised Business.
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3.2 Franchisor shall make available a set of prototypical plans and
specifications (not for construction) for the Franchised Business, which
shall be adapted for use by Franchisee's architects and engineers.
3.3 Franchisor shall make available to Franchisee and Franchisee's employees
an initial training program. Franchisor shall make available to Franchisee
and Franchisee's employees such continuing training programs, conferences,
and seminars as Franchisor deems appropriate. All training programs shall be
conducted at such locations as Franchisor may designate and shall be subject
to the terms and conditions as set forth in Section 5.8 of this Agreement.
3.4 Franchisor shall provide Franchisee one (1) copy of the Manuals, as more
fully described in Section 7 hereof.
3.5 Franchisor shall maintain a national directory (the "Directory"), listing
the address and telephone number of all Microtel hotels, Microtel & Suites
hotels, and Microtel Suites hotels operating under the System.
3.6 Franchisor shall maintain, and make available to Franchisee, a national
"800" number reservation referral system.
3.7 Franchisor shall have the right to establish, maintain, and administer an
advertising fund for the System, subject to the provisions of Section 10.2
hereof.
4. FEES
4.1 Franchisor acknowledges having received from Franchisee an initial
franchise fee in an amount equal to the greater ofthousand dollars
($), ordollars ($) per room, as determined by the
number of guest rooms or suites specified on Attachment A hereto. The initial
franchise fee is deemed fully earned and non-refundable upon the execution of
this Agreement, in consideration for the administrative and other expenses
incurred by Franchisor in furnishing services and assistance to Franchisee,
and for the Franchisor's lost or deferred opportunities to franchise others.
4.2 In consideration of the franchise granted herein, Franchisee shall pay
Franchisor as a continuing monthly royalty fee during the term of this
Agreement a percentage of Franchisee's Gross Room Revenues from the operation
of the Franchised Business, computed as follows:
Microtel
Microtel & Suites
(Applicable when 50% or more total guest rooms are of standard Microtel
configuration):
a. two and one-half percent during the period when fewer than fifty
Microtel hotels, Microtel & Suites hotels, or Microtel Suites hotels
are open for business and receivng Gross Room Revenues;
b. three percent during the period commencing on the first day of the
month following the month when at least fifty but fewer than one
hundred Franchised Businesses are open for business and receiving Gross
Room Revenues; and
c. three and one-half percent during the period commencing on the first
day of the month following the month when at least one hundred
Franchised Businesses are open for business and receiving Gross Room
Revenues.
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Microtel & Suites
Microtel Suites
(Applicable when 51% or more total guest rooms are of Suite configuration):
three and a half percent of gross room revenues
4.3 "Gross Room Revenues" shall mean the gross receipts attributable to or
payable for the rental of guest rooms at the Franchised Business, including,
without limitation, the net proceeds (after deduction of the expenses of
adjustment and collection) of use and occupancy, or for business
interruption, rent loss, or similar insurance with respect to the Franchised
Business (provided that insurance proceeds shall be included in Gross Room
Revenues only when and to the extent actually received). Gross Room Revenues
shall not include gratuities to employees or service charges levied in lieu
of such gratuities, which, in Either case, are payable to employees, or
federal, state, and local taxes or fees collected by Franchisee for
transmittal to the appropriate taxing authorities.
4.4 All monthly payments required by this Agreement shall be paid to
Franchisor on or before the tenth day of each month, shall be based on the
Gross Room Revenues for the preceding calendar month, and shall be submitted
to Franchisor together with all reports required under this Agreement. Any
payment or report not actually received by Franchisor on or before such date
shall be deemed overdue. If any payment is overdue, Franchisee shall pay to
Franchisor, in addition to the amount overdue, interest on such amount from
the day it was due until paid at one and a half percent per month or the
maximum rate permitted by law, whichever is less. Entitlement to such
interest shall be in addition to any of the remedies Franchisor may have.
5. DUTIES OF FRANCHISEE
5.1 Franchisee acknowledges that every detail of the System is important to
Franchisor and other franchisees operating under the System in order to
develop and maintain the standards and public image of the System. Franchisee
agrees to comply with the details of the System as specified by Franchisor in
the Manuals, or otherwise in writing.
5.2 Within ninety days following the date of this Agreement, Franchisee shall
submit to Franchisor for Franchisor's written approval a site layout,
preliminary plans, and outline specifications adapting Franchisor's
then-prototypical plans and specifications to the Approved Location, which
shall comply with all local and state laws, regulations, and ordinances.
Within sixty days of Franchisee's receipt of Franchisor's written approval,
Franchisee shall submit to Franchisor for Franchisor's approval, complete
working drawings and specifications for the hotel and the hotel premises.
When approved by Franchisor, such drawings and specifications shall not
thereafter be changed or modified without the prior written consent of
Franchisor, which consent shall not be unreasonably withheld.
5.3 Franchisee shall commence construction within sixty days after Franchisor
has approved the complete working drawings and specifications, which date
shall be designated the "Commencement Date". Franchisee shall, within five
days after the Commencement Date, provide written notice to Franchisor that
construction has begun. Commencement of construction shall mean the
excavation for footings. Franchisee shall maintain continuous consruction
(except for any interruption of by reason of events constituting force
majeure) until construction is completed in accordance with the approved site
layout and plan. As used in this Agreement, "force majeure" means an act of
God, war, civil disturbance, government action, fire flood, accident,
hurricane, earthquake or other calamity, strike or other labor dispute, or
other action beyond the control of Franchisee. Franchisee and Franchisor
agree that time is of the essence in the construction and opening of the
Franchised Business.
5.4 Franchisee shall notify Franchisor as soon as the interior walls have
been completed so that Franchisor and/or its designees may inspect the site
and the construction in order to determine (solely for its own benefit)
whether construction is proceeding in accordance with the Franchisor's
standards and specifications and approved plans. Franchisee shall cooperate
and cause its architects, engineers, contractors, and subcontractors to
cooperate fully with Franchisor's inspection.
4
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5.5 Subject to any permitted extensions for force majeure interruptions,
Franchisee shall, within two hundred seventy days after the Commencement
Date, complete all required construction and site work, purchase and install
all fixtures, equipment, furnishings, furniture, signs, supplies, and other
items necessary for the completion and operation of the Franchised Business,
as specified in the approved plans and in the Manual, and be ready to open
for business (the "Completion Date").
5.6 Franchisee shall, within tens days of the Completion Date, submit a
written request to Franchisor for Franchisor to conduct a final inspection.
Upon receipt of such request, Franchisor shall promptly conduct such final
inspection. Franchisee shall open for business within ten days after receipt
of Franchisor's authorization to do so. The date upon which Franchisee
receives authorization to open for business shall be the "Opening Date".
Franchisee shall not open for business until Franchisor provides final
approval and authorization in writing.
5.7 Franchisee may request approval by Franchisor to commence operation of a
completed portion of the Franchised Business for an interim period prior to
the Completion Date. Such request shall be in writing and shall demonstrate
to the Franchisor's satisfaction that Franchisee has complied with
Franchisor's standards and specifications with respect to contruction,
training, and pre-opening operations of the Franchised Business, has obtained
all governmental licenses and permits necessary to operate the Franchised
Business under the System, and that a minimum of seventy-five percent of the
scheduled total number of guest rooms or suites have been fully designed,
built, and equipped, and are ready to be opened for occupancy in accordance
with this Agreement. If Franchisor approves Franchisee's request, Franchisee
shall conduct business during the interim period in accordance with all terms
and conditions of this Agreement (including, without limitation, payment of
all fees), as well as any additional conditions which Franchisor may
reasonbly impose for the interim period.
5.8 Prior to the Opening Date, Franchisee's General Manager shall atend and
successfully complete Franchisor's initial training program unless, in the
sole judgement of Franchisor, the General Manager has sufficient prior
experience to make training unnecessary. At Franchisor's discretion, other
employees of Franchisee also may attend the initial training session. All
training shall be provided at such locations as Franchisor may designate.
Franchisee shall be responsible for all expenses associated with attendance
at training, including, but not limited to, transportation, room, board, and
wages of each of its employees. Franchisor may periodically make available
other required or optional training courses to Franchisee's employees, as
well as other programs, conferences, and seminars; and Franchisee shall
ensure that all employees, as Franchisor may direct, satisfactorily complete
any required training within the time specified. All training shall be
provided at such location as Franchisor may designate, and Franchisee shall
be responsible for all expenses associated with attendance at training of its
employees.
5.9 Franchisee shall not expand the number of guest rooms or suites in the
Franchised Business without the prior written consent of Franchisor, which
consent shall not be unreasonably withheld; provided, however, that
Franchisor may impose reasonable conditions on its consent, including,
without limitation, the following:
5.9.1 Franchisee shall demonstrate to the satisfaction of Franchisor
that Franchisee is able to satisfy all such reasonble construction and
operations deadlines and obligations imposed by Franchisor; and
5.9.2 Franchisee shall pay to Franchisor a non-refundable expansion fee
in an amount equal to the then-current per room or suite charge made to
new franchisees multiplied by the number of additional guest rooms or
suites which Franchisee proposes to construct. The expansion fee shall
be due and payable at the time of Franchisor's approval of the proposed
expansion, and is non-refundable.
5.10 Franchisee shall use the premises solely for the operation of the
Franchised Business, and shall refrain from using or permitting the use of
the premises for any other purpose or activity at any time without first
obtaining Franchisor's prior written consent. Franchisee shall operate the
Franchised Business in conformity with such standards, policies, methods, and
techniques as Franchisor may, from time to time, prescribe in the Manuals.
Franchisee shall refrain from deviating from the Manuals, or otherwise
operating the Franchised Business in any manner which adversely reflects on
the System, the Proprietary Marks, the goodwill associated therewith,
Franchisor, or Franchisor's rights therein.
5
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5.11 Franchisee shall maintain the Franchised Business in a high degree of
sanitation, repair, and condition and consistent with the System's image, and
in connection therewith, shall make such additions, alterations, repairs and
replacements thereto as may be required for that purpose (but no others
without Franchisor's prior written consent), including, without limitation,
such periodic repainting, repairs, and replacement of signs and equipment,
furnishings, and furniture as Franchisor may reasonably direct.
5.12 At Franchisor's request, which shall not be more often than once every
five years, Franchisee shall upgrade the Franchised Businss at Franchisee's
expense to conform with the building decor, trade dress, and presentation of
trademarks and service marks consistent with Franchisor's then-current public
image, including, without limitation, such remodeling, redecoration, and such
other modification to existing improvements as may be necessary and specified
by Franchisor.
5.13 Franchisee shall purchase or lease, and install, at Franchisee's
expense, all fixtures, furnishings, furniture, signs, equipment, and
supplies, meeting Franchisor's standards, specifications, and requirements as
provided in the approved plans and as Franchisor may reasonably direct from
time to time in the Manuals or otherwise in writing. Franchisee shall refrain
from installing in, on, or about the Franchised Business, or permitting to be
installed, without Franchisor's prior written consent, any fixtures,
furnishings, furniture, signs, equipment, electronic or video games, vending
machines, gambling devices, or any other items or supplies not previously
approved as meeting Franchisor's then-current standards and specifications as
set forth in the Manuals.
5.14 Franchisee shall comply with all federal, state, local laws, rules and
regulations, and shall timely obtain any and all permits, certificates, and
licenses necessary for the full and proper development and operation of the
business franchised hereunder, including, without limitation, licenses to do
business, fictitious name registrations, building permits, sales tax permits,
health and sanitation permits and ratings, and fire clearances.
5.15 Franchisee shall prominently display in and upon the premises of the
Franchised Business such signs using Franchisor's Proprietary Marks, and
other advertising signs of a nature, form, color, number, location, size and
content as are required by the Franchisor in the Manuals or otherwise in
writing, or as the Franchisor may direct from time to time, or approve in
writing. Franchisee shall comply with the requirements of the System
concerning the types of services and products that may be promoted or
advertised at the Franchised Business, including the display of promotional
materials.
5.16 Franchisee hereby grants to Franchisor and its agents the right to enter
upon the premises of the Franchised Business at any reasonable time for the
purpose of conducting inspections. Franchisee shall take such steps as may be
necessary to correct any deficiencies detected during such inspection, upon
the written request of Franchisor or its agent, within such time as may be
specified therein.
5.17 Franchisee acknowledges and agrees that offering the public a single,
efficient, reservation referral service is essential to the goodwill,
reputation, and success of the System. Franchisee agrees to obtain and
utilize an "800" telephone number and agrees to participate during the term
of this Agreement in a national reservation referral system utilizing both
Franchisor's and Franchisee's "800" numbers, which participation shall
include, without limitation, installing and maintaining at the premises of
the Franchised Business, at Franchisee's expense, such equipment as
Franchisor may prescribe from time to time for use in connection with such
reservation referral system. Franchisee shall also be responsible for
telephone line charges for connecting Franchisee's reservation equipment to
the system, and for the cost of software and supplies used in the operation
of the equipment, and for other related expenses. Franchisee shall execute
the Collateral Assignment of Telephone Numbers and Listings ("Telephone
Listing Agreement") attached hereto as Attachment B, prior to commencement of
operations of the Franchised Business.
5.18 Franchisee shall list the Franchised Business in Franchisor's Directory,
and shall furnish to Franchisor in writing such information as Franchisor may
request for that purpose. Franchisee understands and acknowledges that the
success and utility of the Directory may require that Franchisee provide
information concerning rates for lodging accommodations; that Franchisee
shall have sole discretion for determining the room rates which appear in
each Directory; and that Franchisor assumes no liability for, not shall be
deemed liable by reason of, any failure by Franchisor or Franchisor's other
franchisees to honor any rates for any period for which each Directory is in
effect.
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5.19 Franchisee shall comply with all other requirements set forth in this
Agreement.
6. PROPRIETARY MARKS
6.1 Franchisor represents with respect to the Proprietary Marks that:
6.1.1 Franchisor is the owner of all right, title, and interest in and to
the Proprietary Marks.
6.1.2 Franchisor will take all steps reasonably necessary to preserve and
protect the ownership and validity in and to the Proprietary Marks.
6.2 With respect to Franchisee's licensed use of the Proprietary Marks
pursuant to this Agreement, Franchisee agrees that:
6.2.1 Franchisee shall use only the Proprietary Marks designated by
Franchisor and shall use them only in the manner authorized and permitted
by the Franchisor.
6.2.2 Franchisee shall use the Proprietary Marks only for the operation of
the Franchised Business at the Approved Location.
6.2.3 During the term of this Agreement, Franchisee shall identify itself
as the owner of the Franchised Business in conjunction with any use of the
Proprietary Marks, including, but not limited to, on invoices, order
forms, receipts, business cards, and contracts, and at such conspicuous
locations of the Franchised Business' premises (such as behind the front
desk or in the lobby) as Franchisor shall designate in writing. The
identification shall be in the form which specified Franchisee's name,
followed by the term "Franchised Owner" or such other identification as
shall be approved by Franchisor.
6.2.4 Franchisee's right to use the Proprietary Marks is limited to such
uses as are authorized under this Agreement, and any unauthorized use
thereof shall constitute an infringement of Franchisor's rights.
6.2.5 Franchisee shall not use the Proprietary Marks to incur any
obligation or indebtedness on behalf of Franchisor.
6.2.6 Franchisee shall not use the Proprietary Marks as part of its
corporate or other legal name, without the prior written consent of
Franchisor.
6.2.7 Franchisee shall comply with Franchisor's instructions in filing and
maintaining the requisite trade name or fictitious name registrations, and
shall execute any documents deemed necessary by Franchisor or to its
counsel to obtain protection for the Proprietary Marks or to maintain
their continued validity and enforceability.
6.3 Franchisee expressly understands and acknowledges that:
6.3.1 As between the parties hereto, Franchisor is the owner of all right,
title, and interest in and to the Proprietary Marks and the goodwill
associated with and symbolized by them.
6.3.2 The Proprietary Marks are valid and serve to identify the System and
those who are franchised under the System.
6.3.3 Franchisee shall not directly or indirectly contest the validity or
the ownership of the Proprietary Marks.
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6.3.4 Franchisee's use of the Proprietary Marks pursuant to this Agreement
does not give Franchisee any ownership interest or other interest in or to
the Proprietary Marks, except the nonexclusive franchise granted herein.
6.3.5 Any and all goodwill arising from Franchisee's use of the
Proprietary Marks in its Franchised Business under the System shall insure
solely and exclusively to the benefit of Franchisor, and upon expiration
or termination of this Agreement and the franchise herein granted, no
monetary amount shall be assigned as attributable to any goodwill
associated with Franchisee's use of the System or the Proprietary Marks.
6.3.6 The right and license of the Proprietary Marks granted hereunder to
Franchisee is nonexclusive, and Franchisor thus may:
6.3.6.1 Itself use, and grant franchises to others to use, the
Proprietary Marks.
6.3.6.2 Establish, develop, and franchise other systems, different from
the System franchised herein, without offering or providing Franchisee
any rights in, to, or under such other systems.
6.3.7 Franchisor reserves the right to substitute different Proprietary
Marks for use in identifying the System and the businesses operating
thereunder, and Franchisee agrees to comply with Franchisor's requirements
relating thereto.
6.4 Franchisee shall promptly notify Franchisor of any unauthorized use of
the Proprietary Marks or marks confusingly similar thereto, any challenge to
the validity of the Proprietary Marks, or any challenge to Franchisor's
ownership of, or Franchisee's right to use, the Proprietary Marks. Franchisee
acknowledges that Franchisor has the sole right to direct and control any
administrative proceeding or litigation involving the Proprietary Marks,
including any settlement thereof. Franchisor has the right, but not the
obligation, to take action against uses by others that may constitute
infringement of the Proprietary Marks.
6.5 Provided Franchisee has used the Proprietary Marks in accordance with
this Franchise Agreement, Franchisor will defend at Franchisor's expense
against any third party claim, suit, or demand involving the Proprietary
Marks and arising out of Franchisee's use thereof. In the event that
Franchisee has not used the Proprietary Marks in accordance with this
Agreement, Franchisor shall defend Franchisee, at Franchisee's expense,
against such third party claims, suits, or demands.
6.6 In the event of any litigation or administrative proceeding relating to
the Proprietary Marks, Franchisee shall execute any and all documents and do
all acts as may, in the opinion of Franchisor, be necessary to carry out such
defense or prosecution, including, but not limited to, becoming a nominal
party to any legal action. Except to the extent that such litigation is the
result of Franchisee's use of the Proprietary Marks in a manner inconsistent
with the terms of this Agreement, Franchisor agrees to reimburse Franchisee
for its out of pocket costs in performing such acts, except that Franchisee
shall bear the salary costs of its employees, and Franchisor shall bear the
cost of any judgement or settlement.
7. CONFIDENTIAL MANUALS
7.1 Franchisee shall at all times treat the Manuals, all supplements and
revisions thereto, any other manuals created for or approved for use in the
operation of the Franchised Business and the information contained therein as
confidential, and shall use all reasonable efforts to maintain the
confidentiality of such information. Franchisee shall not at any time,
without Franchisor's prior written consent, copy, duplicate, record, or
otherwise reproduce the foregoing materials, in whole or in part, nor
otherwise make the same available to any unauthorized person. Franchisee may
disclose such information and materials only to such of Franchisee's
contractors, architects, lenders, investors, employees, agents, or others who
must have access to it in connection with their employment or the performance
of this Agreement, in which event Franchisee shall obtain the agreement of
such persons and entities to maintain the confidentiality thereof. The
Manuals shall remain at all times in the sole property of Franchisor.
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7.2 Franchisor may from time to time revise the contents of the Manuals, and
Franchisee expressly agrees to comply with each new or changed standard.
Franchisee shall at all times ensure that Franchisee's copy of the Manuals is
kept current and up-to-date; in the event of any dispute as to the content of
the Manuals, the terms of the master copy of the Manuals maintained by
Franchisor at Franchisor's home office shall be controlling.
8. CONFIDENTIAL INFORMATION
8.1 Franchisee shall not, during the term of this Agreement or thereafter,
communicate, divulge, or use for the benefit of any other person, persons,
partnership, association, or corporation any confidential information,
knowledge, or know-how concerning the System or the operation of the
Franchised Business which may be communicated to Franchisee, or of which
Franchisee may be apprised, by virtue of Franchisee's operation under the
terms of this Agreement. Franchisee shall divulge such confidential
information only to such of Franchisee's employees or agents as must have
access to it in order to operate the Franchised Business. Any and all
information, trade secrets, knowledge, know-how, or other data which
Franchisor designates as confidential shall be deemed confidential for
purposes of this Agreement, except information which Franchisee can
demonstrate came to Franchisee's attention prior to disclosure thereof by
Franchisor, or which, at or after the time of disclosure by Franchisor to
Franchisee, had become or later becomes a part of the public domain, through
publication or communication by others.
8.2 Franchisee acknowledges that the provisions in this Section 8 are and
have been a primary inducement to Franchisor to enter into this Agreement,
and that any failure to comply with the requirements of Section 8.1 will
cause Franchisor irreparable injury without an adequate remedy at law; and
Franchisee agrees to pay all court costs and reasonable attorneys' fees
incurred by Franchisor in obtaining specific performance of, or an injunction
against any violation of, the requirements of Section 8.1.
9. ACCOUNTING AND RECORDS
9.1 During the term of this Agreement, Franchisee shall maintain and
preserve, for at least five years from the date of their preparation, full,
complete, and accurate, books, records, and accounts in accordance with the
most current version of a Uniform System of Accounts for Hotels and in the
form and manner prescribed by Franchisor from time to time in the Manuals or
otherwise in writing.
9.2 Franchisee shall, at Franchisee's expense, submit to Franchisor, by the
tenth day of each month, a monthly statement on forms prescribed by
Franchisor accurately reflecting all Gross Room Revenues, and all other
revenues generated at the Franchised Business, for the preceding calendar
month, and such other data and other information as Franchisor may require,
including, without limitation, room occupancy rates, occupancy percentage,
average daily room rate, reservation data, and the sources and amount of all
expenses and revenues. Each statement shall be signed by Franchisee attesting
that it is true and correct.
9.3 Franchisee shall, at Franchisee's expense, submit to Franchisor an
unaudited semi-annual profit and loss statement (in the form prescribed by
Franchisor), and a balance sheet within sixty days of the end of each
semi-annual fiscal period during the term hereof with respect to the
operations of the Franchised Business. Each statement shall be signed by
Franchisee attesting that it is true and correct.
9.4 Franchisee shall submit to Franchisor, for review and auditing, such
other forms, periodic and other reports, records, information, and data, as
Franchisor may reasonably designate, in the form at the times and places
reasonably required by Franchisor, upon request and as specified from time to
time in the Manuals or otherwise in writing.
9.5 Franchisor or its designated agents shall have the right at all
reasonable times to examine and copy, at its expense, all books, records, and
tax returns of Franchisee related to the Franchised Business and, at its
option, to have an independent audit made. If an inspection or audit should
reveal that payments have been understated in any report to Franchisor, then
Franchisee shall immediately pay to Franchisor the amount understated upon
demand, in addition to interest from the date such amount was due until paid,
at one and
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one half percent per month or the maximum rate permitted by law, whichever is
less. In such event, Franchisor shall also have the right to require that all
future financial statements of Franchisee related to the Franchised Business
be audited at Franchisee's expense for each fiscal year by an independent
certified public accounting firm selected by Franchisee and approved by
Franchisor. If an inspection discloses an underpayment to Franchisor of five
percent or more of the total amount that should have been paid to Franchisor
during any six month period, Franchisee shall, in addition to repayment of
such understated amount, with interest, reimburse Franchisor for any and all
costs and expenses incurred in connection with the inspection or audit
(including, without limitation, reasonable accounting and attorney's fees).
The foregoing remedies shall be in addition to any other remedies Franchisor
may have, including, without limitation the remedies for default.
10. ADVERTISING
10.1 Recognizing the value of advertising and the importance of the
standardization of advertising programs to the furtherance of the goodwill
and public image of the System, the parties agree that all advertising by
Franchisee in any medium shall be conducted in a dignified manner and shall
conform to such standards and requirements as Franchisor may specify from
time to time in writing. Franchisor reserves the right to disapprove upon
written notice to Franchisee any advertising, or promotional materials used
by Franchisee, if in Franchisor's judgement, such materials appear to have a
substantial adverse effect upon the Proprietary Marks or Franchisor's
goodwill therein or to infringe upon the proprietary rights of others.
Franchisee shall discontinue use of any disapproved material upon receipt of
such written notice.
10.2 Recognizing the value to all Franchised Businesses in the System of
marketing and advertising, Franchisor reserves the right to establish,
maintain, and administer an Advertising Fund (the "Fund") for the System. If
the Fund is established, Franchisee agrees to contribute one percent of its
Gross Room Revenues to the Fund, on a monthly basis and in accordance with
the procedures set forth in Section 4.4. Franchisee further agrees that
Franchisor shall maintain and administer the Fund for the System as follows:
10.2.1 The Fund shall be used on behalf of the System for advertising and
marketing including, without limitation, for any and all costs associated
with developing, preparing, producing, directing, administering,
conducting, maintaining, and disseminating advertising, marketing,
telemarketing, promotional, and public relations materials, programs and
campaigns, conducting market research, and publishing the Directory. All
sums paid by Franchisee, other franchisees in the System, and Franchisor
to the Fund, plus any interest or other income earned from such
contributions, shall be maintained in a separate account from the other
funds of Franchisor and shall not be used to defray any of Franchisor's
general operating expenses, except for the reasonable administration costs
and overhead Franchisor incurs in directing and administering the Fund
including, without limitation, the cost of collecting and accounting for
assessments for the Fund.
10.2.2 Franchisee agrees and acknowledges that the Fund is intended to
maximize general public recognition, acceptance, and use of the System,
and that Franchisor undertakes no obligation in administering the Fund to
make expenditures for Franchisee which are equivalent or proportionate to
Franchisee's contribution or to ensure that any particular franchisee
benefits directly or pro rata from expenditures for the Fund.
10.2.3 Franchisee shall contribute to the Fund by check made payable to
the Fund. If Franchisor owns and operates any Microtel hotel, Microtel &
Suites hotel, or Microtel Suites hotel under the System, Franchisor shall
make contributions to the Fund on the same basis as the assessments
required of comparable Franchised businesses within the System.
10.2.4 It is anticipated that all contributions to the Fund shall be
expended during the taxable year within which the contributions are made.
If, however, excess amounts remain in the Fund at the end of such taxable
year, all expenditures in the following taxable year(s) shall be made
first out of accumulated earnings from previous years, next out of
earnings in the current year, and finally from contributions.
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10.2.5 The Fund is not and shall not be an asset of Franchisor and an
audit of the operation of the Fund shall be prepared annually by an
independent certified public accountant selected by Franchisor and shall
be made available to Franchisee.
10.2.6 Although Franchisor intends the Fund to be of perpetual duration,
Franchisor maintains the right to terminate the Fund at any time. The Fund
shall not be terminated, however, until all monies in the Fund have been
expended for the purposes described in this Section.
11. INSURANCE
11.1 Prior to the commencement of any activities or operations pursuant to
this Agreement, Franchisee shall procure and maintain in full force and
effect during the term of this Agreement, at Franchisee's expense, those
insurance policies (set forth in this Section) protecting Franchisee and
Franchisor, and their officers, directors, partners, joint venturers and
employees against any loss or liability resulting in bodily injury, personal
injury, death, property damage or other related expenses arising or occurring
upon, as a result of, or in connection with the Franchised Business, or by
reason of the construction, operation or occupancy of the Franchised
Business.
11.2 Such policy or policies shall be written by an insurance company or
companies satisfactory to Franchisor in accordance with standards and
specifications set forth in the Manuals or otherwise in writing, and shall
include, at a minimum (except as additional coverages and higher policy
limits may reasonably be specified for all franchisees from time to time by
Franchisor in the Manuals or otherwise in writing), the following:
11.2.1 Comprehensive general liability insurance, including bodily injury,
property damage, personal injury coverage, independent contractors
coverage, broad form contractual liability, broad form property damage
endorsement, including products liability and completed operations
coverage. No insurance policy shall contain any exclusion for explosion,
collapse, or underground hazard. Coverage amount will be not less than
five million dollars per occurrence or aggregate. Such policy shall
contain a waiver of subrogation endorsement in favor of Franchisor.
11.2.2 Comprehensive automobile liability insurance, including bodily
injury and property damage for all owned, non-owned and hired vehicles,
with limits of liability not less than five million dollars combined
single limit. Such policy shall have the contractual exclusion removed, or
Franchisee shall provide separate evidence that contractual liability for
automobile exposure is otherwise insured. Such policy shall contain a
waiver of subrogation endorsement in favor of Franchisor.
11.2.3 Worker's compensation and employer's liability insurance as well as
other insurance as may be required by statute or rule of the state in
which the Franchised Business is located. Such policy shall contain a
waiver of subrogation endorsement in favor of Franchisor.
11.2.4 Commercial umbrella liability insurance with limits which bring the
total of all primary underlying coverages to not less than five million
dollars total limit of liability. Such umbrella liability will provide at
minimum those coverages and endorsements required in the underlying
policies.
11.2.5 Property insurance providing for all risk of direct physical loss
or damage including the perils of flood and earthquake. Appropriate
coverage shall also be provided for boiler and machinery exposures and
business interruption/extra expense exposures. Property insurance shall
provide replacement cost coverage, and shall be written to include values
not less than ninety percent of the full replacement value of the premises
of the Franchised Business, its furniture, fixtures, equipment and stock
(real and personal property). Any
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deductibles contained in such policy shall be subject to review and
approval by Franchisor. Property insurance policy(ies) shall contain a
waiver of subrogation in favor of Franchisor.
11.3 In connection with all significant construction of, on or about the
Microtel hotel, Microtel & Suites hotel, or Microtel Suites hotel premises
during the term hereof Franchisee shall cause the general contractor to
effect and maintain at the general contractor's own expense, insurance
policies and bonds set forth below. All such policies must name the
Franchisor and Franchisee as co-insured, contain waiver of subrogation
endorsements in favor of Franchisor and Franchisee, be written by insurance
or bonding companies satisfactory to Franchisor, and shall insure the
following:
11.3.1 Comprehensive general liability insurance providing those coverages
and limits specified in Section 11.2.1.
11.3.2 Comprehensive automobile liability providing those coverages and
limits specified in Section 11.2.2.
11.3.3 Worker's compensation and employer's liability insurance or other
insurance as is specified in Section 11.2.3.
11.3.4 Commercial umbrella liability insurance as specified in Section
11.2.4.
11.3.5 Owners contracts protective policy in the name of Franchisor and
Franchisee with a combined single limit of liability of five
million dollars.
11.3.6 General contractor shall assure compliance by all independent or
subcontractors and maintain evidence that all such independent or
sub-contractors have insurance written to comply with limits and
coverages together with appropriate endorsements as specified in
Sections 11.3.1, 11.3.2, and 11.3.3. Commercial umbrella liability
insurance shall be provided with limits of liability not less than
five million dollars.
11.3.7 General contractor shall provide a builder's risk insurance policy
providing for all risk of direct physical loss or damage in an
amount equal to the full estimated completed value of the
Franchised Business. Such policy shall include Franchisor and
Franchisee as additional named insured and also provide a waiver of
subrogation in favor of both Franchisor and Franchisee.
11.4 Upon execution of this Agreement, on each policy renewal date
thereafter, and each time a change is made in any insurance or insurance
carrier, Franchisee shall submit evidence of satisfactory insurance and proof
of payment therefor to Franchisor, together with, upon request, original or
duplicate copies of all policies and policy amendments. The evidence of
insurance shall include a statement by the insurer that the policy or
policies will not be cancelled or materially altered without at least thirty
(30) days' prior written notice to Franchisor.
11.5 Franchisee's obligation to obtain and maintain the foregoing policy or
policies in the amounts specified shall not be limited in any way by reason
of any insurance which may be maintained by Franchisor, not shall
Franchisee's performance of that obligation relieve Franchisee of liability
under the indemnity provisions set forth in Section 18.3 of this Agreement.
11.6 Should Franchisee, for any reason, fail to procure or maintain the
insurance required by this Agreement, as revised from time to time for all
franchisees by Franchisor in the Manuals or otherwise in writing, Franchisor
shall have the right and authority (without, however any obligation to do so)
immediately to procure such insurance and to charge same to Franchisee, which
charges, together with a reasonable fee for Franchisor's expenses in so
acting, shall be payable by Franchisee immediately upon notice.
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12. TRANSFER OF INTEREST
12.1 Transfer by Franchisor
Franchisor shall have the right to transfer or assign all or any part of its
rights or obligations in this Agreement to any person or legal entity.
12.2 Transfer by Franchisee
12.2.1 Franchisee understands and acknowledges that the rights and duties
set forth in this Agreement are personal to Franchisee, and that
Franchisor has granted this franchise in reliance on the business skill,
financial capacity, and character of Franchisee and its partners or
shareholders. Accordingly, neither Franchisee nor any immediate or remote
successor to any part of Franchisee's interest in this franchise, nor any
individual, partnership, corporation, or other legal entity which directly
or indirectly owns any interest in this franchise or in Franchisee shall
sell, sign, transfer, convey, give away, mortgage, or otherwise encumber
any direct or indirect interest in this franchise (including any ownership
interest in Franchisee), this Agreement, the Franchised Business, or a
substantial portion of the assets (including building and real estate) of
the Franchised Business without the prior written consent of Franchisor;
provided, however, that the transfer of less than a ten percent (10%)
equity interest in Franchisee in a single transaction, which does not have
the affect of transferring control (as described in Sections 12.2.2 and
12.2.5 hereof), shall not require the prior approval of Franchisor,
provided that Franchisee notifies Franchisor in writing of such transfer
within thirty (30) days following such transfer. Any purported assignment
or transfer, by operation of law or otherwise, not having the prior
written consent of Franchisor shall be null and void and shall constitute
a material breach of this Agreement, for which Franchisor may then
terminate without opportunity to cure pursuant to Section 13.2.6 of this
Agreement and seek injunctive relief as well as monetary damages.
12.2.2 Franchisor shall not unreasonably withhold its consent to a
transfer of any interest in this franchise, in Franchisee, in this
Agreement, in the Franchised Business, or in a substantial portion of the
assets (including building and real estate) of the Franchised Business;
provided, however, that if a transfer, alone or together with other
previous, simultaneous, or proposed transfers, would have the affect of
transferring a controlling interest in the franchise, Franchisee, this
Agreement, the Franchised Business, or substantially all of the assets
(including building and real estate) of the Franchise Business. Franchisor
may, in its sole discretion, require any or all of the following a
conditions of its approval:
12.2.2.1 All of Franchisee's accrued monetary obligations to Franchisor
and its subsidiaries and affiliates and all other outstanding
obligations related to the Franchised Business shall have been
satisfied;
12.2.2.2 Franchisee is not in default of any provision of this
Agreement, any amendment hereof or successor hereto, or any other
agreement between Franchisee and Franchisor, or its affiliates;
12.2.2.3 The transferor shall have executed a general release under
seal, in a form satisfactory to Franchisor, of any and all claims
against Franchisor and its officers, directors, shareholders, and
employees, in their corporate and individual capacities, including,
without limitation, claims arising under federal, state, and local
laws, rules, and ordinances;
12.2.2.4 The transferee, and all shareholders or general partners in
the transferee, shall enter into a written assignment, under seal and
in a form satisfactory to Franchisor, assuming and agreeing to
discharge all of Franchisee's obligations under this Agreement.
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12.2.2.5 The transferee, and all shareholders in the transferee, shall
demonstrate to Franchisor's satisfaction that the transferee and its
shareholders or general partners, as appropriate, meet Franchisor's
education, managerial, and business standards; possess good moral
character, business reputation, and credit rating; have the aptitute
and ability to conduct the Franchised Business (as may be evidenced by
prior related business experience or otherwise); and have adequate
financial resources and capital to oeprate the Franchised Business;
12.2.2.6 At the Franchisor's option, the transferee and the
shareholders or general partners in the transferee shall execute for a
term ending on the expiration date of this Agreement and with such
renewal term as may be provided by this Agreement, the standard from
franchise agreement then being offered to new System franchisees and
such other anciallary agreements as Franchisor may require for the
Franchised Businesses, provided, however, that the transferee shall not
be required to pay any innitial franchise fee.
12.2.2.7 The transferee shall, at the transferee's expense and upon the
reasonable requrest of Franchisor, upgrade the Franchised Business to
conform to the then-current standards and specifications for hotels
operating under the System, and shall complete the upgrading and other
requirements within the reasonable time specified by Franchisor.
12.2.2.8 Franchisee shall remain liabile for all obligations to
Franchisor and its subsidiaries and affiliates in connection with the
Franchised Busines prior to the effective date of the transfer and
shall execute any and all instruments reasonably requested by
Franchisor to evidence such liabilty;
12.2.2.9 At the transferee's expense, an officer of the transferee and
the transferee's general manager shall complete the intial training
program then in effect for new licensees upon such terms and conditions
as Franchisor may reasonable require;
12.2.2.10 Franchisee shall pay a transfer fee of Seven Thousand Five
Hundred Dollars ($7,500), except that no fee shall be required for
transfers to the spouse, issue, parent, or sibling of a partner or
shareholder in Franchisee, or from one partner or shareholder to
another.
12.2.3 Notwithstanding any other provision of this Agreement, Franchisor
shall not require approval of the assignment, transfer, pledge, or
hypothecation of all or any part of the assets of the Franchised Business,
excluding this franchise and this Agreement, (and, if Franchisee is a
corporation all and any part of the stock of the said corporation) to
banks or other lending institutions as collateral security for loans made
directly to or for the benefit of the Franchised Business.
12.2.4 Franchisee acknowledges and agrees that each condition which must
be met by the transferee is necessary to assure such transferee's full
performance of the obligations hereunder.
12.2.5 For the purposes of this Agreement, "control" shall mean the
possession, direct or indirect, of the power to direct or cause the
direction of the management and policies of a person, corporation or other
busines entity, whether through the ownership of voting securities, by
contract, or otherwise.
12.3 Transfer Upon Death or Mental Incompetence
Upon the death or mental incompetency of Franchisee or a person owning all or
any interest in Franchisee, the executor, administrator, or personal
representative of such person shall transfer within three (3) months after
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such death or mental incompetency his interest to a third party approved by
Franchisor. Such transfers, including, without limitation, transfers by
devise or inheritance, shall be subject to the same conditions as any inter
vivos transfer. However, in the case of transfer by devise or inheritance, if
the heirs or beneficiaries of any such person are unable to meet the
conditions in this Section 12, the personal representative of the deceased
shareholder shall have reasonable time to dispose of the deceased's interest
in the Franchisee, which disposition shall be subject to all the terms and
conditions for transfers contained in this Agreement. If the interest is not
disposed of within nine months, Franchisor may terminate this Agreement.
12.4 Offerings by Franchisee
Securities in Franchisee may be offered to the public only with the prior
written consent of Franchisor, which consent shall not be unreasonably
withheld. All materials required by federal or state law for the sale of any
interest in Franchisee shall be submitted to Franchisor for review prior to
filing with any government agency; and any materials to be used and any
exempt offering shall be submitted to Franchisor for review prior to their
use. No Franchisee offering shall imply (by use of the Proprietary Marks or
otherwise) that Franchisor is participating as an underwriter, issuer, or
officer of Franchisee's or Franchisor's securities; and Franchisor's review
of any offering shall be limited solely to the subject of the relationship
between Franchisee and Franchisor. Franchisee and other participants in the
offering must fully indemnify Franchisor in connection with the offering. For
each proposed offering, Franchisee shall pay to Franchisor a non-refundable
fee of Five Thousand Dollars, or such greater amount as is necessary to
reimburse Franchisor for its reasonable cost and expenses associated with
reviewing the proposed offering, including, without limitation, legal and
accounting fees.
12.5 Non-Waiver of Claims
Franchisor's consent to a transfer of any interest in the franchise granted
herein shall not constitute a waiver of any claims it may have against the
transferring party, nor shall it be deemed a waiver of Franchisor's right to
demand exact compliance with any of the terms of this Agreement by the
transferee.
13. DEFAULT AND TERMINATION
13.1 Franchisee shall be deemed to be in default under this Agreement, and
all rights granted herein shall automatically terminate without notice to
Franchisee, if Franchisee shall become insolvent or makes a general
assignment for the benefit of creditors; or if a petition in bankruptcy is
filed by Franchisee or such a petition is filed against and consented to by
Franchisee; or if Franchisee is adjudicated a bankrupt; or if a bill in
equity or other proceeding for the appointment of a receiver of Franchisee or
other custodian for Franchisee's business or assets is filed and consented to
by Franchisee; or if a receiver or other custodian (permanent or temporary)
of Franchisee's assets or property, or any part thereof, is appointed by any
court of competent jurisdiction; of if proceedings for a composition with
creditors under any state or federal law is instituted by or against
Franchisee; or if a final judgement against Franchisee remains unsatisfied or
of record for ninety days or longer (unless a supersedeas bond is filed); or
if Franchisee is dissolved; or if execution is levied against any asset of
the Franchised Business, or suit to foreclose any lien or mortgage against
any asset of the Franchised Business is instituted against Franchisee and not
dismissed within ninety days; or if any asset of the Franchised Business is
sold after levy.
13.2 Franchisee shall be deemed to be in default and Franchisor may, at its
option, terminate this Agreement and all rights granted hereunder, without
affording Franchisee any opportunity to cure the defaults, effective
immediately upon receipt of notice by Franchisee, upon the occurrence of any
of the following:
13.2.1 If Franchisee ceases to do business at the Approved Location, or
ceases to operate the Franchised Business under the Proprietary Marks and
System, or loses the right to possession of the Franchised Business, or
otherwise forfeits the right to conduct the Franchised Business at the
Approved Location; provided, however, that if the cessation of business or
loss of possession results from the governmental exercise of the power of
eminent domain, or a fire
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or other casualty, through no fault of Franchisee, then, in such event, this
Agreement shall not be terminated for that reason for six months thereafter,
provided that within that time Franchisee applies for a receives Franchisor's
approval to reconstruct or relocate the Franchised Business, which approval
shall not unreasonably be withheld;
13.2.2 If Franchisee fails to commence construction within the time frame and
in accordance with all of the terms and conditions of this Agreement;
13.2.3 If Franchisee fails to meet its Completion Date within the time frame
and in accordance with all of the terms and conditions of this Agreement;
13.2.4 If a threat or danger to public health or safety results form the
construction, maintenance, or operation of the Franchised Business and an
immediate shutdown thereof is reasonably determined by Franchisor to be
essential to avoid a substantial liability or loss of goodwill; provided,
however, Franchisor shall reinstate this Agreement within six months after
termination under this Section 13.2.4, if, within that period, the threat or
danger to public health or safety is eliminated and Franchisor, in its sole
discretion, reasonably determines that reopening the Franchised Business
would not cause a substantial loss of goodwill;
13.2.5 If Franchisee or any guarantor of this Agreement is convicted of a
felony or any other crime or offense that is reasonably likely, in the sole
opinion of Franchisor, to adversely affect the System, the Proprietary Marks,
the goodwill associated therewith or Franchisor's interest therein;
13.2.6 If Franchisee or any partner or shareholder in Franchisee purports to
transfer any rights or obligations under this Agreement or any interest in
Franchisee or in the Franchised Business or in the substantial portion of the
assets of the Franchised Business to any third party without the Franchisor's
prior written consent, or in a manner violative of this Agreement;
13.2.7 If Franchisee intentionally discloses or divulges the contents of the
Manuals or other trade secrets or confidential information provided to
Franchisee by Franchisor to any unauthorized person or fails to exercise
reasonable care to prevent such disclosure;
13.2.8 If, following Franchisee's death or mental incompetency, an approved
transfer is not effected within the time frame and in accordance with the
provisions of Section 12.3 hereof;
13.2.9 If Franchisee intentionally or negligently makes any material false
statements or omissions to Franchisor in connection with Franchisee's
application for the franchise granted herein, or in connection with any
information submitted to Franchisor; or
13.2.10 If Franchisee misuses or makes any unauthorized use of the
Proprietary Marks or otherwise impairs the goodwill associated therewith or
Franchisor's rights therein.
13.3 Except as provided in Sections 13.1 and 13.2 of this Agreement,
Franchisee shall have thirty days (or such longer period as Franchisor may
specify) from receipt of a written Notice of Termination (citing the
reason(s) therefor) within which to remedy any default hereunder and provide
evidence thereof to Franchisor. If any such default is not cured within that
time, or such longer period as applicable law may require (or such longer
period as may be reasonably required by Franchisee to cure any non-monetary
default if Franchisee immediately commences, diligently and in good faith
pursues, and cures such default), this Agreement shall terminate without
further notice to Franchisee effective immediately upon the expiration of the
thirty day period, expiration of any extended period as described above, or
such longer period as applicable law may require. Franchisee shall be in
default hereunder for any failure to comply with any of the requirements
imposed by this Agreement, as it may from time to time reasonably be
supplemented by the Manuals, or to carry out the terms of this Agreement in
good faith. Such defaults shall include, for example, without limitation, the
occurrence of any of the following:
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13.3.1 If Franchisee fails, refuses, or neglects to pay promptly any
monies owing to Franchisor or its subsidiaries or affiliates when due, or
to submit the financial information or other reports required by
Franchisor under this Agreement;
13.3.2 If Franchisee fails to pay all its financial obligations to third
parties in the ordinary course of business;
13.3.3 If Franchisee, by act or omission, allows a continued violation in
connection with the operation of the Franchised Business, of any law,
ordinance, rule or regulation of a governmental agency, in the absence of
a good faith dispute over its application or legality and without having
promptly resorted to an appropriate administrative or judicial forum for
relief therefrom;
13.3.4 If Franchisee misuses or makes any unauthorized use of the
Proprietary Marks or otherwise impairs the goodwill associated therewith
or Franchisor's rights therein; or
13.3.5 If Franchisee is in default of or terminated any management
agreement under which the Franchised Business is operated if, as a result
of such default or termination, Franchisee fails to operate the Franchised
Business in compliance with the terms and conditions of this Agreement.
13.4 Franchisee may terminate this Agreement on the anniversary date of the
fifth year of its execution by giving written notice no more than fifteen
months but no less than twelve months prior to such anniversary date to
Franchisor. The notice shall be accompanied by a lump sum payment equal to
the total of all amounts required under Section 4 hereof for the thirty-six
calendar months of operation preceding the notice.
14. OBLIGATIONS UPON TERMINATION
Upon termination or expiration of this Agreement, this Agreement and all
rights granted hereunder to Franchisee shall forthwith terminate, and:
14.1 Franchisee shall immediately cease to operate the Franchised Business as
a System hotel and shall not thereafter, directly or indirectly, represent to
the public or hold itself out as a present or former franchisee of
Franchisor.
14.2 Franchisee shall immediately and permanently cease to use, by
advertising or in any other manner whatsoever, the names "MICROTEL",
"MICROTEL & SUITES", "MICROTEL SUITES", and "SAVINGS YOU CAN SLEEP ON" and
other Proprietary Marks of Franchisor, any other identifying characteristics
of the System, and all confidential methods, procedures and techniques
associated with the System. Franchisee shall promptly remove from its place
of business, and discontinue using for any purpose, any and all signs,
fixtures, furniture, furnishings, equipment, advertising materials,
stationery, supplies, forms or other articles which display the Proprietary
Marks or any distinctive features or designs associated with the System. Any
signs containing the Proprietary Marks which Franchisee is unable to remove
within one day of expiration or termination of this Agreement shall be
completely covered by Franchisee until the time of their removal.
14.3 Franchisee shall, at its expense, immediately make such modifications or
alterations as may be necessary to distinguish the Franchised Business so
clearly from its former appearance and from other Microtel hotels, Microtel &
Suites hotels, or Microtel Suites hotels operated under the System as to
prevent any possibility of confusion therewith by the public, and to prevent
the operation of any business at the Approved Location by Franchisee or
others in derogation of this Paragraph 14.3 (including, without limitation,
removal or changing of the triple gabled roof line, the semi-circular window
in the front lobby wall, the floor-to-ceiling mirrors behind the bed, the
built-in furnishings in the guest rooms (e.g. the night-stands and desks),
and the removal of all distinctive physical and structural features
identifying Microtel hotels, Microtel & Suites hotels, or Microtel Suites
hotels in the System, removal of all distinctive signs and emblems, and
removal or changing of any design or decor features that Franchisor, in its
discretion, determines to be indicative of hotels operating under the System.
Further, until all modifications and alterations required by this Paragraph
14.3 are
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completed, Franchisee shall (i) maintain a conspicuous sign at the
registration desk in a form specified by Franchisor stating that the
Franchised Business is no longer associated with the Microtel System, and
(ii) advise all customers or prospective customers telephoning the Franchised
Business that it is no longer associated with the Microtel System. If
Franchisee fails to initiate immediately and complete such alterations when
required by this Paragraph 14.3, Franchisee agrees that Franchisor or its
designated agents may enter the premises and adjacent areas at any time and
make such alterations, at Franchisee's sole risk and expense, without
responsibility for any actual or consequential damages to the property of
Franchisee or others, and without liability for trespass or other tort or
criminal act. Franchisee expressly acknowledges that its failure to make such
alterations will cause irreparable injury to Franchisor.
14.4 Franchisee shall take such action as may be necessary to cancel any
assumed name or equivalent registration which contains the name "MICROTEL",
"MICROTEL & SUITES", "MICROTEL SUITES", or any variation thereof or any other
service mark or trademark of Franchisor, and Franchisee shall furnish
Franchisor with evidence satisfactory to Franchisor of compliance with this
obligation within thirty days after termination or expiration of this
Agreement.
14.5 Franchisee shall promptly pay all sums owing to Franchisor and its
subsidiaries and affiliates, including all damages, costs and expenses,
including reasonable attorneys' fees, incurred by Franchisor as a result of
the default. Franchisor shall have the right within sixty days following
termination or expiration of this Agreement, to inspect Franchisee's hotel
premises and offices, and conduct a review and/or an audit of Franchisee's
books and records, for the purpose, among other things, of assuring
Franchisee's compliance with the provisions of this Section 14.
14.6 In the event of termination as a result of Franchisee's default under
Sections 13.1, 13.2, or 13.3, of this Agreement, Franchisee agrees to pay
Franchisor a lump sum payment (for premature termination only, and not as a
penalty or in lieu of any other payments required under this Agreement),
equal to the total of all amounts required under Section 4 hereof for the
thirty-six calendar months of operation preceding Franchisee's default, or in
the event the Franchisee has not been operating for thirty-six months, an
amount equal to the average of the monthly amounts required under Section 4
hereof during the months that Franchisee was operating pursuant to this
Agreement, multiplied by thirty-six. Franchisor shall not be limited to the
provisions of this Section 14.6 with respect to its rights or remedies
arising out of Franchisee's default under Section 13, but shall be entitled
to pursue all available remedies at law or in equity including, without
limitation, recovery of damages and lost future profits.
14.7 Franchisee shall pay to Franchisor all damages, costs and expenses,
including reasonable attorneys' fees, incurred by Franchisor subsequent to
the termination or expiration of the franchise herein granted in obtaining
injunctive or other relief for the enforcement of any provisions of this
Section 14.
14.8 Franchisee shall immediately turn over to Franchisor all manuals,
including the Manuals, records, files, instructions, correspondence, and all
other materials provided by Franchisor related to the operation of the
Franchised business, and all copies thereof (all of which are acknowledged to
be Franchisor's property), and shall retain no copy or record of any of the
foregoing, excepting only Franchisee's copy of this Agreement and of any
correspondence between the parties, and any other documents which Franchisee
reasonably needs for compliance with any provision of law.
14.9 Franchisee hereby assigns to Franchisor all right, title, and interest
in any telephone numbers and business listings used by Franchisee in
connection with its conduct of the Franchised Business, and agrees that any
such right, title or interest may be assumed by Franchisor, at Franchisor's
option, upon termination or expiration of this Agreement. If the Telephone
Listing Agreement is not in a form acceptable to the telephone company
servicing the Franchised Business, Franchisee shall execute such other
similar telephone number assignment agreement provided by Franchisor.
Franchisee also hereby appoints Franchisor as its attorney-in-fact with full
power and authority to execute on Franchisee's behalf any documents that are
necessary to effectuate such an assignment.
14.10 Franchisor shall have the right, but not the duty, to be exercised by
notice of intent to do so within thirty days after termination of expiration,
to purchase any and all signs, advertising materials, supplies and inventory
and any other items bearing Franchisor's Proprietary Marks, at Franchisee's
cost, or, in the case of
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capital equipment, at Franchisee's net book value. With respect to any
purchase by Franchisor as provided herein, Franchisor shall have the right to
set off all amounts due from Franchisee under this Agreement.
15. COVENANTS
15.1 Franchisee specifically acknowledges that, pursuant to this Agreement,
Franchisee will receive valuable specialized training and confidential
information, including, without limitation, information regarding the
operational, sales, promotional, and marketing methods and techniques of
Franchisor and the System. Franchisee covenants that it will at all times
retain and exercise management control over the Franchised Business.
Franchisee's General Manager shall devote full time, energy and best efforts
to the management and operation of the Franchised Business. Franchisee's
General Manager shall not, except as otherwise approved in writing by
Franchisor (which approval shall not be unreasonably withheld), assist,
promote, or engage in any competing business and shall use every reasonable
means to encourage use by the public of Microtel hotels, Microtel & Suites
hotels, and Microtel Suites hotels owned by other franchisees. The General
Manager shall not engage in any other business or activity, directly or
indirectly which requires substantial managerial responsibility and which may
conflict with Franchisee's or General Manager's obligations herein.
15.2 Franchisee covenants that during the term of this Agreement, except as
otherwise approved in writing by Franchisor, Franchisee shall not, either
directly or indirectly, for itself, or through, on behalf of, or in
conjunction with any person, persons, partnership or corporation, divert or
attempt to divert any business or customer of the Franchised Business or
other franchisee, to any competitor, or competing business, by direct or
indirect inducement or otherwise, or do or perform, directly or indirectly,
any other act injurious or prejudicial to the goodwill associated with
Franchisor's Proprietary Marks and the System.
15.3 Franchisee represents and warrants that Franchisee has no direct or
indirect financial or management interest in any non-Microtel transient
lodging facility, except as disclosed by Franchisee in Exhibit A hereto.
Franchisee agrees to advise Franchisor of any change or modification of such
interest, or the acquisition of any new interest as soon as it occurs, and in
no event later than thirty (30) days thereafter.
15.4 Franchisee and Franchisor covenant and agree that neither party will
seek to employ any person who is at that time employed by the other party or
otherwise directly or indirectly induce such person to leave his or her
employment.
16. CORPORATE OR PARTNERSHIP FRANCHISEE
16.1 Franchisee, if a corporation, shall comply with the following
requirements:
16.1.1 Franchisee shall be newly organized and its charter shall at all
times provide that its activities are confined exclusively to operating
the Franchised Business, and other businesses operated pursuant to
franchises granted to Franchisee by Franchisor;
16.1.2 Copies of Franchisee's Articles of Incorporation, Bylaws, and other
governing documents, and any amendments thereto, including the resolutions
of the Board of Directors authorizing entry into this Agreement shall be
promptly furnished to Franchisor;
16.1.3 Franchisee shall maintain stop transfer instructions against the
transfer on its records of any equity securities, and each stock
certificate of Franchisee shall have conspicuously endorsed on its face
the following printed legend:
The transfer of the stock represented by this certificate
is subject to the terms and conditions of a Franchise
Agreement with Microtel Franchise & Development
Corporation dated , 19 . Reference is made to
the provisions of the said Franchise Agreement and to the
Articles and Bylaws of this Corporation, provided,
however, that this Section 16.1.3 shall not apply if
Franchisee is a publicly-held corporation.
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16.1.4 Franchisee shall maintain a current list of all owners of record
and all beneficial owners of any class of voting stock of Franchisee and
shall furnish the list to Franchisor upon request; and
16.1.5 Such shareholders of Franchisee as specified by Franchisor shall
jointly and severally guarantee Franchisee's performance hereunder and
shall bind themselves to the terms of this Agreement.
16.2 Franchisee, if a partnership, shall comply with the following
requirements throughout the term of this Agreement:
16.2.1 Franchisee shall furnish Franchisor with its partnership agreement
as well as such other documents as Franchisor may reasonably request, and
any amendments thereto; and
16.2.2 Franchisee shall prepare and furnish to Franchisor, at any time,
upon request, a list of all general and limited partners in Franchisee.
17. TAXES, PERMITS, AND INDEBTEDNESS
17.1 Franchisee shall promptly pay when due all taxes levied or assessed by
any federal, state, or local tax authority, and any and all other
indebtedness incurred by Franchisee in the conduct of the Franchised
Business. Franchisee shall pay to Franchisor an amount equal to any sales
tax, gross receipts tax, or similar tax imposed on Franchisor with respect to
any payments to Franchisor required under this Agreement, unless the tax is
credited against income tax otherwise payable by Franchisor.
17.2 In the event of any bona fide dispute as to liability for taxes assessed
or other indebtedness, Franchisee may contest the validity of the amount of
the tax or indebtedness in accordance with the procedures of the taxing
authority or applicable law; however, in no event shall Franchisee permit a
tax sale or seizure by levy of execution or similar writ or warrant, or
attachment by a creditor, to occur against the Franchised Business or any of
its assets.
17.3 Franchisee shall maintain compliance with all federal, state, and local
laws, rules, and regulations and shall timely obtain any and all permits,
certificates or licenses necessary for the full and proper conduct of the
business franchised under this Agreement, including, without limitation,
licenses to do business, fictitious name registration, sales tax permits,
health and sanitation permits and ratings, and fire clearances. Copies of all
inspection reports, warnings, certificates, and ratings issued by any
governmental entity during the term of this Agreement in connection with the
conduct of the Franchised Business which indicate Franchisee's failure to
meet or maintain Franchisor's standards or less than full compliance with any
applicable law, rule, or regulation shall be forwarded to Franchisor by
Franchisee within five days after Franchisee's receipt thereof.
17.4 Franchisee shall notify Franchisor in writing within five days after the
commencement of any action, suit, or proceeding and of the issuance of any
order, writ, injunction, award, or decree of any court, agency, or other
governmental instrumentality which may adversely affect the operation or
financial condition of the Franchised Business.
18. INDEPENDENT CONTRACTOR AND INDEMNIFICATION
18.1 It is understood and agreed by the parties hereto that this Agreement
does not create a fiduciary relationship between them, and Franchisee shall
be an independent contractor and that nothing in this Agreement is intended
to constitute either party an agent, legal representative, subsidiary, joint
venturer, partner, employee or servant of the other for any purpose
whatsoever.
18.2 During the term of this Agreement and any extensions hereof, Franchisee
shall hold itself out to the public as an independent contractor operating
the business pursuant to a franchise from Franchisor and as an authorized
user of the Proprietary Marks which are owned by Franchisor. Franchisee
agrees to take such
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affirmative action as may be necessary to do so, including, without
limitation, exhibiting a notice of that fact in a place on the premises of
the Franchised Business as required under Section 6.2.3 hereof.
18.3 It is understood and agreed that nothing in this Agreement authorizes
either party to make any contract, agreement, warranty or representation on
the other's behalf, or to incur any debt or other obligation in the other's
name, and that neither party shall in any event assume liability for, or be
deemed liable hereunder as a result of, any such action, or by reason of any
act or omission of the other party or any claim or judgement arising
therefrom. Franchisee shall indemnify and hold Franchisor harmless against
any and all claims arising directly or indirectly from, as a result of, or in
connection with, Franchisee's operation of the Franchised Business, as well
as the costs, including reasonable attorneys' fees, of defending against
them. Franchisor shall indemnify and hold Franchisee harmless against any and
all claims arising directly or indirectly from, as a result of, or in
connection with Franchisor's acts (except as set forth in this Section 18.3
and Section 19.2) as well as the costs, including reasonable attorneys' fees,
of defending against them. Franchisee agrees that all of the obligations of
Franchisor under this Agreement are to Franchisee, and no other party is
entitled to rely on, enforce, or obtain relief for breach of such obligations
either directly or indirectly or by subrogation. Franchisor shall not
indemnify or hold Franchisee harmless against any action or claim by any
third party based upon Franchisor's exercise of any of its rights in
accordance with the terms of this Agreement.
19. APPROVALS AND WAIVERS
19.1 Whenever this Agreement requires the prior approval or consent of
Franchisor, Franchisee shall make a timely written request to Franchisor
therefor, and such approval or consent shall be obtained in writing.
19.2 Except as otherwise provided in this Agreement or any other written
agreement between Franchisor and Franchisee, Franchisor makes no warranties
or guarantees upon which Franchisee may rely. Franchisor assumes no liability
or obligation to Franchisee, by providing any waiver, approval, consent, or
suggestion to Franchisee in connection with this Agreement or by reason of
any delay or denial of any request made therefor.
19.3 No failure of a party to exercise any power reserved to it by this
Agreement, or to insist upon strict compliance by the other party with any
obligation or condition hereunder, and no custom or practice of the parties
at variance with the terms hereof, shall constitute a waiver of such party's
right thereafter to demand exact compliance with any of the terms herein.
Waiver by a party of any particular default by the other party shall not
affect or impair such party's rights with respect to any subsequent default
of the same, similar, or different nature; nor shall any delay, forbearance,
or omission of a party to exercise any power or right arising out of any
breach or default by the other party of any of the terms, provisions, or
covenants hereof, affect or impair such party's right to exercise the same.
20. NOTICES
Any and all notices required or permitted under this Agreement shall be in
writing and shall be delivered by any means which will provide evidence of
the date received, to the respective parties at the following addresses
unless and until a different address has been designated by written notice to
the other party:
Notices to FRANCHISOR: Microtel Franchise & Development Corporation
One Airport Way
Suite 200
Rochester, New York 14624
Notices to FRANCHISEE: _____________________
_____________________
_____________________
_____________________
Any notice shall be deemed to have been given at the date and time it is
received.
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Agreement and Warrant to Purchase 100,000 Common Shares
to
U.S. FRANCHISE SYSTEMS, INC.
This certifies that, for value received, U.S. Franchise Systems, Inc., the
registered holder hereof or its assign (the "Warrantholder") is entitled to
purchase from Microtel Franchise and Development Corporation, a New York
corporation with its principal office at One Airport Way, Suite 200,
Rochester, New York (the "Company") one hundred thousand (100,000) shares of
common stock of the Company (the "Shares") at or before 5:00 p.m. Eastern
Standard Time on September 1, 2000 at the purchase price per share of $
(the "Warrant Price"), subject to the following terms and conditions. The
number of Shares purchasable upon exercise of this Warrant and the Warrant
Price per Share shall be subject to adjustment from time to time as set forth
herein.
1. Consideration. This Warrant is granted as part of the consideration for
the Joint Venture Agreement between the parties hereto dated September 1,
1995.
2. Exercise. This Warrant may be exercised in whole or in part by
presentation of this Warrant with the Purchase Form as attached hereto
duly completed and executed, together with payment of the Warrant Price at
the principal office of the Company. Payment of the Warrant Price may be
made in cash, by wire transfer or by check. Upon surrender of the Warrant
and payment of such Warrant Price as aforesaid, the Company shall issue
and cause to be delivered with all reasonable dispatch to or upon the
written order of the Warrantholder and in such name or names as the
Warrantholder may designate a certificate or certificates for the number
of full Shares so purchased upon the exercise of the Warrant, together
with Fractional Warrants, as provided in Section 8 hereof, in respect of
any fractional Shares otherwise issuable upon such surrender. Such
certificate or certificates shall be deemed to have been issued and any
person so designated to be named therein shall be deemed to have become a
holder of record of such Shares as of the date of the surrender of the
Warrant and the payment of the Warrant Price, as aforesaid,
notwithstanding that the certificates representing the Shares shall not
actually have been delivered or that the stock transfer books of the
Company shall then be closed. The Warrant shall be exercisable, at the
election of the Warrantholder, either in full or from time to time in part
and, in the event that a certificate evidencing the Warrant is exercised
in respect of less than all of the Shares specified therein at any time
prior to the Termination Date, a new certificate evidencing the remaining
Warrant will be issued by the Company.
3. Reservation of Shares. There has been reserved, and the Company shall at
all times keep reserved so long as the Warrant remains outstanding, out of
its authorized Common Shares, such number of Shares as shall be subject to
purchase under the Warrant. Every transfer agent for the Common Shares and
other securities of the Company issuable upon the exercise of the Warrant
will be irrevocably authorized and directed at all times to reserve such
number of authorized Shares and other securities as shall be requisite for
such purpose. The Company will keep a copy of this Warrant on file with
every transfer agent for the Common Shares and other securities of the
Company issuable upon the exercise of
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the Warrant. The Company will supply such transfer agent with duly
executed stock and other certificates for such purpose.
4. Further Obligations of Company. The Company covenants and agrees that all
Shares which may be delivered upon exercise of this Warrant shall, upon
delivery, be fully paid and non-assessable, and be free from all taxes,
liens and charges with respect to the purchase thereof hereunder, and
without limiting the generality of the foregoing, the Company covenants
and agrees that it shall from time to time take all such action as may be
necessary to assure that the par value per share of the Common Shares is
at all times equal to or less than the then current Warrant Price per
share of the Common Shares issuable pursuant to this Warrant.
5. Registration and Transfer. The Warrant shall be registered on the books of
the Company when issued and shall be transferable only on the books of the
Company maintained at its principal office in Rochester, New York, or
wherever its principal executive offices may then be located, upon
delivery thereof duly endorsed by the Warrantholder or its duly authorized
attorney or representative, or accompanied by proper evidence of
succession, assignment or authority to transfer. Upon any registration or
transfer, the Company shall execute and deliver a new Warrant to the
person entitled thereto. Notwithstanding any other provision hereof, this
Warrant may not be transferred to any person other than an affiliate of
Warrantholder without the express written consent of the Company.
6. Exchange of Warrant Certificate. This Warrant certificate may be exchanged
for another certificate or certificates entitling the Warrantholder to
purchase a like aggregate number of Shares as the certificate or certificates
surrendered then entitled the Warrantholder to purchase. The Warrantholder
desiring to exchange a Warrant certificate shall make such request in writing
delivered to the Company, and shall surrender, properly endorsed, the
certificate evidencing the Warrant to be so exchanged. Thereupon, the Company
shall execute and deliver to the person entitled thereto a new Warrant
certificate as so requested.
7. Adjustment of Warrant Price and Number of Shares.
7.1 General. The number of Shares purchasable upon the exercise of the
Warrant and the Warrant Price shall be subject to adjustment from time
to time upon the happening of certain events, as follows:
7.1.1. In case the Company shall, with regard to its Common Shares (or
securities convertible into or exchangeable for Common Shares)
(A) pay a dividend in Common Shares or make a distribution in
Common Shares, (B) subdivide its outstanding Common Shares into
a greater number of Shares, (C) combine its outstanding Common
Shares into a smaller number of Common Shares, or (D) issue by
reclassification of its Common Shares other securities of the
Company, the number of Shares purchasable upon exercise of the
Warrant immediately prior
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<PAGE>
thereto shall be adjusted so that the Warrantholder shall be
entitled to receive the kind and number of Shares or other
securities of the Company which it would have owned or would
have been entitled to receive after the happening of any of the
events described above, had the Warrant been exercised
immediately prior to the happening of such event or any record
date with respect thereto. Any adjustment made pursuant to this
subsection shall become effective immediately after the
effective date of such event retroactive to the record date, if
any, for such event.
7.1.2. In case the Company shall fix a record date for the issuance of
rights or warrants to all holders of Common Shares entitling
them for a period expiring within forty-five (45) calendar days
(after such record date) to subscribe for or purchase Common
Shares at a price per share of Common Shares less than the
Closing Price per share of Common Shares on such record date,
the Warrant Price to be in effect after such record date shall
be determined by multiplying the Warrant Price in effect
immediately prior to such record date by a fraction, of which
the numerator shall be the number of shares of Common Shares
outstanding on such record date plus the number of shares of
Common Shares which the aggregate offering price of the total
number of shares of Common Shares so to be offered would
purchase at such Closing Price and of which the denominator
shall be the number of shares of Common Shares outstanding on
such record date plus the number of additional shares of Common
Shares to be offered for subscription or purchase. Shares of
Common Shares owned by or held for the account of the Company
shall not be deemed outstanding for the purpose of any such
computation. Such adjustments shall be made successively
whenever such record date is fixed; and in the event that such
rights or warrants are not so issued, the Warrant Price shall
again be adjusted to be the Warrant Price which would then be in
effect if such record date had not been fixed.
7.1.3. In case the Company shall fix a record date for the making of a
distribution to all holders of Common Shares (including any
distribution made in connection with a consolidation or merger
in which the Company is the continuing corporation) of evidence
of indebtedness or assets (other than cash dividends or cash
distributions payable out of consolidated earnings or earned
surplus or dividends payable in Common Shares) or subscription
rights or warrants (excluding those referred to in Section
7.1.2), the Warrant Price to be in effect after such record date
shall be determined by multiplying the Warrant Price in effect
immediately prior to such record date by a fraction of which the
numerator shall be the Closing Price per shares of Common Shares
on such record date, less the fair market value (as determined
by the Board of Directors of the Company, whose determination
shall be conclusive absent manifest error) of the portion of the
assets or evidences of indebtedness so to be distributed or of
such subscription rights or warrants applicable to one share of
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<PAGE>
Common Shares and of which the denominator shall be the Closing
Price per share of Common Shares. Such adjustments shall be made
successively whenever such a record date is fixed; and in the
event that such distribution is not so made, the Warrant Price
shall again be adjusted to be the Warrant Price which would then
be in effect if such record date had not been fixed.
7.1.4. No adjustment in the number of Shares purchasable hereunder
shall be required unless such adjustment would require an
increase or decrease of at least one percent in the aggregate
number of Shares then purchasable upon the exercise of the
Warrant; provided however, that any adjustments which by reason
of this Section 7.14 are not required to be made immediately
shall be carried forward and taken into account in any
subsequent adjustment.
7.1.5. Whenever the number of Shares purchasable upon the exercise of
the Warrant is adjusted as herein provided, the Warrant Price
payable upon exercise of the Warrant shall be adjusted by
multiplying such Warrant Price immediately prior to such
adjustment by a fraction, of which the numerator shall be the
number of Shares purchasable upon the exercise of the Warrant
immediately prior to such adjustment, and of which the
denominator shall be the number of shares so purchasable
immediately thereafter. Whenever the Warrant Price is adjusted
as herein provided, the number of Shares purchasable upon the
exercise of the Warrant shall be adjusted so that thereafter the
Warrant shall evidence the right to purchase, at the adjusted
Warrant Price, that number of Shares obtained by multiplying the
number of Shares converted by the Warrant Price in effect
immediately prior to such adjustment and dividing the product so
obtained by the Warrant Price in effect immediately after such
adjustment.
7.1.6. Whenever the number of Shares purchasable upon the exercise of
this Warrant or the Warrant Price is adjusted as herein
provided, the Company shall cause to be promptly mailed to the
Warrantholder in accordance with the provisions of Section 10
hereof, notice of such adjustment or adjustments and a
certificate of a firm of independent public accountants selected
by the Board of Directors of the Company (who may be the regular
accountants employed by the Company) setting forth the number of
Shares purchasable upon the exercise of the Warrant and the
Warrant Price after such adjustment, a brief statement of the
facts requiring such adjustment, and the computation by which
such adjustment was made.
7.1.7. For the purpose of this Section 7.1., the term "Common Shares"
shall mean (A) the class of shares designated as (or convertible
or exercisable for) the Common Shares of the Company at the date
of this Agreement, or (B) any other class of shares resulting
from successive changes or reclassifications of such Common
Shares including changes in par value, or from par value to no
par value, or
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<PAGE>
from no par value to par value. In the event that at any time,
as a result of an adjustment made pursuant to this Section 7,
the Warrantholder shall become entitled to purchase any shares
of the Company other than Common Shares, thereafter the number
of such other shares so purchasable upon exercise of the Warrant
and the Warrant Price of such shares shall be subject to
adjustment from time to time in a manner and on terms as nearly
equivalent as practicable to the provisions with respect to the
Shares contained in this Section 7.
7.2. No Adjustment of Dividends. Except as provided in Section 7.1, no
adjustment in respect of regular cash dividends shall be made during
the term of the Warrant or upon the exercise of the Warrant.
7.3. Preservation of Purchase Rights upon Reorganization,
Reclassification, Consolidation, Merger, etc. In case of any capital
reorganization or reclassification of the Common Shares of the
Company, or in case of any consolidation of the Company with or
merger of the Company into another corporation or in case of any sale
or conveyance to another person of the property, assets or business
of the Company as an entirety or substantially as an entirety, the
Company or such successor or purchaser, as the case may be, shall
execute with the Warrantholder an agreement that the Warrantholder
shall have the right thereafter upon payment of the Warrant Price in
effect immediately prior to such action to purchase upon exercise of
the Warrant the kind and amount of shares and other securities and
property which it would have owned or have been entitled to receive
after the happening of such reorganization or reclassification,
consolidation, merger, sale or conveyance had the Warrant been
exercised immediately prior to such action. In the event of a merger
described in Section 368(a)(2)(E) of the Internal Revenue Code of
1986, as amended, in which the Company is the surviving corporation,
the right to purchase Shares under the Warrant shall terminate on the
date of such merger and thereupon the Warrant shall become null and
void but only if the controlling corporation shall agree to
substitute for the Warrant its warrant which entitles the holder
thereof to purchase upon its exercise the kind and amount of shares
and other securities and property which it would have owned or had
been entitled to receive had the Warrant been exercised immediately
prior to such merger. The adjustments required by this Section 7.3
shall be effected in a manner which shall be as nearly equivalent as
may be practicable to the adjustments provided for elsewhere in this
Section 7. The provisions of this Section 7.3 shall similarly apply
to successive consolidations mergers, sales or conveyances.
7.4. Statement on Warrants. Irrespective of any adjustments in the Warrant
Price or the number or kind of Shares purchasable upon the exercise
of the Warrant, the Warrant certificate or certificates theretofore
or thereafter issued may continue to express the same price and
number and kind of Shares as are stated in this initially issued
Warrant.
5
<PAGE>
8. Fractional Shares. The Company shall not be required to issue fractional
Shares on the exercise of the Warrant. If any fraction of a Share would,
except for the provisions of this Section 8, be issuable on the exercise
of the Warrant (or specified portion thereof), the Company shall issue to
the Warrantholder a fractional Warrant entitling Warrantholder, upon
surrender with other fractional Warrants aggregating one or more full
Shares, to purchase such full Shares. If fractional Warrants do not
aggregate a full Share, their value (over and above their exercise price)
shall be paid in full in cash upon exercise to the exercising
Warrantholder.
9. No Rights as Shareholder; Notices to Warrantholder. Nothing contained in
this Agreement or in any of the Warrants shall be construed as conferring
upon the Warrantholder or its transferees any rights as a shareholder of
the Company, including the right to vote, receive dividends, or consent
as a shareholder in respect of any meeting of shareholders for the
election of directors of the Company or any other matter. However, the
Company shall be required to give notice in writing to the Warrantholder
of any meeting of shareholders of the Company or any proposed consent of
the shareholders as provided in Section 10 hereof at least twenty (20)
days prior to the date fixed as a record date or the date of closing the
transfer books for the determination of the shareholders entitled to any
relevant dividend, distribution, subscription rights or other rights or
for the determination of shareholders entitled to vote at any such
meeting or as to which any consent is requested. Such notice shall
specify such record date or the date of closing the transfer books, as
the case may be.
10. Notices. Any notice pursuant to this Agreement by the Company or by the
Warrantholder shall be in writing and shall be deemed to have been duly
given if delivered by hand or if mailed by certified mail, return receipt
requested, postage prepaid, addressed as follows:
10.1. If to the Warrantholder-addressed to U.S. Franchise Systems, Inc. at
. . .
10.2 If to the Company-addressed to Microtel Franchise and Development
Corporation, One Airport Way, Suite 200, Rochester International
Airport, Rochester, New York 14624, Attention: Bruce A. Sahs, Vice
President or to such other address as any such party may designate by
notice to the other party. Notices shall be deemed given at the time
they are delivered personally or three days after they are mailed in
the manner set forth above.
11. Successors. All the covenants and provisions of this Agreement by or for
the benefit of the Company or the Warrantholder shall bind and inure to
the benefit of their respective successors and assigns hereunder.
12. Merger or Consolidation of the Company. The Company will not merge or
consolidate with or into any other corporation or sell all or
substantially all of its property to another person, unless the
provisions of Section 7.3 are complied with.
6
<PAGE>
13. Applicable Law. This Agreement shall be deemed to be a contract made
under the laws of the State of New York and for all purposes shall be
construed in accordance with the laws of said State applicable to
contracts made and to be performed entirely within such State.
14. Counterparts. This Agreement may be executed in counterparts, each of
which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
15. Headings. The headings in this Agreement are for reference purposes only
and shall not affect in any way the meaning or interpretation of this
Agreement.
IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by
its duly authorized officers and the corporate seal hereunto fixed.
MICROTEL FRANCHISE AND
DEVELOPMENT CORPORATION
(corporate seal) By:
Attest: E. Anthony Wilson
Chairman
Alan S. Lockwood,
Secretary
7
<PAGE>
EXHIBIT Y
<TABLE>
<CAPTION>
Interest Paid
at 10% Per
Annum Consulting Principal Total Payment
<S> <C> <C> <C> <C>
Payment at Closing $400,000.00 $1,600,000.00 $2,000,000.00
Payment 1 yr. after Closing $143,764.00 150,000.00 706,236.00 1,000,000.00
Payment 2 yrs. after Closing 73,141.00 150,000.00 276,860.00 500,000.00
Payment 3 yrs. after closing 45,455.00 454,545.00 500,000.00
$4,000,000.00
Purchase Price Allocation
Consulting Services (Section 5) $700,000.00
Category III Assets (Except trademarks and
trade names) and Warrant
(Allocation to Warrant to be mutually
agreed upon by Company and Newco prior
to Closing) $3,037,641.00
Total Purchase Price $3,737,641.00
</TABLE>
8
MASTER FRANCHISE AGREEMENT
between
HSA PROPERTIES, L.L.C.,
a Delaware limited liability company
and
U.S. FRANCHISE SYSTEMS, INC.,
a Delaware corporation
DATED: As of March 27, 1996
<PAGE>
TABLE OF CONTENTS
Page
PRELIMINARY STATEMENT ...................................................... 1
ARTICLE I Definitions ................................................ 2
1.1 Definitions ................................................. 2
1.2 References ................................................... 9
1.3 Gender and Number............................................. 9
ARTICLE II Grant of License ........................................... 9
2.1 Master License................................................ 9
2.2 Assignment of Existing Licenses, Reservation Agreement and
Contracts ....................................................10
2.3 Future Hawthorn Licenses......................................11
2.4 Relationship to Hyatt Hotels..................................11
ARTICLE III Royalty Fees................................................13
3.1 HSA Royalties.................................................13
3.2 HSA Royalty Fees with Respect to Out of System Hawthorn
Licenses......................................................18
3.3 Other Fees Property of USFS...................................18
3.4 Time and Manner of Payment ...................................18
3.5 Books and Records; Audit......................................19
ARTICLE IV Operating Covenants.........................................20
4.1 Grant of Licenses.............................................20
4.2 Promotion and Enhancement of Hawthorn Brand ..................21
4.3 Compliance with Law...........................................22
4.4 Restrictive Covenants.........................................23
4.5 Managed Hotels................................................25
4.6 Reservations .................................................26
4.7 Foreign Rights................................................26
4.8 Additional HSA Covenants......................................27
4.9 Additional USFS Covenants.....................................27
4.10 Independent Contractors ......................................29
4.11 Hawthorn Personnel ...........................................30
4.12 Regarding the Ad Fund.........................................30
ARTICLE V Transfers...................................................31
5.1 Transfers by HSA..............................................31
5.2 Restrictions on Transfer by USFS .............................31
5.3 Permitted Transfers...........................................32
5.4 "Change of Control"...........................................33
5.5 Assumption by Transferee......................................34
ARTICLE VI Default and Termination.....................................34
6.1 Termination Standard .........................................34
6.2 Royalty Reduction Standard ...................................35
6.3 Default.......................................................36
6.4 Remedies......................................................37
6.5 Termination...................................................38
6.6 Continuing USFS Administration................................43
i
<PAGE>
ARTICLE VII Miscellaneous ..............................................44
7.1 Arbitration...................................................44
7.2 Representations and Warranties of HSA.........................45
7.3 Representations and Warranties of USFS .......................51
7.4 HSA and Rockwood Indemnity ...................................52
7.5 USFS Indemnities..............................................52
7.6 Provisions Relating to Intellectual Property,
Infringement and Restrictive Agreements.......................53
7.7 Indemnification Procedures ...................................55
7.8 Governing Law.................................................56
7.9 Successors and Assigns........................................56
7.10 Entire Agreement..............................................57
7.11 Confidentiality ..............................................57
7.12 Notices.......................................................57
7.13 Joint Drafting................................................58
7.14 Brokers.......................................................58
7.15 Severability .................................................58
7.16 Waiver of Obligations.........................................59
7.17 Rights of Parties Are Cumulative .............................59
ii
<PAGE>
MASTER FRANCHISE AGREEMENT
THIS AGREEMENT is dated as of March 27, 1996 and is by and between:
HSA PROPERTIES, L.L.C., ("HSA"),
a Delaware limited liability company
200 West Madison Street
39th Floor
Chicago, Illinois 60606
Attention: Michael C. Shindler
Telecopy No.: (312) 750-8084
- and -
U.S. FRANCHISE SYSTEMS, INC. ("USFS"),
a Delaware corporation
13 Corporate Square
Suite 250
Atlanta, Georgia 30329
Attention: Michael Leven
Telecopy No.: (404) 321-4482
PRELIMINARY STATEMENT
HSA, together with its Affiliates, is the owner of a brand of all-suites
hotels known as "Hawthorn Suites", has licensed the use of the Hawthorn Brand
in the operation of 17 currently existing hotels in the United States, and is
currently the direct owner of the Intellectual Property, the Existing
Licenses and the Contracts. USFS, directly and through its subsidiaries, is
in the business of franchising and licensing others to use certain
proprietary names, marks and other intellectual property in connection with
the operation of hotels and has a particular expertise in such business. HSA,
desiring to take advantage of the expertise of USFS in the hotel licensing
and franchising business, and in order to exploit further the commercial
value of the Hawthorn Brand, has agreed to enter into a master franchise
agreement with USFS, and USFS, desiring to take advantage of the commercial
potential in the Hawthorn Brand, has agreed to license the same from HSA, all
in accordance with the terms and provisions set forth in this Agreement.
NOW, THEREFORE, it is hereby agreed, by and between the parties hereto, as
follows:
<PAGE>
ARTICLE I
Definitions
1.1 Definitions. Except as otherwise herein expressly provided, and in
addition to any other definitions which may be herein contained, the
following terms, when used in this Agreement and in the foregoing Preliminary
Statement, shall have meanings set forth below:
"Ad Fund" shall mean the segregated fund required to be maintained by the
licensor under provisions of the Existing Licenses from which are to be
paid or reimbursed costs incurred by the Licensor in connection with the
Hawthorn reservation system, and in connection with certain advertising,
promotion and marketing expenses.
"Additional Hawthorn" shall mean any Hotel operated under the Hawthorn
Brand as part of the Hawthorn System which is other than an All-Suite
Hotel.
"Affiliate" shall mean, as to any Person, any other Person controlled by,
under common control with, or which controls, directly or indirectly, the
Person in question. The term "Control" for these purposes means the
ability, whether by direct or indirect ownership of shares or other equity
interest, by contract or otherwise, to elect a majority of the directors
of a corporation, to select the managing partner or member of a
partnership or limited liability company, or otherwise to select, or have
the power to remove and then select, a majority of those persons
exercising governing authority over an entity, and, in the case of a
limited partnership or limited liability company, shall mean the sole
general partner thereof, all of the general partners thereof, to the
extent each has equal management control or authority, or the managing
general partner or member or managing general partners or members thereof,
as appropriate (and in any event shall mean the ownership and control
[that is, the right to vote] of fifty percent (50%) or more of the
residual equity interest in an entity). The term "Affiliate" shall also
mean and include: (i) a trust of which the Person, or a direct or indirect
shareholder of such Person, is a trustee, or which has as its principal
income or residuary beneficiaries such Person, or any direct or indirect
shareholder of such Person, or members of the immediate family of such
Person, or direct or indirect shareholder; and (ii) any members of such
Person's immediate family, or the member of the immediate family of any
direct or indirect shareholder of such Person. For purposes hereof, shares
or other ownership interests held by a trust shall be deemed to be owned
pro rata by the income and residuary beneficiaries of such trust. Further,
the members of the immediate family of any Person shall include all
2
<PAGE>
collateral relatives of such Person having a common linear ancestor with
such Person, and the spouse or any former spouse of such Person or any of
such collateral relatives.
"Agreement" shall mean this Master Franchise Agreement, together with any
amendments or supplements hereto which may hereafter be entered into by
the parties.
"All-Suite Hotel" shall mean a hotel (i) at least 50% of whose guest
accommodations consist of Suites, or (ii) whose name includes the word
"suites", or both of the foregoing.
"Change of Control" shall have the meaning set forth in Section 5.4.
"Contracts" shall have the meaning set forth in Section 7.2(j).
"CPI Adjustment" shall mean an adjustment resulting from multiplying the
figure or number to be adjusted by a fraction (which in no event shall be
less than 1/1) the numerator of which shall be the CPI Index as of the
most recent date required under the provisions of this Agreement, the
denominator of which shall be the CPI Index in effect as of the comparison
year specified under the provisions of this Agreement.
"CPI Index" shall mean the Consumer Price Index, United States City
Average, All Items, All Urban Consumers (1982-84 = 100) as published from
time to time from by the United States Bureau of Labor Statistics. If the
foregoing Consumer Price Index shall, for any reason, be discontinued, or
shall otherwise no longer be available, the CPI Index shall be an index of
the purchasing power of the United States dollar as published by a
recognized government or private source agreeable to both HSA and USFS.
"Deemed Approval" shall have the meaning set forth in Section 2.4(b).
"Development Area" shall mean the entire world.
"Effective Date" shall mean the first to occur of (i) ninety (9O) days
after the date hereof; and (ii) the date on which USFS shall be legally
entitled to grant licenses for the use of the Hawthorn Brand in all fifty
(50) states of the United States.
"Existing Hotels" shall mean those hotels, or hotel prospects, listed and
described in Exhibit A hereto, all of which (i) are currently operated, or
under license to be included, under the Hawthorn System, and (ii) meet the
conditions and standards
3
<PAGE>
described in clauses (ii) and (iii) of the defined term "Qualified License
Agreement". In the case of an Existing Hotel which is to be constructed,
or, if completed, is to be converted to the Hawthorn System, the same
shall cease to be an Existing Hotel unless (i) in the case of a hotel to
be constructed, such hotel shall be completed and shall open for operation
as part of the Hawthorn System not later than fifteen (15) months after
grant of the Existing License; or (ii) in the case of a hotel in existence
as of the date of execution of the Existing License and fully completed
and constructed, such hotel shall be converted and become part of the
Hawthorn System not later than nine (9) months after grant of the Existing
License, it being understood and agreed that unless the conditions of this
sentence shall be complied with, any Existing Hotel shall cease to
constitute an Existing Hotel, and the corresponding Hawthorn License shall
cease to constitute an Existing License. The term "Existing Hotels" shall
also mean, (i) any Shaner Hotel, except to the extent provided in Section
3.1(a), and (ii) any hotel at any time on or after the Effective Date
constructed by HSA or any Affiliate of HSA on property currently owned by
an Affiliate of HSA in the city limits of Rosemont, Illinois and operated
as part of the Hawthorn System provided that construction thereof shall
commence within twelve (12) months of the Effective Date.
"Existing License(s)" shall mean the Hawthorn Licenses, together with all
related documentation (other than management contracts), relating to
Existing Hotels.
"Franchise Royalty Fee" shall have the meaning set forth in Section
3.1(c).
"Gross Rooms Revenues" shall have the meaning set forth in Section 3.1(c).
"Hawthorn Brand" shall mean the trade names "Hawthorn", "Hawthorn Suites"
and any other trade names, trademarks, copyrights and other Intellectual
Property now used, or which may hereafter be developed for use, in
connection with the operation of hotels under the "Hawthorn" brand.
"Hawthorn Brand Saturation" shall be deemed to occur as of the date on
which both of the following conditions shall have been satisfied: (i)
there shall be not less than one hundred seventy five (175) Hawthorn Brand
All-Suite Hotels subject to then valid and subsisting Hawthorn Licenses
(excluding, as of the date of determination, "Suspended Hotels" [as
defined in Section 3.1(d)], Additional Hawthorns and Existing Hotels), and
(ii) the total number of guestroom keys in all hotels included in the
number of hotels included for purposes of clause (i) shall be not less
than 11,375.
4
<PAGE>
"Hawthorn License" shall mean any license or franchise agreement granted
by USFS pursuant to the provisions of the Agreement (or, with respect to
Existing Hotels, by HSA or its Affiliate) for the use of the Hawthorn
Brand and for the participation by the licensee in the Hawthorn System.
"Hawthorn System" shall mean the Hawthorn Brand, together with the system
of operation now existing or hereafter developed with respect thereto,
including, without limitation, the system of licensing, reservations,
training, marketing and advertising, prototype plans, specifications and
working drawings, and operations, used or associated with the use and
operation of hotels operated under the Hawthorn Brand, and together with
the rights and interests of HSA under the Reservation Agreement and the
Contracts.
"Hotel Brand" shall mean any series of trademarks, trade names, copyrights
and other intellectual property used by USFS, or any of its Affiliates, in
connection with the use or operation of hotels operated under one or more
of the trade names or trademarks in question, excluding, however, the
Hawthorn Brand and the Microtel Brand.
"HSA Royalty Fee" shall have the meaning set forth in Section 3.1.
"Intellectual Property" shall have the meaning set forth in Section
7.2(d).
"Knowledge of HSA" shall mean the actual (as opposed to imputed or
constructive) knowledge of any of Nicholas J. Pritzker, Douglas G. Geoga,
Michael C. Shindler, Glen Miller, John Lyons, Paul White or Sara Hays.
"Limited Service Brand" shall mean a Hotel Brand wherein (i) the average
daily rate for all hotels of such Hotel Brand which, as of the date of
determination thereof, are opened and operating, is $49 or less, and (ii)
the hotels operated under such Hotel Brand have no Suites and no food or
beverage outlets. The figure of $49 appearing in the preceding sentence
shall be subject to CPI Adjustment based upon the difference between the
CPI Index as of the date of determination in comparison with the CPI Index
as of December 31, 1995. Average daily rate of a Limited Service Brand
shall mean the total Gross Rooms Revenues for the rental or occupancy of
rooms in all hotels bearing the Limited Service Brand divided by the
number of available rooms in the hotel or hotels in question, then further
divided by 365 and multiplied by the decimal equivalent of the percentage
of occupancy for such Brand on a chain-wide basis.
5
<PAGE>
"Managed Hotels" shall mean those of the Existing Hotels which, as of the
Effective Date, in addition to being operated as part of the Hawthorn
System, are actively managed by one or more Affiliates of HSA under
management contracts between said Affiliate, on the one hand, and the
owner of the hotel in question, on the other hand. The Managed Hotels, as
of the date hereof, are those of the Existing Hotels indicated with an
asterisk next to their names on Exhibit A hereto.
"Microtel" shall mean Microtel Inns and Suites Franchising, Inc., a
Georgia corporation, and currently a wholly owned subsidiary of USFS.
"Microtel Brand" shall mean the trade name "Microtel" and any other trade
names, trademarks, copyrights and other intellectual property now used, or
which may hereafter be developed for use, in connection with the operation
of hotels under the "Microtel" Brand.
"Microtel Suite Hotels" shall mean any Microtel Brand hotel constituting
an All-Suite Hotel and having construction costs of $40,000 per hotel room
or less, subject to CPI Adjustment (the calculation of the costs of
construction of a Microtel Suite Hotel to be in accordance with the
provisions set forth in the definition of Mid-Priced Brand).
"Microtel System" shall mean the Microtel Brand, together with the system
of operation now existing or hereafter developed with respect thereto,
including, without limitation, the system of licensing, reservations,
training and operations, used or associated with the use and operation of
hotels under the Microtel Brand.
"Mid-Priced Brand" shall mean a Hotel Brand relating to hotels which (i)
in the case of any hotel either under construction at the time of the
determination of its status or which had been newly constructed within the
preceding two years, had a construction cost of $50,000 per room or less;
or (ii) in the case of any hotel which, as of the date of determination of
its status, has been constructed for more than two years prior thereto,
had an estimated replacement cost of $50,000 per room or less. The number
$50,000 appearing above shall be subject to CPI Adjustment for the
difference in the CPI Index between the date of the determination of the
costs of construction or replacement cost as the case may be, of any hotel
in question, and December 31, 1996. In computing the cost of construction
or replacement cost there shall be included all so-called "hard" and
"soft" costs (meaning actual costs of construction, labor and materials,
costs of acquisition and installation of furnishings, fixtures and
equipment, initial quantities of inventory and working capital,
pre-opening marketing, staff hiring and training costs, utility
installations, construction
6
<PAGE>
period interest and other financing charges such as appraisal, legal and
title insurance, and design costs and fees), excluding, however, the cost
of land acquisition or leasing. If any portion of any particular hotel is
financed, in whole or in part, by means of personal property leases, the
cost of the leased components shall be included in hard costs based on the
purchase price of such items if purchased.
"Person" shall mean any natural person, or any corporation, partnership,
joint venture, limited liability company, business association, trust,
governmental agency or other entity.
"Primary Development Area" shall mean the United States and Canada.
"Qualified License Agreement" shall mean a Hawthorn License (other than an
Existing License) meeting the following conditions and standards: (i) the
licensed hotel shall be either an All-Suites Hotel having more than 40
Suites, or an Additional Hawthorn having a minimum number of rooms to be
agreed to between HSA and USFS; (ii) all application fees required by USFS
to have been paid prior to such date shall have been paid by the licensee
thereunder; (iii) the licensee shall have acquired and shall own or
control 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 all hotels
covered by Hawthorn Licenses which, except for the provisions of this
clause (iv) would constitute Qualified License Agreements, shall be equal
to or greater than fifty (50). If the average number of Suites in hotels
covered by Hawthorn Licenses which, except for the provisions of clause
(iv) of the preceding sentence would constitute Qualified Licenses, is
less than fifty (50), USFS shall have the right to specify which of said
Hawthorn Licenses shall constitute Qualified License Agreements, it being
the understanding that USFS shall have the right to select such of the
then existing Qualified License Agreements in its discretion which would,
in the aggregate, meet the requirements of the preceding sentence. In the
case of a Qualified License Agreement relating to a hotel to be
constructed, or, with respect to a completed hotel which is to be
converted to the Hawthorn System, such Hawthorn License shall cease to be
a Qualified License Agreement unless (i) in the case of a hotel to be
constructed, such hotel shall be completed and shall open for operation as
part of the Hawthorn System not later than fifteen (15) months after grant
of the Hawthorn License; or (ii) in the case of hotel in existence as of
the date of execution of the license and fully completed and constructed,
such hotel shall be converted and become part of the Hawthorn System not
later than nine (9) months after grant of the Hawthorn License, it being
understood and agreed that unless
7
<PAGE>
the conditions of this sentence shall be complied with, any Hawthorn
License formerly constituting a Qualified License Agreement shall cease to
constitute a Qualified License Agreement.
"Qualified Licensee" shall mean the licensee under a Qualified License.
"Required Consents" shall have the meaning set forth in Section 7.2(f).
"Reservation Agreement" shall mean that certain Reservation Agreement, of
even date herewith, between Regency Systems Solutions, Inc. and HSA.
"Restrictive Agreement(s)" shall have the meaning set forth in Section
2.4(b).
"Royalty Reduction Standard" shall have the meaning set forth in Section
6.2.
"Shaner Agreement" shall mean the Amended and Restated Agreement of
Limited Partnership of Shaner Hotel Group Limited Partnership, dated as of
December 19, 1995.
"Shaner Hotels" shall mean those hotels which, under the provisions of
Section 3.3 of the Shaner Agreement, require the Shaner Partnership to
convert or cause an affiliated partnership to convert certain hotels,
thereafter acquired by the Shaner Partnership, to Hawthorn Brand hotels,
all in accordance with the provisions of the Shaner Agreement. The term
"Shaner Hotel" shall not include any hotel, whether or not owned or
controlled by the Shaner Partnership, or any Affiliate of the Shaner
Partnership, unless such hotel shall have been included as part of the
Hawthorn System in satisfaction or in partial satisfaction of the
obligations of the Shaner Partnership under Section 3.3 of the Shaner
Agreement.
"Shaner Partnership" shall mean Shaner Hotel Group Limited Partnership,
the partnership organized and existing under the Shaner Agreement.
"Suite" shall mean a hotel guest accommodation consisting of at least two
distinct areas, separated from each other by a partition (which may
include, without limitation, a door, folding partition, partitioning wall
or other structure), one of which areas shall be intended primarily as a
sleeping area, and the other intended primarily as a sitting room which,
however, may include a convertible sofa or day-bed which may be used as a
sleeping accommodation. A Suite, for purposes of this Agreement, shall
constitute a single unit notwithstanding
8
<PAGE>
that the same may be partitioned and one or more of its component parts
sold or rented as a separate guest accommodation. In any count of Suites
in a hotel, a single sitting area may be considered with only one sleeping
area notwithstanding that, in the hotel configuration in question, it may
be combined with two or more sleeping areas to make more than one Suite
configuration.
"Termination Standard" shall have the meaning set forth in Section 6.1.
"UFOC" shall mean the Uniform Franchise Offering Circular, or such other or
additional written material required under applicable provisions of law to
be delivered to prospective licensees of the Hawthorn Brand in connection
with the granting of a Hawthorn License, together with the form thereof
actually delivered from time to time by USFS, and all attachments and
exhibits thereto.
1.2 References. All references in this Agreement to particular sections or
articles shall, unless otherwise expressly provided or unless the context
otherwise requires, be deemed to refer to the specific sections or articles
in this Agreement. In addition, the words "hereof", "herein", "hereunder", and
words of similar import, refer to this Agreement as a whole and not to any
particular section or article.
1.3 Gender and Number. All pronouns or variations used herein shall,
regardless of the pronouns actually used, be deemed to refer to the
masculine, feminine, neuter, singular or plural as the identity of the person
or persons may, in the context in which such pronoun is used, require.
ARTICLE II
Grant of License
2.1 Master License. Subject to the terms and conditions of this Agreement,
HSA does hereby grant to USFS the exclusive right and license in the
Development Area to (i) act as the franchisor of the Hawthorn System,
including the right to make changes in the Hawthorn System; (ii) grant
franchises and licenses for the development and operation of Hawthorn Brand
hotels; (iii) use the Hawthorn System in connection therewith; and (iv)
control the franchising, licensing, operations and development of Hawthorn
Brand hotels, all in accordance with the terms and conditions of this
Agreement, effective immediately and continuing until the earlier to occur of
(x) ninety-nine (99) years after the date hereof, and (y) the earlier
termination of this Agreement in accordance with the provisions hereof.
Licensees, including Affiliates of USFS, shall execute separate Hawthorn
Licenses for
9
<PAGE>
each Hawthorn Brand hotel. In addition to the foregoing, and subject to the
terms and conditions of this Agreement, HSA hereby further grants to USFS the
exclusive right to be franchisor of the Hawthorn Brand in connection with any
Additional Hawthorns, the specifications for which, if any, shall be prepared
by USFS; provided, however, that before licensing any party to utilize the
Additional Hawthorn, USFS shall have obtained the approval of HSA to (a) the
name of the Additional Hawthorn, and (b) the specifications for the lodging
product and the use of said name. Upon expiration of the ninety-nine (99)
year term hereof, and provided this Agreement shall not have been sooner
terminated in accordance with Section 6.5, HSA shall sell, assign, transfer,
convey, remise, release and transfer to USFS the entire Hawthorn System, and
all estate, right, title and interest of HSA therein, without further
consideration, with usual and customary warranties and representations
relating to HSA acts, in return for which USFS shall assume any liabilities
or obligations with respect thereto that relate to the period on and after
the date of such transfer (including, without limitation, liabilities arising
on or after said date under contracts existing as of such date).
2.2 Assignment of Existing Licenses, Reservation Agreement and Contracts.
HSA does hereby, effective on and as of the date hereof, and without further
consideration, sell, assign, transfer, set over and convey unto USFS (without
representation or warranty of any kind other than as herein expressly set
forth) all of the estate, right, title and interest of HSA in and to the
Reservation Agreement, the Contracts and all then Existing Licenses, the
foregoing to include, without limitation, the right to receive all royalties,
license fees, reservation and marketing fees and charges, and assessments
which may become due and owing, and which relate to hotel operations, on or
after the date hereof, subject only to the express provisions of this
Agreement. USFS shall, and does hereby, agree to assume and pay, perform and
discharge all of the liabilities and obligations of HSA under and with
respect to the Existing Licenses, the Reservation Agreement and the Contracts
that accrue and relate to events occurring, on or after the date hereof.
Notwithstanding the foregoing, HSA, for itself and its Affiliates, hereby
expressly reserves all of its rights and interests under and with respect to
(i) all management contracts relating to any Managed Hotels and all fees or
other amounts required to be paid thereunder; (ii) any direct or indirect
ownership or mortgage interests in any hotel now or at any time hereafter
operated as part of the Hawthorn System (such interests to include, without
limitation, direct ownership of such hotel or hotel mortgage, or the
ownership of stock, partnership or joint venture interests, interests in
limited liability companies and the like, in entities owning or controlling
any such hotels or such hotel mortgages); and (iii) any ownership interest of
HSA or any Affiliate of HSA in Hawthorn Suites Management Corp., or any other
Person engaged primarily in the business of hotel management, as opposed to
licensing or franchising.
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2.3 Future Hawthorn Licenses. Pursuant to the right, power and authority
granted to USFS hereunder, during the term of this Agreement all future licenses
of Hawthorn Brand hotels anywhere in the Development Area shall be granted (if
at all) solely and exclusively by USFS in accordance with the provisions of this
Agreement, and HSA, for itself and its Affiliates, agrees that it shall not at
any time, on or after the date hereof (and for so long as this Agreement shall
remain in effect), grant, or permit any other Person to grant, any further or
additional licenses of Hawthorn Brand hotels anywhere in the world.
2.4 Relationship to Hyatt Hotels. Hyatt Corporation ("Hyatt"), is a
corporation which, directly and through its subsidiaries and other Affiliated
entities, owns, operates and manages a chain of hotels under the "Hyatt" name
and provides to such Hyatt hotels and others related services such as
purchasing, computer services, technical assistance services, reservation
services, special events planning and other such services. Hyatt and HSA,
through contract and other direct and indirect means, are related entities,
both engaged in the lodging industry. Accordingly, the parties hereto have
agreed as follows with respect to Hyatt:
(a) Neither Hyatt, nor any Affiliates of Hyatt, shall be limited or
restricted (i) in its ownership, financing, operation, licensing,
franchising or management of the "Hyatt" chain of hotels, or any other
hotels (excluding only those operated under the "Hawthorn Brand") in
which Hyatt, HSA or their respective Affiliates may have an interest,
or for whom services are performed whether or not any such hotels may
compete with any Hawthorn Brand hotel, or (ii) in any of its other
business activities whether or not related to the lodging or
hospitality industries. Nothing in this Agreement (except the
provisions of this Section 2.4) shall be deemed in any way to relate
to Hyatt, the conduct of its business or its ownership or operation.
(b) Hyatt has heretofore entered into management contracts, leases and the
like containing covenants restricting the right of Hyatt, and its
Affiliates, to own or operate hotels within a restricted area (and,
usually, for a restricted period of time) defined in the governing
documents, some of which provisions, by their terms, restrict or may
be interpreted to restrict, the right or authority of HSA, or any
licensee of HSA, to own, manage, license or operate hotels within the
aforesaid restricted area (the "Restrictive Agreements"). HSA hereby
represents, warrants and covenants that (i) Schedule I hereto contains
a complete and accurate list of all Restrictive Agreements, describing
in reasonable detail the duration, geographic scope and nature of such
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restrictions, (ii) other than the Restrictive Agreements set forth in
Schedule I, there are no other Restrictive Agreements, and (iii)
neither HSA, nor Hyatt, nor any of their Affiliates shall enter into
any further Restrictive Agreements or agree to any amendments,
modifications, extensions or renewals of any existing Restrictive
Agreements which affect the Hawthorn System, without the prior written
consent of USFS, which may be withheld in its sole discretion.
Notwithstanding the previous sentence, neither HSA, nor Hyatt, nor any
of its Affiliates shall be liable or responsible to USFS, or any
Affiliate of USFS, or any licensee of USFS or its Affiliates, in the
event it shall be determined that any of the Restrictive Agreements
listed on Schedule I adversely affects the ability of USFS or its
Affiliates or licensees to own, manage, operate or license any
Hawthorn Brand hotel in the geographic areas identified on Schedule I.
Prior to entering into any Hawthorn License that could reasonably be
expected to violate any of the Restrictive Agreements listed on
Schedule I, USFS agrees that it shall provide written notice of its
intention to do so to HSA and HSA shall promptly (and in no event
later than five (5) days following receipt of such notice from USFS)
advise USFS whether or not the proposed Hawthorn License would violate
any of the Restrictive Agreements listed on Schedule I. If HSA advises
USFS that the proposed Hawthorn License would be in violation of a
Restrictive Agreement, USFS agrees that it shall not grant the
Hawthorn License until after expiration (if applicable) of the
Restrictive Agreement in question. If, however, HSA either advises
USFS in writing that no such Restrictive Agreement will be violated by
the proposed Hawthorn License, or fails to respond, either
affirmatively or negatively, to a notice from USFS as herein
contemplated within the aforesaid period of five (5) days, the same
shall be deemed a representation and warranty (the "Deemed Approval")
by HSA that no such proposed Hawthorn License will be in violation of
any Restrictive Agreement.
(c) Hyatt and each franchisee and licensee of USFS are intended and shall
be third party beneficiaries of the provisions of this Section 2.4.
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ARTICLE III
Royalty Fees
3.1 HSA Royalties. In consideration of the agreements herein contained,
and subject to the provisions of Section 6.4(c) below, USFS shall, throughout
the term of this Agreement, pay royalties ("HSA Royalty Fees") to HSA as
follows:
(a) Existing Hotels. One hundred percent (100%) of Franchise Royalty Fees,
plus one hundred percent (100%) of termination fees (if any are
actually received by USFS), paid to the licensor under all Existing
Licenses, or any extensions or renewals thereof. USFS shall have the
sole right in its discretion to determine whether any Existing License
shall be extended or renewed. For purposes hereof, an Existing License
shall be deemed to have been renewed or extended if, in addition to
any amendment of the Existing License extending its term, a new
Hawthorn License relating to the hotel in question shall be entered
into with the licensee under the Existing License, or any Affiliate of
the said licensee, or any Person (or Affiliate of any Person) who
shall have acquired the existing hotel subject to the then Existing
License. Solely for purposes of determining the amount of HSA Royalty
Fees, the Shaner Hotels shall not constitute Existing Hotels, but
shall be included in the rooms count of Hawthorn Brand hotels and HSA
Royalty Fees shall be determined in accordance with Section 3.1(b)
below, it being understood and agreed, however, that for all other
purposes of this Agreement, all Shaner Hotels shall be deemed Existing
Hotels.
(b) Hawthorn Brand Hotels. With respect to all Hawthorn Brand Hotels,
other than Existing Hotels, the amounts to be paid to HSA shall be one
hundred one and one-one hundredth percent (101.01%) of the following
amounts (all remaining amounts to be retained by USFS as its sole
property):
(1) Two-thirds (2/3rds) of Franchise Royalty Fees actually paid by each
Hawthorn Brand hotel which in the aggregate contain the first three
thousand six hundred (3,600) rooms; provided that if the Franchise
Royalty Fee (expressed as a percentage of Gross Rooms Revenues)
required to be paid under the applicable Hawthorn License is less
than four percent (4%), then the amount to be paid to HSA with
respect to such hotel (and only such hotel) shall be a portion of
the Franchise Royalty Fees actually paid by such hotel that is
equal to a fraction the numerator of which is two and two-
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thirds percent (2.67%) and the denominator of which is the stated
Franchise Royalty Fee (expressed as a percentage of Gross Rooms
Revenues) payable under the applicable Hawthorn License; plus
(2) One-half (1/2) of Franchise Royalty Fees actually paid by each
Hawthorn Brand hotel which in the aggregate contain the next three
thousand one hundred fifty (3,150) rooms; provided that if the
Franchise Royalty Fee (expressed as a percentage of Gross Rooms
Revenues) required to be paid under the applicable Hawthorn License
is less than four percent (4%), then the amount to be paid to HSA
with respect to such hotel (and only such hotel) shall be a portion
of the Franchise Royalty Fees actually paid by such hotel that is
equal to a fraction the numerator of which is two percent (2%) and
the denominator of which is the stated Franchise Royalty Fee
(expressed as a percentage of Gross Rooms Revenues) payable under
the applicable Hawthorn License; plus
(3) Three-eighths (3/8ths) of Franchise Royalty Fees actually paid by
each Hawthorn Brand hotel which in the aggregate contain the next
two thousand one hundred sixty (2,160) rooms; provided that if the
Franchise Royalty Fee (expressed as a percentage of Gross Rooms
Revenues) required to be paid under the applicable Hawthorn License
is less than four percent (4%), then the amount to be paid to HSA
with respect to such hotel (and only such hotel) shall be a portion
of the Franchise Royalty Fees actually paid by such hotel that is
equal to a fraction the numerator of which is one and one-half
percent (1.50%) and the denominator of which is the stated
Franchise Royalty Fee (expressed as a percentage of Gross Rooms
Revenues) payable under the applicable Hawthorn License; plus
(4) One-third (1/3rd) of Franchise Royalty Fees actually paid by each
Hawthorn Brand hotel which in the aggregate contain the next four
thousand four hundred ten (4,410) rooms; provided that if the
Franchise Royalty Fee (expressed as a percentage of Gross Rooms
Revenues) required to be paid under the applicable Hawthorn License
is less than four percent (4%), then the amount to be paid to HSA
with respect to such hotel (and only such hotel) shall be a portion
of the Franchise Royalty Fees actually paid by such hotel that is
equal to a fraction the numerator of which is one and one-third
percent (1.33%) and the denominator of which
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is the stated Franchise Royalty Fee (expressed as a percentage of
Gross Rooms Revenues) payable under the applicable Hawthorn
License; plus
(5) One-fourth (1/4th) of Franchise Royalty Fees actually paid by each
Hawthorn Brand hotel which in the aggregate contain all other hotel
rooms; provided that if the Franchise Royalty Fee (expressed as a
percentage of Gross Rooms Revenues) required to be paid under the
applicable Hawthorn License is less than four percent (4%), then
the amount to be paid to HSA with respect to such hotel (and only
such hotel) shall be a portion of the Franchise Royalty Fees
actually paid by such hotel that is equal to a fraction the
numerator of which is one percent (1%) and the denominator of which
is the stated Franchise Royalty Fee (expressed as a percentage of
Gross Rooms Revenues) payable under the applicable Hawthorn
License.
Notwithstanding the foregoing, (i) if the application of the proviso
contained in clauses (1) through (5) applicable to any particular Hawthorn
License is greater than one hundred percent (100%), that percentage,
applied to the amount actually received from the licensee under the
Hawthorn License in question shall be paid to HSA and USFS shall be
responsible for the difference between the amount actually paid by the
said licensee and the amount required to be paid in accordance with the
formula above set forth; and (ii) USFS shall have the right to provide to
licensees or franchisees under Hawthorn Licenses allowances or
royalty-free periods of not more than six (6) months during the initial
term of such Hawthorn License and during each extension or renewal of the
term thereof. HSA acknowledges and agrees that the provision of allowances
or royalty-free periods by USFS will result in a reduction of the amount
of Franchise Royalty Fees and HSA Royalty Fees and that the provision of
such allowances or royalty-free periods shall not be deemed to be a
reduction of the stated percentage royalty payable under the applicable
Hawthorn License for purposes of this Section 3.1 or any other section of
this Agreement.
(c) "Gross Rooms Revenues" and "Franchise Royalty Fees" Defined. For
purposes of this Section 3.1, and wherever else reference is made to
these terms, (1) the term "Gross Rooms Revenues shall be as defined in
the applicable Hawthorn License and, to the extent not inconsistent
therewith, generally shall mean all amounts paid by or on behalf of
hotel guests for the rental or occupancy of hotel rooms excluding (i)
charges for other hotel services or other forms of hotel revenues
including, without limitation, telephone charges, valet
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services, in-room entertainment, vending machines and store or
merchandise sales or rentals; and (ii) sales, use or occupancy taxes
relating solely to revenues for the use or occupancy of hotel rooms
charged to and collected directly from hotel guests; and (2) the term
"Franchise Royalty Fees" shall mean the franchise royalty fees actually
received by USFS from licensees under Hawthorn Licenses (or any
amounts actually received by USFS from licensees in lieu thereof),
less out-of-pocket collection costs, gross receipts taxes payable by
USFS thereon, and, with respect to Hawthorn Licenses relating to
hotels in any jurisdiction in which USFS incurred expenses under
Section 4.7 to protect its rights in the Intellectual Property in that
jurisdiction, amounts necessary to reimburse USFS for such expenses,
excluding, however, reservation, sales, marketing and advertising fees
and expenses, initial license fees or other origination charges,
franchisee assessments, termination fees and charges for specific
services such as training, use of prototype plans and the like.
(d) Rooms Count Determination. In determining whether Franchise Royalty
Fees are attributable to the first 3,600 rooms or to some subsequent
tranche of hotel rooms, the rooms count shall be arranged in
chronological order beginning with the Hawthorn License which, as of
the date of determination, represents the Hawthorn Brand hotel having
then been opened and operating as part of the Hawthorn System for the
longest time, and proceeding then in descending chronological order to
the hotel which, as of the date of determination, has most recently
been added to the Hawthorn System. The chronological order shall be
recomputed as of the end of each calendar quarter to reflect new or
additional Hawthorn Brand hotels added to the Hawthorn System since
the end of the preceding quarter, or the deletion of a former member
of the Hawthorn System either because of the expiration or earlier
termination of the applicable Hawthorn License.
Any Hawthorn Brand hotel (herein a "Suspended Hotel") whose operation,
as of the date of determination, has ceased (either by reason of
casualty, temporary condemnation, or construction or refurbishing
activities) shall, so long as the applicable Hawthorn License shall
remain in effect, be deemed part of the Hawthorn System, but shall not
be included in the rooms count until such time (if ever) as its
operations as part of the Hawthorn System are resumed. During the
period of time that a hotel constitutes a Suspended Hotel, it shall be
disregarded for purposes of determining room count or the
chronological ordering of Hawthorn Licenses. Operations of a Hawthorn
Brand hotel shall be deemed to have ceased
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(and the same shall constitute a Suspended Hotel) if, and for so long
as, two-thirds (2/3rds) or more of its rooms formerly available for
occupancy are not so available.
The parties acknowledge that it is unlikely that arranging Hawthorn
Licenses in chronological order will provide a cut off precisely at
the rooms count contemplated above. Accordingly, the dividing line for
a particular tranche shall be increased to that number of rooms
corresponding to the last Hawthorn License necessary to be included in
order to reach the required rooms count. For example, in determining
the Hawthorn Licenses relating to the first 3,600 rooms, if the total
rooms count for the chronologically oldest Hawthorn Licenses totals
3,500 hotel rooms, and if the next oldest Hawthorn License relates to
a hotel containing 150 rooms, the first tranche shall be deemed to
have been increased from 3,600 rooms to 3,650 rooms, the immediately
succeeding tranche shall be reduced accordingly, and similar increases
shall be made in each of the other tranches to the extent necessary in
order that the dividing line can correspond to a particular Hawthorn
License.
All calculations and determinations of rooms count shall be as of the
last day of the calendar quarter for which HSA Royalty Fees are being
calculated. With respect to any Hawthorn License granted a royalty
free period, the hotel with respect thereto shall be included in the
rooms count only as of the date when such royalty free period shall
expire.
(e) Defaulted Licenses. For purposes hereof, a "Defaulted License" shall
mean any Hawthorn License under which, as of the date of determination
of the amount of HSA Royalty Fees payable hereunder, the licensee has
failed to pay the full amount of Franchise Royalty Fees required to be
paid under such Hawthorn License for three (3) months (whether or not
consecutive) in any period of six (6) consecutive months, for reasons
other than the allowance or royalty-free period which may have been
granted to the licensee as contemplated by Section 3.1(b) above. Any
hotel operating under a Defaulted License shall, until such time as
the applicable Hawthorn License shall have been terminated, be deemed
part of the Hawthorn System, but shall not be included in the rooms
count until such time (if ever) as the licensee thereunder shall have
cured all previous payment defaults in full. So long as a Hawthorn
License constitutes a Defaulted License, it shall be disregarded for
purposes of determining rooms count or the chronological ordering of
Hawthorn Licenses. If the default is cured, in whole or in part, by an
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amendment to the applicable Hawthorn License changing the structure of
the Franchise Royalty Fees payable thereunder, or by waiver, in whole
or in part, of Franchise Royalty Fees required to be paid (as opposed
to settlement of a dispute as to the required amount), the said
Hawthorn License shall, for all purposes of this Article III, be
deemed a new Hawthorn License with an effective date as of the date of
any such amendment, modification or waiver.
(f) Terminated Licenses. Any Hawthorn License which, as of the date of
determination of rooms count, has been terminated, whether by USFS or
by the licensee thereunder, and regardless of whether the termination
is being contested, shall, for rooms count purposes, be deemed a
terminated Hawthorn License until the same shall have been
reinstituted, if at all, by court order or agreement of the parties,
and the provisions of Section 3.2 below shall govern the payments to
HSA with respect thereto. The foregoing shall apply to any Hawthorn
License that the hotel in question continues to operate as part of the
Hawthorn System during the pendency of any termination dispute.
3.2 HSA Royalty Fees with Respect to Out of System Hawthorn Licenses. For
purposes hereof, the term "Out of System Payments" shall mean any collections
of Royalty Fee Payments by USFS pursuant to a Hawthorn License which, as of
the date of determination, relates to a hotel or hotels not included, as of
such date, in the rooms count of Hawthorn Brand hotels, less out-of-pocket
collection costs and gross receipts taxes payable by USFS therefrom. With
respect to Out of System Payments, the amount of the HSA Royalty Fee shall be
equal to that amount which would have been payable to HSA hereunder had the
hotels to which the Out of System Payments relate been chronologically the
hotels most recently added to the Hawthorn System.
3.3 Other Fees Property of USFS. Except as expressly provided herein, all
fees, charges, payments, assessments or other amounts payable under any
Hawthorn License shall be payable to USFS and may be retained by USFS as its
sole property, including, without limitation, reservation or marketing fees,
joint advertising charges, training charges and the like, it being understood
and agreed that the provisions of this Article III shall relate solely to
Franchise Royalty Fees.
3.4 Time and Manner of Payment. Payment of HSA Royalty Fees shall be made,
in lawful money of the United States, not later than twenty (20) days
following the end of each calendar quarter and shall relate to Gross Rooms
Revenues and Franchise Royalty Fees for Hawthorn Brand hotels actually
realized by the licensee or collected by USFS, as the case may be, during the
preceding
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calendar quarter. All payments of HSA Royalty Fees shall be accompanied by a
report (the "Quarterly Report") setting forth, in reasonable detail, and with
respect to each separate Hawthorn License, (i) the amount of Gross Rooms
Revenue received by each such Hawthorn Brand hotel; (ii) the amount of
Franchise Royalty Fees received by USFS with respect to each Hawthorn
License; (iii) the number of hotel rooms in each Hawthorn Brand hotel as of
the end of the preceding quarter; (iv) the identity of each Suspended Hotel;
(v) the amount of collections by USFS of Out of System Payments during the
preceding quarter; and (vi) a chronological listing of all Hawthorn Licenses
in existence as of the last day of such calendar quarter. Each Quarterly
Report submitted to HSA in accordance with the provisions of this Section 3.3
shall be certified on behalf of USFS by its Chief Financial Officer as being
true and correct in all material respects. For all purposes hereunder, the
rooms count, the chronological ordering of Hawthorn Licenses, and the number
of available guest rooms, shall be made as of the last day of the calendar
quarter as to which each Quarterly Report shall relate.
3.5 Books and Records; Audit.
(a) USFS agrees that it shall maintain accurate books and records
sufficient, for all purposes, for the preparation of Quarterly Reports,
and to verify the information contained therein, and otherwise to
calculate the HSA Royalty Fees required to be paid by USFS to HSA pursuant
hereto. USFS agrees that it shall grant to HSA, and each of its agents,
accountants, employees and other authorized representatives executing a
customary confidentiality agreement in form and substance reasonably
satisfactory to USFS, full and complete access to all books and records of
USFS relating to the Hawthorn Brand, and the revenues and income received
therefrom by USFS. To the extent such information is contained in
electronic storage media, USFS agrees to provide, upon request of HSA and
at the sole cost and expense of USFS, hard copies of all such data. All
such materials shall be maintained by HSA strictly in accordance with the
provisions of Section 7.11 and shall be returned to USFS promptly upon
written demand therefor. Any investigation conducted by HSA or its
Affiliates, employees or agents shall be upon reasonable prior written
notice and during normal business hours and shall be conducted in a manner
so as to minimize disruption of the operations of USFS and its employees
and agents.
(b) HSA shall have the right once during each twelve (12) month period,
directly and through representatives appointed by it executing a customary
confidentiality agreement in form and substance reasonably satisfactory to
USFS, to audit the books and records of USFS for any period or periods
during the three (3) full fiscal years next preceding the date of such
audit that have not previously been so audited to the extent the same
relate to Hawthorn Licenses or other activities of USFS under or pursuant
to
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this Agreement, all at the sole cost and expense of HSA except as otherwise
hereinafter expressly provided. If, as a result of any such audit, it shall
be determined that the amount of HSA Royalty Fees theretofore paid to HSA
pursuant hereto is less than the amount required to have been paid, USFS
shall promptly remit the deficiency to HSA together with interest thereon at
the rate of Prime (as reported by The Wall Street Journal) plus two percent
(2%) per annum from the date on which payment was otherwise due to the actual
date of payment thereof. If, however, it shall be determined that the amounts
actually paid by USFS to HSA were greater than the amounts otherwise required
to be paid hereunder, the overpayment shall be credited against the next
payment of HSA Royalty Fees coming due by USFS to HSA without, however, any
interest thereon. In addition, if any such audit discloses an underpayment to
HSA for any one of the calendar quarters being audited of five percent (5%)
or more, USFS shall promptly reimburse HSA for all reasonable costs and
expenses incurred by HSA in conducting such audit for all quarters then being
audited.
ARTICLE IV
Operating Covenants
4.1 Grant of Licenses. USFS shall have sole, exclusive and complete
control and authority over all aspects of the commercial development of the
Hawthorn Brand and the franchising, licensing and operation of the Hawthorn
System, subject, however, to the express terms and provisions of this
Agreement. Without limiting the generality of the preceding sentence, USFS
shall have full control, authority and discretion (subject in all cases to
compliance with the express provisions of this Agreement) to (i) grant
Hawthorn Licenses, except that with respect to the Shaner Hotels, USFS shall
issue the same in accordance with, and subject to the terms and provisions
of, Section 4.9(g); (ii) make any election not to grant a Hawthorn License;
(iii) establish the terms and conditions of all Hawthorn Licenses granted by
USFS, including, without limitation, the amount of Franchise Royalty Fees,
initial license fees, assessments and other fees and charges required to be
paid by licensees, together with additional charges for specialized services
such as marketing and reservations which may not, however, be intended as
charges in lieu (in whole or in part) of Franchise Royalty Fees or exceed in
amount the reasonably estimated costs to USFS of providing such services;
provided, however, HSA shall have the right to approve any Franchise Royalty
Fee in excess of five percent (5%) of Gross Rooms Revenues or any application
fee in excess of the lesser of Seven Hundred Fifty Dollars ($750) per room or
Seventy-Five Thousand Dollars ($75,000); (iv) establish performance and
operating standards required to be met by licensees under Hawthorn Licenses;
(v) make any elections with respect to enforcement of Hawthorn Licenses
including elections to institute proceedings against licensees, terminate or
cancel licenses, or to
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waive or grant consents with respect to any Hawthorn License; (vi) develop
and implement standards of operations, construction and furnishing for
Hawthorn Brand hotels, except that such standards with respect to Existing
Hotels shall not be varied by USFS from those required under Existing
Licenses; (vii) establish the direction and strategy for development,
operations and design of the Hawthorn Brand; and (viii) make any elections to
advertise and promote the Hawthorn Brand. Notwithstanding the foregoing, in
the event HSA or any of its Affiliates shall at any time on or after the
Effective Date construct any hotel which it proposes to operate as part of
the Hawthorn System, USFS agrees to grant to HSA or its said Affiliate a
Hawthorn License on terms and conditions (including royalty, license and
other fees and charges) not less favorable to HSA or its said Affiliate than
those then being offered to other licensees, subject however to the
following: (x) the hotel being constructed shall meet all quality,
construction and operating standards then applicable to Hawthorn Brand
hotels; (y) the issuance of the Hawthorn License shall not violate any
restrictive agreements to which USFS shall then be a party or general "impact"
policy of USFS at the time; and (z) USFS shall not then have received, or is
not reasonably expecting to receive within ten (10) days, an application for
a Hawthorn License which would, if issued, be violated by the issuance to
HSA.
4.2 Promotion and Enhancement of Hawthorn Brand. USFS agrees to use all
reasonable efforts to promote the Hawthorn Brand and to maximize Franchise
Royalty Fees. In promoting the Hawthorn Brand, and in the development and
operation of the Hawthorn System, USFS agrees that it will use commercially
reasonable efforts to preserve the good will of the Hawthorn Brand and the
Hawthorn System. Accordingly, USFS agrees that it shall at all times
faithfully, honestly and diligently perform its obligations hereunder and
continuously exert its reasonable efforts to promote and enhance the
development and operation of Hawthorn Brand hotels and the Hawthorn System
within the Development Area and use reasonable efforts to seek out and
recruit high quality licensees. At all times, USFS will use reasonable
efforts to seek to maintain a high quality standard applicable to the
Hawthorn Brand and that it will not change the standards relating to
operations, construction and furnishing required by Existing Hotels beyond
what is currently required under Existing Licenses. Upon written request from
time to time from HSA (not to exceed once per year), USFS agrees to disclose
to HSA all ideas, concepts, methods, techniques, products and services
relating to the development and operation of Hawthorn Brand hotels conceived
or developed by USFS or its Affiliates, or by any licensees of Hawthorn Brand
hotels during the Term, all of which shall be and become part of the Hawthorn
System, shall be covered by the license granted hereunder, shall be held
confidential by HSA throughout the term hereof, and shall not be used for any
other purpose.
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Neither HSA nor any of its Affiliates shall have any liability or obligation
to incur any costs or expenses in connection with promotion of the Hawthorn
Brand. USFS shall, at all times, have not less than fifteen (15) full time
sales persons (including corporate and regional supervisory personnel)
seeking to sell Hawthorn Licenses and licenses for Microtel Brand Hotels. If
USFS engages in franchising or licensing of either or both of a Limited
Service Brand, or licensing or other activities in non-lodging industries, it
shall engage in such businesses only with sales persons and corporate and
regional supervisory personnel who are not involved in the sales or promotion
of the Hawthorn System or the Microtel System, or, if such personnel are
involved with the Hawthorn Brand or the Microtel Brand, USFS shall increase
the number of personnel engaged in the selling of franchises or licenses to a
sufficient number so that there shall, on a full time basis, at all times be
the equivalent of 15 persons devoted to the sales and promotion of licenses
relating to the Hawthorn Brand and the Microtel Brand. In determining the
full time equivalence of personnel, HSA and USFS shall meet from time to time
to assess the number of persons and their deployment to determine compliance
with the requirements of this Section. Any decision by USFS regarding the
number of personnel constituting fifteen full time equivalents shall be
subject to approval of HSA, not to be unreasonably withheld, until such time
as Hawthorn Brand Saturation shall have been achieved, after which the
decisions regarding full time equivalents shall be within the discretion of
USFS. If any required sales or supervisory positions shall become vacant,
USFS shall have not more than ninety (90) days in which to fill such
position.
Without in any way limiting the generality of any of the provisions of
this Section 4.2, USFS agrees that it shall spend not less than One Hundred
Thousand Dollars ($100,000) in each of 1996 and 1997 for hotel marketing
expenditures (other than payroll and payroll related expenses) to promote the
Hawthorn Brand. For purposes of the preceding sentence, marketing
expenditures shall include only direct expenses incurred in connection with
marketing activities, such as advertising, sales brochures and the like, but
shall not include any general or corporate overhead (or allocations thereof)
or costs attributable to specific Hawthorn Licenses or proposed or
prospective Hawthorn Licenses such as the cost of negotiating Hawthorn
Licenses, preparation of any UFOC, required franchise filing, registration or
reporting fees, or sales or other commissions paid in connection with the
execution of delivery of any Hawthorn License.
4.3 Compliance with Law. In all of its activities under or pursuant to
this Agreement, USFS shall, at its sole cost and expense, comply in all
material respects with applicable provisions of law; provided, however, the
foregoing shall not apply unless the failure to comply with law has a
material adverse effect on the financial condition of the Hawthorn System, or
unless the failure
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to comply by USFS constitutes a material violation of law. Without in any way
limiting the generality of the foregoing, USFS shall (i) prepare and deliver,
on a timely basis, all required UFOCs and related materials required to be
delivered to prospective franchisees or licensees, and any required
supplements or amendments thereto (subject to prior written approval of HSA
which shall not be unreasonably withheld, conditioned or delayed); (ii) with
respect to any Existing Licenses, where required by law in the reasonable
opinion of HSA, prepare and deliver to the franchisees and licensees
thereunder (subject to prior written approval of HSA which shall not be
unreasonably withheld, conditioned or delayed) supplements or amendments to
the UFOCs and other required materials theretofore delivered to said
licensees or franchisees describing the transfer of the Existing License in
question to USFS, making additional disclosures as required by law; and (iii)
make all reports and filings required under applicable law except where the
failure to comply with any of the foregoing would not have a material adverse
effect on HSA or the Hawthorn System; provided, however, HSA shall have no
such approval right at such time as Hawthorn Brand Saturation has been
reached.
4.4 Restrictive Covenants.
(a) Subject to the limitations and conditions hereinafter set forth, USFS,
for itself, and on behalf of any present or future Affiliate of USFS, hereby
agrees that neither USFS nor any such Affiliate shall (A) for a period of two
(2) years from the Effective Date, engage in any licensing or franchising
business of any kind or manner whatsoever excepting only the licensing or
franchising of (i) Microtel Brand hotels (including, without limitation,
Microtel Suite/Hotels); (ii) Hawthorn Brand hotels in accordance with the
provisions hereof; (iii) Limited Service Brand hotels; and (iv) commencing
one (1) year after the Effective Date (and not prior thereto) licensing or
franchising of business operations which do not include hotel or lodging
facilities; and (B) without complying with Section 4.4(d), license or
franchise a Hotel Brand relating to All Suites Hotels during the term of this
Agreement and for a period of six (6) months thereafter. With respect to
Mid-Priced Brand hotels, the restriction above provided shall restrict any
announcements with respect to the proposed licensing activity, preparation
(or commencement of preparation) of any UFOC with respect thereto or
negotiation with prospective licensees with respect to licenses or franchises
to be issued, until after the occurrence of the second anniversary of the
Effective Date. The provisions of clause (B) above shall survive the
termination of this Agreement.
(b) The parties hereto acknowledge that the restrictions set forth in
Section 4.4(a) above are reasonable in scope and time and are necessary in
order that HSA can be reasonably assured of achieving the benefits it intends
to achieve by entering into this Agreement. The parties further acknowledge
that any breach of the
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foregoing restrictions by USFS shall be material, and will result in material
damage to HSA which cannot reasonably be remedied solely by the payment of
money damages. Accordingly, USFS, for itself and on behalf of any Person now
or at any time hereafter constituting or becoming an Affiliate of USFS, that
HSA shall be entitled to appropriate equitable relief in connection with any
breach or threatened breach of provisions of Section 4.4(a) above, USFS, for
itself and on behalf of any of its aforesaid Affiliates, hereby waiving the
requirement of the posting of any bond or other surety in connection with any
such proceedings.
(c) Nothing herein contained shall limit or restrict the right of USFS or
any Affiliate of USFS to license or franchise the Microtel Brand in
connection with Microtel Brand hotels (including, without limitation,
Microtel Suite Hotels).
(d) Notwithstanding the foregoing provisions of this Section 4.4, but
subject to the provisions of this subsection (d), USFS shall be relieved of
all of its obligations under Section 4.4(a) at such time as Hawthorn Brand
Saturation shall have been achieved. If at any time during the term of this
Agreement USFS intends to license or franchise a Hotel Brand relating to an
All Suites Hotel in violation of the provisions of Section 4.4(a) but in the
reliance on provisions of the preceding sentence, it shall so notify HSA
thereof in writing not less than fifteen (15) days prior to the execution of
any franchise or license setting forth (i) the name of the Hotel Brand to be
licensed, (ii) the location of the initial licensed hotel or hotels, (iii) a
description in reasonable detail of the Hotel Brand in question including its
intended marketing niche (such as, the anticipated average daily rate, the
anticipated costs of construction of hotels of the Hotel Brand in question,
the facilities expected to be included in hotels of the Hotel Brand, such as
food and beverage outlets, meeting space, recreational and banquet
facilities, and the like); and (iv) the assessment of USFS of the competitive
impact of the Hotel Brand in question on the Hawthorn Brand. Such information
shall be maintained strictly in accordance with Section 7.11 and shall be
used by HSA solely for purposes of evaluating whether to exercise its rights
under this Section 4.4(d) and for no other purpose.
Upon receipt of any such written notice from USFS, HSA shall have the
right, by written notice (the "Sale Notice") to USFS delivered at any time
within thirty (30) days after receipt of the aforesaid notice from USFS, and
subject to the provisions of this Section 4.4(d), to cause USFS to purchase
the "Hawthorn Assets" for the "Selling Price" (both of the above-quoted terms
being as defined in subsection (e) below). If HSA fails to deliver the Sale
Notice within the aforesaid period of thirty (30) days, its right to cause
the sale of the Hawthorn Assets to USFS pursuant to the provisions of this
Section 4.4(d) shall terminate. If, however, HSA shall deliver the Sale
Notice on a timely basis as herein contemplated, the delivery thereof shall
constitute a binding
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agreement between HSA and USFS for the purchase and sale of the Hawthorn
Assets at the Selling Price and upon the terms and conditions set forth
below, provided that, within fifteen (15) days after delivery of the Sale
Notice, USFS may, by written notice to HSA, withdraw its intention to license
or franchise a Hotel Brand relating to All-Suites Hotels, in which case it
shall not be obligated to purchase the Hawthorn Assets as provided in this
Section 4.4(d). If USFS shall subsequently intend to license or franchise a
Hotel Brand of All-Suites Hotels, it shall do so only after once again
complying with this Section 4.4(d).
Any sale of the Hawthorn Assets made pursuant hereto shall be upon the
following terms and conditions: (i) closing shall take place sixty (60) days
after delivery of the Sale Notice; (ii) the sale shall be with customary
representations and warranties by HSA which, where appropriate, will be to
the Knowledge of HSA, including, without limitation, a warranty by HSA that
the Hawthorn Assets being transferred to USFS are free and clear of any
liens, claims, charges or encumbrances of any kind or nature; (iii) any
required disclosures to licensees, amendments to UFOCs, or other reports,
notices, filings or registrations required in connection with the sale of the
Hawthorn Assets shall be the sole responsibility, and the sole cost, of USFS;
(iv) HSA Royalty Fees, and any other amounts required to be paid pursuant to
the provisions of this Agreement, shall be prorated as of the closing date
and paid promptly after collected; (v) this Agreement shall, concurrently
with the closing, terminate, except that all indemnities shall continue with
respect to events occurring or matters arising prior to the closing date; and
(vi) USFS shall indemnify, defend (with counsel selected by HSA) and hold HSA
and its Affiliates completely free and harmless of and from any and all
manner of all claim, loss, damage, liability or expense (other than transfer
taxes) in any way relating to the Hawthorn System arising, accruing and
relating to events occurring from and after the closing date of such sale.
(e) For purposes hereof, the term "Hawthorn Assets" shall mean and include
any and all right, title and interest of HSA and its Affiliates in and to the
assets relating to the Hawthorn Brand and the Hawthorn System (including the
Intellectual Property), but shall exclude any direct or indirect interest of
HSA, or any of its Affiliates, in any of the hotels which are operated as
part of the Hawthorn System, or in, to or under any management agreements
relating to any such Hawthorn Brand hotels.
For purposes hereof, the term "Selling Price" shall mean ten times the
amount of HSA Royalty Fees earned or accrued by HSA hereunder during the
twelve full calendar months next preceding the date of the delivery by HSA of
the Sale Notice.
4.5 Managed Hotels. HSA and its Affiliates shall continue to have the
right to manage and operate any hotels, including
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specifically but without limitation, Hawthorn Brand hotels, and any other
hotels now or at any time hereafter managed or operated by HSA or its
Affiliates. HSA and its Affiliates shall have no obligation or liability to
include any hotels hereafter managed by HSA or its Affiliates in the Hawthorn
System, and USFS shall have no liability or obligation to grant any Hawthorn
License to any hotels managed or operated by HSA or its Affiliates.
Management fees payable under any management agreements with HSA or its
Affiliates shall be the sole property of HSA, and neither the management
agreements nor the income therefrom, shall be included as part of the
Hawthorn System.
4.6 Reservations.
(a) The Hawthorn System includes the right of all Hawthorn System hotels
to participate in the reservation system under Reservation Agreement. The
assignment of the Hawthorn System to USFS as hereinabove provided includes
all right, title and interest of HSA under the Reservation Agreement, and the
assumption by USFS of the obligations and liabilities of HSA thereunder
arising, accruing and relating to events occurring on and after the date
hereof, it being the understanding and agreement of the parties hereto that
any consent of third parties to the transfer and assignment of the
Reservation Agreement shall have been obtained prior to the date hereof.
Charges for reservation services shall be paid by licensees in accordance
with the Hawthorn License to be entered into between USFS and the proposed
licensee, except that charges for Existing Hotels shall be made in accordance
with the Existing Licenses.
(b) Subject to the provisions of the Reservation Agreement to be assumed
by USFS, and subject to the provisions of the various Hawthorn Licenses, USFS
shall have the right, at its discretion, to change the provisions applicable
to the reservation system, the reservation provider, or any other aspects of
the reservation system in its discretion.
4.7 Foreign Rights. HSA has heretofore advised USFS, and USFS does hereby
acknowledge, that trademark, trade name and copyright registrations have been
filed and obtained by HSA only in the jurisdictions referred to in Schedule
7.2(d)(3). In the event USFS elects to license Hawthorn Brand hotels in any
jurisdiction within the Development Area in which Intellectual Property
registration has not been obtained, USFS shall have the right, at its
expense, to make or cause HSA to make such filings or registrations as it
deems necessary in order to protect the rights of USFS and HSA in the
Intellectual Property in the jurisdiction in which Hawthorn Licenses are to
be granted, it being understood and agreed that any such registrations or
filings shall be for the benefit of, and shall, upon the effectiveness
thereof, constitute part of, the Hawthorn System. Throughout the term of this
Agreement HSA agrees that it shall not, and shall not license or
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authorize any other Person to, grant licenses either within or outside the
Development Area relating to Hawthorn Brand hotels, and USFS agrees that it
shall not license or franchise the Hawthorn Brand in any such other
jurisdictions except as part of the Hawthorn System and in accordance with
the provisions of this Agreement.
4.8 Additional HSA Covenants. In addition to each of its other covenants,
agreements and obligations herein set forth, HSA, for itself and its present
and future Affiliates, hereby covenants and agrees as follows:
(a) At the request of USFS during the term of this Agreement HSA shall
share with USFS the management and other expertise and tactics
specific to the Hawthorn Brand which it has accumulated in licensing
and operating the Hawthorn System.
(b) For as long as this Agreement is in effect, HSA shall, and shall cause
its Affiliates to, cooperate with USFS, its Affiliates and their
representatives and counsel, in the preparation of any documents or
other materials in connection with the Hawthorn System that may be
reasonably required by any governmental authority, including, without
limitation, any filings with federal or state franchise authorities.
All reasonable out-of-pocket costs or expenses incurred by HSA in
complying with the provisions of this Section 4.8 shall be paid or
reimbursed to HSA by USFS upon presentation of proper documentation
therefor.
(c) For as long as this Agreement is in effect, HSA will promptly notify
USFS in writing upon becoming aware of any investigations, lawsuits,
claims or proceedings relating to the Hawthorn System that, after the
date hereof, are commenced or threatened against HSA or the Hawthorn
System.
4.9 Additional USFS Covenants. In addition to each of its other covenants,
agreements and obligations herein set forth, USFS, for itself and its present
and future Affiliates, hereby covenants and agrees as follows:
(a) For so long as this Agreement is in effect, USFS shall promptly notify
HSA in writing upon becoming aware of any investigations, lawsuits,
claims or proceedings relating to the Hawthorn System that, after the
date hereof, are commenced or threatened against or with respect to
the Hawthorn System.
(b) Attached hereto as Exhibit B is a form of license agreement
substantially in the form which USFS proposes
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to use in connection with its franchising activities hereunder and
which shall constitute future Hawthorn Licenses. HSA hereby approves
the form of License Agreement substantially in the form attached
hereto as Exhibit B. All ancillary agreements and documents, including
operating and other relevant standards relating to the Hawthorn Brand,
shall be subject to the approval of HSA, which approval shall not be
unreasonably withheld or delayed. The form of license agreement shall
not be altered in any material respect by USFS without the approval of
HSA, which approvals shall not be unreasonably withheld or delayed.
The provisions of this Section 4.9(b) shall terminate and be of no
further force or effect, on and after Hawthorn Brand Saturation.
(c) USFS or its Affiliates shall diligently and continuously monitor, and
strictly enforce, compliance by licensees with the provisions of
Sections 3(A), 3(B), 5(C) and 1O(D) of the form of the Hawthorn
License attached hereto as Exhibit B.
(d) USFS, by itself or through its Affiliates, or as part of the
provisions of Hawthorn Licenses, agrees to maintain insurance
necessary to comply with all legal requirements concerning insurance
and to maintain general liability insurance against claims for bodily
and personal injury, death and property damage caused by or occurring
in connection with the conduct of USFS's business pursuant to this
Agreement. Such insurance shall be maintained under one or more
policies of insurance containing minimum liability and types of
coverages appropriate in the Development Area. Each policy of general
liability insurance shall name HSA, and such of the Affiliates of HSA
as shall be designated in writing by HSA, as additional insureds, such
coverage to contain a waiver of all subrogation against HSA, its
Affiliates, and their successors and assigns. To the extent of any
extra costs incurred by USFS by reason of adding HSA as an additional
insured, the amount of such extra costs shall be borne and paid for by
HSA. USFS shall furnish to HSA annually a copy of the certificate of
insurance or other evidence requested by HSA confirming that such
insurance coverage is in force. HSA shall have no right or obligation
to prescribe types or amounts of insurance coverage and shall have no
liability or obligation to USFS, or any third party, for failure to do
so.
(e) USFS or its Affiliates shall maintain and preserve at its principal
office full, complete and accurate records and reports pertaining to
the development and operation of the Hawthorn System and the
performance by USFS of its obligations hereunder.
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(f) USFS shall not use the Intellectual Property as part of any corporate
name or with any prefix, suffix, or other modifying words, terms,
designs or symbols, or in any modified form, nor may USFS use any of
the Intellectual Property in connection with the performance or sale
of any other services or products or in any other manner not expressly
authorized hereunder or otherwise in writing by HSA. HSA hereby
approves of the corporate name "Hawthorn Suites Franchising Inc." by
USFS or any subsidiary of USFS.
(g) USFS agrees that it shall grant Hawthorn licenses as required from
time to time under the terms of the Shaner Agreement. All such
licenses granted in satisfaction or partial satisfaction of the
obligations of the Shaner Partnership under the Shaner Agreement shall
constitute Existing Licenses (except as otherwise provided by Section
3.1 above). Notwithstanding the foregoing, in the event the Shaner
Partnership shall apply for or request the issuance of a Hawthorn
License for a hotel which does not, for any reason, comply with the
requirements of the Shaner Agreement, USFS shall have the sole and
exclusive right to determine whether or not to grant the Hawthorn
License being requested. If a Hawthorn License is issued by USFS in
accordance with the provisions of the preceding sentence, the same
shall constitute a Shaner Hotel only if HSA, in its discretion,
determines that the same constitutes a Shaner Hotel and that,
accordingly, the Shaner Partnership has fulfilled, to that extent, its
obligation under the Shaner Agreement. If it is determined by HSA that
a Hawthorn License granted to the Shaner Partnership constitutes a
Shaner Hotel, said Hawthorn License shall constitute an Existing
License for purposes hereof, except as otherwise provided in Section
3.1 above. If, however, the hotel subject to the Hawthorn License is
not considered a Shaner Hotel then the Hawthorn License so granted
shall in no event, and for no purpose, be deemed an Existing License
but simply a Hawthorn License issued in accordance with the provisions
of this Agreement.
4.10 Independent Contractors. It is understood and agreed by the parties
hereto that this Agreement does not create a fiduciary relationship between
HSA and USFS, that HSA and USFS are and shall be independent contractors, and
that nothing in this Agreement is intended to make either party a general or
special agent, joint venturer, partner or employee of the other for any
purpose. Except as expressly authorized hereunder or in writing, neither HSA
nor USFS shall make any express or implied agreements, warranties, guarantees
or representations, or incur any debt, in the name of or on behalf of the
other, or represent that their relationship is other than franchisor and
sub-franchisor, and neither HSA nor USFS
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shall be obligated by or have any liability under any agreements or
representations made by the other that are not expressly authorized in
writing.
4.11 Hawthorn Personnel. It is hereby understood and agreed that USFS
shall have the right, at its option (but in no event shall be obligated) at
any time on, prior to or after the Effective Date, to solicit any HSA
employees for employment by USFS and no such solicitation or employment by
USFS shall violate any rights of HSA or its Affiliates, and shall be without
liability to USFS or its Affiliates.
4.12 Regarding the Ad Fund.
(a) Concurrently with the execution and delivery hereof, or as soon
thereafter as reasonably practicable, HSA shall deliver, or cause to be
delivered, to USFS, or as USFS shall direct, the entire remaining cash
balance in the Ad Fund. USFS shall, or shall cause its Affiliate, to accept
such deposit and to hold, operate and administer the Ad Fund, receive
deposits thereto, and make expenditures therefrom, all in accordance with the
provisions of the Existing Licenses. USFS also agrees that it shall, or shall
cause its Affiliate, in all future Hawthorn Licenses granted by USFS or its
Affiliates, to include appropriate provisions regarding the Ad Fund
consistent with, and in accordance with, the provisions of the Existing
Licenses. Any approval herein contained with respect to the form of the
Hawthorn License to be used by USFS or its Affiliates in connection with
licensing and franchising Hawthorn Brand hotels is conditioned upon, and on
the express understanding of the parties that, all such Hawthorn Licenses
shall contain appropriate provisions regarding Ad Fund as currently required
under the Existing Licenses.
(b) As soon as reasonably practicable after the date hereof, HSA shall
deliver, or cause to be delivered to USFS, copies of all annual reports
heretofore prepared with respect to the Ad Fund as required by the Existing
Licenses. HSA agrees that it shall provide such other information as may be
reasonably requested by USFS to enable it to prepare the annual reports for
1996. USFS agrees that it shall, out of funds available in the Ad Fund, pay
all accrued liabilities as disclosed on the Accounting (as defined below) as
and when requested by HSA. Any request for payment by HSA shall constitute a
certification by HSA that the amounts being requested are due and payable,
and that payment thereof from the Ad Fund represents an appropriate use of
such funds in accordance with the provisions of the Existing Licenses.
(c) HSA hereby represents and warrants to USFS and its Affiliates that all
amounts received and expended from the Ad Fund with respect to matters
arising or events occurring prior to the date hereof have been properly
received and expended or accrued in accordance with the provisions of the
Existing Licenses, that all
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information contained in the accounting of the Ad Fund's receipts,
expenditures and liabilities heretofore delivered to USFS (the "Accounting")
is true and correct in all material respects for all periods shown except
that amounts for March 1996 are HSA's good faith estimate of actual amounts,
and that all information in any annual report furnished by HSA to USFS
hereunder is true and correct in all material respects, that HSA or its
Affiliates, as appropriate, have administered the Ad Fund in all respects in
compliance with the provisions of the Existing Licenses, and that there are
no unreimbursed loans or advances to the Ad Fund by HSA or any of its
Affiliates other than as set forth in the Accounting and that there are no
commitments relating to the Ad Fund for any period after the date hereof.
(d) USFS covenants and agrees that it shall pay or reimburse HSA, and each
of the Affiliates of HSA, any loss, cost, damage, liability or expense which
HSA or any of its said Affiliates may suffer and incur by reason of the
administration of the Ad Fund after the date hereof and during the term of
this Agreement (except with respect to matters for which USFS may be entitled
to indemnity hereunder).
(e) The parties hereto do hereby acknowledge that as of the date hereof
there remains an outstanding and unreimbursed advance due from the Ad Fund to
HSA, or an Affiliate of HSA, in the amount of approximately $169,000, subject
to adjustment with respect to estimated amounts for the month of March 1996
but in no event to exceed $179,000. USFS agrees that it shall pay or
reimburse HSA for the outstanding balance of such advance less the amount of
any receivables reflected as assets on the Accounting ($154,489 in the
aggregate) that have not been collected by December 31, 1996 without resort
to litigation or extraordinary collection activity, without interest (such
interest being hereby expressly waived and released by HSA for itself and on
behalf of each of its Affiliates) out of funds available from time to time in
the Ad Fund and in any event shall repay the full amount of the advance, if
not sooner paid, not later than December 31, 1996.
ARTICLE V
Transfers
5.1 Transfers by HSA. HSA shall not, without the prior written consent or
approval of USFS, sell, transfer, assign, pledge, encumber, hypothecate, set
over or convey any of its rights, obligations or interests hereunder or in
the Intellectual Property or any part thereof or interest therein.
5.2 Restrictions on Transfer by USFS. Except as otherwise herein expressly
provided, USFS shall have no right, power or authority to sell, assign,
transfer, pledge, encumber, hypothecate, set over or convey (any of the
foregoing being herein collectively referred to as a "Transfer") all or any
part of its right, title or interest in, to or under this Agreement, or in or
to the Hawthorn Brand or the Hawthorn System, or any part or interest
therein, either directly or indirectly, without the express written approval
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of HSA (which approval may be granted or withheld in the sole discretion of
HSA). It is the intention of the parties that there shall be no indirect
Transfer of this Agreement by USFS as a result of a "Change of Control" (as
hereinafter defined) of USFS under any circumstances in which a direct
Transfer of this Agreement would be prohibited or restricted. Accordingly,
the provisions of this Article V with respect to any Transfer by USFS shall
be equally applicable to a Change of Control, and all references herein to
Transfers of this Agreement shall apply equally to any such Change of
Control. Any Transfer made in violation of any of the provisions of this
Section 5.2, or any other provisions of this Article V, shall be void, except
as otherwise hereinafter provided.
5.3 Permitted Transfers. Notwithstanding the foregoing, the following
shall constitute "Permitted Transfers" which may be made by USFS without the
prior written consent of HSA and free of any restrictions on Transfer set
forth in Section 5.2 (but subject to any restrictions, conditions or
limitations hereinafter set forth):
(a) Any Transfer made by USFS to any wholly-owned subsidiary of USFS, it
being understood and agreed, however, that no such Transfer to a
wholly-owned subsidiary shall, anything herein contained to the
contrary notwithstanding, relieve USFS of any of its liabilities,
obligations, duties or responsibilities hereunder; or
(b) The granting of any sub-license by USFS to any wholly-owned
subsidiary of USFS so long as the term of such sub-license shall not
extend beyond the date on which any such subsidiary shall cease to be
a wholly-owned subsidiary of USFS, it being understood and agreed,
however, that in the event USFS shall grant a sub-license to any such
subsidiary, such sub-license shall, for all purposes of this
Agreement, be disregarded and shall not constitute a Hawthorn License;
only licenses granted by said wholly-owned subsidiary pursuant to its
authority under any sub-license shall be deemed to constitute a
Hawthorn License for purposes hereof; or
(c) Any grant of, and exercise of rights under, a security interest in
this Agreement or any of the Hawthorn Licenses given as security for
any indebtedness of USFS or any of its subsidiaries for money borrowed
by USFS or any of its subsidiaries from the Person secured by such
security interest; or
(d) Any Transfer made by USFS at such time as the Royalty Reduction
Standard shall be in effect and shall have been satisfied by USFS; or
(e) Any transfer made at such time as any class of "equity securities" of
USFS shall be registered under the United
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States Securities Exchange Act of 1934, as amended (the term "equity
securities" to have the same meaning as set forth in the said Act); or
(f) Any transfer made at such time as the number of Qualified License
Agreements then in effect shall be sufficient to constitute Hawthorn
Brand Saturation;
provided, however, no Transfer by USFS pursuant to subsections (c) through
(f), both inclusive, of this Section 5.3 shall be made to a Person who is
not, as of the date of such Transfer, a "Qualified Transferee", and, provided
further, no such Transfer (other than a Change of Control) shall be made
unless the provisions of Section 5.5 below shall have been complied with. For
purposes hereof, a "Qualified Transferee" shall mean a Person who (i) has a
net worth (that is, stockholder's equity), exclusive of its interest in the
Hawthorn System, equal to or greater than the net worth (stockholder's
equity) of USFS as of the date of Transfer; (ii) has a generally good
business reputation; and (iii) has not, and any Person or Persons in control
of said Transferee has not been convicted of or indicted for, any criminal
act or activity; provided, however, in the case of any Change of Control, the
net worth test shall be deemed to have been met, notwithstanding the net
worth of the Person acquiring controlling interest in USFS, so long as the
transaction giving rise to the Change of Control, and any related transaction
or transactions, shall not cause any reduction in the net worth of USFS to an
amount less than the lesser of (i) the net worth of USFS as of the effective
date of any such Change of Control, and (ii) Twenty-Five Million Dollars
($25,000,000). "Net worth" for purposes hereof shall include any redeemable
preferred stock, including mandatorily redeemable preferred stock. In the
case of any Person acquiring an interest in this Agreement from USFS as
security for the payment of money or the performance of obligations, such
Person need be a Qualified Transferee only at the time of said Person's
acquisition of the security interest and not necessarily at the time of its
acquisition of full rights of HSA hereunder whether upon foreclosure,
transfer in lieu of foreclosure or otherwise.
5.4 "Change of Control". As used in this Article V, and anywhere else in
this Agreement where such term is referred to, the term "Change of Control"
shall mean any transaction or series of related transactions whereby actual
control of USFS shall be transferred to a Person or group of related Persons
other than a Person who is, or is part of a group of related, Affiliated or
associated Persons who are, currently shareholders of USFS, or to members of
their immediate family (or trusts for their benefit, or the benefit of
members of their immediate family, or both) (any such Person being herein
referred to as a "Current Shareholder"). The immediate family of any person
shall mean the spouse or any lineal ancestor or descendent of such person.
For purposes hereof, "control" of USFS shall mean control in fact and may
arise by
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virtue of the ownership or control of a majority of the voting rights in HSA
(whether by ownership of equity interests, through a voting trust, by proxy
or other means) or by contract or other arrangement in which control over the
business and affairs of USFS is governed. Any change of equity ownership in
USFS, or transfer of voting rights, to a Person or group of Affiliated,
associated or related Persons (other than Current Shareholders) not then
holding voting or other control interests in USFS, shall constitute a Change
of Control if the transfer, regardless of the amount of voting or controlling
interests so transferred, together with any other voting or controlling
interests then held by the transferee Person or group of Persons, shall
result in a Change of Control in fact.
5.5 Assumption by Transferee. Upon any Transfer (other than a Change of
Control or grant of a security interest), whether in violation of or
compliance with the provisions of this Article V, the Transferee shall, by
written instrument reasonably satisfactory in form and substance to HSA,
assume, for the benefit of HSA, all of the duties, liabilities, obligations
and responsibilities of USFS under this Agreement relating to any events
occurring or matters arising on or after the effective date of any such
Transfer. A fully executed copy of the aforesaid written instrument shall
promptly be delivered to HSA in accordance with the provisions of this
Agreement. Upon any Transfer made in strict compliance with all of the terms,
covenants and conditions of this Article V, including, without limitation,
delivery of the written instrument referred to in the preceding sentence, the
Transferor shall be relieved of any further liability or obligation hereunder
except with respect to matters arising or events occurring prior to the
effective date of any such Transfer, as to which the Transferee shall remain
fully liable for so long as any such covenants or obligations shall remain in
effect in accordance with the terms of this Agreement.
ARTICLE VI
Default and Termination
6.1 Termination Standard. The following represents the "Termination
Standard" to be adhered to by USFS:
(a) not later than the first anniversary of the occurrence of the
Effective Date, there shall be not less than ten (10) hotels subject
to Qualified License Agreements which are in effect and in good
standing on the said date; and
(b) not later than the second anniversary of the occurrence of the
Effective Date, there shall be not less than twenty (20) hotels
subject to Qualified License
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Agreements, which are in effect and in good standing on the said date;
(c) not later than the third anniversary of the occurrence of the
Effective Date, there shall be not less than forty (40) hotels subject
to Qualified License Agreements which are in effect and in good
standing on the said date;
(d) not later than the fourth anniversary of the occurrence of the
Effective Date, there shall be not less than sixty (60) hotels subject
to Qualified License Agreements which are in effect and in good
standing on the said date;
(e) not later than the fifth anniversary of the occurrence of the
Effective Date, there shall be not less than eighty (80) hotels
subject to Qualified License Agreements which are in effect and in
good standing on the said date; and
(f) not later than the sixth anniversary of the occurrence of the
Effective Date, there shall be not less than one hundred (100) hotels
subject to Qualified License Agreements which are in effect and in
good standing on the said date.
6.2 Royalty Reduction Standard. The following shall comprise the Royalty
Reduction Standard for purposes of this Agreement:
(a) not later than the first anniversary of the occurrence of the
Effective Date, there shall be not less than twenty (20) hotels
subject to Qualified License Agreements which are in effect and in
good standing on the said date; and
(b) not later than eighteen (18) months following the occurrence of the
Effective Date, there shall be not less than thirty (30) hotels
subject to Qualified License Agreements which are in effect and in
good standing on the said date;
(c) not later than the second anniversary of the occurrence of the
Effective Date, there shall be not less than forty (40) hotels subject
to Qualified License Agreements which are in effect and in good
standing on the said date;
(d) not later than the third anniversary of the occurrence of the
Effective Date, there shall be not less than sixty-five (65) hotels
subject to Qualified License Agreements which are in effect and in
good standing on the said date;
(e) not later than the fourth anniversary of the occurrence of the
Effective Date, there shall be not less than ninety (90) hotels
subject to Qualified License
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Agreements which are in effect and in good standing on the said date;
(f) not later than the fifth anniversary of the occurrence of the
Effective Date, there shall be not less than one hundred fifteen (115)
hotels subject to Qualified License Agreements which are in effect and
in good standing on the said date; and
(g) not later than the sixth anniversary of the occurrence of the
Effective Date, there shall be not less than one hundred forty (140)
hotels subject to Qualified License Agreements which are in effect and
in good standing on the said date.
6.3 Default. USFS shall be deemed to be in default under the provisions of
this Agreement upon the occurrence of any one or more of the following events
and for so long as the same shall remain in effect:
(a) As of any anniversary of the Effective Date, the Termination Standard
shall not have been complied with, and such condition shall continue
to and including the date of termination (if any) of this Agreement in
accordance with the provisions of this Agreement. If, prior to (but
not after) the delivery of a "Default Notice" (as defined below), the
number of hotels in the Hawthorn System operating under Qualified
License Agreements shall equal or exceed the number required to have
been in effect on the immediately preceding anniversary date of the
Effective Date, the same shall constitute a cure of the default and
compliance with the applicable Termination Standard.
(b) USFS shall have failed to fully satisfy, perform or discharge any one
or more of its covenants or obligations under this Agreement (other
than the Termination Standard or the Royalty Reduction Standard), and
such failure shall continue for not less than thirty (30) days after
written notice thereof from HSA to USFS setting forth specifically the
manner in which USFS is in default hereunder.
(c) As of any relevant date after the occurrence of the Effective Date,
the Royalty Reduction Standard shall not have been complied with, such
default to continue until such time as the number of hotels subject to
Qualified License Agreements shall equal or exceed the number required
in order to satisfy the Royalty Reduction Standard as of the
immediately preceding relevant date after occurrence of the Effective
Date.
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6.4 Remedies. In the event of the occurrence of any one or more defaults
hereunder, HSA shall have the following rights and remedies:
(a) In connection with any default under the provisions of Section 6.3(a),
HSA shall have the right, in its discretion, to deem such default
either a default under Section 6.3(a) or under Section 6.3(c), such
election to be set forth in a written notice from HSA to USFS (the
"Default Notice"). Until such time as a Default Notice shall have been
delivered by HSA to USFS, and for so long as such default shall
continue in effect, any such default shall be deemed a default under
Section 6.3(c) and the rights and remedies of HSA shall be as provided
in Section 6.4(c) below. The delivery of a Default Notice from HSA to
USFS (during the continuance of any default under Section 6.3(a)) to
the effect that HSA elects to treat such default as a default under
Section 6.3(a) shall constitute an election by HSA to terminate this
Agreement, and all of the rights and remedies of the parties hereto,
such termination to become effective thirty (30) days after the
delivery of the Default Notice from HSA to USFS notwithstanding that
after the delivery of the Default Notice additional Qualified License
Agreements shall have been entered into which, had they been in effect
prior thereto, would have constituted a cure of the default.
(b) Upon the occurrence of any event of default under Section 6.3(b) and
expiration of the grace period applicable thereto, HSA shall have and
may exercise all rights and remedies provided herein or at law or in
equity, except that HSA shall have no right to terminate this
Agreement by reason of any event of default under Section 6.3(b)
unless specifically provided in Section 6.5.
(c) Upon the occurrence of any event of default under Section 6.3(c)
(including, without limitation, any event of default under Section
6.3(a) prior to the time that HSA delivers a Default Notice with
respect thereto as hereinabove provided), the amount of the HSA
Royalty Fees payable to HSA by USFS during the continuance of such
event of default shall be increased by an amount determined by
multiplying the "USFS Share" by a fraction the numerator of which
shall be the number of additional Qualified License Agreements that
would be required on the date of determination in order for USFS to
comply with the applicable Royalty Reduction Standard (but in no event
shall the numerator be greater than the denominator), and the
denominator of which shall be the minimum number of Qualified License
Agreements required to be in effect as of the date of determination in
order
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that the Royalty Reduction Standard shall have been complied with. For
purposes hereof the "USFS Share" shall mean the difference between:
(i) the total Franchise Royalty Fees paid for the calendar quarter in
question under all Hawthorn Licenses in effect as of the date on which
the event of default shall have occurred, less (ii) the amount of HSA
Royalty Fees required to be paid with respect to each such Hawthorn
License. The increase herein provided for shall be in addition to the
amount of HSA Royalty Fees otherwise required to be paid under Section
3.1.
The remedies forth above shall be the sole and exclusive remedies of HSA with
respect to the occurrence of any default hereunder, subject however to the
provisions of Section 4.4(b) and Section 6.5.
6.5 Termination.
(a) This Agreement may be terminated, by written notice delivered in
accordance with the provisions hereof, at any time prior to the expiration of
the Term by reason of the occurrence of any one or more of the following
events:
(i) Immediately, by mutual action of HSA and USFS set forth in a
written instrument;
(ii) At the election of HSA, exercisable by written notice
delivered to USFS within thirty (30) days after receipt of written
notice of, or, if no such written notice shall have been delivered,
after receipt of actual knowledge of, the death, disability,
retirement, resignation or inability to function (for any reason
including termination of employment) of Michael Leven as Chief
Executive Officer of USFS at any time prior to the occurrence of a
Permitted Transfer under Section 5.3, or, if earlier, prior to the time
that a Permitted Transfer may be made under Section S.3(d) or Section
5.3(f);
(iii) At the election of HSA, exercisable by written notice
delivered to USFS within thirty (30) days after receipt of written
notice of, or, if no such written notice shall have been delivered,
after receipt of actual knowledge of, a Transfer made in violation of
the provisions of Article V;
(iv) At the election of HSA in accordance with the provisions of
Section 6.4(a); or
(v) At the election of HSA, exercisable by written notice delivered
to USFS, in the event of any breach or default by USFS in any material
respect in the performance of its covenants, duties and obligations
under Section 4.3 and
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Section 4.4 hereof which continues uncured for more than the period of
grace applicable thereto and remains uncured on and as of the date of
exercise by HSA of its right of termination as herein provided;
provided that any such termination shall become effective (A) immediately in
the case of a termination under clause (a)(i), and (B) on the thirtieth
(30th) day after delivery of the notice of termination in the case of any
other termination.
(b) Upon termination of this Agreement for any reason (other than
expiration of the term hereof), all of the rights, duties, liabilities,
obligations, remedies and authority of the respective parties hereto under
this Agreement shall terminate and expire, except with respect to those
matters which, under the express provisions hereof, survive the expiration or
earlier termination of this Agreement. Without in any way limiting the
generality of the foregoing, upon any such termination of this Agreement, all
right and interest of USFS in and to the Hawthorn Brand and the Hawthorn
System shall, except as otherwise herein expressly provided, terminate and
HSA shall have and may exercise the full use and enjoyment of all rights and
interests in and to the Hawthorn Brand and the commercial exploitation
thereof, and in and to the Hawthorn System.
(c) Upon any such termination of this Agreement:
(i) Subject to the provisions of subsections (d) and (e) of this
Section 6.5, USFS shall sell, transfer, assign and convey to HSA (subject
to usual and customary representations and warranties which, where
appropriate, will be to the knowledge of USFS) all right, title and
interest of USFS in, to and under, any then existing Hawthorn Licenses and
HSA shall expressly assume in writing all of the liabilities and
obligations of the licensor thereunder. In connection with the foregoing,
appropriate disclosures, filings, registrations, amendments or
supplements, in form required by applicable law, shall be made and
delivered in accordance with applicable law, by HSA at its sole cost and
expense.
(ii) If, on such date of termination, USFS shall be subject to any
contract or agreement with respect to the reservation system, marketing or
promotional agreements or the like (but excluding contracts or agreements
with employees or consultants or which related to Hotel Brands other than
or in addition to the Hawthorn Brand) all such contracts or agreements
which, by their terms, permit the assignment thereof shall likewise be
transferred and assigned by USFS to HSA, without payment of any kind to
USFS or any third party,
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and HSA shall, in connection therewith, expressly assume in writing all of
the liabilities and obligations of USFS with respect thereto.
(iii) Any books or records pertaining to the operation of the Hawthorn
System, including, without limitation, original document files, accounting
books and records and the like shall be delivered to HSA, or its then
successor in interest, although USFS shall be entitled to retain copies
thereof. With respect to any books or records stored on electronic storage
media, both hard copies thereof and convertible forms of electronic
storage shall be delivered to HSA.
(iv) Any funds remaining unexpended in the Ad Fund shall be delivered
to or at the direction of HSA. USFS shall, as soon as reasonably
practicable, but in no event later than 45 days following the effective
date of any such termination, provide HSA with an accounting of all
accrued and unpaid liabilities of the Ad Fund as of such date which shall
be true and correct in all material respects. HSA agrees that it shall,
out of funds available in the Ad Fund, pay all such accrued liabilities to
USFS as and when requested by USFS. Any request for payment by USFS shall
constitute a certification by USFS that the amounts being requested are
due and payable and that the payment thereof from the Ad Fund represents
an appropriate use of such funds in accordance with the provisions of the
Hawthorn Licenses. HSA shall be fully liable and responsible for the
satisfaction, payment and performance of all liabilities and obligations
of the Ad Fund thereafter. In addition, at the request and expense of HSA,
USFS shall prepare the necessary accounting and annual reports, to the
extent it has not previously done so, sufficient to comply with the
provisions of all Hawthorn licenses and to permit compliance by HSA for
the year in which such termination shall occur.
(d) Upon any termination of this Agreement pursuant to Section 6.5(a)(iv),
and subject to the following provisions of this Section 6.5(d), any amounts
required to be paid by licensees under Hawthorn Licenses shall thereafter (to
the extent the same relate to operations by such licensees after the
effective date of termination and subject to the provisions of Section 6.4(a)
above) be the sole property of HSA, although any payments received shall be
applied first to amounts owing with respect to operations on or prior to the
effective date of termination and promptly remitted to USFS (less the amounts
which would otherwise be required to be paid to HSA as HSA Royalty Fees in
accordance with the provisions of this Agreement). Notwithstanding the
foregoing, in the event of any termination pursuant to Section 6.5(a)(iv), in
addition to any amounts required to be paid to USFS by HSA pursuant to the
provisions of Section 6.6 (in the event HSA elects to cause USFS to
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continue to administer the Hawthorn Licenses then in effect), USFS shall also
be entitled to receive (and HSA agrees to pay or to permit USFS to withhold
from amounts otherwise required to be paid to HSA) a portion of the Franchise
Royalty Fees required to be paid by licensees under any Hawthorn Licenses in
existence on the effective date of any termination in accordance with the
following schedule:
(i) If, on the date of termination, the number of then existing
Hawthorn Licenses shall be equal to or greater than ninety percent (90%)
of the required Termination Standard, but less than one hundred percent
(100%) thereof, HSA shall be entitled to receive all Franchise Royalty
Fees and other fees and charges thereunder less forty percent (40%) of an
amount equal to the difference between: (i) the Franchise Royalty Fees
under then existing Hawthorn Licenses as of the end of each calendar
quarter, less (ii) the amount which would, absent any such termination,
otherwise be required to be paid to HSA with respect thereto as HSA
Royalty Fees, such percentage of the difference to be remitted to USFS.
(ii) If, on the date of termination, the number of then existing
Hawthorn Licenses shall be equal to or greater than seventy-five percent
(75%) of the required Termination Standard, but less than ninety percent
(90%) thereof, HSA shall be entitled to receive all Franchise Royalty Fees
and other fees and charges thereunder less twenty-five percent (25%) of an
amount equal to the difference between: (i) the Franchise Royalty Fees
under then existing Hawthorn Licenses as of the end of each calendar
quarter, less (ii) the amount which would, absent any such termination,
otherwise be required to be paid to HSA with respect thereto as HSA
Royalty Fees, such percentage of the difference to be remitted to USFS.
(iii) If, on the date of termination, the number of then existing
Hawthorn Licenses shall be less than seventy-five percent (75%) of the
required Termination Standard, HSA shall be entitled to receive all
Franchise Royalty Fees and other fees and charges thereunder less fifteen
percent (15%) of an amount equal to the difference between: (i) the
Franchise Royalty Fees under then existing Hawthorn Licenses as of the end
of each calendar quarter, less (ii) the amount which would, absent any
such termination, otherwise be required to be paid to HSA with respect
thereto as HSA Royalty Fees, such percentage of the difference to be
remitted to USFS.
(e) Upon any termination of this Agreement pursuant to Section 6.5(a)(ii),
(iii) or (v), HSA shall be entitled to receive all Franchise Royalty Fees and
other fees and charges actually paid by licensees under any Hawthorn Licenses
existing as of the date of any such termination less eighty-two and one-half
percent (82.5%)
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of an amount equal to the difference between: (x) the Franchise Royalty Fees
under the said then existing Hawthorn Licenses as of the end of each calendar
quarter, less (y) the amount which would, absent any such termination,
otherwise be required to be paid to HSA with respect thereto as HSA Royalty
Fees, such percentage of the difference to be promptly remitted to or
retained by USFS. If at the date of termination HSA shall be entitled to
terminate this Agreement pursuant to Section 6.5(a)(iv) and one or more of
the other provisions of Section 6.5(a), the subsection pursuant to which this
Agreement is being terminated shall be any one of the applicable subsections
selected by, and at the election of, HSA as set forth in its notice of
termination, and if no such subsection shall be set forth, shall be deemed to
be a termination pursuant to Section 6.5(a)(iv).
(f) Payments required to be made to USFS as above provided shall continue
to be made so long as any Hawthorn Licenses, or any extensions or renewals
thereof, in existence as of the effective date of any termination hereof
(including, without limitation, those referred to in the last sentence of
Section 6.5(g) below) shall continue in effect, it being understood and
agreed, however, that HSA shall have the sole right, in its discretion, to
determine which of the Hawthorn Licenses shall be extended or renewed, or
which shall be cancelled or terminated either by agreement of the parties or
for any other reason permitted in accordance with the Hawthorn License in
question. For purposes hereof, a Hawthorn License shall be deemed to have
been renewed or extended if, in addition to any amendment of such Hawthorn
License, extending its term, a new Hawthorn License relating to the hotel in
question shall be entered into with the licensee under any such Hawthorn
License, or any affiliate of said licensee, or any Person (or affiliate of
any Person) who shall have acquired the Existing Hotel subject to the then
existing Hawthorn License.
(g) If, on the effective date of termination, there shall be any
applications for Hawthorn Licenses pending, such pending applications, and
the files with respect thereto, shall be assigned and transferred to HSA, but
any decisions with respect to granting a Hawthorn License with respect to any
such pending applications shall be in the reasonable discretion of HSA. With
respect to any applications for Hawthorn License which have been accepted,
but as to which no Hawthorn License shall have been issued as of the
effective date of any such termination, HSA agrees that it shall grant a
Hawthorn License in accordance with the agreement contained in the accepted
application unless conditions applicable to the issuance thereof shall not
have been satisfied or performed by the Licensee thereunder, or unless, under
the provisions of the approved application, the Licensee shall otherwise be
excused from the obligation to grant, execute or deliver a Hawthorn License.
Any Hawthorn Licenses that are so granted by HSA shall be deemed to be
Hawthorn Licenses that were in effect as of the effective date of termination
of this Agreement.
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(h) Any and all other aspects of the Hawthorn System then in effect,
including, without limitation, licensee operating standards, prototype plans and
specifications, marketing brochures, interior design standards, samples and
specimens, training manuals and the like shall likewise be delivered and
conveyed by USFS to HSA.
(i) The provisions of this Section 6.5 shall survive the termination of
this Agreement.
6.6 Continuing USFS Administration. In connection with any termination of
the Agreement pursuant to any of the provisions of this Article VI, HSA shall
have the right (exercisable by notice contained in the Default Notice
delivered as above provided), to cause USFS to continue to administer
Hawthorn Licenses in effect as of the effective date of any termination of
this Agreement, as agent for HSA, for a period of not more than one (1) year
after the effective date of any such termination and for a fee equal to one-
half of one percent (0.5%) of Gross Rooms Revenues from the Hawthorn Brand
hotels then subject to Hawthorn Licenses in effect as of the effective date
of any termination. Administration of the Hawthorn Licenses, for this
purpose, shall mean collection of Franchise Royalty Fees and other amounts
required to be paid by licensees, remitting the same, less any amounts to
which USFS may be entitled therefrom, to HSA, maintaining communication with
licensees, at HSA's direction monitoring performance and adherence to
operating standards by licensees, at HSA's direction enforcing the provisions
of Hawthorn Licenses, maintaining books and records necessary in connection
with the administration of Hawthorn Licenses, preparing for filing by HSA all
necessary filings and reports with governmental agencies required in order to
comply with applicable provisions of law, and notifying HSA promptly of the
occurrence of any breach or default by any licensee under the provisions of
any then existing Hawthorn License; provided, however, in no event shall USFS
thereafter have the right to grant, withhold, or terminate any Hawthorn
License, to waive compliance by a Hawthorn licensee with the provisions of
any Hawthorn License, or to modify or amend any Hawthorn License then in
existence; provided, further, that USFS will have no liability to HSA or its
Affiliates relating to the manner in which USFS so administers the Hawthorn
Licenses other than as a result of its gross negligence or willful
misconduct. In addition to the fee (if any) required to be paid to USFS
pursuant to the preceding sentence in connection with the administration of
Hawthorn Licenses following termination of this Agreement, USFS shall be
entitled to (and HSA shall promptly pay to USFS) reimbursement for its
reasonable direct out-of-pocket costs incurred in connection therewith, which
amounts USFS may deduct from amounts otherwise required to be remitted to
HSA, and a report of any such deducted amounts shall be furnished to HSA, in
reasonable detail, each time amounts are remitted to HSA.
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ARTICLE VII
Miscellaneous
7.1 Arbitration.
(a) In case of any dispute arising under this Agreement the same shall be
resolved exclusively by arbitration conducted in accordance with the
provisions of this Section 7.1.
(b) In any matter submitted to arbitration, the arbitrators shall each be
individuals having not less than ten years experience in senior executive
positions in the lodging industry. The parties intend that the third
arbitrator selected by the two arbitrators previously appointed by each of
the parties (if any shall be appointed hereunder) shall be independent and
impartial. Consequently, the said third arbitrator shall not have or have had
any professional relationship with either party hereto, or their respective
Affiliates, or the respective directors, officers, supervisory employees or
counsel of any such party or its said Affiliates, which could reasonably be
considered as likely to affect his or her independence or impartiality. To
this end, the third arbitrator shall be required to disclose to the parties
any professional relationships, present or past, with either party, or its
directors, officers, supervisory employees or counsel, or any of their
respective Affiliates.
(c) Whenever any disputes or disagreements shall arise between HSA and
USFS hereunder, HSA and USFS shall meet and confer in an attempt to resolve
such dispute, each party setting forth its position regarding the matter in
question in writing and suggesting a proposed solution. After discussion, and
review or revision of any of their respective proposals, if the parties
remain unable to resolve their differences in full, the remaining unresolved
issues may be submitted to arbitration. Any arbitration initiated pursuant
hereto shall be conducted in the City of Chicago, Illinois in accordance with
the rules and regulations of the local chapter of the American Arbitration
Association, subject, however, to the specific terms and provisions of this
Agreement. In any such arbitration, the party submitting the same to
arbitration shall designate, in writing, its arbitrator and shall serve
written notice thereof on the other party. Upon receipt of such notice, the
other party shall have twenty (20) days in which to identify its arbitrator
and to notify the other party of the identity of its arbitrator. If the other
party shall fail to identify its arbitrator within the aforesaid period of
twenty (20) days the matter in dispute shall be resolved by the single
arbitrator previously selected. If both parties shall name their respective
arbitrators as herein provided on a timely basis, the two arbitrators so
selected shall thereafter, and in any event within thirty (30) days after
selection of the second of the two arbitrators, select a third arbitrator. If
the two arbitrators are
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unable to agree on a third arbitrator, the third arbitrator shall be selected
in accordance with the rules and regulations of the American Arbitration
Association, provided that the third arbitrator shall meet the qualifications
for an arbitrator herein specified.
(d) The three arbitrators so selected shall have full power and authority
to resolve the dispute, and issue any order or award which they deem
reasonably necessary in connection therewith, including orders for specific
or other equitable forms of relief, except that the arbitrators may not award
any relief not previously suggested by one of the parties and not any other
or modified relief, nor award any punitive or exemplary damages. A decision
of the majority of the arbitrators shall constitute the decision or award of
the arbitration panel, and shall, absent fraud or manifest error, be binding
on the parties hereto. In any arbitration proceeding, the arbitrator shall be
bound by the provisions of this Agreement, including, without limitation, the
provisions of this Section 7.1(d).
(e) The award or decision of the arbitrators may be enforced by
appropriate court action.
(f) Each party shall bear the costs and expenses of its own counsel in
connection with any arbitration proceeding, and shall pay the fees and
expenses of the arbitrator appointed by it. The fees and expenses of the
third arbitrator shall be paid by USFS or HSA as the third arbitrator may
determine, or shall be borne by both of them in such proportions or such
amounts as the third arbitrator shall determine.
(g) During the pendency of any arbitration proceedings, either party may
seek temporary equitable relief in a court of competent jurisdiction such as
temporary restraining orders or temporary injunctions.
(h) The provisions of this Section 7.1 shall survive the termination of
this Agreement.
7.2 Representation and warranties of HSA. HSA hereby represents and
warrants to USFS, and its successors and assigns, as follows:
(a) The Existing Licenses are in full force and effect.
(b) To the Knowledge of HSA, neither the licensor nor the licensee under
any of the Existing Licenses is in breach or default thereunder as of
the date hereof, nor, to the Knowledge of HSA, does any condition
exist which, with notice or lapse of time or both, would constitute a
material breach or default or permit termination under or modification
of the terms of any Existing License, and no
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party has repudiated any provision of any Existing License.
(c) Schedule 7.2(c) hereto contains a true and correct list of the
Existing Licenses. Copies of the Existing Licenses heretofore
delivered by HSA to USFS are true, accurate and complete in all
respects.
(d) (1) "Intellectual Property" shall mean:
(i) United States and foreign trademarks, service marks, trade names,
brand names, trade dress, designs and logos, and product or
service identifiers, whether registered or unregistered, and all
registrations and applications for registration thereof, that are,
as of the date hereof, used by HSA in connection with the Hawthorn
System (the "Trademarks");
(ii) Patents and patent applications throughout the world that are, as
of the date hereof, actually used or intended for use by HSA in
connection with the Hawthorn System (the "Patents");
(iii) Copyrights, registered or unregistered, throughout the world that
are, as of the date hereof, actually used or intended to be used
by HSA in connection with the Hawthorn System (the "Copyrights");
(iv) Trade secrets (if any) used by HSA in connection with the Hawthorn
System and other information in the possession of HSA concerning
the Hawthorn System that is not generally available to the public
and that is treated as confidential or proprietary by HSA
(excluding information regarding employees);
(v) Computer software programs, source code, object code, date and
documentation to the extent owned by HSA that are, as of the date
hereof, actually used or intended for use in connection with the
Hawthorn System;
(vi) All transferable permits, grants and licenses or other rights
running to or from HSA relating to any of the foregoing; and
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(viii) Any other similar intellectual property rights actually used in
connection with the Hawthorn Brand.
(2) To the Knowledge of HSA, HSA owns or is exclusively licensed or
otherwise has the exclusive right to use, practice, sell, license
and dispose of, without restriction, all Intellectual Property
reasonably necessary for the operation of the business relating to
the Hawthorn System as presently conducted, except that the name
"Hawthorn" or variations thereof, are being used in connection with
the operation of a hotel in Salem, Massachusetts without license
from HSA or any Affiliate of HSA but, to the Knowledge of HSA,
without violation or infringement of any rights of HSA.
(3) Schedule 7.2(d)(3) hereto sets forth all Trademarks, Patents and
Copyrights which, to the Knowledge of HSA, are owned by HSA and
used by HSA in connection with the Hawthorn System which Schedule
7.2(d)(3) specifies, as to each item of Trademark, Patent or
Copyright: (w) the nature of the item, including the title or
description; (x) the jurisdictions by or in which the item is, to
Knowledge of HSA, issued or registered, or in which an application
for issuance or registration has been filed, including the
respective registration or application numbers; (y) the issue date
and expiration date of the item, and (z) with respect to each
Trademark, the class or classes of goods or services on which such
Trademark is or is intended to be used.
(4) Schedule 7.2(d)(4) sets forth all licenses, sublicenses and other
agreements or permissions ("IP Licenses") under which HSA is a
licensee or otherwise is authorized to use or practice any
Intellectual Property and all IP Licenses, other than the Existing
Licenses, under which HSA is a licensor or otherwise authorizes any
Person to use or practice Intellectual Property.
(5) To the Knowledge of HSA, HSA possesses all right, title and
interest in and to the Intellectual Property, free and clear of any
lien, license or other restriction (other than the Existing
Licenses and the IP Licenses), and has received no notice from any
third party to the contrary.
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(6) HSA is not, and, as a result of the execution and delivery of this
Agreement or the performance of its obligations hereunder or
thereunder, will not be, in violation of, and will not lose any
rights pursuant to, any instrument or agreement governing
Intellectual Property. Each IP License is now, to the Knowledge of
HSA, valid and enforceable and in full force and effect, and will
continue to be so on identical terms following the execution and
delivery of this Agreement, in accordance with the terms of each
such IP License.
(7) To the Knowledge of HSA, no other party is in breach or default
under any IP License in any material respect, nor does any
condition exist which with notice or lapse of time or both would
constitute a material breach or default by any such third party, or
permit termination, modification or acceleration thereunder, and no
such third party has repudiated any provision thereof. HSA has not
received from any third party any notice, and has no actual
knowledge of the existence of, any breach or default under any IP
License in any material respect, nor, to the Knowledge of HSA, does
any condition exist which with notice or the lapse of time or both
would constitute a material breach or default by HSA or permit
termination, modification or acceleration thereunder, or give rise
to a right of repudiation, by any other party to any such IP
License.
(8) No litigation is pending or, to the Knowledge of HSA, threatened
that challenges the validity, enforceability, ownership or right to
use, sell, license or dispose of any item of Intellectual Property,
and no item of Intellectual Property is subject to any outstanding
order, ruling, judgment, decree, stipulation, charge or agreement
restricting in any manner the use or licensing thereof by HSA or
the sublicensing thereof by USFS.
(9) HSA has received no notice of any claim, charge, complaint, demand
or notice alleging any infringement upon or other violation of the
intellectual property rights of third parties, and, to the
Knowledge of HSA, no basis for any such claim exists. To the
Knowledge of HSA, the use of the Intellectual Property by USFS
pursuant to this Agreement will not infringe upon or otherwise
violate any intellectual property right of third parties.
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(10) To the Knowledge of HSA, no third party is infringing upon or
otherwise violating any of its rights to the Intellectual
Property.
(e) HSA is a limited liability company, duly organized, validly existing
and in good standing under the laws of the State of Delaware and has
full right, power and authority to own and license the Hawthorn Brand,
to operate the Hawthorn System, to execute, deliver and perform the
Existing Licenses and the assignment thereof to USFS, and to enter
into and perform this Agreement, all in accordance with the terms and
provisions of this Agreement and the Existing Licenses. The execution
and delivery of this Agreement has been duly authorized by all
necessary action of the governing board of HSA and, upon the due
authorization, execution and delivery hereof by and on behalf of USFS,
constitutes and will constitute the valid and binding obligation of
HSA enforceable against HSA in accordance with its terms, subject,
however, to bankruptcy, moratorium, reorganization, insolvency and
other similar laws of general application affecting the rights of
creditors in general.
(f) Neither the execution and delivery of this Agreement or any other
agreement or instrument contemplated hereby, nor the consummation of
the transactions contemplated hereby, nor the performance of this
Agreement or any other agreement or instrument contemplated hereby in
accordance with their respective terms and conditions, by HSA will
require HSA to obtain any consent, approval or action of, or make any
filing with or give any notice to, any governmental authority or other
person, (i) conflict with or result in any breach or violation of any
of the terms and conditions of, or constitute (with or without notice
or lapse of time or both), to the Knowledge of HSA, a default under,
the certificate of organization, operating agreement or other similar
organizational documents of HSA or any law, statute, rule or
regulation, order, writ, injunction, determination, award, judgment or
decree applicable to HSA or the Hawthorn System, or any instrument,
contract, franchise agreement or other agreement to which HSA is a
party or by which HSA or the Hawthorn System may be bound or subject,
or (iii) require any consent, approval or written notice under or
result in a violation or breach of, or a material modification of the
effect of, or constitute (with or without due notice or lapse of time
or both) a default (or give rise to any right of termination,
cancellation or acceleration) under, any of the terms, conditions or
provisions of any note, bond, mortgage, indenture or any agreement,
instrument, license or obligation to which HSA
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is a party or by which HSA or the Hawthorn System may be bound.
(g) There are no outstanding orders, writs, injunctions, determinations,
awards, judgments or decrees against HSA relating to the Hawthorn
System, and there are no actions, suits, claims or legal
administrative or arbitral proceedings or investigations
(collectively, "Claims"), pending, or to the Knowledge of HSA,
threatened against HSA relating to the Hawthorn System.
(h) Except as set forth in Schedule 7.2(h), (i) no franchisee that is a
party to any Existing License has cancelled or otherwise terminated,
or threatened in writing to cancel or otherwise terminate, its
relationship with HSA, (ii) none of the franchisees that are parties
to any Existing License have formed or organized any association
relating to the franchisees' relationship with HSA, (iii) no party to
any Existing License has commenced, or notified HSA in writing of any
intention to commence, any Claim against HSA or any Affiliate thereof,
or asserted that any provision of the franchise agreements used by HSA
is not enforceable or that any offering circular or other disclosure
statement issued by HSA or any of its Affiliates is false or
misleading, and (iv) HSA has not entered into any agreement or
arrangement, written or oral, with any franchisee for any concessions
with respect to fees or other payments owed or to be owed by such
franchisee to HSA.
(i) To the Knowledge of HSA, the Hawthorn System is in material compliance
with all laws (including, without limitation, all federal and state
franchise laws and regulations), ordinances, regulations and orders,
judgments, injunctions, awards or decrees as presently enacted and in
force, of any governmental authority relating to the Hawthorn System.
To the Knowledge of HSA, HSA has all licenses, permits, orders or
approvals (including, without limitation, with respect to offer and
sale of franchises) of any governmental authority (collectively,
"Permits") that are necessary for the conduct of the Hawthorn System as
now conducted and Schedule 7.2(i) contains a true and complete list of
all Permits currently in effect and held by HSA. HSA has received no
written notice from any governmental authority of any violation of any
Permit and no proceeding is pending, or to the Knowledge of HSA,
threatened, to revoke or limit any Permit. To the Knowledge of HSA,
HSA has made all filings and disclosures under all state franchise
disclosure laws required by reason of the business conducted by HSA in
order to offer and sell franchises. The UFOCs filed by
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HSA comply in all material respects with applicable state and federal
law and HSA has not received any written notice that such offering
circulars are not in compliance with any applicable laws.
(j) Schedule 7.2(j) sets forth a true and complete list of all agreements,
contracts, commitments or undertakings entered into by HSA or any of
its Affiliates with respect to the Hawthorn System (the "Contracts").
HSA has delivered to USFS true and complete copies of each of the
Contracts. Each of the Contracts is, to the Knowledge of HSA, legal,
valid, binding and enforceable and in full force and effect and will
continue to be so on identical terms after the consummation of the
transactions contemplated hereby. To the Knowledge of HSA, no party is
in breach or default under any Contract in any material respect, nor,
to the Knowledge of HSA, does any condition exist which with notice or
lapse of time or both would constitute a material breach or default or
permit termination, modification or acceleration thereunder, and no
party has repudiated any provision thereof.
(k) HSA has, to the Knowledge of HSA, heretofore provided USFS with all
material information in its possession regarding prospective Hawthorn
Brand licensees with whom HSA is negotiating or for whom HSA has
received inquiries.
(1) HSA has, to the Knowledge of HSA, made available to USFS all prototype
plans, specifications and drawings currently in effect with respect to
the Hawthorn Brand, or under development by Hawthorn, including the
specifications, plans and drawings being developed by HSA for a $65 to
$90 per room Hawthorn Brand hotel prototype. USFS shall have no
obligation to use such plans, specifications or drawings. Any
amendments of modifications to the HSA plans shall be the sole cost
and expense of USFS.
7.3 Representations and Warranties of USFS. USFS does hereby represent and
warrant to HSA that USFS is a corporation duly organized, validly existing
and in good standing under the laws of the State of Delaware and is duly
qualified as a foreign corporation in each jurisdiction in which the nature
of the business conducted by it or the assets owned by it require such
qualification, except where the failure to be so qualified would not have a
material adverse effect on the financial condition of USFS and its
subsidiaries, taken as a whole, or materially and adversely affect its
ability to conduct its business as heretofore conducted or as contemplated by
the provisions of this Agreement. USFS has full corporate right, power and
authority to execute and
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deliver this Agreement in accordance with the terms and provisions of this
Agreement, and to perform its duties and obligations hereunder. The execution
and delivery of this Agreement by or on behalf of USFS has been duly
authorized by all necessary corporate action by USFS and, upon the due
authorization, execution and delivery hereof constitutes and will constitute
the valid and binding obligation of USFS enforceable against USFS in
accordance with their respective terms, subject, however, to bankruptcy,
moratorium, reorganization, insolvency and other similar laws of general
application affecting the rights of creditors in general.
7.4 HSA and Rockwood Indemnity. Subject to the provisions of Section 7.6,
HSA and Rockwood & Co., jointly and severally, for themselves and on behalf
of their Affiliates do hereby indemnify and agree to defend and hold USFS,
its officers, directors, shareholders, employees, agents, successors,
permitted assigns and Affiliates completely free and harmless from any and
all manner of claim, loss, damage, liability or expense (including, without
limitation, reasonable legal fees and expenses) (collectively, the "Losses")
arising under or in any relating to: (i) any representation or warranty of
HSA herein contained being untrue or incorrect in any material respect as of
the date made; (ii) failure of HSA to perform or comply in any material
respect with any of its covenants or agreements contained in this Agreement;
(iii) the operation of the Hawthorn System, including, without limitation,
any matters pertaining to the Existing Licenses (including without limitation
the administration of the Ad Fund), prior to the date hereof; (iv) the grant
of any Hawthorn License, or the execution of any agreement, by HSA or any of
its Affiliates; (v) any Restrictive Agreement that relates to or is asserted
against any Hawthorn Brand hotel for which Deemed Approval was given under
Section 2.4(b) or which is not listed on Schedule I; or (vi) any matters
pertaining to any UFOC prepared or delivered by USFS to the extent relating
to or arising out of information that was provided in writing by HSA or its
Affiliates to USFS for inclusion therein. The provisions of this Section 7.4
shall survive the expiration or earlier termination of this Agreement.
7.5 USFS Indemnities. Subject to the provisions of Section 7.6, USFS, for
itself and on behalf of its Affiliates, hereby agrees to indemnify, defend
and hold HSA, its officers, directors, shareholders, employees, agents,
successors, permitted assigns and Affiliates completely free and harmless of
and from any and all manner of Losses arising out of or in any way relating
to any of the Existing Licenses, or the operation of the Hawthorn System, or
any other acts or omissions of USFS, or its Affiliates, with respect to the
Hawthorn Brand or the Hawthorn System, to the extent the same relates to
matters occurring or events arising or otherwise in any respect relating to
the period on or after the date hereof (except for such matters that entitle
USFS to indemnify from HSA under Section 7.4). Without in any way limiting
the generality of the foregoing, the aforesaid indemnity shall relate
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to: (i) any representation or warranty of USFS herein contained being untrue
or incorrect in any material respect as of the date made; (ii) failure of
USFS to perform or comply in any material respect with any of its covenants
or agreements contained in this Agreement; (iii) the operation of the
Hawthorn System, including, without limitation, any matters pertaining to the
Existing Licenses, after the date hereof; (iv) the grant of any Hawthorn
License or the execution of any agreement by USFS after the date hereof; or
(v) any matters pertaining to any UFOC prepared or delivered by USFS other
than any matters included therein relating to or arising out of information
that was provided in writing by HSA or its Affiliates to USFS for inclusion
therein. The provisions of this Section 7.5 shall survive the expiration or
earlier termination of this Agreement.
7.6 Provisions Relating to Intellectual Property, Infringement and
Restrictive Agreements.
(a) Except as provided in Section 7.6(f), the provisions of this Section
7.6 shall prevail over contrary provisions, if any, contained in Sections
7.4, 7.5 or 2.4(b) above.
(b) For purposes hereof, the term "infringement" shall mean the occurrence
of any one or more of the following events: (i) any licensee under a Hawthorn
License shall be enjoined, restrained or otherwise prevented from the use of
any of the Intellectual Property the use of which it shall be entitled to
under the applicable provisions of its Hawthorn License anywhere within the
Primary Development Area; (ii) either HSA or USFS shall be enjoined,
restrained or otherwise prevented from using or licensing others to use any
of the Intellectual Property anywhere within the Primary Development Area; or
(iii) any unauthorized or unlicensed use anywhere within the Primary
Development Area of any of the Intellectual Property by a party other than
HSA or USFS (in accordance with the provisions of this Agreement) or a
Hawthorn licensee. Also, for purposes hereof, "Significant Intellectual
Property" shall mean all of the Intellectual Property other than as described
on Schedule 7.2(d)(3).
(c) In the event HSA or USFS shall receive written or other actual notice
of the existence of an infringement, or any claim by any third party of the
occurrence of any infringement, relating to any Significant Intellectual
Property, or any notice of the existence or claimed existence of a
restriction on any of the rights of USFS hereunder, or of any licensee under
a Hawthorn License, arising under or with respect to any contract, agreement
or understanding with Hyatt or any of its Affiliates other than the
Restrictive Agreements listed on Schedule I (a "Hyatt Claim"), the party
receiving such notice shall promptly notify the other party thereof and shall
include copies of any correspondence, complaints, petitions or other written
materials relating thereto. The parties shall then meet and confer in an
attempt to develop a mutually
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satisfactory response to the infringement or claim of infringement, or the
Hyatt Claim, as the case may be, which may include contesting the same by
litigation or otherwise, settling any claim, electing to terminate or accept
termination of an affected Hawthorn License, or electing to cease licensing
activities in the geographic area in dispute. In the event the parties hereto
are unable to agree, between themselves, as to the appropriate action to be
taken, any claim of infringement, or any Hyatt Claim, as the case may be,
will be contested by the parties hereto by all appropriate proceedings which
shall be conducted in good faith and with due diligence, utilizing, where
appropriate, counsel mutually satisfactory to HSA and USFS, and in the case
of a Hyatt claim, Hyatt. All Losses (other than consequential damages)
arising out of any infringement contest referred to in this Section 7.6 will
be paid by USFS out of Franchise Royalty Fees collected by USFS under
Hawthorn Licenses, and shall be deducted from Franchise Royalty Fees prior to
any determination of the actual amount thereof collected by USFS; and any
Losses (other than consequential damages) arising out of any Hyatt Claim
contest will be paid by HSA or Hyatt and USFS shall be, and hereby is,
indemnified with respect thereto. In determining the amount of such Losses
attributable to each of the particular Hawthorn Licenses for purposes of
allocating the remaining Franchise Royalty Fees and the determination of the
amount of HSA Royalty Fees, such Losses shall be deemed to have been deducted
from Franchise Royalty Fees actually received by USFS pro rata in accordance
with the amount received under each Hawthorn License. In the event the Losses
arising out of an infringement contest herein referred to shall exceed the
amount of Franchise Royalty Fees actually collected by USFS during and as of
the end of the month in which such costs are incurred, the excess shall be
borne between the parties in the same proportion that the Franchise Royalty
Fees theretofore collected have been allocated to the parties in accordance
with Section 3.1 and HSA shall promptly pay to USFS the portion to be borne
by HSA.
(d) If in connection with any infringement, or claimed infringement, or in
connection with any Hyatt Claim, whether as a result of a final determination
by a court of other tribunal of competent jurisdiction, or by settlement of
any such dispute, USFS or HSA, or both, shall be enjoined, restrained or
otherwise restricted in its use of any of the Significant Intellectual
Property, either permanently or temporarily, anywhere within the Primary
Development Area or in selected geographic portions thereof, the parties
shall meet and confer for the purpose of achieving an equitable revision to
this Agreement as the same relates to the number of Hawthorn Licenses
necessary to achieve Hawthorn Brand Saturation, compliance with the
Termination Standard or compliance with the Royalty Reduction Standard, or
all of the foregoing, taking into account the nature of the restriction and
the geographic area in which such restriction shall be applicable, and its
anticipated effect on the ability of USFS to enter into Hawthorn Licenses as
herein contemplated, and to achieve maximum
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amount of Franchise Royalty Fees. In the event of any disagreement between
the parties hereto regarding the appropriate revisions, if any, to the
Termination Standard, Royalty Reduction Standard or Hawthorn Brand
Saturation, each party shall submit its proposals to arbitration conducted in
accordance with the provisions of this Agreement, and the decision of the
arbitration panel shall be binding and conclusive on the parties hereto.
In addition to the foregoing, during such period of time, if any, in which
USFS or HSA is enjoined, restrained, or otherwise restricted in the use of
Significant Intellectual Property the restrictive covenants set forth in
Section 4.4 shall be inapplicable but only with respect to the specific
geographic area in which the injunction, restraint or limitation shall be
applicable. In all other respects, and in all other areas, and at all other
times, the said restrictive covenants shall continue in full force and effect
in accordance with the provisions of this Agreement; provided that any
franchises entered into or other activities commenced as hereinabove provided
may continue in full force and effect, and may be extended or renewed in the
ordinary course of business, even after the injunction, restraint or other
restriction has been terminated, but no new franchises may be granted or new
activities commenced thereafter.
(e) Notwithstanding the foregoing, in the event of any infringement or
claimed infringement with respect to portions of the Intellectual Property
other than Significant Intellectual Property, any decision with respect to
contesting the claimed infringement, consenting to cease and desist, or
otherwise settling any claims with respect thereto, shall be at the sole
option and election of HSA, which shall bear all costs and expenses in
connection therewith. Any loss of the right to use any Intellectual Property
which is not Significant Intellectual Property shall in no event be deemed a
breach or default hereunder (except as provided in subsection (f) below), or
entitle USFS to any reduction in the Termination Standard, Royalty Reduction
Standard or Hawthorn Brand Saturation.
(f) Anything in this Section 7.6 to the contrary notwithstanding, the
indemnity provisions of Section 7.4 shall apply with respect to any
infringement with respect to any of the Intellectual Property, whether or not
Significant Intellectual Property, to the extent the same constitutes a
breach of any representation or warranty by HSA hereunder.
(g) The provisions of this Section 7.6 shall survive the expiration or
earlier termination of this Agreement.
7.7 Indemnification Procedures. Any party that proposes to assert the
right to be indemnified under Section 7.4 or 7.5 or 7.6 shall, promptly after
receipt of notice of commencement or threatened commencement of any action
against such party in respect
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of which a claim is to be or may be made against an indemnifying party or
parties under such Sections, notify the indemnifying party of the
commencement or threatened commencement of such action, enclosing a copy of
all papers served, it being understood and agreed, however, that the failure
so to notify promptly the indemnifying party will not relieve the
indemnifying party from any liability it may have to any indemnified party
under such Sections unless, and only to the extent that, such omission
results in the forfeiture of substantive rights or defenses by the
indemnifying party or otherwise materially adversely affects the ability of
the indemnifying party to defend against or diminish the losses arising out
of such claim, action or proceeding. If any such action is brought against
any indemnified party and it notifies the indemnifying party of its
commencement, the indemnifying party will be entitled to participate in and,
to the extent that it elects by delivering written notice to the indemnified
party promptly after receiving notice of the commencement of the action from
the indemnified party, to assume the defense of the action, with counsel
selected by the indemnified party. After notice from the indemnifying party
to the indemnified party of its election to assume the defense, the
indemnifying party will not be liable to the indemnified party for any legal
or other expenses except as provided below and except for the reasonable cost
of investigation subsequently incurred by the indemnified party in connection
with the defense. It is understood and agreed that the indemnifying party or
parties shall not, in connection with any proceeding or related proceedings
in the same jurisdiction, be liable for the reasonable fees, disbursements
and other charges of more than one separate firm admitted to practice in such
jurisdiction at any one time for all such indemnified party or parties. All
such fees, disbursements and other charges will be paid or reimbursed by the
indemnifying party promptly as they are incurred. An indemnifying party who
has assumed the defense of any claim or action pursuant to this Section 7.7
will not be liable for any settlement of any action or claim effected without
its written consent. If the indemnifying party assumes the defense of any
claim or action pursuant to this Section 7.7, the indemnified party shall
make available to the indemnifying party any books, records or other
documents within its control that are reasonably necessary for such defense.
The provisions of this Section 7.7 shall survive the expiration or earlier
termination of this Agreement.
7.8 Governing Law. This Agreement is being made with reference to the laws
of the State of Illinois, and shall be governed in all respects by the laws
of the State of Illinois, and, to the extent applicable, the laws of the
United States.
7.9 Successors and Assigns. This Agreement shall be binding on USFS and
HSA and their respective successor and permitted assigns, subject, however,
to the provisions of Article V. Wherever reference herein is made to HSA, the
same shall mean HSA or any successor in interest to HSA hereunder, and
wherever
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reference is made to USFS, the same shall mean USFS and any successor in
interest to USFS acquiring its interest in compliance with the provisions of
Article V.
7.10 Entire Agreement. This Agreement and any exhibits hereto, constitute
the entire understanding and agreement of the parties hereto, and shall
supersede any prior agreements or understandings of the parties with respect
to the subject matter hereof, including, without limitation, the provisions
of that certain Letter of Intent dated December 14, 1995.
7.11 Confidentiality. The parties hereto do hereby agree to keep all
matters concerning this Agreement, the Hawthorn Brand, the Hawthorn System
and any information or documents delivered pursuant to this Agreement,
completely confidential, and neither party shall make any public announcement
with respect thereto to any Person except the parties' attorneys,
accountants, advisors, shareholders or employees who are aware of and bound
by the provisions of this Section 7.11 without the prior written consent of
the other party. Notwithstanding the foregoing, nothing herein contained
shall prohibit advertising, promotion, public relations or marketing efforts
by USFS relating to the Hawthorn Brand and the Hawthorn System as herein
contemplated. Notwithstanding the foregoing, either party may make
disclosures as required by law, including, without limitation, in response to
court order, in filings or registrations including UFOCs, and disclosures to
counsel and accountants for the respective parties. In addition, any
information which either party obtains with respect to the other party shall
be kept in strict confidence (except as provided above). The provisions of
this Section 7.11 shall survive the expiration or earlier termination of this
Agreement.
7.12 Notices. All notices or other communications delivered hereunder
shall be in writing and shall be deemed duly delivered: (i) three (3)
business days after deposit thereof in the United States mails, certified
mail, return receipt requested with postage prepaid; (ii) upon delivery by
electronic facsimile delivery provided the equipment on which such
transmission is made automatically encodes the transmission with the date and
time thereof; (iii) the next business day following delivery to a nationally
recognized air freight courier service; or (iv) upon actual hand delivery
thereof by personal messenger; provided, however, no such notice shall be
deemed duly delivered unless addressed as set forth on the first page of this
Agreement.
The cost of delivery of any notice shall be born by the party sending the
same. Either party shall have the right to change its address, or facsimile
number, by delivery of notice to the other party in the manner hereinabove
set forth. As an accommodation to the parties, and without it being a
condition to the effectiveness of delivery of any notice, copies of notices
delivered hereunder
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shall likewise be delivered to the following parties by any method of
delivery which is permitted for delivery of the notice itself:
(a) Copies of any notices delivered to USFS shall likewise be delivered
to:
Paul D. Ginsberg, Esq.
Paul, Weiss, Rifkind, Wharton & Garrison
1285 Avenue of the Americas
New York, New York 10019
Telecopy No.: (212) 757-3990
(b) Copies of any notices delivered to HSA shall likewise be delivered
to:
Philip M. Kayman, Esq.
Neal Gerber & Eisenberg
Two North LaSalle Street
Suite 2100
Chicago, Illinois 60602
Telecopy No.: (312) 269-1747
7.13 Joint Drafting. Each of the parties hereto has been represented by
counsel selected by it in connection with the negotiation, preparation,
execution and delivery of this Agreement, and each party, and its counsel,
has participated in the preparation of this Agreement. This Agreement shall
not be construed against, or more strictly with respect to, either of the
parties regardless of which party, or the counsel for such party, had
principal drafting responsibilities.
7.14 Brokers. Each of the parties hereto does hereby represent and warrant
to the other that neither has dealt with any broker or finder in connection
with any of the matters or transactions herein. The provisions of this
Section 7.14 shall constitute additional representations and warranties made
by each of the parties hereto, which shall be subject to the indemnification
provisions set forth in Section 7.4 and 7.5 hereof, and which shall survive
the expiration or earlier termination of this Agreement.
7.15 Severability. In case any one or more of the provisions or part of a
provision contained in this Agreement shall for any reason be held to be
invalid, illegal or unenforceable in any respect in any jurisdiction, such
invalidity, illegality or unenforceability shall be deemed not to affect any
other jurisdiction or any other provision or part of a provision of this
Agreement, but the Agreement shall be reformed and construed in such
jurisdiction as if such provision or part of a provision held to be invalid
or illegal or unenforceable had never been contained herein and such
provision or part reformed so that it would be
58
<PAGE>
valid, legal and enforceable in such jurisdiction to the maximum extent
possible.
7.16 Waiver of Obligations. HSA and USFS shall each have the right, by
written notice delivered to the other party, unilaterally to waive any
obligation of or restriction upon the other party under this Agreement,
either generally, or in any specific circumstance, for any limited period of
time or subject to any other conditions or limitations as may be contained in
such written notice. No acceptance by HSA of any payment by USFS or any other
Person, and no failure, refusal or neglect of HSA or USFS to exercise any
right under this Agreement or to insist upon full compliance by the other
with its obligations hereunder, shall constitute a waiver of any provision of
this Agreement. Any waiver granted by either party on any one occasion shall
in no event be deemed a waiver applicable on any other occasion or in any
other circumstance. HSA and USFS shall not be deemed to have waived or
impaired any right, power or option reserved by this Agreement (including,
without limitation, the right to demand exact compliance with every term,
condition and covenant herein, or to declare any breach thereof to be a
default and to terminate this Agreement prior to the expiration of its Term
in accordance with the provisions hereof) by virtue of any custom or practice
of the parties at variance with the terms hereof, or by reason of any failure
or refusal by either party to act, it being the intention of the parties
hereto that there shall be no implied waivers of any rights or obligations
hereunder, and only a waiver contained in a written notice delivered as
herein provided shall be binding on the waiving party, or may be relied upon
by the other party.
7.17 Rights of Parties Are Cumulative. The rights of HSA and USFS
hereunder are cumulative, unless otherwise herein expressly provided, and no
exercise or infringement by HSA or USFS of any right or remedy hereunder
shall preclude the exercise or enforcement by HSA or USFS of any other right
or remedy hereunder or which HSA or USFS is entitled by law to enforce,
unless otherwise herein provided.
IN WITNESS WHEREOF, the parties hereto have cause this Agreement to be
duly executed on their behalf as of the day and year first above written.
HSA PROPERTIES, L.L.C., a Delaware
limited liability company, by its
managing member
/s/ HSA PROPERTIES, INC.
By /s/ Glen Miller
__________________________
Vice President
59
<PAGE>
U.S. FRANCHISE SYSTEMS, INC., a Delaware
corporation
By /s/ Michael A. Leven
____________________________
_____ President
JOINDER OF ROCKWOOD & CO.
The undersigned, Rockwood & Co., a Delaware corporation, for valuable
consideration which is hereby acknowledged, hereby joins in the execution and
delivery of this Agreement solely for purposes of binding itself to the
provisions of Section 7.1 and Section 7.4. In addition, the undersigned does
hereby unconditionally guarantee full payment, performance, satisfaction and
discharge of the obligations of HSA under and pursuant to Section 7.6 hereof.
Notwithstanding the foregoing, the liability of the undersigned hereunder
shall be limited to an aggregate amount of Twenty-Five Million Dollars
($25,000,000) (the "Guarantee Amount"). At such time as the undersigned has
paid, in the aggregate (and without consideration of interest or other
carrying charges) the Guarantee Amount, whether or not as a result of any
single or group of related occurrences, this joinder shall terminate and the
undersigned shall have no further liability or obligation hereunder.
The provisions of this joinder are intended solely for the benefit of
USFS, and its successors in interest under the above Agreement, and is not
intended for the benefit of, and may not be enforced by, any third party.
ROCKWOOD & CO., a Delaware corporation
By /s/ Glen Miller
____________________________
Vice President
60
<PAGE>
EXHIBITS
<PAGE>
EXHIBIT A
LIST OF EXISTING HOTELS
Hawthorn Suites Atlanta
1500 Parkwood Circle
Atlanta, GA 30339
Hawthorn Suites Austin (Central)
935 LaPosada Drive
Austin, TX 78752
Hawthorn Suites Austin (Northwest)
8888 Tallwood Drive
Austin, TX 78759
Hawthorn Suites Austin (South)
4020 IH 35 South
Austin, TX 78704
Hawthorn Suites Charleston
181 Church Street
Charleston, SC 29401
Hawthorn Suites Dallas (Arlington)
2401 Brookhollow Plaza Drive
Arlington, TX 76006
Hawthorn Suites Dallas (Market Center)
7900 Brookriver Drive
Dallas, TX 75247
Hawthorn Suites Dallas (Richardson)
250 Municipal Drive
Richardson, TX 75080
Hawthorn Suites Durham (currently operating as Meredith Suites)
1900 Meredith Drive
Durham, NC 27713
Hawthorn Suites Edina (Minneapolis)
3400 Edinborough Way
Edina, MN 55435
<PAGE>
Hawthorn Suites Houston
6910 Southwest Freeway
Houston, TX
Hawthorn Suites Kent
6329 South 212th
Kent, WA 98032
Hawthorn Suites Lincolnshire (Chicago)
10 Westminster Way Road
Lincolnshire, IL 60069
Hawthorn Suites Omaha
11025 M Street
Omaha, NE 68137
Hawthorn Suites Orlando (at Sea World)
6435 Westwood Blvd.
Orlando, FL 32821
Hawthorn Suites Pittsburgh
700 Mansfield Avenue
Pittsburgh, PA 15205
Hawthorn Suites San Antonio
4041 Bluemel Road
San Antonio, TX 78240
Hawthorn Suites Tulsa
3509 South 79th East Ave.
Tulsa, OK 74145
3 New England Suites Hotels
-Indianapolis, Indianapolis
-Grand Rapids, Michigan
-Columbus, Ohio
Naperville, Illinois (new construction)
Intersection of I-88 and Hwy 59
<PAGE>
EXHIBIT B
Location: [HOTELADDRESS1]
[HOTELADDRESS2]
ID Number: [IDNUMBER]
Date:______________________
HAWTHORN SUITES LICENSE AGREEMENT
BETWEEN
HAWTHORN FRANCHISING, INC.
AND
[[ENTITYNAMECAPS]]
<PAGE>
TABLE OF CONTENTS
PAGE
RECITALS
1. THE LICENSE ..........................................................
2. GRANT OF LICENSE .....................................................
3. LICENSEE'S RESPONSIBILITIES ..........................................
4. LICENSOR'S RESPONSIBILITIES ..........................................
5. PROPRIETARY RIGHTS ...................................................
6. RECORDS AND AUDITS ...................................................
7. INDEMNITY AND INSURANCE ..............................................
8. TRANSFER .............................................................
9. CONDEMNATION AND CASUALTY ............................................
10. TERMINATION ..........................................................
11. AGREEMENT IS RENEWABLE ...............................................
12. RELATIONSHIP OF PARTIES .............................................
13. MISCELLANEOUS ........................................................
GUARANTY
ATTACHMENT A
ATTACHMENT B
ATTACHMENT C
<PAGE>
LICENSE AGREEMENT
Dated ___, between Hawthorn Franchising, Inc. ("Licensor" or "HFI") and
[[ENTITYNAMECAPS]], a [[ENTITYTYPE]] ("Licensee"), whose address is
-----------.
PARTIES AGREE AS FOLLOWS:
1. The License.
Licensor has been licensed by Hawthorn Suites Associates ("HSA"), under the
terms of a master License Agreement (the "Master License Agreement"), the right
to use and license others to use a unique concept and system relating to the
establishment and operation of certain hotels that operate under the name
"HAWTHORN SUITES" ("Hawthorn Hotels" or the "Hotel System"). Hawthorn Hotels are
all-suite hotels in which the lodging units each contain sleeping quarters,
bath, living room, and kitchen. You have independently investigated the risks of
the business to be operated hereunder, including current and potential market
conditions, competitive factors and risks, and have read Licensor's "Offering
Circular for Prospective Franchisees", and have made an independent evaluation
of all such facts. Aware of the relevant facts, you desire to enter into this
Sublicense Agreement ("Agreement") in order to obtain a license to use the Hotel
System in the operation of a hotel located at [[HOTELADDRESS1]],
[[HOTELADDRESS2]] (the "Hotel").
<PAGE>
A. The Hotel. The Hotel comprises all structures, facilities,
appurtenances, furniture, fixtures, equipment, and entry, exit, parking and
other areas from time to time located on the land identified on the plot plan
most recently submitted to an acknowledged by Licensor in anticipation of the
execution of this Agreement, or located on any land from time to time approved
by Licensor for additions, signs or other facilities. The Hotel currently
includes the facilities listed on Attachment A hereto. No change in the number
of approved standard suites or guest rooms (which are hereinafter referred to
collectively as "Suites") and no other significant change in the Hotel shall be
made without Licensor's approval. Redecoration and minor structural changes that
comply with Licensor's standards and specifications shall not be considered
significant. You represent that you are entitled to possession of the Hotel
during the entire License Term, as defined in Paragraph 2 hereof, without
restrictions that would interfere with any of your obligations under this
Agreement.
B. The Hotel System. The Hotel System is composed of elements, as
designated from time to time by Licensor, designed to identify Hawthorn Suites
hotels to the consuming public and/or to contribute to such identification and
its association with quality standards. The Hotel System at present includes,
without limitation, the tradenames, trademarks, and service marks, "HAWTHORN
SUITES" and such other tradenames, trademarks, and service marks as are now
designated (and may hereafter be designated by Licensor in writing) as part of
the Hotel System (hereinafter "Proprietary Marks"); prototypical architectural
plans, designs, and layouts, including, without limitation, site plan, floor
plan, roof plan, plumbing plan, lobby plan, electrical plan, and landscape plan;
access to a reservation service; a centralized reservation system; a national
Hawthorn Suites directory (the "National Directory"); management and personnel
training, and training programs and materials; management and operational
procedures and techniques as prescribed in the Confidential Manual (hereinafter
the "Manual"); standards and specifications for construction, equipment, and
furnishings, as described in the Manual; advertising, marketing, and promotional
programs; and such other improvements that Licensor may make from time to time.
2. Grant of License. Licensor hereby grants to you a license (the
"License") to use the Hotel System only at the Hotel, only in connection with
the operation of the Hotel and, only in accordance with the Agreement, beginning
with the date hereof and terminating as provided in Paragraph 10 hereof (the
"License Term"). During the License Term, neither Licensor nor any affiliate of
Licensor, shall develop any Hawthorn Hotel within the territorial boundaries as
defined in Attachment B hereto (the "Exclusive Territory"). Your rights to the
Exclusive Territory shall automatically terminate if the Hotel's Quality
Assurance Score (defined in Paragraph 4.C. hereof) falls below 425, or its
then-current equivalent, and you are unable to increase the score to 425 within
thirty (30) days of the inspection, or if this Agreement is otherwise terminated
in accordance with Section 10 hereof. This Agreement
2
<PAGE>
does not limit Licensor's right, or the rights of any parent, subsidiary,
division or affiliate of Licensor, to use or license to others the Hotel System
or any part thereof at any location outside of the Exclusive Territory. Further,
Licensor, or its parent, subsidiary, division or affiliate may conduct any
business activity or license other hospitality concepts under brands other than
the Proprietary Marks outside and within the Exclusive Territory. You
acknowledge that Licensor, its parent, subsidiaries, divisions and affiliates
are and may in the future be engaged in other business activities including
activities related to transient lodging, which may be or may be deemed to be
competitive with the Hotel System; that facilities, programs, services and/or
personnel used in connection with the Hotel System may also be used in
connection with such other business activities of Licensor, its parent,
subsidiaries, divisions or affiliates; and that you are acquiring no rights
hereunder other than the right to use the Hotel System in connection with a
Hawthorn Hotel as specifically defined herein in accordance with the terms of
the Agreement.
3. Licensee's Responsibilities.
A. Operational and Other Requirements. During the License Term, you shall:
(1) maintain a high moral and ethical standard and atmosphere at the
Hotel;
(2) maintain the Hotel in a clean,safe and orderly manner and in first
class condition;
(3) provide efficient, courteous, and high-quality service to the
public;
(4) operate the Hotel twenty four (24) hours a day, every day;
(5) strictly comply in all respects of the Hotel System and the
Manual and with all other policies, procedures and requirements of
Licensor which may be from time to time communicated to you;
(6) strictly comply with Licensor's reasonable requirements to use
only reliable sources of supplies for the Hotel including any
suppliers approved by Licensor;
(7) strictly comply with Licensor's requirements as to:
(a) the types of services, products, and amenities that may be
used, promoted or offered at the Hotel;
(b) use, display, style
and type of signage;
(c) directory and reservation service listings of the Hotel;
3
<PAGE>
(d) training of persons to be involved in the operation of the
Hotel, including all expenses incurred by you associated
therewith;
(e) participation in all marketing, reservation service,
advertising,training and operating programs designated by
Licensor as System-wide (or area-wide) programs in the best
interests of hotels using the Hotel System; (f) maintenance,
appearance and condition of the Hotel; and (g) quality and
type of service offered to customers at the Hotel.
(8) use such automated guest service and/or hotel management and/or
telephone system(s) as Licensor shall specify, including any
additions, enhancements, supplements or variants developed during the
term hereof;
(9) participate in and use the those reservation services as Licensor
shall specify, including any additions, enhancements, supplements or
variants thereof which may be developed during the term hereof;
(10) adopt improvements or standard changes to the Hotel System as
may be from time to time designated by Licensor, which improvements
are not intended to cause undue hardship;
(11) strictly comply with all governmental requirements including the
filing and maintenance of any required trade name or fictitious name
registrations, pay all taxes, and maintain all governmental licenses
and permits necessary to operate the Hotel in accordance with the
Hotel System;
(12) permit inspection of the Hotel by Licensor's representatives at
any time and give them free lodging for such time as may be
reasonably necessary to complete their inspections;
(13) insure that no part of the Hotel System is used to further or
promote a competing business or other lodging facility, except as
Licensor may approve for those competing businesses or lodging
facilities owned, licensed, operated or otherwise approved by
Licensor or its parent, divisions, subsidiaries and/or affiliates;
(14) in all respects use your best efforts to reflect credit upon and
create favorable public response to the name "Hawthorn Suites";
(15) promptly pay to Licensor all amounts due Licensor, its parent,
divisions, subsidiaries and/or affiliates as royalties or fees or for
goods or services purchased by you;
4
<PAGE>
(16)comply with Licensor's requirements concerning confidentiality of
information, and, specifically; treat the Manual and all supplements
and revisions as confidential; use all reasonable efforts to keep the
information confidential; not copy the Manual in any way, not make it
available to any unauthorized person; only disclose information
contained in the Manual only to persons who must have access to it in
connection with their employment with you; and obtain each such
person's agreement to keep such information confidential; and
(17) conduct your advertising in a dignified manner and conform to
the standards and requirements as Licensor may specify from time to
time in writing; submit samples of all advertising and promotional
materials to Licensor for approval; and discontinue use of any
disapproved material upon receipt of such written notice.
B. Performance of the Work. You agree to perform the construction and
renovation and/or conversion work on the property including without limitation,
the purchase of furniture, fixtures, and equipment set forth on Attachment C
hereto and incorporated herein by reference (the "Work"). You acknowledge that
your agreement to perform the Work is an essential element of the consideration
relied upon by Licensor in entering into the Agreement. Your failure to perform
the Work in accordance with Licensor's requirements and specifications
(including the progress, milestone, completion and other dates specified in
Attachment "C") shall constitute a material breach of your obligations under
this License. Licensee may not commence operation of the Hotel as a Hawthorn
Suites hotel without Licensor's written authorization. Notwithstanding any
consent by Licensor to the authorized conditional opening of the Hotel, all
upgrading shall be completed and the Hotel shall otherwise be in compliance with
the License and shall be open as a Hawthorn Suites hotel on or before a date
____ months from the date hereof.
C. Upgrading of the Hotel. Licensor shall review the Quality
Assurance Scores (as defined in Paragraph 4.C hereof) of the Hotel upon each
five (5) year anniversary of the opening of the Hotel. If over the previous
five(5) year period, the Hotel has failed to maintain an average score of four
hundred fifty (450) or greater out of a possible five hundred (500) (or its
then-current equivalent), Licensor may require modernization of the Hotel,
softgood rehabilitation (including but not limited to carpet, drapes,
bedspreads) or other upgrading of the Hotel. If the upgrading requirements
contained in this Paragraph 3.C. cause you undue hardship, you may terminate
this Agreement by paying a fee computed according to Paragraph 10.E.
D. Fees.
(1)For each month (or part of a month) during the License Term, you
shall pay to Licensor by the tenth (10th) of the following month:
5
<PAGE>
(a) a royalty fee equal to five percent (5%) of the Gross Room
Revenues of the Hotel, with deductions for sales and room taxes only ("Gross
Room Revenues");
(b) an "Advertising Fund Contribution" of 2.5 percent of Gross Rooms
Revenue. The Advertising Fund Contribution payments do not include the cost,
installation or maintenance of reservation services equipment or training.
Licensor may, in its sole discretion and at any time, increase the Advertising
Fund Contribution amount above by no more than ten percent (10%) per year
provided that Licensee's Advertising Fund Contributions shall not exceed a
maximum of three percent (3.0%). Licensor hereby acknowledge that each such
increase, if any, shall not be imposed unless Licensor imposes a similar
increase on all licensees operating under the Hotel System according to license
agreements that contain provisions similar to this Paragraph 3(D)(1)(6) that
provides for such increased contributions by licensees; and
(c) an amount equal to any sales, gross receipts, or similar tax
imposed on Licensor and calculated solely on payment required hereunder, unless
the tax is an optional alternative to an income tax otherwise payable by
Licensor.
(2) "Gross Room Revenues" shall mean the gross receipts attributable
to or payable for the rental of guest rooms at the Hotel, including, without
limitation, the net proceeds (after deduction of the expenses of adjustment and
collection) of use and occupancy, or for business interruption, rent loss, or
similar insurance with respect to the Hotel (provided that insurance proceeds
shall be included in Gross Room revenues only when and to the extent actually
received). Gross Room Revenues shall not include gratuities to employees or
service charges levied in lieu of such gratuities, which, in either case, are
payable to employees, or federal, state, and local taxes or fees collected by
you for transmittal to the appropriate taxing authorities.
(3) All monthly payments required by this Agreement shall be
submitted to Licensor together with all reports required under this Agreement.
Licensor may require that all monthly payments required under this Agreement
shall be made by telegraphic transfer, automatic debit arrangement, or other
means as Licensor may specify from time to time, to a bank account designated by
Licensor. In the event such arrangements are made, Licensor shall be responsible
for the cost of connection to such service and you shall maintain sufficient
funds in your bank account to pay all such debited obligations. Any payment or
report not actually received by Licensor on or before such date shall be deemed
overdue, or, if an automatic debit or similar arrangement is utilized and funds
are insufficient to cover your payment obligation, any amounts unpaid on or
before such date shall be deemed overdue. If any payment is overdue, you shall
pay to Licensor, in addition to the amount overdue, interest on such amount from
the day it was due until paid at one and a half
6
<PAGE>
percent (1.5%) per month or the maximum rate permitted by law, whichever is
less. Entitlement to such interest shall be in addition to any of the remedies
Licensor may have.
(4) A standard initial fee for additional guest rooms equal to the
higher of -(a) Three Hundred and Fifty Dollars ($350) per room; or (b) the
then-current per room charge for the Application Fee per room shall be paid by
you to Licensor on your submission of an application to add any Suites to the
Hotel. As a condition to Licensor granting its approval of such application,
Licensor may require you to upgrade the Hotel, subject to Paragraph 3.C.
(5) Local and regional marketing programs and related activities may
be conducted by you, but only at your expense and subject to Licensor's
requirements. Reasonable charges may be made by Licensor for optional
advertising materials ordered or used by you for such programs and activities.
4. Licensor's Responsibilities.
A. Training. During the License Term, Licensor shall continue to specify
and provide required and optional training programs at various locations that
Licensor shall designate. Reasonable charges may be made for required training
materials. Travel, lodging and other expenses of you and your employees shall be
borne by you. If such training is held at your Hotel, you must provide
Licensor's representatives lodging at the Hotel at no cost to Licensor.
B. Reservation Services. Provided that Licensee is in full compliance with
its material obligations under this Agreement, Licensor will afford License
access to reservation services for the Hotel.
C. Consultation on Operations, Facilities and Marketing. Licensor shall
provide you with a set a confidential prototypical plans and specifications,
which must be adapted by your architects and engineers. We will review your site
layout and working drawings prepared by your architects, and any other related
plans and specifications. In addition Licensor shall, from time to time at
Licensor's sole discretion, make available to you consultation and advice in
connection with operations, facilities and marketing, including lists of
suppliers for Hotel fixtures, furnishings, signs and other equipment. Licensor
shall also periodically evaluate the performance of the Hotel, but in any case
at least once each year, by giving your Hotel a Quality Assurance Score.
D. Use of Marketing/Reservation Contribution. The Marketing/Reservation
Contribution shall be used by Licensor for costs associated with advertising,
promotion, publicity, market research and other marketing programs and related
activities, cost of
7
<PAGE>
maintaining and producing a National Directory, as well as reservations
programs, services and overhead for individuals directly related to national and
local marketing and reservations. For the purpose of this Paragraph, overhead
shall be limited to individuals directly related to the Reservation or Marketing
departments such as the Vice President of Marketing and costs related to the
financial management of the fund. Licensor shall not use any of the funds in the
Marketing and Reservation Contributions to pay for marketing directly related to
the sale of franchises. Licensor is not obligated to expend funds for marketing
or reservation services in excess of the amounts received from licensees using
the Hotel System. In the event excess amounts remain at the end of any taxable
year, all expenditures in the following taxable year(s) shall be made first out
of accumulated earnings from previous years, next out of earnings in the current
year, and finally from contributions. Marketing and Reservation Contributions
shall not be an asset of Licensor, and an audit of the operation of the
Marketing and Reservation Contributions shall be prepared annually by an
independent certified public accountant selected by Licensor and shall be made
available to you on request. Licensor shall maintain the National Directory,
listing the address and telephone number of all Hawthorn Suites operating under
the Hotel System.
E. Application of Manual. Licensor shall provide you, on loan, one (1) copy
of the Manual. All hotels operated within the Hotel System shall be subject to
the Manual, as it may from time to time be modified or revised by Licensor,
including limited exceptions which may be made by Licensor based on local
conditions or special circumstances. Each change in the Manual must be explained
in writing to you at least thirty (30) days before it goes into effect.
F. Other Arrangements for Marketing Etc. Licensor may enter into
arrangements for development, marketing, operations, administrative, technical
and support functions, facilities, programs, services and/or personnel with any
other entity and may use any facilities, programs, services and/or personnel
used in connection with the Hotel System in connection with any business
activities of its parent, subsidiaries, divisions or affiliates.
G. Inspections/Compliance Assistance. Licensor has the right to inspect the
Hotel at any time, with or without notice to you, to determine if the Hotel is
in compliance with the standards and rules of operation set forth in the Manual.
If the Hotel fails to comply with such standards and rules of operation,
Licensor may, at its option and at your cost, require an action plan to correct
the deficiencies. You must then take all steps necessary to correct any
deficiencies within the times established by Licensor. Licensor's approval of an
action plan does not waive any rights it has or may have under this Agreement
not does it relieve you of any obligations under this Agreement.
8
<PAGE>
5. Proprietary Rights
A. Ownership of the Hotel System and Proprietary Marks. You acknowledges and
shall not contest, either directly or indirectly, Licensor's unrestricted and
exclusive right to license the Hotel System and any element(s) or component(s)
thereof, and acknowledges that Licensor has the sole right to grant licenses to
use all or any element(s) or component(s) of the Hotel System. You specifically
agree and acknowledge that HSA is the owner of all right, title and interest in
and to the Proprietary Marks together with the goodwill symbolized thereby and
that you shall not contest directly or indirectly the validity or ownership of
the marks either during the term of this Agreement or at any time thereafter.
All improvements and additions whenever made to or associated with the Hotel
System by the parties to this Agreement or anyone else, and all Proprietary
Marks, and all goodwill arising from your use of Licensor's marks shall inure to
the benefit of and become the property of HSA. Upon expiration or termination of
this Agreement, no monetary amount shall be assigned as attributable to any
goodwill associated with your use of the Hotel System or any element(s) or
component(s) of the Hotel System including the name or marks.
B. Trademark Disputes. Licensor and/or HSA shall have the sole right and
responsibility to handle disputes with third parties concerning use of all or
any part of the Hotel System, and you shall, at your reasonable expense, extend
your full cooperation to Licensor and/or HSA in all such matters. All recoveries
made as a result of disputes with third parties regarding use of the Hotel
System or any part thereof shall be for the account of Licensor and/or HSA.
Neither Licensor nor HSA need initiate suit against alleged imitators or
infringers and may settle any dispute by grant of a license or otherwise. You
shall not initiate any suit or proceeding against alleged imitators or
infringers or any other suit or proceeding to enforce or protect the Hotel
System.
C. Protection of Name and Marks. Both parties shall make every effort
consistent with the foregoing to protect and maintain the Proprietary Marks and
their distinguishing characteristics. You agree to execute any documents deemed
necessary by Licensor, HSA or their respective counsel to obtain protection for
Licensor's marks or to maintain their continued validity and enforceability. You
agree to use the names and marks associated with the Hotel System only in
connection with the operation of a Hawthorn Hotel and in the manner authorized
by Licensor and you acknowledge that any unauthorized use thereof shall
constitute infringement of Licensor's and HSA's rights. You must notify Licensor
immediately, in writing, of any infringement or challenge to your use of
Licensor's marks or of any unauthorized use or possible misuse of Licensor's
marks or Licensor's proprietary information.
9
<PAGE>
6. Records and Audits.
A. Monthly Reports. At least monthly, you shall prepare a statement which
shall include all information concerning Gross Rooms Revenue, other revenues
generated at the Hotel, room occupancy rates, reservation data and other
information required by Licensor that may be useful in connection with marketing
and other functions of Licensor, its parent, subsidiaries, divisions or
affiliates (the "Data"). The Data shall be the property of Licensor. By the
tenth (10th) of each month, you shall submit to Licensor a statement setting
forth the Data for the previous month and reflecting the computation of the
amounts then due under Paragraph 3.D hereof. The statement shall be in such form
and detail as Licensor may reasonably request from time to time, and may be used
by Licensor for its reasonable purposes. Licensor shall not willingly or
knowingly provide Data on your property as an inducement to develop other hotel
brands in your market area.
B. Preparation and Maintenance of Records. You shall, in a manner and form
satisfactory to Licensor and utilizing accounting and reporting standards as
reasonably required by Licensor, prepare on a current basis (and preserve for no
less than four (4) years), complete and accurate records concerning Gross Rooms
Revenue and all financial, operating, marketing and other aspects of the Hotel,
and maintain an accounting system which fully and accurately reflects all
financial aspects of the Hotel and its business. Such records shall include but
not be limited to books of account, tax returns, governmental reports, register
tapes, daily reports, and complete quarterly and annual financial statements
(profit and loss statements, balance sheets and cash flow statements).
C. Audit. Licensor or its designated agents shall have the right at any time
to examine and copy, at its expense, all books, records, and your tax returns
related to the Hotel and, at its option, to have an independent audit made. If
an inspection or audit should reveal that payments have been understated in any
report to Licensor, then you shall immediately pay to Licensor the amount
understated upon demand, in addition to interest from the date such amount was
due until paid, at one and one half percent (1.5%) per month or the maximum rate
permitted by law, whichever is less. In such event, Licensor shall also have the
right to require that all your future financial statements related to the Hotel
be audited at your expense for each fiscal year by an independent certified
public accounting firm selected by you and approved by Licensor. If an
inspection discloses an underpayment to Licensor of five percent (5%) or more of
the total amount that should have been paid to Licensor during any six (6) month
period, you shall, in addition to repayment of such understated amount, with
interest, reimburse Licensor for any and all costs and expenses incurred in
connection with the inspection or audit (including, without limitation,
reasonable
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accounting and attorneys' fees). The foregoing remedies shall be in addition
to any other remedies Licensor may have, including, without limitation the
remedies for default.
D. Annual Financial Statements. At Licensor's request, you shall submit to
Licensor as soon as available but not later than ninety (90) days after the end
of your fiscal year, complete financial statements for such year. You shall
certify them to be true and correct and to have been prepared in accordance with
generally accepted accounting principles consistently applied, and any false
certification shall be a breach of this Agreement. Licensor may also request,
from time to time, gross operating profits percentages and certain operating
statistics (i.e. energy and repairs costs) which you must provide.
7. Indemnity and Insurance.
A. Indemnity. It is understood and agreed that nothing in this Agreement
authorizes either party to make any contract, agreement, warranty or
representation on the other's behalf, or to incur any debt or other obligation
in the other's name, and that neither party shall in any event assume liability
for, or be deemed liable hereunder as a result of, any such action, or by reason
of any act or omission of the other party or any claim or judgement arising
therefrom. You shall indemnify and hold Licensor and HSA, their parents,
affiliates, subsidiaries, officers, directors, agents, and employees, harmless
against any and all claims arising directly or indirectly from, as a result of,
or in connection with, your operation of the Hotel, including claims of
intentional or negligent conduct by you, and any claims of acts or omissions by
Licensor or HSA relating to the operation of the Hotel System (even though
Neither HSA nor Licensor is actively involved in the operation or supervision of
the Hotels, as well as the costs, including reasonable attorney's fees, of
defending against them. You agree that all of the obligations of Licensor under
this Agreement are to you, and no other party is entitled to rely on, enforce,
or obtain relief for breach of such obligations either directly or indirectly or
by subrogation. Licensor shall not indemnify or hold you harmless against any
action or claim by any third party based upon Licensor's exercise of any of its
rights in accordance with the terms of this Agreement.
B. Insurance. During the License Term, you shall comply with all insurance
requirements of any lease or mortgage covering the Hotel, and Licensor's
specifications for insurance as to amount and type of coverage as may be
reasonably specified by Licensor from time to time in writing, and shall in any
event maintain as a minimum the following insurance underwritten by an insurer
approved by Licensor:
(1) employer's liability and workers' compensation insurance as
prescribed by applicable law; and
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(2) comprehensive general liability insurance (with products, completed
operations and independent contractors coverage) and comprehensive automobile
liability insurance, all on an occurrence basis naming Licensor and its then
current parent, subsidiaries, divisions, affiliates and their successors and
assigns as additional insureds and underwritten by an insurer approved by
Licensor with single-limit coverage for personal and bodily injury and property
damage of at least Five Million Dollars ($5,000,000) for each occurrence. In
connection with all significant construction at the Hotel during the License
Term, you shall cause the general contractor to maintain with an insurer
approved by Licensor comprehensive general liability insurance (with products,
completed operations and independent contractors coverage) in at least the
amount of Five Million Dollars ($5,000,000) for each occurrence with Licensor
and its then current parent, subsidiaries, divisions, affiliates and their
successors and assigns named as additional insureds.
C. Changes in Insurance. Simultaneously herewith, annually hereafter and
each time a change is made in any insurance or insurance carrier, you shall
furnish to Licensor certificates of insurance including the term and coverage of
the insurance in force, the persons insured, and the fact that the coverage may
not be cancelled, altered or permitted to lapse or expire without thirty (30)
days' advance written notice to Licensor.
8. Transfer.
A. Transfer by Licensor. Licensor shall have the right to transfer or
assign all or any part of its rights or obligations in this Agreement to any
person or legal entity, and you hereby consent to such transfer.
B. Transfer by Licensee.
(1) You understand and acknowledge that the rights and duties set forth
in this Agreement are personal to you, and that Licensor has granted this
license in reliance on your business skill, financial capacity, and character,
and that of your partners or shareholders. Accordingly, neither you nor any
immediate or remote successor to any part of your interest in this license, nor
any individual, partnership, corporation, or other legal entity which directly
or indirectly owns any interest in this license or in you shall sell, sign,
transfer, convey, give away, mortgage, or otherwise encumber any direct or
indirect interest in this License (including any ownership interest in you), the
Hotel, or a substantial portion of the assets (including building and real
estate) of the Hotel without the prior written consent of Licensor.
(2) If the transfer is equal to less than a fifty percent (50%) equity
interest in you and does not have the effect of transferring control (as
described in Paragraphs (3) and (4) below), the transfer shall not require
the prior approval of Licensor, provided that
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(3) If a transfer, alone or together with other previous, simultaneous, or
proposed transfers, would have the effect of transferring a controlling interest
in the License, you, the Hotel, or greater than fifty percent (50%) of the
assets (including building and real estate) of the Hotel, such transfer shall
require Licensor's prior approval, and Licensor may, in its sole discretion,
require any or all of the following as conditions of its approval, which
approval shall not be unreasonably withheld:
(a) all of your accrued monetary obligations to Licensor and its
subsidiaries and affiliates and all other outstanding obligations related to the
Hotel shall have been satisfied and you are not otherwise in default;
(b) the transferee, and all shareholders in the transferee, shall
demonstrate to Licensor's satisfaction that the transferee and its shareholders
or general partners, as appropriate, meet Licensor's then current qualifications
being applied to new applicants including, business standards, ability to
conduct the Hotel (as may be evidenced by prior related business experience or
otherwise), and have adequate financial resources and capital to operate the
Hotel;
(c) transferee and the shareholders or general partners in the
transferee shall execute the standard form license agreement then being offered
to new Hotel System licensees (provided, however, that the royalty fee and the
Marketing/Reservation Contribution shall be the greater of the then-current fees
or the same as the amount assessed on the date of the transfer, which amount
shall be adjusted in accordance with the terms of the license agreement
executed) and such other ancillary agreements as Licensor may require for the
Hotel and the general manager shall complete the initial training program then
in effect for new licensees;
(d) The Hotel shall be upgraded to conform to the then-current
standards and specifications for hotels operating under the Hotel System if the
most recent Quality Assurance Score was below four hundred and fifty (450). In
any event, all deficiencies noted on the most recent inspection must be remedied
by the transferee within ninety (90) days of such transfer. You shall complete
any upgrade required under this Paragraph within the time specified by Licensor;
(e) You shall pay a transfer fee equal to Two Thousand Five Hundred
Dollars ($2,500.00), for a term equal to the balance of the original term of
this License. No fee shall be required for transfers to the spouse, issue,
parent, or sibling of a partner or shareholder in you, or from one partner or
shareholder to another. If the transferee requests approval of a term greater
than the remaining term of this License, the then-current standard minimum
application fee, prorated according to the period of time requested which
exceeds the original term of this License, shall be paid to Licensor;
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(f) the transferor shall have executed a general release, in a form
satisfactory to Licensor, of any and all claims against Licensor and its
officers, directors, shareholders, and employees, in their corporate and
individual capacities, including, without limitation, claims arising under
federal, state, and local laws, rules, and ordinances;
(g) the transferee, and all shareholders or general partners in the
transferee, shall enter into a written assignment, in a form satisfactory to
Licensor, assuming and agreeing to discharge all of your obligations under
this Agreement;
(h) you shall remain liable for all obligations to Licensor and its
subsidiaries and affiliates in connection with the Hotel prior to the
effective date of the transfer and shall execute any and all instruments
reasonably requested by Licensor to evidence such liability.
(4) For the purposes of this Agreement, "control" shall mean the
possession, direct or indirect, of the power to direct or cause the direction of
the management and policies of a person, corporation or other business entity,
whether through the ownership of voting securities, by contract, or otherwise.
(5) Any purported assignment or transfer, by operation of law or otherwise,
not having the prior written consent of Licensor shall be null and void and
shall constitute a material breach of this Agreement, for which Licensor may
then terminate without opportunity to cure pursuant to Paragraph 10.C. of this
Agreement, and seek injunctive relief as well as monetary damages.
C. Transfers of the License or Equity Interest in Licensee Upon Death. Upon
the death or mental incompetency of you or a person owning all or any interest
in you, the executor, administrator, or personal representative of such person
shall transfer within three (3) months after such death or mental incompetency
his interest to a third party approved by Licensor. Such transfers, including,
without limitation, transfers by devise or inheritance, shall be subject to the
same conditions as any inter vivos transfer. However, in the case of transfer by
devise or inheritance, if the heirs or beneficiaries of any such person are
unable to meet the conditions in this Paragraph 12, the personal representative
of the deceased shareholder shall have reasonable time to dispose of the
deceased's interest in you, which disposition shall be subject to all the terms
and conditions for transfers contained in this Agreement. If the interest is not
disposed of within nine (9) months, Licensor may terminate this Agreement.
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D. Registration of a Proposed Transfer of Equity Interests. Securities in
you may be offered to the public only with the prior written consent of
Licensor, which consent shall not be unreasonably withheld. All materials
required by federal or state law for the sale of any interest in you shall be
submitted to Licensor for review prior to filing with any government agency; and
any materials to be used and any exempt offering shall be submitted to Licensor
for review prior to their use. No offering by you shall imply (by use of the
Proprietary Marks or otherwise) that Licensor is participating as an
underwriter, issuer, or officer of you or Licensor's securities; and Licensor's
review of any offering shall be limited solely to the subject of the
relationship between you and Licensor. You and other participants in the
offering must fully indemnify Licensor in connection with the offering. For each
proposed offering, you shall pay to Licensor a non-refundable fee of Five
Thousand Dollars ($5,000.00), or such greater amount as is necessary to
reimburse Licensor for its reasonable cost and expenses associated with
reviewing the proposed offering, including, without limitation, legal and
accounting fees.
E. Non-Waiver of Claims. Licensor's consent to a transfer of any interest
in the license granted herein shall not constitute a waiver of any claims it may
have against the transferring party, nor shall it be deemed a waiver of
Licensor's right to demand exact compliance with any of the terms of this
Agreement by the transferee.
F. Licensor's Right of First Refusal. If in the event that any party
holding any direct or indirect interest in this License, in you, or in all or
substantially all of the assets of the Hotel desires to accept any bona fide
offer from a third party to purchase such interest, you shall notify Licensor as
provided in Paragraph 13.F. hereof, and shall provide such information and
documentation relating to the offer as Licensor may require. Licensor shall have
the right and option, provided the third party wishes to remove the Hotel from
the Hotel System, exercisable within thirty (30) days after receipt of such
written notification, to send written notice to the seller that Licensor intends
to purchase the seller's interest on the same terms and conditions offered by
the third party. If Licensor elects to purchase the seller's interest, closing
on such purchase shall occur within ninety (90) days from the date of notice to
the seller of the election to purchase by Franchisor. If Licensor elects not to
purchase the seller's interest, any material change thereafter in the terms of
the offer from a third party shall constitute a new offer subject to the same
rights of first refusal by Licensor as in the case of the third party's initial
offer (minor changes to the offer shall not constitute a new offer and shall be
subject to the notice period of the initial offer). Failure of Licensor to
exercise the option afforded by this Paragraph 8.F. shall not constitute a
waiver of any other provision of this Agreement, including all of the
requirements of this Paragraph 8.F., with respect to a proposed transfer. In the
event the consideration, terms, and/or conditions offered by a third party are
such that Licensor may not reasonably be required to furnish the same
consideration, terms, and/or conditions, then Licensor may purchase the interest
proposed to be sold for the reasonable equivalent in cash. If the parties cannot
agree within thirty (30) days on the reasonable equivalent in cash of the
consideration, terms, and/or conditions
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shall have no right of first refusal provided the third party meets the
qualifications set forth in Paragraph 8.
9. Condemnation and Casualty.
A. Condemnation. You shall, at the earliest possible time, give Licensor
full notice of any proposed taking of the Hotel by eminent domain. In the event
the Hotel is taken by eminent domain, Licensor shall give due and prompt
consideration, without any obligation, to transferring this Agreement to a
nearby location selected by you and approved by Licensor as promptly as
reasonably possible, and in any event within four (4) months of the taking. If
the new location is approved by Licensor and the transfer authorized by Licensor
and if you open a new hotel at the new location in accordance with Licensor's
specifications within two (2) years of the closing of the Hotel, the new hotel
shall thenceforth be deemed to be the Hotel licensed under this Agreement. If a
condemnation takes place and a new hotel does not, for whatever reason, become
the Hotel under this Agreement in strict accordance with this Paragraph (or if
it is reasonably evident to Licensor that such shall be the case), this
Agreement will terminate forthwith upon notice thereof by Licensor to you,
without the payment of liquidated damages hereunder.
B. Casualty. If the Hotel is damaged by fire or other casualty, you shall
expeditiously repair the damage. If the damage or repair requires closing the
Hotel, you shall immediately notify Licensor, shall repair or rebuild the Hotel
in accordance with Licensor's standards, shall commence reconstruction within
four (4) months after closing, and shall reopen the Hotel for continuous
business operations as soon as practicable (but in any event within twenty four
(24) months after closing of the Hotel), giving Licensor ample advance notice of
the date of reopening. If the Hotel is not reopened in accordance with this
Paragraph 9.B., this Agreement shall forthwith terminate upon notice thereof by
Licensor to you, with the payment of liquidated damages calculated in the manner
set forth in Paragraph 10.E.
C. No Extensions of Term. Nothing in this Paragraph 9 shall extend the
License Term but you shall not be required to make any payments pursuant to
Paragraphs 3.C. (1), (2) or (3) for periods during which the Hotel is closed by
reason of condemnation or casualty.
10. Termination
A. Expiration of Term. This Agreement shall expire without notice effective
20 years from the authorized opening date, subject to earlier termination as set
forth herein. The parties recognize the difficulty of ascertaining damages to
Licensor resulting from premature termination of this Agreement, and have
provided for liquidated damages in Paragraph 10.F. below, which liquidated
damages represent the parties' best estimate as to the damages arising from the
circumstances in which they are provided.
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B. Default with Opportunity to Cure.
(1) Except as provided in Paragraphs 10.C. hereof, you shall have
thirty (30) days (unless otherwise specified herein or in the notice by
Licensor) from receipt of written notice of a default within which to remedy
such default. If any such default is not cured within that time, or such longer
period as applicable law may require (or such longer period as may be reasonably
required by you to cure any non-monetary default if you immediately commence,
diligently and in good faith pursues, and cures such default), this Agreement
shall terminate without further notice to you effective immediately upon the
expiration of the thirty (30) day period, expiration of any extended period as
described above, or such longer period as applicable law may require.
Alternatively, Licensor may, at its option, suspend your access to the
reservation system until such default has been cured to Licensor's satisfaction.
You shall be in default hereunder for any failure to comply with any of the
requirements imposed by this Agreement, as it may from time to time reasonably
be supplemented by the Manual, or to carry out the terms of this Agreement in
good faith.
(2) If during the twelve (12) months preceding a notice of default in
(1) above you shall have engaged in a violation of this Agreement for which a
notice of default was given and such default was remedied, the period given to
remedy defaults thereafter shall, if and to the extent permitted by law, be ten
(10) days instead of thirty (30).
(3) In any judicial proceeding in which the validity of termination is
at issue, Licensor shall not be limited to the reasons set forth in any notice
sent under this Paragraph.
(4) Licensor's notice of termination or suspension of services as
described in Section 10(B)(1) shall not relieve you of your obligations
hereunder.
C. Immediate Termination by Licensor. This Agreement shall immediately
terminate without notice to you if:
(1) (a) you, or any Guarantor of your obligations hereunder (a
"Guarantor"), shall generally not pay your debts as they become due or shall
admit in writing an inability to pay your debts, or shall make a general
assignment for the benefit of creditors; or
(b) you, or any Guarantor, shall commence or consent to any case,
proceeding or other action seeking reorganization, arrangement, adjustment,
liquidation, dissolution
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or composition of you or your debts under any law relating to bankruptcy,
insolvency, reorganization or relief of debtors, or seeking appointment of a
receiver, trustee, custodian or other similar official for it or for all or
any substantial part of its property; or
(c) you, or any Guarantor, shall take any corporate or other action to
authorize any of the actions set forth above in Paragraphs (a) or (b); or
(d) any case, proceeding or other action against you or any such
guarantor shall be commenced seeking to have an order for relief entered against
it as debtor, or seeking reorganization, arrangement, adjustment, liquidation,
dissolution or composition of it or its debts under any law relating to
bankruptcy, insolvency, reorganization or relief of debtors, or seeking
appointment of a receiver, trustee, custodian or other similar official for it
or for all or any substantial part of its property, and such case, proceeding or
other action (i) results in the entry of an order for relief against it which is
not fully stayed within seven (7) business days after the entry thereof or (ii)
remains undismissed for a period of forty-five (45) days; or
(e) an attachment remaining on all or a substantial part of the Hotel
or of your or any Guarantor's assets for thirty (30) days; or
(f) you or any Guarantor fails, within sixty (60) days of the entry of
a final judgment against you in any amount exceeding Fifty Thousand Dollars
($50,000), to discharge, vacate or reverse the judgment, or to stay execution of
it, or if appealed, to discharge the judgment within thirty (30) days after a
final adverse decision in the appeal; or
(2) you cease to operate the Hotel at the Location or under the
Proprietary Marks, or loses possession or the right to possession of all or a
significant part of the Hotel, except as otherwise provided in Paragraph 9
hereof; or
(3) you contest in any court or proceeding Licensor's ownership of the
Hotel System or any part of it, or the validity of any of the Proprietary
Marks; or
(4) a breach of Paragraph 8 hereof occurs; or
(5) you fail to continue to identify the Hotel to the public as a
Hawthorn Hotel; or
(6) any action is taken toward dissolving or liquidating you or any
Guarantor, if it is a corporation or partnership, except for death of a
partner; or
(7) you or any of your principals is, or is discovered to have been,
convicted of a felony (or any other offense if it is likely to adversely
reflect upon or affect the Hotel, the Hotel
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(8) you knowingly maintains false books and records of account or
knowingly submits false reports or information to Licensor; or
(9) if you intentionally discloses or divulges the contents of the
Manual or other trade secrets or confidential information provided to you by
Licensor to any unauthorized person or fails to exercise reasonable care to
prevent such disclosure; or
(10) if you intentionally or negligently makes any material false
statements or omissions to Licensor in connection with your Application.
D. De-identification of Hotel Upon Termination. You shall take whatever
action is necessary to assure that no use is made of any part of the Hotel
system at or in connection with the Hotel or otherwise after the license term
ends. This shall involve, among other things, returning to Licensor the
Manual and all other materials proprietary to Licensor, removal of all
distinctive signs, changing the telephone listing and removal of all terms
bearing the Hawthorn Hotel logo, name, trademarks and/or service marks.
Further, until all modifications required by this Paragraph 10.D. are
completed, your shall (i) maintain a conspicuous sign at the registration
desk in a form specified by Licensor stating that the Hotel is no longer
associated with the Hotel System, and (ii) advise all customers or
prospective customers telephoning the Hotel that it is no longer associated
with the Hotel System. Anything not done by you within thirty (30) days after
the license term ends, may be done at your expense by Licensor or its agents,
who may enter upon the premises of the Hotel for that purpose.
E. Payment of Liquidated Damages. If this Agreement terminates pursuant
to Paragraphs 3.B., 9.B., 10.C. or 10.D. above at any time after the first
twenty four (24) months of operation, you shall promptly pay Licensor (in
addition to any amounts then due to Licensor, and only as liquidated damages
for the premature termination of this Agreement, and not as a penalty or as
damages for breaching this Agreement or in lieu of any other payment) a lump
sum based on the average occupancy rate for the twelve (12) months preceding
the termination as follows:
1. if the occupancy rate was less than fifty percent (50%) then you
shall pay no liquidated damages;
2. if the occupancy rate was fifty percent (50%) to fifty nine and
nine tenths percent (59.9%) then you shall pay an amount equal to twelve (12)
months of fees required under Paragraph 3.C.1;
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3. if the occupancy rate was sixty percent (60%) to sixty nine and
nine tenths percent (69.9%) then you shall pay an amount equal to twenty four
(24) months of fees required under Paragraph 3.C.1;
4. if the occupancy rate was seventy percent (70%) or greater then you
shall pay an amount equal to thirty six (36) months of fees required under
Paragraph 3.C.1;
5. if this Agreement terminates at any time during the first twenty
four (24) months of operation, you shall promptly pay to Licensor liquidated
damages equal to thirty six (36) times the average monthly royalty paid under
Paragraph 3.C.1.
11. Renewal. Licensee may apply to renew this License Agreement for a term
of ten years. Licensor will require submission of a completed application on
Licensor's then current form, submission of an application fee in the amount
equal to the then current fee charged to new licensees, and Licensor's
approval of the application. Licensor may require reasonable renovation and
upgrading of the Hotel to applicable Hotel System standards as a condition or
pre-condition thereof.
12. Relationship of Parties.
A. No Agency Relationship. You are an independent contractor. Neither party
is the legal representative or agent of, or has the power to obligate (or has
the right to direct or supervise the daily affairs of) the other for any purpose
whatsoever. Licensor and you expressly acknowledge that the relationship
intended by them is a business relationship based entirely on, and defined by,
the express provisions of this Agreement and that no partnership, joint venture,
agency, fiduciary or employment relationship is intended or created by reason of
this Agreement.
B. Licensee's Notices to Public Concerning Independent Status. You shall
take such steps as are necessary and such steps as Licensor may from time to
time reasonably request to minimize the chance of a claim being made against
Licensor for anything that occurs at the Hotel, or for acts, omissions or
obligations of you or anyone associated or affiliated with you or the Hotel.
Such steps may, for example, include giving notice in private rooms, public
rooms and advertisements, on business forms and stationery, and any other
materials, making clear to the public that Licensor is not the owner or operator
of the Hotel and is not accountable for what happens at the Hotel. Unless
required by law, you shall not use the word "Hawthorn" or any similar words in
your corporate, partnership, or trade name, nor authorize or permit such use by
anyone else. You shall not use the word "Hawthorn" or any other name or mark
associated with the Hotel System to incur any obligation or indebtedness on
behalf of Licensor.
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C. Third Party Beneficiary. You hereby acknowledge that HSA is a third
party beneficiary under this Agreement, with the independent right to enforce
your obligations hereunder and to obtain such remedies for any failure on your
part to perform your obligations to the full extent permitted by this Agreement
and in the place of the Licensor.
13. Miscellaneous.
A. Severability and Interpretation. The remedies provided in this Agreement
are not exclusive. In the event any provision of this Agreement is held to be
unenforceable, void or voidable as being contrary to the law or public policy of
the United States or any other jurisdiction entitled to exercise authority
hereunder, all remaining provisions shall nevertheless continue in full force
and effect unless deletion of the provision(s) deemed unenforceable, void or
voidable impairs the consideration for this Agreement in a manner which
frustrates the purpose of the parties or makes performance commercially
impracticable. In the event any provision of this Agreement requires
interpretation, such interpretation shall be based on the reasonable intention
of the parties in the context of this transaction without interpreting any
provision in favor of or against any party hereto by reason of the drafting of
the party or its position relative to the other party. Any covenant, term or
provision of this Agreement which, in order to effect the intent of the parties,
must survive the termination of this Agreement, shall survive any such
termination.
B. Binding Effect. This Agreement shall become valid when executed and
accepted by Licensor at Atlanta, Georgia. It shall be deemed made and entered
into in the state of Georgia and shall be governed and construed under and in
accordance with the laws of the state of Georgia. In entering into this
Agreement, you acknowledge that it has sought, voluntarily accepted and become
associated with Licensor who is headquartered in Atlanta, Georgia and that this
Agreement contemplates and shall result in business relationships with
Licensor's headquarter's personnel. The choice of law designation permits, but
does not require that all suits concerning this Agreement be filed in the state
of Georgia.
C. Exclusive Benefit. This Agreement is exclusively for the benefit of the
parties hereto and it shall not give rise to liability to a third party, except
as otherwise specifically set forth herein. No agreement between Licensor and
anyone else is for the benefit of you.
D. Entire Agreement. This is the entire Agreement (and supersedes all
previous agreements including without limitation, any commitment agreement
between the parties concerning the Hotel) between the parties relating to the
Hotel. Neither Licensor nor any other person on Licensor's behalf has made any
representation to you concerning this Agreement or relating to the Hotel System,
which representation is not fully set forth herein or in Licensor's "Offering
Circular for Prospective Franchisees." No change in this Agreement shall be
valid unless in writing signed by both parties. No failure to require strict
performance or to exercise
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any right or remedy hereunder shall preclude requiring strict performance or
exercising any right or remedy in the future.
E. Licensor's Withholding of Consent. Licensor's consent, wherever
required, may be withheld if any default by you exists under this Agreement.
Approvals and consents by Licensor shall not be effective unless evidenced by a
writing duly executed on behalf of Licensor.
F. Notices. Any and all notices required or permitted under this Agreement
shall be in writing and shall be delivered by any means which shall provide
evidence of the date received, to the respective parties at the following
addresses unless and until a different address has been designated by written
notice to the other party:
Notices to LICENSOR: Hawthorn Franchising, Inc.,
13 Corporate Square, Suite 250
Atlanta, Georgia 30329
(404) 321-4045
Notices to you: [ENTITYNAMECAPS]
[PCADDRESS1]
[PCADDRESS2]
Attn: [PCNAME]
Any notice shall be deemed to have been given at the date and time it is
evidenced to have been received.
G. Descriptive Headings. The descriptive headings in this Agreement are for
convenience only and shall not control or affect the meaning or construction of
any provision in this Agreement.
H. Management of the Hotel. You must at all times retain and exercise
direct management control over the Hotel's business. You shall not enter into
any lease, management agreement or other similar arrangement for the operation
of the Hotel or any part thereof (including without limitation, food and/or
beverage service facilities), with any independent entity without the prior
consent of Licensor.
J. Guest Room Rates. You acknowledge that it is your responsibility to
establish room rates for the Hotel. Rates must be submitted to Licensor prior to
the deadline for the upcoming National Directory and you may not charge a rate
in excess of the rate published in the National Directory for a particular time
period.
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IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first stated above.
LICENSEE:
[ENTITYNAMECAPS]
By: ____________________________
[SIGNEENAME]
[SIGNEETITLE]
Attest:_______________________
Secretary
LICENSOR:
HAWTHORN FRANCHISING, INC.
By:_____________________
Jon Leven
Attest:____________________
Asst. Secretary
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GUARANTY
As an inducement to _______________________("Licensor") to execute the
above License Agreement, the undersigned, jointly and severally, hereby
unconditionally warrant to Licensor and its successors and assigns that all of
Licensee's representations in the License Agreement and the application
submitted by Licensee to obtain the License Agreement are true and guarantee
that all of Licensee's obligations under the above License Agreement, including
any amendments thereto whenever made (the "Agreement"), shall be punctually paid
and performed.
Upon default by Licensee or notice from Licensor, the undersigned shall
immediately make each payment and perform each obligation required of Licensee
under the Agreement. Without affecting the obligations of the undersigned under
this Guaranty, Licensor may without notice to the undersigned extend, modify or
release any indebtedness or obligation of Licensee, or settle, adjust or
compromise any claims against Licensee. The undersigned waive notice of
amendment of the Agreement and notice of demand for payment or performance by
Licensee.
Upon the death of an individual guarantor, the estate of such guarantor
will be bound by this Guaranty but only for defaults and obligations hereunder
existing at the time of death, and the obligations of the other guarantors shall
continue in full force and effect.
The Guaranty constitutes a guaranty of payment and performance and not of
collection, and each of the guarantors specifically waives any obligation of
Licensor to proceed against Licensee on any money or property held by Licensee
or by any other person or entity as collateral security, by way of set off or
otherwise. The undersigned further agree that this Guaranty shall continue to be
effective or be reinstated as the case may be, if at any time payment or any of
the guaranteed obligations is rescinded or must otherwise be restored or
returned by Licensor upon the insolvency, bankruptcy or reorganization of
Licensee or any of the undersigned, all as though such payment has not been
made.
IN WITNESS WHEREOF, each of the undersigned has signed this Guaranty as of the
date of the above Agreement. Witnesses: Guarantors:
________________________________ __________________________________
[GUARANTOR1], Legal Signature
________________________________ ________________________________
[GUARANTOR2], Legal Signature
<PAGE>
ATTACHMENT A
Facilities (Paragraph 1):
Site - Area and general description:
Number of approved Guest Rooms (including suites):
Number of Suites included:
Ownership of Licensee (Paragraph 8):
<PAGE>
ATTACHMENT B
EXCLUSIVE TERRITORY
The Exclusive Territory is defined as that area bordered by:
<PAGE>
ATTACHMENT C
You acknowledge that every detail of the Hotel System is important to
Licensor and other licensees operating under the Hotel System in order to
develop and maintain the standards and public image of the Hotel System. You
agree to comply with the details of the Hotel System as specified by Licensor in
the Manual, or otherwise in writing, and not to deviate therefrom. Specifically,
you acknowledge that the Hotel is intended to offer minimal amenities and to
compete directly with hotels offering the lowest average room rate in each
target market. You therefore agree that it shall offer or install only those
amenities that are approved in advance by Licensor.
The dates below set forth the development schedule for the Hotel, whether new
development or upgrading an existing facility.
1) You shall submit preliminary plans, including site layout and outline
specifications adapting Licensor's then-prototypical plans by
____________________________________________________________________________
2) You shall submit complete working drawings and specifications for the Hotel
and Hotel premises, including its proposed equipment, furnishings, facilities
and signs with such detail and containing such information as Licensor may
request by .
_________________________________________________________________
The Plans as submitted to Licensor shall conform to then prevailing Hotel
System standards, including the construction standards set forth in the Manual.
Construction shall not begin unless and until Licensor has approved the Plans.
Thereafter, no change shall be made to the Plans without the advance consent of
Licensor. Notwithstanding the foregoing, after the Plans have been approved, if
in the course of actual construction any change in the Plans occurs, you shall
notify Licensor promptly. Licensor shall determine whether construction has been
completed in accordance with the Plans.
3) Construction of the Hotel shall commence on or before.
______________________________________________________________
Commencement of construction shall mean excavation and poured footings with
a finished building slab. Once the construction has commenced, it shall continue
uninterrupted (except for interruption by reason of events constituting force
majeure) until construction is completed. You shall, within five (5) days of the
commencement of construction, provide written notice to Licensor that
construction has begun. As used in this License, "force majeure" means an act of
God, war, civil disturbance, government action, fire, flood, accident,
hurricane, earthquake or other calamity, strike or other labor dispute, or other
action beyond the control of you.
<PAGE>
4) The Hotel shall be furnished, equipped and shall otherwise be made ready
to open for business in accordance with the License not later than
_____________________________________("Completion Date").
5) If the Hotel shall be a conversion from an existing lodging facility to a
Hawthorn Suites Hotel, following is a required timetable for certain required
changes/upgrades.
Requirements By (date):
_________________________________________________________________
_________________________________________________________________
_________________________________________________________________
You shall, within ten (10) days of the Completion Date, submit a written
request to Licensor for Licensor to conduct a final inspection. Upon receipt of
such request, Licensor shall promptly conduct such final inspection. You shall
open for business within ten (10) days after receipt of Licensor's authorization
to do so. The date upon which you receive authorization to open for business
shall be the "Opening Date". You shall not open for business until Licensor
provides final approval and authorization in writing.
The Hotel shall not be opened for business as a Hawthorn Hotel unless and
until:
(i) Licensor has approved and accepted, in advance, in writing the
construction of the Hotel in accordance with the Plans; the installation of all
items of equipment, furniture, signs, computer terminals and related supplies;
and the hiring and training of staff necessary to operate the Hotel in
accordance with Licensor's requirements;
(ii) no accounts are past due to Licensor, its parent, divisions,
subsidiaries or affiliated companies by you;
(iii) you are in full compliance with all of the terms of this License
Notwithstanding anything else herein to the contrary, Licensor may authorize
License to open and operate the Hotel even though you have not fully complied
with the terms of this License, provided that you agree to fulfill all remaining
terms of this License on or before the dates designated by Licensor.
STATE OF GEORGIA
COUNTY OF FULTON
U.S. FRANCHISE SYSTEMS, INC.
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement"), is made as of October 1,
1995, by and between U.S. FRANCHISE SYSTEMS, INC., a Delaware corporation
having its principal place of business in Atlanta, Georgia (the "Company");
and MICHAEL A. LEVEN, an individual resident of the State of Georgia
("Employee"). This Agreement shall become effective upon the Effective Date.
Company desires to employ Employee and Employee desires to be employed by
Company, on the terms and conditions set forth in this Agreement.
Accordingly, both parties, in consideration of the mutual and exchanged
promises and agreements contained herein and of wages paid and services
rendered hereunder, hereby agree as follows:
Section 1. Definitions. For purposes hereof, the following terms shall be
defined as follows:
a. "Affiliate" shall mean, with respect to a specified entity, an entity
that directly, or indirectly through one or more intermediaries, controls or
is controlled by or is under common control with, the entity specified. For
purposes of this definition, the term "control" (including the terms
"controlled by" and "under common control with") means possession, directly
or indirectly, of the power to direct or cause the direction of the
management and policies of an entity, whether through ownership of voting
securities, by contract, or otherwise.
b. "Cause" shall mean:
(i) the conviction of or plea of guilty or nolo contendere by
Employee of any felony;
(ii) fraud, theft, embezzlement or intentional misappropriation by
Employee of funds of the Company or the Group;
(iii) repeated neglect of his duties hereunder (other than on account
of Disability); provided, however, that Cause as defined in clause (iii)
hereunder shall in no event mean:
(a) bad judgment or incompetence;
(b) negligence other than repeated neglect of duty;
(c) dissatisfaction by the Company with the Employee's performance
of his duties hereunder (other than as a result of any of the
occurrences set forth in clauses (i), (ii) or (iii) set forth above) or
a bona fide disagreement over corporate policy;
(d) any act or omission believed by the Employee in good faith to
have been in the interest of the Company (without intent of the
Employee to gain therefrom, directly or indirectly, a profit to which
the Employee was not legally entitled), unless such act or omission is
in contravention of a lawful and reasonable direction of the Company's
Board of Directors.
(iv) a material breach of Employee's obligations pursuant to this
Employment Agreement;
(v) material breach of Employee's obligations pursuant to the
Stockholders' Agreement.
Notwithstanding the foregoing, the Employee shall not be deemed to have
repeatedly neglected his duties within the meaning of clause (iii) or
materially breached his obligations under this Employment Agreement or the
Stockholders'
<PAGE>
Agreement within the meaning of clause (iv) or (v) above unless the Company
gives written notice to the Employee thereof, and the Employee fails to
remedy the matter within 15 days after receiving such notice.
c. "Company Activities" shall mean the business of franchising in general
and franchising, operating or managing hotels or motels and all operations,
financial and marketing activities connected with that business.
d. "Disability" shall be defined as the inability for a continuous period
of six (6) months or for a total of six (6) months in any twelve (12) month
period of Employee to render substantial services to the Company or to
perform the daily functions required of such Employee due to accident,
illness, sickness, or other physical or mental condition, as certified to the
Company by a physician licensed to practice medicine in the State of Georgia.
e. "Effective Date" shall be the date that Employee's resignation from his
current employer shall have become effective (which resignation Employee has
delivered in writing to his current employer on or prior to the date hereof).
f. "Good Reason" means the occurrence of any one of the following events:
(i) any material breach (which is not corrected in 30 days following
written notice from the Employee to the Company specifying such breach) by
the Company of its obligations under this Agreement, the Stock Purchase
Agreement or the Stockholders Agreement (including, without limitation,
(a) the refusal or failure of the Company to pay the compensation and/or
benefits due under this Agreement, (b) any material diminution (without
the Employee's consent), other than an insignificant or incidental
diminution, in the Employee's duties, authority, responsibilities or
reporting requirements (whether or not accompanied by a change in title),
(c) the failure to elect the Employee to and continue his membership on
the Board of Directors of the Company, or (d) the involuntary relocation
of the Employee outside Atlanta, Georgia, or
(ii) resignation by Employee at the written request of the Company
which has been authorized by the Company's Board of Directors.
g. "Group" shall mean the Company and any other Affiliate of the Company,
including any subsidiary entity; and shall also include all other companies
or entities under common management as Company even if not an Affiliate.
h. "Noncompete Period" shall mean the period of Employee's employment with
Company and a period of five (5) years after the date that Employee's
employment with Company terminates either for cause or due to resignation of
Employee (other than for Good Reason).
i. "Territory" shall be entire continental United States and Canada. The
Territory shall include those countries, at the time of termination of
Employee's employment hereunder, where the Company or the Group shall be
selling franchises or operating hotels. Employee acknowledges that in his
capacity as President of Company, he will be substantially involved in
overseeing and conducting Company Activities in all geographic areas served
by Company and he therefore agrees that the foregoing definition of
"Territory" is fair and reasonable.
j. "Year" shall mean the twelve calendar month period commencing on the
Effective Date if dated as of the first day of a given calendar month, and as
of the first day of the first calendar month immediately following if dated
as of a date other than the first day of a given calendar month, and ending
on the last day of the twelfth (12) full calendar month thereafter.
2
<PAGE>
Section 2. Employment.
a. Subject to the terms contained in this Agreement, Company hereby
employs Employee and Employee hereby accepts such employment. Employee shall
serve as President, Chief Executive Officer, and Chairman of the Board of
Directors of the Company and certain of the members of the Group and shall
serve and perform the duties, exercise the powers, have the authority given
to Employee, all as provided pursuant to that certain Stockholders' Agreement
among the Company, the Company's Stockholders and Employee dated September
29, 1995 (the "Stockholders' Agreement") and that certain Stock Purchase
Agreement between the Company and Employee dated September 29, 1995 ("Stock
Purchase Agreement"), such Stock Purchase Agreement hereby made a part
hereof, and perform those duties and exercise those powers which are
consistent with those given to Employee pursuant to the Stockholders'
Agreement and Stock Purchase Agreement, which may from time to time be
assigned to or vested in him by the Board of Directors of the Company or the
duly authorized committee thereof. Employee shall not be required to report
to any other officer or employee of the Company or a member of the Group.
Subject to his election or appointment as such, the Employee agrees to serve
without additional compensation during the Term as a director and a member of
any committees of the Board of Directors of the Company or any company within
the Group, provided that the Employee is indemnified for serving in any and
all such capacities on a basis no less favorable than provided to any other
director of the Company or a member of the Group. The Company agrees to use
its best efforts to cause the Employee to be elected and continued in office
throughout the Term as a member of the Board of Directors of the Company and
as Chairman of the Board of Directors of the Company and shall include him in
the management slate for election as a director of the Company at every
stockholders meeting or vote of the stockholders of the Company at which his
term as a director would otherwise expire. The Company further agrees that if
the Board of Directors of the Company shall appoint an executive committee,
the Employee shall be elected to serve as a member and chairman of such
committee.
b. The parties acknowledge and agree that this Agreement and the
obligations and benefits of the parties hereto are expressly made subject to
and conditioned upon the ratification, adoption and approval of this
Agreement by a majority of the Board of Directors of the Corporation. This
Agreement has been negotiated in good faith by the Employee with the initial
sole director of the Corporation, Mr. Neal K. Aronson, prior to the
appointment of the full Board of Directors of the Corporation by its
Stockholders; however, Mr. Aronson has reserved the final ratification,
adoption and acceptance of this Agreement to the initial Board of Directors
to be elected. Accordingly, the Employee agrees that he may not withdraw or
rescind this Agreement until the earlier of: (1) the rejection of this
Agreement by the Board of Directors of the Corporation (as elected pursuant
to the Stockholders' Agreement) after due consideration, or (2) the day of
, 1995, if it has not then been ratified, adopted and approved by the Board
of Directors of the Corporation. The parties further acknowledge and agree
that the Employee may continue his current employment or continue to consult
for such employer for such period of time as is required under the Employee's
employment agreement with his current employer (but in no event for a period
of six (6) months following his resignation from such current employer).
c. During the Term and unless otherwise agreed with the Company, the
Employee shall devote his primary attention to the performance of his duties
and responsibilities on a substantially full time and exclusive basis during
such business hours and such other periods and times as may be necessary for
the proper performance of his duties.
Notwithstanding any other provision to the contrary contained herein but
consistent with the commitment to perform services for the Company on
substantially a full time and exclusive basis, nothing in this Agreement is
intended to preclude the Employee from devoting reasonable time to (i)
serving on the boards of other entities (profit or not-for-profit), making
public appearances, making speaking engagements, writing books or articles or
other similar activities and retaining all compensation received from such
activities; (ii) engaging in charitable and community activities; and (iii)
managing his own investments.
3
<PAGE>
Section 3. Term.
The term of Employee's employment hereunder (the "Term") shall commence on
the Effective Date and unless earlier terminated as provided in Section 5 of
this Agreement, Employee's employment hereunder shall continue for a period
of ten (10) years from the Effective Date.
Section 4. Compensation. During the Term, the Company shall provide to the
Employee the following:
a. A basic salary of U.S. $375,000 per year, payable bi-weekly in arrears,
inclusive of any remuneration to which he may be entitled as an officer of
the Company or any other company within the Group. All deductions and taxes
required to be withheld by the Company under the law of the United States and
the State of Georgia shall be deducted from such basic salary;
b. The basic salary referred to in this paragraph shall be subject to
increase by the Company at annual intervals in the light of prevailing
economic circumstances and the Employee's performance but in any event such
annual increases shall be equal to the annual percentage increase in the
Consumer Price Index for the same annual intervals. For the purpose of this
Agreement, "Consumer Price Index" shall mean the Consumer Price Index for all
Urban Consumers, U.S. City average compiled and published by the United
States Department of Labor.
c. Payment on behalf of the Employee of such sums as shall be required to
maintain the following benefits on behalf of Employee:
(1) Life Insurance. If available on commercially reasonable terms, the
Company shall provide term life insurance coverage on Employee's life in
an amount at least equal to $1,500,000.00. If available on commercially
reasonable terms, such insurance shall be transferable to the Employee in
the event of the termination of employment hereunder. Upon Company's
request, Employee shall make himself available for physical or other
related examination.
(2) Health Insurance. If available on commercially reasonable terms,
the Company shall provide executive health, dental and medical insurance
covering Employee, Employee's spouse and Employee's dependents. If
available on commercially reasonable terms, such insurance shall be
transferable to the Employee in the event of the termination of employment
hereunder.
(3) Long term Disability Insurance. If available on commercially
reasonable terms, the Company shall provide long-term disability insurance
for the Employee with coverage in the annual amount of at least $250,000
payable to death with no greater than a 90-day waiting period. If
available on commercially reasonable terms, such insurance shall be
transferable to the Employee in the event of the termination of employment
hereunder.
(4) Long Term Home Care Insurance. If available on commercially
reasonable terms, the Company shall provide to the Employee, Employee's
spouse and Employee's dependents insurance coverage for executive home or
other facility assisted care. If available on commercially reasonable
terms, such insurance shall be transferable to the Employee in the event
of the termination of employment hereunder.
(5) Automobile Allowance. The Company shall provide the Employee with a
monthly automobile allowance in the amount of $1,000.
d. The Employee shall be eligible for participation in all employee
welfare and benefit plans, programs and arrangements of the Company now or
hereafter made available to senior executives of the Company, as such plans,
programs and arrangements may be in effect from time to time (including,
without limitation, each retirement plan, supplemental and excess retirement
plans, annual and long-term incentive compensation plans,
4
<PAGE>
group life insurance, accident and death insurance, medical and dental
insurance, sick leave, pension plans and disability plans); provided,
however, the Employee shall not be eligible to participate in any stock
option or other stock plans (except as is provided for or contemplated in the
Stock Purchase Agreement and the Stockholders' Agreement). The Employee shall
also be eligible to participate in the Company's executive perquisites in
accordance with the terms and provisions of the arrangements as in effect
from time to time for the Company's senior executives. To the extent
permitted under all applicable plans, programs, arrangements, and benefits
(including, without limitation, the benefits or plans in Section 4.c.
hereof), benefits shall inure to the Employee's spouse and eligible
dependents.
e. Prompt reimbursement of all out-of-pocket expenses properly incurred by
the Employee in the performance of his duties and as shall properly be
incurred by him and vouched for in connection with the Company's business.
f. The Employee shall be entitled to not less than five (5) weeks annual
holiday (in addition to legal or national holidays at his location of work)
in each Year.
g. In addition to the basic salary set forth above, Employee shall be paid
a performance bonus as follows: (i) One Thousand Dollars ($1,000) for every
franchise agreement executed by the Company or any company within the Group
in a given Year up to one hundred fifty (150) franchises; and (ii) Two
Thousand Dollars ($2,000) for every franchise agreement executed by the
Company or any company within the Group in such given year above the
aforesaid 150. Such performance bonus shall be paid quarterly on last day of
the month following the applicable quarter. For the purposes of this Section
4.g, such performance bonus of $1,000 or $2,000 per executed franchise
agreement shall be payable on a proportionate basis to the extent that the
Company or any company within the Group receives payment of initial franchise
or similar fees ("Initial Fee") from a franchisee (based on 100% of an Initial
Fee equalling $30,000).
Section 5. Termination.
Notwithstanding anything contained herein to the contrary, this Agreement
may be terminated at any time by either party in accordance with the
following terms:
a. Death. In the event of Employee's death, this Agreement shall terminate
immediately, provided, however, the Company shall be obligated to pay within
thirty (30) days of Employee's death to Employee's family or estate a lump
sum payment equal to the basic salary, unused vacation time (not to exceed
five (5) weeks), and performance bonus actually earned or accrued as of the
date of Employee's death, and Company shall for a period of twelve (12)
months from the date of death continue for the benefit of the Employee's
spouse and dependents all of Employee's benefits in effect at such time (if
available under the plans).
b. Disability. In the event the employment of Employee is interrupted due
to the Disability of such Employee, the basic salary and other benefits
payable to such Employee shall be continued by the Company for a period of
six (6) full calendar months from the date of last regular employment. Should
such Disability continue thereafter, no additional salary, performance bonus,
fringe benefits, or other benefits shall be paid to such Employee, and the
Company shall have the right to terminate this Agreement upon written notice
to Employee. During the period of his Disability (including any period after
the date of termination), the Employee shall be entitled to continued
participation for himself, his spouse and his dependents Employee's benefits
(including without limitation) those under the Company's health and welfare
plans and to continued participation in all the Company's employee benefit
plans all to the extent permitted under the plans, and all vested rights
which the Employee may have shall remain in full force and effect. Upon
request, the Employee shall submit to tests and examination by a physician on
behalf of the Company. In the event of disagreement of the two physicians,
the two shall select a third physician whose determination shall be deemed
conclusive.
5
<PAGE>
c. Termination Without Cause or For Good Reason. If Company terminates
Employee's employment hereunder without Cause or Employee resigns for Good
Reason, Company shall be obligated to pay all basic salary, fringe benefits,
unused vacation time, and performance bonus accrued as of the date of
termination, and shall thereafter continue to pay Employee's base salary and
fringe benefits for three years following the effective date of termination
of employment. Company shall have the option of paying the remaining contract
amount in a single lump sum (discounted using the then applicable SunTrust
Bank prime rate) or in regular installments over the remaining term of the
Agreement. Any performance bonus shall accrue through the Year including the
date of termination. During the Term (including the three-year period after
the effective date of such termination), the Employee shall be entitled to
continue participation for himself, his spouse and his dependents under the
Company's health and welfare plans and to continued participation in all of
the Company's employee benefit plans, and all vested rights which the
Employee may have shall remain in full force and effect and shall be deemed
vested.
d. Resignation. In addition to Employee's right to resign for Good Reason,
after the first five (5) years of the term of this Agreement and provided the
Preferred Stock issued by Company as contemplated by the Stockholders'
Agreement has been redeemed, Employee may resign from employment hereunder at
any time by providing Company with written notice at least six (6) months in
advance of the effective date of the resignation. If Employee resigns without
Good Reason, Company shall pay the basic salary, unused vacation time, and
performance bonus actually earned or accrued through the effective date of
resignation but shall have no further obligations under this Agreement
whatsoever. Without limitation, if Employee shall resign without Good Reason
during the first five (5) years of this Agreement, the Employee shall not be
liable for any consequential damages or damages for loss of economic
opportunity or profits to the Company.
e. Termination for Cause. Company may terminate this Agreement and
Employee's employment hereunder immediately for Cause. If Company terminates
Employee for Cause, Company shall be obligated to pay Employee's basic
salary, fringe benefits, and performance bonus accrued only through the
effective date of termination and shall not be responsible to pay any other
amounts or provide any other benefits thereafter.
Section 6. Other Provisions Governing Termination.
The Employee shall not be required to mitigate amounts payable pursuant to
Section 5 by seeking other employment or otherwise. The Employee's acceptance
of other employment during the Term shall not, directly or indirectly,
diminish or impair the amounts payable by the Company pursuant to Section 5.
Section 7. Nondisclosure of Trade Secrets and Confidential Information.
a. Trade Secrets Defined. As used in this Agreement, the term "Trade
Secrets" shall mean all secret, proprietary or confidential information
regarding Company, Company activities or Company Affiliates, or any member of
the Group of which Company is a part, including any and all information not
generally known to, or ascertainable by, persons not employed by Company or
the Group, the disclosure or knowledge of which would permit those persons to
derive actual or potential economic value therefrom or to cause economic or
financial harm to Company or its affiliates. Such information shall include,
but not be limited to, customer lists, customer billing information,
technical information regarding Company products, prices paid by customers,
purchase and supply information, current and future development and expansion
or contraction plans of Company or its affiliates, sales and marketing
techniques, information concerning personnel assignments and operations of
Company or its affiliates and matters concerning the financial affairs,
future plans and management of Company or Affiliates. "Trade Secrets" shall
not include information that has become generally available to the public by
the act of one who has the right to disclose such information without
violating any right or privilege of Company or Affiliates. This definition
shall not limit any definition of "trade secrets" under state or federal law.
b. Nondisclosure of Trade Secrets. Throughout the term of this Agreement
and at all times after the date that this Agreement terminates for any
reason, Employee shall not (except where Employee believes in good faith that
disclosure is in furtherance of his employment hereunder) directly or
indirectly transmit or disclose any
6
<PAGE>
Trade Secret of Company or of any affiliate of Company to any person, concern
or entity, and shall not make use of any such Trade Secret, directly or
indirectly, for himself or for others, without the prior consent of Company.
c. Confidential Information Defined. As used in this Agreement, the term
"Confidential Information" shall mean all information regarding Company,
Company's affiliates, Company's activities, Company's business or Company's
customers that is not generally known to persons not employed by Company but
that does not rise to the level of a Trade Secret and that is not generally
disclosed by Company practice or authority to persons not employed by Company
Affiliates. "Confidential Information" shall not include information that has
become generally available to the public by the act of one who has the right
to disclose such information without violating any right or privilege of
Company.
d. Equipment, Records, Papers or Documents. All equipment, records, papers
and documents kept or made by, or supplied to, the Employee relating to the
business of the Company or any member of the Group, shall be and remain the
property of such member of the Group, and on the termination of the
Employee's employment hereunder, shall, so far as they are in possession, be
delivered to the Company.
e. Nondisclosure of Confidential Information. Throughout the term of this
Agreement and for a period of five (5) years after the date this Agreement
terminates for any reason, Employee shall not (except where Employee believes
in good faith that disclosure is in furtherance of his employment hereunder)
directly or indirectly transmit or disclose any Confidential Information to
any person, concern or entity, or make use of any such Confidential
Information, directly or indirectly, for himself or for others, without the
prior consent of Company.
f. Injunctive Relief. Employee acknowledges that the nondisclosure
covenants contained in this Section are a reasonable means of protecting and
preserving Company's interest in the confidentiality of this information.
Employee agrees that any breach of these covenants will result in irreparable
damage and injury to Company and that Company will be entitled to injunctive
relief in any court of competent jurisdiction without the necessity of
posting any bond. Employee also agrees that any such injunctive relief shall
be in addition to any damages that may be recoverable by Company.
g. Enforceability of Covenants. Employee and Company agree that Employee's
obligations under these nondisclosure covenants are separate and distinct
from other provisions of this Agreement, and a failure or alleged failure of
Company to perform its obligations under any provision of this Agreement
shall not constitute a defense to the enforceability of these nondisclosure
covenants.
Section 8. Noncompetition and Nonsolicitation Covenants.
a. Special Value of Employee Services. The parties acknowledge:
(1) that Employee is employed under this Agreement in connection with
the formation of the Company as a new business enterprise in which
Employee has been given the opportunity to acquire a significant
ownership interest;
(2) that Employee's services under this Agreement require special
expertise and talent in the area of operations, sales, franchising,
marketing and management, and that such experience has been and will
continue to be built up over the years, including Employee's period of
employment with Company;
(3) that Employee will be a management employee and will be
well-compensated under this Agreement for the expertise and knowledge
he has obtained and will obtain;
(4) that pursuant to this Agreement, Employee will be placed in a
position of trust and responsibility and he will have access to a
substantial amount of Confidential Information, Trade
7
<PAGE>
Secrets and Company goodwill and that Company is placing him in such
position and giving him access to such information in reliance upon his
not competing against Company, not soliciting Company's customers, not
using Company's goodwill for his own benefit or for the benefit of
others, except Company and Affiliates, and not recruiting Company's
employees during the time periods set forth below; and
(5) that due to Employee's special experience and talent, the loss of
Employee's services to Company under this Agreement cannot reasonably
or adequately be fully compensated solely by damages in an action at
law.
b. Employee's Covenants. In consideration of the compensation and benefits
being paid and to be paid by Company to Employee hereunder, Employee hereby
agrees that, during the Noncompete Period, he shall not, in any manner (other
than as an employee of or a consultant to Company or Affiliate), directly or
indirectly:
(1) engage in Company Activities or have any equity or profit interest
in any person or entity, other than Company or an Affiliate of Company,
or any member of the Group, that engages in the Company Activities
within the Territory; provided however, Employee may own, directly or
indirectly, solely as an investment, securities of any person traded on
any national securities exchange or listed on the NASDAQ National
Market (including, without limitation, in Employee's current employer
or an affiliate or such employer) if Employee is not a controlling
person of, or a member of a group which controls, such person or
Employee does not, directly or indirectly, own 5% or more of any class
of equity securities, or securities convertible into or exercisable or
exchangeable for 5% or more of any class of equity securities, of such
person and provided further that Employee may enter the employ of, or
render consulting or other services to, a corporation or other person
engaged in diversified businesses that derives less than 5% of its
annual revenues from the Company Activities, so long as Employee is not
employed in, or does not render consulting or other services to, the
division of such corporation or other person engaged in the Company
Activities except for incidental services rendered pursuant to his
position with such person; or
(2) employ or seek to employ, on his own behalf or on behalf of any
other person or entity other than Company, any Affiliate of Company, or
any member of the Group, any person who was employed within the
Territory by Company or any member of the Group during Employee's
employment with Company.
(3) induce or attempt to induce any franchisee or supplier of Company,
an Affiliate of Company, or any member of the Group from terminating
their contractual relationship with Company, such Affiliate or member.
c. Injunctive Relief. Employee acknowledges that the above covenants are a
reasonable means of protecting and preserving Company's goodwill, its
investment in Employee and its other legitimate business interests. Employee
agrees that any breach of these covenants will result in irreparable damage
and injury to Company and that Company will be entitled to injunctive relief
in any court of competent jurisdiction without the necessity of posting any
bond. Employee also agrees that any such injunctive relief shall be in
addition to any damages that may be recoverable by Company.
d. Enforceability of Covenants. Employee and Company agree that Employee's
obligations under the above covenants are separate and distinct under this
Agreement, and the failure or alleged failure of Company to perform its
obligations under any other provisions of this Agreement shall not constitute
a defense to the enforceability of these covenants.
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Section 9. Enforcement of Restrictive Covenants.
Employee acknowledges that the nondisclosure and noncompetition covenants
contained in this Agreement are a reasonable means of protecting and
preserving Company's interest in the confidentiality of its information, of
protecting Company's legitimate business and financial interests, including
future plans, and of preserving Company's investment in Employee. Employee
agrees that any breach of these covenants will result in irreparable
jurisdiction without the necessity of posting any bond.
Section 10. Indemnification. The Company shall indemnify the Employee to
the maximum extent permitted by applicable law and the Company's charter and
by-laws as currently in effect (copies of which have heretofore been provided
to the Employee) against all costs, charges and expenses (including, without
limitation, legal fees or the provision of counsel by the Company) incurred
or sustained by him in connection with any action, suit or proceeding to
which he may be made a party by reason of his entering into this Agreement or
his being an officer, director or employee of the Company or the Group
whether or not such action, suit or proceeding is brought during the
Employee's employment by the Company. The Company will reimburse Employee for
all reasonable legal fees and disbursements incurred by Employee in
connection with the negotiation and preparation of this Agreement and all
reasonable fees and disbursements incurred by Employee in connection with any
dispute over the enforcement by Employee of his rights under this Agreement,
but only if Employee prevails in such dispute.
Section 11. Notice. All notices or other communications hereunder shall be
in writing and shall be deemed to have been duly given (a) when delivered
personally, (b) on the business day following the day such notice or other
communication is sent by recognized overnight courier, (c) on acknowledgment
of the receipt of a facsimile of such notice or other communication, or (d)
on the fifth day following the date of deposit in the United States mail if
sent first class, postage prepaid, by registered or certified mail. The
addresses for such notices shall be as follows:
If to the Company:
U.S. Franchise Systems, Inc.
ATTN: Neal K. Aronson
13 Corporate Square
Suite 250
Atlanta, Georgia 30329
If to the Employee:
Michael A. Leven
5 West Wesley Ridge
Atlanta, Georgia 30327
Section 12. Miscellaneous.
a. Severability. The covenants set forth in this Agreement shall be
considered and construed as separate and independent covenants. Should any
part or provision of any covenant be held invalid, void or unenforceable in
any court of competent jurisdiction, such invalidity, voidness or
unenforceability shall not render invalid, void or unenforceable any other
part or provision of this Agreement. If any portion of the foregoing
provisions is found to be invalid or unenforceable by a court of competent
jurisdiction because its duration, the territory, the definition of
activities or the definition of information covered is invalid or
unreasonable in scope, the invalid or unreasonable term shall be redefined,
or a new enforceable term provided, such that the intent of Company and
Employee in agreeing to the provisions of this Agreement will not be impaired
and the provision in
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question shall be enforceable to the fullest extent of the applicable laws.
Without limitation of the other agreements contained in this Section, this
provision shall be considered to be Employee's express consent to
modification of any restriction or provision that is deemed to be overbroad
or otherwise unreasonable in scope.
b. Waiver. The waiver by any party to this Agreement of a breach of any of
the provisions of this Agreement shall not operate or be construed as a
waiver of any other or subsequent breach.
c. Governing Law. This Agreement shall be deemed to be made in and shall
in all respects be interpreted, construed and governed by and in accordance
with the laws of the State of Georgia (without giving effect to the conflict
of law principles thereof). No provision of this Agreement or any related
documents shall be construed against, or interpreted to the disadvantage of,
any party hereto, by any court or any governmental or judicial authority by
reason of such party having or being deemed to have structured or drafted
such provision.
d. Entire Agreement. This Agreement is intended by the parties hereto to
be the final expression of their agreement with respect to the subject matter
hereof and this is the complete and exclusive statement of the terms of their
agreement, notwithstanding any representations, statements or agreements to
the contrary heretofore made. This Agreement supersedes any former
agreements, correspondence, or other communication governing the same subject
matter. This Agreement may be modified only by a written instrument signed by
each of the parties hereto.
e. Counterparts. This Agreement may be executed simultaneously in two or
more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
COMPANY: EMPLOYEE:
U.S. FRANCHISE SYSTEMS, INC.,
a Delaware corporation
By: /s/ Neal Aronson /s/Michael A. Leven(SEAL)
MICHAEL A.LEVEN
EVP and Chief Financial Officer
9/29/95 9/29/95
DATE DATE
10
STATE OF GEORGIA
COUNTY OF FULTON
U.S. FRANCHISE SYSTEMS, INC.
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement"), is made as of October 1,
1995, by and between U.S. FRANCHISE SYSTEMS, INC., a Delaware corporation
having its principal place of business in Atlanta, Georgia (the "Company");
and NEAL K. ARONSON, an individual resident of the State of New York
("Employee"). This Agreement shall become effective upon the Effective Date.
Company desires to employ Employee and Employee desires to be employed by
Company, on the terms and conditions set forth in this Agreement.
Accordingly, both parties, in consideration of the mutual and exchanged
promises and agreements contained herein and of wages paid and services
rendered hereunder, hereby agree as follows:
Section 1. Definitions. For purposes hereof, the following terms shall be
defined as follows:
a. "Affiliate" shall mean, with respect to a specified entity, an entity
that directly, or indirectly through one or more intermediaries, controls or
is controlled by or is under common control with, the entity specified. For
purposes of this definition, the term "control" (including the terms
"controlled by" and "under common control with") means possession, directly
or indirectly, of the power to direct or cause the direction of the
management and policies of an entity, whether through ownership of voting
securities, by contract, or otherwise.
b. "Cause" shall mean:
(i) the conviction of or plea of guilty or nolo contendere by Employee
of any felony;
(ii) fraud, theft, embezzlement or intentional misappropriation by
Employee of funds of the Company or the Group;
(iii) repeated neglect of his duties hereunder (other than on account
of Disability); provided, however, that Cause as defined in clause (iii)
hereunder shall in no event mean:
(a) bad judgment or incompetence;
(b) negligence other than repeated neglect of duty;
(c) dissatisfaction by the Company with the Employee's performance
of his duties hereunder (other than as a result of any of the occurrences set
forth in clauses (i), (ii) or (iii) set forth above) or a bona fide
disagreement over corporate policy;
(d) any act or omission believed by the Employee in good faith to
have been in the interest of the Company (without intent of the Employee to
gain therefrom, directly or indirectly, a profit to which the Employee was
not legally entitled), unless such act or omission is in contravention of a
lawful and reasonable direction of the Company's Board of Directors.
(iv) a material breach of Employee's obligations pursuant to this
Employment Agreement;
(v) material breach of Employee's obligations pursuant to the
Stockholders' Agreement.
Notwithstanding the foregoing, the Employee shall not be deemed to have
repeatedly neglected his duties within the meaning of clause (iii) or
materially breached his obligations under this Employment Agreement or the
Stockholders'
<PAGE>
Agreement within the meaning of clause (iv) or (v) above unless the Company
gives written notice to the Employee thereof, and the Employee fails to
remedy the matter within 15 days after receiving such notice.
c. "Company Activities" shall mean the business of franchising in general
and franchising, operating or managing hotels or motels and all operations,
financial and marketing activities connected with that business.
d. "Disability" shall be defined as the inability for a continuous period
of six (6) months or for a total of six (6) months in any twelve (12) month
period of Employee to render substantial services to the Company or to
perform the daily functions required of such Employee due to accident,
illness, sickness, or other physical or mental condition, as certified to the
Company by a physician licensed to practice medicine in the State of Georgia.
e. "Effective Date" shall be October 1, 1995.
f. "Good Reason" means the occurrence of any one of the following events:
(i) any material breach (which is not corrected in 30 days following
written notice from the Employee to the Company specifying such breach) by
the Company of its obligations under this Agreement, the Stock Purchase
Agreement or the Stockholders Agreement (including, without limitation, (a)
the refusal or failure of the Company to pay the compensation and/or benefits
due under this Agreement, (b) any material diminution (without the Employee's
consent), other than an insignificant or incidental diminution, in the
Employee's duties, authority, responsibilities or reporting requirements
(whether or not accompanied by a change in title), (c) the failure to elect
the Employee to and continue his membership on the Board of Directors of the
Company, or (d) the involuntary relocation of the Employee outside Atlanta,
Georgia, or
(ii) resignation by Employee at the written request of the Company
which has been authorized by the Company's Board of Directors.
g. "Group" shall mean the Company and any other Affiliate of the Company,
including any subsidiary entity; and shall also include all other companies
or entities under common management as Company even if not an Affiliate.
h. "Noncompete Period" shall mean the period of Employee's employment with
Company and a period of five (5) years after the date that Employee's
employment with the Company terminates either for cause or due to resignation
of Employee (other than for Good Reason).
i. "Territory" shall be entire continental United States and Canada. The
Territory shall include those countries, at the time of termination of
Employee's employment hereunder, where the Company or the Group shall be
selling franchises or operating hotels. Employee acknowledges that in his
capacity as Chief Financial Officer of Company, he will be substantially
involved in overseeing and conducting Company Activities in all geographic
areas served by Company and he therefore agrees that the foregoing definition
of "Territory" is fair and reasonable.
j. "Year" shall mean the twelve calendar month period commencing on the
Effective Date if dated as of the first day of a given calendar month, and as
of the first day of the first calendar month immediately following if dated
as of a date other than the first day of a given calendar month, and ending
on the last day of the twelfth (12) full calendar month thereafter.
Section 2. Employment
a. Subject to the terms contained in this Agreement, Company hereby
employs Employee and Employee hereby accepts such employment. Employee shall
serve as Chief Financial Officer of the Company and certain of the members of
the Group and shall serve and perform the duties, exercise the powers, have
the authority
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<PAGE>
given to Employee, all as provided pursuant to that certain Stockholders'
Agreement among the Company, the Company's Stockholders and Employee dated
September 29, 1995 (the "Stockholder Agreement") and that certain Stock
Purchase Agreement between the Company and Employee dated September 29, 1995
("Stock Purchase Agreement"), such Stock Purchase Agreement hereby made a
part hereof, and perform those duties and exercise those powers which are
consistent with those given to Employee pursuant to the Stockholders'
Agreement and Stock Purchase Agreement, which may from time to time be
assigned to or vested in him by the Board of Directors of the Company or the
duly authorized committee thereof. Subject to his election or appointment as
such, the Employee agrees to serve without additional compensation during the
Term as a director and a member of any committees of the Board of Directors
of the Company or any company within the Group, provided that the Employee is
indemnified for serving in any and all such capacities on a basis no less
favorable than provided to any other director of the Company or a member of
the Group. The Company agrees to use its best efforts to cause the Employee
to be elected and continued in office throughout the Term as a member of the
Board of Directors of the Company and shall include him in the management
slate for election as a director of the Company at every stockholders meeting
or vote of the stockholders of the Company at which his term as a director
would otherwise expire. The Company further agrees that if the Board of
Directors of the Company shall appoint an executive committee, the Employee
shall be elected to serve as a member of such committee.
b. The parties acknowledge and agree that this Agreement and the
obligations and benefits of the parties hereto are expressly made subject to
and conditioned upon the ratification, adoption and approval of this
Agreement by a majority of the Board of Directors of the Corporation. This
Agreement has been negotiated in good faith by the Employee with the initial
sole director of the Corporation, Mr. Neal K. Aronson, prior to the
appointment of the full Board of Directors of the Corporation by its
Stockholders; however, Mr. Aronson has reserved the final ratification,
adoption and acceptance of this Agreement to the initial Board of Directors
to be elected. Accordingly, the Employee agrees that he may not withdraw or
rescind this Agreement until the earlier of: (1) the rejection of this
Agreement by the Board of Directors of the Corporation (as elected pursuant
to the Stockholders' Agreement) after due consideration, or (2) the ___ day
of ____________, 1995, if it has not then been ratified, adopted and approved
by the Board of Directors of the Corporation.
c. During the Term and unless otherwise agreed with the Company, the
Employee shall devote his primary attention to the performance of his duties
and responsibilities on a substantially full time and exclusive basis during
such business hours and such other periods and times as may be necessary for
the proper performance of his duties.
Notwithstanding any other provision to the contrary contained herein but
consistent with the commitment to perform services for the Company on
substantially a full time and exclusive basis, nothing in this Agreement is
intended to preclude the Employee from devoting reasonable time to (i)
serving on the boards of other entities (profit or not-for-profit), making
public appearances, making speaking engagements, writing books or articles or
other similar activities and retaining all compensation received from such
activities; (ii) engaging in charitable and community activities; and (iii)
managing his own investments.
Section 3. Term.
The term of Employee's employment hereunder (the "Term") shall commence on
the Effective Date and unless earlier terminated as provided in Section 5 of
this Agreement, Employee's employment hereunder shall continue for a period
of ten (10) years from the Effective Date.
Section 4. Compensation. During the Term, the Company shall provide to the
Employee the following:
a. A basic salary of U.S. $200,000 per year, payable bi-weekly in arrears,
inclusive of any remuneration to which he may be entitled as an officer of
the Company or any other company within the Group.
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<PAGE>
All deductions and taxes required to be withheld by the Company under the law
of the United States and the State of Georgia shall be deducted from such
basic salary;
b. The basic salary referred to in this paragraph shall be subject to
increase by the Company at annual intervals in the light of prevailing
economic circumstances and the Employee's performance but in any event such
annual increases shall be equal to the annual percentage increase in the
Consumer Price Index for the same annual intervals. For the purpose of this
Agreement, "Consumer Price Index" shall mean the Consumer Price Index for all
Urban Consumers, U.S. City average compiled and published by the United
States Department of Labor.
c. Payment on behalf of the Employee of such sums as shall be required to
maintain the following benefits on behalf of Employee:
(1) Life Insurance. If available on commercially reasonable terms, the
Company shall provide term life insurance coverage on Employee's life in an
amount at least equal to $500,000.00. If available on commercially reasonable
terms, such insurance shall be transferable to the Employee in the event of
the termination of employment hereunder. Upon Company's request, Employee
shall make himself available for physical or other related examination.
(2) Health Insurance. If available on commercially reasonable terms,
the Company shall provide executive health, dental and medical insurance
covering Employee, Employee's spouse and Employee's dependents. If available
on commercially reasonable terms, such insurance shall be transferable to the
Employee in the event of the termination of employment hereunder.
(3) Automobile Allowance. The Company shall provide the Employee with a
monthly automobile allowance in the amount of $750.00.
d. The Employee shall be eligible for participation in all employee
welfare and benefit plans, programs and arrangements of the Company now or
hereafter made available to senior executives of the Company, as such plans,
programs and arrangements may be in effect from time to time (including,
without limitation, each retirement plan, supplemental and excess retirement
plans, annual and long-term incentive compensation plans, group life
insurance, accident and death insurance, medical and dental insurance, sick
leave, pension plans and disability plans); provided, however, the Employee
shall not be eligible to participate in any stock option or other stock plans
(except as is provided for or contemplated in the Stock Purchase Agreement
and the Stockholders' Agreement). The Employee shall also be eligible to
participate in the Company's executive perquisites in accordance with the
terms and provisions of the arrangements as in effect from time to time for
the Company's senior executives. To the extent permitted under all applicable
plans, programs, arrangements, and benefits (including, without limitation,
the benefits or plans in Section 4.c. hereof), benefits shall inure to the
Employee's spouse and eligible dependents.
e. Prompt reimbursement of all out-of-pocket expenses properly incurred by
the Employee in the performance of his duties and as shall properly be
incurred by him and vouched for in connection with the Company's business.
f. The Employee shall be entitled to not less than five (5) weeks annual
holiday (in addition to legal or national holidays at his location of work)
in each Year.
g. In addition to the basic salary set forth above, Employee shall be paid
a performance bonus as follows: (i) Five Hundred Dollars ($500) for every
franchise agreement executed by the Company or any company within the Group
in a given Year up to one hundred fifty (150) franchises; and (ii) One
Thousand Dollars ($1,000) for every franchise agreement executed by the
Company or any company within the Group in such given year above the
aforesaid 150. Such performance bonus shall be paid quarterly on last day of
the month following the applicable quarter. For the purposes of this Section
4.g, such performance bonus for $500 or $1,000 per executed franchise
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<PAGE>
agreement shall be payable on a proportionate basis to the extent that the
Company or any company within the Group receives payment of initial franchise
or similar fees ("Initial Fee") from a franchisee (based on 100% of an
Initial Fee equaling $30,000).
Section 5. Termination.
Notwithstanding anything contained herein to the contrary, this Agreement
may be terminated at any time by either party in accordance with the
following terms:
a. Death. In the event of Employee's death, this Agreement shall terminate
immediately, provided, however, the Company shall be obligated to pay within
thirty (30) days of Employee's death to Employee's family or estate a lump
sum payment equal to the basic salary, unused vacation time (not to exceed
five (5) weeks), and performance bonus actually earned or accrued as of the
date of Employee's death, and Company shall for a period of twelve (12)
months from the date of death continue for the benefit of the Employee's
spouse and dependents all of Employee's benefits in effect at such time (if
available under the plans).
b. Disability. In the event the employment of Employee is interrupted due
to the Disability of such Employee, the basic salary and other benefits
payable to such Employee shall be continued by the Company for a period of
six (6) full calendar months from the date of last regular employment. Should
such Disability continue thereafter, no additional salary, performance bonus,
fringe benefits, or other benefits shall be paid to such Employee, and the
Company shall have the right to terminate this Agreement upon written notice
to Employee. During the period of his Disability (including any period after
the date of termination), the Employee shall be entitled to continued
participation for himself, his spouse and his dependents Employee's benefits
(including without limitation) those under the Company's health and welfare
plans and to continued participation in all the Company's employee benefit
plans all to the extent permitted under the plans, and all vested rights
which the Employee may have shall remain in full force and effect. Upon
request, the Employee shall submit to tests and examinations by a physician
on behalf of the Company. In the event of disagreement of the two physicians,
the two shall select a third physician whose determination shall be deemed
conclusive.
c. Termination Without Cause or For Good Reason. If Company terminates
Employee's employment hereunder without Cause or Employee resigns for Good
Reason, Company shall be obligated to pay all basic salary, fringe benefits,
unused vacation time, and performance bonus accrued as of the date of
termination, and shall thereafter continue to pay Employee's base salary and
fringe benefits for three years following the effective date of termination
of employment. Company shall have the option of paying the remaining contract
amount in a single lump sum (discounted using the then applicable SunTrust
Bank prime rate) or in regular installments over the remaining term of the
Agreement. Any performance bonus shall accrue through the Year including the
date of termination. During the Term (including the three-year period after
the effective date of such termination), the Employee shall be entitled to
continue participation for himself, his spouse and his dependents under the
Company's health and welfare plans and to continued participation in all of
the Company's employee benefit plans, and all vested rights which the
Employee may have shall remain in full force and effect and shall be deemed
vested.
d. Resignation. In addition to Employee's right to resign for Good Reason,
after the first five (5) years of term of this Agreement and provided the
Preferred Stock issued by Company as contemplated by the Stockholders'
Agreement has been redeemed, Employee may resign from employment hereunder at
any time by providing Company with written notice at least six (6) months in
advance of the effective date of the resignation. If Employee resigns without
Good Reason, Company shall pay the basic salary, unused vacation time, and
performance bonus actually earned or accrued through the effective date of
resignation but shall have no further obligations under this Agreement
whatsoever. Without limitation, if Employee shall resign without Good Reason
during the first five (5) years of this Agreement, the Employee shall not be
liable for any consequential damages or damages for loss of economic
opportunity or profits to the Company.
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e. Termination for Cause. Company may terminate this Agreement and
Employee's employment hereunder immediately for Cause. If Company terminates
Employee for Cause, Company shall be obligated to pay Employee's basic
salary, fringe benefits, and performance bonus accrued only through the
effective date of termination and shall not be responsible to pay any other
amounts or provide any other benefits thereafter.
Section 6. Other Provisions Governing Termination.
The Employee shall not be required to mitigate amounts payable pursuant to
Section 5 by seeking other employment or otherwise. The Employee's acceptance
of other employment during the Term shall not, directly or indirectly,
diminish or impair the amounts payable by the Company pursuant to Section 5.
Section 7. Nondisclosure of Trade Secrets and Confidential Information.
a. Trade Secrets Defined. As used in this Agreement, the term "Trade
Secrets" shall mean all secret, proprietary or confidential information
regarding Company, Company activities or Company Affiliates, or any member of
the Group of which Company is a part, including any and all information not
generally known to, or ascertainable by, persons not employed by Company or
the Group, the disclosure or knowledge of which would permit those persons to
derive actual or potential economic value therefrom or to cause economic or
financial harm to Company or its affiliates. Such information shall include,
but not be limited to, customer lists, customer billing information,
technical information regarding Company products, prices paid by customers,
purchase and supply information, current and future development and expansion
or contraction plans of Company or its affiliates, sales and marketing
techniques, information concerning personnel assignments and operations of
Company or its affiliates and matters concerning the financial affairs,
future plans and management of Company or Affiliates. "Trade Secrets" shall
not include information that has become generally available to the public by
the act of one who has the right to disclose such information without
violating any right or privilege of Company or Affiliates. This definition
shall not limit any definition of "trade secrets" under state or federal law.
b. Nondisclosure of Trade Secrets. Throughout the term of this Agreement
and at all times after the date that this Agreement terminates for any
reason, Employee shall not (except where Employee believes in good faith that
disclosure is in furtherance of his employment hereunder) directly or
indirectly transmit or disclose any Trade Secret of Company or of any
affiliate of Company to any person, concern or entity, and shall not make use
of any such Trade Secret, directly or indirectly, for himself or for others,
without the prior consent of Company.
c. Confidential Information Defined. As used in this Agreement, the term
"Confidential Information" shall mean all information regarding Company,
Company's affiliates, Company's activities, Company's business or Company's
customers that is not generally known to persons not employed by Company but
that does not rise to the level of a Trade Secret and that is not generally
disclosed by Company practice or authority to persons not employed by Company
Affiliates. "Confidential Information" shall not include information that has
become generally available to the public by the act of one who has the right
to disclose such information without violating any right or privilege of
Company.
d. Equipment, Records, Papers or Documents. All equipment, records, papers
and documents kept or made by, or supplied to, the Employee relating to the
business of the Company or any member of the Group, shall be and remain the
property of such member of the Group, and on the termination of the
Employee's employment hereunder, shall, so far as they are in possession, be
delivered to the Company.
e. Nondisclosure of Confidential Information. Throughout the term of this
Agreement and for a period of five (5) years after the date this Agreement
terminates for any reason, Employee shall not (except where Employee believes
in good faith that disclosure is in furtherance of his employment hereunder)
directly or indirectly transmit or disclose any Confidential Information to
any person, concern or entity, or make use of any such Confidential
Information, directly or indirectly, for himself or for others, without the
prior consent of Company.
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f. Injunctive Relief. Employee acknowledges that the nondisclosure
covenants contained in this Section are a reasonable means of protecting and
preserving Company's interest in the confidentiality of this information.
Employee agrees that any breach of these covenants will result in irreparable
damage and injury to Company and that Company will be entitled to injunctive
relief in any court of competent jurisdiction without the necessity of
posting any bond. Employee also agrees that any such injunctive relief shall
be in addition to any damages that may be recoverable by Company.
g. Enforceability of Covenants. Employee and Company agree that Employee's
obligations under these nondisclosure covenants are separate and distinct
from other provisions of this Agreement, and a failure or alleged failure of
Company to perform its obligations under any provision of this Agreement
shall not constitute a defense to the enforceability of these nondisclosure
covenants.
Section 8. Noncompetition and Nonsolicitation Covenants.
a. Special Value of Employee Services. The parties acknowledge:
(1) that Employee is employed under this Agreement in connection with
the formation of the Company as a new business enterprise in which
Employee has been given the opportunity to acquire a significant
ownership interest;
(2) that Employee's services under this Agreement require special
expertise and talent in the area of operations, sales, franchising,
marketing and management, and that such experience has been and will
continue to be built up over the years, including Employee's period of
employment with Company;
(3) that Employee will be a management employee and will be
well-compensated under this Agreement for the expertise and knowledge
he has obtained and will obtain;
(4) that pursuant to this Agreement, Employee will be placed in a
position of trust and responsibility and he will have access to a
substantial amount of Confidential Information, Trade Secrets and
Company goodwill and that Company is placing him in such position and
giving him access to such information in reliance upon his not
competing against Company, not soliciting Company's customers, not
using Company's goodwill for his own benefit or for the benefit of
others, except Company and Affiliates, and not recruiting Company's
employees during the time periods set forth below; and
(5) that due to Employee's special experience and talent, the loss of
Employee's services to Company under this Agreement cannot reasonably
or adequately be fully compensated solely by damages in an action at
law.
b. Employee's Covenants. In consideration of the compensation and benefits
being paid and to be paid by Company to Employee hereunder, Employee hereby
agrees that, during the Noncompete Period, he shall not, in any manner (other
than as an employee of or a consultant to Company or Affiliate), directly or
indirectly:
(1) engage in Company Activities or have any equity or profit interest
in any person or entity, other than Company or an Affiliate of Company,
or any member of the Group, that engages in the Company Activities
within the Territory; provided however, Employee may own, directly or
indirectly, solely as an investment, securities of any person traded on
any national securities exchange or listed on the NASDAQ National
Market (including, without limitation, in Employee's current employer
or an affiliate or such employer) if Employee is not a controlling
person of, or a member of a group which controls, such person or
Employee does not, directly or indirectly, own 5% or more of any class
of equity securities, or securities convertible into or
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exercisable or exchangeable for 5% or more of any class of equity
securities, of such person and provided further that Employee may enter
the employ of, or render consulting or other service to, a corporation
or other person engaged in diversified businesses that derives less
than 5% of its annual revenues from the Company Activities, so long as
Employee is not employed in, or does not render consulting or other
services to, the division of such corporation or other person engaged
in the Company Activities except for incidental services rendered
pursuant to his position with such person; or
(2) employ or seek to employ, on his own behalf or on behalf of any
other person or entity other than Company, any Affiliate of Company, or
any member of the Group, any person who was employed within the
Territory by Company or any member of the Group during Employee's
employment with Company.
(3) induce or attempt to induce any franchisee or supplier of Company,
an Affiliate of Company, or any member of the Group from terminating
their contractual relationship with Company, such Affiliate or member.
c. Injunctive Relief. Employee acknowledges that the above covenants are a
reasonable means of protecting and preserving Company's goodwill, its
investment in Employee and its other legitimate business interests. Employee
agrees that any breach of these covenants will result in irreparable damage
and injury to Company and that Company will be entitled to injunctive relief
in any court of competent jurisdiction without the necessity of posting any
bond. Employee also agrees that any such injunctive relief shall be in
addition to any damages that may be recoverable by Company.
d. Enforceability of Covenants. Employee and Company agree that Employee's
obligations under the above covenants are separate and distinct under this
Agreement, and the failure or alleged failure of Company to perform its
obligations under any other provisions of this Agreement shall not constitute
a defense to the enforceability of these covenants.
Section 9. Enforcement of Restrictive Covenants.
Employee acknowledges that the nondisclosure and noncompetition covenants
contained in this Agreement are a reasonable means of protecting and
preserving Company's interest in the confidentiality of its information, of
protecting Company's legitimate business and financial interests, including
future plans, and of preserving Company's investment in Employee. Employee
agrees that any breach of these covenants will result in irreparable damage
and injury to Company and that Company will be entitled to injunctive relief
in any court of competent jurisdiction without the necessity of posting any
bond.
Section 10. Indemnification. The Company shall indemnify the Employee to
the maximum extent permitted by applicable law and the Company's charter and
by-laws as currently in effect (copies of which have heretofore been provided
to the Employee) against all costs, charges and expenses (including, without
limitation, legal fees or the provision of counsel by the Company) incurred
or sustained by him in connection with any action, suit or proceeding to
which he may be made a party by reason of his entering into this Agreement or
his being an officer, director or employee of the Company or the Group
whether or not such action, suit or proceeding is brought during the
Employee's employment by the Company. The Company will reimburse Employee for
all reasonable legal fees and disbursements incurred by Employee in
connection with the negotiation and preparation of this Agreement and all
reasonable fees and disbursements incurred by Employee in connection with any
dispute over the enforcement by Employee of his rights under this Agreement,
but only if Employee prevails in such dispute.
Section 11. Notice. All notices or other communications hereunder shall be
in writing and shall be deemed to have been duly given (a) when delivered
personally, (b) on the business day following the day such notice
8
<PAGE>
or other communication is sent by recognized overnight courier, (c) on
acknowledgment of the receipt of a facsimile of such notice or other
communication, or (d) on the fifth day following the date of deposit in the
United States mail if sent first class, postage prepaid, by registered or
certified mail. The addresses for such notices shall be as follows:
If to the Company:
U.S. Franchise Systems, Inc.
ATTN: Michael A. Leven
13 Corporate Square
Suite 250
Atlanta, Georgia 30329
If to the Employee:
Neal K. Aronson
196 East 75th Street
Apt. 19-C
New York, New York 10021
Section 12. Miscellaneous.
a. Severability. The covenants set forth in this Agreement shall be
considered and construed as separate and independent covenants. Should any
part or provision of any covenant be held invalid, void or unenforceable in
any court of competent jurisdiction, such invalidity, voidness or
unenforceability shall not render invalid, void or unenforceable any other
part or provision of this Agreement. If any portion of the foregoing
provisions is found to be invalid or unenforceable by a court of competent
jurisdiction because its duration, the territory, the definition of
activities or the definition of information covered is invalid or
unreasonable in scope, the invalid or unreasonable term shall be redefined,
or a new enforceable term provided, such that the intent of Company and
Employee in agreeing to the provisions of this Agreement will not be impaired
and the provision in question shall be enforceable to the fullest extent of
the applicable laws. Without limitation of the other agreements contained in
this Section, this provision shall be considered to be Employee's express
consent to modification of any restriction or provision that is deemed to be
overbroad or otherwise unreasonable in scope.
b. Waiver. The waiver by any party to this Agreement of a breach of any of
the provisions of this Agreement shall not operate or be construed as a
waiver of any other or subsequent breach.
c. Governing Law. This Agreement shall be deemed to be made in and shall
in all respects be interpreted, construed and governed by and in accordance
with the laws of the State of Georgia (without giving effect to the conflict
of law principles thereof). No provision of this Agreement or any related
documents shall be construed against, or interpreted to the disadvantage of,
any party hereto, by any court or any governmental or judicial authority by
reason of such party having or being deemed to have structured or drafted
such provision.
d. Entire Agreement. This Agreement is intended by the parties hereto to
be the final expression of their agreement with respect to the subject matter
hereof and this is the complete and exclusive statement of the terms of their
agreement, notwithstanding any representations, statements or agreements to
the contrary heretofore made. This Agreement supersedes any former
agreements, correspondence, or other communication governing the same subject
matter. This Agreement may be modified only by a written instrument signed by
each of the parties hereto.
e. Counterparts. This Agreement may be executed simultaneously in two or
more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
9
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
COMPANY: EMPLOYEE:
U.S. FRANCHISE SYSTEMS, INC.,
a Delaware corporation
By: /s/ Michael A. Leven /s/ Neal K. Aronson
(SEAL)
MICHAEL A. LEVEN, CEO NEAL K. ARONSON
Oct. 4, 1995 October 4, 1995
DATE DATE
OFFICE LEASE
PROPERTY: Corporate Square
LANDLORD: HALLWOOD REAL ESTATE INVESTORS FUND XV
A Delaware General Partnership
TENANT: U.S. Franchise Systems, Inc.
<PAGE>
SECTION ITEM PAGE
1. BASIC LEASE PROVISIONS......................................... 1
2. PREMISES ...................................................... 1
2.1 Premises ................................................. 1
2.2 Tenant's Proportionate Share.............................. 1
2.3 Use Clause ............................................... 1
2.4 Common Area .............................................. 1
3. TERM OF LEASE.................................................. 1
4. SECURITY DEPOSIT............................................... 1
5. RENTS.......................................................... 1
5.1 Payment................................................... 1
5.2 Late Fees................................................. 2
5.3 Base Rent................................................. 2
5.4 Additional Rent........................................... 2
5.5 Operating Expenses........................................ 2
5.6 Additional Taxes.......................................... 3
6. SERVICES....................................................... 3
7. COMPLETION OF IMPROVEMENTS..................................... 3
8. ACCEPTANCE..................................................... 4
9. ASSIGNMENT OR SUBLETTING....................................... 4
10. CONDUCT OF BUSINESS............................................ 4
11. RULES & REGULATIONS............................................ 4
12. DEFAULTS AND REMEDIES.......................................... 4
12.1 Defaults................................................. 4
12.2 Remedies................................................. 5
13. INSURANCE...................................................... 5
13.1 Tenant's Insurance....................................... 5
13.2 Landlord's Insurance..................................... 5
13.3 Insurance Policies....................................... 5
13.4 Waiver of Subrogation.................................... 5
14. NO PERSONAL LIABILITY OF LANDLORD.............................. 6
15. HOLD HARMLESS.................................................. 6
16. ACCESS TO PREMISES............................................. 6
17. ALTERATIONS.................................................... 6
17.1 Alterations by Landlord.................................. 6
17.2 Alterations by Tenant.................................... 6
18. REPAIRS AND MAINTENANCE........................................ 6
18.1 Landlord's Obligations................................... 6
18.2 Tenant's Obligations..................................... 6
18.3 Surrender................................................ 7
19. LIENS.......................................................... 7
20. DAMAGE OR DESTRUCTION.......................................... 7
20.1 Lease Termination........................................ 7
20.2 Repair or Restoration.................................... 7
21. CONDEMNATION................................................... 7
22. FORCE MAJEURE.................................................. 7
23. LANDLORD'S LIEN:............................................... 7
24. SUCCESSION TO LANDLORD'S INTEREST.............................. 8
24.1 Attornment............................................... 8
24.2 Subordination............................................ 8
24.3 Estoppel Certificate..................................... 8
<PAGE>
25. SURRENDER OF PREMISES.......................................... 8
26. PARKING........................................................ 8
27. HAZARDOUS SUBSTANCES........................................... 8
28. MISCELLANEOUS.................................................. 8
28.1 Partial Invalidity...................................... 8
28.2 Successors and Assigns.................................. 8
28.3 Waiver.................................................. 9
28.4 Accord and Satisfaction................................. 9
28.5 Attorney's Fees......................................... 9
28.6 Time is of the Essence.................................. 9
28.7 Broker's Commission..................................... 9
28.8 No Light, Air or View Easement.......................... 9
28.9 Entire Agreement........................................ 9
28.10 Applicable Law.......................................... 9
28.11 Notices................................................. 9
28.12 Quiet Enjoyment......................................... 9
28.13 Compliance with Law..................................... 9
28.14 Superior Law............................................ 9
28.15 Guarantor............................................... 9
28.16 Exhibits/Riders......................................... 9
28.17 Execution of Lease...................................... 9
28.18 Confidentiality......................................... 9
EXHIBITS RIDERS
"A" - The Premises
"B" - The Property
"C" - Leasehold Improvements Agreement
"D" - Rules and Regulations
<PAGE>
(OFFICE LEASE AGREEMENT)
LEASE DATE: September 25, 1995
TENANT: U.S. Franchise Systems, Inc.
ADDRESS (A) Notice Address: 13 Corporate Square, Suite 250
OF TENANT Atlanta, Georgia 30329
(Articles
5.1, 28.11): (B) Billing Address: 13 Corporate Square, Suite 250
Atlanta, Georgia 30329
CONTACT: Mike Leven Telephone: ( ) ___________
LANDLORD: Hallwood Real Estate Investors Fund XV,
a Delaware General Partnership
ADDRESSES OF (A) Notice Address: 3 Corporate Square, Suite 315
LANDLORD Atlanta, Georgia 30329
(Articles
5.1, 28.11): (B) Payment Address: 3 Corporate Square, Suite 315
Atlanta, Georgia 30329
CONTACT: Hallwood Management Company Telephone: (404)321-6644
PREMISES Unit # 13.250
(Article 2.1): Building 13
Address 13 Corporate Square, Suite 250
City Atlanta
State Georgia Zip 30329
RENTABLE AREA
OF THE PREMISES
(Article 2.1): approximately 8,439 square feet (the "Area")
TOTAL RENTABLE
ARE OF THE
PROPERTY approximately N/A square feet (the "Total Rentable
(Article 2.2): Area")
PERMITTED USE
(Article 2.3): General Office Use
TERM OF LEASE 5 Years, 0 Months, commencing on the Lease
(Article 3): Commencement Date and ending at 5:00 p.m. on the
Lease Expiration Date, subject to adjustment and
earlier termination as provided in this Lease.
LEASE
COMMENCEMENT
DATE
(Article 3): October 1, 1995
LEASE
EXPIRATION
DATE
(Article 3.1): September 30, 2000
SECURITY DEPOSIT
(Article 4): $11,112.47
BASE RENT
COMMENCEMENT DATE
(Article 5.3): October 1, 1995
BASE RENT From 10/01/95 To 09/30/96 Monthly $9,142.25
MONTHLY From 10/01/96 To 09/30/97 Monthly $9,599.36
INSTALLMENTS From 10/01/97 To 09/30/98 Monthly $10,079.33
(Article 5.3): From 10/01/98 To 09/30/99 Monthly $10,583.30
From 10/01/99 To 09/30/2000 Monthly $11,112.47
BASE EXPENSES Operating Expenses for calendar year N/A or
(Article 5.4): Total Rentable Area of the Property multiplied by
$ N/A (per square foot expense) or $ N/A in total
BROKERS Hallwood Management Company has acted as agent for
(Article 28.7): Landlord in connection with this Lease, and N/A has
acted as agent for Tenant in connection with this
Lease. Landlord shall be responsible for the payment
of all brokerage commissions to be paid to Brokers in
connection with this Lease.
The foregoing Basic Lease Information is incorporated into and made a part
of the Lease identified above. If any conflict exists between any Basic Lease
Information and the Lease, then the Lease shall control.
<PAGE>
LANDLORD: TENANT:
Hallwood Real Estate Investors Fund XV, U.S. Franchise Systems, Inc.
a Delaware General Partnership
Hallwood Management Company, as Agent
By: /s/ Richard D. Stilovich By: /s/ Michael A. Leven
Name: Richard D. Stilovich Name: Michael A. Leven
Title: Regional Director Title: Chief Executive Officer
<PAGE>
OFFICE LEASE AGREEMENT
THIS OFFICE LEASE AGREEMENT (this "Lease") is entered into this 25th day of
September, 1995, by and between Hallwood Real Estate Investors Fund XV
("Landlord"), as landlord, and U.S. Franchise Systems, Inc. d/b/a N/A
("Tenant"), as tenant.
1. BASIC LEASE PROVISIONS:
The definitions and basic provisions set forth in the Basic Lease
Information (the "Basic Lease Information"), entered into by Landlord and
Tenant concurrently herewith, are incorporated herein by reference for all
purposes. The descriptions and amounts set forth in the Basic Lease
Information are qualified by their usage elsewhere in this Lease.
2. PREMISES:
2.1 Premises. (a) Landlord leases to Tenant and Tenant leases from
Landlord, for the term, at the rental and upon all of the conditions set
forth in this Lease, the premises known by the unit number and address, and
consisting of the approximate Area, as specified in the Basic Lease
Information (the "Premises"). The Premises are outlined and depicted on the
floor plan attached to this Lease as Exhibit "A". The Premises are located in
a building (the "Building") being situated on the real property described on
Exhibit "B" attached hereto (the Building, the real property, other buildings
and improvements thereon, and any parking facilities or structures
appurtenant thereto, are hereinafter referred to collectively as the
"Property.")
(b) Landlord shall have the right to verify the actual square footage
of the Premises from time to time during the Term of this Lease and to
adjust the Area of the Premises to reflect the actual square footage of
the Premises as determined by measurement, provided, however, such
adjustment shall not affect the Base Rent.
(c) Landlord shall have the right at any time during the Term of this
Lease, upon giving the Tenant sixty (60) days prior written notice, to
provide and furnish Tenant with space elsewhere in the Building of
approximately the same size and Area as the Premises and to remove and
place Tenant in such new space. Any such substitution is affected for the
purpose of accommodating a tenant that will occupy all or a substantial
portion of the Area in which the Premises are located, and, if Tenant is
occupying the Premises at the time of any such substitution, Landlord
shall pay the expense of moving Tenant, Tenant's property and equipment to
the new premises, and shall at Landlord's sole cost, improve the new
premises with improvements substantially similar to those located in the
Premises. Should Tenant refuse to move to such new space at the end of
said sixty (60) day period, Landlord shall have the right to cancel and
terminate this Lease effective immediately without further notice to
Tenant. In the event Tenant moves to said new space, this Lease and all of
the terms, covenants, and provisions hereof, shall remain in full force
and effect and be deemed applicable to such new space.
2.2 Tenant's Proportionate Share. Tenant's share of the Total Rentable
Area of the Property shall be the percentage ("Tenant's Proportionate Share")
equal to a fraction, the numerator of which shall be the Rentable Area of the
Premises and the denominator of which shall be the Total Rentable Area of the
Property. Tenant's Proportionate Share may be adjusted from time to time as
the Rentable Area of the Premises or the Total Rentable Area of the Property
changes, for whatever reason.
2.3 Use Clause. Tenant is permitted to use the Premises for the purpose
specified in the Basic Lease Information, and for no other purpose whatsoever
(the "Use"). Tenant shall obtain, at Tenant's own expense, all necessary
governmental licenses and permits, inclusive of any impact or use fees
imposed by said governmental bodies, for such Use. Tenant shall not conduct
any secondhand, auction, distress, fire, bankruptcy or going-out-of-business
sales.
2.4 Common Area. As long as this Lease remains in effect and Tenant is not
in default hereunder, Tenant shall have the nonexclusive right, in common
with Landlord, other tenants, subtenants, employees and invitees, to use the
<PAGE>
common area of the Property (the "Common Area"), which includes, without
limitation, the following: walkways, patios, landscaped areas and parks,
sidewalks, service corridors, lobbies, recreational facilities, restrooms,
stairways, elevators, plazas, malls, throughways, parking areas and roadways;
provided, however, that Landlord shall have the right at any time to exclude
from the Common Area such areas as Landlord may determine so long as access
to the Premises is not unreasonably denied.
3. TERM OF LEASE:
The Term of this Lease, the Lease Commencement Date and the Lease
Expiration Date shall be as set forth in the Basic Lease Information, unless
sooner terminated pursuant to any provision of this Lease.
4. SECURITY DEPOSIT:
Tenant shall deposit with Landlord upon execution of this Lease the amount
specified in the Basic Lease Information as the Security Deposit to be held
by Landlord as security for Tenant's faithful performance of Tenant's duties
and obligations under this Lease. In the event Landlord invests the Security
Deposit to earn interest thereon, Tenant shall not be entitled to such
interest on the Security Deposit. If Tenant fails to pay rent or other
charges due under this Lease, or otherwise defaults with respect to the
provisions of this Lease, Landlord may, without notice to Tenant, apply or
retain all or any portion of the Security Deposit for the payment of rent or
other charges in default or for the payment of any sum to which Landlord may
become obligated by reason of Tenant's default or to compensate Landlord for
any loss or damage which Landlord may suffer thereby. If Landlord so uses or
applies all or any portion of the Security Deposit, Tenant shall within five
(5) days after written demand therefor deposit cash with Landlord in an
amount sufficient to restore the Security Deposit to its full amount. The
Security Deposit shall be returned to Tenant within sixty (60) days following
the expiration of the Term of this Lease, provided Tenant has fully performed
all of its duties and obligations under this Lease.
5. RENTS:
5.1 Payment. (a) All rents are payable in advance, without prior demand or
any right of offset or deduction, in monthly installments on the first day of
each calendar month of the Term of this Lease. Tenant promises and agrees to
pay all rents to Landlord in lawful money of the United States of America at
the address stated in the Basic Lease Information for payment or to such
other persons or at such other places as Landlord may designate in writing.
(b) If the Lease Commencement Date occurs on a day other than the first
day of a calendar month, then all rents except Base Rent shall be prorated
for the balance of that month based upon the actual number of days this
Lease is in effect during said calendar month. The term "Lease Year", as
used in this Lease, refers to each successive twelve-month period
beginning with the Lease Commencement Date, as it may be adjusted pursuant
to Article 7 of this Lease. Notwithstanding anything to the contrary
contained in this
<PAGE>
Lease, after the Lease Expiration Date, Landlord shall have the right to
reconcile all rents billed, paid and/or owed by Tenant during the Term of
this Lease, and thereafter submit a final billing to Tenant. Upon receipt
of such final billing, Tenant shall submit payment in full to Landlord
within thirty (30) days.
5.2 Late Fees. If Tenant fails to pay any installment of rent or any other
sum payable to Landlord under the terms of this Lease within ten (10) days of
when due, Landlord may assess interest on such sum at the lesser of eighteen
percent (18%) per annum or the highest legal rate from and after the date on
which any such sum shall be due and payable, and such interest, and/or at the
option of Landlord a late fee of $50.00, shall be paid by Tenant to Landlord
at the time of payment of the delinquent sum; provided, however, nothing
charged hereby shall ever exceed the amount that may properly be charged or
recovered under the laws of the state in which the Premises are located.
5.3 Base Rent. (a) Payment of Base Rent shall begin on the Base Rent
Commencement Date (as set forth in the Basic Lease Information). If the Base
Rent Commencement Date occurs on a day other than the first day of a calendar
month, then Base Rent shall be prorated for the balance of that month based
upon the actual number of days from the Base Rent Commencement Date through
the last day of said calendar month. The amount of each Base Rent Monthly
Installment for the entire Term of this Lease shall be as specified in the
Basic Lease Information, subject to adjustment pursuant to Paragraph 5.3(b)
below.
(c) In the event of the enactment, adoption or enforcement by any
governmental authority of any assessment, levy, or tax, whether sales, use
or otherwise, on or with respect to the rentals and charges set forth in
this Lease, on or with respect to the right to lease or occupy the
Property, the Building, or the Premises, so long as such assessment, levy
or tax is not in substitution of or in connection with a reduction of
expenses referred to in Section 5.5(a) above, Tenant shall pay such
assessment, levy or tax to Landlord or, at Landlord's option, Tenant shall
pay such assessment, levy or tax directly to the governmental authority.
If such assessment, levy or tax is imposed on or with respect to all of
the rentals derived from the Building or the Property, or is imposed on or
with respect to the Property as a whole, Tenant
<PAGE>
shall pay to Landlord Tenant's Proportionate Share of such assessment,
levy or tax. Notwithstanding the foregoing, this shall not impose upon
Tenant the obligation to reimburse Landlord for any income, gift,
inheritance or estate tax as such taxes are now structured.
5.6 Additional Taxes. If Landlord is assessed additional taxes or if
Landlord's present taxes are increased as a result of any value placed on
Tenant's leasehold, fixtures, furnishings, goods or services, then
immediately upon demand Tenant shall pay to Landlord the amount of said
additional tax, or the amount of the increase.
6. SERVICES:
A. Landlord shall maintain the Common Area in reasonably good order and
condition except for damage occasioned by the act of Tenant, which damage
shall be repaired by Landlord at Tenant's expense.
B. Landlord shall furnish the Premises with (i) electricity sufficient to
provide power for typewriters, personal computers other office machines of
similar low electrical consumption; provided, however, Landlord shall not be
required to provide electricity required for electronic data processing
equipment, special lighting in excess of building standard improvements, and
any other item of electrical equipment which (singly) consumes more than .5
kilowatts per hour at rated capacity or requires a voltage other than one
hundred twenty (120) volts single phase and if the installation of such
electrical equipment requires additional air conditioning capacity above that
provided by the building standard improvements, the additional air
conditioning installation and operating costs shall be paid by Tenant, (ii)
heat and air conditioning to the extent reasonably required for the
comfortable occupation of the Premises during reasonable and usual business
hours of 8:00 a.m. to 6:00 p.m. weekdays and 8:00 a.m. to 1:00 p.m. on
Saturdays (exclusive of state and national holidays) or such shorter period
specified or prescribed by any applicable policies or regulations adopted by
any utility or government agency, (iii) elevator service, (iv) restroom
supplies, (v) janitorial service on a five (5) day/week basis, excluding
holidays; provided, however, if tenant improvements are not consistent in
quality and quantity with building standard improvements, Tenant shall pay
any cleaning and janitorial costs attributable thereto, and (vi) security for
the building; provided, however, Landlord shall not be liable to Tenant for
any losses, including personal injury and property damage, that may result to
Tenant from theft, burglary or intentional conduct on the part of any person
or entity, or for damages directly or indirectly resulting therefrom, nor
shall the rental herein reserved be abated by reason of (1) the installation,
use or interruption of any services, or (2) the failure to furnish or delay
in furnishing any such services when such failure or delay is caused by
accident or any condition beyond the reasonable control of Landlord or by the
making of necessary repairs or improvements to the Premises, the Building or
the Property. Landlord shall use reasonable efforts to remedy any
interruption in the furnishing of such services.
C. It is understood that Landlord does not represent or warrant that any
of the services referred to above, or any other services which Landlord may
supply, will be free from interruption. Tenant acknowledges that any one or
more of such services may be suspended or reduced by reason of accident or
repairs, alterations or improvements necessary to be made, by strikes or by
any other cause beyond the reasonable control of Landlord, or by orders or
regulations of any federal, state, county or municipal authority or
otherwise. Tenant agrees that any such interruption or suspension of services
shall never be deemed an eviction or disturbance to Tenant's use and
possession of the Premises or any part thereof, or render Landlord liable to
Tenant for damages or abatement of rent or relieve Tenant of performance of
Tenant's obligations under this Lease. Landlord will use its reasonable
efforts in the event of a strike to secure parties not involved in the labor
dispute to provide minimum services for cleaning restrooms, waste removal,
and janitorial services.
D. Tenant shall notify Landlord of any need for an increase in power
usage. Should an increase in usage of power by Tenant be recognized by
Landlord in the absence of notice from Tenant, the increased amount of usage
shall be deemed to have been initiated the first day of occupancy of the
Premises by Tenant.
<PAGE>
E. Whenever heat generating machines or equipment or lighting other than
building standard lights, are used in the Premises by Tenant which affect the
temperature otherwise maintained by the air conditioning system, Landlord
shall have the right to install supplementary air conditioning units in the
Premises, and the cost thereof, including the cost of installation and the
cost of operating and maintenance thereof, shall be paid by Tenant to
Landlord upon billing by Landlord. If Tenant installs lighting requiring
power in excess of that required for normal desk-top office equipment or
normal copying equipment as determined by Landlord, Tenant shall immediately
pay to Landlord for the cost of such excess power as Additional Rent,
together with the cost of installing any additional risers or other
facilities that may be necessary to furnish such excess power to the
Premises. In the event the water usage by Tenant exceeds the normal office
use of water for such items as coffeemakers, sinks, dishwashers,
refrigerators and icemakers, the cost of such excess water usage shall be
paid by Tenant to Landlord upon billing by Landlord. Landlord shall have the
right to cause any of the utilities servicing the Premises to be separately
metered, in which event the cost of any such utility and the installation of
metering equipment shall be paid by Tenant to Landlord upon billing by
Landlord.
7 COMPLETION OF IMPROVEMENTS:
A. Prior to the Lease Commencement Date, Landlord shall complete,
construct or install in the Premises the improvements shown on the Approved
Working Drawings (as defined in Exhibit "C", attached hereto) upon the terms
and conditions set forth in the Leasehold Improvements Agreement (the
"Agreement"), attached hereto as Exhibit "C" and made a part hereof for all
purposes. The Premises shall be deemed complete and possession delivered to
Tenant and accepted by Tenant upon the date Tenant commences occupancy of any
portion of the Premises or when Landlord has substantially completed these
improvements, whichever occurs first. As used in this Lease and the
Agreement, the phrase "substantial completion" shall mean when (i)
installation of building standard improvements has occurred, (ii) Tenant has
direct access from street to the elevator lobby on the floor where the
Premises are located, and (iii) building services are ready to be furnished
to the Premises. Substantial completion shall be deemed to have occurred
notwithstanding a requirement to complete "punchlist" or similar corrective
work. Landlord shall use its best efforts to advise Tenant of the anticipated
date of completion at least 30 days prior to such date, but the failure to
give such notice shall not constitute a default by Landlord under this Lease.
If Landlord, for any reason whatsoever other than Tenant's Delay (as defined
in the Agreement), cannot deliver possession of the Premises to Tenant at the
Lease Commencement Date (i) this Lease shall not be void or voidable and such
failure shall not affect the validity of this Lease or the obligations of
Tenant hereunder, (ii) Landlord shall not be liable to Tenant for any loss or
damage resulting therefrom, (iii) Base Rent shall be waived for the period
between the Lease Commencement Date and the time when Landlord can deliver
possession, and (iv) the Lease Expiration Date shall be extended for the
number of days between the Lease Commencement Date and the time when Landlord
can deliver possession. In the event that Landlord shall permit Tenant to
occupy the Premises prior to the Lease Commencement Date, such occupancy
shall be subject to all of the provisions of this Lease and shall not affect
the Lease Expiration Date. Upon Landlord's request, Landlord and Tenant shall
execute an acceptance of premises Rider establishing the Lease Commencement
Date and confirming the Lease Expiration Date, but this Lease shall not be
affected in any manner if either party fails or refuses to execute such
Rider. Except as specifically set forth herein, no delay in delivery of
possession shall operate to extend the Term of this Lease. Any abatement of
rent pursuant to this Article 7 shall constitute full settlement of all
claims that Tenant might otherwise have against Landlord by reason of the
Premises not being ready for occupancy by Tenant on the Lease Commencement
Date.
B. In the event Tenant does not occupy the Premises, all interior
finishing costs, among other amounts owed by Tenant hereunder, shall become
due and payable by Tenant upon billing by Landlord.
<PAGE>
C. In the event Landlord provides Tenant any concessions, including,
without limitation, rent abatement and/or tenant improvements, Tenant
acknowledges, understands and agrees that (i) any concessions are personal to
Tenant and shall not be assigned or sublet, in whole or in part, to any
assignee or subtenant without the prior written approval of Landlord, and
(ii) Landlord has provided such concessions to Tenant in reliance upon
Tenant's warranty that Tenant shall faithfully and timely perform all of the
terms and conditions of this Lease. Accordingly, in the event Tenant fails,
after written notice to Tenant as required by this Lease, to timely perform
any term or condition of this Lease, including, without limitation, the
timely payment of rent, any concessions provided to Tenant under this Lease
shall be immediately due and payable as Additional Rent without further
notice or demand to Tenant.
8. ACCEPTANCE:
Subject to the terms and provisions of the Agreement attached hereto as
Exhibit "C", Tenant acknowledges that it has fully inspected the Premises,
and by moving into the Premises or taking possession thereof, Tenant accepts
the Premises "As Is", as suitable for the purposes for which the same are
leased and in their present condition. Tenant further acknowledges that
Landlord has made no warranties or representations with respect to the
Property, the Building, the Premises or otherwise or as to either the
condition or the suitability of the Premises for the Use and Tenant hereby
waives any and all defects with respect thereto. This Lease is, and shall be
considered as, the only agreement between the parties hereto and their
representatives and agents. All negotiations and oral agreements have been
merged into and are included herein. There are no other representations or
warranties between the parties and any reliance with respect to
representations is solely upon the representations and agreements contained
in this Lease, if any.
9. ASSIGNMENT OR SUBLETTING:
A. Tenant shall not voluntarily or by action of law transfer, assign,
sublet, mortgage or otherwise transfer or encumber all or any part of this
Lease or Tenant's interest in this Lease or in the Premises without
Landlord's prior written consent (which consent shall not be unreasonably
withheld), nor shall Tenant suffer or permit the Premises or any part thereof
to be used or occupied by others except Tenant's employees without Landlord's
prior written consent. Any attempted assignment, transfer, mortgage,
encumbrance or subletting without such consent shall be void and shall
constitute a breach of this Lease. Regardless of Landlord's consent, no
subletting or assignment or other transfer shall release Tenant of Tenant's
obligations, or alter the primary liability of Tenant to pay the rent and to
perform all other obligations to be performed by Tenant, under this Lease.*
B. In the event that Tenant is a privately owned corporation, if there
shall occur any change in the ownership of and/or power to vote more than 50%
of the outstanding capital stock of Tenant without the prior written consent
of Landlord, then in addition to any and all other remedies herein provided,
Landlord shall have the option to terminate this Lease upon at least thirty
(30) days' notice to Tenant. In the event that Tenant is a partnership, if
there shall occur any change in the ownership of and/or power to vote more
than 50% of the partnership interests of Tenant without the prior written
consent of Landlord, then in addition to any and all other remedies herein
provided, Landlord shall have the option to terminate this Lease upon at
least thirty (30) days' notice to Tenant.
C. As a condition precedent to obtaining Landlord's consent to any
assignment, subletting or transfer of stock or partnership interests, Tenant
shall submit to Landlord with Tenant's request for consent the effective date
of the transfer (which must be at least sixty days after the submission
date), the name of the proposed assignee, subtenant or transferee, the terms
and provisions of the proposed transaction, the proposed use (which must be
consistent with the Use provided in the Basic Lease Information), a financial
statement, a business history and such other information regarding the
proposed assignee, subtenant or transferee as is necessary to demonstrate to
Landlord that the proposed assignee, subtenant or transferee has business
experience and financial strength and stability equal to or greater than that
of Tenant.
<PAGE>
D. In addition, Tenant shall execute a written agreement with Landlord
agreeing to pay to Landlord, as Additional Rent, fifty percent (50%) of all
monies or other consideration received by Tenant from its transferee in
excess of the amounts owed by Tenant to Landlord under this Lease, which
Additional Rent shall be paid to Landlord as and when received by Tenant. In
the event Landlord shall consent to a sublease, assignment or transfer,
Tenant shall pay Landlord $200.00 for administrative fees incurred in
connection with such consent, in addition to any associated legal fees and
expenses. Consent by Landlord to one assignment, sublease or transfer shall
not be deemed a waiver of Landlord's right to reject future assignments,
subleases or transfers.
10. CONDUCT OF BUSINESS:
Tenant covenants and agrees that, continuously and uninterruptedly from
and after Tenant's initial opening for business, Tenant shall operate and
conduct within the Premises the business Tenant is permitted to operate and
conduct under the provisions of this Lease, except while the Premises are
untenable by reason of fire or other casualty. Tenant agrees to conduct
Tenant's business at all times in a first class manner consistent with
reputable business standards and practices.
11. RULES & REGULATIONS:
A. Tenant agrees to comply with and observe the rules and regulations set
forth on Exhibit "D", attached hereto (the "Rules and Regulations"), and
Tenant's failure to keep and observe them shall constitute a default of this
Lease. Landlord reserves the right from time to time to amend or supplement
the Rules and Regulations, and to adopt and promulgate additional rules and
regulations applicable to the Premises and the Property. Notice of such
amended and additional rules and regulations shall be given to Tenant, and
Tenant agrees thereupon to comply with and observe all rules and regulations
and amendments and additions thereto.
B. Landlord may waive any one or more of the Rules and Regulations for the
benefit of any particular tenant or tenants, but no such waiver by Landlord
shall be construed as a waiver of the Rules and Regulations in favor of any
other tenant or tenants, nor prevent Landlord from thereafter enforcing the
Rules and Regulations against any or all of the tenants of the Property.
C. The Rules and Regulations are in addition to, and shall not be
construed to in any way modify or amend, in whole or in part, the terms,
covenants, agreements and conditions of any lease of premises in the
Property.
12. DEFAULTS AND REMEDIES:
12.1 Defaults. The occurrence of any one or more of the following events
shall constitute a default and breach of this Lease by Tenant:
(A) The failure by Tenant to make any payment of Base Rent, Additional
Rent or any other payment required to be made by Tenant under this Lease,
as and when due and such failure shall continue for a period of ten (10)
days after written notice thereof from Landlord to Tenant: provided,
however, that for each Lease Year during which Landlord has already given
Tenant two written notices of the failure to make such payments, no
further notice shall be required and an event of default shall
automatically occur on the date upon which such payment was due; or
*Tenant may freely sublease, transfer or assign this Lease to any operating
subsidiary or affiliated company, provided however, that no such sublease,
transfer or assignment shall release Tenant from its obligations hereunder
without consent of Landlord.
<PAGE>
(B) The failure by Tenant to observe or perform any of the covenants,
conditions or provisions of this Lease to be observed or performed by
Tenant, other than Paragraph (A) above, and such failure shall continue
for a period of thirty (30) days after written notice thereof from
Landlord to Tenant; or
(C) The insolvency of Tenant or the execution by Tenant of an
assignment for the benefit of creditors; or
(D) The filing by or for reorganization or arrangement of Tenant under
any law relating to bankruptcy or insolvency; or
(E) The appointment of a receiver or trustee to take possession of
substantially all of Tenant's assets located at the Premises or of
Tenant's interest in this Lease; or
(F) The abandonment of the Premises by Tenant for a period of seven (7)
days or more, or dispossession by process of law or otherwise.
12.2 Remedies. Upon the occurrence of any event of default, Landlord shall
have the right at any time thereafter to pursue any one or more of the
remedies set forth in Paragraphs 12.2(A) - (E) below without notice or
demand, both of which are hereby waived by Tenant. Pursuit of any one or more
of such remedies by Landlord shall not preclude pursuit of any of the other
remedies set forth below or any other remedies provided by law, nor shall
pursuit of any remedy set forth below constitute a forfeiture or waiver of
any rents due to Landlord hereunder or of any damages accruing to Landlord by
reason of the Tenant's violation of any of the terms, conditions or covenants
herein contained.
(A) Terminate this Lease, in which event Tenant shall immediately
surrender the Premises to Landlord, and if Tenant fails to do so, Landlord
may, without prejudice to any other remedy which Landlord may have for
possession or arrearages in rents, enter upon and take possession of the
Premises and expel or remove Tenant and any other person who may be
occupying the Premises or any part thereof, without being liable for
prosecution or any claim for damages therefor. Tenant agrees to pay to
Landlord on demand the amount of all loss and damage which Landlord may
suffer by reason of such termination, whether through inability to relet
the Premises on satisfactory terms or otherwise.
(B) Without terminating this Lease, enter upon and take possession of
the Premises and expel or remove Tenant and any other person who may be
occupying the Premises, without being liable for prosecution or any claim
for damages therefor, and relet the Premises and receive the rents
therefrom. Tenant agrees to pay to landlord on demand any deficiency that
may arise by reason of such reletting.
(C) Without terminating this Lease, enter upon the Premises without
being liable for prosecution or any claim for damages therefor, and do
whatever Tenant is obligated to do under the terms of this Lease. Tenant
agrees to reimburse Landlord on demand for expenses which Landlord may
incur in effecting compliance with Tenant's obligations under this Lease,
and Tenant further agrees that Landlord shall not be liable for any
damages resulting to the Tenant from such action.
(D) At its option, declare the rents, including Base Rent and any
Additional Rent due hereunder, for the entire remaining Term of this Lease
and any other indebtedness due and payable without regard to whether or
not possession shall have been surrendered to or taken by Landlord, and
Landlord may commence action for the recovery of a judgment for such
amounts.
(E) Demand that payments for any rents, whether past due or to become
due in the future, be made by certified check, cashier's check or money
order.
13. INSURANCE:
13.1 Tenant's Insurance. Tenant, at Tenant's sole cost and expense, shall
obtain and keep in force during the Term of this Lease the following policies
of insurance, naming Landlord as an additional insured:
<PAGE>
(A) Comprehensive general liability insurance and personal injury
liability insurance, insuring Tenant against liability for injury to
persons or damage to property occurring in or about the Premises or
arising out of the ownership, maintenance, use or occupancy thereof. Said
insurance shall specify a combined single limit of at least $1,000,000 per
occurrence;
(B) All Risk property insurance, including coverage against damage
caused by fire, windstorm, explosion, aircraft, vehicles, smoke, riot or
vandalism on all of Tenant's personal property, trade fixtures, leasehold
improvements and furnishings in the minimum amount of 80% of their
replacement cost; and
(C) Worker's Compensation insurance insuring Tenant from all claims for
personal injury, disease and/or death under the worker's compensation laws
of the state where the Property is located, in the amounts required by
law.
13.2 Landlord's Insurance. Landlord shall obtain and keep in force during
the Term of this Lease fire and extended coverage on the Building. Tenant
agrees that it will not store, keep, use, or sell in or upon the Premises,
gasoline and related products, firearms, explosives or any other article
which may be prohibited by the standard form of fire insurance policy, or
which will increase Landlord's insurance cost.
13.3 Insurance Policies. Insurance required to be obtained by Tenant
hereunder shall be by companies rated A- or better in "Best's Insurance
Guide", and licensed to do business in the state where the policy is written.
Tenant shall furnish Landlord proof of insurance policies within ten (10)
days after the execution of this Lease. Such policies shall provide that
coverage may not be canceled or reduced without at least thirty (30) days
prior written notice first being given to Landlord. If Tenant shall fail to
procure and maintain the insurance required under this Lease, Landlord may,
but shall not be required to, procure and maintain such insurance, and any
amounts paid by Landlord for such insurance shall be Additional Rent, which
shall be due and payable by Tenant on the next succeeding date on which a
Base Rent Monthly Installment is due.
13.4 Waiver of Subrogation. As long as their respective insurers so permit
without additional premium, Tenant and Landlord each waives any and all
rights of recovery against the other, or against the officers, employees,
agents and representatives of the other for loss or damage to such waiving
party or its property or the property of others under its control, where such
loss or damage is insured under any insurance policy in force at the time of
such loss or damage. In addition, Tenant shall cause the insurance company
issuing Tenant's liability and worker's compensation insurance to include in
the respective policy or certificate, or by way of separate endorsement
thereto, a waiver of subrogation provision for the benefit of Landlord.
<PAGE>
14. NO PERSONAL LIABILITY OF LANDLORD:
"Landlord", as used in this Lease insofar as covenants or obligations on
the part of Landlord are concerned, shall be limited to mean and include only
the owner or owners of the Premises at the time in question. In the event of
any transfer of title, the Landlord named herein shall automatically be
related and discharged from and after the date of such transfer or conveyance
of and from all personal liability with respect to the performance of any
covenants or obligations on the part of Landlord contained in this Lease
thereafter to be performed, provided that any funds of Tenant in the hands of
such landlord at the time of such transfer shall be turned over to the
grantee. Notwithstanding the foregoing, except as specifically set forth in
Article 15 below, Tenant shall look solely to the estate and property of
Landlord in the Property of which the Premises are a part for the
satisfaction of Tenant's remedies for collection of a judgment or other
judicial process requiring the payment of money by Landlord in the event of
any default or breach by Landlord of any of the terms, covenants and
conditions of this Lease to be observed and/or performed by Landlord, and no
other property or assets of Landlord, its partners, shareholders or agents
shall be subject to levy, execution or other enforcement procedure for the
satisfaction of Tenant's damages or remedies.
15. HOLD HARMLESS:
Tenant shall indemnify, defend and hold Landlord harmless from and against
any and all claims, liabilities, damages and costs, including attorneys'
fees, incurred by Landlord which may arise from Tenant's use of the Premises
or from the conduct of its business or from any activity, work or things
which may be permitted or suffered by Tenant in, on or about the Premises,
and shall further indemnify, defend and hold Landlord harmless from and
against any and all claims, liabilities, damages and costs, including
attorneys' fees, incurred by Landlord which may arise from any breach or
default in the performance of any obligation on Tenant's part under this
Lease or which may arise from any negligence of Tenant or any of Tenant's
agents, representatives, customers, employees or invitees. Landlord shall
indemnify, defend and hold Tenant harmless from and against any and all
claims, liabilities, damages and costs, including attorney's fees, incurred
by Tenant which may arise from any gross negligence or willful misconduct by
Landlord or Landlord's agents, representatives, customers, employees or
invitees in, on or about the Premises.
16. ACCESS TO PREMISES:
Landlord, Landlord's agents, representatives and designees shall have the
right to enter the Premises upon reasonable prior notice (but in no event
less than 24 hours prior notice) from Landlord (except in the event of an
emergency and normal maintenance, janitorial and security services, in which
event no prior notice is required), at any time to examine and inspect the
same, or to make such repairs, additions or alterations as Landlord may deem
necessary or proper for the safety, improvement or preservation thereof.
Landlord shall also have the right to enter the Premises during Tenant's
regular business hours, upon reasonable prior notice (but in no event less
than 24 hours prior notice) from Landlord, to exhibit same to prospective
purchasers, mortgagees, lessees and tenants.
17. ALTERNATIONS:
17.1 Alterations by Landlord. The Property and common areas are at all
times subject to the exclusive control and management of Landlord. Without
limiting the generality of the foregoing, Landlord has the right to do and
perform such acts in and to the Property, in the use of Landlord's good
business judgment and without materially interfering with the operation of
Tenant's business at the Premises, that Landlord determines to be advisable
for the more efficient and proper operation of the Property, including, but
not limited to, the following:
(A) Obstruct or close off all or any part of the Property for the
purpose of maintenance, repair or construction;
(B) Use any part of the common area for merchandising, display,
decorations, entertainment, and structures designed for retail selling or
special features or promotional activities;
<PAGE>
(C) Change area, level, location, arrangement or use of the Property or
any part thereof;
(D) Construct other buildings, structures or improvements on the
Property and make alterations thereto, additions thereto, subtractions
therefrom, or rearrangements thereof, build additional stories on any
building, and construct additional buildings or facilities adjoining or
proximate to the Property; and
(E) Construct multiple deck, elevated or underground parking
facilities, and expand, reduce or alter same in any manner whatsoever.
17.2 Alterations by Tenant. Tenant shall not make any structural,
mechanical, interior or other alterations in any portion of the Premises, or
any non-structural alterations, without first obtaining the written consent
of Landlord. All alterations, additions and improvements provided for herein
shall become, upon completion thereof, the property of Landlord; provided,
however, upon termination of tenant's right to possession of the Premises, if
Landlord elects at Landlord's sole option, Tenant shall promptly remove all
alterations, additions and improvements and any other property placed in the
Premises by Tenant and Tenant shall be responsible for restoring the Premises
to its original condition, normal wear and tear excepted, and for any damage
caused by such removal.
18. REPAIRS AND MAINTENANCE:
18.1 Landlord's Obligations. Landlord shall keep in good order, condition
and repair the structural portions of the Buildings and those portions of the
Property not occupied or leased by any tenant, and all costs incurred by
Landlord in making such repairs or performing such maintenance shall be
Operating Expenses as defined in Article 5.5 of this Lease, provided that
Landlord shall have no obligation to perform any act which is the obligation
of Tenant or any other tenant in the Building. Tenant expressly waives the
benefit of any statute now or hereafter in effect which would otherwise
afford Tenant the right to make repairs at Landlord's expense or to terminate
this Lease because of Landlord's failure to keep the Premises in good order,
condition or repair. Landlord shall comply with the Americans With
Disabilities Act (the "ADA"), and specifically "Title III: The Provisions
Governing Public Accommodations and Services Operated by Private Entities" of
the ADA, and all amendments thereto and any standards and regulations issued
thereunder, but only to the extent applicable to and affecting the Building,
with respect to those portions of the Building for which it is responsible to
maintain and repair under the terms and provisions of this Lease and which
are within its control. Any penalty or damage assessed against Tenant by
reason of the failure of Landlord to comply with this paragraph shall be paid
by landlord, and any such failure shall be rectified by Landlord at its own
expense.
18.2 Tenant's Obligations. Tenant, at Tenant's sole cost and expense,
shall keep in good order, condition and repair the Premises and every part
thereof including, without limitation, all plumbing and sewer lines to the
point where they intersect with common lines, fixtures, interior walls and
interior surfaces of exterior walls, ceilings, windows, doors and plate glass
located within or upon the Premises. All repairs made by Tenant shall be at
least of the same quality, design and class as that of the original work.
Tenant shall comply with the ADA, and specifically "Title III: The Provisions
Governing Public Accommodations and Services Operated By Private Entities" of
the ADA, and all amendments thereto and any standards and regulations issued
thereunder, but only to the extent applicable to and affecting the Building,
with respect to those portion of the Building and the Premises for which it
is responsible to maintain and repair under the terms and provisions
<PAGE>
of this Lease and which are within its control. Any penalty or damage
assessed against Landlord by reason of the failure of Tenant to comply with
this paragraph shall be paid by Tenant, and any such failure shall be
rectified by Tenant at its own expense. If Tenant refuses or neglects to make
repairs and/or to maintain the Premises or any part thereof in a manner
reasonably satisfactory to Landlord, Landlord shall have the right, but not
the obligation, upon giving Tenant five (5) days (or in the case of
emergency, twenty-four hours) written notice of its election to do so, to
make such repairs or perform such maintenance on behalf of and for the
account of Tenant. Such work shall be paid for by Tenant, as Additional Rent
under this Lease, promptly upon receipt of a bill for such work.
18.3 Surrender. On the last day of the Term of this Lease, or on any
sooner termination or date on which Tenant ceases to possess the Premises,
Tenant shall surrender to Landlord (i) the Premises in good and clean
condition, ordinary wear and tear excepted, and (ii) the keys to the
Premises. Prior to such surrender, Tenant shall repair any damage to the
Premises occasioned by Tenant or Tenant's removal of trade fixtures,
furnishings and equipment, which repair shall include the patching and
filling of holes and repair of structural damage.
19. LIENS:
Tenant shall not cause any liens of any kind to be placed upon the
Premises or the Property. Subject to the performance of Landlord's duties and
obligations under Section 7 of this Lease, if any lien is placed upon the
Premises or the Property as a result of any work done for or on behalf of
Tenant, or as a result of any goods or services sold or rendered to Tenant or
otherwise, then Tenant shall, within ten (10) days after the imposition of
the lien, cause said lien to be removed, at Tenant's sole cost and expense.
If at any time Tenant either desires to or is required to make repairs or
alterations in accordance with this Lease, Landlord may require Tenant, at
Tenant's sole cost and expense, to obtain and provide to Landlord lien
waivers and/or a completion bond (or such other applicable bond as determined
by Landlord) in an amount equal to one and one-half times the estimated cost
of such improvements to insure Landlord against liability arising out of such
repairs or alterations, including, without limitation, liability for
mechanics' and materialmen's liens, and to insure completion of the work.
20. DAMAGE OR DESTRUCTION:
20.1 Lease Termination.
(A) If the Building or the Premises is damaged or destroyed to the
extent of fifty percent (50%) or more of its reasonable market value prior
to the time of said damage or destruction, Landlord may terminate this
Lease as of the date of the occurrence.
(B) If the Building or the Premises is damaged or destroyed to the
extent of less than fifty percent (50%) of its reasonable market value
prior to the time of said damage or destruction, but the Building cannot,
in the sole judgment of Landlord, be operated economically as an integral
unit, then Landlord may terminate this Lease as of the date of the
occurrence.
(C) If the Premises is damaged or destroyed within the last thirty-six
(36) months of the Term of this Lease or any extension thereof, to the
extent that Tenant cannot carry on Tenant's business and Landlord fails to
restore the Premises within ninety (90) days of such damage or
destruction, then Tenant may terminate this Lease as of the date of the
occurrence.
20.2 Repair or Restoration. If Landlord elects to repair or restore the
Premises to the same condition as existed before such damage or
destruction, Landlord shall proceed with reasonable dispatch to perform
the necessary work. However, notwithstanding anything in this Lease to the
contrary, if the cost of repair or restoration exceeds any insurance
proceeds available for such work, Landlord may terminate this Lease unless
Tenant shall, after notice of the amount of deficiency, pay to Landlord
that deficiency. Upon Landlord's election to repair or restore the
Premises, the Base Rent and the Additional Rent shall be abated until such
work is completed, but Landlord shall not be liable to Tenant for any
<PAGE>
delay which arises by reason of labor strikes, adjustments of insurance or
any other cause beyond Landlord's control, and in no event shall Landlord
by liable for any loss of profits or income. If fire or other casualty
causing damage to the Premises or other parts of the Building shall have
been caused by the negligence or misconduct of the Tenant, its agents,
representatives, employees, or of any other person entering the Premises
under express or implied invitation of Tenant, such damage, at the option
of Landlord, may be repaired by Landlord at the expense of Tenant despite
contrary provisions appearing in this Lease and in such event there shall
be no abatement of rent as set forth in the preceding sentence.
21. CONDEMNATION:
If the Premises, in whole or in part, shall be taken by right of eminent
domain for public purposes or should be sold by Landlord under the threat of
the exercise of such power, then this Lease, at the option of Landlord, shall
terminate and the Base Rent and any Additional Rent shall be properly
apportioned to the date of such taking, and the Landlord shall receive the
entire award for the lands and improvements so taken, or the entire amount of
any payment made under the threat of the exercise of the power of eminent
domain, and Tenant shall have no claim for the value of any portion of its
leasehold estate so terminated or otherwise. If less than a substantial
portion of the Premises shall be taken, this Lease shall not terminate and
Landlord, at its sold expense, shall promptly restore and reconstruct the
Premises to the extent necessary for the Premises to be reasonably suitable
for the uses for which the Premises are leased, but in no event shall
Landlord be required to expend any amount greater than the amount received by
Landlord as compensation for the portion of the Premises taken by the
condemnor. Tenant's rental obligations during the unexpired portion of this
Lease shall be adjusted proportionately to reflect the Rentable Area in the
Premises remaining, as of the date on which the condemning authority takes
title or possession.
22. FORCE MAJEURE:
In the event that either party hereto shall be delayed or hindered in or
prevented from the performance of any act required hereunder by reason of
strikes, lockouts, inability to procure materials, loss of utility services,
restrictive governmental laws or regulations, riots, insurrection, war, acts
of God, or other reason of a like nature not the fault of or under the
control of the party delayed in performing work or doing acts required under
the terms of this Lease, then performance of such act shall be excused for
the period of delay and the period for the performance of any such act shall
be extended for a period equivalent to the period of such delay. The
provisions of this Article 22 shall not operate to excuse Tenant from the
prompt payment of Base Rent, any Additional Rent or any other charges under
this Lease.
<PAGE>
23. SUCCESSION TO LANDLORD'S INTEREST:
23.1 Attornment. Tenant shall attorn and be bound to any of Landlord's
successors and assigns under all terms, covenants and conditions of this
Lease for the balance of the remaining Term of this Lease.
23.2 Subordination. This Lease shall be subordinate to the lien of any
mortgage or security deed or the lien resulting from any other method of
financing or refinancing now or hereafter in force against the Property, any
portion thereof, or upon any buildings hereafter placed upon the land of
which the Premises are a part, and to any and all advances to be made under
such mortgages, and all renewals, modifications, extensions, consolidations
and replacements thereof. The aforesaid provisions shall be self-operative
and no further instrument shall be required to evidence such subordination.
Within ten (10) days after written notice to do so, Tenant covenants and
agrees to execute and deliver such further instrument(s) subordinating this
Lease on the foregoing basis to the lien of any such mortgage(s) as shall be
desired by Landlord and any mortgagees or proposed mortgagees, and if Tenant
fails to do so, Tenant hereby irrevocably appoints Landlord the
attorney-in-fact of Tenant to execute and deliver such instrument(s).
23.3 Estoppel Certificate. Within ten (10) days after request therefor by
Landlord or any mortgagee, or in the event that upon any sale, assignment or
hypothecation of the Premises and/or the land thereunder by Landlord an
estoppel certificate shall be required from Tenant, Tenant agrees to deliver
in recordable form a certificate (in form and substance satisfactory to
Landlord) to any proposed mortgagee or purchaser, or to Landlord, certifying
that, among other things, this Lease is unmodified and in full force and
effect (or if modified, the same is in full force and effect as modified, and
stating the modifications), that there are no defenses or offsets thereto (or
stating those claimed by Tenant), the amount of the Security Deposit, the
dates to which Base Rent and Additional Rent under this Lease have been paid,
and such other matters and items reasonably required by any proposed
mortgagee or purchaser or Landlord.
24. SURRENDER OF PREMISES, HOLDOVER:
At the expiration or earlier termination of this Lease, Tenant shall
surrender the Premises to Landlord in the same condition as when tendered by
Landlord, reasonable wear and tear and insured casualty excepted, and in
broom clean condition. Tenant shall promptly repair any damage to the
Premises caused by the removal of any furniture, trade fixtures or other
personal property placed in the Premises. If Tenant holds over at the end of
the term of this Lease without Landlord's written consent, Tenant shall pay
Landlord as liquidated damages a sum equal to twice the Base Rent, Additional
Rent and other charges to be paid by Tenant to Landlord under this Lease for
all the time Tenant shall so retain possession of the Premises; provided that
the exercise of Landlord's rights under this clause shall not be interpreted
as a grant of permission to Tenant to continue in possession.
25. PARKING:
A. The parking areas, or designated portions thereof, (i) shall be
available for the use of tenants of the Property and, to the extent
designated by Landlord, the employees, agents, customers and invitees of said
tenants, and (ii) shall be subject to the rules, regulations, charges, and
rates as set forth by the Landlord from time to time. However, Landlord may
restrict parking for the Tenant and other tenants of the Property and their
employees and agents to certain portions of the parking areas, and may
designate other areas to be used at large only by customers and invitees of
the Property. Notwithstanding anything contained in this Lease to the
contrary, Landlord reserves the right from time to time to make reasonable
changes in, additions to and deletions from the parking areas and the
purposes to which the same may be devoted, and the use of parking areas shall
at all times be subject to rules and regulations as may be promulgated by
Landlord provided that Landlord shall not reduce Tenant's parking rights as
described above (although it may change the locations thereof).
B. Landlord or its agents (if Landlord has delegated such privileges)
shall have the right to remove or cause to be removed any vehicles of Tenant,
its employees or agents, that are parked in violation of this Lease or the
Rules and Regulations, without liability of any kind to Landlord, its agents
<PAGE>
or employees, and Tenant agrees to hold Landlord harmless from and defend it
against any and all claims, losses, or damages asserted or arising with
respect to or in connection with the removal of any such vehicles. Tenant
shall from time to time upon request of Landlord supply Landlord with a list
of license plate numbers of all vehicles operated by its employees and agents
who are to have parking privileges hereunder. Landlord may, as a part of the
regulations promulgated by Landlord, require that Tenant cause an
identification sticker issued by Landlord to be affixed to all vehicles of
Tenant and its employees or agents who are authorized to park in the parking
areas.
26. HAZARDOUS SUBSTANCES:
Tenant, at its sole cost and expense, shall fully, diligently and promptly
comply with all present and future laws, ordinances, requirements, orders,
directives, rules and regulations of all federal, state or local authorities
(collectively, "Applicable Laws") in connection with Tenant's use, operation
and maintenance of the Premises, to ensure that the Premises are not
contaminated with any substance or material currently identified by any
Applicable Laws to be toxic or hazardous, including without limitation, any
asbestos, pcb, radioactive substance, methane, volatile hydrocarbons,
industrial solvents, or any other material or substance which has in the past
or could at any time in the future cause or constitute a health, safety, or
environmental hazard to any person or property (collectively, "Hazardous
Substance"). Tenant will not cause to occur any discharge, spillage,
uncontrolled loss, seepage or filtration of oil or petroleum or chemical
liquids or solids, liquid or gaseous products or Hazardous Substance (a
"Spill") at, under or within the Premises or otherwise violate any Applicable
Laws. Tenant will not be involved in operations which could lead to the
imposition of any liability or lien on any person or any lessor of the
Premises under any applicable federal, state or local statute, rule or
regulation. If Tenant knows, or has reasonable cause to believe, that a
Hazardous Substance, or a condition involving or resulting from same, has
come to be located in, on, under or about the Premises, Tenant shall
immediately give written notice of such fact to Landlord. Tenant shall also
immediately give Landlord a copy of any statement, report, notice,
registration, application, permit, business plan, license, claim, action or
proceeding given to, or received from, any governmental authority or private
party, or persons entering or occupying the Premises, concerning the
presence, spill, release, discharge of, or exposure to, any Hazardous
Substance or contamination in, on, or about the Premises. Tenant shall pay
all costs, expenses, liabilities, losses, damages, fines, penalties, claims
and demands that may in any manner arise from or be imposed because of the
failure of Tenant to comply with this Section 27 ("Costs") and Tenant shall
indemnify, protect, hold harmless and defend Landlord from and against the
Costs.
27. MISCELLANEOUS:
27.1 Partial Invalidity. If any term, covenant or condition of this Lease
or the application thereof to any person or circumstance shall, to any
extent, be invalid or unenforceable, the remainder of this Lease, or the
application of such term, covenant or condition to persons or circumstances
other than those as to which it is held invalid or unenforceable, shall not
be affected thereby, and all other terms, covenants or conditions of this
Lease shall be valid and be enforced to the fullest extent permitted by law.
27.2 Successors and Assigns. Except as otherwise provided herein, this
Lease shall be binding upon and inure to the benefit of the parties hereto
and their respective heirs, personal representatives, executors, successors
and assigns.
<PAGE>
27.3 Waiver. The waiver by Landlord of any breach of any term, covenant or
condition contained in this Lease shall not be deemed to be a waiver of such
term, covenant or condition for any subsequent breach of the same or any
other term, covenant or condition contained in this Lease. The subsequent
acceptance of rent by Landlord under this Lease shall not be deemed to be a
waiver of any preceding breach by Tenant by any term, covenant or condition
of this Lease, other than the failure of Tenant to pay the particular rental
so accepted, regardless of Landlord's knowledge of such preceding breach at
the time of acceptance of such rent. No covenant, term or condition of this
Lease shall be deemed to have been waived by Landlord, unless such waiver be
in writing by landlord.
27.4 Accord and Satisfaction. No payment by Tenant or receipt by Landlord
of a lesser amount than the monthly rent herein stipulated shall be deemed to
be other than on account of the earliest stipulated rent, nor shall any
endorsement of statement on any check or any letter accompanying any check or
payment as rent be deemed an accord and satisfaction, and Landlord may accept
such check or payment without prejudice to Landlord's right to recover the
balance of such rent or pursue any other remedy provided in this Lease or
otherwise.
27.5 Attorney's Fees. In the event any action is commenced for any breach
of any covenant, condition or agreement herein contained, the prevailing
party in such action shall be entitled to receive all costs incurred in such
action, including, without limitation, all reasonable attorneys' fees.
27.6 Time is of the Essence. Time is of the essence of this Lease.
27.7 Broker's Commission. Tenant warrants that it has had no dealing with
any broker or agent in connection with this Lease except as designated in the
Basic Lease Information, and covenants to pay, hold harmless and indemnify
Landlord from and against any and all cost, expense or liability for any
compensation, commissions and charges claimed by any other broker or agent
with respect to this Lease or the negotiation thereof. In no event shall
Landlord by liable to any such broker for the payment of any fees or
commissions.
27.8 No Light, Air or View Easement. Any diminution or shutting off of
light, air or view by any structure which may be erected on lands adjacent to
the Building shall in no way affect this Lease or impose any liability on
Landlord.
27.9 Entire Agreement. This Lease and the Exhibits and Riders, if any,
attached hereto and forming a part hereof, se forth all the covenants,
promises, agreements, conditions and understandings between Landlord and
Tenant concerning the Premises and there are no covenants, promises,
agreements, conditions or understandings, either oral or written, between
Landlord and Tenant other than as are set forth in this Lease, the Exhibits
and Riders attached hereto. Except as otherwise provided herein, no
subsequent alteration, amendment, change or addition to this Lease shall be
binding upon Landlord or Tenant unless reduced to writing and signed by
Landlord and Tenant.
27.10 Applicable Law. The validity, performance and enforcement of this
Lease shall be governed by the laws of the state in which the Property is
located.
27.11 Notices. Whenever provision is made for any demand, notice or
declaration of any kind under this Lease, or where it is deemed desirable or
necessary by either party to give or serve any such notice, demand or
declaration to the other party, it shall be in writing and sent by certified
mail, return receipt requested, postage prepaid, to the address set forth in
the Basic Lease Information, or to such other address as may be given by a
party to the other by proper notice hereunder. The date on which the
certified mail is deposited with the United States Postal Service shall be
the date on which any proper notice hereunder shall be deemed given.
27.12 Quiet Enjoyment. Landlord warrants that Tenant, on payment of the
sums due hereunder and performance of all of the covenants, conditions and
provisions on Tenant's part to be observed and performed hereunder, shall
peacefully and quietly have, hold and enjoy the Premises during the Term of
this Lease and any extension or renewal hereof.
<PAGE>
27.13 Compliance with Law. Tenant shall comply with all present and future
laws, ordinances and regulations applicable to the use of the Premises, and
shall promptly comply with all governmental orders and directives for the
correction, prevention and abatement of nuisance in, upon or connected with
the Premises, all at Tenant's sole cost and expense.
27.14 Superior Law. If any provision of this Lease is ever in conflict
with any applicable law or regulation, either now in effect or hereafter
adopted, said law or regulation shall control.
27.15 Guarantor. In the event that there is a guarantor of this Lease,
said guarantor shall have the same obligations as Tenant under this Lease and
said guarantor shall execute the Lease Guaranty in form and substance
satisfactory to Landlord.
27.16 Exhibits/Riders. The Exhibits/Riders listed in the Table of Contents
are attached hereto and by this Article made a part hereof for all purposes.
27.17 Execution of Lease. The submission of this Lease for examination
does not constitute a reservation of or option for the Premises and this
Lease becomes effective as a lease only upon execution and delivery thereof
by Landlord and Tenant. If Tenant is a partnership or corporation, Tenant
shall furnish Landlord with such evidence as Landlord reasonably requires to
evidence the binding effect on Tenant of the execution and delivery of this
Lease.
27.18 Confidentiality. As a material part of the consideration for the
agreements on the part of the Landlord contained herein, Tenant agrees for
itself and its employees, agents, legal representatives, successors and
assigns, that the terms and conditions of Tenant's leasing of space in the
Property shall be maintained in confidence and not disclosed to any third
persons (other than Tenant's accountants, attorneys and others within
Tenant's organization with a similar need to know) including other current
(or prospective) tenants of the Property and real estate agents.
<PAGE>
IN WITNESS WHEREOF, the parties have subscribed their respective
signatures in execution hereof, on the day and year written.
LANDLORD: TENANT:
Hallwood Real Estate U.S. Franchise Systems, Inc.
Investors Fund XV,
a Delaware General Partnership
*
By: /s/ Richard D. Stilovich By: /s/ Michael A. Leven
Name: Richard D. Stilovich Name: Michael A. Leven
Title: Regional Director Title: Chief Executive Officer
Date: 9/26/95
Date: 9/27/95
Signed in the presence of:
Signed in the presence of:
Witness:
Witness: /s/ Robin [UNREADABLE]
Title:
Title: A.A.
*BY: Hallwood Management Company, as Agent
<PAGE>
Exhibit "A"
The Premises
(Floor Plan)
[Diagram of Floor Plan]
<PAGE>
Exhibit "C"
Leasehold Improvements Agreement
This Leasehold Improvements Agreement (this "Agreement)) is made a part of
that certain Office Lease Agreement (the "Lease), executed concurrently
herewith by and between Hallwood Real Estate Investors Fund XV ("Landlord")
and U.S. Franchise Systems, Inc. ("Tenant"), and constitutes the entire
agreement of Landlord and Tenant with respect to the construction and
completion of the Premises described in the Lease. In the event of a conflict
between the provisions of this Agreement and other provisions of the Lease,
the provisions of this Agreement will control. Terms defined in the Lease,
when used herein, shall have the same meanings as are ascribed to them in the
Lease.
1. Premises Condition. Since the Premises have been occupied by a previous
tenant, Tenant hereby agrees to accept the Premises in its "as is" condition,
subject to the installation of any improvements identified below.
2. Space Plan. Tenant shall deliver to Landlord a space plan showing the
configuration of the leasehold improvements that Tenant desires to have
constructed in the Premises. The space plan and any revisions thereto shall
be prepared at Tenant's sole cost and expense and shall be subject to the
written approval of Landlord, which approval may be granted or withheld at
the sole discretion of Landlord. If Tenant employs a consultant, such as an
architect, engineer, interior designer or decorator, whether in connection
with Tenant's space plan or the working drawings referred to below, Tenant
shall be responsible for coordinating the consultant's work with Landlord and
shall also be responsible for any delays resulting from any lack of
coordination or the consultant's lack of responsiveness, and any other delays
caused by the consultant. Landlord reserves the right to approve any such
consultant; such approval may be conditioned upon the payment of the
reasonable costs associated with updating the Building's master plans to
incorporate Tenant's working drawings.
3. Working Drawings. After Tenant's proposed space plan and any revisions
thereto have been approved by Landlord, Tenant shall deliver to Landlord
proposed working drawings for the fixed leasehold improvements to be
constructed in the Premises based upon the space plan approved by Landlord.
The working drawings shall consist of any and all architectural, electrical,
mechanical, plumbing, structural and communication/security drawings and
written specifications necessary to permit Landlord to construct the fixed
leasehold improvements. The working drawings and any revisions thereto shall
be prepared at Tenant's sole cost and expense, in accordance with the
Landlord approved space plans, and shall be subject to the written approval
of Landlord. Landlord's review of the proposed space plan or such working
drawings shall not constitute any representation, warranty or agreement of
Landlord as to the adequacy, efficiency, performance or desirability of the
space plan, working drawings or contemplated leasehold improvements, or the
compliance of the working drawings or the leasehold improvements with the
space plan or any applicable laws, ordinances, codes, rules or regulations.
The working drawings and revisions thereto approved by Landlord are
hereinafter referred to as the "Approved Working Drawings".
4. Schedule and Delays. Tenant acknowledges that in order for Tenant's
leasehold improvements to be substantially completed and for the Premises to
be ready for occupancy by Tenant on or before the Lease Commencement Date
stated in the Lease, the space plan desired by Tenant must be submitted to
Landlord on or before N/A, 199 , and the working drawings for the leasehold
improvements contemplated by the space plan must be submitted to Landlord on
or before N/A, 199 (jointly the "Submission Dates"). Landlord agrees to
notify Tenant within ten (10) business days after its receipt of any material
delivered by Tenant pursuant to this Agreement whether the material is
approved by Landlord. Accordingly, Tenant acknowledges and agrees that in
order for Tenant's leasehold improvements to be substantially completed and
for the Premises to be ready for occupancy on or before the Lease
Commencement Date, Tenant's proposed space plan and proposed working drawings
must be submitted to Landlord on or before the applicable Submission Dates.
Tenant further acknowledges that the Lease Commencement Date shall not be
extended on account of a delay in the substantial completion of the leasehold
improvements if the delay is due to any of the following (referred to herein
and in the Lease, individually or collectively as "Tenant's Delay"):
<PAGE>
(a) Tenant's failure to submit its proposed space plan and proposed
working drawings on or before the applicable Submission Dates;
(b) Tenant's failure to submit a space plan and/or working drawings
that are acceptable to Landlord;
(c) Any delay caused by any of Tenant's consultants;
(d) Any delay due to revisions of Tenant's space plan or proposed
working drawings and the Approved Working Drawings and any delay due to a
change reflected in a Change Order; or
(e) Any other delay that is the responsibility of Tenant under this
Agreement or otherwise.
If Landlord objects to any aspect of Tenant's proposed space plan or working
drawings or any revision thereto, Landlord shall notify Tenant in writing
within ten (10) business days after Landlord's receipt of the material
submitted by Tenant and shall specify the aspects of the material to which
Landlord objects. If Landlord fails to notify Tenant of Landlord's approval
of such material prior to the expiration of such ten (10) business-day
period, it shall be deemed that Landlord has disapproved of the material in
question.
5. Cost Estimate. Within fifteen (15) days after Landlord approves
Tenant's proposed working drawings, Landlord shall advise Tenant of
Landlord's estimate of the total cost that Tenant must pay in order for
Landlord to construct Tenant's leasehold improvements in accordance with the
Approved Working Drawings. If the cost proposed by Landlord is satisfactory
to Tenant, Tenant and Landlord shall execute a written confirmation to that
effect. The confirmation shall constitute an authorization by Tenant for
Landlord to proceed with construction of the leasehold improvements
contemplated by the Approved Working Drawings. All of the work required by
the Approved Working Drawings (the "Work") will be performed by one or more
contractors approved and engaged by Landlord. If Tenant is not satisfied with
the proposed cost, Tenant shall so notify Landlord in writing and shall
either revise the scope of the Work by modifying Tenant's space plan and
Approved Working Drawings, or shall ask Landlord to solicit bids from three
(3) additional contractors who are approved by Landlord for the performance
of construction work in the Building. If one of the three bids is lower than
the cost proposed initially by Landlord, Landlord and Tenant shall execute a
written confirmation approving the reduced cost and Landlord shall proceed to
construct the leasehold improvements for the agreed cost. The cost of the
Work agreed upon by Landlord and Tenant pursuant to this Paragraph 5, as
affected by any Change Order accepted by Tenant as provided below, is
hereinafter referred to as the "Agreed Cost". Any delay in the substantial
completion of the Work that is due to change in the scope of the Work or the
completion of the bidding process to arrive at an Agreed Cost shall be the
responsibility of Tenant.
<PAGE>
6. Change Orders. In the event Tenant desires any changes to the Approved
Working Drawings, Tenant shall submit the proposed changes to Landlord for
Landlord's approval. If any proposed change is acceptable to Landlord,
Landlord shall prepare and submit to Tenant a change order (a "Change Order")
setting forth, among other things, any increase or decrease in the Agreed
Cost as a result of the change sought by Tenant, specifically including,
without limitation, any change in the cost of the Work, changes in the
contractor's fees, architectural and engineering fees, Landlord's
construction coordination fee, and any increased cost due to delays in
construction of any aspect of the Work on account of the change sought by
tenant. The Change Order shall also set forth the anticipated delay, if any,
in the substantial completion of the leasehold improvements on account of the
change sought by tenant. If Tenant fails to execute and approve the Change
Order within five (5) business days following delivery of the Change Order by
Landlord to Tenant, Tenant shall be deemed to have withdrawn the proposed
change and it shall not be implemented by Landlord. If Tenant executes the
Change Order within the five (5) business-day period, Landlord shall
implement the change and the Agreed Cost shall be adjusted as set forth in
the Change Order.
7. Tenant Payments; Construction Coordination Fee. Tenant shall pay the
Agreed Cost for construction of the leasehold improvements in monthly
installments as the Work progresses, each such installment to be paid by
Tenant within three (3) days after Tenant's receipt from Landlord of an
invoice for the amount due on account of construction during the preceding
month, together with a copy of the contractor's bill to Landlord
substantiating the amount due. However, to the extent provided in Paragraph
10 below, Tenant shall have the right to use the construction Allowance
(hereinafter defined) as a credit against the installments of the Agreed Cost
payable by Tenant. In the event the estimate of the Agreed Cost exceeds the
Allowance or Tenant requests a Change Order which results in an increase in
the Agreed Cost in excess of the Allowance, Tenant shall deposit such
additional funds with Landlord and Landlord shall advance such funds as the
Work progresses prior to the Landlord advancing any of the Allowance. In
addition, Tenant shall pay to Landlord in monthly installments as the Work
progresses, a construction coordination fee equal to ten percent (10%) of the
Agreed Cost.
8. Occupancy of the Premises. The Term of the Lease and Tenant's rental
obligations under the Lease will commence upon the Lease Commencement Date
set forth in the Lease except as otherwise expressly provided herein or in
the Lease. Subject to any delays that are the responsibility of Tenant,
Landlord shall cause all of the Work to be completed on or before the Lease
Commencement Date set forth in the Lease, subject to Tenant's Delays, delays
caused by force majeure and subject to the provisions of Paragraphs 7 and 8
of the Lease. Tenant agrees that upon substantial completion of the Work,
Tenant will occupy and accept the Premises, subject to any incomplete or
defective work described on a punch list prepared by Landlord and approved by
Tenant prior to occupancy. Only one punch list will be prepared prior to
Tenant's occupancy of the Premises. Tenant shall not enter into possession of
the Premises prior to substantial completion without Landlord's written
consent, which consent may be granted or withheld at the sole discretion of
Landlord. In the event Tenant takes possession of all or any portion of the
Premises with Landlord's consent prior to substantial completion of the
Premises, without limitation of Landlord's other rights and remedies, Tenant
agrees to indemnify Landlord and hold Landlord harmless from and against any
and all loss, cost, expense, damage, claim, action and liability that
Landlord may ever suffer or incur or have asserted against it on account of
any loss of or damage to property (whether owned by Landlord, Tenant or any
third party) or injury or death of any person that occurs prior to the date
of substantial completion, whether due to the negligence of Landlord or
Tenant, or their respective employees, agents or contractors.
9. Defaults. The Agreed Cost and any other sums payable by Tenant to
Landlord under this Agreement shall constitute Additional Rent under the
Lease. In the event Tenant shall fail to pay any amount of such Additional
Rent when due, and any such failure continues for a period of five (5) days
after written notice of such failure is issued by Landlord to Tenant, then
such failure shall constitute an event of default under the Lease and
hereunder and Landlord shall have the right to exercise all of its rights and
remedies under the Lease and under applicable law. In no event shall any
termination of the Lease by Landlord relieve Tenant of Tenant's obligation to
<PAGE>
pay to Landlord the Agreed Cost and any other sums payable by Tenant
hereunder.
10. Landlord agrees, at its own expense, to provide the following
improvements to the Premises:
A. Recarpet the Premises with Tenant's choice of color from Landlord's
building standard selection.
B. Repaint all prior painted walls with color of Tenant's choice from
Landlord's standard selection.
C. Install new entrance door.
D. Rekey the Premises and provide Tenant door sign.
E. Install all new ceiling tiles to the Premises.
11. Landlord hereby grants Tenant the right to relocate into larger
Premises within Corporate Square, subject to availability, during the entire
lease term. Terms and conditions on the larger Premises shall be negotiated
at that time.
12. Tenant shall provide a Letter of Credit for a period of three (3)
years after the Lease Commencement Date in the amount of $50,000 as
additional security hereunder. Such Letter of Credit shall include terms
mutually agreeable to Landlord and Tenant but shall provide that Landlord may
draw upon such Letter in the event of a default (after full opportunity to
cure) hereunder or if such Letter of Credit is not renewed in year two (2)
and year three (3) by the date which is sixty (60) days prior to the first
and second anniversary of this Lease Commencement Date, respectively. Tenant
shall provide proof of renewal to Landlord.
<PAGE>
EXHIBIT "D"
Rules and Regulations
1. No Tenant shall allow the Premises to be used for lodging, nor shall
cooking be done or permitted by any Tenant on the Premises; except, use by
the Tenant of insurance underwriters' laboratory approved equipment for
brewing coffee, tea, hot chocolate and similar beverages or microwave ovens
or similar appliances installed for occasional use by Tenant's employees or
invitees shall be permitted, provided that such use is in accordance with all
applicable federal, state and city laws, codes, ordinances, rules and
regulations.
2. Neither Tenant, its agents nor its employees shall solicit business in
the parking area or other common areas, nor shall Tenant, its agents or its
employees, distribute or display any handbills or other advertising matter in
or on automobiles or other vehicles parked in the parking area, or in other
common areas. If any such materials are distributed, Tenant shall pay
Landlord for the cost of cleanup.
3. No aerial antenna, satellite dish or similar device shall be erected on
the roof or exterior walls of the Building or on the grounds, without the
prior written consent of Landlord. Any such device so installed without such
consent shall be subject to removal without notice at any time, without
liability to the Landlord therefor; costs incurred by Landlord for such
removal shall be paid by Tenant.
4. No loudspeakers, televisions, phonographs, radios or other devices
shall be used in a manner so as to be heard or seen outside of the Premises
without the prior written consent of Landlord.
5. No Tenant shall use or keep or permit to be used or kept any foul or
obnoxious gas or substance in the Premises, or permit or suffer the Premises
to be occupied or used in a manner offensive of objectionable to Landlord or
to other occupants of the Building by reason of noise, odors or vibrations,
or interfere in any way with other Tenants or those having business therein.
6. The plumbing facilities, including fixtures and appliances, shall not
be used for any purpose other than that for which they are constructed, and
no foreign substance of any kind shall be deposited therein. The expense of
any breakage, stoppage, or damage resulting from a violation of this
provision shall be borne by the Tenant whose employees, agents or invitees
shall have caused same. Tenant shall be responsible for all private sanitary
sewer lines up to the point they connect with a common sanitary sewer line,
whether or not such lines or point are located within the Premises.
7. Tenant's access to the roof is limited to maintenance of equipment
installed with Landlord's approval and inspections for damage to that
equipment. Neither Tenant nor its agents or employees shall enter upon the
roof at any time without the express prior approval of Landlord.
8. Tenant and its employees shall park their motor vehicles only in those
parking areas designated for that purpose by Landlord, and Tenant shall
provide Landlord with a list of its employees' automobile or motor vehicle
license tag numbers. If Tenant and/or its employees are in violation of this
rule, Landlord shall have the right to tow said automobile or vehicle at
Tenant's expense.
9. No Tenant shall use or keep in the Premises or the Building any
kerosene, gasoline or inflammable or combustible fluid or material other than
limited quantities thereof reasonably necessary for the operation or
maintenance of office equipment, without Landlord's prior written approval.
10. Landlord shall have the right, exercisable without notice and without
liability to any Tenant, to change the name and street address of the
Building.
11. No curtains, draperies, blinds, shutters, shades, screens or other
coverings, hangings or decorations shall be attached to, hung or placed in,
or used in connection with any window of the Building without the prior
written consent of Landlord, and such items shall be installed as instructed
by landlord.
<PAGE>
12. Should a Tenant require telegraphic, telephonic, annunciator or any
other communication service, the Landlord will direct the electricians and
installers where and how the wires are to be introduced and placed, and none
shall be introduced or placed except as the Landlord shall direct.
13. The Landlord has the right to evacuate the Building in event of
emergency or catastrophe.
14. Tenant agrees not to allow or keep any animals or pets of any kind on
the Premises, except those guide dogs which are for the direct purposes of
aiding and assisting the visually impaired.
15. The requirements of the Tenants will be attended to only upon
application by telephone or in person at the office of Landlord. Employees of
Landlord shall not perform any work or do anything outside of their regular
duties unless under special instructions from Landlord.
16. The sidewalks, halls, passages, exits, entrances, elevators and
stairways of the Building shall not be obstructed by any of the Tenants or
used by them for any purpose other than for ingress to and egress from their
respective Premises. The halls, passages, exits, entrances, elevators and
stairways are not for the general public, and Landlord shall in all cases
retain the right to control and prevent access thereto of all persons whose
presence in the judgment of Landlord would be prejudicial to the safety,
character, reputation and interest of the Building and its Tenants, provided
that nothing herein contained shall be construed to prevent such access to
persons with whom any tenant normally deals in the ordinary course of its
business, unless such persons are engaged in illegal activities.
17. No sign, placard, picture, name, advertisement or notice, visible from
the exterior of any Tenant's business shall be inscribed, painted, affixed or
otherwise displayed by any Tenant on any part of the Building without the
prior written consent of Landlord. Landlord will adopt and furnish to Tenant
general guidelines relating to signs inside the Building on the office
floors. Tenant agrees to conform to such guidelines, but may request approval
of Landlord for modifications, which approval will not be unreasonably
withheld. Material visible from outside the Building will not be permitted.
18. Tenant shall not allow a fire or bankruptcy sale or any auction to be
held on the Premises or allow the Premises to be used for the storage of
merchandise held for sale to the general public.
<PAGE>
19. No Tenant shall employ any person or persons other than the janitor of
Landlord for the purpose of cleaning the Premises, unless otherwise agreed to
by Landlord in writing. Except with the written consent of Landlord, no
person or persons other than those approved by Landlord shall be permitted to
enter the Building for the purpose of cleaning the same. No Tenant shall
cause any unnecessary labor by reason of such Tenant's carelessness or
indifference in the preservation of good order and cleanliness. Janitor
services will not be furnished on nights when rooms are occupied after 9:30
p.m. unless, by agreement in writing, service is extended to a later hour for
specifically designated rooms.
20. Landlord will furnish each Tenant free of charge with two keys to each
door lock in the Premises. Landlord may make a reasonable charge for any
additional keys. No Tenant shall have any keys made. No Tenant shall alter
any lock or install a new or additional lock or any bolt on any door of its
Premises without the prior written consent of Landlord. Tenant shall in each
case furnish Landlord with a key for any such lock. Each Tenant, upon the
termination of its tenancy, shall deliver to Landlord all keys to doors in
the Building which shall have been furnished to Tenant.
21. No tenant shall use any method of heating or air conditioning other
than that supplied by Landlord.
22. Landlord reserves the right to exclude from the Building, between the
hours of 6:00 p.m. and 7:00 a.m. and at all hours on Sundays, legal holidays
and on Saturdays any person who, in Landlord's sole opinion, has no
legitimate business in the Building. Landlord shall in no case be liable for
damages for any error with regard to the admission to or exclusion from the
Building of any person. In the case of invasion, mob, riot, public excitement
or other circumstances rendering such action advisable in Landlord's opinion,
Landlord reserves the right to prevent access to the Building during the
continuance of the same by such action as Landlord may deem appropriate,
including closing doors.
23. The directory of the Building will be provided for the display of the
name and location of Tenants. Any additional name which Tenant shall desire
to place upon said directory must first by approved by landlord in writing,
and, if so approved, a charge will be made therefore.
24. Each Tenant shall see that the doors of its Premises are closed and
locked and that all water faucets, water apparatus and utilities are shut off
before Tenant or Tenant's employees leave the Premises, so as to prevent
waste or damage, and for any default or carelessness in this regard Tenant
shall make good all losses or injuries sustained by other tenants or
occupants of the building or Landlord. All Tenants shall keep the doors to
the Building corridors closed at all times except for ingress and egress.
25. Except with the prior written consent of Landlord, no Tenant will
sell, or permit the sale at retail, of newspapers, magazines, periodicals,
theatre tickets or any other goods or merchandise to the general public in or
on the Premises, nor shall any Tenant carry on, or permit or allow any
employee or other person to carry on, the business of stenography,
typewriting or any similar business in or from the Premises for the service
or accommodation of occupants of any other portion of the Building, nor shall
the Premises of any Tenant be used for manufacturing of any kind, or any
business or activity other than that specifically provided for in such
Tenant's lease.
26. Landlord shall designate the time and how all office equipment,
furniture, appliances and other large objects or property ("Equipment") shall
be moved in and/or out of the Building. The persons employed to move such
Equipment in or out of the Building must be acceptable to Landlord. Landlord
shall have the right to prescribe the weight, size and position of all
Equipment brought into the Building. Heavy objects shall, if considered
necessary by Landlord, stand on wood strips of such thickness as is necessary
to properly distribute the weight. Landlord will not be responsible for loss
of or damage to any such Equipment from any cause, and all damage done to the
Building by moving or maintaining such Equipment shall be repaired at the
expense of Tenant. Tenant agrees to coordinate all moving activities of
Equipment in and out of the Building with Landlord or Landlord's agent, and
to use the services of an insured professional moving company. Tenant
acknowledges that any attempts to bring in or take out any Equipment from the
<PAGE>
Building without prior written approval of Landlord or Landlord's agent will
be prevented by the on-site security guard.
27. Hand trucks shall not be used in any space or public halls of the
Building, either by any Tenant or others, except those equipped with rubber
tires and side guards or such other material-handling equipment as Landlord
may approve, and shall not be placed in any elevators servicing the Building
other than designated freight elevators. No other vehicles of any kind shall
be brought by any Tenant into the Building or kept in or about the Premises.
28. Each Tenant shall store all its trash and garbage within its Premises.
No material shall be placed in the trash boxes, receptacles or common areas
if such material is of such nature that it may not be disposed of in the
ordinary and customary manner of removing and disposing of trash ordinance
governing such disposal. All garbage and refuse disposal shall be made only
through entry ways and elevators provided for such purposes and at such times
as Landlord shall designate.
FIRST AMENDMENT
STATE OF GEORGIA
COUNTY OF DEKALB
Amendment, made this 20th Day of May, 1996, by and between HALLWOOD 95,
L.P., a Delaware Limited Partnership, hereinafter referred to as "Landlord",
and US Franchise Systems, Inc., having an office at 13 Corporate Square,
Suite 250, Atlanta, Georgia, hereinafter referred to as "Tenant".
WITNESSETH
WHEREAS, by lease dated September 25, 1995, Landlord leased to Tenant
certain premises, more particularly described as Building 13, Suite 250,
Corporate Square, Atlanta, Georgia 30329, and
WHEREAS, Landlord and Tenant are desirous of further amending said Lease
in the manner set forth below:
EXPANSION
Tenant agrees to expand its premises into approximately 1,644 rentable
square feet as shown on Exhibit A attached hereto. The new total square
footage shall be 10,083 rentable square feet which includes, 8,439 rentable
square feet of existing space and 1,644 rentable square feet of expansion
space.
The commencement of said amendment shall be July 1, 1996 and shall
continue through September 30, 2000. The rental schedule shall be the
following:
<TABLE>
<CAPTION>
TERM CURRENT RENT EXPANSION RENT COMBINED SPACE
<S> <C> <C> <C>
(8,439 square feet) (1,644 square feet) (10,083 square feet)
07/01/96 -
09/30/96 $9,142.25 per month $1,781.00 per month $10,923.25 per month
10/01/96 -
09/30/97 $9,599.36 per month $1,870.05 per month $11,469.41 per month
10/01/97 -
09/30/98 $10,079.33 per month $1,963.55 per month $12,042.88 per month
10/01/98 -
09/30/99 $10,583.30 per month $2,061.73 per month $12,645.03 per month
10/01/99 -
09/30/2000 $11,112.47 per month $2,164.82 per month $13,277.29 per month
</TABLE>
EFFECTIVE DATE
This First Amendment to the Lease shall take effect as of July 1, 1996,
and shall continue in effect for the duration of the said Amendment, that is
to September 30, 2000.
GENERAL TERMS
All the terms, covenants provisions and agreements of the said Lease dated
September 25, 1995, and as amended herein, shall remain in full force and
effect.
TENANT IMPROVEMENTS
Landlord agrees to re-paint and install carpet in expansion space with
building standard selections. Landlord also agrees to install ceiling tile,
shelving 18" x 15'/7-high (using existing brackets), re-key and provide suite
signage for expansion space.
BROKERAGE
Hallwood Management Company has acted for the Landlord in this
transaction, and is to be paid a commission by the Landlord. Hallwood
Management Company has acted as agent for the Tenant in this transaction.
IN WITNESS WHEREOF, each party has caused this Amendment to Lease to be
executed by its duly authorized officer(s).
<PAGE>
LANDLORD: HALLWOOD 95, L.P.,
a Delaware General
Partnership TENANT: US FRANCHISE SYSTEMS, INC.
BY: Hallwood Management
Company,
as Agent BY: /s/ Michael A. Leven
NAME: Richard D. Stilovich NAME: Michael A. Leven
TITLE: Regional Director TITLE: President & CEO
DATE: 5/24/96 DATE: 5/22/96
<PAGE>
[Technical Drawing: floor plan]
CORPORATE SQUARE
BUILDING 13, SUITE 220
1,644 SQ. FT.
<PAGE>
TO: ALL CORPORATE SQUARE TENANTS 13/250
FROM: PROPERTY MANAGEMENT
SUBJECT: UPDATED PROOF OF INSURANCE / EMERGENCY CONTACT LIST
DATE: JANUARY 2, 1996
=============================================================================
Hallwood Management Company is currently updating our Tenant files for 1996.
To ensure that all Tenant files are correct and up to date, we are requesting
the following:
1. All Corporate Square Tenants are to submit an updated proof of insurance
form to the Hallwood Management Office by January 15, 1996. Please refer to
your lease for guidance on what information the proof of insurance form
should contain.
2. All Corporate Square Tenants are to complete the attached Tenant
Contact/Emergency Notification forms. Please include area codes and any pager
numbers.
We thank you in advance for your cooperation in this matter. If you have
any questions, please contact the management Office at (404-321-6644). FAX-
634-3296
File Office
Lease
<PAGE>
TENANT CONTACT AND EMERGENCY NOTIFICATION LISTINGS
CORPORATE SQUARE OFFICE PARK
Please complete the information requested below, sign and date the form, and
return it to the Property Manager at the address listed below. This
information is for emergency use only and will not be distributed to anyone
other than qualified Hallwood Management Company and emergency personnel.
This information is necessary to enable us to contact your designated
representative in the event of after hour emergencies. The day time Tenant
Contact Information will also help us to contact the proper personnel should
we have any administrative, maintenance, or billing questions.
Thank you for your prompt assistance.
HALLWOOD MANAGEMENT COMPANY
TENANT CONTACT INFORMATION
TENANT: U. S. Franchise Systems, Inc.
BUILDING AND SUITE: 13 - Suite 250 PHONE NUMBER: 321-4045
OFFICE CONTACT: Shelley Shapiro MAINTENANCE CONTACT: Geno Welch
MAILING ADDRESS (IF DIFFERENT THAN ABOVE): __________________________________
_____________________________________________________________________________
BILLING CONTACT NAME: David E. Shaw TITLE: EVP - Admin
BILLING ADDRESS (IF DIFFERENT THAN ABOVE): __________________________________
_____________________________________________________________________________
____________________ PHONE NUMBER: ___________________________________________
EMERGENCY NOTIFICATION LISTING
TENANT * Michael A. Leven HOME PHONE 404-355-8920
OWNER(S)
* Neal K. Aronson HOME PHONE 404-812-3722
TENANT * David E. Shaw HOME PHONE 770-587-0403
MGR(s)
_______________________ HOME PHONE ________________________
OTHER Shelley Shapiro HOME PHONE 770-410-1173
_______________________ HOME PHONE ________________________
Signed and Approved by: /s/ David E. Shaw Date: 1/5/96
*NOTE: ALL CONTACTS LISTED WITH AN ASTERISK WILL AUTOMATICALLY BE LISTED AS
PERSONNEL AUTHORIZED FOR GRANTING PERMISSION TO HALLWOOD MANAGEMENT COMPANY
PERSONNEL TO UNLOCK TENANT SPACE FOR TENANT EMPLOYEES. IF YOU DO NOT WISH
THESE PERSONS TO BE AUTHORIZED FOR UNLOCKING APPROVAL, THEN PLEASE NOTE AT
THE BOTTOM OF THE PAGE. IF YOU WISH TO AUTHORIZE ANY OTHER PERSONNEL FOR
UNLOCKING APPROVAL, PLEASE ATTACH A LIST OF NAMES AND HOME PHONE NUMBERS.
Exhibit 21.1
List of Direct and Indirect Subsidiaries of U.S. Franchise Systems, Inc.
1. Microtel Inns and Suites Franchising, Inc., a Georgia corporation
2. Hawthorn Suites Franchising, Inc., a Georgia corporation
3. US Funding Corp., a Georgia corporation
4. Microtel International, Inc., a Georgia corporation and a wholly owned
subsidiary of Microtel Inns and Suites Franchising, Inc.
Exhibit 23.3
Consent of Director
U.S. Franchise Systems, Inc.
I hereby consent to be named in the Registration Statement on
Form S-1 of U.S. Franchise Systems, Inc. relating to the proposed initial public
offering of shares of its Class A Common Stock, including in any supplement to
any prospectus included in such Registration Statement, any amendment to such
Registration Statement or any subsequent Registration Statement filed pursuant
to Rule 462(b) under the Securities Act of 1933, as amended.
By: /s/ Dean S. Adler
Dean S. Adler
Atlanta, Georgia
August 31, 1996
Exhibit 23.4
Consent of Director
U.S. Franchise Systems, Inc.
I hereby consent to be named in the Registration Statement on
Form S-1 of U.S. Franchise Systems, Inc. relating to the proposed initial public
offering of shares of its Class A Common Stock, including in any supplement to
any prospectus included in such Registration Statement, any amendment to such
Registration Statement or any subsequent Registration Statement filed pursuant
to Rule 462(b) under the Securities Act of 1933, as amended.
By: /s/ Jeffrey A. Sonnenfeld
Jeffrey A. Sonnenfeld
Atlanta, Georgia
August 31, 1996
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial
information extracted from the consolidated
statements of financial position of U.S. Franchise
Systems, Inc. and subsidiaries as of June 30, 1996
and December 31, 1995 and the related consolidated
statements of operations for the six months ended
June 30, 1996 and the period from August
28, 1995 (inception) to December 31, 1995.
</LEGEND>
<CIK> 0001020350
<S> <C> <C>
<PERIOD-TYPE> 4-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1995
<PERIOD-START> APR-28-1995 JAN-01-1996
<PERIOD-END> DEC-31-1995 JUN-30-1996
<CASH> 13,893,000 12,732,000
<SECURITIES> 0 0
<RECEIVABLES> 0 122,000
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 14,379,000 13,290,000
<PP&E> 137,000 408,000
<DEPRECIATION> 3,000 19,000
<TOTAL-ASSETS> 18,072,000 19,027,000
<CURRENT-LIABILITIES> 1,114,000 5,261,000
<BONDS> 731,000 731,000
16,759,000 17,597,000
0 0
<COMMON> 111,000<F1> 111,000<F1>
<OTHER-SE> (643,000)<F1> (4,673,000)<F1>
<TOTAL-LIABILITY-AND-EQUITY> 18,072,000 19,027,000
<SALES> 0 0
<TOTAL-REVENUES> 0 395,000
<CGS> 0 0
<TOTAL-COSTS> 1,327,000 3,849,000
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 36,000 72,000
<INCOME-PRETAX> (1,168,000) (3,195,000)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (1,168,000) (3,195,000)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,645,000)<F2> (4,033,000)<F2>
<EPS-PRIMARY> $ 1.48<F2> $ 3.63<F2>
<EPS-DILUTED> $ 1.48<F2> $ 3.63<F2>
<FN>
<F1>Common stock and other stockholder's equity include common stock and
additional paid-in-capital classified as redeemable common stock in the
Companies financial statements.
<F2>The net loss and related per share amounts are based on the losses
applicable to common shareholders which represents the net loss adjusted
for accrued dividends on the redeemable preferred stock.
</FN>
</TABLE>
