As filed with the Securities and Exchange Commission on October 11, 1996
Registration No. 333-11427
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_____________
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
_____________
U.S. FRANCHISE SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
_____________
Delaware
(State or other
jurisdiction of 7011 58-2190911
incorporation or (Primary Standard Industrial (I.R.S. Employer
organization) Classification Code Number) Identification Number)
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:
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
_____________
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
------------------------------------------------------------------------------
Title of Each Class Proposed Maximum
of Securities to be Registered Aggregate Amount of
Offering Price(1)(2) Registration Fee(3)
- ------------------------------------------------------------------------------
Class A Common Stock $37,432,500 $12,377.66
- ------------------------------------------------------------------------------
(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) In connection with the initial filing by the Registrant of this
Registration Statement on September 5, 1996, the Registrant paid a
registration fee of $8,534.48. The maximum aggregate offering price has
subsequently been increased by $12,682,500. Accordingly, the Registrant has
increased the maximum dollar value being registered and has paid an
additional filing fee of $3,843.18 in accordance with 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.
[U.S. Franchise Systems, Inc. logo]
SUBJECT TO COMPLETION, DATED OCTOBER 11, 1996
2,325,000 Shares
U.S. Franchise Systems, Inc.
Class A Common Stock
($0.01 par value)
Of the 2,325,000 shares of Class A Common Stock offered hereby, 1,825,000
shares are being sold by U.S. Franchise Systems, Inc. ("USFS" or the
"Company") and 500,000 shares are being sold by the Selling Stockholders. The
Company will not receive any of the proceeds from the sale of shares of Class
A Common Stock by the Selling Stockholders. See "Selling Stockholders".
Prior to this offering, there has been no public market for the Class A
Common Stock. It is currently estimated that the initial public offering
price per share will be between $12.00 and $14.00. See "Underwriting" for
information relating to the method of determining the initial public offering
price.
The Company has two classes of authorized Common Stock: Class A Common
Stock and Class B Common Stock. The holders of Class A Common Stock are
entitled to one vote per share and the holders of Class B Common Stock are
entitled to ten votes per share. Otherwise, the rights of the holders of
Class A Common Stock and the holders of Class B Common Stock are
substantially identical. Certain members of management own all of the
outstanding shares of Class B Common Stock. Upon completion of the Offering,
such members of management will control approximately 78% of the combined
voting power of the Class A Common Stock and the Class B Common Stock. Shares
of Class B Common Stock are convertible into shares of Class A Common Stock
on a share-for-share basis. Both classes will generally vote together as one
class on all matters submitted to a vote of stockholders, including the
election of directors. See "Description of Capital Stock".
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.
---------------------------------------------------------------------------
Underwriting Proceeds to
Price to Discounts and Proceeds to Selling
Public Commissions(1) Company(2) Stockholders
---------------------------------------------------------------------------
Per Share $ $ $ $
---------------------------------------------------------------------------
Total(3) $ $ $ $
---------------------------------------------------------------------------
(1) See "Underwriting" for indemnification arrangements.
(2) Before deducting estimated expenses of $700,000 payable by the Company.
(3) The Company and the Selling Stockholders have granted to the Underwriters
a 30-day option to purchase up to an additional 273,750 and 75,000 shares
of Class A Common Stock, respectively, solely to cover over-allotments.
If this option is exercised in full, total Price to Public, Underwriting
Discounts and Commissions, Proceeds to Company and Proceeds to Selling
Stockholders will be $ , $ , $ and $ , respectively. See
"Underwriting."
The shares of Class A Common Stock offered hereby are being offered by the
several Underwriters named herein, subject to prior sale and acceptance by
the Underwriters and subject to their right to reject any order in whole or
in part. It is expected that the Class A Common Stock will be available for
delivery on or about , 1996, at the offices of Schroder Wertheim &
Co. Incorporated, New York, New York.
Schroder Wertheim & Co. Montgomery Securities
, 1996.
<PAGE>
U S F r a n c h i s e
[Map of United States showing plot points of Microtel Inns Properties Open,
Microtel Inns Executed Franchise, Agreements, Hawthorn Suites Properties
Open, Hawthorn Suites Executed Franchise, Agreements.]
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>
Photos and discriptions of Hotel Properties
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements (including the notes thereto) appearing
elsewhere in this Prospectus. As used in this Prospectus, unless the context
otherwise requires, the terms "USFS" and "Company" include U.S. Franchise
Systems, Inc. and its subsidiaries and their operations. The offering of
shares of the Class A Common Stock, par value $0.01 per share (the "Class A
Common Stock"), of U.S. Franchise Systems, Inc. is referred to herein as the
"Offering". Unless otherwise indicated, all information included in this
Prospectus (i) assumes that the Underwriters' over-allotment option will not
be exercised and (ii) has been adjusted to give effect to the
reclassification of the Company's Common Stock, par value $.10 per share (the
"Old Common Stock"), pursuant to which each share of Old Common Stock will
become 9.67 shares of Class A Common Stock, and to the exchange of 2,707,919
shares of such Class A Common Stock held by certain members of management for
the same number of shares of a newly created class of common stock to be
designated Class B Common Stock, par value $0.01 per share (the "Class B
Common Stock" and together with the Class A Common Stock, the "Common Stock",
and the foregoing reclassification and exchange, the "Reclassification").
THE COMPANY
General
U.S. Franchise Systems, Inc. was formed in August 1995 to acquire, market
and expand high-quality, well-positioned brands with potential for rapid
unit growth through the sale of franchises to third-party operators. The
Company's initial brands, both of which are in the lodging industry, are the
Microtel(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 Inn
Worldwide (1990-95) and President and Chief Operating Officer of Days Inn of
America, Inc. (1985-90), franchisors of the two largest lodging brands in the
world. The Company has hired and trained a staff of 73 employees, including a
28-person sales force, which management believes is the third largest
franchise sales organization in the lodging industry. Mr. Leven and the
Company's sales force have collectively sold over 2,200 hotel franchises on
behalf of other hotel chains. Since acquiring the Microtel brand in October
1995 and establishing a sales force by January 1996, the Company has executed
145 franchise agreements and accepted applications for an additional 74
hotels as of September 30, 1996, expanding the number of states in which
Microtels are or may be located from 10 to 44. Since acquiring the exclusive
rights to franchise hotels under the Hawthorn Suites brand in March 1996 and
establishing a sales force by July 1996, the Company has executed five
franchise agreements and accepted applications for 16 additional hotel sites
as of September 30, 1996.
As a franchisor, USFS licenses the use of its brand names to independent
hotel owners and operators (i.e., franchisees). The Company provides its
franchisees with a variety of benefits and services designed to (i) decrease
development costs, (ii) shorten the time frame and reduce the complexity of
the construction process and (iii) increase occupancy rates, revenues and
profitability of the franchised properties. The Company offers prospective
franchisees access to financing, a business format, design and construction
assistance (including architectural plans), uniform quality standards,
training programs, national reservations systems, national and local
advertising and promotional campaigns and volume purchasing discounts. The
Company does not currently build, own or manage properties.
The Company expects that its future revenues will consist primarily of (i)
franchise royalty fees, (ii) franchise application fees, (iii) reservation
and marketing fees, (iv) various fees and other revenues from third-party
financing arranged by the Company for its franchisees and (v) payments made
by vendors who supply the Company's franchisees with various products and
services. Currently, the Company derives substantially all of its revenues
from reservation and marketing fees collected from its franchisees. The
Company also receives cash from its franchisees in the form of application
fees, which are recognized as revenue only upon the opening of the
3
<PAGE>
underlying hotels. See the Consolidated Financial Statements and the related
Notes included elsewhere in this Prospectus and "Management's Discussion and
Analysis of Financial Condition and Results of Operations".
Microtel
The Microtel system currently includes 27 hotels operating under the Microtel
Inn(R) and Microtel Inn & Suites(R) brand names. In addition, the Company has
executed one franchise agreement for a hotel to be operated under the Microtel
Suites brand name. Microtel properties operate in the budget segment of the
lodging industry, which is the lowest priced segment in the industry (with an
average daily room rate in 1995 of approximately $36) and which has experienced
favorable growth in room demand relative to growth in room supply. For the six
months ended June 1996, the rate of growth in room demand exceeded the rate of
growth in room supply in the budget segment by 3.4 times, significantly higher
than comparable ratios for any other segment in the lodging industry during this
period. According to an industry study, the rate of growth in room demand
relative to the rate of growth in room supply was 2.0x in the luxury segment,
1.1x in the upscale segment, 1.3x in the mid-price segment and 1.5x in the
economy segment over the same period.
Microtels are distinctively styled hotels with a residential look that
offer travelers an attractive and consistent appearance, clean, comfortable
rooms and the safety of interior corridor access, all for a competitive room
rate. Management believes that Microtel is one of the only brands in the
budget segment that franchises only newly constructed, interior corridor
properties. In contrast, many other budget hotels are older properties with
rooms that are accessible only through outside entrances and that may have
been converted from independent hotels or other brands. Management believes
that Microtels' strict new construction and interior corridor requirements
provide travelers with a brand that is among the safest, most consistent and
highest quality in the budget segment. Evidence of the appeal of Microtels to
hotel guests is found in its "intent-to-return" rating, which measures
guests' overall satisfaction and willingness to return to a Microtel in the
future. In surveys of approximately 5,000 Microtel guests conducted by
franchisees from 1989 to 1994, more than 95% of Microtel guests expressed an
intent to return to a Microtel in the future.
The Company believes that Microtels offer franchisees significant
financial advantages. Microtels are designed to minimize construction costs
and maintenance expenses by incorporating smaller room sizes, limited common
areas, relatively smaller land requirements and built-in standardized
furniture, all of which enable franchisees to build and operate a Microtel at
a lower cost. These lower costs may reduce a franchisee's equity investment
and may broaden its debt financing alternatives, thereby expanding the appeal
of the Microtel brand to prospective franchisees. See "Business--Microtel".
Hawthorn Suites
The Hawthorn Suites(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, extended-stay rooms accounted for over 30% of all hotel room
nights sold in the United States in 1995. Another industry study indicates
that the supply of dedicated extended-stay rooms accounted for only 1.3% of
the total number of hotel rooms. Extended-stay properties offer attractive
economics to franchisees because of the relatively high occupancy rates in
this segment and the lower operating costs relative to similarly priced,
full-service hotel properties. Extended-stay hotels experienced occupancy
rates of approximately 80% in 1995 compared to approximately 65% for the
lodging industry as a whole during the same period.
Hawthorn Suites hotels offer large suites equipped with full kitchens and
work spaces, laundry facilities and exercise rooms, daily housekeeping,
24-hour front-desk service, complimentary hot breakfast and hospitality
hours. Hawthorn Suites hotels include both newly constructed properties and
conversions of pre-existing hotels and apartment buildings. The Company has
also recently developed prototypes for a mid-price, all-suite hotel brand,
called Hawthorn Suites LTD, which is designed to meet the needs of both
extended-stay and short-term guests. See "Business--Hawthorn Suites".
The agreement pursuant to which the Company acquired the exclusive
worldwide rights to franchise the Hawthorn Suites brand of hotels (the
"Hawthorn Acquisition Agreement") limits the Company's ability to franchise
4
<PAGE>
certain types of all-suite and full-service lodging brands prior to June 26,
1998 and any non-lodging brands prior to June 26, 1997. For a more complete
discussion of the terms and conditions of the Hawthorn Acquisition Agreement,
see "Risk Factors--Risks Relating to Hawthorn Acquisition Agreement",
"--Limitations on New Brands" and "Business--Acquisition of the Microtel and
Hawthorn Suites Systems".
Business Strategy
The Company's business strategy is to (i) rapidly increase the number of
open Microtels and Hawthorn Suites, (ii) operate its administrative and
franchisee support departments in order to maximize the operating leverage
inherent in the franchising business and (iii) acquire additional lodging or
other service-oriented brands that provide attractive unit economics to
franchisees and significant growth opportunities for the Company (to the
extent permitted under the Hawthorn Acquisition Agreement). See
"Business--Acquisition of the Microtel and Hawthorn Suites Systems".
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
Microtel brand.
The Company was formed in August 1995 as a Delaware corporation. Its
executive offices are located at 13 Corporate Square, Suite 250, Atlanta,
Georgia 30329. Its telephone number is (404) 321-4045.
5
<PAGE>
THE OFFERING
Common Stock
offered by:
The Company 1,825,000 shares of Class A Common Stock
The Selling
Stockholders 500,000 shares of Class A Common Stock
Common Stock to be
outstanding
after
the Offering 9,872,490 shares of Class A Common Stock
2,707,919 shares of Class B Common Stock
12,580,409 total shares of Common Stock
Use of Proceeds The proceeds of the Offering will be used for working
capital and general corporate purposes, which may include
(i) funding the Company's remaining obligations
(approximately $2 million) under the agreement pursuant to
which it acquired the Microtel brand (the "Microtel
Acquisition Agreement"), (ii) acquiring additional lodging
or other service-oriented brands or exclusive franchise
rights (to the extent permitted under the Hawthorn
Acquisition Agreement), (iii) making initial deposits in
connection with the American Dream Program until qualified
lessees can be identified, (iv) investing in financing
programs developed by its wholly owned subsidiary, US
Funding Corp., and (v) investing in entities that make
equity investments in hotel properties built and managed
by certain franchisees with the potential for multi-unit
development. See "Use of Proceeds", "Business--
Acquisition of the Microtel and Hawthorn Suites Systems"
and "--Special Programs".
Voting Rights Shares of Class A Common Stock have one vote per share,
while shares of Class B Common Stock have ten votes per
share. The Class B Common Stock, the holders of which have
effective control of the Company, is voted only by Messrs.
Leven and Aronson. Class B Common Stock is convertible
into Class A Common Stock on a share-for-share basis and,
with limited exceptions, will automatically convert into
Class A Common Stock upon transfer. The Class B Common
Stock is not being offered by this Prospectus. See "Risk
Factors--Control by Management and Anti-Takeover Effect of
Dual Classes of Stock", "Description of Capital
Stock--Common Stock" and "Principal
Stockholders--Management's Shares of Common Stock".
Nasdaq National
Market symbol USFS
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.
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)
Statement of Operations Data:
Revenues $ -- $ 395
Operating expenses 1,327 3,849
Operating loss 1,327 3,454
Interest income 195 331
Interest expense 36 72
Net loss 1,168 3,195
Loss applicable to common
stockholders 1,645 4,033
Net loss applicable to common
stockholders per share (1) 0.15 0.38
Weighted average number of common
shares outstanding (2) 10,755,409 10,755,409
Balance Sheet Data (at period
end):
Working capital $ 13,265 $ 8,029
Total assets 18,072 19,027
Total liabilities 1,845 5,992
Redeemable Preferred Stock 16,759 17,597
Redeemable Common Stock 330 330
Stockholders' deficit 862 4,892
(1) Based upon 8,047,490 shares of Class A Common Stock and 2,707,919 shares
of Class B Common Stock assumed to be outstanding after the
Reclassification but before the Offering.
(2) Includes 3,186,294 shares of Class A Common Stock that are redeemable
under certain circumstances by the Company for reasons not under the
Company's control. See "Principal Stockholders--Management's Shares of
Common Stock".
7
<PAGE>
Franchised Hotels
<TABLE>
<CAPTION>
Microtel (1) Hawthorn Suites (2)
------------------------------------- --------------------------------------
As of As of As of As of
December 31, 1995 September 30, 1996 December 31, 1995 September 30, 1996
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Properties Open 23 27 17 18
Properties Under
Construction 0 7 0 2
Executed Franchise
Agreements 3 145 0 5
Franchise Applications
Accepted (3) 10 74 0 16
</TABLE>
(1) The Company will not receive royalties from the 23 Microtels open as of
December 31, 1995 and from 26 of the 27 Microtels open as of September
30, 1996, but does receive marketing fees from the franchisees of these
properties. See "Business--Microtel" and "Business--Acquisition of the
Microtel and Hawthorn Suites Systems".
(2) The Company will not receive royalties from the 17 Hawthorn Suites hotels
open as of December 31, 1995 and the 18 Hawthorn Suites hotels open as of
September 30, 1996, but does receive reservation and marketing fees from
the franchisees of these properties. See "Business--Hawthorn Suites" and
"Business--Acquisition of the Microtel and Hawthorn Suites Systems."
(3) Represents franchise applications as to which the Company has approved
the proposed site and the prospective franchisee but has not yet executed
a franchise agreement.
Operating Data(1)
Microtel
--------------------------------------
For the Six Months
Ended
For the Year Ended ------------------
December 31, June 30, June 30,
1995 1995 1996
- ------------------------------------------------------------
Average Daily Room
Rate ("ADR") $35.75 $34.32 $35.40
Average Occupancy 69.3 % 66.1 % 66.6 %
Average Revenue Per
Available Room $24.77 $22.68 $23.57
Number of Hotels 15 15 15
Hawthorn Suites
-------------------------------------
For the Six Months
For the Year Ended
Ended ------------------
December 31, June 30, June 30,
1995 1995 1996
- -----------------------------------------------------------
Average Daily Room
Rate ("ADR") $78.27 $77.50 $82.02
Average Occupancy 78.1 % 77.8 % 80.6 %
Average Revenue Per
Available Room $61.13 $60.29 $66.11
Number of Hotels 15 15 15
(1) Includes data only from those Microtels and Hawthorn Suites hotels that
have been operating as part of the applicable franchise system for two
years or more as of June 30, 1996.
8
<PAGE>
RISK FACTORS
The following risks should be carefully considered in evaluating the
Company and its business before purchasing the Class A Common Stock offered
by this Prospectus. Such risks represent all material risks associated with
an investment in the Class A Common Stock.
Limited Operating History; Dependence on Hotel Openings
The Company began operating in October 1995 and therefore has a very
limited operating history upon which investors can evaluate the Company's
performance. While the Company believes that it has a well-conceived strategy
and that it has assembled an experienced and well-qualified management team
to implement this strategy, the Company has incurred losses to date and there
can be no assurance that the Company will be profitable in the future. As of
June 30, 1996, the Company had an accumulated deficit of $4,970,000.
The Company expects that in the future a principal source of revenues will
be royalty fees received from its franchisees. However, the terms of the
Microtel Acquisition Agreement and the Hawthorn Acquisition Agreement
expressly provide that the Company is not entitled to royalties with respect
to Microtels and Hawthorn Suites hotels that were open or under construction,
or with respect to which franchise agreements had been executed or
applications accepted, at the time of the acquisition by the Company of the
right to franchise these brands. Similarly, the Company is not entitled to
royalties with respect to the 23 additional Microtels and the 10 Microtel
all-suites hotels that Hudson Hotels Corporation, the entity from which the
Company acquired the Microtel brand ("Hudson"), its affiliates and certain
other persons are entitled to franchise pursuant to the terms of the Microtel
Acquisition Agreement. Of the existing Microtel and Hawthorn Suites
properties, the Company is entitled to receive royalty fees from one
Microtel. Accordingly, the Company is dependent upon future hotel openings to
recognize franchise application fees as revenue and to generate franchise
royalty fees. There can be no assurance that accepted franchise applications
will result in executed franchise agreements or that executed franchise
agreements will result in open properties. See "Business--Acquisition of the
Microtel and Hawthorn Suites Systems".
Management, By Virtue of Ownership of Supervoting Class B Common Stock,
Will Control the Company Following the Offering
Holders of the Company's Class A Common Stock are entitled to one vote per
share and holders of the Company's Class B Common Stock are entitled to ten
votes per share. Each share of Class B Common Stock is convertible at any
time into one share of Class A Common Stock and, with limited exceptions,
converts automatically upon any transfer thereof. Immediately after the
Offering, Mr. Leven and Mr. Aronson will have the right to vote all of the
outstanding shares of Class B Common Stock, which, together with their shares
of Class A Common Stock, will represent approximately 78% of the combined
voting power of the Company's outstanding Common Stock after the Offering. By
reason of their right to vote the Class B Common Stock, Messrs. Leven and
Aronson will be able to (i) elect all of the Company's directors, (ii) amend
the Charter with respect to most matters, (iii) effect a merger, sale of
assets or other major corporate transaction, (iv) defeat an unsolicited
takeover attempt and (v) generally direct the affairs of the Company.
However, Mr. Leven and Mr. Aronson do not have any agreements or other
obligations to vote together on matters involving the Company (although Mr.
Aronson has granted Mr. Leven the right to vote some of his shares of Class A
Common Stock and some of his shares of Class B Common Stock). See
"Description of Capital Stock", "Principal Stockholders", and "Certain
Relationships and Related Transactions".
Management of Growth
The Company has experienced rapid growth in the number of its employees
and the scope of its operations since its inception. This growth has resulted
in, and is expected to continue to create, new and increased responsibilities
for management personnel, as well as added demands on the Company's operating
and financial systems. The Company's continued growth will depend on its
ability to manage this growth while implementing its strategy. The efforts of
key management personnel and the Company's ability to attract or develop new
management personnel and to integrate these new employees into its overall
operations will be crucial to continued growth. If the Company is unable to
manage growth effectively, the Company's business and results of operations
could be materially and adversely affected. See "Management".
Dependence on Senior Management
The success of the Company is largely dependent on the efforts and
abilities of its senior management and certain other key personnel,
particularly Mr. Leven, Chairman, President and Chief Executive Officer, Mr.
Aronson,
9
<PAGE>
Executive Vice President and Chief Financial Officer, and Steven Romaniello,
Executive Vice President, Franchise Sales and Development. The Company's
success will depend in large part on its ability to retain these individuals
and other current members of its senior management team and to attract and
retain qualified personnel in the future. The loss of members of senior
management or of certain other key employees or the Company's inability to
retain other qualified employees could have an adverse impact on the
Company's business and results of operations. Currently, except with respect
to Mr. Leven, the Company does not maintain key person life insurance on
behalf of the lives of any of its officers or employees. See "Management".
The terms of the Company's 10% Cumulative Redeemable Exchangeable
Preferred Stock (the "Redeemable Preferred Stock") expressly require the
Company to redeem any shares of Redeemable Preferred Stock outstanding in the
event the employment of Mr. Leven is terminated by the Company for any reason
(including resignation) at a redemption price per share equal to $100 plus
all accrued and unpaid dividends thereon. As of June 30, 1996, the aggregate
redemption price for all outstanding shares of Redeemable Preferred Stock,
including accrued but unpaid dividends thereon, was $17,597,000. In addition,
the Hawthorn Acquisition Agreement, by its terms, may be terminated by HSA
Properties, L.L.C. ("HSA"), the entity from which the Company acquired the
exclusive rights to franchise the Hawthorn Suites brand, if Mr. Leven is no
longer employed by the Company, or upon his death or disability, at any time
prior to a permitted transfer of the Company's rights thereunder or, if
earlier, the satisfaction by the Company of certain hotel development levels
set forth in such agreement. See "Risk Factors--Mandatory Redemption of
Redeemable Preferred Stock", "Description of Capital Stock--Preferred Stock"
and "Business--Acquisition of the Microtel and Hawthorn Suites Systems".
Management's Discretion With Respect to Proceeds of the Offering
Although the Company intends to apply the net proceeds of the Offering in
the manner described under "Use of Proceeds", the Company's management has
broad discretion as to the precise allocation of the net proceeds, the timing
of expenditures and all other aspects of the use thereof. As a result, the
success of the Company will be substantially dependent upon the discretion
and judgment of the management of the Company with respect to the application
and allocation of the net proceeds. See "Use of Proceeds".
Risks Relating to Microtel Acquisition Agreement
The Microtel Acquisition Agreement obligates the Company to execute new
franchise agreements and have open or under construction a specified number
of Microtels each year. Specifically, the Microtel Acquisition Agreement
requires that there are, on a cumulative basis, at least 50 new Microtels
open or under construction by December 1997, 100 by December 1998, 175 by
December 1999, and 250 by December 2000. The Microtel Acquisition Agreement
further provides that if the Company is unable to comply with the development
schedule for two consecutive years but opens or has under construction at
least 75% of the number of Microtels required by such schedule, the Company
may cure the default by paying a $1 million penalty within 30 days of notice
of such default. If the Company fails to comply with this development
schedule and to make the requisite cure payment or payments, all rights to
the Microtel system automatically revert to Hudson. There can be no assurance
that the Company will comply with the foregoing development schedule, and the
Company's failure to meet such schedule or to pay the requisite cure payments
would have a material adverse effect on the Company. See
"Business--Acquisition of the Microtel and Hawthorn Suites Systems".
Risks Relating to Hawthorn Acquisition Agreement
Under the Hawthorn Acquisition Agreement, the Company is obligated to
execute a minimum number of Qualified License Agreements (as defined below)
for new Hawthorn Suites by certain dates (the "Termination Standard").
Specifically, the Hawthorn Acquisition Agreement requires that the Company
have executed, on a cumulative basis, a minimum of 10 Qualified License
Agreements by June 26, 1997, 20 by June 26, 1998, 40 by June 26, 1999, 60 by
June 26, 2000, 80 by June 26, 2001, and 100 by June 26, 2002. The term
"Qualified License Agreement" is generally defined in the Hawthorn
Acquisition Agreement as any license agreement granted by the Company for the
use of the Hawthorn Suites brand, provided that (i) the hotel to which such
agreement relates is an all-suites hotel (i.e., a hotel in which greater than
50% of the available rooms are suites) with more than 40 suites, (ii) all
application fees required to be paid by the franchisee to the Company have
been paid, (iii) the licensee owns or controls through long-term lease the
land on which the hotel is located or is to be constructed and (iv) the
average number of suites in hotels covered by Qualified License Agreements is
greater than 50. If the Company fails to meet any of these development
milestones and the default has not been cured prior to the delivery of a
default notice, HSA may terminate the Hawthorn Acquisition Agreement.
10
<PAGE>
If the Company meets the Termination Standard, but fails to achieve
specified higher development goals (the "Royalty Reduction Standard"), the
percentage of franchise royalties payable to HSA will increase. The Hawthorn
Acquisition Agreement may also be terminated, at the election of HSA, on the
death, disability, retirement, resignation or termination of employment of
Mr. Leven as Chief Executive Officer of the Company prior to such time as the
Royalty Reduction Standard has been met or such time as there are 75 new
Hawthorn Suites with a minimum aggregate total of 11,375 rooms ("Hawthorn
Brand Saturation"). See "Business--Acquisition of the Microtel and Hawthorn
Suites Systems".
Limitations on New Brands
Under the Hawthorn Acquisition Agreement, the Company and its affiliates
are generally restricted until June 26, 1998 from franchising any lodging
brands other than (i) Hawthorn Suites brand hotels, (ii) Microtel brand
hotels and (iii) other limited-service, non-suite hotel brands with an ADR of
$49 and under. Until June 26, 1997, the Company must also refrain from
franchising any brands outside of the lodging industry. In addition, until
such time as Hawthorn Brand Saturation has been achieved or, if Hawthorn
Brand Saturation is not achieved, for the duration of the term (unless
earlier terminated) of the Hawthorn Acquisition Agreement and for six months
thereafter, the Company may not franchise another all-suite hotel brand
(other than Microtels costing under a certain amount to construct). If the
Company decides to franchise another all-suite hotel brand after Hawthorn
Brand Saturation has been achieved, HSA has the option to sell its interest
in the Hawthorn Suites brand and system of operation to the Company for a sum
equal to 10 times the portion of franchise royalty fees earned or accrued by
HSA in the 12 months prior to such sale. See "Business--Acquisition of the
Microtel and Hawthorn Suites Systems".
Competition for New Franchise Properties and Hotel Guests
Competition among national brand franchisors and smaller chains in the
lodging industry to grow their franchise systems is intense. The Company
believes that competition for the sale of lodging franchises is based
principally upon (i) the perceived value and quality of the brand, (ii) the
nature and quality of services provided to franchisees, (iii) the
franchisees' view of the relationship of building or conversion costs and
operating expenses to the potential for revenues and profitability during
operation and upon sale and (iv) the franchisee's ability to finance and sell
the property. The Company's franchisees are generally in intense competition
for guests with franchisees of other hotel chains, independent properties and
owner-operated chains. The success of the Company's franchisees affects the
profitability of the Company, as the Company's receipt of royalty fees under
its franchise agreements is tied directly to the gross room revenues earned
by its franchisees.
In choosing a particular hotel or motel, consumers consider differences in
room rates, quality and condition of accommodations, name recognition,
availability of alternative lodging (including short-term lease apartments),
service levels, reputation, safety, reservation systems and convenience of
location.
Both among consumers and potential franchisees, Microtel competes with budget
and economy hotels such as Comfort Inn(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 SuitesSM, MainStaySM, CandlewoodSM, Wingate InnSM, Towne
PlaceSM 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
11
<PAGE>
in travel patterns, extreme weather conditions, changes in governmental
regulations that influence or determine wages, prices, construction costs or
methods of operation, changes in interest rates, the availability of
financing for operating or capital needs and changes in real estate tax rates
and other operating expenses. In addition, due in part to the strong
correlation between the lodging industry's performance and economic
conditions, the lodging industry is subject to cyclical changes in revenues
and profits. These risks may be exacerbated by the relatively illiquid nature
of real estate holdings. Downturns or prolonged adverse conditions in real
estate or capital markets or in national or local economies could have a
material adverse impact on the Company's ability to locate new franchisees.
As a hotel franchisor, the Company expects to experience seasonal revenue
patterns similar to those experienced by participants in the lodging industry
generally. Accordingly, the summer months, because of increases in leisure
travel, are expected to produce higher franchise royalty revenues for the
Company than other periods during the year. In addition, developers of new
hotels typically attempt, whenever feasible, to schedule the opening of a new
property to occur prior to the spring and summer seasons. This may have a
seasonal impact on the Company's revenues, a significant portion of which is
not recognized until the opening of a property. Accordingly, the Company may
experience lower revenues and profits in the first and fourth quarters and
higher revenues and profits in the second and third quarters.
Development Risk
Although the Company does not currently own hotel properties, because its
revenues are dependent on the revenues of its franchisees, the Company is
subject to risks associated with developing hotel properties. These risks,
which are applicable to Microtels as new construction properties and Hawthorn
Suites as both new construction and conversion properties, include delays in
completion of construction, failure to obtain all necessary zoning and
construction permits, discovery of environmental hazards, unavailability of
financing on favorable terms, if at all, the failure of developed properties
to achieve desired revenue or profitability levels once opened, competition
for suitable development sites from competing franchise chains, the risk of
incurring substantial costs in the event a development project must be
abandoned prior to completion, changes in governmental rules, regulations and
interpretations and general economic and business conditions. The Company's
revenues may also be adversely affected by increases in interest rates, which
could increase the costs of financing new hotel construction or the
conversion of existing hotels. Any one of these risks could discourage or
prohibit potential franchisees from beginning or completing hotel projects.
In addition, in connection with the American Dream Program, the Company may
in the future lease and, ultimately, own Microtels. To the extent the Company
leases and/or owns hotel properties it would be subject to risks experienced
by hotel operators generally.
Risks Relating to the Franchisee Financing Facility
In May 1996, the Company reached an agreement in principle with NACC,
pursuant to which NACC would make available to the Company's franchisees over
a two-year period up to $200 million in construction and long-term mortgage
financing, subject to certain terms and conditions (the "Franchisee Financing
Facility"). Under the Franchisee Financing Facility, the ultimate decision
regarding the provision of loans to franchisees will be made by NACC. There
can be no assurance that any loans will be made in connection with the
Franchisee Financing Facility or any other financing facility. See
"Business--Special Programs--Franchisee Financing Facility".
The Company generally does not make construction or mortgage loans to its
franchisees. However, in connection with the Franchisee Financing Facility,
the Company may in the future participate in construction loans and long-term
mortgage loans made to franchisees, including through direct subordinated
loans to such franchisees. In such cases, the Company would be subject to the
risks experienced by lenders generally, including risks of
franchisee/borrower defaults and bankruptcies. In the event of a default
under such loans, the Company, as a subordinated lender, would bear the risk
of loss of principal to the extent the value of the collateral was not
sufficient to pay both the senior lender and the Company, as subordinated
lender. See "Risk Factors--Regulation" and "Business--Special
Programs--Franchisee Financing Facility".
Regulation
The sale of franchises is regulated by various state laws, as well as by
the Federal Trade Commission (the "FTC"). The FTC requires that franchisors
make extensive disclosure to prospective franchisees, although it does not
require registration of offers to prospective franchisees. A number of states
require registration and disclosure in connection with franchise offers and
sales. In addition, several states have "franchise relationship laws" that
limit the ability of
12
<PAGE>
franchisors to terminate franchise agreements or to withhold consent to the
renewal or transfer of these agreements. While the Company's franchising
operations currently are not materially adversely affected by such
regulations, the Company cannot predict the effect any future legislation or
regulation may have on its business operations or financial condition.
Additionally, various national, state and local laws and regulations may
affect activities undertaken by the Company in connection with the Franchisee
Financing Facility and under an agreement with PMC Commercial Trust ("PMC"),
pursuant to which the Company has agreed to, among other things, make
available to potential Microtel franchisees information regarding PMC's
financing programs for land acquisition and construction costs (the "PMC
Agreement"). In particular, the Company may be required to obtain a license
or to register in certain states in order to arrange loans to be made by NACC
or PMC, as the case may be, under such programs or in the event the Company
determines to make loans itself under the Franchisee Financing Facility. See
"Business--Special Programs--Franchisee Financing Facility" and "--PMC
Agreement".
Mandatory Redemption of Redeemable Preferred Stock
As of June 30, 1996, there were 163,500 shares of the Company's Redeemable
Preferred Stock outstanding. Pursuant to the terms of the Company's Amended
and Restated Certificate of Incorporation (the "Charter"), the Company is
required, upon the earlier of (i) September 29, 2007 or (ii) a Change of
Control (as defined below) of the Company, to redeem each outstanding share
of Redeemable Preferred Stock at a cash price per share equal to $100 plus
all accrued and unpaid dividends thereon. A "Change of Control" is defined
generally as (A) the sale of all or substantially all of the Company's
assets, (B) the transfer of more than 50% of its Common Stock to persons who
are not employees of the Company and were not stockholders prior to the
Offering or (C) the termination of the employment of Mr. Leven for any reason
by the Company (including resignation). If Mr. Leven's employment were to be
terminated by the Company for any reason or the Company were to otherwise
experience a Change of Control, the Company would be obligated to redeem all
outstanding shares of Redeemable Preferred Stock at a cost, as of June 30,
1996, of $17,597,000. See "Description of Capital Stock--Preferred Stock".
No Prior Market for Class A Common Stock; Possible Volatility of Stock Price
Prior to the Offering, there has been no public market for the Class A
Common Stock, and there can be no assurance that a regular trading market for
the Class A Common Stock will develop after the Offering or that, if
developed, it will be sustained. The initial public offering price of the
Class A Common Stock will be determined by negotiation between the Company
and the Underwriters based on several factors and will not necessarily
reflect the market price of the Class A Common Stock after the Offering or
the price at which the Class A Common Stock may be sold in the public market
after the Offering.
The market price for the Class A Common Stock may be significantly
affected by such factors as the Company's operating results, changes in any
earnings estimates publicly announced by the Company or by analysts,
announcements of new brands acquired by the Company or its competitors,
seasonal effects on revenues and various factors affecting the economy in
general. In addition, the stock market has experienced a high level of price
and volume volatility, and market prices for the stock of many companies,
especially newly public companies, have experienced wide price fluctuations
not necessarily related to the fundamentals or operating performance of such
companies.
Dilution
The amount by which the initial public offering price per share of Class A
Common Stock exceeds the pro forma net tangible book value per share of
Common Stock after the Offering constitutes dilution to investors in the
Offering. Based on an assumed initial public offering price of $13.00 per
share (the midpoint of the range of prices set forth on the cover of this
Prospectus), purchasers of shares of Class A Common Stock in the Offering
would experience an immediate and substantial dilution of net tangible book
value of $12.06 per share. See "Dilution".
Absence of Dividends
The Company intends to retain any earnings to finance its growth and for
general corporate purposes and therefore does not anticipate paying any cash
dividends in the foreseeable future. In addition, the terms of the Company's
Redeemable Preferred Stock contain, and future financing agreements may
contain, limitations on the payment of cash dividends or other distributions
of assets to the holders of Common Stock. See "Dividend Policy".
13
<PAGE>
Anti-Takeover Devices
Certain provisions of the Charter and the Company's Amended and Restated
By-Laws (the "By-laws") that will become operative prior to or simultaneously
with the closing of the Offering may be deemed to have anti-takeover effects
and may delay, deter or prevent a change in control of the Company that
stockholders might otherwise consider in their best interests. These
provisions (i) allow only the Board of Directors, the Chairman of the Board
of Directors or the Chief Executive Officer of the Company to call special
meetings of the stockholders, (ii) eliminate the ability of stockholders to
take any action without a meeting, (iii) establish certain advance notice
procedures for nomination of candidates for election as directors and for
stockholder proposals to be considered at stockholders' meetings, (iv)
generally authorize the issuance of one or more classes of "blank check"
preferred stock (in addition to the Redeemable Preferred Stock), with such
designations, rights and preferences as may be determined from time to time
by the Board of Directors, (v) require approval of holders of 75% of the
outstanding Class B Common Stock for the Board of Directors to create a
series of Preferred Stock with general voting rights or with the right to
elect a majority of directors under any circumstances and (vi) require
approval of holders of 75% of the outstanding voting power to amend or repeal
items (i), (ii), (v) and (vi) above. See "Description of Capital
Stock--Delaware Law and Certain Charter and By-Law Provisions".
Shares Eligible for Future Sale
Upon the consummation of the Offering, the Company will have 9,872,490
shares of Class A Common Stock outstanding and 2,707,919 shares of Class B
Common Stock outstanding. Of these shares, the 2,325,000 shares of Class A
Common Stock offered hereby will be freely tradeable by persons other than
affiliates of the Company, without restriction under the Securities Act of
1933, as amended (the "Securities Act"). In addition, approximately 9,425,000
shares of Class A Common Stock (including shares of Class A Common Stock into
which the Class B Common Stock is convertible) will be eligible for sale
under Rule 144 beginning on September 29, 1997 (subject to certain volume
limitations and other restrictions prescribed by Rule 144). At such time as
at least 20% of the outstanding Common Stock has been registered for public
sale, certain holders of Common Stock (who, following the Offering, will own
in the aggregate 7,547,490 shares of Class A Common Stock and 2,707,919
shares of Class B Common Stock) will have "piggyback" registration rights
permitting such holders to include a portion of their shares (including, in
the case of Class B Common Stock, the shares of Class A Common Stock into
which such shares are convertible), at the Company's expense, in certain
registration statements filed by the Company (the "piggyback shares"). The
maximum number of shares of Class A Common Stock that may be included in such
registration by such holders is determined by multiplying all of the
piggyback shares by a fraction, the numerator of which is the number of
shares being registered by the Company and the denominator of which is the
number of shares to be outstanding after such registration (excluding the
piggyback shares). In addition, subsequent to September 29, 2000, holders of
a majority of such shares will have the right to request on one occasion
(subject to certain limitations) that such shares (including, in the case of
Class B Common Stock, the shares of Class A Common Stock into which such
shares are convertible) be registered for resale under the Securities Act at
the Company's expense. See "Certain Relationships and Related Transactions"
and "Description of Capital Stock--Registration Rights". No prediction can be
made as to the effect, if any, that sales of shares of Class A Common Stock
or the availability of such shares for sale will have on the market prices
prevailing from time to time. The Company, its officers and directors and
certain of its other stockholders have agreed with the Underwriters not to
sell or otherwise dispose of any of their shares of Class A Common Stock or
Class B Common Stock for a period of 180 days from the date of this
Prospectus without the prior written consent of the representatives of the
Underwriters. Nevertheless, the possibility that substantial amounts of Class
A Common Stock (including those shares into which the Class B Common Stock is
convertible) may be sold in the public market may adversely affect prevailing
market prices for the Class A Common Stock and could impair the Company's
ability to raise equity capital in the future.
14
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Class A
Common Stock offered hereby are estimated to be approximately $21,364,000
($24,673,887 if the Underwriters' over-allotment option is exercised in
full), based on an initial public offering price of $13.00 per share (the
midpoint of the range of prices set forth on the cover of this Prospectus),
after deducting the underwriting discounts and commissions and estimated
expenses of the Offering payable by the Company.
The proceeds of the Offering will be used for working capital and general
corporate purposes, which may include (i) funding the Company's remaining
obligations (approximately $2 million) under the Microtel Acquisition
Agreement , (ii) acquiring additional lodging or other service-oriented
brands or exclusive franchise rights (to the extent permitted under the
Hawthorn Acquisition Agreement), (iii) making initial deposits in connection
with the American Dream Program until qualified lessees can be identified,
(iv) investing in financing programs developed by its wholly owned
subsidiary, US Funding Corp., and (v) investing in entities that make equity
investments in hotel properties built and managed by certain franchisees with
the potential for multi-unit development. The Company currently has no
agreements, commitments or formal understandings with respect to any
acquisitions and, accordingly, is unable to estimate the aggregate amount of
the net proceeds that may be used for any such purposes. Pending such uses,
the Company intends to invest such funds in cash and marketable securities;
provided that the Company intends to invest and to use the net proceeds of
the Offering so as not to be considered an investment company within the
meaning of the Investment Company Act of 1940. See "Business--Acquisition of
the Microtel and Hawthorn Suites Systems", "--Business
Strategy--Acquisitions" and "--Special Programs".
The Offering is also intended to increase the Company's equity base,
provide a public market for the Company's Class A Common Stock, facilitate
future access by the Company to the public equity markets and possibly
provide an additional form of currency for future acquisitions.
DIVIDEND POLICY
The Company has never declared or paid cash dividends on its Common Stock.
The Company currently intends to retain its earnings to provide funds for the
operation and expansion of its business and, therefore, does not anticipate
declaring or paying cash dividends in the foreseeable future. The terms of
the Company's Redeemable Preferred Stock prohibit the Company from declaring
or paying dividends on its Common Stock at any time when dividends have not
been paid in full with respect to its Redeemable Preferred Stock (although
dividends are payable in additional shares of Redeemable Preferred Stock).
Any payment of future dividends will be at the discretion of the Board of
Directors and will depend upon, among other things, the Company's earnings,
financial condition, capital requirements, level of indebtedness, contractual
restrictions with respect to the payment of dividends and other relevant
factors. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources" and "Description of
Capital Stock--Preferred Stock".
15
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at June
30, 1996 on a historical basis and on a pro forma basis reflecting the
Reclassification, certain amendments (collectively, the "1996 Amendment") to
be made to the agreements pursuant to which Messrs. Leven and Aronson
purchased shares of Old Common Stock (the "Old Stock Purchase Agreements"),
and the Offering (including the application of the proceeds therefrom),
assuming an initial public offering price per share of $13.00 (the midpoint
of the range of prices set forth on the cover of this Prospectus). The table
should be read in conjunction with the Selected Financial Data and the
Consolidated Financial Statements of the Company and the Notes thereto
included elsewhere in this Prospectus. See "Selected Financial Data",
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Principal Stockholders--Management's Shares of Common
Stock".
June 30, 1996
-----------------------------
Historical Pro Forma
-------------- --------------
Long Term Debt
Due to Hudson $ 731,000 $ 731,000
Redeemable Stock
10% Cumulative Redeemable Exchangeable
Preferred Stock, par value $.01 per share;
up to 525,000 authorized; 163,500 shares
issued and outstanding as of June 30, 1996 17,597,000 17,597,000
Redeemable shares of Class A Common Stock, par
value $.01 per share; 3,186,294 shares
issued and outstanding as of June 30,
1996(1) 330,000
Redeemable shares of Class A Common Stock, par
value $0.01 per share; 2,006,559 shares
issued and outstanding after the
Reclassification, the 1996 Amendment and the
Offering(1) -- 208,000
Stockholders' Equity (Deficit)
Common Stock, par value $.01 per share;
7,569,115 shares of Class A Common Stock
issued and outstanding as of June 30, 1996 78,000
Common Stock, par value $0.01 per share;
30,000,000 shares of Class A Common Stock and
5,000,000 shares of Class B Common Stock
authorized; 7,865,931 shares of Class A
Common Stock and 2,707,919 shares of
Class B Common Stock issued and outstanding
after the Reclassification, the 1996 Amendment
and the Offering(2) 106,000
Capital in excess of par 21,458,000
Accumulated Deficit (4,970,000) (4,970,000)
-------------- --------------
Total Stockholders' Equity (Deficit) (4,892,000) 16,594,000
-------------- --------------
Total Capitalization $13,766,000 $35,130,000
============== ==============
(1) These shares are redeemable under certain conditions by the Company for
reasons not under the Company's control. See "Principal
Stockholders--Management's Shares of Common Stock".
(2) Excludes 325,000 shares of Class A Common Stock reserved for issuance
under the U.S. Franchise Systems, Inc. 1996 Stock Option Plan (the
"Option Plan") and 125,000 shares of Class A Common Stock reserved for
issuance under the U.S. Franchise Systems, Inc. 1996 Stock Option Plan
for Non-Employee Directors ("The Directors Plan").
16
<PAGE>
DILUTION
At June 30, 1996, the net tangible book value of the Company was a deficit
of $9,569,000 or ($0.89) per share of outstanding Common Stock (taking into
account the Reclassification). After giving effect to the Reclassification
and to the sale of the 1,825,000 shares of Class A Common Stock being offered
by the Company hereby at an assumed initial offering price of $13.00 per
share (the midpoint of the range of prices set forth on the cover page of
this Prospectus) and the application of the net proceeds therefrom (after
deducting estimated offering expenses and underwriting discounts and
commissions), the pro forma net tangible book value of the Company at June
30, 1996 would have been $11,795,000, or $0.94 per share, representing an
immediate increase in net tangible book value of $1.83 per share to existing
stockholders and an immediate dilution of $12.06 per share to persons
purchasing shares of Class A Common Stock in the Offering. The following
table illustrates this per share dilution:
<TABLE>
<CAPTION>
<S> <C> <C>
Assumed initial public offering price per share (1) $13.00
Net tangible book value per share of
Common Stock at June 30, 1996
(adjusted for the Reclassification
but excluding the Offering) $(0.89)
Increase in net tangible book value per
share of Common Stock attributable to
new investors in the Offering 1.83
Pro forma net tangible book value per share
of Common Stock after the Offering 0.94
---------
Dilution per share to purchasers of Class A
Common Stock in the Offering $12.06
---------
</TABLE>
(1) Before deduction of underwriting discounts and commissions and offering
expenses.
The following table sets forth, as of June 30, 1996, and after giving
effect to the Reclassification and the Offering, the number of shares of
Common Stock issued by the Company, the total consideration paid and the
average price per share paid by existing stockholders and to be paid by
purchasers of shares in the Offering, assuming that shares purchased in the
Offering are sold at $13.00 per share (the midpoint of the range of prices
set forth on the cover page of this Prospectus) and before deducting the
underwriting discounts and commissions and estimated offering expenses
payable by the Company:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
-------------------------- ------------------------- ------------
Average
Price
Number Percent Amount Percent Per Share
--------------- --------- -------------- --------- ------------
<S> <C> <C> <C> <C> <C>
Existing Stockholders 10,755,409 85.0% $ 1,112,000 5.0% $ 0.10
New Investors 1,825,000(1) 15.0 23,725,000 95.0 $13.00
--------------- --------- -------------- --------- ------------
12,580,409 100.0% $24,837,000 100.0%
=============== ========= ============== =========
</TABLE>
(1) Does not include shares of Class A Common Stock to be purchased in the
Offering from the Selling Stockholders, as the Company will not receive
any proceeds from the sale of such shares.
17
<PAGE>
SELECTED FINANCIAL DATA
Set forth below is certain selected consolidated historical financial
information of the Company and its subsidiaries as of December 31, 1995 and
June 30, 1996, for the period from August 28, 1995, the date of the Company's
inception, to December 31, 1995 and the six months ended June 30, 1996. Such
information has been derived from the Company's Consolidated Financial
Statements and related Notes thereto as of such dates and with respect to
such periods, which financial statements have been audited by Deloitte &
Touche LLP, independent auditors. Their report on the Company's financial
statements as of such dates and for such periods is included elsewhere in
this Prospectus. See the Consolidated Financial Statements and related Notes
included elsewhere in this Prospectus and "Management's Discussion and
Analysis of Financial Condition and Results of Operations".
Period from
August 28, 1995 to Six Months Ended
December 31, 1995 June 30, 1996
---------------------- ----------------
(in thousands of dollars, except share
and per share data)
Statement of Operations Data:
Revenues ....................................$ -- $ 395
Operating expenses ....................... 1,327 3,849
Operating loss ............................ 1,327 3,454
Interest income ........................... 195 331
Interest expense .......................... 36 72
Net loss .................................... 1,168 3,195
Loss applicable to common
stockholders ............................. 1,645 4,033
Net loss applicable to common
stockholders per share (1) .......... 0.15 0.38
Weighted average number of common
shares
outstanding (2) ....................... 10,755,409 10,755,409
Balance Sheet Data (at period end):
Working capital ...........................$ 13,265 $ 8,029
Total assets ............................... 18,072 19,027
Total liabilities ........................ 1,845 5,992
Redeemable Preferred Stock ............ 16,759 17,597
Redeemable Common Stock ................ 330 330
Stockholders' deficit ................... 862 4,892
(1) Based upon 8,047,490 shares of Class A Common Stock and 2,707,919 shares
of Class B Common Stock assumed to be outstanding after the
Reclassification but before the Offering.
(2) Includes 3,186,294 shares of Class A Common Stock that are redeemable
under certain circumstances by the Company for reasons not under the
Company's control. See "Principal Stockholders--Management's Shares of
Common Stock".
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The Company was formed in August 1995 to acquire, market and expand
high-quality, well-positioned brands with potential for rapid unit growth
through the sale of franchises to third-party operators. The Company
commenced operations in October 1995 and has since focused on acquiring
brands and developing the infrastructure necessary to increase the size and
scope of each brand.
Since October 1995, the Company has acquired two lodging brands--Microtel
(October 1995) and Hawthorn Suites (March 1996). The Company has hired and
trained a staff of 73 employees, including a franchise sales force of 28,
which management believes is the third largest franchise sales organization
in the lodging industry. In addition, the Company has hired executive and
other management employees to head its marketing, administration,
construction and design, finance, training, personnel, national accounts
purchasing and public relations departments. As a result of these hirings,
the Company believes that it has established the infrastructure sufficient to
support significant growth of its brands without further large increases in
its senior management team. Most of the Company's employees have extensive
experience with franchise companies in general and lodging companies
specifically.
In addition, the Company has prepared documentation required under various
federal and state laws for the sale of new franchises under both the Microtel
and Hawthorn Suites brands, including a Uniform Franchise Offering Circular
(a "UFOC"), a form of Franchise Agreement and an application form for each
brand. Subsidiaries of the Company are currently registered to sell Microtels
and Hawthorn Suites hotels in all 50 states. The Company has also developed
the marketing materials, architectural and construction plans, training
programs, reservation systems and franchisee assistance programs to support
the sale of Microtel and Hawthorn Suites franchises.
In order to support its franchise sales effort, the Company has arranged
for a third party to make financing available to its franchisees. In May
1996, the Company reached an agreement in principle with NACC with respect to
the Franchisee Financing Facility, pursuant to which NACC would make
available to the Company's franchisees, over a two-year period, up to $200
million in construction and long-term mortgage financing, subject to certain
terms and conditions. Under the Franchisee Financing Facility, the ultimate
decision regarding the provision of loans to franchisees will be made by
NACC. See "Business--Special Programs--Franchisee Financing Facility".
Results of Operations
Comparison of the four month period ended December 31, 1995 to the six
month period ended June 30, 1996
General. Although the Company was formed in August 1995, it did not begin
operations until October 1995, making the period from August 28, 1995
(inception) to December 31, 1995 (the "1995 Period") effectively a three
month time period from an operations perspective. During the 1995 Period, the
Company's primary focus was the hiring of its executive staff and the
acquisition of the Microtel brand. The Company experienced a three to four
month period between the closing of its acquisition of the exclusive
worldwide franchising rights of the Microtel hotel system (the "Microtel
Acquisition") and the beginning of significant franchise sales activities,
during which time the Company (i) hired and trained its key executive staff
and franchise sales personnel, (ii) developed sales materials, prototypical
architectural drawings and various employee and franchisee training manuals
and (iii) completed legal documentation and filings necessary to allow the
Company to sell franchises in all states. The Company experienced a similar
three to four month lag period between the closing of its acquisition of the
exclusive worldwide rights to franchise hotels under the Hawthorn Suites
brand (the "Hawthorn Acquisition") and the beginning of significant franchise
sales activities. Accordingly, the full-time franchise sales efforts for the
Microtel and Hawthorn Suites brands did not begin until January 1996 and July
1996, respectively. The Company did not acquire the rights to royalties
related to properties that were open or under development at the time of the
Microtel Acquisition or the Hawthorn Acquisition, although the Company will
receive reservation and marketing fees from the franchisees of such
properties. See "Business--Acquisition of the Microtel and Hawthorn Suites
Systems".
19
<PAGE>
The table below summarizes the results of the Company's franchise sales
efforts as of the dates below.
Executed Franchise Properties
Franchise Applications Under
Microtel Agreements Accepted (1) Construction
- ------------------------ --------------- ---------------- -----------------
December 31, 1995 3 10 0
March 31, 1996 47 32 1
June 30, 1996 93 63 1
September 30, 1996 145 74 7
Hawthorn Suites
- ------------------------
June 30, 1996 0 1 0
September 30, 1996 5 16 2
(1) Represents franchise applications as to which the Company has approved
the proposed site and the prospective franchisee but has not yet executed
a franchise agreement.
Revenue. The Company generated $395,000 of revenues, representing
reservation and marketing fees collected from franchisees, during the six
months ended June 30, 1996. The Company began collecting such fees from
Microtel and Hawthorn Suites franchisees in February 1996 and April 1996,
respectively, and, accordingly, no such revenues were earned during the 1995
Period. While the Company recognizes reservation and marketing fees as
revenues, such fees are intended to reimburse the Company for the expenses
associated with providing support services to its franchisees and do not
produce any profit for the Company. The Company also received franchise
application fees of $2,722,000 for the six months ended June 30, 1996,
compared to $120,000 for the 1995 Period. However, such fees are recognized
as revenue only when the applicable hotel opens, and therefore, the Company
did not recognize revenues related to such fees during the applicable
periods.
Expenses. Reservation and marketing costs were $13,000 for the 1995 Period
and $490,000 for the six months ended June 30, 1996. The increase in
marketing and reservation costs in the latter period reflects the
availability of reservation and marketing fees paid to the Company by
franchisees, as well as additional spending by the Company to promote the
Microtel brand to travelers. In the second half of 1996 and through 1997 as
well, the Company expects to spend more on marketing and reservations than it
receives from its franchisees, as it continues its efforts to build
recognition and acceptance of its newly-acquired brands among the traveling
public. Sales commissions of $41,000 were paid during the 1995 Period for the
three license agreements executed during such period compared to commissions
of $1,241,000 which were paid with respect to the 90 license agreements
executed during the six months ended June 30, 1996, reflecting the higher
level of sales activity in the latter period. Such payments will not be
recognized as expenses until the applicable hotel opens and the related
application fee is recognized as revenue. Other franchise sales and
advertising costs, which are costs related to the Company's franchise sales
effort, were $550,000 for the 1995 Period and $1,263,000 for the six months
ended June 30, 1996. This increase primarily relates to the addition of six
sales people in connection with the Hawthorn Acquisition. Corporate salaries,
wages and benefits, which are non-selling personnel costs, were $423,000
during the 1995 Period and $993,000 for the six months ended June 30, 1996.
Approximately $120,000 of this increase was the result of 11 hirings made
necessary by the Hawthorn Acquisition. The remainder reflects the comparison
of the six months ended June 30, 1996 with the 1995 Period, which was
effectively a three-month operating period. Other general and administrative
expenses were $215,000 during the 1995 Period compared to $835,000 (including
a $200,000 non-recurring charge related to the anticipated termination of the
Company's corporate office lease) for the six months ended June 30, 1996. In
addition to the $200,000 non-recurring charge, the difference reflects the
increased activity experienced by the Company during the first six months of
1996 as compared to the last three months of 1995, when it was in its
start-up phase. Depreciation and amortization expense includes depreciation
of equipment for the corporate and regional sales offices, amortization of
the cost of acquiring the Microtel brand and the exclusive rights to
franchise the Hawthorn Suites brand, amortization of consulting payments made
to Hudson under the Microtel Acquisition Agreement and amortization of costs
related to the formation of the Company. Such costs were $126,000 in the 1995
Period and $268,000 in the six months ended June 30, 1996.
Other Income/Expense. During the 1995 Period and the six months ended June
30, 1996, interest expense of $36,000 and $72,000, respectively, was accrued
on the remaining portion of the purchase price of the Microtel
20
<PAGE>
brand. Interest income of $195,000 in the 1995 Period and $331,000 in the six
months ended June 30, 1996 resulted from investments in cash and marketable
securities held by the Company.
Net Loss. The Company had a net loss of $1,168,000 and net loss applicable
to common stockholders of $1,645,000 (including $477,000 of accumulated but
undeclared and unpaid dividends on Redeemable Preferred Stock) for the 1995
Period. For the six months ended June 30, 1996, the net loss was $3,195,000
and the loss applicable to common stockholders was $4,033,000 (including
$838,000 of accumulated but undeclared and unpaid dividends on the Redeemable
Preferred Stock). The Company had a net operating loss carryforward for
income tax purposes on December 31, 1995 and June 30, 1996 of $1,037,000 and
$2,792,000, respectively. Given the limited operating history of the Company,
management has recorded a valuation allowance for the full amount of the
deferred tax asset on December 31, 1995 and June 30, 1996 .
Liquidity and Capital Resources
The Company has financed its operations since its inception primarily
through a private placement of securities, franchise application fees and
interest income. In October 1995, the Company raised approximately $17.5
million in gross proceeds through sales of shares of Old Common Stock and
Redeemable Preferred Stock. Franchise application fees and interest income
generated cash of $120,000 and $195,000, respectively, for the 1995 Period
and $2,306,000 and $331,000, respectively, for the six months ended June 30,
1996. In the 1995 Period, the Company invested $3,720,000, of which
$3,428,000 related to the Microtel Acquisition, $137,000 went toward the
acquisition of equipment and $155,000 was for organization costs. Of the
approximately $3.4 million spent to acquire the Microtel brand, $1,437,000
was paid in the form of a note, with the remainder paid in cash. In the six
months ended June 30, 1996, the Company spent a total of $388,000, $271,000
of which was used to purchase equipment and $117,000 was spent primarily on
legal costs relating to the Hawthorn Acquisition.
In the future, the Company will support the American Dream Program by
committing to make initial deposits under such program until qualified
lessees can be identified. In the event a qualified lessee is not identified
for a particular property, the Company may become the lessee under the
program. If the Company becomes the lessee with respect to a particular
property, it may also acquire the Microtel from the franchisee under the
terms of the American Dream Program. See "Business--Special
Programs--American Dream Program". The Company anticipates that the net
proceeds of the Offering, together with cash on hand and interest thereon,
will be sufficient to fund the Company's working capital requirements and to
carry out part of the Company's business strategy. See "Business--Business
Strategy". The Company may fund its future cash needs through additional
equity or debt offerings, although there can be no assurance that the Company
will be able to do so. The Company had outstanding indebtedness related to
the Microtel Acquisition of $1,437,000 as of both December 31, 1996 and June
30, 1996.
As of June 30, 1996, there were 163,500 shares of the Company's Redeemable
Preferred Stock outstanding. Pursuant to the terms of the Charter, the
Company is required, upon the earlier of (i) September 29, 2007 or (ii) a
Change of Control of the Company, to redeem each outstanding share of
Redeemable Preferred Stock at a cash price per share equal to $100 plus all
accrued and unpaid dividends thereon. If Mr. Leven's employment were to be
terminated by the Company for any reason (including resignation) or the
Company were to otherwise experience a Change of Control, the Company would
be obligated to redeem all outstanding shares of Redeemable Preferred Stock
at a cost, as of June 30, 1996, of $17,597,000. See "Risk Factors--Mandatory
Redemption of Redeemable Preferred Stock" and "Description of Capital
Stock--Preferred Stock".
Seasonality
As a hotel franchisor, the Company expects to experience seasonal revenue
patterns similar to those experienced by participants in the lodging industry
generally. Accordingly, the summer months, because of increases in leisure
travel, are expected to produce higher franchise royalty revenues for the
Company than other periods during the year. In addition, developers of new
hotels typically attempt, whenever feasible, to schedule the opening of a new
property to occur prior to the spring and summer seasons. This may have a
seasonal impact on the Company's revenues, a significant portion of which is
not recognized until the opening of a property. Accordingly, the Company may
experience lower revenues and profits in the first and fourth quarters and
higher revenues and profits in the second and third quarters.
Inflation
The rate of inflation has not had a material effect on the revenues or
operating results of the Company since its inception.
21
<PAGE>
BUSINESS
Overview
U.S. Franchise Systems, Inc. ("USFS" or the "Company") was formed in
August 1995 to acquire, market and expand high-quality, well-positioned
brands with potential for rapid unit growth through the sale of franchises to
third-party operators. The Company's initial brands, which are in the
lodging industry, are the Microtel budget hotel brand ("Microtel") and the
Hawthorn Suites upscale, extended-stay hotel brand ("Hawthorn Suites"). The
Company acquired the rights to these brands because of their potential for
significant growth, which reflects, among other things, their profitability
for franchisees at the property level and their positions in attractive
segments of the lodging industry.
The Company has assembled an experienced management team and sales force
led by its Chairman, President and Chief Executive Officer, Michael A. Leven,
who has 35 years of experience in the lodging industry, and its Executive
Vice President and Chief Financial Officer, Neal K. Aronson, a former
principal of the New York investment firm Odyssey Partners, L.P. Mr. Leven
most recently served as President and Chief Operating Officer of Holiday Inn
Worldwide (1990-95) and President and Chief Operating Officer of Days Inn of
America, Inc. (1985-90), franchisors of the two largest lodging brands in the
world. The Company has hired and trained a staff of 73 employees, including a
28-person sales force, which management believes is the third largest
franchise sales organization in the lodging industry. Mr. Leven and the
Company's sales force have collectively sold over 2,200 hotel franchises on
behalf of other hotel chains. Since acquiring the Microtel brand in October
1995 and establishing a sales force by January 1996, the Company has executed
145 franchise agreements and accepted applications for an additional 74
hotels as of September 30, 1996, expanding the number of states in which
Microtels are or may be located from 10 to 44. Since acquiring the exclusive
rights to franchise the Hawthorn Suites brand in March 1996 and establishing
a sales force by July 1996, the Company has executed five franchise
agreements and accepted applications for 16 additional hotel sites as of
September 30, 1996.
As a franchisor, USFS licenses the use of its brand names to independent
hotel owners and operators (i.e., franchisees). The Company provides its
franchisees with a variety of benefits and services designed to (i) decrease
development costs, (ii) shorten the time frame and reduce the complexity of
the construction process and (iii) increase the occupancy rates, revenues and
profitability of the franchised properties. The Company offers prospective
franchisees access to financing, a business format, design and construction
assistance (including architectural plans), uniform quality standards,
training programs, national reservations systems, national and local
advertising and promotional campaigns and volume purchasing discounts. The
Company does not currently build, own or manage properties.
The Company expects that its future revenues will consist primarily of (i)
franchise royalty fees, (ii) franchise application fees, (iii) reservation
and marketing fees, (iv) various fees and other revenues from third-party
financing arranged by the Company for its franchisees and (v) payments made
by vendors who supply the Company's franchisees with various products and
services. Currently, the Company derives substantially all of its revenues
from reservation and marketing fees collected from its franchisees. The
Company also receives cash from its franchisees in the form of application
fees, which are recognized as revenue only upon the opening of the underlying
hotels. See the Consolidated Financial Statements and the related Notes
included elsewhere in this Prospectus and "Management's Discussion and
Analysis of Financial Condition and Results of Operations".
Business Strategy
The Company's business strategy is to (i) rapidly increase the number of
open Microtels and Hawthorn Suites, (ii) operate its administrative and
franchisee support departments in order to maximize the operating leverage
inherent in the franchising business and (iii) acquire additional lodging or
other service-oriented brands that provide attractive unit economics to
franchisees and significant growth opportunities for the Company (to the
extent permitted under the Hawthorn Acquisition Agreement). See
"--Acquisition of the Microtel and Hawthorn Suites Systems".
Growth of the Franchise Systems. The Company is focused on accelerating
the growth of the Microtel and Hawthorn Suites franchise systems through the
sale of franchises to third-party owners and operators. To this end, the
Company has hired a 28-person sales force (which the Company believes is the
third largest in the lodging industry) whose members have sold 150 franchises
and secured an additional 90 franchise applications on behalf of the Company
since its inception. The Company also benefits from the extensive experience
of Mr. Leven, who has served as President and Chief Operating Officer of the
franchisors of the world's two largest lodging brands. The sales force
targets a broad
22
<PAGE>
pool of potential franchisees, including both franchisees with experience
developing and operating multiple hotel properties and single-unit
franchisees, including first-time hotel owners.
In addition to direct sales, management is actively developing programs
designed to accelerate the growth of the Microtel and Hawthorn Suites
systems. For example, the Company has developed a financing program through
which NACC would make construction and long-term mortgage financing available
to franchisees. This program is intended to add speed and certainty to the
hotel development process, enabling franchisees to spend more time
identifying hotel locations and developing properties and less time obtaining
financing. The Company has also created the American Dream Program, which is
designed to enable first-time hotel owners to lease and own a Microtel with a
low initial investment and thereby increase the number of potential Microtel
franchisees. The Company expects to participate in the American Dream Program
by committing to make initial deposits on and to lease Microtels under this
program until qualified lessees can be identified. See "--Special Programs".
Finally, the Company has extended the Microtel and Hawthorn Suites brands
from two products at the time of their respective acquisitions (Microtel Inn
and Hawthorn Suites) to five products currently (including Microtel Inn &
Suites, Microtel Suites and Hawthorn Suites LTD). The Company believes that
brand extensions allow it to capitalize on the recognition of its brands
among consumers and franchisees and to compete in new markets without the
costs associated with acquiring an existing brand. Of the 145 Microtel
franchise agreements executed by the Company since the Microtel Acquisition,
over 50% relate to Microtel Inn & Suites or Microtel Suites, two of the
products that the Company developed since acquiring the Microtel brand.
Operating Leverage. The Company expects to benefit in the future from the
operating leverage inherent in its cost structure. As new Microtels and
Hawthorn Suites open, the Company expects that recurring royalty revenues
(derived from its franchisees' gross room revenues) will represent an
increasing percentage of the Company's total revenues. At the same time, the
Company expects to incur relatively limited incremental expenses associated
with these royalty revenues because the Company (i) has hired and trained the
sales force and has staffed teams of marketing, franchise administration,
construction and design, reservations and other professionals at levels it
believes are necessary to support the intended expansion of the Microtel and
Hawthorn Suites brands and (ii) earns reservation and marketing fees from
franchisees to offset a large portion of its expenditures on these
activities. At the same time, the Company, as a franchisor, does not incur
the significant capital costs and operating expenses associated with owning
hotels.
Acquisitions. A principal focus of the Company's business strategy is on
the acquisition of additional lodging and other service-oriented franchise
brands. In evaluating potential acquisitions, the Company seeks brands that
have clear market positions and significant multi-unit expansion potential,
are profitable and relatively easy to manage at the unit level and, at the
same time, can be integrated on a cost-effective basis into the Company's
franchise sales and franchisee support organization. From time to time, the
Company engages in discussions with owners of various lodging and non-lodging
brands. However, under the terms of the Hawthorn Acquisition Agreement, the
Company is generally prohibited until June 26, 1998 from franchising any
lodging brand other than (i) Hawthorn Suites brand hotels, (ii) Microtel
brand hotels and (iii) other limited-service, non-suite hotel brands with an
ADR of $49 and under. In addition, until June 26, 1997, the Company generally
may not franchise any non-lodging brands. Also, until 175 Hawthorn Suites
with 11,375 rooms have been developed, the Company may not franchise another
all-suite hotel brand (other than Microtels costing under a certain amount to
construct). As of September 30, 1996, the Company did not have any
agreements, commitments or formal understandings with third parties regarding
possible acquisitions. See "--Acquisition of the Microtel and Hawthorn Suites
Systems".
The Hotel Franchising and Lodging Industries
Hotel Franchising. In recent years, owners of hotels not affiliated with
regional or national lodging companies have increasingly chosen to join hotel
franchise chains. The Company and other hotel franchise chains provide a
number of services designed to directly or indirectly increase hotel
occupancy rates, revenues and profitability. The Company believes that hotel
operators often view franchise chain membership as an important means of
remaining competitive with hotels that are either owned by or affiliated with
national or regional lodging companies. In determining whether to affiliate
with a franchise chain, hotel operators will compare costs of affiliation
with the incremental revenues anticipated to be derived from chain
membership. Costs of affiliation include capital expenditures and operating
costs required to meet a chain's quality and operating standards, plus the
ongoing payment of franchise royalties and assessments for the reservations
system and marketing programs maintained by the franchisor.
23
<PAGE>
Lodging Industry. The lodging industry has traditionally been divided into
five segments, each of which is identified by the average daily room rate
generally charged by hotel operators in the segment (the "ADR"). According to
an industry study, in 1995 the various segments and their respective ADRs
were: budget (approximately $36), economy (approximately $47), mid-price
(approximately $61), upscale (approximately $80) and luxury (approximately
$118). Hotels are further segmented into limited-service and full-service,
depending on the degree of food and beverage and other services offered, and
hotels are also segmented into transient hotels, which serve short-term
guests, and extended-stay hotels, which serve guests on multiple night or
multiple week stays. The Company's franchised properties operate in the
budget segment of the limited-service sector through its Microtel brand and
the extended-stay segment through its Hawthorn Suites brand.
The lodging industry as a whole has shown significant improvement in recent
years. Industry reports indicate that the lodging industry marked its third
consecutive year of profitability in 1995, resulting from a favorable supply/
demand relationship, with increases in room demand exceeding increases in
room supply in 1992, 1993, 1994 and 1995. According to a study prepared in
January 1996, these trends are expected to continue, with demand projected to
increase at 2.5% annually from 1996 to 1998 compared to projected supply
growth of 2.0% for this same period. However, demand historically has been
sensitive to shifts in economic activity, which has resulted in cyclical
changes in room and occupancy rates, and there can be no assurance that
industry projections will be met.
The Company believes that the budget and the extended-stay segments of the
lodging industry offer particularly attractive industry dynamics relative to
other segments of the lodging industry, for the reasons set forth below.
Budget Segment.
Room supply growth in the budget segment has been and is expected to
continue to be lower than in the other segments of the market. Growth since
1994 in the numbers of rooms in the various segments, according to an
industry report, was as follows:
Annual Room Supply Growth (in %)
1996 (through
Segment 1994 1995 June)
------------- ------ ------ ---------------
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
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
1996 (through
Segment 1994 1995 June)
------------- ------ ------ ---------------
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
Extended-Stay Segment.
The extended-stay segment consists of hotels that offer rooms with full
kitchen facilities and that target travelers staying five or more consecutive
nights. This segment is a growing segment of the lodging industry, as
travelers' demand for better value and for environments that feel more like
home have contributed to increased demand for extended-stay rooms. Corporate
downsizing has resulted in an increasing need for consultants, long-term
project work and growth in corporate training programs. Moreover, with
extensive corporate relocations each year, more people are away from home on
longer trips. Leisure and vacation travelers are also discovering the value
of extended-
24
<PAGE>
stay hotels. According to lodging consultant D.K. Shifflet & Associates Ltd.,
approximately 292 million extended-stay room nights were sold in the United
States in 1995, representing over 30% of all hotel room nights sold in the
United States during the year. However, dedicated extended-stay rooms
constituted only 1.3% of the lodging industry's total rooms at the end of
1995. While growth in room supply in the extended-stay sector is expected to
outpace room supply growth in other segments of the lodging industry in the
next several years, management believes that the projected growth in supply
will be insufficient to meet demand for extended-stay rooms.
Extended-stay properties offer attractive economics to franchisees because
of the relatively high occupancy rates in this segment and the lower
operating costs relative to similarly priced, full-service hotel properties.
According to an industry survey, in 1995, extended-stay properties
experienced an average occupancy rate of 80.8%, compared to an overall
average occupancy rate for the lodging industry of 65.5%. Due to the longer
average stay of the extended-stay guest and lower guest turnover, operators
of extended-stay hotels enjoy reduced staffing needs, both at the front desk
and in housekeeping, relative to operators of transient hotels. At the same
time, reduced guest turnover contributes to lower supply costs, as hotel
operators are not required to replenish amenities such as soap and shampoo on
a daily basis. These factors, combined with the elimination of the high costs
of operating full service restaurants, allow extended-stay hotels to realize
higher profit margins than typical full-service hotels.
Microtel
Microtels include three types of properties: Microtel Inns, which have
single and double rooms; Microtel Suites, which are all-suite properties; and
Microtel Inn & Suites, which contain singles, doubles and suites. All
Microtels operate in the budget segment of the lodging industry, which is the
lowest priced segment in the industry with an average daily room rate in 1995
of approximately $36. Microtels are distinctively styled hotels with a
residential look that offer travelers an attractive and consistent
appearance, clean, comfortable rooms and the safety of interior corridor room
access, all for a competitive room rate. Management believes that the
Microtel system is one of the only brands in the budget segment that
franchises only newly constructed, interior corridor properties. In contrast,
many other budget hotels are older properties with rooms that are accessible
only through outside entrances and that may have been converted from
independent hotels or other brands. Management believes that Microtels'
strict new construction and interior corridor requirements provide travelers
with a brand that is among the safest, most consistent and highest quality in
the budget segment.
The Company believes that Microtels offer financial advantages to
franchisees. Microtels feature a distinctive architectural design that
minimizes construction costs and maintenance expenses through smaller room
sizes, limited common areas, smaller land requirements and built-in
standardized furniture, all of which enable franchisees to own and operate a
Microtel at a lower cost. These lower costs may reduce a franchisee's equity
investment and may broaden its debt financing alternatives, thereby expanding
the appeal of the Microtel brand to prospective franchisees.
Today's security conscious, value oriented travelers have shown their
approval of Microtels. Although there were no national advertising or
significant promotional campaigns prior to the Company's acquisition of the
Microtel brand, the 15 properties open more than two years as of June 30,
1996 achieved a 69.3% occupancy rate in 1995 compared to an approximately
61.9% occupancy rate for the budget sector as a whole. Further evidence of
the appeal of Microtels is found in its "intent-to-return" rating, which
measures customers' overall satisfaction and willingness to return to a
Microtel in the future. Based on surveys of approximately 5,000 Microtel
guests conducted by franchisees from 1989 to 1994, more than 95% of Microtel
guests expressed an intent to return to a Microtel in the future.
Since acquiring the Microtel brand in October 1995 and establishing its
sales force by January 1996, the Company has realized franchise sales growth
as follows:
As of As of
December 31, 1995 September 30, 1996
------------------ ------------------
Microtel Franchise Data(1)
Properties Open 23 27
Properties Under Construction 0 7
Executed Franchise Agreements 3 145
Franchise Applications Accepted 10 74
(1) The Company will not receive royalties from the 23 Microtels open as of
December 31, 1995 and from 26 of the 27 Microtels open as of September
30, 1996, but does receive reservation and marketing fees from the
franchisees of these properties. See "--Acquisition of the Microtel and
Hawthorn Suites Systems".
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Microtels are designed to offer the following advantages to franchisees:
Lower Construction Costs. Compact and consistently designed rooms, vinyl
exteriors, minimal public space and the elimination of low profit margin
areas such as kitchen and restaurant facilities, exercise rooms and expansive
lobbies combine to lower total development costs. As a result, a Microtel can
be completed for as little as $23,000 per room (including soft costs,
furniture, fixtures and equipment, but excluding land costs). These lower
construction costs may reduce a franchisee's equity investment and may
broaden its debt financing alternatives, thereby expanding the appeal of the
Microtel brand to prospective franchisees.
Lower Land Costs/More Available Sites. Microtels' innovative architectural
designs, particularly their smaller room size, built-in standardized
furniture and limited public areas, eliminate wasted space, enabling
Microtels to be built on as little as one acre of land. In addition to
minimizing development costs, the ability to build a Microtel on smaller
parcels of land significantly increases the number of available sites, some
of which have traditionally been unsuitable for hotel projects.
Shorter Construction Time. The Company provides Microtel franchisees with
a detailed construction prototype (including mechanical and electrical
working drawings) that requires a local architect only to make changes
related to site adaptation and local zoning codes. Microtel franchisees may
choose from among several different prototypes depending upon the size of the
property and the number and type of rooms. The Company also provides its
franchisees with ongoing construction and design assistance during the
building phase. The result is a shorter construction period (estimated at a
total of 120 to 151 days), which reduces construction period interest costs
and accelerates market entry and the growth of the Microtel system.
Lower Operating Costs. Compact rooms, built-in standardized furniture and
minimal public space lower the number of people required to clean and
maintain a Microtel, reduce heat, light and power consumption, minimize
repair and maintenance costs and reduce capital expenditures.
Lower Reservation Costs. The Company maintains a toll-free referral system
on behalf of its franchisees, which is designed to generate guest
reservations at a lower cost. The toll-free number connects callers to an
operator who refers callers directly to the appropriate Microtel. By reducing
the need for complex and high-cost computer hardware, software and training
at the property level, less of the franchisees' reservation and marketing
fees must be dedicated to maintaining a reservation system, allowing a
greater portion of such fees to fund brand marketing expenditures to end
consumers.
For the hotel guest, Microtel provides a high quality, aesthetically
appealing, safe and secure property at a competitive room rate, as described
in greater detail below:
Strong Price/Value Relationship. A Microtel has a residential-looking
exterior, attractive landscaping and interior corridor design,
differentiating it from other budget properties, many of which are older and
have exterior guest room entrances. As one of the only 100% interior
corridor, new construction brands in the budget segment, Microtel provides
the safety and price conscious customer with an appealing alternative to
other budget hotels.
High Quality/Consistent Product. All Microtels are newly constructed in
accordance with working drawings provided by the Company. The Company does
not allow conversions from existing properties, as is permitted by many of
its competitors. Strict adherence to these construction standards is
monitored by Microtel's in-house design and construction department, which
must approve all franchisee building plans. Management believes that the
result is one of the most consistent chains in the budget segment.
Focus on Safety and Security. Microtels are designed with security in
mind, featuring interior corridors, well-lit lobbies, hallways and parking
areas and a single general access entrance through the lobby to all guest
rooms. All Microtels that have been built subsequent to the Microtel
Acquisition contain, and all Microtels built in the future will contain,
electronic door-locking systems as an additional security feature. These
features, particularly popular with women travelers, combine to provide
enhanced safety for Microtel guests.
Hawthorn Suites
As an upscale, extended-stay hotel, Hawthorn Suites provide the traveler
with the convenience of a hotel and the amenities typically found in an
apartment. Hawthorn Suites' hotel rooms contain full-service kitchens with
appliances,
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cookware and utensils, video cassette players, modem ports, exercise
facilities and valet service. Hawthorn Suites hotels also offer a hot
breakfast buffet every morning and guests are invited to an evening social
hour held four times a week. A center courtyard, an outdoor pool, a multi-use
sport court, a barbecue area and a retail store selling sundry and meal
items, snacks and beverages, will also be part of newly constructed Hawthorn
Suites hotels.
In addition to participating in the upscale, extended-stay segment through
its Hawthorn Suites brand, the Company has recently developed a prototype
called Hawthorn Suites LTD. Hawthorn Suites LTD is a mid-price, all-suites
hotel brand that is designed to meet the needs of both the extended-stay and
transient guests. The prototype developed by the Company for Hawthorn Suites
LTD targets development costs and average daily rates approximately 20% below
those for Hawthorn Suites hotels.
Hotels that are part of the Hawthorn Suites system use the Spirit
Reservation System ("Spirit"), a system operated by Regency Systems Solutions
("Regency"), which receives and processes calls made to a toll-free number
dedicated to Hawthorn Suites. The Spirit system is directly linked by
computer to all Hawthorn Suites hotels. Regency, which is owned by Hyatt
Hotel Corporation ("Hyatt"), also currently operates the reservation system
for Hyatt hotels. The Company benefits from a unique relationship with Hyatt.
Persons calling the Hyatt toll-free number who experience a sold out Hyatt or
no Hyatt in their desired market are automatically referred to the closest
Hawthorn Suites hotel. Revenue generated from reservations made through the
Spirit system accounted for 25% of Hawthorn Suites' total room sales in 1995.
Management believes its franchisees derive substantial benefits from use of
the Spirit system at a low cost. As and when Hawthorn Suites LTD properties
are opened, these properties will also be linked to the Spirit system and
will benefit in the manner described above from any overflow at Hyatt hotels.
There can be no assurance, however, that Regency will continue to service the
Company's or Hyatt's reservation needs in the future or that the Company will
continue to use the reservation services of Regency.
Operations
The following departments of the Company are responsible for identifying
potential franchisees and locations, obtaining franchise applications,
executing franchise agreements, assisting franchisees in building and opening
properties and providing ongoing support, training and services:
Franchise Sales. The Company employs a national franchise sales force
consisting of 28 people who, collectively with Mr. Leven, have sold over
2,200 hotel franchises as employees of other hotel chains. The primary
objectives of the Company's franchise sales strategy are to identify
potential franchisees and possible locations for each of the Company's brands
and to create an awareness and general acceptance of its products with
numerous participants in the hospitality industry, including hotel owners,
lodging consultants, vendors, operators and educational institutions. The
sales force seeks to achieve these objectives through the implementation of a
multi-faceted sales strategy, which includes cold calling, telemarketing,
direct mail, trade advertising and public relations. The compensation program
is structured so that each franchise salesperson is expected to earn at least
50% of his or her annual income in sales commissions.
Design and Construction. The Company's design and construction department
provides development expertise in the disciplines associated with new
construction and renovation, with emphasis on low development costs, low
maintenance expense, quality construction and profit maximization for its
franchisees. The Company provides detailed architectural plans, CAD-CAM
computer files, specifications, system standards and manuals, and makes the
services of the department available to franchisees at various stages of the
development process. In addition, in order to maintain consistent product
quality and brand identity, the design and construction department approves,
among other things, all architectural plans of Microtel and Hawthorn Suites
franchisees.
Quality Assurance. Quality control is essential to maintaining and
increasing the value of the Company's brands and in generating repeat
business among travelers. Franchise quality control is accomplished through
inspections prior to a franchisee's entry into the system and on an ongoing
basis. Quality assurance programs promote uniform standards throughout each
of the Company's franchise systems, an important factor in increasing
consumer demand for lodging facilities. The Company inspects each property
two times per year. Hotels that fail to meet certain franchise standards are
notified and are generally given 30 days to either correct the conditions
that led to the failure or to implement a plan to correct the failure. If
they do not correct the deficiencies, the Company can rescind the franchise.
Since the Company acquired the Microtel brand, one property has been
terminated from the Microtel system due to quality deficiencies.
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<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
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hotel during the term of the agreement and an application fee. Franchise
application fees are non-refundable and are generally collected from
potential franchisees by the time the franchise agreement is executed.
Franchise fees are comprised of two components: a royalty portion and a
reservation and marketing portion, both of which are based upon a percentage
of the franchisee's gross room revenues. The royalty portion of the franchise
fee is intended to cover the operating expenses of the franchisor, such as
costs incurred in providing quality assurance, administrative support and
other franchise services, and to provide the Company with operating profits.
The reservation and marketing portion of the franchise fee is intended to
reimburse the Company for the expenses associated with providing such
franchise services as a reservation system, national advertising and certain
promotional programs. Marketing and reservation fees do not produce any
profit for the Company, but mitigate a significant cost of business for
franchisees and are an important consideration for potential franchisees when
evaluating competing brands. The Company does not receive royalty fees from
those Microtels and those Hawthorn Suites hotels that were open or under
development at the time the Company acquired the right to franchise the
respective brands. The Company does, however, receive reservation and
marketing fees from the franchisees of these properties.
The terms of the Company's current standard forms of franchise agreements
state that, by year of operation, franchisees are required to pay the
following ongoing royalty fees and reservation and marketing fees (each, as a
percentage of gross room revenues), although the actual fees may vary:
Microtel Hawthorn Suites
------------- ---------------------
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%
During the first quarter of 1996, when the Company began its full-time
franchise sales efforts, prospective franchisees were offered a three month
royalty-free period during Year 1 as an inducement to join the Company's
franchise system. The Company is no longer offering this discount and
currently has no intention to do so in the future. With respect to Hawthorn
Suites, two franchisees have received discounts from the Company's standard
fee structure. Discounts were granted in these two instances due to the
unique property size and accelerated opening schedule of these franchises.
With respect to both Microtel and Hawthorn Suites, the Company also has
agreed in certain situations to dedicate a portion of a particular
franchisee's marketing fees to local (as opposed to national) promotion of
the applicable brand.
The Company has modified its standard forms of license agreements in an
attempt to reduce negotiations with potential franchisees, modifications that
the Company believes have reduced the burden on its sales force and
administrative staff. The Company believes that these changes make the
Company's franchise agreements more attractive to potential franchisees
without sacrificing the protection typically afforded to franchisors under
franchise agreements. The Company's standard form of franchise agreement is
terminable by the Company if the franchisee fails to maintain certain quality
standards or to pay royalties, reservation and marketing fees or other
charges. In the event of termination, the Company is generally entitled to
liquidated damages.
Special Programs
American Dream Program. American Dream by Microtel is a unique program
that the Company has developed to enable potential first-time hotel owners
with limited financial resources and/or little or no building experience to
lease and ultimately acquire a Microtel (the "American Dream Program"). Under
the American Dream Program, qualified potential Microtel franchisees would
lease a Microtel for an initial deposit and, at the lessees' option, acquire
the hotel for additional payments over a fixed period. The American Dream
Program is designed to accelerate the
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growth of the Microtel system by permitting those who otherwise could not
afford to build a Microtel an opportunity to become a hotel owner. Although
the Company did not begin marketing this program until August 1996, five
franchise agreements were executed under this program by September 30, 1996.
The Company has reached an understanding in principle with TAD Properties,
L.L.C. ("TAD"), an affiliate of Motels of America, Inc. ("MOA"), pursuant to
which TAD or one of its affiliates will be the exclusive developer,
franchisee and owner-lessor of properties under the American Dream Program.
MOA owns and manages more than 140 hotels, making it one of the largest
owners of limited-service hotel properties in the United States. The Company
will support the American Dream Program by committing to make initial
deposits on individual properties and to lease the hotels until qualified
lessees can be identified. In the event a qualified lessee is not identified
for a particular property, the Company may become the lessee under the
program. If the Company becomes the lessee with respect to a particular
property, it may also acquire the Microtel from the franchisee under the
terms of the American Dream Program. However, no specific amount of capital
has been committed to this program. The Company's UFOC is being amended to
describe the American Dream Program. See "--Regulation".
Franchisee Financing Facility. In May 1996, the Company reached an
agreement in principle with NACC, pursuant to which NACC would make available
to the Company's franchisees, over a two year period, up to $200 million in
construction and long-term mortgage financing, subject to certain terms and
conditions (the "Franchisee Financing Facility"). The Company believes that
the Franchisee Financing Facility can add speed and certainty to the
development process by enabling the Company's franchisees to devote more time
to identifying acceptable hotel locations and constructing properties and
less time obtaining financing. The Company is currently revising its UFOC to
describe the Franchisee Financing Facility. See "--Regulation".
Under the Franchisee Financing Facility, neither the Company nor the
subsidiary through which the Company operates the program, US Funding Corp.,
is obligated to provide any credit or credit support. Rather, it is expected
that US Funding Corp. will provide the Company's franchisees with access to
financing from NACC. Under the Franchisee Financing Facility, NACC is
expected to provide eligible franchisees with 27-to-30 month construction
loans, which convert into 10-year mortgage loans at maturity or earlier under
certain circumstances. The program is expected to be subject to a
comprehensive underwriting process, which will be conducted by US Funding
Corp. and NACC and which will be separate from the franchise application
process. The ultimate decision as to whether to make any loan will be made by
NACC. There can be no assurance that applications preliminarily approved by
US Funding Corp. under this program will ultimately result in loans being
made. To date, no loans have been made to franchisees under the Franchisee
Financing Facility. Franchisees will be required to contribute at least 30%
of the development cost (through the contribution of cash or other assets),
financing the remaining portion from the facility. During the construction
phase, interest will accrue and principal payments will be deferred. The
loans will become secured by the hotel property and will be non-recourse to
the franchisee once the franchisee has received a certificate of occupancy
for the property.
In addition to facilitating the development process, the Company expects
to earn revenues when its franchisees borrow under the Franchisee Financing
Facility. Specifically, the Company expects to receive to a portion of
certain upfront fees payable by the franchisee to NACC, plus a portion of
certain ongoing interest charges payable by the franchisee during the
construction phase. For many reasons, a loan preliminarily approved under
this program may not be made, including if NACC does not approve the loan or
if conditions to lending are not satisfied.
Although the Company generally does not make construction or mortgage
loans to its franchisees, the Company is considering becoming a participant
in both the construction loans and the long-term mortgage loans made to
franchisees under this program, including by making direct subordinated loans
to franchisees. In such cases, the Company would be subject to the risks
ordinarily experienced by lenders, including risks of franchisee/borrower
defaults and bankruptcies. In the event of a default in construction and/or
long-term mortgage loans, the Company, as a subordinated lender, would bear
the risk of loss of principal to the extent the value of the collateral was
not sufficient to pay both the senior lender and the Company, as subordinated
lender. If the Company were to make loans directly, its UFOC would have to be
further amended before any such loans could be offered or made. See
"--Regulation".
PMC Agreement. Under an agreement with PMC Commercial Trust, a Texas real
estate investment trust ("PMC"), the Company has also agreed to make
available to potential Microtel franchisees information regarding PMC's
financing programs for land acquisition and construction costs (the "PMC
Agreement"). The Company earns a marketing fee based on the average principal
amount of the outstanding and performing loans extended by PMC to Microtel
franchisees. The Company and PMC jointly agree as to which franchisee loan
applications will be covered by the PMC Agreement, but the Company may not
participate in the approval or underwriting of any loan applications, and
PMC, in its sole discretion,
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determines whether and the terms under which loans will be made. The PMC
Agreement may be terminated by either party upon 30 days' notice. The Company
is currently updating its UFOC to describe this program. See "--Regulation".
Acquisition of the Microtel and Hawthorn Suites Systems
Microtel Acquisition. On September 7, 1995, the Company entered into the
Microtel Acquisition Agreement with Hudson, a public company then called
Microtel Franchise and Development Corporation, to acquire the exclusive
worldwide franchising rights and operating assets of the Microtel hotel
system. The purchase price for these franchise rights and operating assets
was $3,037,000, of which the Company paid $1,600,000 at the closing on
October 5, 1995 and agreed to pay a total of $1,437,000 over the following
three years, plus interest at 10% (for a total payment of approximately
$1,700,000). In addition, royalties are payable to Hudson, as described
below, for the right to all trade names, trademarks, service marks and other
intellectual property used in connection with the Microtel business,
including the Microtel name (the "Proprietary Marks").
The operating assets of the Microtel system acquired from Hudson included
(i) all prototype architectural plans and designs used in connection with the
Microtel business and (ii) the Microtel reservation referral system,
directories, manuals and marketing materials.
Pursuant to the Microtel Acquisition, the Company also acquired Hudson's
rights under then existing Microtel franchising agreements relating to the 27
Microtels open or under development at the time of the acquisition. Although
the Company acquired the existing franchises from Hudson and is obligated to
fulfill all of the obligations of the franchisor thereunder, Hudson retained
the right to receive all franchise royalties and franchise renewal fees
payable by the existing franchisees under such agreements. The Microtel
Acquisition Agreement does, however, permit the Company to retain any
reservation and marketing fees and any other one-time or non-recurring fees
or charges payable to the franchisor under the applicable franchise
agreement, such as those relating to the initial placement, substitution,
amendment, organization, termination or transfer of the franchise.
The Microtel Acquisition Agreement also grants Hudson, its affiliates and
certain other persons the right to acquire from the Company up to an
additional 23 Microtel hotel franchises and up to an additional 10 Microtel
all-suites hotels and to retain the franchise application fees and the
franchise royalties from such franchises (provided Hudson, its affiliates or
such other persons own and operate the hotels covered by such franchises).
Since the closing of the Microtel Acquisition, Hudson, its affiliates or such
other persons have executed franchise agreements for eight additional
Microtels, which, when opened, will be included in the 23 Microtel franchises
referred to above.
In consideration for the transfer of the Proprietary Marks, the Microtel
Acquisition Agreement provides that, for each new Microtel or Microtel
all-suites hotel (collectively, the "Microtel Properties") opened after the
closing of the Microtel Acquisition, other than the additional franchises
referred to in the preceding paragraph, the Company is required to pay
monthly royalties to Hudson as follows: 1.0% of the "revenues subject to
royalties" on the first 100 Microtels opened after the closing, 0.75% of such
revenues for the next 150 Microtels opened, and 0.50% of such revenues for
each Microtel opened after the first 250 have opened. "Revenues subject to
royalties" generally are those payable by the franchisees to the Company
based on gross room revenues, as well as other royalty payments payable by
such franchisees under the applicable franchise agreement. The Company is
entitled to all other fees (other than termination fees, which must be shared
with Hudson) payable by the Microtel franchisees, including the franchise
application fees, all of the remaining royalties, reservation and marketing
fees and fees applicable to any financing arranged through the Company.
The Microtel Acquisition Agreement requires the Company to satisfy a
development schedule, which requires that new Microtel Properties be opened
or under construction in the following numbers, on a cumulative basis, by
December of each of the following years:
Number of
Microtel
Year Properties(1)
------------------ ---------------------
1996 0
1997 50
1998 100
1999 175
2000 250
(1) Excluding (i) the 27 Microtels that were open or under construction or
with respect to which franchise agreements had been executed or
applications accepted at the time of the Microtel Acquisition and (ii)
the 23 additional Microtels
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(with respect to which eight franchise agreements have been executed
since the closing of the Microtel Acquisition) and the 10 Microtel
all-suites hotels that Hudson, its affiliates and certain other persons
are entitled to franchise under the Microtel Acquisition Agreement.
Under the Microtel Acquisition Agreement, the development schedule is
deemed to have been complied with unless such schedule has not been met for
two consecutive years (including 1996, where applicable). That is, the
Company will not violate its development obligations under the Microtel
Acquisition Agreement unless it has failed to meet the targets for two
consecutive years. If, however, at the end of any two year period, at least
75% (but less than 100%) of the number of Microtel Properties scheduled to
have been opened by such date have been opened, the Microtel Acquisition
Agreement permits the Company to cure the default by paying a fee of $1
million. Upon such payment, the Company will be deemed to have fully complied
with the development schedule for such two year period (including when
determining whether it complies with such schedule in future periods).
The Microtel Acquisition Agreement further provides that, in the event the
Company fails to satisfy the development schedule, fails to pay any monies
due to Hudson or otherwise fails to fulfill its material obligations under
the Microtel Acquisition Agreement, in each case subject to the Company's
right to cure such breach within the applicable notice and cure periods, all
of the rights to the Microtel system and all operating assets associated
therewith will revert to Hudson. In such instance, the Company will, however,
retain the rights to any franchise royalty payments due to it under franchise
agreements entered into by the Company after the closing of the Microtel
Acquisition, less a servicing fee payable to Hudson in an amount equal to
0.75% of all revenues subject to royalties under such agreements.
Also in connection with the Microtel Acquisition, Hudson agreed to provide
consulting services to the Company over the three-year period beginning
October 5, 1995, for which the Company agreed to pay Hudson a total of
$700,000 ($400,000 of which was paid at the closing of the Microtel
Acquisition). The Company also received warrants to purchase 100,000 common
shares of Hudson at an exercise price of $8.375 per share. The warrants
expire on September 1, 2000.
Hawthorn Acquisition. On March 27, 1996, the Company entered into the
Hawthorn Acquisition Agreement with HSA, an entity indirectly controlled by
the Pritzker family, pursuant to which the Company acquired the exclusive,
worldwide rights to franchise and to control the development and operation of
the Hawthorn Suites brand of hotels (the "Hawthorn Acquisition"). In
connection with the Hawthorn Acquisition, HSA also assigned to the Company
all of HSA's rights in the licenses (other than the right to receive royalty
payments) for the then existing Hawthorn Suites brand hotels (the "Existing
Hawthorn Hotels"), HSA's agreement with Regency to provide reservation
support services and certain other agreements relating to the operation of
the Hawthorn Suites brand hotels. No money was paid by the Company at the
closing of the Hawthorn Acquisition. The Company is, however, required to
make royalty payments to HSA under circumstances described below.
Under the Hawthorn Acquisition Agreement, the Company remits to HSA all
franchise royalty fees paid to the Company by franchisees of the Existing
Hawthorn Hotels, with the Company and HSA generally dividing royalty fees
paid with respect to any Hawthorn Suites brand hotels opened subsequent to
the Hawthorn Acquisition (the "New Hotels"), as described below. All other
fees and other charges payable under the licenses for the Existing Hawthorn
Hotels or New Hotels, including marketing and advertising fees and
origination or initial franchise application fees, will be retained by the
Company. Pursuant to the Hawthorn Acquisition Agreement, as indicated on the
chart below, the percentage of such royalties payable to HSA will decrease as
the aggregate number of rooms in New Hotels increases.
Division of Franchise Royalties
Rooms(1) HSA Company
--------------------- ------- ----------
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%
(1) For this purpose, a suite is considered to be one "room".
32
<PAGE>
In the event, however, that the Company fails to achieve certain specified
development milestones (the "Royalty Reduction Standard"), the royalty fees
payable to HSA will increase. Specifically, the amount of additional royalty
fees payable to HSA during the period that the Company fails to comply with
the Royalty Reduction Standard is determined by multiplying the Company's
share of royalty fees (in dollars) for the calendar quarter in which the
default occurs by a fraction, the numerator of which is the number of
additional Qualified License Agreements required in order for the Company to
comply with the Royalty Reduction Standard and the denominator of which is
the minimum number of Qualified License Agreements required in order for the
Company to have complied with the Royalty Reduction Standard. The Hawthorn
Acquisition Agreement further provides that if the franchise royalty payable
by a New Hotel is less than 4% of that hotel's gross room revenue, the
percentage of the royalty payable to HSA for that particular hotel will
increase.
The Hawthorn Acquisition Agreement also restricts the Company's ability to
franchise other hotel brands for certain periods if the Company fails to meet
certain development targets. Specifically, the agreement provides that unless
and until such time as the Company's franchisees have opened 175 Hawthorn
Suites with a minimum aggregate total of 11,375 rooms ("Hawthorn Brand
Saturation"), the Company generally may not franchise another all-suite hotel
brand. The Company's new combined extended-stay/transient all-suite hotel
property, Hawthorn Suites LTD, may be counted toward Hawthorn Brand
Saturation so long as they are "all suite" hotels, as defined below. The
Company may, however, franchise Microtel Suites at any time so long as they
cost $40,000 (subject to adjustment for inflation) or less per suite to
build, excluding the cost of land. For purposes of the Hawthorn Acquisition
Agreement, a hotel that is at least 50% suites or uses "suites" in its name
is an "all-suite" hotel. If the Company decides to franchise or license
another all-suite hotel brand after Hawthorn Brand Saturation is achieved,
HSA retains the option within a limited period to sell its right and interest
in the Hawthorn Suites brand and system of operation, including the relevant
intellectual property and the royalty stream, to the Company for a sum equal
to 10 times the franchise royalty fees earned or accrued by HSA in the 12
months prior to such sale.
Until the earlier of June 26, 1998 and the date on which Hawthorn Brand
Saturation is achieved, the Company is restricted from franchising any
lodging brand other than (i) Hawthorn Suites hotels, (ii) Microtel hotels and
(iii) other limited-service, non-suite hotels with an ADR of $49 and under.
In addition, until June 26, 1997, the Company must also refrain from
franchising any non-lodging brands.
Until Hawthorn Brand Saturation is achieved, the Company is obligated to
receive HSA's approval for any material changes in its approved standard form
franchise agreement, and all UFOCs and related materials delivered to
prospective franchisees. The Hawthorn Acquisition Agreement also requires
that the Company have a total of at least 15 full-time sales persons selling
licenses for the Hawthorn Suites and Microtel brands and that the Company
spend more than $100,000 in each of 1996 and 1997 to promote the Hawthorn
Suites brand.
The Hawthorn Acquisition Agreement requires that the Company adhere to a
development schedule under which a minimum number of Qualified License
Agreements must be executed as of certain dates (the "Termination Standard").
The term Qualified License Agreements is defined in the Hawthorn Acquisition
Agreement to mean a license granted by the Company to use the Hawthorn brand,
provided that (i) the licensed hotel is an all-suites hotel (i.e., a hotel in
which at least 50% of the rooms are suites or that uses "suites" in its name)
with more than 40 suites, (ii) the Company has received all application fees
from the licensee and (iii) the licensee either owns or controls through
long-term lease the land on which the hotel is located or to be constructed.
If any of these development milestones are not met and the default has not
been cured prior to the delivery of a default notice, HSA may elect to
terminate the Hawthorn Acquisition Agreement. If HSA opts to terminate the
Hawthorn Acquisition Agreement, the Company may only retain a percentage of
the franchise royalties to which it would otherwise be entitled on previously
opened hotels. The portion retained by the Company ranges from 15% to 40% of
the franchise royalties it would have received but for the termination,
depending on the percentage of the Termination Standard achieved. As noted
above, in the event that the Company surpasses the Termination Standard, but
fails to meet the higher Royalty Reduction Standard, or for such time as HSA
opts not to terminate for failure to achieve the Termination Standard, the
percentage of franchise royalties payable to HSA increases.
33
<PAGE>
The minimum development requirements are as follows:
Development Schedule
(Qualified License Agreements)
Royalty Reduction
Date Standard Termination Standard
------------------ ---------------------------------------
June 27, 1997 20 10
December 27, 1997 30 N/A
June 27, 1998 40 20
June 27, 1999 65 40
June 27, 2000 90 60
June 27, 2001 115 80
June 27, 2002 140 100
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 SuitesSM, MainStaySM, CandlewoodSM, Wingate InnSM, Towne
PlaceSM 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 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 October 7, 1996, the Company had 73 employees. None of the Company's
employees are represented by unions. The Company considers its employee
relations to be satisfactory.
Properties
The principal executive and administrative offices of the Company are
located at 13 Corporate Square, Suite 250, Atlanta, Georgia 30329. The
Company currently leases 10,083 square feet of office space at the foregoing
address, pursuant to a lease that expires September 30, 2000. The Company
expects to leave its current office space due to its growth and therefore is
in the process of discussing with its landlord the possibility of leasing
additional space in the office park in which its current office is located.
Legal Proceedings
The Company is not a party to any material litigation. However, claims and
litigation may arise in the normal course of business.
35
<PAGE>
MANAGEMENT
Directors and Executive Officers
The following table sets forth certain information with respect to the
directors and executive officers of the Company and their ages as of
October 1, 1996.
Name Age Office or Position Held
- ----------------------- ----- -----------------------------------------------
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
Each director is elected to serve until a successor is elected and qualified
or, if earlier, until the director's death, resignation or removal. Officers,
subject to the terms of their respective employment agreements, serve at the
pleasure of the Board of Directors. See "--Employment Agreements". Each of
the directors of the Company, other than Dean Adler and Jeffrey A.
Sonnenfeld, has served as such since September 30, 1995. Messrs. Adler and
Sonnenfeld were elected to the Board of Directors on October 11, 1996,
effective as of the effective date of the Registration Statement of which
this Prospectus is a part.
Certain additional information concerning the persons listed above is set
forth below.
Michael A. Leven, Chairman, President and Chief Executive Officer. Mr. Leven
has been Chairman, President and Chief Executive Officer of the Company since
October 1995. From October 1990 to September 1995, Mr. Leven was President
and Chief Operating Officer for Holiday Inn Worldwide in Atlanta, Georgia.
From April 1985 to May 1990, he was President and Chief Operating Officer of
Days Inn of America, Inc. in Atlanta, Georgia. Mr. Leven is a director of
Starwood Lodging Trust, the nation's largest hotel REIT. Mr. Leven is also a
member of the Board of Governors of the American Red Cross, a Director of the
Biomedical Services Board of the American Red Cross and a Trustee of National
Realty Trust, the largest franchisee of Coldwell Banker Corporation, a
subsidiary of HFS Incorporated. On September 27, 1991, approximately 16
months after Mr. Leven resigned from Days Inn, Days Inn filed a voluntary
petition under Chapter 11 of Title 11 of the United States Bankruptcy Code.
Mr. Leven is an uncle of Mr. Aronson.
Neal K. Aronson, Executive Vice President, Chief Financial Officer and
Director. Mr. Aronson has been Executive Vice President and Chief Financial
Officer of the Company since October 1995. Mr. Aronson was the founding
partner of Growth Capital Partners in New York, New York, and was with the
partnership from September 1994 to October 1995. From December 1993 to
September 1994, he was Managing Director of Rosecliff, Inc., a private equity
investment group in New York, New York. From January 1992 to December 1993,
he was a principal of Odyssey Partners, L.P. in New York, New York. From June
1989 to December 1991, Mr. Aronson was a principal of Acadia Partners, L.P.
in New York, New York. Mr. Aronson is a nephew of Michael A. Leven.
David E. Shaw, Sr., Executive Vice President, Administration. Mr. Shaw has
been Executive Vice President, Administration of the Company since October
1995. From January 1991 to September 1995 he was Vice President of Operations
Administration for Holiday Inn Worldwide in Atlanta, Georgia. From July 1990
to January 1991, Mr. Shaw was Executive Vice President, Administration for
Hospitality Franchise Systems, Inc. (now known as HFS Incorporated) in Wayne,
New Jersey.
Steven Romaniello, Executive Vice President, Franchise Sales and
Development. Mr. Romaniello has been Executive Vice President, Franchise
Sales and Development of the Company since August 1996. From October 1995
through July 1996, he served as Senior Vice President, Franchise Sales and
Development of the Company. From March 1991 through September 1995, Mr.
Romaniello was Vice President, Franchise Sales and Services for Holiday Inn
Worldwide in Atlanta, Georgia. From December 1988 to March 1991 he was
Regional Vice President, Franchise Sales for Days Inn of America, Inc. in
Atlanta, Georgia and in Boston, Massachusetts.
36
<PAGE>
Dean S. Adler, Director. Since 1988, Mr. Adler has been a principal and
Managing Director of private equity investments for CMS Companies ("CMS"), a
Philadelphia based investment firm that manages approximately $1.7 billion of
assets. Mr. Adler is a member of the Board of Directors of the Lane Company,
which specializes in the management and development of multifamily housing,
Jacoby Development, Inc., which specializes in shopping center development,
and RMS Technologies, a leading provider of information technology services
to federal and other governmental institutions.
Irwin Chafetz, Director. Since 1990, Mr. Chafetz has been the President and a
Director of Interface Group-Massachusetts, Inc., a privately held company
that owns and operates GWV International, New England's largest tour
operator. From 1990 until April 1995, Mr. Chafetz was a Vice President and
Director of the Interface Group-Nevada, Inc., which owned and operated
COMDEX, a computer trade show that is the largest American trade show. From
1989 to 1995, Mr. Chafetz was also a Vice President and a director of Las
Vegas Sands, Inc., which owned the Sands Hotel and Casino in Las Vegas and
the adjacent Sands Expo and Convention Center. Mr. Chafetz is a member of the
Board of Directors of Syratech Corporation, a New York Stock Exchange listed
company, and of Back Bay Restaurants Group, Inc., a Nasdaq company.
Richard D. Goldstein, Director. Since 1990, Mr. Goldstein has been a Managing
Director of Alpine Capital Group Inc., a specialized investment banking firm
located in New York. Prior to joining Alpine, Mr. Goldstein was a partner at
the law firm of Paul, Weiss, Rifkind, Wharton & Garrison. Mr. Goldstein
serves as Trustee, member of the Executive Committee and Treasurer of the
Queens College Foundation, Trustee of the North Shore Hospital System and a
member of the Corporate Advisory Board of the State University of New York at
Stony Brook.
Jeffrey A. Sonnenfeld, Director. Since 1989, Mr. Sonnenfeld has been a
Professor of Organization and Management at the Goizueta Business School of
Emory University in Atlanta, Georgia, where Mr. Sonnenfeld is currently the
Director of the Center for Leadership & Career Studies. Mr. Sonnenfeld has
published five books and numerous articles in the areas of career management,
executive training and development, and the management of corporate social
performance. Mr. Sonnenfeld serves on the Board of Directors of the American
Association of Retired Persons, Moseley Securities Corporation, National
Council on the Aging, Transmedia-CBS, Inc., and the Hyatt Executive Travel
Council.
Barry S. Sternlicht, Director. Since 1993, Mr. Sternlicht has been the
President and Chief Executive Officer of Starwood Capital Group, L.P.
("Starwood Capital"), a real estate investment firm that he founded in 1993.
From 1991 to 1993, Mr. Sternlicht was the President of Starwood Capital
Partners, L.P., predecessor of Starwood Capital. Mr. Sternlicht is the
Chairman of the Board of Starwood Lodging Trust, the nation's largest hotel
REIT, in which Starwood Capital controls 30% of the stock. He is the
co-Chairman of the Board of Westin Hotel & Resorts Company, which Starwood
purchased in 1995 for $537 million. Mr. Sternlicht is also a trustee of
Equity Residential Properties Trust, a multi-family REIT, and of Angeles
Participating Mortgage Trust, which is also a REIT.
Agreements Regarding Board Positions
Pursuant to the terms of a Stockholders' Agreement entered into in connection
with the initial capitalization of the Company (the "Old Stockholders'
Agreement"), the original investors in the Company (the "Original
Investors"), which included Messrs. Leven and Aronson, agreed to cause the
Board of Directors to consist of five members and to vote their shares of Old
Common Stock to elect as a director the stockholder of the Company or his
nominee (other than Messrs. Leven and Aronson) holding, together with his
immediate family members, the largest number of shares of Old Common Stock.
Irwin Chafetz, together with his two sons, has been the largest stockholder
of the Company (other than Messrs. Leven and Aronson) since the initial
capitalization of the Company and was elected to the Board pursuant to this
provision. Pursuant to the Old Stockholders' Agreement, the Original
Investors also agreed to vote their shares of Old Common Stock in favor of
the election of Messrs. Leven and Aronson as directors of the Company and
granted Mr. Leven the right to nominate persons to fill the remaining two
board positions. Pursuant to this provision, Mr. Leven nominated Messrs.
Goldstein and Sternlicht to serve as directors, who were then elected to
serve as such by the Original Investors. The foregoing governance provisions
were deleted as part of amendments to the Old Stockholders' Agreement that
will become effective simultaneously with the completion of the Offering. See
"Certain Relationships and Related Transactions--Transactions Entered into in
Connection with the Offering--Restated Stockholders' Agreement".
37
<PAGE>
Compensation of Directors
In 1995, directors of the Company were not paid any cash compensation for
their services but were reimbursed for their out-of-pocket expenses. The
Company recently adopted a stock option plan for its non-employee directors,
the material terms of which are described in "--Stock Option Plans--Directors
Plan" below, and authorized the payment of $5,000 annually to each director
as compensation for services provided. Messrs. Leven and Aronson, as
employees of the Company, are not eligible to participate in the Directors
Plan (as defined below), and accordingly, will receive no compensation as
directors other than $5,000 in annual compensation and reimbursement for
out-of-pocket expenses incurred in connection with their service as
directors.
Executive Compensation
The following table sets forth information with respect to the
compensation of Michael A. Leven, the Company's Chairman, President and Chief
Executive Officer, and Neal K. Aronson, Executive Vice President and Chief
Financial Officer of the Company. No other executive officers of the Company
received salary and bonus in excess of $100,000 for the period from August
28, 1995, the date of the Company's inception, through December 31, 1995. The
Company anticipates that during 1996, its most highly compensated officers
and their estimated salaries will be: Mr. Leven ($375,000), Mr. Aronson
($200,000), Steven Romaniello ($100,000) and David Shaw, Sr. ($150,000). In
addition to their respective base salaries, Messrs. Leven, Aronson and
Romaniello will each receive a bonus based on the number of franchises sold
during 1996. See "--Employment Agreements". The Company may also pay
discretionary bonuses.
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term Compensation
----------------------------------
1995 Awards Payouts
----------------------- ---------
Annual Compensation Restricted
----------------------------------------
Name and Principal Other Annual Options/ LTIP All Other
Position Salary Bonus Compensation Stock Awards SARs Payouts Compensation
- ------------------ ----------------------- --------------- ------------- --------- --------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Michael A. Leven
- ------------------
Chairman,
President and
Chief Executive
Officer $93,750 $153,000(1)(2) $0 -- -- -- --
- ------------------
Neal K. Aronson
- ------------------
Executive Vice
President and
Chief Financial
Officer $50,000 $151,500(1)(2) $0 -- -- -- --
- ------------------
</TABLE>
(1) Mr. Leven and Mr. Aronson each received a transaction bonus of $150,000
for their efforts in organizing the Company and successfully negotiating
and completing the Microtel Acquisition on behalf of the Company.
(2) Mr. Leven and Mr. Aronson, pursuant to the terms of their respective
employment agreements with the Company, are each entitled to receive
bonuses based upon the number of franchises sold each year. See
"--Employment Agreements". During 1995, neither Mr. Leven nor Mr. Aronson
received a bonus for the three franchises sold during 1995, although the
Company accrued $3,000 and $1,500 for bonuses owed to Mr. Leven and Mr.
Aronson, respectively, with respect to such franchise agreements.
Employment Agreements
The Company has entered into employment agreements with Messrs. Leven and
Aronson, the material terms of which are described below.
Michael A. Leven. Mr. Leven's employment agreement with the Company
provides for his employment as Chairman of the Board of Directors, President
and Chief Executive Officer of the Company for a 10-year term expiring on
September 30, 2005. Mr. Leven is entitled to a base salary of at least
$375,000 per year, subject to annual cost of living increases and other
annual increases determined by the Company based on the performance of Mr.
Leven and the Company and on prevailing economic circumstances.
Certain insurance benefits, if available on commercially reasonable terms,
are to be provided to Mr. Leven under his Employment Agreement, including
term life insurance in the amount of $1,500,000, executive health, dental and
medical insurance, long term disability and long term home care. The Company
has obtained all of the foregoing benefits for Mr. Leven. In addition, Mr.
Leven is entitled to a monthly automobile allowance in the amount of $1,000.
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<PAGE>
Mr. Leven's employment agreement provides for a performance bonus of (i)
$1,000 for each franchise agreement executed in a given Year (defined as each
12 month period commencing October 1st and ending on September 30th of each
year during the term of such agreement) up to 150 franchise agreements and
(ii) $2,000 for each franchise agreement above the first 150 franchise
agreements entered into in a given Year.
Mr. Leven's employment agreement also contains confidentiality provisions
that prohibit him from disclosing company trade secrets at any time in the
future and from disclosing any confidential information relating to the
Company for a period extending five years after the termination of his
employment agreement. In addition, the agreement contains non-competition
provisions that prohibit Mr. Leven from competing in the franchising business
generally and in the business of franchising, operating or managing of hotels
and motels for a period of five years following the termination of his
employment for "cause" or his resignation without "good reason". The
enforceability of these non-disclosure and non-competition provisions under
Georgia law, which governs Mr. Leven's agreement, is uncertain.
In addition to allowing Mr. Leven to resign at any time for "good reason",
his employment agreement provides that, after the first five years of such
agreement and provided the Redeemable Preferred Stock has been redeemed, Mr.
Leven may resign at any time upon six months notice. If his resignation is
without "good reason", the Company is required to pay Mr. Leven only his base
salary, unused vacation time, and performance bonus actually earned through
the effective date of resignation. The employment agreement further provides
that if Mr. Leven resigns without good reason during the first five years, he
will not be liable for any consequential damages or damages for loss of
economic opportunity or profits to the Company. If Mr. Leven resigns for
"good reason", or if his employment is terminated "without cause", he is
entitled to severance pay in accordance with the terms of his employment
agreement. For the purpose of Mr. Leven's employment agreement, "good reason"
includes, but is not limited to, the failure to elect and continue Mr.
Leven's membership on the Board of Directors of the Company or his
involuntary relocation outside of Atlanta, Georgia. In addition, pursuant to
the Company's By-Laws, Mr. Leven's employment agreement may not be terminated
without the approval of 75% of the Board of Directors (excluding Mr. Leven).
Neal K. Aronson. Mr. Aronson's employment agreement, pursuant to which he
is to serve as Chief Financial Officer of the Company, is substantially
similar to Mr. Leven's agreement, except that (i) his base salary is $200,000
per year, (ii) the term life insurance benefit is $500,000, (iii) his
automobile allowance is $750 per month, (iv) the bonus is $500 for each
franchise agreement executed within a Year (as defined above) up to 150
franchise agreements, and $1,000 for each agreement executed in any Year in
excess of 150 and (v) Mr. Aronson is not entitled to receive long-term
disability or long-term home care insurance coverage from the Company.
Pursuant to the Company's By-Laws, Mr. Aronson's employment agreement may
not be terminated without the approval of 75% of the Board of Directors
(excluding Mr. Aronson).
See "Principal Stockholders--Management's Shares of Common Stock" as to
the effect of termination of employment on the Class A Common Stock held by
Messrs. Leven and Aronson.
Stock Option Plans
1996 Stock Option Plan. On September 27, 1996, the Board of Directors of
the Company (the "Board") adopted, subject to the approval of the Company's
stockholders, the U.S. Franchise Systems, Inc. 1996 Stock Option Plan (the
"Option Plan"). The Company's stockholders approved the Option Plan on
October 11, 1996. The following is a summary of the material features of the
Option Plan.
The purpose of the Option Plan is to promote the interests of the Company
and its stockholders by (i) attracting and retaining exceptional officers and
other key employees of the Company and its subsidiaries; (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.
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<PAGE>
The Option Plan authorizes the grant of awards to participants of a
maximum of 325,000 shares of the Company's Class A Common Stock ("Shares"),
which maximum number is subject to adjustment in certain circumstances to
prevent dilution or enlargement. Awards under the Option Plan may be made in
the form of (i) nonqualified stock options and (ii) stock options intended to
qualify as incentive stock options under section 422 of the Code; provided
that the maximum number of Shares with respect to which stock options may be
granted to any participant in the Option Plan in any calendar year may not
exceed 250,000. If, after the effective date of the Option Plan, any Shares
covered by an award granted under the Option Plan, or to which such an award
relates, are forfeited, or if an award has expired, terminated or been
canceled for any reason whatsoever (other than by reason of exercise), then
the Shares covered by such award shall again be, or shall become, Shares with
respect to which awards may be granted under the Option Plan.
Non-qualified and incentive stock options granted under the Option Plan
shall be subject to such terms, including exercise price and timing of
exercise, and conditions as may be determined by the Option Plan Committee
and specified in the applicable award agreement or thereafter; provided that
stock options that are intended to qualify as incentive stock options will be
subject to terms and conditions that comply with such rules as may be
prescribed by section 422 of the Code. Payment in respect of the exercise of
an option granted under the Option Plan may be made in cash, or its
equivalent, or if, and to the extent permitted by the Option Plan Committee,
(i) by exchanging Shares owned by the optionee (which are not the subject of
any pledge or other security interest and which have been owned by such
optionee for at least six months) or (ii) subject to such rules as may be
established by the Committee, through delivery of irrevocable instructions to
a broker to sell the Shares being acquired upon exercise of the option and to
deliver promptly to the Company an amount equal to the aggregate exercise
price, or by a combination of the foregoing.
The Board may amend, alter, suspend, discontinue or terminate the Option
Plan or any portion thereof at any time; provided that no such amendment,
alteration, suspension, discontinuation or termination shall be made without
stockholder approval if such approval is necessary to comply with any tax or
regulatory requirement, including for these purposes any approval requirement
which is a prerequisite for exemptive relief from section 16(b) of the
Exchange Act or Code section 162(m) (provided that the Company is subject to
the requirements of section 16 of the Exchange Act or Code section 162(m), as
the case may be, as of the date of such action).
Directors Plan. On September 27, 1996, the Board of Directors adopted,
subject to the approval of the Company's stockholders, the U.S. Franchise
Systems, Inc. 1996 Stock Option Plan for Non-Employee Directors (the
"Directors Plan"). The Directors Plan was approved by the Company's
stockholders on October 11, 1996.
The purpose of the Directors Plan is to secure for the Company the
benefits of the additional incentive inherent in the ownership of Shares by
non-employee directors of the Company and to help the Company secure and
retain the services of such non-employee directors. The Directors Plan is
intended to be a self-governing formula plan. To this end, the Directors Plan
requires minimal discretionary action by any administrative body with regard
to any transaction under the Directors Plan. To the extent, if any, that
questions of administration arise, such issues will be resolved by the Board
of Directors. Eligible persons under the Directors Plan are directors of the
Company who are not employees of the Company or any affiliate of the Company
("Outside Directors").
A maximum of 125,000 Shares has been reserved by the Company for issuance
pursuant to options under the Directors Plan, which number is subject to
adjustment in certain circumstances in order to prevent dilution or
enlargement. If, after the effective date of the Directors Plan, any Shares
covered by an award granted under the Directors Plan, or to which such an
award relates, are forfeited, or if an award has expired, terminated or been
canceled for any reason whatsoever (other than by reason of exercise), then
the Shares covered by such award shall again be, or shall become, Shares with
respect to which awards may be granted under the Directors Plan.
As of the effective date of the Offering, each Outside Director will be
granted an option to purchase 2,000 shares of Class A Common Stock.
Thereafter, each person who is an Outside Director as of January 1st of each
calendar year during the term of the Directors Plan shall receive an option
to purchase 2,000 shares of Class A Common Stock as of such date. All options
granted under the Directors Plan shall be "nonqualified" stock options
subject to the provisions of section 83 of the Code.
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
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<PAGE>
service as an Outside Director due to death or disability, (iii) the date the
optionee's service as an Outside Director terminates for cause (as defined in
the Directors Plan) and (iv) the expiration of three months from the date the
optionee's service as an Outside Director terminates other than by reason of
death, disability or cause.
The exercise price per share of Class A Common Stock purchasable under
each option granted upon the consummation of the Offering shall be the
initial public offering price per share, and the exercise price per share of
Class A Common Stock purchasable under all other options granted under the
Directors Plan shall be the Fair Market Value (as defined in the Directors
Plan) of a share of Class A Common Stock on the date the option is granted.
Shares of Class A Common Stock purchased upon the exercise of an option are
to be paid for in cash, check or money order or by shares of Class A Common
Stock owned by the optionee for at least six months prior to exercise.
The Directors Plan may be terminated or amended at any time by the Board
of Directors; provided that (i) such amendment complies with all applicable
laws and applicable stock exchange listing requirements, (ii) the provisions
of the Directors Plan with respect to eligibility for participation or the
timing or amount of grants of awards and the option price shall not be
amended more than once every six months (other than to comport with changes
in the Code or the Employee Retirement Income Security Act of 1974, as
amended) and (iii) any amendment for which stockholder approval is necessary
to comply with any tax or regulatory requirement, including for these
purposes any approval requirement which is a prerequisite for exemptive
relief from section 16(b) of the Exchange Act (provided that the Company is
subject to the requirements of such section as of the date of such action),
shall not be effective until such approval has been obtained.
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<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Transactions Entered into in Connection with the Offering
Reclassification. In connection with the Offering, the Company intends to
effect the Reclassification. Pursuant to the Reclassification, each share of
Old Common Stock will be converted into 9.67 shares of Class A Common Stock.
Also in connection with the Offering, pursuant to the 1996 Amendment (see
"Principal Stockholders--Management's Shares of Common Stock"), Mr. Leven,
his wife, Andrea Leven, and Mr. Aronson will exchange 2,707,919 shares of
Class A Common Stock held directly by them (which shares do not include those
shares of Class A Common Stock that will continue to be held as Restricted
Shares (as defined herein) pursuant to the 1996 Amendment) for the same
number of shares of Class B Common Stock. See "Description of Capital
Stock--Common Stock" for a description of the relative rights of holders of
Class A Common Stock and Class B Common Stock.
Voting. Simultaneously with the completion of the Offering, Mr. Leven will
enter into a voting agreement with his wife, Andrea, pursuant to which she
will grant him the right to vote all of the 233,032 shares of Class A Common
Stock and all of the 770,801 shares of Class B Common Stock to be owned by
her following the Offering. At the same time, Mr. Leven will enter into a
voting agreement with Mr. Aronson, pursuant to which Mr. Aronson will grant
Mr. Leven the right to vote 111,347 shares of his Class A Common Stock and
311,007 shares of his Class B Common Stock. Mr. Aronson will continue to vote
the remaining 1,198,466 shares of his Class B Common Stock. As a result of
these agreements, Mr. Leven will vote a total of 942,440 shares of Class A
Common Stock and 1,509,453 shares of Class B Common Stock, which shares
together represent approximately 43.4% of the total outstanding voting power
of the Company immediately following the Offering.
Immediately following the Offering, Messrs. Leven and Aronson will have
the right to vote a total of 1,773,533 shares of Class A Common Stock and
2,707,919 shares of Class B Common Stock, which will represent approximately
78% of the outstanding voting power of the Common Stock after the Offering.
Accordingly, Messrs. Leven and Aronson will be able to (i) elect all of the
Company's directors, (ii) amend the Charter with respect to most matters,
(iii) effect a merger, sale of assets or other major corporate transaction,
(iv) defeat an unsolicited takeover attempt and (v) generally direct the
affairs of the Company. However, Mr. Leven and Mr. Aronson do not have any
agreements or other obligations to vote together on matters involving the
Company. See "Risk Factors--Management, By Virtue of Ownership of
Supervoting Class B Common Stock, Will Control the Company Following the
Offering" and "Principal Stockholders--Management's Shares of Common Stock".
Restated Stockholders' Agreement. Effective simultaneously with the
closing of the Offering, the Company will amend and restate the Old
Stockholders' Agreement that was entered into with the Original Investors in
connection with the initial capitalization of the Company (the "Restated
Stockholders' Agreement"). The purpose of the amendment is to remove certain
voting and corporate governance provisions that were determined to be more
suitable for a private company, including provisions (i) restricting the
transfer of shares of Old Common Stock, (ii) authorizing each of the Original
Investors to cause the Company's remaining stockholders to sell their
interests in the Company in certain circumstances, (iii) fixing the size of
the Board of Directors at five, (iv) pursuant to which the Original Investors
agreed to vote for Messrs. Leven and Aronson and the Original Investor (other
than Messrs. Leven and Aronson) owning the most shares of Old Common Stock
(or his nominee) as directors of the Company, (v) that generally prohibited
Messrs. Leven and Aronson from transferring their shares of Old Common Stock
for a three-year period ending in September 1998 and (vi) granting the
Original Investors preemptive rights in certain circumstances. The Restated
Stockholders' Agreement continues only to grant the Original Investors
certain piggy-back registration rights, although such rights are not
exercisable until 20% of the Company's outstanding Common Stock has been
registered under the Securities Act, and the right to cause the Company to
file a registration statement under the Securities Act on one occasion,
commencing September 29, 2000. See "Shares Eligible for Future Sale" and
"Description of Capital Stock--Registration Rights".
1996 Amendment. See "Principal Stockholders--Management's Shares of Common
Stock--1996 Amendment" for a description of amendments to Messrs. Leven's and
Aronson's Old Stock Purchase Agreements and those of certain other executive
officers of the Company.
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Miscellaneous
In consideration for their efforts in organizing the Company and
negotiating and consummating the Microtel Acquisition, Messrs. Leven and
Aronson each received a bonus of $150,000 from the Company.
The Company has obtained $15 million of key man life insurance on the life
of Mr. Leven.
Howard and Lawrence Chafetz, sons of Irwin Chafetz, a director of the
Company, have established a limited liability company to acquire and operate
Microtels. To date, the limited liability company has not acquired any
Microtel franchises or entered into any agreements with the Company regarding
the same.
The Company expects to invest from time to time in entities that make
investments in Microtel and Hawthorn Suites franchisees with a successful
track record of multi-unit development. The Company will receive management
fees and other fees based on the total investments made by these entities. To
date, no investments have been made by these entities.
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PRINCIPAL STOCKHOLDERS
The following table sets forth (i) as of October 1, 1996 and (ii) as
adjusted for the Reclassification and the 1996 Amendment and for the sale by
the Company of the shares of Class A Common Stock pursuant to the Offering,
certain information regarding the beneficial ownership of the Class A Common
Stock and the Class B Common Stock by each person known by the Company to be
the beneficial owner of 5% or more of the outstanding Class A Common Stock or
Class B Common Stock, by each of the Company's directors and by all directors
and executive officers of the Company as a group. Unless otherwise indicated,
the persons listed below have sole investment and sole voting power with
respect to the shares of Class A Common Stock and Class B Common Stock listed
across from their names in the table below. See "--Management's Shares of
Common Stock" for a discussion of restrictions on certain shares of Class A
Common Stock held by Mr. Leven and Mr. Aronson.
<TABLE>
<CAPTION>
Beneficial Ownership
Prior
to the Offering and Beneficial Ownership Subsequent
the Reclassification to the Offering
--------------------- ---------------------------------------------------
Shares of Shares Shares Total
Name and Address of Common of of Total Voting
Beneficial Owner Stock % Class A Class B Equity** Power
----------------------------------------- ------- -------------- --------------- ----------- --------
(Class A and Class B)
<S> <C> <C> <C> <C> <C> <C>
Michael A. Leven
13 Corporate Square
Suite 250
Atlanta, Georgia 30329 185,031(1) 16.6% 942,440(2) 1,509,453(3) 19.5% 43.4%
Neal K. Aronson
13 Corporate Square
Suite 250
Atlanta, Georgia 30329 233,223(4) 21.0% 942,440(5) 1,509,453(6) 19.5% 34.7%
Dean Adler
CMS Companies
1926 Arch Street
Philadelphia, PA 19103 0 * 0 0 * *
Irwin Chafetz (7)
c/o The Interface Group
300 First Avenue
Needham, MA 02194 30,000 2.7% 290,100 0 * *
Richard D. Goldstein (8)
c/o Alpine Microtel LLC
1285 Avenue of the
Americas
New York, NY 10019 16,500 1.5% 159,555 0 * *
Andrea Leven c/o U.S.
Franchise Systems, Inc. 13
Corporate Square Suite 250
Atlanta, Georgia 30329 103,809(9) 9.3% 233,032(10) 770,801(11) 8.0% *
Jeffrey A. Sonnenfeld
1602 Mizell Drive
Room 310
Atlanta, Georgia 30322 0 * 0 0 * *
Barry Sternlicht (12)
c/o Starwood Capital Group
3 Pickwick Plaza
Greenwich, CT 06830 31,000 2.8% 299,770 0 * *
All officers and
directors as a group
(9 persons)** 526,340 47.3% 2,818,725 2,707,919 43.9% 80.9%
</TABLE>
* Represents less than 1% of the outstanding Common Stock, both in number
and in terms of voting power.
** Duplications eliminated.
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<PAGE>
(1) Consists of (i) 31,422 shares held directly by Mr. Leven as Unrestricted
Shares under his Old Stock Purchase Agreement, over which Mr. Leven has
sole voting and investment power, (ii) 55,612 shares held by Mr. Leven's
wife as Unrestricted Shares, (iii) 24,192 shares that were designated as
Unrestricted Shares under the Old Stock Purchase Agreement, which have
been reallocated to other members of management and are voted by them in
the same manner that Mr. Leven votes his Unrestricted Shares, (iv) 25,608
shares that were designated as Restricted Shares under Mr. Leven's Old
Stock Purchase Agreement, which are voted by Mr. Leven in the same
proportion as the Original Investors (other than Messrs. Leven and
Aronson) vote their shares and (v) 48,197 shares that were designated as
Restricted Shares under Mr. Leven's Old Stock Purchase Agreement, which
were given by Mr. Leven to his wife and are voted in the same proportion
as the Original Investors (other than Messrs. Leven and Aronson) vote
their shares. Mr. Leven disclaims beneficial ownership of the shares
owned by his wife. The number shown in the table does not include 103,806
shares that have been transferred by Mr. Leven to his adult sons.
(2) Consists of (i) 123,815 shares held directly by Mr. Leven, which will
continue as Restricted Shares following the 1996 Amendment and as to
which Mr. Leven has sole voting power, (ii) 233,032 Restricted Shares
held by Mr. Leven's wife, which are voted by Mr. Leven, (iii) 365,012
Unrestricted Shares, which have been reallocated to other members of
management and are voted in the same manner that Mr. Leven votes his
shares, (iv) 109,234 shares that were designated as Restricted Shares
pursuant to Mr. Leven's Old Stock Purchase Agreement, which have been
reallocated to other members of management and by virtue of the 1996
Amendment are voted in the same manner that Mr. Leven votes his
Unrestricted Shares, and (v) 111,347 Restricted Shares owned by Mr.
Aronson, which are voted by Mr. Leven.
(3) Consists of (i) 427,665 Unrestricted Shares, as to which Mr. Leven has
sole voting power, (ii) 770,801 shares held by Mr. Leven's wife as
Unrestricted Shares, which are voted by Mr. Leven, and (iii) 311,007
Unrestricted Shares owned by Mr. Aronson, which are voted by Mr. Leven.
(4) Consists of (i) 95,097 shares held directly by Mr. Aronson as
Unrestricted Shares under his Old Stock Purchase Agreement, over which
Mr. Aronson has sole voting and investment power, (ii) 16,127 shares that
were designated as Unrestricted Shares under the Old Stock Purchase
Agreements, which have been reallocated to other members of management
and are voted by them in the same manner that Mr. Aronson votes his
Unrestricted Shares and (iii) 121,999 shares that were designated as
Restricted Shares under Mr. Aronson's Old Stock Purchase Agreement, which
are voted by Mr. Aronson in the same proportion as the Original Investors
(other than Messrs. Leven and Aronson) vote their shares.
(5) Consists of (i) 589,865 shares held directly by Mr. Aronson, which will
continue as Restricted Shares following the 1996 Amendment and as to
which Mr. Aronson has sole voting power, (ii) 109,234 shares that were
designated as Restricted Shares pursuant to Mr. Aronson's Old Stock
Purchase Agreement, which have been reallocated to other members of
management and by virtue of the 1996 Amendment are voted by them in the
same manner that Mr. Aronson votes his shares and (iii) 243,341 shares
that were designated as Unrestricted Shares under the Old Stock Purchase
Agreements, which have been reallocated to other members of management
and are voted by them in the same manner that Mr. Aronson votes his
shares. Mr. Aronson has transferred voting power to Mr. Leven with
respect to 111,347 of such shares.
(6) Consists of 1,509,453 shares designated as Unrestricted Shares, of which
Mr. Aronson has sole voting power as to 1,198,466 shares and has
transferred voting power to Mr. Leven as to 311,007 shares.
(7) Prior to the 1996 Amendment, Mr. Chafetz, by virtue of provisions in the
Old Stock Purchase Agreements that required Messrs. Aronson and Leven to
vote their Restricted Shares in the same manner and the same proportion
as the Original Investors (other than Messrs. Leven and Aronson),
effectively had the right to vote a portion of such Restricted Shares.
These provisions were eliminated in the 1996 Amendment.
(8) Such shares are owned by G(2) Investment Partners, an investment
partnership of which Mr. Goldstein is a general partner. Mr. Goldstein
shares voting and investment power with respect to such shares. Prior to
the 1996 Amendment, G(2) Investment Partners, by virtue of provisions in
the Old Stock Purchase Agreements that required Messrs. Aronson and Leven
to vote their Restricted Shares in the same manner and the same
proportion as the Original Investors (other than Messrs. Leven and
Aronson), effectively had the right to vote a portion of such Restricted
Shares. These provisions were eliminated in the 1996 Amendment.
(9) Consists of (i) 55,612 Unrestricted Shares of Old Common Stock received
from Mr. Leven and (ii) 48,197 Restricted Shares of Old Common Stock
received from Mr. Leven.
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<PAGE>
(10) Represents shares that were designated under Mr. Leven's Old Stock
Purchase Agreement as Restricted Shares, which will continue as the same
following the 1996 Amendment and which have been transferred to Mrs.
Leven. Pursuant to a voting agreement to be entered into simultaneously
with the closing of the Offering, Mrs. Leven has transferred voting
power with respect to these shares to Mr. Leven.
(11) Represents shares of Class B Common Stock that were originally
designated as Unrestricted Shares under Mr. Leven's Old Stock Purchase
Agreement, which were subsequently transferred to Mrs. Leven and which,
pursuant to a voting agreement to be entered into simultaneously with
the closing of the Offering, are voted by Mr. Leven.
(12) Such shares are owned by Starwood Opportunity Fund II, L.P., a Delaware
limited partnership whose general partner is Starwood Capital, which is
indirectly controlled by Mr. Sternlicht. Prior to the 1996 Amendment,
the holder of such shares, by virtue of provisions in the Old Stock
Purchase Agreements that required Messrs. Aronson and Leven to vote
their Restricted Shares in the same manner and the same proportion as
the Original Investors (other than Messrs. Leven and Aronson),
effectively had the right to vote a portion of such Restricted Shares.
These provisions were eliminated in the 1996 Amendment.
Personal Holding Company Tax. Under section 541 of the Code, a personal
holding company is subject to a 39.6% tax on its undistributed personal
holding company income (the "PHC Tax"). In order to be considered a personal
holding company in any taxable year, a corporation must satisfy two tests.
First, at any time during the last half of the taxable year more than 50% in
value of its outstanding stock must be owned, directly or indirectly, by or
for not more than five individuals (the "Stock Ownership Test"). Second, at
least 60% of its adjusted ordinary gross income for the taxable year must be
personal holding company income, which generally consists of passive forms of
income such as dividends, interest, rents and royalties, as defined for tax
purposes, but generally does not include income from the provision of
services (the "Income Test"). Certain attribution rules that are included as
part of the Stock Ownership Test could be interpreted in such a manner as to
result in the Stock Ownership Test being satisfied in the case of the
Company. While there can be no assurance that the Company will not satisfy
both the Stock Ownership Test and the Income Test, the Company believes that
the nature of its activities and its expected sources of income will be such
that the PHC Tax will not apply.
Management's Shares of Common Stock
Background. On October 5, 1995, simultaneously with the closing of the
Microtel Acquisition, Messrs. Leven and Aronson purchased 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 $.10 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 August 23, 1996, the Board of Directors voted to amend the respective
Employee Stock Purchase Agreements pursuant to which Messrs. Leven and
Aronson purchased the 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
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<PAGE>
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, these holders are required to
vote those reallocated shares that are Restricted Shares, on a one vote per
share basis, one-half in the same manner as Mr. Leven votes his shares and
one-half as Mr. Aronson votes his shares (prior to the 1996 Amendment, such
management members were required to vote those reallocated shares that were
Restricted Shares in the same manner and the same proportions as the Original
Investors in the Company (other than Messrs. Leven and Aronson) voted their
shares of Old Common Stock). With respect to those reallocated shares that
are Unrestricted Shares, the holders continue to be required to vote 60% of
such shares in the manner that Mr. Leven votes his shares and 40% in the
manner that Mr. Aronson votes his shares. The Company's right to cause the
redemption and 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.
47
<PAGE>
(2) The amount of Restricted Shares that could become Earned Shares was
based on the highest annual Adjusted EBITDA at any time and from time
to time. In all calculations, increments less than $1,000,000 were
ignored. For example, if Adjusted EBITDA in a fiscal year was
$3,000,000 to $3,999,999.99, then 3/26 of the Restricted Shares would
become Earned Shares; if, thereafter, Adjusted EBITDA for a fiscal
year was $10,100,000, then 10/26 (i.e., an additional 7/26) would
become Earned Shares. Accordingly, all of the Restricted Shares would
become Earned Shares only at such time as the Company had Adjusted
EBITDA of $26,000,000 or more in a fiscal year.
(3) Once Restricted Shares become Earned Shares, such shares are not
affected by a decline in annual Adjusted EBITDA in subsequent fiscal
years. However, once Adjusted EBITDA of $3,000,000 or more had been
attained, if the annual Adjusted EBITDA declined in a subsequent
fiscal year from the highest level at which Restricted Shares had
become Earned Shares, additional Restricted Shares would not become
Earned Shares until the average annual Adjusted EBITDA for the fiscal
years including and following the year of such decline in annual
Adjusted EBITDA was greater than the level of annual Adjusted EBITDA
at which Restricted Shares were last earned.
As of the date hereof, except pursuant to the 1996 Amendment, as described
below, no Restricted Shares had become Earned Shares. Pursuant to the 1996
Amendment, one-half (i.e., 13/26) of the Restricted Shares will be deemed to
be 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 Unrestricted
Shares, notwithstanding the fact that performance criteria relating to
Adjusted EBITDA have not been met, (ii) their remaining Restricted Shares
(which constitute, in the aggregate, approximately 9% of the 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 Unrestricted Shares referred to in
clause (i) above, will be vested and not subject to Termination Forfeiture,
(iv) the Unrestricted Shares held by Messrs. Leven and Aronson and by Mr.
Leven's wife, including the Unrestricted Shares referred to in clause (i)
above, will be shares of Class B Common Stock (with ten votes per share), (v)
the remaining Restricted Shares held by Messrs. Leven and Aronson will be
Class A Common Stock (with one vote per share), including if and when such
shares become Earned Shares, and will continue to be subject to Termination
Forfeiture, (vi) Messrs. Leven and Aronson will have the right to vote their
Restricted Shares and to receive dividends, if any, declared thereon before
they become Earned Shares, (vii) no additional shares will be 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
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<PAGE>
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.
Current Ownership. The following table sets forth, as of August 1, 1996,
the ownership of the Unrestricted Shares and Restricted Shares, as a
percentage of the then outstanding Common Stock prior to the Offering, and
adjusted to take into account the 1996 Amendment.
<TABLE>
<CAPTION>
Prior to the As Adjusted for the
1996 Amendment 1996 Amendment
----------------------------- -----------------------------
Unrestricted Restricted Unrestricted Restricted Total
--------------- ------------- --------------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Michael A. Leven (1) 12.825% 10.969% 18.310% 5.480% 23.794%
Neal K. Aronson 8.550 10.969 14.030 5.480 19.518
Other Members of
Management (2) 3.625 4.062 5.660 2.040 7.688
--------------- ------------- --------------- ------------- ----------
25.000% 26.000% 38.000% 13.000% 51.000%
=============== ============= =============== ============= ==========
</TABLE>
(1) Includes shares transferred from Mr. Leven to members of his immediate
family in transactions permitted under his Old Stock Purchase Agreement.
(2) Includes certain shares that were not included in the numbers referenced
in note 1 above and that have been reallocated to Jonathan Leven and
Robert Leven (employees of the Company and sons of Mr. Leven), as members
of the Company's management, in accordance with the terms of Mr. Leven's
Old Stock Purchase Agreement.
See "Principal Stockholders" for details regarding the beneficial ownership
of the foregoing shares, as adjusted for the Reclassification, the 1996
Amendment and the Offering.
49
<PAGE>
SELLING STOCKHOLDERS
The following table sets forth certain information regarding (i) the
beneficial ownership of Class A Common Stock by the Selling Stockholders as
of October 1, 1996 (adjusted for the Reclassification), (ii) the number of
shares of Class A Common Stock being offered hereby by each Selling
Stockholder and (iii) their beneficial ownership of the Class A Common Stock
after the Offering. Unless otherwise indicated, each Selling Stockholder
listed below has sole voting and investment power with respect to the shares
listed across from its name in the table.
No members of the Company's management or its Board of Directors will be
selling shares pursuant to the Offering.
<TABLE>
<CAPTION>
Beneficial Ownership
Prior Beneficial Ownership
to the Offering After the Offering
----------------------
Shares of
Shares Class A Shares %
of Class A Common Stock of Class A % of Total
Name Common Stock % Being Sold Common Stock Equity Voting Power
<S> <C> <C> <C> <C> <C> <C>
Ronald N. Beck 48,350 * 17,471 30,879 * *
H. Pierre Eilian, M.D. 9,670 * 2,195 7,475 * *
Jonathan D. Eilian 9,670 * 2,195 7,475 * *
Nancy B. and Howard
Feinglass 38,680 * 3,800 34,880 * *
Sonia E. Gardner 38,680 * 8,782 29,898 * *
Glenbrook Partners, L.P. 77,360 * 17,563 59,797 * *
Goolock Associates 299,770 2.8% 68,057 231,713 1.8% *
Indenture of Trust F/B/O
Alyssa Michelle Berlin 49,955 * 11,342 38,613 * *
Indenture of Trust F/B/O
Elana Danielle Berlin 49,964 * 11,343 38,621 * *
Indenture of Trust F/B/O
Nicole Amy Berlin 49,964 * 11,343 38,621 * *
Indenture of Trust F/B/O
Jeremy J. Kaufthal 49,964 * 11,343 38,621 * *
Indenture of Trust F/B/O
Jonathan S. Kaufthal 49,964 * 11,343 38,621 * *
Indenture of Trust F/B/O
Joshua M. Kaufthal 49,955 * 14,343 38,612 * *
Jeffrey J. Keenan 154,720 1.4% 5,269 149,451 1.2% *
Marc Lasry 38,680 * 8,782 29,898 * *
Leon Levy 145,050 1.4% 32,931 112,119 * *
Microtopp Associates 328,780 3.1% 74,643 254,137 2.0% *
David A. Mintz 19,340 * 3,866 15,474 * *
Nash Grandchildren 1986
Trust 299,770 2.8% 100,000 199,770 1.6% *
Donald Rechler 29,101 * 1,647 27,454 * *
Rodger Rechler 29,101 * 1,317 27,784 * *
Schwartz Microtel
Investors, L.L.C. 336,266 3.1% 83,425 252,841 2.0% *
Total 500,000
</TABLE>
* Represents less than 1% of the outstanding Common Stock, both in number and
in terms of voting power.
50
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following description of the Company's capital stock does not purport
to be complete and is subject in all respects to applicable Delaware law and
to the provisions of the Company's Charter and By-laws, as amended, copies of
which have been filed as exhibits to the Registration Statement of which this
Prospectus is a part.
The authorized capital stock of the Company consists of 35,000,000 shares
of Common Stock, par value $0.01 per share, of which 30,000,000 shares have
been designated as Class A Common Stock and 5,000,000 shares have been
designated as Class B Common Stock, and 1,000,000 shares of Preferred Stock,
par value $.01 per share (the "Preferred Stock"), of which up to 525,000 have
been designated as Redeemable Preferred Stock. Immediately after the
completion of the Offering, 9,872,490 shares of Class A Common Stock will be
outstanding and 2,707,919 shares of Class B Common Stock will be outstanding.
In addition, 450,000 shares of Class A Common Stock will be reserved for
issuance under the Option Plans and 2,707,919 shares of Class A Common Stock
will be reserved for issuance upon conversion of Class B Common Stock.
Currently, 163,500 shares of Redeemable Preferred Stock are outstanding.
Common Stock
Holders of the Class A Common Stock are entitled to one vote per share and
holders of Class B Common Stock are entitled to ten votes per share on all
matters to be voted upon by the stockholders. Holders of Class A Common Stock
and Class B Common Stock do not have cumulative voting rights and, therefore,
holders of shares possessing a majority of the voting power can elect all of
the directors. In such event, the holders of the remaining shares will not be
able to elect any directors.
Holders of Class A Common Stock and Class B Common Stock are entitled to
share ratably such dividends as may be declared from time to time by the
Board of Directors out of funds legally available therefor, subject to the
terms of the Redeemable Preferred Stock and of agreements governing the
Company's indebtedness. The Company does not anticipate paying cash dividends
in the foreseeable future. See "Dividend Policy". In the event of the
liquidation, dissolution or winding up of the Company, the holders of Class A
Common Stock and Class B Common Stock are entitled to share ratably in all
assets remaining after payment of liabilities and the liquidation preference
and any accrued but unpaid dividends with respect to any then outstanding
Preferred Stock.
In the event of any merger or consolidation of the Company with or into
any other corporation pursuant to which shares of Class A Common Stock and
Class B Common Stock are converted into other securities, cash or other
property, shares of Class A Common Stock and shares of Class B Common Stock
shall be converted into the identical consideration at the same rate per
share, except that any voting securities into which Class B Common Stock
shall be converted shall have ten times the voting power of any otherwise
identical securities into which Class A Common Stock is converted, unless the
holders of a majority of the shares of each such class shall have approved
such merger or consolidation.
Shares of Class B Common Stock are convertible at the option of the holder
into shares of Class A Common Stock on a share-for-share basis. In addition,
shares of Class B Common Stock will automatically convert into shares of
Class A Common Stock upon any transfer thereof, other than a transfer by a
holder of Class B Common Stock to (i) an immediate family member of such
holder or (ii) any trust or partnership of which all of the beneficiaries or
partners, as the case may be, are such holder and/or immediate family members
of such holder, so long as the transferee authorizes Mr. Leven or Mr. Aronson
to vote such transferred shares. Holders of Class A Common Stock and Class B
Common Stock have no preemptive or redemption rights and are not subject to
further calls or assessments by the Company, except as otherwise provided in
the Amended Stock Purchase Agreements.
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;
51
<PAGE>
provided, however, that the Board of Directors may not create a series of
Preferred Stock with general voting rights or with the right to elect more
than 50% of the Board under any circumstances without the approval of holders
of 75% of the outstanding Class B Common Stock.
On September 29, 1995, pursuant to the "blank-check" authority vested in
the Board by the Company's Charter, the Board of Directors adopted a
resolution creating the Redeemable Preferred Stock, consisting of up to
525,000 shares (which number may be decreased, but not increased, by the
Board without a vote of the stockholders). By its terms, the Redeemable
Preferred Stock ranks prior to the Common Stock and all other classes of the
Company's capital stock with respect to dividend rights and rights upon the
liquidation, dissolution or winding up of the Company. Shares of Redeemable
Preferred Stock accrue dividends cumulatively in additional shares of
Redeemable Preferred Stock at an annual rate of 10% on the $100 liquidation
preference. The Company may redeem the Redeemable Preferred Stock in whole or
in part at its discretion at any time and must redeem any outstanding shares
of the Redeemable Preferred Stock on September 29, 2007 or within 10 business
days of a Change of Control (as defined below) of the Company, at a
redemption price per share equal to $100 plus all accrued but unpaid
dividends thereon. A Change of Control is defined generally as (i) the sale
or transfer of all or substantially all of the Company's assets to any person
that is not an affiliate of the Company, (ii) the sale or transfer (whether
by merger, consolidation or otherwise) of a majority of the Common Stock, in
the aggregate to persons who (a) were not Original Investors, (b) are not
employees of the Company or (c) are not members of the immediate family or of
a trust or partnership for the benefit of any person described in clauses (a)
or (b) above or an affiliate of any of the foregoing or (iii) the termination
of employment for any reason by the Company (including by way of resignation)
of Mr. Leven. In addition, the Company may, at any time, elect to require the
holders of shares of Redeemable Preferred Stock to exchange all or part of
their shares of Redeemable Preferred Stock for Subordinated Debentures due
September 29, 2007 in the aggregate principal amount per share equal to $100
plus all accrued but unpaid dividends thereon. Interest on the Subordinated
Debentures is payable one-half in cash and one-half through the issuance of
additional Subordinated Debentures.
Certain Effects of Authorized but Unissued Stock
Authorized but unissued shares of Common Stock and Preferred Stock are
available for future issuance without stockholder approval, except as may
otherwise be required under Nasdaq rules. These additional shares may be
utilized for a variety of corporate purposes, including future public
offerings to raise additional capital, corporate acquisitions and employee
benefit plans.
The existence of authorized but unissued and unreserved Common Stock and
Preferred Stock may enable the Board of Directors to issue shares to persons
friendly to current management, which could render more difficult or
discourage an attempt to obtain control of the Company by means of a proxy
contest, tender offer, merger, or otherwise, and thereby protect the
continuity of the Company's management.
Registration Rights
Pursuant to the terms of the Restated Stockholders' Agreement, the Company
has granted the Original Investors piggyback and demand registration rights,
which permit such persons to cause the Company to register their shares of
Class A Common Stock (including shares of Class A Common Stock into which
shares of Class B Common Stock are convertible) under the Securities Act in
certain circumstances. The demand registration rights generally provide that,
at any time after September 29, 2000, the holders of a majority of the shares
of Class A Common Stock (including the shares of Class B Common Stock
referred to above) registrable under such Agreement have the right to cause
the Company to file one registration statement under the Securities Act
covering all or part of such shares of Class A Common Stock (including the
shares into which the shares of Class B Common Stock are convertible) and
that the Company will use its best efforts to effect such registration. With
respect to piggyback registration rights, at any time following such time
that greater than 20% of the outstanding Common Stock has been registered
under the Securities Act, the Company is required to notify the holders of
Common Stock registrable under such Agreement that the Company intends to
register some of its securities and, if requested by such holder, to include
a portion of their shares of Common Stock in such registration ("piggyback
shares"). The maximum number of shares of Class A Common Stock that may be
included in such registration is determined by multiplying all of the
piggyback shares by a fraction, the numerator of which is the number of
shares being registered by the Company and the denominator of which is the
number of shares to be outstanding after such registration (excluding the
piggyback shares). The Company generally is obligated to bear the expenses,
other than underwriting discounts, sales commissions and
52
<PAGE>
transfer taxes, if any, of the registration of such shares. Any exercise by
the holders of such registration rights may hinder efforts by the Company to
arrange future financings and may have an adverse impact on the market price
of the Class A Common Stock.
Delaware Law and Certain Charter and By-Law Provisions
The Company is a Delaware corporation and is subject to Section 203 of the
Delaware General Corporation Law ("DGCL"). In general, Section 203 prevents
an "interested stockholder" (defined generally as a person owning 15% or more
of a corporation's outstanding voting stock) from engaging in a "business
combination" (as defined in such section) with a Delaware corporation for
three years following the date such person became an interested stockholder
unless (i) before such person became an interested stockholder, the board of
directors of the corporation approved the transaction in which the interested
stockholder became an interested stockholder or approved the business
combination; (ii) upon consummation of the transaction that resulted in the
interested stockholder becoming an interested stockholder, the interested
stockholder owns at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced (excluding shares owned by
persons who are both officers and directors of the corporation, and held by
certain employee stock ownership plans) or (iii) following the transaction in
which such person became an interested stockholder, the business combination
is approved by the board of directors of the corporation and authorized at a
meeting of stockholders by the affirmative vote of the holders of at least
two-thirds of the outstanding voting stock of the corporation not owned by
the interested stockholder. Messrs. Leven and Aronson are interested
stockholders under the DGCL. However, since their acquisition of the
Company's securities was approved in advance by the Company's Board of
Directors, they would not be prohibited from engaging in a business
combination with the Company.
In addition, certain provisions of the Company's Charter and By-laws
summarized in the following paragraphs will become operative prior to or
simultaneously with the completion of the Offering and may be deemed to have
an anti-takeover effect and may delay, defer or prevent an attempt to obtain
control of the Company by means of a proxy contest, tender offer, merger or
other transaction that a stockholder might consider in its best interest,
including those attempts that might result in a premium over the market price
for the shares held by stockholders.
Special Meeting of Stockholders. The Charter provides that special
meetings of stockholders of the Company may be called only by the Board of
Directors, the Chairman of the Board of Directors or the Chief Executive
Officer. This provision will make it more difficult for stockholders to take
actions opposed by the Board of Directors. This provision may not be amended
or repealed without the approval of holders of at least 75% of the
outstanding voting power of the Company. This provision of the Charter may
not be amended or repealed without the approval of holders of at least 75% of
the outstanding voting power of the Company.
Stockholder Action by Written Consent. The Charter provides that no action
required or permitted to be taken at any annual or special meeting of the
stockholders of the Company may be taken without a meeting, and the power of
stockholders of the Company to consent in writing, without a meeting, to the
taking of any action is specifically denied. This provision may not be
amended or repealed without the approval of holders of at least 75% of the
outstanding voting power of the Company. This provision of the Charter may
not be amended or repealed without the approval of holders of at least 75% of
the outstanding voting power of the Company.
Prohibition on Issuance of Voting Preferred Stock. The Charter provides
that the Board of Directors cannot create a series of Preferred Stock with
general voting rights or with the right to elect more than 50% of the Board
under any circumstances without the approval of holders of 75% of the
outstanding Class B Common Stock. This provision may not be amended or
repealed without the approval of holders of at least 75% of the outstanding
voting power of the Company.
Advance Notice Requirements for Stockholder Proposals and Director
Nominations. The By-laws provide that stockholders seeking to bring business
before an annual meeting of stockholders, or to nominate candidates for
election as directors at an annual or special meeting of stockholders, must
provide timely notice thereof in writing. To be timely, a stockholder's
notice must be delivered to or mailed and received at the principal executive
offices of the Company not less than 70 days nor more than 90 days prior to
the meeting; provided, however, that in the event that the date of the annual
meeting is advanced by more than 20 days or delayed by more than 70 days from
such anniversary date, notice by the stockholder to be timely must be
received no earlier than the close of business on the ninetieth day prior to
such annual meeting and not later than the close of business on the later of
the seventieth day prior to such annual meeting or the tenth day following
the day on which public announcement of the date of
53
<PAGE>
such meeting is first made. The By-laws also specify certain requirements for
a stockholder's notice to be in proper written form. These provisions may
preclude some stockholders from bringing matters before the stockholders at
an annual or special meeting or from making nominations for directors at an
annual or special meeting.
Termination of Employment Agreements. The By-laws provide that approval of
75% of the Board of Directors is required to terminate the employment
agreements of Messrs. Leven or Aronson.
Limitation of Liability and Indemnification Agreements
The Charter provides that to the fullest extent permitted by the DGCL, a
director of the Company shall not be liable to the Company or its
stockholders for monetary damages for breach of fiduciary duty as a director.
Under current Delaware law, liability of a director may not be limited (i)
for any breach of the director's duty of loyalty to the Company or its
stockholders, (ii) for acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law, (iii) in respect of
certain unlawful dividend payments or stock redemptions or repurchases and
(iv) for any transaction from which the director derives an improper personal
benefit. The effect of the provision of the Charter is to eliminate the
rights of the Company and its stockholders (through stockholders' derivative
suits on behalf of the Company) to recover monetary damages against a
director for breach of the fiduciary duty of care as a director (including
breaches resulting from negligent or grossly negligent behavior) except in
the situations described in clauses (i) through (iv) above. This provision
does not limit or eliminate the rights of the Company or any stockholder to
seek nonmonetary relief such as an injunction or rescission in the event of a
breach of a director's duty of care. In addition, the Charter provides that
the Company shall indemnify its directors, officers, employees and agents to
the extent not prohibited by Delaware law.
In addition, prior to the completion of the Offering, the Company intends
to enter into agreements (the "Indemnification Agreements") with each of the
directors of the Company pursuant to which the Company will agree to
indemnify each such director against claims, liabilities, damages, expenses,
losses, costs, penalties or amounts paid in settlement (collectively,
"Losses") incurred by such director and arising out of his capacity as a
director, executive officer, employee and/or agent of the Company to the
maximum extent permitted by applicable law. In addition, such director or
officer shall be entitled to an advance of expenses to the maximum extent
authorized or permitted by law to meet the obligations indemnified against.
The Indemnification Agreements also obligate the Company to purchase and
maintain insurance for the benefit and on behalf of its directors insuring
against all liabilities that may be incurred by such director in or arising
out of his capacity as a director, officer, employee and/or agent of the
Company.
To the extent that the Board of Directors or the stockholders of the
Company may in the future wish to limit or repeal the ability of the Company
to indemnify directors, such repeal or limitation may not be effective as to
directors who are currently parties to the Indemnification Agreements,
because their rights to full protection are contractually assured by the
Indemnification Agreements. It is anticipated that similar contracts may be
entered into, from time to time, with future directors and with executive
officers of the Company.
54
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, each of
the Underwriters named below, and each of the Underwriters for whom Schroder
Wertheim & Co. Incorporated and Montgomery Securities are acting as
representatives (the "Representatives"), has severally agreed to purchase
from the Company and the Selling Stockholders an aggregate of 2,325,000
shares of Class A Common Stock at the Price to Public less the underwriting
discounts and commissions set forth on the cover page of this Prospectus, in
the amounts set forth below opposite their respective names.
Number of
Shares of
Underwriter Class A Common Stock
---------------------------------------- ----------------------
Schroder Wertheim & Co. Incorporated
Montgomery Securities
----------------------
Total 2,325,000
======================
The Underwriting Agreement provides that the Underwriters' obligation to
pay for and accept delivery of the shares of Class A Common Stock offered
hereby is subject to certain conditions precedent and that the Underwriters
will be obligated to purchase all such shares, excluding shares covered by
the over-allotment option, if any are purchased. The Underwriters have
informed the Company and the Selling Stockholders that no sales of Class A
Common Stock will be confirmed to discretionary accounts.
The Company and the Selling Stockholders have been advised by the
Underwriters that they propose initially to offer the Class A Common Stock to
the public at the public offering price set forth on the cover page of this
Prospectus and to certain dealers at such price, less a concession not in
excess of $ per share. The Underwriters may allow and such dealers may
reallow a concession not in excess of $ per share to certain other
brokers and dealers. After the Offering, the public offering price, the
concession and reallowances to dealers and other selling terms may be changed
by the Underwriters.
The Company and the Selling Stockholders have granted to the Underwriters
an option exercisable for 30 days after the date of this Prospectus to
purchase up to an aggregate of 348,750 additional shares of Class A Common
Stock to cover overallotments, if any, at the same price per share to be paid
by the Underwriters for the other shares of Class A Common Stock offered
hereby. If the Underwriters purchase any such additional shares pursuant to
the overallotment option, each Underwriter will be committed, subject to
certain conditions, to purchase a number of the additional shares of Class A
Common Stock proportionate to such Underwriter's initial commitment.
The Company, its directors and executive officers, and certain other
stockholders have agreed with the Representatives, for a period of 180 days
after the date of this Prospectus, not to issue, sell, offer to sell, grant
any options for the sale of, or otherwise dispose of any shares of Class A
Common Stock or Class B Common Stock or any rights to purchase shares of the
same (other than stock issued or options granted pursuant to the Company's
stock incentive plans), without the prior written consent of the
Representatives. See "Shares Eligible for Future Sale."
The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities that may be incurred in connection
with the sale of the Class A Common Stock, including liabilities arising
under the Securities Act, and to contribute to payments that the Underwriters
may be required to make with respect thereto.
Prior to the Offering, there has been no public market for the Class A
Common Stock. The initial public offering price for the Class A Common Stock
will be determined by negotiation among the Company, the Selling Stockholders
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.
55
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, 9,872,490 shares of Class A Common Stock
will be outstanding and 2,707,919 shares of Class B Common Stock will be
outstanding. Of these shares, the 2,325,000 shares of Class A Common Stock
sold in the Offering will be freely tradeable by persons other than
"affiliates" of the Company, without restriction under the Securities Act.
Further, 8,047,490 shares of Class A Common Stock and all 2,706,557 shares of
Class B Common Stock will be "restricted" securities within the meaning of
Rule 144 and may not be sold in the absence of registration under the
Securities Act unless an exemption from registration is available, including
the exemptions contained in Rule 144. However, approximately 9,425,000 shares
of Class A Common Stock (including 2,707,919 shares of Class A Common Stock
into which the Class B Common Stock is convertible) will be eligible for sale
under Rule 144 beginning on September 29, 1997 (subject to certain volume and
other restrictions prescribed by Rule 144). As defined in Rule 144, an
"affiliate" of an issuer is a person that directly, or indirectly through one
or more intermediaries, controls, or is controlled by, or is under common
control with, such issuer.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including an "affiliate" as that term is
defined below, who has paid for shares is entitled, beginning two years from
the later of the date of acquisition of the shares from the Company or from
an affiliate of the Company, to sell within any three-month period up to
that number of shares that does not exceed the greater of 1% of the then
outstanding shares or the average weekly trading volume of the then
outstanding shares during the four calendar weeks preceding each such sale. A
person (or persons whose shares are aggregated) who is not deemed an
affiliate of the Company and who has paid for his shares is entitled,
beginning three years from the later of the date of the acquisition from the
Company or from an affiliate of the Company, to sell such shares under Rule
144(k) without regard to the volume limitations described above. Affiliates
continue to be subject to such volume limitations after the three-year
holding period.
The Company, its officers and directors and certain of its other current
stockholders, who collectively hold 2,818,725 shares of Class A Common Stock
and 2,707,919 shares of Class B Common Stock, have agreed that they will not
dispose of any shares of Class A Common Stock or Class B Common Stock, or any
securities convertible or exchangeable for shares of Class A Common Stock,
for a period of 180 days after the date of this Prospectus without the
written consent of the Representatives of the Underwriters. After the
Offering, certain holders of shares of Common Stock will be entitled to have
shares included in certain registration statements filed by the Company. See
"Description of Common Stock--Registration Rights".
Following the Offering, the Company intends to file a registration
statement on Form S-8 under the Securities Act to register 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
56
<PAGE>
in this Prospectus as to the contents of any contract or other document are
not necessarily complete, and in each such instance reference is made to the
copy of such contract or document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference. As a result of the Offering, the Company will become subject to
the informational requirements of the Exchange Act, and in accordance
therewith will file reports, proxy statements and other information with the
Commission. The Registration Statement, as well as all periodic reports and
other information filed by the Company pursuant to the Exchange Act, may be
inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street N.W., Washington, D.C. 20549, and at the
regional offices of the Commission located at 7 World Trade Center, 7th
Floor, New York, New York 10048 and Citicorp Center, 500 Madison Street,
Suite 1400, Chicago, Illinois 60661. Copies of such materials may be obtained
from the World Wide Web site that the Commission maintains at
http://www.sec.gov. and from the Public Reference Section of the Commission,
450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates.
57
<PAGE>
U.S. FRANCHISE SYSTEMS, INC.
AND SUBSIDIARIES
INDEX TO CONSOLIDATED
FINANCIAL STATEMENTS
Page
---------
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
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
and Stockholders of U.S. Franchise Systems, Inc.:
We have audited the accompanying consolidated statements of financial
position of U.S. Franchise Systems, Inc. and subsidiaries (the "Company") as
of December 31, 1995 and June 30, 1996 and the related consolidated
statements of operations, stockholders' deficit, and cash flows for the
periods from August 28, 1995 (inception) to December 31, 1995 and the six
months ended June 30, 1996. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company at December 31,
1995 and June 30, 1996 and the results of its operations and its cash flows
for the periods from August 28, 1995 (inception) to December 31, 1995 and the
six months ended June 30, 1996, in conformity with generally accepted
accounting principles.
Deloitte & Touche LLP
August 9, 1996
(October 11, 1996 as to Note 11)
F-2
<PAGE>
U.S. FRANCHISE SYSTEMS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
December 31, June 30,
1995 1996
--------------- --------------
Assets
CURRENT ASSETS:
Cash and temporary cash investments $13,893,000 $12,732,000
Accounts receivable 122,000
Deposits 87,000 87,000
Prepaid expenses 399,000 349,000
-------------- -------------
Total current assets 14,379,000 13,290,000
PROMISSORY NOTES RECEIVABLE 416,000
EQUIPMENT--Net 134,000 389,000
FRANCHISE RIGHTS 3,371,000 3,369,000
DEFERRED COMMISSIONS 41,000 1,282,000
OTHER ASSETS 147,000 281,000
-------------- -------------
$18,072,000 $19,027,000
============== =============
Liabilities and Stockholders' Deficit
CURRENT LIABILITIES:
Accounts payable $ 201,000 $ 375,000
Commissions payable 22,000 572,000
Deferred application fees 120,000 2,842,000
Accrued expenses 65,000 376,000
Royalties due to HSA Properties 390,000
Due to Hudson Hotels Corporation 706,000 706,000
-------------- -------------
Total current liabilities 1,114,000 5,261,000
DUE TO HUDSON HOTELS CORPORATION 731,000 731,000
-------------- -------------
Total liabilities 1,845,000 5,992,000
-------------- -------------
REDEEMABLE STOCK:
Preferred shares, par value $0.01 per
share; authorized 525,000 shares; issued
and outstanding 163,500 shares;
cumulative, exchangeable (entitled in
redemption to $16,759,000 and
$17,597,000 at December 31, 1995 and
June 30, 1996, respectively) 16,759,000 17,597,000
-------------- -------------
Common shares, par value $0.01 per share;
issued and outstanding 3,186,294 Class A
shares (see Note 11) entitled in
redemption (under certain conditions) to
$330,000 at December 31, 1995 and June
30, 1996 330,000 330,000
-------------- -------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT:
Common shares, par value $0.01 per share;
authorized 30,000,000 shares of Class A
Common Stock and 5,000,000 shares of
Class B Common Stock; issued and
outstanding 4,861,196 Class A shares and
2,707,919 Class B shares (see Note 11) 78,000 78,000
Capital in excess of par 228,000
Accumulated deficit (1,168,000) (4,970,000)
-------------- -------------
Total stockholders' deficit (862,000) (4,892,000)
-------------- -------------
$18,072,000 $19,027,000
============== =============
See notes to consolidated financial statements.
F-3
<PAGE>
U.S. FRANCHISE SYSTEMS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Period From
August 28, 1995 Six Months
(Inception) to Ended
December 31, June 30,
1995 1996
---------------- -------------
REVENUES $ -- $ 395,000
---------------- -------------
EXPENSES:
Marketing and reservations 13,000 490,000
Other franchise sales and advertising 550,000 1,263,000
Corporate salaries, wages, and benefits 423,000 993,000
Other general and administrative 215,000 835,000
Depreciation and amortization 126,000 268,000
---------------- -------------
1,327,000 3,849,000
---------------- -------------
LOSS FROM OPERATIONS 1,327,000 3,454,000
OTHER INCOME (EXPENSE):
Interest income 195,000 331,000
Interest expense (36,000) (72,000)
---------------- -------------
NET LOSS $ 1,168,000 $ 3,195,000
================ =============
LOSS APPLICABLE TO COMMON STOCKHOLDERS $ 1,645,000 $ 4,033,000
================ =============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 10,755,409 10,755,409
================ =============
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS
PER SHARE $ 0.15 $ 0.38
================ =============
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
----------------------
Total
Capital in Accumulated Stockholders'
Shares Amount Excess of Par Deficit Deficit
------------ ---------------------- --------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE--August 28, 1995 -- $ -- $ -- $ -- $ --
Issuance of capital stock 7,569,115 78,000 705,000 783,000
Undeclared dividends on
redeemable preferred stock (477,000) (477,000)
Net loss (1,168,000) (1,168,000)
------------ ---------------------- --------------- ----------------
BALANCE--December 31, 1995 7,569,115 78,000 228,000 (1,168,000) (862,000)
Redemption of capital stock (322,669) (3,000) (33,000) (36,000)
Issuance of capital stock 322,669 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 7,569,115 $78,000 $ -- $(4,970,000) $(4,892,000)
============ ====================== =============== ================
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
U.S. FRANCHISE SYSTEMS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period From Six Months
August 28, 1995 Ended
(Inception) to June 30,
December 31, 1995 1996
------------------ ---------------
<S> <C> <C> <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.1. BASIS OF PRESENTATION AND ORGANIZATION
Microtel Inns and Suites Franchising, Inc.
On October 5, 1995, the Company entered into an agreement (the "Microtel
Agreement") with Hudson Hotels Corporation ("Hudson") to acquire the
exclusive worldwide franchising rights and operating assets of the Microtel
hotel system (the "Microtel Acquisition") for $3,037,000. The Company paid
$1,600,000 at closing and agreed to pay $1,437,000 (see Note 6) over the next
three years with interest at 10%. The Company also agreed to pay $700,000 for
consulting services, $400,000 of which was paid at closing, with the
remainder payable over two years. As part of the Microtel Agreement, the
Company received warrants to purchase 100,000 common shares of Hudson through
September 1, 2000 at an exercise price of $8.375 per share. The Microtel
Agreement requires the Company to pay a royalty for the right to use, and
license others to use, certain trademarks, service marks, and trade names
(the "Microtel Proprietary Marks") associated with the Microtel hotel system
(see Note 10). This acquisition was accounted for as a purchase of franchise
rights.
The Company did not acquire physical facilities, employee base, sales
force, production techniques or an existing customer base in conjunction with
the acquisition of the worldwide franchising rights.
Pursuant to a Trademark, Service Mark, and System License Agreement (the
"Microtel License Agreement"), the Company granted to Microtel Inns and
Suites Franchising, Inc. the exclusive right to use, and to license others to
use, the Microtel Proprietary Marks and Microtel hotel system in connection
with the operation of hotels under the Microtel hotel system.
Hawthorn Suites Franchising, Inc.
On March 27, 1996, the Company entered into an agreement with HSA
Properties, L.L.C. ("HSA") to acquire the exclusive worldwide franchising
rights with respect to the Hawthorn hotel system (the "Hawthorn Agreement").
The Company made no payment to HSA at closing but agreed to remit to HSA a
portion of the royalties the Company actually receives from future Hawthorn
franchisees.
The Company did not acquire physical facilities, employee base, sales
force, production techniques or an existing customer base in conjunction with
the acquisition of the worldwide franchising rights.
Pursuant to a Trademark, Service Mark, and System License Agreement which
expires in April 1998 (the "Hawthorn License Agreement"), the Company granted
to HSF, its wholly owned subsidiary, the exclusive right to use, and to
license others to use, the Hawthorn proprietary marks in connection with the
Hawthorn hotel system (see Note 10).
Marketing and Reservation Funds
The Company collects reservation and marketing fees from its franchisees
and uses such funds at its discretion to develop, support and enhance the
reservation systems and marketing programs of the Microtel and Hawthorn hotel
systems. The related revenues and expenses are reported gross in the
accompanying financial statements.
F-7
<PAGE>
U.S. FRANCHISE SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
AS OF DECEMBER 31, 1995 AND JUNE 30, 1996 AND
FOR THE PERIOD FROM AUGUST 28, 1995 (INCEPTION)
TO DECEMBER 31, 1995 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1996
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Application Fee Revenue and Related Costs--Initial franchise fee revenue
consists of application fees received by the Company's subsidiaries from
prospective franchisees. Such fees are recognized in income when the
underlying hotels open for business. Related franchise sales commissions are
also deferred until the underlying hotels open for business, at which time
such costs are charged to expense.
Cash and Temporary Cash Investments--The Company considers its investments
with an original maturity of three months or less to be cash equivalents.
Included in "cash and temporary cash investments" are the following:
<TABLE>
<CAPTION>
December 31, 1995 June 30, 1996
------------------ ----------------
<S> <C> <C>
Cash in bank deposit accounts $ 518,000 $ 1,792,000
Money market funds 13,375,000 10,940,000
------------------ ----------------
$13,893,000 $12,732,000
================== ================
</TABLE>
Franchise Rights--Franchise rights represent the cost of acquiring such
rights and are amortized on a straight-line basis over 15 years. Accumulated
amortization was $57,000 at December 31, 1995 and $176,000 at June 30, 1996.
Impairment of Long-Lived Assets--The Company has adopted Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to Be Disposed of" ("SFAS 121"), as
of January 1, 1996. The adoption of SFAS 121 in 1996 did not have a material
effect on the financial condition or operations of the Company. Long-lived
assets, principally intangibles, are evaluated annually and written down to
fair value when management believes that the unamortized balance cannot be
recovered through future undiscounted cash flows.
Income Taxes--The Company has adopted the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes," which
requires the use of the asset and liability approach in accounting for income
taxes.
Stock Plans--The Company has elected to account for stock plans in
accordance with SFAS No. 123, "Accounting for Stock-Based Compensation."
Accordingly, compensation expense will likely result from the award of stock
options, restricted stock and similar awards to employees.
Per Share Amounts--Per share amounts are determined by dividing loss
applicable to common stockholders by weighted average shares outstanding.
Weighted average shares include redeemable common shares outstanding. Loss
applicable to common stockholders represents net loss adjusted for accrued
dividends on the redeemable preferred stock.
All references in the financial statements to the number of shares and per
share amounts of the Company's common stock have been retroactively restated
to reflect the increased number of common shares outstanding resulting from a
stock split (See Note 11).
Management Estimates--The preparation of financial statements in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
F-8
<PAGE>
U.S. FRANCHISE SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
AS OF DECEMBER 31, 1995 AND JUNE 30, 1996 AND
FOR THE PERIOD FROM AUGUST 28, 1995 (INCEPTION)
TO DECEMBER 31, 1995 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1996
3. REDEEMABLE PREFERRED STOCK
The cumulative redeemable exchangeable preferred stock (the "redeemable
preferred stock") earns cumulative dividends at an annual dividend rate of
10%, payable in additional shares of redeemable preferred stock when
declared. The redeemable preferred stock is, at the Company's option,
redeemable or exchangeable into 10% subordinated debentures due September 29,
2007 at $100 per share plus accrued and unpaid dividends (the "Liquidation
Value") at any time before September 29, 2007. If issued, 50% of the interest
due on the debentures may be paid partially in kind by the issuance of
additional debentures at the option of the Company, with the balance of
interest payable in cash. On September 29, 2007, the redeemable preferred
stock is required to be redeemed at the Liquidation Value.
4. EQUIPMENT
Equipment is recorded at historical cost and consisted of the following:
December 31, June 30,
1995 1996
--------------- -----------
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
=============== ===========
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:
1996 $131,000
1997 259,000
1998 203,000
1999 207,000
2000 146,000
-----------
Total minimum payments $946,000
===========
F-9
<PAGE>
U.S. FRANCHISE SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
AS OF DECEMBER 31, 1995 AND JUNE 30, 1996 AND
FOR THE PERIOD FROM AUGUST 28, 1995 (INCEPTION)
TO DECEMBER 31, 1995 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1996
6. DUE TO HUDSON HOTELS CORPORATION
The Company is required to pay Hudson $1,437,000 ($1,700,000 discounted at a
rate of 10%), which represents the balance due for the assets of the Microtel
hotel system (see Note 1), payable on October 5, annually, as follows:
1996 $ 706,000
1997 277,000
1998 454,000
------------
1,437,000
Less current portion (706,000)
------------
$ 731,000
============
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.
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
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).
9. INCOME TAXES
Deferred income taxes in the accompanying consolidated statement of
financial position includes the following amounts of deferred tax assets and
liabilities:
December 31, June 30,
1995 1996
--------------- --------------
Deferred tax liability $ (487,000)
Deferred tax asset 441,000 2,125,000
Valuation allowance (441,000) (1,638,000)
--------------- --------------
Net deferred income taxes $ -- $ --
=============== ==============
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:
December 31, June 30,
1995 1996
--------------- -----------
Statutory federal rate 34.0% 34.0%
Statutory state rate less federal effect 4.0 4.0
Other -- (1.0)
Change in valuation allowance (38.0) (37.0)
--------------- -----------
Effective tax rate -- % -- %
--------------- -----------
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:
Number
Year of Hotels
- -------- ------------
1997 50
1998 100
1999 175
2000 250
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)
The above development schedule is considered to have been complied with
unless such schedule is not met for two consecutive years. If 75% of the
development level has been met, a fee of $1,000,000 may be paid and upon such
payment, the Company will be deemed to be in compliance with such schedule.
Hudson will retain the right to receive franchise application fees and all
franchise royalty payments under existing agreements at October 5, 1995 or
under agreements for which franchise applications had been received as of
October 5, 1995, except for the reservation and marketing fees, which are
retained by the Company.
As part of the Microtel Acquisition, Hudson retained the right to
franchise and to receive royalties on 60 franchises either issued or which
may be issued in the future to Hudson, its affiliates and certain other
persons. For each new franchise other than the 60 issued or which may be
issued to Hudson, its affiliates and such other persons, the Company is
required to remit to Hudson a continuing monthly royalty equal to 1.0% of the
revenues subject to royalties on the first 100 properties opened by the
Company, 0.75% for the next 150 properties, and 0.5% for each new property
after the first 250 properties.
If any of the above obligations are not met, including the payment of
amounts due to Hudson (see Note 6), all of the rights to the Microtel system
may, at Hudson's discretion, revert back to Hudson. In the event Hudson
exercises its right to the Microtel system, the Company, through Microtel
Inns and Suites Franchising, Inc., will retain the rights to any franchise
royalty payments due under franchises granted by the Company and its
subsidiary, less certain processing fees due to Hudson.
The Company, as part of the Hawthorn Agreement, is required to fulfill
certain obligations under such agreement. These include the following:
To execute qualified franchise agreements, as defined in the Hawthorn
Agreement, for the operation of the following number of Hawthorn hotels (the
"Termination Standard") on June 27, annually:
Number of
Year Hotels
------------------ ------------
1997 10
1998 20
1999 40
2000 60
2001 80
2002 100
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
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)
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:
Number of
Date Hotels
----------------------- ------------
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
The Company is required to employ at least 15 persons devoted to the sales
and promotion of the Hawthorn and Microtel brands and is required to spend
not less than $100,000 on marketing during 1996 and 1997 promoting the
Hawthorn brand.
The Company is required to reimburse HSA for amounts previously advanced
by HSA to a reservation and advertising fund in connection with the Existing
Hawthorn Hotels in an amount not to exceed $179,000.
Under the Hawthorn Acquisition Agreement, the Company and its affiliates
are generally restricted until June 27, 1998 from franchising any lodging
brands other than (i) Hawthorn brand hotels, (ii) Microtel brand hotels, and
(iii) other limited-service non-suite hotels with an average daily rate of
$49 and under. Until June 27, 1997, the Company generally must also refrain
from franchising any brands outside of the lodging industry.
11. SUBSEQUENT EVENTS
On October 11, 1996, the shareholders approved the creation of two classes
of common stock: Class A Common Stock, par value $.01 per share and Class B
Common Stock, par value $.01 per share, and to split and reclassify each
share of its existing common stock, par value $.10 per share, into 9.67
shares of Class A common stock. In connection with the Reclassification,
certain members of management and related stockholders holding 2,707,919
shares of Class A Common Stock will exchange such shares for the same number
of shares of Class B Common Stock. Shares of Class A Common Stock and Class B
Common Stock will be identical in all respects except that (i) holders of
Class B Common Stock shall be entitled to ten votes per share and holders of
Class A Common Stock will be entitled to one vote per share and (ii) the
Class B Common Stock will be convertible into Class A Common Stock at the
option of the holder and, with limited exceptions, upon the transfer thereof.
Following the Reclassification, there will be 30 million shares of Class A
Common Stock and 5 million shares of Class B Common Stock authorized for
issuance. All references in the financial statements to the number of shares
and per share amounts of the Company's common stock have been retroactively
restated to reflect the increased number of common shares outstanding.
In addition, prior to and contingent upon the completion of the proposed
public offering, the Stock Purchase Agreements described in Note 8 were
amended to revise the vesting requirements with respect to 50% of the
Restricted Shares (approximately 13% of the Common Stock outstanding before
the offering). Such shares will be deemed to be earned and vested shares
notwithstanding the fact that performance criteria have not been met by the
Company. Remaining Restricted Shares will be Class A Common Stock when earned
under the Agreements. No effect has been given in the historical financial
statements for the change in vesting requirements.
F-13
<PAGE>
Company Logos
<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
Page
---------
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 44
Selling Stockholders 50
Description of Capital Stock 51
Underwriting 55
Shares Eligible for Future Sale 56
Validity of Class A Common Stock 56
Experts 56
Available Information 56
Index to Consolidated Financial Statements F-1
Until , 1996 (25 days after the commencement of the
Offering), all dealers effecting transactions in the Class A Common Stock,
whether or not participating in this distribution, may be required to deliver
a Prospectus. This is in addition to the obligation of dealers to deliver a
Prospectus when acting as Underwriters and with respect to their unsold
allotments or subscriptions.
=============================================================================
2,325,000 Shares
[U.S. Franchise Systems, Inc. logo]
U.S. Franchise
Systems, Inc.
Class A Common Stock
($0.01 par value)
Schroder Wertheim & Co.
Montgomery Securities
, 1996
=============================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth all expenses, other than underwriting
discounts and commissions, in connection with the issuance and distribution
of the securities registered hereby. All the amounts shown are estimates,
except for the Securities and Exchange Commission registration fee, the NASD
filing fee and the Nasdaq National Market listing fee. All of the following
fees and expenses will be paid by the Company.
Securities and Exchange Commission registration fee $ 12,377.66
NASD filing fee 4,243.25
Nasdaq National Market listing fee 50,000.00
Printing and engraving expenses *
Legal fees and expenses 400,000.00
Accounting fees and expenses 300,000.00
Blue Sky fees and expenses (including counsel fees and
expenses) 20,000.00
Transfer Agent and Registrar fees and expenses *
Miscellaneous *
-------------
Total $ *
=============
* 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.
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 October 11, 1996, among the Company and the
Original Investors.
10.6 Amended and Restated Employee Stock Purchase Agreement between U.S.
Franchise Systems, Inc. and Michael A. Leven, entered into as of
September 29, 1995, as amended effective simultaneously with the
closing of the Offering.
10.7 Amended and Restated Employee Stock Purchase Agreement between U.S.
Franchise Systems, Inc. and Neal K. Aronson, entered into as of
September 29, 1995, as amended effective simultaneously with the
closing of the Offering.
10.8** Employment Agreement by and between U.S. Franchise Systems, Inc. and
Michael A. Leven, dated as of October 1, 1995.
10.9** Employment Agreement by and between U.S. Franchise Systems, Inc. and
Neal K. Aronson, dated as of October 1, 1995.
10.10* Voting Agreement between Michael A. Leven and Andrea Leven, to be
entered into simultaneously with the closing of the Offering.
10.11 Voting Agreement between Michael A. Leven and Neal K. Aronson, to be
entered into simultaneously with the closing of the Offering.
10.12** Office Lease Agreement between Hallwood Real Estate Investors Fund XV
and U.S. Franchise Systems, Inc., dated September 25, 1995.
10.13** First Amendment to Office Lease between Hallwood 95, L.P. and U.S.
Franchise Systems, Inc., dated May 20, 1996.
10.14* U.S. Franchise Systems, Inc. 1996 Stock Option Plan.
10.15* U.S. Franchise Systems, Inc. 1996 Stock Option Plan for Non-Employee
Directors.
10.16 Term Sheet, dated May 14, 1996, between the Company and NACC
regarding the Franchisee Financing Facility.
21.1** List of Subsidiaries of U.S. Franchise Systems, Inc.
23.1* Consent of Paul, Weiss, Rifkind, Wharton & Garrison (contained in the
opinion filed as Exhibit 5.1 hereto).
23.2 Consent of Deloitte & Touche LLP.
23.3** Consent of Dean S. Adler.
23.4** Consent of Jeffrey A. Sonnenfeld.
24.1** Power of Attorney from officers and directors (contained on signature
page).
27.1** Financial Data Schedule.
* To be filed by amendment.
** Previously Filed.
(b) Financial Statement Schedules. none required.
Item 17. Undertakings
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described under Item 15 above, or
otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
In the event that a claim for indemnification for such liabilities (other
than the payment by the registrant of expenses incurred or paid by a
director, officer or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is 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
II-3
<PAGE>
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
The undersigned registrant hereby undertakes:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(3) To provide to the Underwriters at the closing specified in the
underwriting agreements certificates in such denominations and registered in
such names as required by the Underwriters to permit prompt delivery to each
purchaser.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the registrant has duly caused this registration statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Atlanta, State of Georgia, on October 11, 1996.
By: /s/ Michael A. Leven
Michael A. Leven
Chairman, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this registration statement has been signed by the following persons on
October 11, 1996 in the capacities indicated.
Signatures Title or Capacities
-------------------------- ----------------------------------
* Chairman, President, Chief
________________________ Executive Officer and
Michael A. Leven Director (Principal Executive
Officer)
*
________________________
Irwin Chafetz Director
*
________________________
Richard D. Goldstein Director
*
________________________
Barry Sternlicht Director
By /s/ Neal K. Aronson Executive Vice President,
________________________ Chief Financial Officer and
Neal K. Aronson Director (Principal Financial
Attorney-in-Fact and Accounting Officer)
II-5
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Description Page
-------- ------------------------------------------------------------ -------
1.1* Form of Underwriting Agreement
3.1 Amended and Restated Certificate of Incorporation of U.S.
Franchise Systems, Inc.
3.2 Amended and Restated Bylaws of U.S. Franchise Systems, Inc.
4.1 Specimen Common Stock Certificate of U.S. Franchise Systems,
Inc.
5.1* Opinion of Paul, Weiss, Rifkind, Wharton & Garrison.
10.1** Form of License Agreement for Microtels.
10.2** Form of License Agreement for Hawthorn Suites hotels.
10.3** Joint Venture Agreement between Microtel Franchise and
Development Corporation and U.S. Franchise Systems, Inc.,
dated as of September 7, 1995. The Registrant agrees to
furnish a copy of any omitted schedule supplementally to the
Commission upon request.
10.4** Master Franchise Agreement between HSA Properties, L.L.C.
and U.S. Franchise Systems, Inc., dated as of March 27,
1996. The Registrant agrees to furnish a copy of any omitted
schedule supplementally to the Commission upon request.
10.5 Amended and Restated Stockholders' Agreement, dated as of
September 29, 1995, as amended on October 11, 1996, among
the Company and the Original Investors.
10.6 Amended and Restated Employee Stock Purchase Agreement
between U.S. Franchise Systems, Inc. and Michael A. Leven,
entered into as of September 29, 1995, as amended effective
simultaneously with the closing of the Offering.
10.7 Amended and Restated Employee Stock Purchase Agreement
between U.S. Franchise Systems, Inc. and Neal K. Aronson,
entered into as of September 29, 1995, as amended effective
simultaneously with the closing of the Offering.
10.8** Employment Agreement by and between U.S. Franchise Systems,
Inc. and Michael A. Leven, dated as of October 1, 1995.
10.9** Employment Agreement by and between U.S. Franchise Systems,
Inc. and Neal K. Aronson, dated as of October 1, 1995.
10.10* Voting Agreement between Michael A. Leven and Andrea Leven,
to be entered into simultaneously with the closing of the
Offering.
10.11 Voting Agreement between Michael A. Leven and Neal K.
Aronson, to be entered into simultaneously with the closing
of the Offering.
10.12** Office Lease Agreement between Hallwood Real Estate
Investors Fund XV and U.S. Franchise Systems, Inc., dated
September 25, 1995.
10.13** First Amendment to Office Lease between Hallwood 95, L.P.
and U.S. Franchise Systems, Inc., dated May 20, 1996.
10.14* U.S. Franchise Systems, Inc. 1996 Stock Option Plan.
10.15* U.S. Franchise Systems, Inc. 1996 Stock Option Plan for
Non-Employee Directors.
10.16 Term Sheet, dated May 14, 1996, between the Company and NACC
regarding the Franchisee Financing Facility.
21.1** List of Subsidiaries of U.S. Franchise Systems, Inc.
23.1* Consent of Paul, Weiss, Rifkind, Wharton & Garrison
(contained in the opinion filed as Exhibit 5.1 hereto).
23.2 Consent of Deloitte & Touche LLP.
23.3** Consent of Dean S. Adler.
23.4** Consent of Jeffrey A. Sonnenfeld.
24.1** Power of Attorney from officers and directors (contained on
signature page).
27.1** Financial Data Schedule.
* To be filed by amendment.
** Previously Filed.
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
of
U.S. FRANCHISE SYSTEMS, INC.
----------------------------
U.S. FRANCHISE SYSTEMS, INC., a corporation organized and existing under
the laws of the State of Delaware (hereinafter called the "Corporation"), hereby
certifies pursuant to Sections 242 and 245 of the General Corporation Law of the
State of Delaware (the "General Corporation Law") as follows:
FIRST: The Corporation's name is U.S. Franchise Systems, Inc. and it was
originally incorporated under such name.
SECOND: The Certificate of Incorporation of the Corporation was filed with
the Secretary of State on August 28, 1995. An Amended and Restated Certificate
of Incorporation was filed with the Secretary of State on September 27, 1995. A
Certificate of Designation to the Amended and Restated Certificate of
Incorporation was filed with the Secretary of State on September 29, 1995.
THIRD: The Certificate of Incorporation, as heretofore amended, is hereby
further amended to effect one or more of the amendments or changes authorized by
the General Corporation Law, to wit:
1. To change the designation of the currently authorized Common Stock, par
value $.10 per share, to Class A Common Stock, par value $.01 per share (the
"Class A Common Stock").
<PAGE>
2
2. To authorize an increase in the number of authorized shares of
newly-designated Class A Common Stock from Two Million (2,000,000) to Thirty
Million (30,000,000).
3. To change each issued share of newly-designated Class A Common Stock
into 9.67 shares of Class A Common Stock; provided that if, as a result of such
change, any holder of Class A Common Stock would receive a fractional share
(based on multiplying such holder's shares of Class A Common Stock prior to such
change, by 9.67), then in lieu thereof, such holder shall receive cash (based
upon the initial public offering price of shares of Class A Common Stock sold
pursuant to the Corporation's initial public offering or, if such offering is
not consummated within 90 days of the filing hereof, based on a per share price
of $13).
4. To authorize Five Million (5,000,000) shares of a new class of Common
Stock, par value $.01 per share, and to designate the same as Class B Common
Stock (the "Class B Common Stock").
5. To fix the designation and relative rights, preferences and limitations
of the Class A Common Stock and Class B Common Stock.
6. To provide that special meetings of the stockholders of the Corporation
may be called only at the direction of the Board of Directors of the Corporation
(the "Board of Directors") by resolution adopted by the affirmative vote of a
majority of the entire Board or by the Chairman or the Chief Executive Officer
of the Corporation and must be called by such officers at the written request of
the Board of Directors, and to require for amendment of the provision described
in this
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3
paragraph a greater proportion of the voting power of holders of shares of the
Corporation's capital stock than is required by the General Corporation Law.
7. To provide that any action taken by the stockholders of the Corporation
cannot be taken by the written consent of such stockholders without a meeting,
and to require for amendment of the provision described in this paragraph a
greater proportion of the voting power of holders of shares of the Corporation's
capital stock than is required by the General Corporation Law.
FOURTH: This Amended and Restated Certificate of Incorporation amends and
restates the Certificate of Incorporation of the Corporation, as previously
amended and now in effect. This Amended and Restated Certificate of
Incorporation was adopted by the Board of Directors and stockholders of the
Corporation entitled to vote in respect thereof in the manner and by the vote
prescribed by Section 242 of the General Corporation Law to read as follows:
1. Name. The name of the corporation is U.S. Franchise Systems, Inc. (the
"Corporation").
2. Address; Registered Office and Agent. The address of the Corporation's
registered office is 1209 Orange Street, Wilmington, New Castle County, State of
Delaware; and its registered agent at such address is Corporation Trust Company.
3. Purposes. The purpose of the Corporation is to engage in any lawful act
or activity for which corporations may be organized under the General
Corporation Law.
<PAGE>
4
4. Number and Designation of Shares of Capital Stock. The total number of
shares of all classes of stock that the Corporation shall have authority to
issue is Thirty-Six Million (36,000,000), of which (a) Thirty-Five Million
(35,000,000) shall be shares of Common Stock, par value $.01 per share, and (b)
One Million (1,000,000) shall be shares of preferred stock, par value $.01 per
share (the "Preferred Stock"), which includes up to 525,000 shares of 10%
Cumulative Redeemable Exchangeable Preferred Stock (the "Redeemable Preferred
Stock").
4.1 Common Stock. The common stock, par value $.01 per share, shall be
divided into Class A Common Stock and Class B Common Stock. There shall be
Thirty Million (30,000,000) shares of Class A Common Stock and Five Million
(5,000,000) shares of Class B Common Stock (the Class A Common Stock and Class B
Common Stock are sometimes collectively referred to herein as the "Common
Stock"). Immediately upon the effectiveness of this Amended and Restated
Certificate of Incorporation, each share of common stock of the Corporation, par
value $.10 per share, that is issued and outstanding immediately prior to such
effectiveness shall be changed into and reclassified as 9.67 shares of Class A
Common Stock. All shares of Common Stock will be identical and will entitle the
holders thereof to the same rights and privileges, except as otherwise provided
herein.
(a) Voting Rights. Except as otherwise set forth herein or as
otherwise required by law, in all matters, every holder of Class A Common Stock
shall be entitled to one (1) vote in person or by proxy for each share of Class
A Common Stock standing in such holder's name on the transfer books of the
Corporation and every holder of Class B Common Stock shall be entitled to ten
<PAGE>
5
(10) votes in person or by proxy for each share of Class B Common Stock standing
in such holder's name on the transfer books of the Corporation. Holders of
Common Stock shall not have cumulative voting rights. Except as otherwise
provided herein or required by law, the holders of Class A Common Stock and
Class B Common Stock shall vote together as a single class on all matters. The
number of authorized shares of any class or classes of stock may be increased or
decreased (but not below the number of shares thereof then outstanding) by the
affirmative vote of holders of a majority of the voting power of the Common
Stock of the Corporation irrespective of the provisions of Section 242(b)(2) of
Delaware Law.
(b) Dividends. Subject to the rights of holders of Preferred Stock,
and subject to any other provisions of this Amended and Restated Certificate of
Incorporation, as amended from time to time, holders of Class A Common Stock and
Class B Common Stock shall be entitled to receive such dividends and other
distributions in cash, property or shares of stock of the Corporation as may be
declared thereon by the Board of Directors of the Corporation (the "Board of
Directors") from time to time out of assets or funds of the Corporation legally
available therefor. Shares of Class A Common Stock and Class B Common Stock will
rank on a par with each other as to dividends. No dividend in cash, property or
shares of stock of the Corporation may be declared and paid on any shares of
Common Stock unless a dividend of the same character (i.e., cash, property or
shares of stock of the Corporation) is simultaneously declared and paid on all
Common Stock, except as set forth in the sentence immediately following. If
stock dividends are paid on shares of Common Stock, then the dividends paid with
respect to (i) the
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6
Class A Common Stock shall be paid with shares of Class A Common Stock and (ii)
the Class B Common Stock shall be paid with shares of Class B Common Stock. In
the case of dividends or other distributions consisting of other voting
securities of the Corporation, the Corporation shall declare and pay such
dividends in two separate classes of such voting securities, identical in all
respects, except that the voting rights of each such security paid to the
holders of Class A Common Stock shall be one-tenth of the voting rights of each
such security paid to the holders of Class B Common Stock, and such security
paid to the holders of Class B Common Stock shall convert into the security paid
to the holders of Class A Common Stock upon the same terms and conditions
applicable to the Class B Common Stock. In the case of dividends or other
distributions consisting of securities convertible into, or exchangeable for,
voting securities of the Corporation, the Corporation shall provide that such
convertible or exchangeable securities and the underlying securities be
identical in all respects (including, without limitation, the conversion or
exchange rate), except that the voting rights for the underlying securities of
the convertible or exchangeable security paid to the holders of Class A Common
Stock shall be one-tenth of the voting rights of each underlying security of the
convertible or exchangeable security paid to the holders of the Class B Common
Stock, and such underlying securities paid to the holders of the Class B Common
Stock shall convert into the underlying securities paid to the holders of Class
A Common Stock upon the same terms and conditions applicable to the Class B
Common Stock. The rate per share of each share dividend declared and paid on the
Class A Common Stock shall be identical to the simultaneous dividend per share
declared and paid on the Class B Common Stock.
<PAGE>
7
No offering of rights to subscribe for shares of capital stock may be made to
holders of Class A Common Stock or Class B Common Stock unless an identical
offering is made simultaneously to the holders of the other class, except that
if the offering is of rights to subscribe for shares of Common Stock, the
holders of the Class A Common Stock shall be offered the right to subscribe for
shares of Class A Common Stock and the holders of Class B Common Stock shall be
offered the right to subscribe for shares of Class B Common Stock. All such
rights offerings shall offer the respective holders of Class A Common Stock and
Class B Common Stock the right to subscribe at the same rate per share.
(c) Liquidation Rights, Merger, Etc. In the event of any
dissolution, liquidation or winding up of the affairs of the Corporation,
whether voluntary or involuntary, after payment or provision for payment of the
debts and other liabilities of the Corporation and after making provision for
the holders of each series of Preferred Stock, if any, the remaining assets and
funds of the Corporation, if any, shall be divided among and paid ratably to the
holders of the Class A Common Stock and the Class B Common Stock treated as a
single class. For purposes of this Section 4.1(c), a merger or consolidation of
the Corporation with or into any other corporation shall not constitute a
dissolution, liquidation or winding up of the affairs of the Corporation. In the
event of any merger or consolidation of the Corporation with or into any other
corporation pursuant to which shares of Class A Common Stock and Class B Common
Stock are converted into other securities, cash or other property, the shares of
Class A Common Stock and Class B Common Stock shall be converted into the
identical consideration at the same rate per share, except that any
<PAGE>
8
voting securities into which Class B Common Stock shall be converted shall have
ten (10) times the voting power of any otherwise identical securities into which
Class A Common Stock is converted, unless the holders of a majority of the
shares of each such class shall have approved such merger or consolidation.
(d) Conversion Rights of Class B Common Stock.
(i) Optional Conversion. Subject to and upon compliance with
the provisions of this Section 4.1(d), each holder of shares of Class B Common
Stock shall be entitled to convert, at any time and from time to time, any and
all of the shares of such holder's Class B Common Stock, on a one-for-one basis,
into shares of Class A Common Stock. Each conversion of shares of Class B Common
Stock into shares of Class A Common Stock pursuant to this Section 4.1(d) shall
be effected by the surrender of the certificate or certificates representing the
shares to be converted (the "Converting Shares") at the principal office of the
Corporation (or such other office or agency of the Corporation as the
Corporation may designate by written notice to the holders of Class B Common
Stock) at any time during its usual business hours, together with written notice
by the holder of such Converting Shares, stating that such holder desires to
convert the Converting Shares, or a stated number of the shares represented by
such certificate or certificates, into an equal number of shares of Class A
Common Stock (the "Converted Shares"). Such notice shall also state the name or
names (with addresses) and denominations in which the certificate or
certificates for Converted Shares are to be issued and shall include
instructions for the delivery thereof. Promptly after such surrender and the
receipt of such written notice, the Corporation will issue and deliver
<PAGE>
9
in accordance with the surrendering holder's instructions the certificate or
certificates evidencing the Converted Shares issuable upon such conversion, and
the Corporation will deliver to the converting holder a certificate or
certificates (which shall contain such legends, if any, as were set forth on the
surrendered certificate or certificates) representing any shares that are
represented by the certificate or certificates that were delivered to the
Corporation in connection with such conversion, but which were not converted.
Such conversion, to the extent permitted by law, shall be deemed to have been
effected as of the close of business on the date on which (A) such certificate
or certificates shall have been surrendered, (B) such notice shall have been
received by the Corporation and (C) any payment required pursuant to Section
4.1(f) shall have been made, and at such time the rights of the holder of the
Converting Shares as such holder shall cease and the person or persons in whose
name or names the certificate or certificates for the Converted Shares are to be
issued upon such conversion shall be deemed to have become the holder or holders
of record of the Converted Shares. Upon issuance of shares in accordance with
this Section 4.1(d), such Converted Shares shall be deemed to be duly
authorized, validly issued, fully paid and non-assessable. All Converting Shares
shall be retired and canceled.
(ii) Automatic Conversion. Except as otherwise provided in the
following paragraph, each share of Class B Common Stock shall automatically
convert into one (1) share of Class A Common Stock upon the transfer (including
any transfer by operation of law, including to any estate of a holder thereof)
of such share, effective on the date on which a certificate representing such
share is presented for transfer on the books of the Corporation. As promptly as
<PAGE>
10
practicable following the surrender for transfer of a certificate representing
shares of Class B Common Stock and the payment in cash of any amount required by
the provisions of Section 4.1(f), the Corporation will deliver or cause to be
delivered a certificate or certificates representing the number of full shares
of Class A Common Stock issuable upon such transfer and automatic conversion,
issued in such name or names as such holder may direct. Such automatic
conversion shall be deemed to have been effected immediately prior to the close
of business on the date of transfer. Upon the date any automatic conversion
under this Section 4.1(d)(ii), all rights of the holder of the transferred
shares of Class B Common Stock shall cease, and the new owner or owners of such
shares shall be treated for all purposes as having become the record holder or
holders of an equivalent number of shares of Class A Common Stock.
The foregoing provision for automatic conversion shall not apply to any
transfer by a holder of Class B Common Stock (other than by will or through
intestate succession) to any immediate family member (which shall mean, with
respect to any person, such person's spouse, parents, children and grandchildren
and the spouse of such person's children and grandchildren) of such holder or to
any trust or partnership of which all the beneficiaries or partners, as the case
may be, are such holder and/or an immediate family member of such holder,
provided that the transferee of such shares grants the exclusive power to vote
such shares to the person who had such right prior to such transfer.
Shares of Class B Common Stock shall be registered in the names of the
beneficial owners thereof and not in "street" or "nominee" name. For this
purpose, a "beneficial owner" of any shares of Class B Common Stock shall mean a
<PAGE>
11
person who, or an entity which, possesses the power, either singly or jointly,
to direct the voting of such shares.
(iii) Reservation of Shares. The Corporation shall at all times
reserve and keep available out of its authorized but unissued shares of Class A
Common Stock, solely for the purpose of issuance upon the conversion of shares
of Class B Common Stock, such number of shares of such class as are then
issuable upon the conversion of all outstanding shares of Class B Common Stock;
provided, that, nothing contained herein shall be construed to preclude the
Corporation from satisfying its obligations in respect of the conversion of the
outstanding shares of Class B Common Stock by delivery of shares of Class A
Common Stock held in the treasury of the Corporation. The Corporation covenants
that if any shares of Class A Common Stock required registration with or
approval of any governmental authority under any federal or state law before
such shares of Class A Common Stock may be issued upon conversion, the
Corporation will use reasonable efforts to cause such shares to be duly
registered or approved, as the case may be. The Corporation will use its
reasonable efforts to list the shares of Class A Common Stock required to be
delivered upon conversion prior to such delivery upon each national securities
exchange (including, if applicable, The Nasdaq Stock Market) upon which the
outstanding Class A Common Stock is listed or quoted at the time of such
delivery. The Corporation covenants that all shares of Class A Common Stock that
shall be issued upon conversion of the shares of fully paid and nonassessable
Class B Common Stock will, upon issue, be fully paid and nonassessable.
<PAGE>
12
(e) Stock Splits, Adjustments. If the Corporation shall in any
manner subdivide (by stock split, stock dividend or otherwise) or combine (by
reverse stock split or otherwise) the outstanding shares of the Class A Common
Stock or the Class B Common Stock (other than the 9.67-for-one stock split being
effected immediately upon the effectiveness hereof), then the outstanding shares
of such other classes of Common Stock will be subdivided or combined, as the
case may be, to the same extent, share and share alike, and effective provision
shall be made for the protection of the conversion rights hereunder. In case of
any reorganization, reclassification or change of shares of the Common Stock
subsequent to the date hereof (other than a change in par value or from par to
no par value as a result of a subdivision or combination), or in case of any
consolidation of the Corporation with one or more corporations or a merger of
the Corporation with another corporation (other than a consolidation or merger
in which the Corporation is the resulting or surviving corporation and which
does not result in any reclassification or change of outstanding shares of
Common Stock), each holder of a share of Class B Common Stock shall have the
right at any time thereafter, so long as the conversion right hereunder with
respect to such share would exist had such event not occurred, to convert such
share into the kind and amount of shares of stock and other securities and
properties (including cash) receivable upon such reorganization,
reclassification, change, consolidation or merger by a holder of the number of
shares of Class A Common Stock, into which such shares of Class B Common Stock
might have been converted immediately prior to such reorganization,
reclassification, change, consolidation or merger. In the event of such a
reorganization, reclassification,
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13
change, consolidation or merger, effective provision shall be made in the
certificate of incorporation of the resulting or surviving corporation or
otherwise for the protection of the conversion rights of the shares of Class B
Common Stock.
(f) No Charge. The issuance of certificates for any shares of Class
A Common Stock upon conversion of shares of Class B Common Stock shall be made
without charge to the holders of such shares for any issuance or transfer tax in
respect thereof or other cost incurred by the Corporation in connection with
such conversion and the related issuance of shares of Class A Common Stock;
provided, however, that the Corporation shall not be required to pay any tax
that may be payable in respect of any transfer involved in the issuance and
delivery of any certificate in a name other than that of the holder of the Class
B Common Stock that is converted.
4.2 Preferred Stock.
(a) The shares of Preferred Stock may be issued from time to time
in one or more series of any number of shares, provided that the aggregate
number of shares issued and not canceled of any and all such series shall not
exceed the total number of shares of Preferred Stock hereinabove authorized, and
with distinctive serial designations, all as shall hereafter be stated and
expressed in the resolution or resolutions providing for the issue of such
shares of Preferred Stock from time to time adopted by the Board of Directors
pursuant to authority so to do which is hereby vested in the Board of Directors
or as is stated and expressed in this Amended and Restated Certificate of
Incorporation. Each series of shares of Preferred Stock (i) may have such voting
powers, full or limited, or may be without
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14
voting powers; provided, however, that, unless holders of at least seventy-five
percent (75%) of the outstanding shares of Class B Common Stock have approved
the issuance of such shares of Preferred Stock, the Board of Directors may not
issue any shares of Preferred Stock that have the right (A) to vote for the
election of directors under ordinary circumstances or (B) under any
circumstances to elect fifty percent (50%) or more of the directors of the
Corporation; (ii) may be subject to redemption at such time or times and at such
prices; (iii) may be entitled to receive dividends (which may be cumulative or
non-cumulative) at such rate or rates, on such conditions and at such times, and
payable in preference to, or in such relation to, the dividends payable on any
other class or classes or series of stock; (iv) may have such rights upon the
dissolution of, or upon any distribution of the assets of, the Corporation; (v)
may be made convertible into or exchangeable for shares of any other class or
classes or of any other series of the same or any other class or classes of
shares of the Corporation or any securities of the Corporation at such price or
prices or at such rates of exchange and with such adjustments; (vi) may be
entitled to the benefit of a sinking fund to be applied to the purchase or
redemption of shares of such series in such amount or amounts; (vii) may be
entitled to the benefit of conditions and restrictions upon the creation of
indebtedness of the Corporation or any subsidiary, upon the issue of any
additional shares (including additional shares of such series or of any other
series) and upon the payment of dividends or the making of other distributions
on, and the purchase, redemption or other acquisition by the Corporation or any
subsidiary of, any outstanding shares of the Corporation and (viii) may have
such other relative, participating, optional or other special rights,
qualifications,
<PAGE>
15
limitations or restrictions thereof, all as shall be stated in said resolution
or resolutions providing for the issue of such shares of Preferred Stock. Any of
the voting powers, designations, preferences, rights and qualifications,
limitations or restrictions of any such series of Preferred Stock may be made
dependent upon facts ascertainable outside of the resolution or resolutions
providing for the issue of such Preferred Stock adopted by the Board pursuant to
the authority vested in it by this Section 4.2, provided that the manner in
which such facts shall operate upon the voting powers, designations,
preferences, rights and qualifications, limitations or restrictions of such
series of Preferred Stock is clearly and expressly set forth in the resolution
or resolutions providing for the issue of such Preferred Stock. The term "facts"
as used in the next preceding sentence shall have the meaning given to it in
Section 151(a) of the General Corporation Law. Shares of Preferred Stock of any
series that have been redeemed (whether through the operation of a sinking fund
or otherwise) or that if convertible or exchangeable, have been converted into
or exchanged for shares of any other class or classes or for securities of the
Corporation shall have the status of authorized and unissued shares of Preferred
Stock of the same series and may be reissued as a part of the series of which
they were originally a part or may be reclassified and reissued as part of a new
series of shares of Preferred Stock to be created by resolution or resolutions
of the Board or as part of any other series of shares of Preferred Stock, all
subject to the conditions or restrictions on issuance set forth in the
resolution or resolutions adopted by the Board of Directors providing for the
issue of any series of shares of Preferred Stock.
<PAGE>
16
(b) Subject to the provisions of any applicable law or of the
By-laws of the Corporation, as from time to time amended, with respect to the
closing of the transfer books or the fixing of a record date for the
determination of stockholders entitled to vote and except as otherwise provided
by law or by the resolution or resolutions, or by the provisions of this Amended
and Restated Certificate of Incorporation, providing for the issue of any series
of shares of Preferred Stock, the holders of outstanding shares of Common Stock
shall exclusively possess voting power for the election of directors and for all
other purposes, each holder of record of shares of Common Stock being entitled
to the number of votes established herein for each share of Common Stock
standing in his or her name on the books of the Corporation. Except as otherwise
provided by the resolution or resolutions, or by the provisions of this Amended
and Restated Certificate of Incorporation, providing for the issue of any series
of shares of Preferred Stock, the holders of shares of Common Stock shall be
entitled, to the exclusion of the holders of shares of Preferred Stock of any
and all series, to receive such dividends as from time to time may be declared
by the Board. In the event of any liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary, after payment shall have been
made to the holders of shares of Preferred Stock of the full amount to which
they shall be entitled pursuant to the resolution or resolutions, or by the
provisions of this Amended and Restated Certificate of Incorporation, providing
for the issue of any series of shares of Preferred Stock, the holders of shares
of Common Stock shall be entitled, to the exclusion of the holders of shares of
Preferred Stock of any and all series, to share, ratably according to the number
of shares of
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17
Common Stock held by them, in all remaining assets of the Corporation available
for distribution to its stockholders.
4.3 Redeemable Preferred Stock. On September 29, 1995, pursuant to the
authority heretofore granted to the Board of Directors to issue Preferred Stock
in series, the Board of Directors adopted a resolution providing for the
issuance of the Redeemable Preferred Stock, with such powers, preferences,
rights, qualifications, limitations and restrictions as were set forth in such
resolution and in the related Certificate of Designation, a copy of which is
attached hereto as Exhibit A.
4.4 Issuance and Consideration. Subject to the provisions of this
Amended and Restated Certificate of Incorporation and except as otherwise
provided by law, the stock of the Corporation, regardless of class, may be
issued for such consideration and for such corporate purposes as the Board may
from time to time determine.
5. Election of Directors. Members of the Board of Directors may be elected
either by written ballot or by voice vote.
6. Limitation of Liability. No director of the Corporation shall be
personally liable to the Corporation or its stockholders for monetary damages
for breach of fiduciary duty as a director, provided that this provision shall
not eliminate or limit the liability of a director (a) for any breach of the
director's duty of loyalty to the Corporation or its stockholders, (b) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (c) under Section 174 of the General Corporation Law
or (d) for any transaction from which the
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18
director derived any improper personal benefits. Any repeal or modification of
the foregoing provision shall not adversely affect any right or protection of a
director of the Corporation existing at the time of such repeal or modification.
7. Indemnification.
7.1 To the extent not prohibited by law, the Corporation shall
indemnify any person who is or was made, or threatened to be made, a party to
any threatened, pending or completed action, suit or proceeding (a
"Proceeding"), whether civil, criminal, administrative or investigative,
including, without limitation, an action by or in the right of the Corporation
to procure a judgment in its favor, by reason of the fact that such person, or a
person of whom such person is the legal representative, is or was a director or
officer of the Corporation, or, at the request of the Corporation, is or was
serving as a director or officer of any other corporation or in a capacity with
comparable authority or responsibilities for any partnership, joint venture,
trust, employee benefit plan or other enterprise (an "Other Entity"), against
judgments, fines, penalties, excise taxes, amounts paid in settlement and costs,
charges and expenses (including attorneys' fees, disbursements and other
charges). Persons who are not directors or officers of the Corporation (or
otherwise entitled to indemnification pursuant to the preceding sentence) may be
similarly indemnified in respect of service to the Corporation or to an Other
Entity at the request of the Corporation to the extent the Board at any time
specifies that such persons are entitled to the benefits of this Article 7.
7.2 The Corporation shall, from time to time, reimburse or advance to
any director or officer or other person entitled to indemnification
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19
hereunder the funds necessary for payment of expenses, including attorneys' fees
and disbursements, incurred in connection with any Proceeding, in advance of the
final disposition of such Proceeding; provided, however, that, if required by
the General Corporation Law, such expenses incurred by or on behalf of any
director or officer or other person may be paid in advance of the final
disposition of a Proceeding only upon receipt by the Corporation of an
undertaking, by or on behalf of such director or officer (or other person
indemnified hereunder), to repay any such amount so advanced if it shall
ultimately be determined by final judicial decision from which there is no
further right of appeal that such director, officer or other person is not
entitled to be indemnified for such expenses.
7.3 The rights to indemnification and reimbursement or advancement of
expenses provided by, or granted pursuant to, this Article 7 shall not be deemed
exclusive of any other rights to which a person seeking indemnification or
reimbursement or advancement of expenses may have or hereafter be entitled under
any statute, this Amended and Restated Certificate of Incorporation, the
By-laws, any agreement, any vote of stockholders or disinterested directors or
otherwise, both as to action in his or her official capacity and as to action in
another capacity while holding such office.
7.4 The rights to indemnification and reimbursement or advancement of
expenses provided by, or granted pursuant to, this Article 7 shall continue as
to a person who has ceased to be a director or officer (or other person
indemnified hereunder) and shall inure to the benefit of the executors,
administrators, legatees and distributees of such person.
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20
7.5 The Corporation shall have power to purchase and maintain insurance
on behalf of any person who 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 an Other Entity, against any liability
asserted against such person and incurred by such person in any such capacity,
or arising out of such person's status as such, whether or not the Corporation
would have the power to indemnify such person against such liability under the
provisions of this Article 7, the By-laws or under Section 145 of the General
Corporation Law or any other provision of law.
7.6 The provisions of this Article 7 shall be a contract between the
Corporation, on the one hand, and each director and officer who serves in such
capacity at any time while this Article 7 is in effect and any other person
entitled to indemnification hereunder, on the other hand, pursuant to which the
Corporation and each such director, officer, or other person intend to be, and
shall be, legally bound. No repeal or modification of this Article 7 shall
affect any rights or obligations with respect to any state of facts then or
theretofore existing or there after arising or any proceeding theretofore or
thereafter brought or threatened based in whole or in part upon any such state
of facts.
7.7 The rights to indemnification and reimbursement or advancement of
expenses provided by, or granted pursuant to, this Article 7 shall be
enforceable by any person entitled to such indemnification or reimbursement or
advancement of expenses in any court of competent jurisdiction. The burden of
proving that such indemnification or reimbursement or advancement of expenses is
<PAGE>
21
not appropriate shall be on the Corporation. Neither the failure of the
Corporation (including its Board, its independent legal counsel and its
stockholders) to have made a determination prior to the commencement of such
action that such indemnification or reimbursement or advancement of expenses is
proper in the circumstances nor an actual determination by the Corporation
(including its Board, its independent legal counsel and its stockholders) that
such person is not entitled to such indemnification or reimbursement or
advancement of expenses shall constitute a defense to the action or create a
presumption that such person is not so entitled. Such a person shall also be
indemnified for any expenses incurred in connection with successfully
establishing his or her right to such indemnification or reimbursement or
advancement of expenses, in whole or in part, in any such proceeding.
7.8 Any director or officer of the Corporation serving in any capacity
(a) another corporation of which a majority of the shares entitled to vote in
the election of its directors is held, directly or indirectly, by the
Corporation or (b) any employee benefit plan of the Corporation or any
corporation referred to in clause (a) shall be deemed to be doing so at the
request of the Corporation.
7.9 Any person entitled to be indemnified or to reimbursement or
advancement of expenses as a matter of right pursuant to this Article 7 may
elect to have the right to indemnification or reimbursement or advancement of
expenses interpreted on the basis of the applicable law in effect at the time of
the occurrence of the event or events giving rise to the applicable Proceeding,
to the extent permitted by law, or on the basis of the applicable law in effect
at the time such indemnification or reimbursement or advancement of expenses is
sought.
<PAGE>
22
Such election shall be made, by a notice in writing to the Corporation, at the
time indemnification or reimbursement or advancement of expenses is sought;
provided, however, that if no such notice is given, the right to indemnification
or reimbursement or advancement of expenses shall be determined by the law in
effect at the time indemnification or reimbursement or advancement of expenses
is sought.
8. Action by Stockholders.
8.1 No Action by Written Consent. The stockholders of the Corporation
entitled to take action on any matter may not consent in writing to the taking
of any such action without a meeting of stockholders duly called and held in
accordance with law and this Amended and Restated Certificate of Incorporation
and the By-laws.
8.2 Meetings of Stockholders. The annual meeting of stockholders for
the election of directors and the transaction of such other business as may be
brought before such meeting in accordance with this Amended and Restated
Certificate of Incorporation shall be held at such hour and on such business day
in each year as may be determined by resolution adopted by the affirmative vote
of a majority of the entire Board of Directors (the "entire Board"). Except as
otherwise required by law, special meetings of stockholders may be called only
at the direction of the Board of Directors by resolution adopted by the
affirmative vote of a majority of the entire Board or by the Chairman or by the
Chief Executive Officer. Upon a written request by the Board of Directors to
call a special meeting of stockholders, the Chairman, the President or the Chief
Executive Officer shall call such meeting. Except as otherwise required by law,
stockholders of the Corporation shall not have
<PAGE>
23
the right to request or call a special meeting of the stockholders. Annual and
special meetings of stockholders shall not be called or held otherwise than as
herein provided.
9. Adoption, Amendment and/or Repeal of By-Laws. The Board of Directors may
from time to time adopt, amend or repeal the By-laws; provided, however, that
any By-laws adopted or amended by the Board of Directors may be amended or
repealed, and any By-laws may be adopted, by the stockholders of the Corporation
by vote of a majority of the holders of shares of stock of the Corporation
entitled to vote in the election of directors of the Corporation.
10. Amendment of Certain Articles.
10.1 The provisions set forth in Article Ten, Article Eight and Section
4.2 (a)(i) may not be amended, altered, changed or repealed in any respect
unless such amendment, alteration, change or repeal is approved by the
affirmative vote of holders of not less than seventy-five percent (75%) of the
voting power of the outstanding shares of the Corporation entitled to vote
thereon, voting together as a single class. In addition, any proposed amendment,
alteration or change to this Amended and Restated Certificate of Incorporation,
or repeal of any provision of this Amended and Restated Certificate of
Incorporation, which would amend, alter, change or repeal the powers,
preferences or special rights of the shares of Class B Common Stock so as to
affect them adversely, the affirmative vote of not less than seventy-five
percent (75%) of the outstanding shares of Class B Common Stock voting as a
separate class, shall be required in addition to the vote otherwise required
pursuant to this Article Ten.
<PAGE>
24
10.2 Subject to the provisions of Section 10.1 of this Article Ten, the
Corporation reserves the right to amend, alter, change or repeal any provision
contained in this Amended and Restated Certificate of Incorporation, in the
manner now or hereafter prescribed by statute, and all rights conferred on
stockholders herein are granted subject to this reservation.
<PAGE>
25
IN WITNESS WHEREOF, this Amended and Restated Certificate of Incorporation
of the Corporation, which restates, integrates and amends the provisions of the
certificate of incorporation of the Corporation, as heretofore amended, and
which was duly approved pursuant to resolutions adopted by the Board of
Directors of the Corporation and approved by the stockholders of the Corporation
at a meeting of such stockholders, in accordance with the requirements of
Sections 141, 242 and 245 of the General Corporation Law, has been executed by
the undersigned, who hereby affirms on __________ __, 1996, under penalties of
perjury, that the statements contained herein have been examined by him and are
true and correct.
U.S. FRANCHISE SYSTEMS, INC.
By: /s/ Neal K. Aronson
-------------------------------
Neal K. Aronson
Executive Vice President and
Chief Financial Officer
<PAGE>
Exhibit A
U.S. FRANCHISE SYSTEMS, INC.
CERTIFICATE OF DESIGNATION
OF 10% CUMULATIVE REDEEMABLE EXCHANGEABLE
PREFERRED STOCK SETTING FORTH THE POWERS,
PREFERENCES, RIGHTS, QUALIFICATIONS,
LIMITATIONS AND RESTRICTIONS OF
SUCH SERIES OF PREFERRED STOCK
Pursuant to Section 151 of the Delaware General Corporation Law, U.S.
Franchise Systems, Inc., a Delaware corporation (the "Company"), DOES HEREBY
CERTIFY:
That pursuant to the authority conferred upon the Board of Directors of the
Company by the Amended and Restated Certificate of Incorporation of the Company
(the "Certificate of Incorporation"), the Board of Directors of the Company on
September 29, 1995 adopted the following resolution creating a series of
Preferred Stock designated as 10% Cumulative Redeemable Exchangeable Preferred
Stock, and such resolution has not been modified and is in full force and effect
on the date hereof:
RESOLVED that, pursuant to the authority vested in the Board of Directors
of the Company in accordance with the provisions of the Certificate of
Incorporation, a series of the class of authorized Preferred Stock, par value
$.01 per share, of the Company is hereby created and that the designation and
number of shares thereof and the voting powers, preferences and relative,
participating, optional and other special rights of the shares of such series,
and the qualifications, limitations and restrictions thereof are as follows:
Section 1. Designation and Number.
1.1 The shares of such series shall be designated as "10% Cumulative
Redeemable Exchangeable Preferred Stock" (the "Preferred Stock"). The number of
shares initially constituting the Preferred Stock shall be 525,000 which number
may be decreased (but not increased) by the Board of Directors without a vote of
stockholders; provided, however, that such number may not be decreased below the
number of then outstanding shares of Preferred Stock.
1.2 The Preferred Stock shall, with respect to dividend rights and rights
on liquidation, dissolution or winding up, rank prior to all other classes and
series of capital stock of the Company now or hereafter authorized including,
without limitation, the common stock of the Company. No class or series of
capital stock of the Company that ranks senior to or on parity with the
Preferred Stock shall be created unless approved by holders of a majority of the
Preferred Stock.
<PAGE>
1.3 Capitalized terms used herein and not otherwise defined shall have the
meanings set forth in Section 7 below.
Section 2. Dividends and Distributions.
2.1 The holders of shares of Preferred Stock, in preference to the holders
of shares of common stock and of any shares of other capital stock of the
Company, shall be entitled to receive, when, as and if declared by the Board of
Directors, out of the assets of the Company legally available therefor,
cumulative dividends at an annual rate on the Liquidation Preference thereof
equal to 10%, calculated on the basis of a 360-day year consisting of twelve
30-day months, compounding semi-annually on June 30 and December 31, accruing
and payable in additional shares of Preferred Stock on such Business Day as may
be fixed from time to time by the Board of Directors for the payment of
dividends (each such date being referred to herein as a "Dividend Payment
Date"); provided, however, that such dividends shall continue to accrue, and
compound annually, to the extent not declared payable.
2.2 Dividends payable pursuant to Section 2(a) shall begin to accrue and be
cumulative from the Issue Date, and shall accrue on a daily basis, in each case
whether or not declared. Dividends paid on the shares of Preferred Stock in an
amount less than the total amount of such dividends at the time accrued and
payable on such shares shall be allocated pro rata on a share-by-share basis
among all such shares of Preferred Stock at the time outstanding. The Board of
Directors may fix a record date for the determination of holders of shares of
Preferred Stock entitled to receive payment of a dividend declared thereon,
which record date shall be no more than 60 days or less than 10 days prior to
the date fixed for the payment thereof.
2.3 The holders of shares of Preferred Stock shall not be entitled to
receive any dividends or other distributions except as provided herein.
Section 3. Certain Restrictions.
3.1 Whenever dividends payable on shares of Preferred Stock as provided in
Section 2 are not paid in full, at such time and thereafter until all unpaid
dividends, whether or not declared, on the outstanding shares of Preferred Stock
shall have been paid in full or declared and set apart for payment, or whenever
the Company shall not have redeemed shares of Preferred Stock at a time required
by Section 4(b) or (d) at such time and thereafter until all redemption
obligations provided in Section 4(b) or (d) that have come due shall have been
satisfied or all necessary funds have been set apart for payment, the Company
shall not declare or pay dividends, or make any other distributions, on any
shares of Junior Stock.
2
<PAGE>
3.2 Whenever dividends payable on shares of Preferred Stock as provided in
Section 2 are not paid in full, at such time and thereafter until all unpaid
dividends payable, whether or not declared, on the outstanding shares of
Preferred Stock shall have been paid in full or declared and set apart for
payment, or whenever the Company shall not have redeemed shares of Preferred
Stock at a time required by Section 4(b) or (d) at such time and thereafter
until all redemption obligations provided in Section 4(b) or (d) that have come
due shall have been satisfied or all necessary funds have been set apart for
payment, the Company shall not redeem, purchase or otherwise acquire for
consideration, or require the conversion of, any shares of Junior Stock.
3.3 The Company shall not permit any Subsidiary of the Company, or cause
any other Person, to purchase or otherwise acquire for consideration any shares
of capital stock of the Company unless the Company could, pursuant to Section
3(b), purchase such shares at such time and in such manner.
Section 4. Redemption; Exchange at Company's Option.
4.1 Subject to the restrictions contained in Section 3, the Company shall
have the right, at its sole option and election, to redeem the shares of
Preferred Stock, in whole or in part, on not less than 10 days notice of the
date of redemption (any such redemption date pursuant to this Section 4(a) being
referred to herein as an "Optional Redemption Date") at a price per share (the
"Optional Redemption Price") equal to (x) 100% of the Liquidation Preference of
such share plus (y) an amount per share equal to all accrued and unpaid
dividends thereon, whether or not declared or payable, to the applicable
Optional Redemption Date, in immediately available funds.
4.2 On September 29, 2007 (the "Mandatory Redemption Date"), the Company
shall redeem all of the shares of Preferred Stock then outstanding at a price
per share (the "Mandatory Redemption Price") equal to (x) 100% of the
Liquidation Preference per share plus (y) an amount per share equal to all
accrued and unpaid dividends thereon, whether or not declared or payable, to the
Mandatory Redemption Date, in immediately available funds.
4.3 4.3.1 (A) At any time, the Company shall have the right, at its sole
option and election, on not less than 30 days notice of the date of the required
conversion (the "Exchange Date"), to require all the holders of Preferred Stock
to exchange all or part of their shares of Preferred Stock into Subordinated
Debentures in an aggregate principal amount for each share of Preferred Stock so
exchanged equal to (x) 100% of the Liquidation Preference per share plus (y) an
amount per share equal to all accrued and unpaid dividends thereon, whether or
not declared or payable, to the Exchange Date.
3
<PAGE>
4.3.2 On the Exchange Date, the Company shall deliver to or upon the
written order of the holder of the Preferred Stock being so exchanged a
certificate or certificates representing the Subordinated Debentures into which
the shares of Preferred Stock being exchanged (the "Exchanged Shares") may be or
have been exchanged in accordance with the provisions of this Section 4(c).
Subject to the satisfaction of the following provisions of this paragraph and of
this Section 4, such exchange shall be deemed to have been made immediately
prior to the close of business on the Exchange Date.
4.4 On the date that is 10 Business Days after the occurrence of a Change
of Control (the "Change of Control Redemption Date"), the Company shall redeem
all of the shares of Preferred Stock then outstanding at a price per share (the
"Change of Control Redemption Price") equal to (x) 100% of the Liquidation
Preference per share plus (y) an amount per share equal to all accrued and
unpaid dividends thereon, whether or not declared or payable, to the Change of
Control Redemption Date, in immediately available funds.
4.5 If pursuant to Section 4(a) or (c) less than all shares of Preferred
Stock at the time outstanding are to be redeemed or exchanged, as the case may
be, the shares to be redeemed or exchanged, as the case may be, shall be
determined pro rata.
4.6 Notice of any redemption or exchange of shares of Preferred Stock
pursuant to Section 4(a), 4(b), 4(c) or 4(d) shall be mailed at least 10 (or 5
in the case of redemption under Section 4(d)), but not more than 60, days prior
to the date fixed for redemption or exchange to each holder of shares of
Preferred Stock to be redeemed or converted, at such holder's address as it
appears on the transfer books of the Company. In order to facilitate the
redemption or exchange of shares of Preferred Stock, the Board of Directors may
fix a record date for the determination of shares of Preferred Stock to be
redeemed or exchanged, or may cause the transfer books of the Company for the
Preferred Stock to be closed, not more than 60 days or less than 30 days prior
to the date fixed for such redemption or exchange.
4.7 Notice of redemption or exchange having been given as aforesaid, upon
payment of the Optional Redemption Price, Mandatory Redemption Price or Change
of Control Redemption Price or delivery of the Subordinated Debentures, as the
case may be, in respect of shares of Preferred Stock to be redeemed or exchanged
pursuant to Section 4(a), 4(b), 4(c) or 4(d), notwithstanding that any
certificates for such shares shall not have been surrendered for cancellation,
from and after the date of redemption or exchange designated in the notice of
redemption or exchange, (i) the shares of Preferred Stock represented thereby
shall no longer be deemed outstanding, (ii) the rights to receive dividends
thereon shall cease to accrue, (iii) all rights of the holders of shares of
Preferred Stock to be redeemed or exchanged shall cease and terminate, excepting
only the right to receive the Optional Redemption Price, the Mandatory
Redemption Price, Change of Control Redemption
4
<PAGE>
Price or the Subordinated Debentures and (iv) interest shall accrue on the
Subordinated Debentures in accordance with their terms.
Section 5. Liquidation, Dissolution or Winding Up.
5.1 If the Company shall commence a voluntary case under the United States
bankruptcy laws or any applicable bankruptcy, insolvency or similar law of any
other country, or consent to the entry of an order for relief in an involuntary
case under any such law or to the appointment of a receiver, liquidator,
assignee, custodian, trustee, sequestrator (or other similar official) of the
Company or of any substantial part of its property, or make an assignment for
the benefit of its creditors, or admit in writing its inability to pay its debts
generally as they become due, or if a decree or order for relief in respect of
the Company shall be entered by a court having jurisdiction in the premises in
an involuntary case under the United States bankruptcy laws or any applicable
bankruptcy, insolvency or similar law of any other country, or appointing a
receiver, liquidator, assignee, custodian, trustee, sequestrator (or other
similar official) of the Company or of any substantial part of its property, or
ordering the winding up or liquidation of its affairs, and on account of any
such event the Company shall liquidate, dissolve or wind up, or if the Company
shall otherwise liquidate, dissolve or wind up, no distribution shall be made to
the holders of shares of Junior Stock unless, prior thereto, the holders of
shares of Preferred Stock shall have received the Liquidation Preference, plus
all accrued and unpaid dividends, whether or not declared or currently payable,
to the date of distribution, with respect to each share.
5.2 Neither the consolidation or merger of the Company with or into any
other Person nor the sale or other distribution to another Person of all or
substantially all the assets, property or business of the Company shall be
deemed to be a liquidation, dissolution or winding up of the Company for
purposes of this Section 5.
Section 6. Certain Remedies.
Any registered holder of Preferred Stock shall be entitled to an injunction
or injunctions to prevent breaches of the provisions of this Certificate of
Designation and to enforce specifically the terms and provisions of this
Certificate of Designation in any court of the United States or any state
thereof having jurisdiction, this being in addition to any other remedy to which
such holder may be entitled at law or equity.
5
<PAGE>
Section 7. Definitions.
For the purposes of this Certificate of Designation of Preferred Stock, the
following terms shall have the meanings indicated:
"Affiliate" shall have the meaning ascribed to such term in Rule 12b-2 of
the General Rules and Regulations under the Exchange Act.
"Business Day" shall mean any day other than a Saturday, Sunday or other
day on which commercial banks in the City of New York are authorized or required
by law or executive order to close.
"Change of Control" shall mean (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 (i.e., greater than 50%) of the Common Stock, in the
aggregate, to Persons who are: (a) not purchasers of capital stock of the
Company pursuant to the offering described in the Company's Confidential
Investment Memorandum, dated August 19, 1995, (b) not an employee of the
Company, or (c) not a member of the immediate family of or a trust or
partnership for the benefit of any person described in clauses (a) or (b) or an
immediate family member of any such person or any Affiliate of the foregoing, or
(iii) the termination of employment for any reason by the Company (including
resignation) of Michael Leven.
"common stock" of the Company shall mean the Common Stock and any other
common stock of the Company issued from time to time.
"Common Stock" shall mean the Common Stock, par value $.10 per share, of
the Company.
"Issue Date" shall mean the first date on which shares of Preferred Stock
are issued.
"Junior Stock" shall mean any capital stock of the Company ranking junior
(either as to dividends or upon liquidation, dissolution or winding up) to the
Preferred Stock.
"Liquidation Preference" with respect to a share of Preferred Stock shall
mean $100.
"Person" shall mean any individual, firm, corporation, partnership, trust,
incorporated or unincorporated association, joint venture, joint stock company,
limited liability company, government (or an agency or political subdivision
thereof) or other entity of any kind, and shall include any successor (by merger
or otherwise) of such entity.
6
<PAGE>
"Subordinated Debentures" shall mean the 10% Subordinated Debentures due
September 29, 2007 of the Company, substantially in the form of Exhibit A
hereto.
"Subsidiary" of any Person shall mean any corporation or other entity of
which a majority of the voting power of the voting equity securities or equity
interest, or rights to profits, is owned, directly or indirectly, by such
Person.
IN WITNESS WHEREOF, U.S. Franchise Systems, Inc. caused this Certificate to
be duly executed in its corporate name on this 29th day of September, 1995.
U.S. FRANCHISE SYSTEMS, INC.
By: /s/ Neal K. Aronson
------------------------------
Name: Neal K. Aronson
Title: Incorporator
7
<PAGE>
EXHIBIT A TO
CERTIFICATE OF DESIGNATION
[FORM OF 10% SUBORDINATED DEBENTURE
DUE SEPTEMBER 29, 2007]
THIS SECURITY (AND ANY INTEREST HEREIN) MAY NOT BE TRANSFERRED, OFFERED, SOLD,
ASSIGNED, PLEDGED, HYPOTHECATED, ENCUMBERED OR OTHERWISE DISPOSED OF UNLESS SUCH
TRANSFER, OFFER, SALE, ASSIGNMENT, PLEDGE, HYPOTHECATION, ENCUMBRANCE OR OTHER
DISPOSITION COMPLIES WITH THE PROVISIONS OF A STOCKHOLDERS' AGREE MENT DATED AS
OF SEPTEMBER 29, 1995 (A COPY OF WHICH IS ON FILE WITH THE SECRETARY OF THE
COMPANY AND WILL BE MAILED TO THE HOLDER WITHOUT CHARGE WITHIN 15 DAYS AFTER
RECEIPT BY THE COMPANY OF A WRITTEN REQUEST THEREFOR FROM SUCH HOLDER). NO
TRANSFER, OFFER, SALE, ASSIGNMENT, PLEDGE, HYPOTHECATION, ENCUMBRANCE OR OTHER
DISPOSITION OF THIS SECURITY (OR ANY INTEREST HEREIN) MAY BE MADE EXCEPT AS
OTHERWISE PROVIDED IN SUCH STOCKHOLDERS' AGREEMENT AND (A) PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 (THE "ACT")
AND ANY APPLICABLE STATE SECURI TIES AND "BLUE SKY" LAWS, OR (B) IF THE COMPANY
HAS BEEN FURNISHED WITH AN OPINION OF COUNSEL FOR THE HOLDER, WHICH OPINION AND
COUNSEL SHALL BE REASONABLY SATIS FACTORY TO THE COMPANY, TO THE EFFECT THAT
SUCH TRANSFER, OFFER, SALE, ASSIGNMENT, PLEDGE, HYPOTHECA TION, ENCUMBRANCE OR
OTHER DISPOSITION IS EXEMPT FROM THE REGISTRATION PROVISIONS OF SECTION 5 OF THE
ACT AND THE RULES AND REGULATIONS IN EFFECT THEREUNDER AND ANY SIMILAR
REGISTRATION REQUIREMENT UNDER SUCH STATE SECURITIES, OR "BLUE SKY", LAWS.
U.S. FRANCHISE SYSTEMS, INC.
SUBORDINATED DEBENTURE
DUE SEPTEMBER 29, 2007
$ ____________ Atlanta, Georgia
---------, ----
FOR VALUE RECEIVED, the undersigned, U.S. FRANCHISE SYSTEMS, INC., a
Delaware corporation (the "Company"), promises to pay to the order of
<PAGE>
__________________________ or its registered assigns (the "Holder"), the
principal sum of ______________________ __________________ Dollars ($ ) on
September 29, 2007 (the "Maturity Date"), with interest thereon from time to
time as provided herein.
1. Preferred Stock. This Subordinated Debenture (this "Debenture") is one
of the Debentures (the "Debentures") issued in exchange for the Company's 10%
Cumulative Redeemable Exchangeable Preferred Stock.
2. Interest. The Company promises to pay interest on the principal amount
of this Debenture at the rate of 10.0% per annum. The Company shall pay accrued
interest semi-annually on the last Business Day of each June and December of
each year (each date upon which interest shall be so payable, an "Interest
Payment Date"). Interest on this Debenture shall be paid one-half in cash and
one-half through the issuance of additional Debentures to the Holder. Cash
interest shall be paid by wire transfer of immediately available funds to an
account designated by the Holder. Interest on this Debenture shall accrue from
the date of issuance until repayment of the principal and pay ment of all
accrued interest in full. Interest shall be computed on the basis of a 360-day
year of twelve 30-day months. Notwithstanding the foregoing provisions of this
Section 2, but subject to applicable law, any overdue principal of and overdue
interest on this Debenture shall bear interest, payable on demand in immediately
available funds, for each day from the date payment thereof was due to the date
of actual payment, at a rate equal to the rate of interest otherwise in effect
pursuant to this Section 2 plus 2% per annum. Subject to applicable law, any
interest that shall accrue on overdue interest on this Debenture as provided in
the preceding sentence and shall not have been paid in full on or before the
next Interest Payment Date to occur after the Interest Payment Date on which the
overdue interest became due and payable shall itself be deemed to be overdue
interest on this Debenture to which the preceding sentence shall apply.
3. Mandatory Prepayment Upon a Change of Control.
(a) On the date that is 10 Business Days after the occurrence of a
Change of Control (the "Change of Control Prepayment Date"), the Company shall
prepay in full the outstanding principal amount of and accrued interest on this
Debenture and the other Debentures.
(b) Any prepayment pursuant to the terms of Section 3(a) shall be
subject to the provisions of Section 6.
(c) The Company shall give written notice to the Holder of any
mandatory prepayment pursuant to this Section 3 at least 5 Business Days prior
to the date of such prepayment.
2
<PAGE>
4. Optional Prepayment.
(a) Upon notice given to the Holder as provided in subsection (b) of
this Section 4, the Company, at its option, may prepay all or any portion of
this Debenture, pro rata with the prepayment of all other Debentures, at any
time, by paying an amount equal to the outstanding principal amount of this
Debenture, or the portion of this Debenture called for prepayment, together with
interest accrued and unpaid thereon to the date fixed for prepayment without
penalty or premium.
(b) The Company may give written notice of prepayment of this Debenture
or any portion thereof not less than 10 nor more than 60 days prior to the date
fixed for such prepayment. Upon notice of prepayment being given by the Company,
the Company covenants and agrees, subject to Section 6, that it will prepay, on
the date therein fixed for prepayment, this Debenture or the portion hereof so
called for prepayment, at the outstanding principal amount thereof or the
portion thereof so called for prepayment together with interest accrued and
unpaid thereon to the date fixed for such prepayment.
5. Defaults and Remedies.
(a) Events of Default. An "Event of Default" shall occur if:
(i) the Company shall default in the payment of the principal of
this Debenture or any of the other Debentures, when and as the same shall become
due and payable, whether at maturity or at a date fixed for prepayment or by
acceleration or otherwise; or
(ii) the Company shall default in the payment of any installment of
interest on this Debenture or any of the other Debentures according to its
terms, when and as the same shall become due and payable and such default shall
continue for a period of 5 days; or
(iii) an involuntary proceeding shall be commenced or an
involuntary petition shall be filed in a court of competent jurisdiction seeking
(a) relief in respect of the Company or any Subsidiary, or of a substantial part
of its property or assets, under Title 11 of the United States Code, as now
constituted or hereafter amended, or any other Federal or state bankruptcy,
insolvency, receivership or similar law, (b) the appointment of a receiver,
trustee, custodian, sequestrator, conservator or similar official for the
Company or any Subsidiary, or for a substantial part of its property or assets,
or (c) the winding up or liquidation of the Company or any Subsidiary; and such
proceeding or petition shall continue undismissed for 60 days, or an order or
decree approving or ordering any of the foregoing shall be entered; or
(iv) the Company or any Subsidiary shall (a) voluntarily commence
any proceeding or file any petition seeking relief under Title 11 of the United
States Code, as now constituted or hereafter amended, or any other Federal or
state
3
<PAGE>
bankruptcy, insolvency, receivership or similar law, (b) consent to the
institution of, or fail to contest in a timely and appropriate manner, any
proceeding or the filing of any petition described in paragraph (viii) of this
Section 7(a), (c) apply for or consent to the appointment of a receiver,
trustee, custodian, sequestrator, conservator or similar official for the
Company or any Subsidiary, or for a substantial part of its property or assets,
(d) file an answer admitting the material allegations of a petition filed
against it in any such proceeding, (e) make a general assignment for the benefit
of creditors, (f) become unable, admit in writing its inability or fail
generally to pay its debts as they become due or (g) take any action for the
purpose of effecting any of the foregoing.
(b) Acceleration. If an Event of Default occurs under clauses (a)(iii)
or (iv) of this Section 5, then the outstanding principal of and all accrued
interest on this Debenture shall automatically become immediately due and
payable, without presentment, demand, protest or notice of any kind, all of
which are expressly waived. If any other Event of Default occurs and is
continuing, the Holder of this Debenture, by written notice to the Company, may,
subject to Section 6, declare the principal of and accrued interest on this
Debenture to be due and payable immediately. Upon such declaration, such
principal and interest shall become immediately due and payable.
6. Subordination.
(a) Loans Subordinated. Notwithstanding any provision of this Debenture
to the contrary, the Company covenants and agrees, and the Holder by acceptance
of this Debenture likewise covenants and agrees:
(i) that all payments and prepayments of principal of and interest
on this Debenture (all such amounts being collectively referred to as "Amounts
Payable") shall be subordinated to the extent set forth in Sections 6(b) through
6(i) hereof to the prior payment in full of all Senior Obligations;
(ii) this Section 6 shall constitute a continuing offer to all
Persons who become holders of, or continue to hold, Senior Obligations
(irrespective of whether such Senior Obligations were created or acquired before
or after the issuance of this Debenture);
(iii) the provisions of this Section 6 and Section 3(b) are made
for the benefit of all present and future holders of Senior Obligations (and
their successors and assigns), and shall be enforceable by them directly against
the Holder;
(iv) all present and future holders of Senior Obligations (and
their successors and assigns) are third party beneficiaries of the provisions of
this Section 6 and of Section 3(b), and the provisions of this Section 6 and of
Section 3(b) shall be enforceable by such holders of Senior Obligations (and
their successors and assigns) directly against the Holder; and
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<PAGE>
(v) the holders of Senior Obligations may demand specific
performance of this Section 6 and Section 3(b), whether or not the Company or
any Holder shall have complied with any of the provisions of this Section 6 or
Section 3(b) applicable to it, at any time when the Holder or the Company shall
have failed to comply with any of the provisions of this Section 6 or of Section
3(b). The Holder and the Company hereby irrevocably waive any defense based on
the adequacy of a remedy at law that might be asserted as a bar to such remedy
of specific performance.
(b) Priority and Payment Over of
Proceeds in Certain Events.
(i) Upon any payment or Distribution of Assets of the Company to
creditors of the Company, upon the dissolution, winding up, liquidation,
arrangement, reorganization, adjustment, protection, relief or composition of
the Company or its debts, whether in any bankruptcy, insolvency, arrangement,
reorganization, receivership, relief or similar proceedings or upon an
assignment for the benefit of creditors or any other marshalling of the assets
and liabilities of the Company or otherwise, any payment or distribution of any
kind (whether in cash, property or securities) that otherwise would be payable
or deliverable upon or with respect to any Amount Payable shall be paid or
delivered directly, to the holders of Senior Obligations for application (in the
case of cash) to or as collateral (in the case of non-cash property or
securities) for the payment or prepayment of the Senior Obligations until such
Senior Obligations shall have been paid in full, except that the Holder may,
pursuant to a plan of reorganization under Chapter 11 of the Bankruptcy Code of
1978, as amended, or any similar provision of any successor legislation thereto,
receive securities that are subordinate to the Senior Obligations to at least
the same extent as this Debenture.
(ii) The Company shall not make any payment on or with respect to
any Amount Payable irrespective of whether upon acceleration or otherwise if, at
such time, a Default on Senior Obligations shall have occurred (or, if as a
result of such payment, a Default on Senior Obligations would occur) and a
Blockage Period (as defined below) shall be in effect. A Blockage Period shall
begin upon the receipt by the Holder of a notice or notices ("Default Notice")
(which shall either be in writing or telephonic and, if telephonic, confirmed in
writing) from the representative of the holders of the Senior Obligations, or
such a holder, stating that a Default on Senior Obligations has occurred (or
would occur as a result of such payment) and that the Blockage Period has
commenced and shall end on the earliest of (i) (A) the date such Default is
cured or waived if the Default on Senior Obligations to which the Default Notice
refers is a default in payment of any Senior Obligations or (B) the 720th day
after the beginning of such period if the Default on Senior Obligations to which
the Default Notice refers is not a default in payment of any Senior Obligations,
(ii) the date upon which all such Defaults on Senior Obligations shall cease to
exist or shall have been cured or waived and (iii) the 180th day after the
occurrence of a Triggering Event (the "Blockage Period"). Immediately following
the last day of the Blockage Period, the Company shall pay all Amounts Payable
then due; provided, however, that, if during a Blockage Period the holders of
Senior Obligations accelerates the Senior
5
<PAGE>
Obligations or commences judicial action to enforce the Senior Obligations, all
Amounts Payable, if any, that are received by the Holder thereafter (unless and
until such acceleration is rescinded or such judicial action ceases to be
pending) shall be for the benefit of and paid over to the holders of Senior
Obligations as provided in clause (iii) below.
(iii) All payments or distributions upon or with respect to any
Amount Payable that are received by the Holder that are not expressly permitted
under this Section 6 shall be segregated from other funds and property held by
the Holder, shall be received in trust for the benefit of the holders of the
Senior Obligations, and shall be forthwith paid over in the same form as so
received (with any necessary endorsement) to the holders of Senior Obligations
to be applied (in the case of cash) to or held as collateral (in the case of
non-cash property or securities) for the payment or prepayment in full of the
Senior Obligations.
(iv) So long as any Senior Obligations remain outstanding, the
Holder will not be entitled to:
(A) take, demand, or receive, indirectly, by set-off,
redemption, purchase or in any manner, any voluntary prepayment or other payment
or realization of any Amount Payable in amounts or in a manner which are in
violation of the provisions of this Section 6;
(B) cancel or otherwise discharge any Amounts Payable or
subordinate any such Amounts Payable to any indebtedness of the Company; or
(C) prior to the end of any applicable Blockage Period,
accelerate payment of the scheduled maturity of any amount owing under this
Note, or institute any proceedings to enforce payment of any indebtedness
evidenced by this Note or institute any bankruptcy proceedings in respect
thereof.
(v) Upon any payment or Distribution of Assets referred to in
Section 6(b)(i) hereof, the Holder shall be entitled to rely upon any order or
decree of a court of competent jurisdiction in which such dissolution, winding
up, liquidation or reorganization proceedings are pending, and upon a
certificate of the receiver, trustee in bankruptcy, liquidating trustee, agent
or other Person making any such payment or Distribution of Assets, delivered to
the Holder for the purpose of ascertaining the Persons entitled to participate
in such Distribution of Assets, the holders of Senior Obligations or other
indebtedness of the Company, the amount thereof or payable thereon, the amount
or amounts paid or distributed thereon and all other facts pertinent thereto or
to this Section 6.
(c) Amendments. This Section 6 may not be amended without the written
consent of each holder of the Senior Obligations, the Company and of the Holders
of more than 50% of the outstanding aggregate principal amount of the
Debentures, and
6
<PAGE>
any purported amendment without such consent shall be void. No holder of Senior
Obligations shall be prejudiced in such holder's right to enforce the
subordination and other terms and conditions of this Debenture by any act or
failure to act by any such holder or by any act or failure to act by the Company
or anyone in custody of its assets or property.
(d) Subrogation. The Holder agrees that no payment or distribution to
the holders of the Senior Obligations pursuant to the provisions of this Section
6 shall entitle the Holder to exercise any rights of subrogation in respect
thereof until payment in full of the Senior Obligations.
(e) Obligations of the Company Unconditional. Nothing contained in this
Debenture is intended to or shall impair as between the Company and the Holder
the obligation of the Company, which is absolute and unconditional, to pay to
the Holder all Amounts Payable, as and when the same shall become due and
payable in accordance with their terms, or to affect the relative rights of the
Holder and other creditors of the Company (other than the holders of Senior
Obligations), nor, subject to Section 6(b)(iii), shall anything herein prevent
the Holder from exercising any rights it may have (i) in a bankruptcy or similar
proceeding affecting the Company or its property or (ii) under Section 6(b)(iv)
hereof, upon the occurrence and continuance of an Event of Default under this
Debenture, subject to the rights under this Section 6 of the holders of Senior
Obligations in respect of cash, property or securities of the Company otherwise
payable or delivered to such Holder upon the exercise of any such remedy.
(f) No Fiduciary Duty. The Holder shall not be deemed to owe any
fiduciary duty to the holders of Senior Obligations by virtue of the provisions
of this Section 6.
(g) Purchase of Stock; Contribution and Cancellation. Nothing contained
in this Section 6 shall prohibit the Holder hereof to purchase stock of the
Company by surrendering the Debenture to the Company for cancellation of any or
all of the principal amount of and interest accrued on the Debenture or to
contribute and cancel any or all of the principal amount of and interest accrued
on the Debenture as equity of the Company.
(h) Miscellaneous.
(i) To the extent permitted by applicable law, the holders of the
Debentures and the Company hereby waive (1) notice of acceptance hereof by the
holders of the Senior Obligations and (2) all diligence in the collection or
protection of or realization upon the Senior Obligations.
(ii) The Company and the Holder hereby expressly agree that the
holders of Senior Obligations may enforce any and all rights derived herein by
suit, either in equity or law, for specific performance of any agreement
contained in this
7
<PAGE>
Section 6 or for judgment at law and any other relief whatsoever appropriate to
such action or procedure.
(iii) The Holder acknowledges and agrees that the foregoing
subordination provisions are, and are intended to be, an inducement and a
consideration to each holder of Senior Obligations, whether such Senior
Obligations was created or acquired before or after the issuance of this
Agreement, and each holder of Senior Obligations shall be deemed conclusively to
have relied upon such subordination provisions in acquiring and continuing to
hold such Senior Obligations.
(i) Definitions. As used in this Section 6, the following terms
shall have the following meanings:
"Amounts Payable" shall have the meaning set forth in Section
6(a)(i).
"Blockage Period" shall have the meaning set forth in Section
6(b)(ii).
"Default Notice" shall have the meaning set forth in Section
6(b)(ii).
"Default on Senior Obligations" means any default of the Senior
Obligations (regardless of any applicable notice and cure period) if the effect
thereof is to cause, or permit the holder or holders thereof (or a trustee or
trustees on behalf of such holder or holders) to cause, the Senior Obligations
to become due and payable.
"Distribution of Assets" means, with respect to any Person, any
distribution of assets of such Person of any kind or character, whether in cash,
property or securities.
"Senior Obligations" shall mean (i) the principal of and interest
on (including, without limitation, any interest that accrues after the
commencement of any case, proceeding or other legal action relating to the
bankruptcy, insolvency or reorganization of the Company whether or not such
interest constitutes an allowed claim) any indebtedness for borrowed money of
the Company (other than the Debentures), whether outstanding on the date hereof
or thereafter created, incurred or assumed, and any renewal, refunding,
refinancing, replacement or extension thereof, unless, in the case of any
particular indebtedness, the instrument creating or evidencing the same or
pursuant to which the same is outstanding expressly provides that such
indebtedness shall not be senior in right of payment to the Debentures, (ii) any
obligations of the Company for the reimbursement of any obligor on any letter of
credit, banker's acceptance or similar credit transaction and (iii) any
obligations of the Company as guarantor or surety for the obligations of others
of the type referred to [in] clause (i) or (ii) above.
"Triggering Event" shall mean the earlier to occur of (a) the
Maturity Date or (b) a Change of Control.
8
<PAGE>
7. Suits for Enforcement. Subject to Section 6, upon the occurrence of any
one or more Events of Default, the holders of a majority in principal amount of
the outstanding Debentures may proceed to protect and enforce the rights of all
holders of the Debentures by suit in equity, action at law or by other
appropriate proceeding, or may proceed to enforce the payment of the Debentures,
or to enforce any other legal or equitable right of the holders of the
Debentures.
8. Remedies Cumulative. No remedy herein conferred upon the Holder is
intended to be exclusive of any other remedy and each and every such remedy
shall be cumulative and shall be in addition to every other remedy given
hereunder or now or hereafter existing at law or in equity or by statute or
otherwise. To the extent permitted by applicable law, the Company and the
holders of the Debentures severally waive presentment for payment, demand,
protest and notice of dishonor.
9. Remedies Not Waived. No course of dealing between the Company and the
Holder or any delay on the part of the Holder in exercising any rights hereunder
shall operate as a waiver of any right.
10. Holder; Transfer.
(a) The term "Holder" as used herein shall also include any Permitted
Transferee of this Debenture whose name has been recorded by the Company in the
register referred to in Section 10(b). Each Permitted Transferee of this
Debenture acknowledges that this Debenture has not been registered under the
Securities Act, and may be transferred only upon receipt by the Company of an
opinion of counsel, which opinion shall be satisfactory in form and substance to
the Company, stating that this Debenture may be transferred without registration
under the Securities Act in reliance on an exemption therefrom.
(b) The Company shall maintain a register in its office for the purpose
of registering the Debentures and any transfer thereof, which register shall
reflect and identify, at all times, the ownership of any interest in the
Debentures. Upon the issuance of this Debenture, the Company shall record the
name of the initial purchaser of this Debenture in such register as the first
Holder. Thereafter, the Company shall duly record the name of a transferee on
such register promptly after receipt of notice of a transfer and of the opinion
referred to in Section 10(a) above.
(c) Any Holder of this Debenture shall be deemed to be a party to, and
subject to the terms of, the Stockholders' Agreement.
11. Defined Terms. For purposes of this Debenture, the following terms
shall have the meanings indicated:
"Affiliate" shall have the meaning ascribed to such term in Rule 12B-2 of
the General Rules and Regulations under the Securities Exchange Act of 1934, as
amended.
9
<PAGE>
"Business Day" shall mean any day other than a Saturday, Sunday or other
day on which commercial banks in the City of New York are authorized or required
by law or executive order to close.
"Change of Control" shall mean (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 or (ii) the sale or transfer (whether by merger, consolidation or
otherwise) of the majority (i.e., greater than 50%) of the Common Stock, in the
aggregate, to persons who are: (a) not purchasers of capital stock of the
Company pursuant to the Offering described in the Company's Confidential
Investment Memorandum, dated August 19, 1995, (b) not an employee of the
Company, or (c) not a member of the immediate family of or a trust or
partnership for the benefit of any person described in the clauses (a) or (b) or
an immediate family member of any such person or any affiliate of the foregoing,
or (iii) the termination of employment for any reason by the Company (including
resignation) of Michael Levin.
"Common Stock" shall mean the common stock, par value, $.10 per share, of
the Company.
"Permitted Transferee" shall have the meaning set forth in the
Stockholder's Agreement.
"Person" shall mean any individual, firm, corporation, partnership, trust,
incorporated or unincorporated association, joint venture, joint stock company,
limited liability company, government (or any agency or political subdivision
thereof) or other entity of any kind, and shall include any successor (by merger
or otherwise) of such entity.
"Stockholders' Agreement" shall mean the Stockholder's Agreement, dated as
of September __, 1995, among the stockholders of the Company as such agreement
may be amended from time to time.
"Subsidiary" of any Person shall mean any corporation or Person entity of
which a majority of the voting equity securities or equity interest (or rights
to profits), is owned, directly or indirectly, by such Person.
12. Payments. All payments and prepayments of principal of and interest on
this Debenture shall be made in lawful money of the United States of America.
13. Covenants Bind Successors and Assigns. All the covenants, stipulations,
promises and agreements in this Debenture contained by or on behalf of the
Company shall bind its successors and assigns, whether so expressed or not.
14. Governing Law. This Debenture shall be governed by and construed in
accordance with the laws of the State of Georgia without regard to the
principles of conflicts of law of such State.
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<PAGE>
15. Variation in Pronouns. All pronouns and any variations thereof refer to
the masculine, feminine or neuter, singular or plural, as the context may
require.
16. Headings. The headings in this Debenture are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
U.S. FRANCHISE SYSTEMS, INC.
By: _____________________________
Name:
Title:
11
AMENDED AND RESTATED
BY-LAWS
of
U.S. FRANCHISE SYSTEMS, INC.
(A Delaware Corporation)
------------------------
ARTICLE 1
DEFINITIONS
As used in these By-laws, unless the context otherwise requires, the term:
1.1 "Assistant Secretary" means an Assistant Secretary of the Corporation.
1.2 "Assistant Treasurer" means an Assistant Treasurer of the Corporation.
1.3 "Board" means the Board of Directors of the Corporation.
1.4 "By-laws" means the initial by-laws of the Corporation, as amended from
time to time.
1.5 "Certificate of Incorporation" means the initial certificate of
incorporation of the Corporation, as amended, supplemented or restated from time
to time.
1.6 "CFO" means the Chief Financial Officer of the Corporation.
1.7 "Chairman" means the Chairman of the Board of Directors of the
Corporation.
<PAGE>
2
1.8 "Chief Executive Officer" means the Chief Executive Officer of the
Corporation.
1.9 "Corporation" means U.S. Franchise Systems, Inc.
1.10 "Directors" means directors of the Corporation.
1.11 "Entire Board" means all directors of the Corporation in office,
whether or not present at a meeting of the Board, but disregarding vacancies.
1.12 "General Corporation Law" means the General Corporation Law of the
State of Delaware, as amended from time to time.
1.13 "Office of the Corporation" means the executive office of the
Corporation, anything in Article 131 of the General Corporation Law to the
contrary notwithstanding.
1.14 "Officer" means the Chairman, the President, the Chief Executive
Officer, the Chief Financial Officer, any Vice President, any Secretary or
Assistant Secretary, any Treasurer or Assistant Treasurer and any other officer
of the Corporation.
1.15 "President" means the President of the Corporation.
1.16 "Secretary" means the Secretary of the Corporation.
1.17 "Stockholders" means Stockholders of the Corporation.
1.18 "Treasurer" means the Treasurer of the Corporation.
1.19 "Vice President" means a Vice President of the Corporation.
<PAGE>
3
ARTICLE 2
STOCKHOLDERS
2.1 Place of Meetings. Every meeting of Stockholders shall be held at the
office of the Corporation or at such other place within or without the State of
Delaware as shall be specified or fixed in the notice of such meeting or in the
waiver of notice thereof.
2.2 Annual Meeting. A meeting of Stockholders shall be held annually for
the election of Directors and the transaction of other business at such hour and
on such business day in April or May or as may be determined by the Board and
designated in the notice of meeting.
2.3 Deferred Meeting for Election of Directors, Etc. If the annual meeting
of Stockholders for the election of Directors and the transaction of other
business is not held within the months specified in Article 2.2 hereof, the
Board shall call a meeting of Stockholders for the election of Directors and the
transaction of other business as soon thereafter as convenient.
2.4 Other Special Meetings. A special meeting of Stockholders (other than a
special meeting for the election of Directors), unless otherwise prescribed by
statute, may be called at any time by the Board or by the Chairman or the Chief
Executive Officer. At any special meeting of Stockholders, only such business
may be transacted as is related to the purpose or purposes of such meeting set
forth in the notice thereof given pursuant to Article 2.6 hereof or in any
waiver of notice thereof given pursuant to Article 2.7 hereof.
<PAGE>
4
2.5 Fixing Record Date. For the purpose of (a) determining the Stockholders
entitled (i) to notice of or to vote at any meeting of Stockholders or any
adjournment thereof or (ii) to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock; or (b) any other lawful
action, the Board may fix a record date, which record date shall not precede the
date upon which the resolution fixing the record date was adopted by the Board
and which record date shall not be (x) in the case of clause (a)(i) above, more
than 60 nor less than 10 days before the date of such meeting and (y) in the
case of clause (a)(iii) or (b) above, more than 60 days prior to such action. If
no such record date is fixed:
2.5.1 the record date for determining Stockholders entitled to notice
of or to vote at a meeting of Stockholders shall be at the close of business on
the day next preceding the day on which notice is given, or, if notice is
waived, at the close of business on the day next preceding the day on which the
meeting is held; and
2.5.2 the record date for determining Stockholders for any purpose
other than those specified in Article 2.5.1 shall be at the close of business on
the day on which the Board adopts the resolution relating thereto.
When a determination of Stockholders entitled to notice of or to vote at any
meeting of Stockholders has been made as provided in this Article 2.5, such
determination shall apply to any adjournment thereof unless the Board fixes a
new record date for the adjourned
<PAGE>
5
meeting. Delivery made to the Corporation's registered office in accordance with
Article 2.5.2 shall be by hand or by certified or registered mail, return
receipt requested.
2.6 Notice of Meetings of Stockholders. Except as otherwise provided in
Articles 2.5 and 2.7 hereof, whenever under the provisions of any statute, the
Certificate of Incorporation or these By-laws, Stockholders are required or
permitted to take any action at a meeting, written notice shall be given stating
the place, date and hour of the meeting and, in the case of a special meeting,
the purpose or purposes for which the meeting is called. Unless otherwise
provided by any statute, the Certificate of Incorporation or these By-laws, a
copy of the notice of any meeting shall be given, personally or by mail, not
less than ten nor more than sixty days before the date of the meeting, to each
Stockholder entitled to notice of or to vote at such meeting. If mailed, such
notice shall be deemed to be given when deposited in the United States mail,
with postage prepaid, directed to the Stockholder at his or her address as it
appears on the records of the Corporation. An affidavit of the Secretary or an
Assistant Secretary or of the transfer agent of the Corporation that the notice
required by this Article 2.6 has been given shall, in the absence of fraud, be
prima facie evidence of the facts stated therein. When a meeting is adjourned to
another time or place, notice need not be given of the adjourned meeting if the
time and place thereof are announced at the meeting at which the adjournment is
taken, and at the adjourned meeting any business may be transacted that might
have been transacted at the meeting as originally called. If, however, the
adjournment is for more than thirty days, or if after the adjournment a new
record date is fixed for
<PAGE>
6
the adjourned meeting, a notice of the adjourned meeting shall be given to each
Stockholder of record entitled to vote at the meeting.
2.7 Waivers of Notice. Whenever the giving of any notice is required by
statute, the Certificate of Incorporation or these By-laws, a waiver thereof, in
writing, signed by the Stockholder or Stockholders entitled to said notice,
whether before or after the event as to which such notice is required, shall be
deemed equivalent to notice. Attendance by a Stockholder at a meeting shall
constitute a waiver of notice of such meeting except when the Stockholder
attends a meeting for the express purpose of objecting, at the beginning of the
meeting, to the transaction of any business on the ground that the meeting has
not been lawfully called or convened. Neither the business to be transacted at,
nor the purpose of, any regular or special meeting of the Stockholders need be
specified in any written waiver of notice unless so required by statute, the
Certificate of Incorporation or these By-laws.
2.8 List of Stockholders. The Secretary shall prepare and make, or cause to
be prepared and made, at least ten days before every meeting of Stockholders, a
complete list of the Stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each Stockholder and the number
of shares registered in the name of each Stockholder. Such list shall be open to
the examination of any Stockholder, the Stockholder's agent, or attorney, at the
Stockholder's expense, for any purpose germane to the meeting, during ordinary
business hours, for a period of at least ten days prior to the meeting, either
at a place within the city where the meeting is to be held, which place shall be
specified in the notice of the meeting, or, if not so specified, at
<PAGE>
7
the place where the meeting is to be held. The list shall also be produced and
kept at the time and place of the meeting during the whole time thereof, and may
be inspected by any Stockholder who is present. The Corporation shall maintain
the Stockholder list in written form or in another form capable of conversion
into written form within a reasonable time. Upon the willful neglect or refusal
of the Directors to produce such a list at any meeting for the election of
Directors, they shall be ineligible for election to any office at such meeting.
The stock ledger shall be the only evidence as to who are the Stockholders
entitled to examine the stock ledger, the list of Stockholders or the books of
the Corporation, or to vote in person or by proxy at any meeting of
Stockholders.
2.9 Notice of Stockholder Business and Nominations.
2.9.1 Annual Meetings of Stockholders.
(a) Nominations of persons for election to the Board of Directors
of the Corporation and proposals of business to be considered by the
stockholders at an annual meeting of stockholders may be made (i) pursuant to
the Corporation's notice of meeting delivered pursuant to Section 2.6 of these
By-laws, (ii) by or at the direction of the Chairman of the Board of Directors
or (iii) by any stockholder of the Corporation who is entitled to vote at the
meeting, who complied with the notice procedures set forth in clauses (b) and
(c) of this Section 2.9.1(a) and who was a stockholder of record at the time
such notice is delivered to the Secretary of the Corporation.
(b) For nominations or other business to be properly brought before
an annual meeting by a stockholder pursuant to clause (iii) of Section
<PAGE>
8
2.9.1(a), the stockholder must have given timely notice thereof in writing to
the Secretary of the Corporation. To be timely, a stockholder's notice shall be
delivered to the Secretary at the principal executive offices of the Corporation
not less than seventy days nor more than ninety days prior to the first
anniversary of the preceding year's annual meeting; provided, however, that in
the event that the date of the annual meeting is advanced by more than twenty
days, or delayed by more than seventy days, from such anniversary date, notice
by the stockholder to be timely must be so delivered not earlier than 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. Such stockholder's notice shall set forth (i) as to each
person whom the stockholder proposes to nominate for election or re-election as
a director, all information relating to such person that is required to be
disclosed in solicitations of proxies for election of directors, or is otherwise
required, in each case pursuant to Regulation 14A under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), including such person's written
consent to being named in the proxy statement as a nominee and to serve as a
director if elected; (ii) as to any other business desired to be brought before
the meeting, the reasons for conducting such business at the meeting and any
material interest in such business of such stockholder and the beneficial owner,
if any, on whose behalf the proposal is made; and (iii) as to the stockholder
giving the notice and the beneficial owner, if any, on whose behalf the
nomination or proposal is made (1) the name and address of such stockholder, as
they appear on the Corporation's books, and of such beneficial owner and (2)
the class
<PAGE>
9
and number of shares of the Corporation which are owned beneficially and of
record by such stockholder and such beneficial owner.
(c) Notwithstanding anything in the second sentence of Section
2.9.1(b) to the contrary, in the event that the number of directors to be
elected to the Board of Directors of the Corporation is increased and there is
no public announcement naming all of the nominees for director or specifying the
size of the increased Board of Directors made by the Corporation at least eighty
days prior to the first anniversary of the preceding year's annual meeting, a
stockholder's notice required by the By-law shall also be considered timely, but
only with respect to nominees for any new positions created by such increase, if
it shall be delivered to the Secretary at the principal executive offices of the
Corporation not later than the close of business on the tenth day following the
day on which such public announcement is first made by the Corporation.
2.9.2 Special Meetings of Stockholders. Only such business shall be
conducted at a special meeting of stockholders as shall have been brought before
the meeting pursuant to the Corporation's notice of meeting pursuant to 2.6 of
these By-laws. Nominations of persons for election to the Board of Directors may
be made at a special meeting of stockholders at which directors are to be
elected pursuant to the Corporation's notice of meeting (a) by or at the
direction of the Board of Directors or (b) by any stockholder of the Corporation
who is entitled to vote at the meeting, who complies with the notice procedures
set forth in this By-law and who is a stockholder of record at the time such
notice is delivered to the Secretary of the Corporation. Nominations by
stockholders of persons for election to the Board of Directors may be made at
such special
<PAGE>
10
meeting of stockholders if the stockholder's notice as required by paragraph
2.9.1(b) of this By-law shall be delivered to the Secretary at the principal
executive offices of the Corporation not earlier than the ninetieth day prior to
such special meeting and not later than the close of business on the later of
the seventieth day prior to such special meeting or the tenth day following the
day on which public announcement is first made of the date of the special
meeting and of the nominees proposed by the Board of Directors to be elected at
such meeting. In no event shall the public announcement of an adjournment of a
special meeting commence a new time period for the giving of a stockholder's
notice as described above.
2.9.3 General.
(a) Only persons who are nominated in accordance with the procedure
set forth in this By-law shall be eligible to serve as a director, and only such
business shall be conducted at a meeting of stockholders as shall have been
brought before the meeting in accordance with the procedures set forth in this
By-law. Except as otherwise provided by law, the Certificate of Incorporation or
these Bylaws, the chairman of the meeting shall have the power and duty to
determine whether a nomination or any business proposed to be brought before the
meeting was made in accordance with the procedures set forth in this By-law and,
if any proposed nomination or business is not in compliance with this By-law, to
declare that such defective proposal or nomination shall be disregarded.
(b) For purposes of this By-law, "public announcement" shall mean
disclosure in a press release reported by the Dow Jones New Service,
<PAGE>
11
Associated Press or comparable national news service or in a document publicly
filed by the Corporation with the Securities and Exchange Commission pursuant to
Section 13, 14 or 15(d) of the Exchange Act.
(c) Notwithstanding the foregoing provisions of this By-law, a
stockholder shall also comply with all applicable requirements of the Exchange
Act and the rules and regulations thereunder with respect to the matters set
forth in this By-law. Nothing in this By-law shall be deemed to affect any
rights of stockholders to request inclusion of proposals in the Corporation's
proxy statement pursuant to Rule 14a-8 under the Exchange Act.
2.10 Quorum of Stockholders; Adjournment. Except as otherwise provided
by any statute, the Certificate of Incorporation or these By-laws, the holders
of one-third of all outstanding shares of stock entitled to vote at any meeting
of Stockholders, present in person or represented by proxy, shall constitute a
quorum for the transaction of any business at such meeting. When a quorum is
once present to organize a meeting of Stockholders, it is not broken by the
subsequent withdrawal of any Stockholders. The holders of a majority of the
shares of stock present in person or represented by proxy at any meeting of
Stockholders, including an adjourned meeting, whether or not a quorum is
present, may adjourn such meeting to another time and place. Shares of its own
stock belonging to the Corporation or to another corporation, if a majority of
the shares entitled to vote in the election of directors of such other
corporation is held, directly or indirectly, by the Corporation, shall neither
be entitled to vote nor be counted for quorum purposes; provided, however, that
the foregoing shall not limit the right of the
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Corporation to vote stock, including but not limited to its own stock, held by
it in a fiduciary capacity.
2.11 Voting; Proxies. Unless otherwise provided in the Certificate of
Incorporation, every Stockholder of record shall be entitled at every meeting of
Stockholders to one vote for each share of capital stock standing in his or her
name on the record of Stockholders determined in accordance with Article 2.5
hereof. If the Certificate of Incorporation provides for more or less than one
vote for any share on any matter, each reference in the By-laws or the General
Corporation Law to a majority or other proportion of stock shall refer to such
majority or other proportion of the votes of such stock. The provisions of
Articles 212 and 217 of the General Corporation Law shall apply in determining
whether any shares of capital stock may be voted and the persons, if any,
entitled to vote such shares; but the Corporation shall be protected in assuming
that the persons in whose names shares of capital stock stand on the stock
ledger of the Corporation are entitled to vote such shares. Holders of
redeemable shares of stock are not entitled to vote after the notice of
redemption is mailed to such holders and a sum sufficient to redeem the stocks
has been deposited with a bank, trust company, or other financial institution
under an irrevocable obligation to pay the holders the redemption price on
surrender of the shares of stock. At any meeting of Stockholders (at which a
quorum was present to organize the meeting), all matters, except as otherwise
provided by statute or by the Certificate of Incorporation or by these By-laws,
shall be decided by a majority of the votes cast at such meeting by the holders
of shares present in person or represented by proxy and entitled to vote
thereon, whether or not a quorum is present when the vote is
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13
taken. All elections of Directors shall be by written ballot unless otherwise
provided in the Certificate of Incorporation. In voting on any other question on
which a vote by ballot is required by law or is demanded by any Stockholder
entitled to vote, the voting shall be by ballot. Each ballot shall be signed by
the Stockholder voting or the Stockholder's proxy and shall state the number of
shares voted. On all other questions, the voting may be viva voce. Each
Stockholder entitled to vote at a meeting of Stockholders or to express consent
or dissent to corporate action in writing without a meeting may authorize
another person or persons to act for such Stockholder by proxy. The validity and
enforceability of any proxy shall be determined in accordance with Article 212
of the General Corporation Law. A Stockholder may revoke any proxy that is not
irrevocable by attending the meeting and voting in person or by filing an
instrument in writing revoking the proxy or by delivering a proxy in accordance
with applicable law bearing a later date to the Secretary.
2.12 Voting Procedures and Inspectors of Election at Meetings of
Stockholders. The Board, in advance of any meeting of Stockholders, may appoint
one or more inspectors to act at the meeting and make a written report thereof.
The Board may designate one or more persons as alternate inspectors to replace
any inspector who fails to act. If no inspector or alternate is able to act at a
meeting, the person presiding at the meeting may appoint, and on the request of
any Stockholder entitled to vote thereat shall appoint, one or more inspectors
to act at the meeting. Each inspector, before entering upon the discharge of his
or her duties, shall take and sign an oath faithfully to execute the duties of
inspector with strict impartiality and according to the best of his or her
ability. The inspectors shall (a) ascertain the number of shares outstanding and
the voting power
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14
of each, (b) determine the shares represented at the meeting and the validity of
proxies and ballots, (c) count all votes and ballots, (d) determine and retain
for a reasonable period a record of the disposition of any challenges made to
any determination by the inspectors, and (e) certify their determination of the
number of shares represented at the meeting and their count of all votes and
ballots. The inspectors may appoint or retain other persons or entities to
assist the inspectors in the performance of their duties. Unless otherwise
provided by the Board, the date and time of the opening and the closing of the
polls for each matter upon which the Stockholders will vote at a meeting shall
be determined by the person presiding at the meeting and shall be announced at
the meeting. No ballot, proxies or votes, or any revocation thereof or change
thereto, shall be accepted by the inspectors after the closing of the polls
unless the Court of Chancery of the State of Delaware upon application by a
Stockholder shall determine otherwise.
2.13 Organization. At each meeting of Stockholders, the President, or
in the absence of the President, the Chairman, or if there is no Chairman or if
there be one and the Chairman is absent, a Vice President, and in case more than
one Vice President shall be present, that Vice President designated by the Board
(or in the absence of any such designation, the most senior Vice President,
based on age, present), shall act as chairman of the meeting. The Secretary, or
in his or her absence one of the Assistant Secretaries, shall act as secretary
of the meeting. In case none of the officers above designated to act as chairman
or secretary of the meeting, respectively, shall be present, a chairman or a
secretary of the meeting, as the case may be, shall be chosen by a majority
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15
of the votes cast at such meeting by the holders of shares of capital stock
present in person or represented by proxy and entitled to vote at the meeting.
2.14 Order of Business. The order of business at all meetings of
Stockholders shall be as determined by the chairman of the meeting, but the
order of business to be followed at any meeting at which a quorum is present may
be changed by a majority of the votes cast at such meeting by the holders of
shares of capital stock present in person or represented by proxy and entitled
to vote at the meeting.
ARTICLE 3
Directors
3.1 General Powers. Except as otherwise provided in the Certificate of
Incorporation, the business and affairs of the Corporation shall be managed by
or under the direction of the Board. The Board may adopt such rules
and regulations, not inconsistent with the Certificate of Incorporation or these
By-laws or applicable laws, as it may deem proper for the conduct of its
meetings and the management of the Corporation. In addition to the powers
expressly conferred by these By-laws, the Board may exercise all powers and
perform all acts that are not required, by these By-laws or the Certificate of
Incorporation or by statute, to be exercised and performed by the Stockholders.
3.2 Number; Qualification; Term of Office. The Board shall consist of
seven (7) members or such other number as may be fixed from time to time by
action of the Board. Directors need not be Stockholders. Each Director shall
hold office until a successor is elected and qualified or until the Director's
death, resignation or removal.
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16
3.3 Election. Directors shall, except as otherwise required by statute
or by the Certificate of Incorporation, be elected by a plurality of the votes
cast at a meeting of Stockholders by the holders of shares entitled to vote in
the election.
3.4 Newly Created Directorships and Vacancies. Unless otherwise
provided in the Certificate of Incorporation, newly created Directorships
resulting from an increase in the number of Directors and vacancies occurring in
the Board for any other reason, including the removal of Directors without
cause, may be filled by the affirmative votes of a majority of the entire Board,
although less than a quorum, or by a sole remaining Director, or may be elected
by a plurality of the votes cast by the holders of shares of capital stock
entitled to vote in the election at a special
meeting of Stockholders called for that purpose. A Director elected to fill a
vacancy shall be elected to hold office until a successor is elected and
qualified, or until the Director's earlier death, resignation or removal.
3.5 Resignation. Any Director may resign at any time by written notice
to the Corporation. Such resignation shall take effect at the time therein
specified, and, unless otherwise specified in such resignation, the acceptance
of such resignation shall not be necessary to make it effective.
3.6 Removal. Subject to the provisions of Article 141(k) of the General
Corporation Law, any or all of the Directors may be removed with or without
cause by vote of the holders of a majority of the shares then entitled to vote
at an election of Directors.
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3.7 Compensation. Each Director, in consideration of his or her service as
such, shall be entitled to receive from the Corporation such amount per annum or
such fees for attendance at Directors' meetings, or both, as the Board may from
time to time determine, together with reimbursement for the reasonable
out-of-pocket expenses, if any, incurred by such Director in connection with the
performance of his or her duties. Each Director who shall serve as a member of
any committee of Directors in consideration of serving as such shall be entitled
to such additional amount per annum or such fees for attendance at committee
meetings, or both, as the Board may from time to time determine, together with
reimbursement for the reasonable out-of-pocket expenses, if any, incurred by
such Director in the performance of his or her duties. Nothing contained in this
Article 3.7 shall preclude any Director from serving the Corporation or its
subsidiaries in any other capacity and receiving proper compensation therefor.
3.8 Times and Places of Meetings. The Board may hold meetings, both regular
and special, either within or without the State of Delaware. The times and
places for holding meetings of the Board may be fixed from time to time by
resolution of the Board or (unless contrary to a resolution of the Board) in the
notice of the meeting.
3.9 Annual Meetings. On the day when and at the place where the annual
meeting of Stockholders for the election of Directors is held, and as soon as
practicable thereafter, the Board may hold its annual meeting, without notice of
such meeting, for the purposes of organization, the election of officers and the
transaction of other business. The annual meeting of the Board may be held at
any other time and place
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specified in a notice given as provided in Article 3.11 hereof for special
meetings of the Board or in a waiver of notice thereof.
3.10 Regular Meetings. Regular meetings of the Board may be held
without notice at such times and at such places as shall from time to time be
determined by the Board.
3.11 Special Meetings. Special meetings of the Board may be called by
the Chairman, the President or the Secretary or by any two or more Directors
then serving on at least one day's notice to each Director given by one of the
means specified in Article 3.14 hereof other than by mail, or on at least three
days' notice if given by mail. Special meetings shall be called by the Chairman,
President or Secretary in like manner and on like notice on the written request
of any two or more of the Directors then serving.
3.12 Telephone Meetings. Directors or members of any committee
designated by the Board may participate in a meeting of the Board or of such
committee by means of conference telephone or similar communications equipment
by means of which all persons participating in the meeting can hear each other,
and participation in a meeting pursuant to this Article 3.12 shall constitute
presence in person at such meeting.
3.13 Adjourned Meetings. A majority of the Directors present at any
meeting of the Board, including an adjourned meeting, whether or not a quorum is
present, may adjourn such meeting to another time and place. At least one day's
notice of any adjourned meeting of the Board shall be given to each Director
whether or not present at the time of the adjournment, if such notice shall be
given by one of the means specified in Article 3.14 hereof other than by mail,
or at least three days' notice if by mail. Any
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business may be transacted at an adjourned meeting that might have been
transacted at the meeting as originally called.
3.14 Notice Procedure. Subject to Articles 3.11 and 3.17 hereof,
whenever, under the provisions of any statute, the Certificate of Incorporation
or these By-laws, notice is required to be given to any Director, such notice
shall be deemed given effectively if given in person or by telephone, by mail
addressed to such Director at such Director's address as it appears on the
records of the Corporation, with postage thereon prepaid, or by telegram, telex,
telecopy or similar means addressed as aforesaid.
3.15 Waiver of Notice. Whenever the giving of any notice is required by
statute, the Certificate of Incorporation or these By-laws, a waiver thereof, in
writing, signed by the person or persons entitled to said notice, whether before
or after the event as to which such notice is required, shall be deemed
equivalent to notice. Attendance by a person at a meeting shall constitute a
waiver of notice of such meeting except when the person attends a meeting for
the express purpose of objecting, at the beginning of the meeting, to the
transaction of any business on the ground that the meeting has not been lawfully
called or convened. Neither the business to be transacted at, nor the purpose
of, any regular or special meeting of the Directors or a committee of Directors
need be specified in any written waiver of notice unless so required by statute,
the Certificate of Incorporation or these By-laws.
3.16 Organization. At each meeting of the Board, the Chairman, or, in
the absence of the Chairman, the President, or, in the absence of the President,
a chairman chosen by a majority of the Directors present, shall preside. The
Secretary shall act as
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20
secretary at each meeting of the Board. In case the Secretary shall be absent
from any meeting of the Board, an Assistant Secretary shall perform the duties
of secretary at such meeting; and in the absence from any such meeting of the
Secretary and all Assistant Secretaries, the person presiding at the meeting
may appoint any person to act as secretary of the meeting.
3.17 Quorum of Directors. The presence in person of a majority of the
entire Board shall be necessary and sufficient to constitute a quorum for the
transaction of business at any meeting of the Board, but a majority of a smaller
number may adjourn any such meeting to a later date.
3.18 Action by Majority Vote. Except as otherwise expressly required by
statute, the Certificate of Incorporation or these By-laws, the act of a
majority of the Directors present at a meeting at which a quorum is present
shall be the act of the Board.
3.19 Action Without Meeting. Unless otherwise restricted by the
Certificate of Incorporation or these By-laws, any action required or permitted
to be taken at any meeting of the Board or of any committee thereof may be taken
without a meeting if all Directors or members of such committee, as the case may
be, consent thereto in writing, and the writing or writings are filed with the
minutes of proceedings of the Board or committee.
3.20 Initial Director. To facilitate the organization of the
Corporation, acceptance of original subscriptions, the preparation and execution
of certain employment agreements with the Officers and otherwise, the
Incorporator of the Corporation may appoint himself as the sole initial director
of the Corporation with full authority; provided,
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21
the initial sole director shall not have authority to bind the Corporation to
any employment agreement with Executive Officers, which authority shall be
vested in the full Board of Directors of the Corporation. Notwithstanding the
foregoing, the initial sole director shall have the authority to prepare and
adopt a stockholders' agreement among the Stockholders and the Corporation,
negotiate a joint venture agreement between Microtel Franchising Development
Corporation and the Corporation and to undertake the transactions set forth in
the Memorandum on behalf of the Corporation.
ARTICLE 4
COMMITTEES OF THE BOARD
4.1 Generally. The Board may, by resolution passed by a vote of the
entire Board, designate one or more committees, each committee to consist of one
or more of the Directors of the Corporation. The Board may designate one or more
Directors as alternate members of any committee, who may replace any absent or
disqualified members at any meeting of such committee. If a member of a
committee shall be absent from any meeting, or disqualified from voting thereat,
the remaining member or members present and not disqualified from voting,
whether or not such member or members constitute a quorum, may, by a unanimous
vote, appoint another member of the Board to act at the meeting in the place of
any such absent or dis qualified member. Any such committee, to the extent
provided in a resolution of the Board passed as aforesaid, shall have and may
exercise all the powers and authority of the Board in the management of the
business and affairs of the Corporation, and may authorize the seal of the
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22
Corporation to be impressed on all papers that may require it, but no such
committee shall have the power or authority of the Board in reference to
amending the Certificate of Incorporation, adopting an agreement of merger or
consolidation under Article 251 or Article 252 of the General Corporation
Law, recommending to the Stockholders (a) the sale, lease or exchange of all or
substantially all of the Corporation's property and assets, or (b) a dissolution
of the Corporation or a revocation of a dissolution, or amending the By-laws of
the Corporation; and, unless the resolution designating it expressly so
provides, no such committee shall have the power and authority to declare a
dividend, to authorize the issuance of stock or to adopt a certificate of
ownership and merger pursuant to Article 253 of the General Corporation Law.
Unless otherwise specified in the resolution of the Board designating a
committee, at all meetings of such committee a majority of the total number of
members of the committee shall constitute a quorum for the transaction of
business, and the vote of a majority of the members of the committee present at
any meeting at which there is a quorum shall be the act of the committee. Each
committee shall keep regular minutes of its meetings. Unless the Board otherwise
provides, each committee designated by the Board may make, alter and repeal
rules for the conduct of its business. In the absence of such rules each
committee shall conduct its business in the same manner as the Board conducts
its business pursuant to Article 3 of these By-laws.
4.2 Stock Reallocation Committee. To the extent required under any
agreement to which the Corporation is a party, the Board of Directors shall
appoint a Stock Reallocation Committee, with full authority to undertake the
transactions set forth
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23
in any agreement to which the Corporation is a party, or any other transactions
as may be added by the Board of Directors. The Stock Reallocation Committee
shall have full authority to monitor, oversee and authorize transactions with
respect to stock held by Officers or held by the Corporation for the benefit of
Officers. The Stock Reallocation Committee shall have such other authority and
duties as may be delegated by the Board of Directors from time to time.
ARTICLE 5
OFFICERS
5.1 Positions. The officers of the Corporation shall be a Chief
Executive Officer, a President, a Chief Financial Officer, a Secretary, a
Treasurer and such other officers as the Board may appoint, including a
Chairman, one or more Vice Presidents and one or more Assistant Secretaries and
Assistant Treasurers, who shall exercise such powers and perform such duties as
shall be determined from time to time by the Board. The Board may designate one
or more Vice Presidents as Executive Vice Presidents and may use descriptive
words or phrases to designate the standing, seniority or areas of special
competence of the Vice Presidents elected or appointed by it. Any number of
offices may be held by the same person unless the Certificate of Incorporation
or these By-laws otherwise provide.
5.2 Appointment. The officers of the Corporation shall be chosen by the
Board at its annual meeting or at such other time or times as the Board shall
determine.
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5.3 Compensation. The compensation of all officers of the Corporation
shall be fixed by the Board. No officer shall be prevented from receiving a
salary or other compensation by reason of the fact that the officer is also a
Director.
5.4 Term of Office. Each officer of the Corporation shall hold office
for the term for which he or she is elected and until such officer's successor
is chosen and qualifies or until such officer's earlier death, resignation or
removal. Any officer may resign at any time upon written notice to the
Corporation. Such resignation shall take effect at the date of receipt of such
notice or at such later time as is therein specified, and, unless otherwise
specified, the acceptance of such resignation shall not be necessary to make it
effective. The resignation of an officer shall be without prejudice to the
contract rights of the Corporation, if any. Any officer elected or appointed by
the Board may be removed at any time, with or without cause, by vote of a
majority of the entire Board; provided, however, that no employment agreement in
effect as of September 30, 1996 may be terminated without the approval of 75% of
the full Board of Directors, it being understood that the officer whose
continued employment is at issue (if such officer is also a director) may not
vote on the termination of his own employment agreement. Any vacancy occurring
in any office of the Corporation shall be filled by the Board. The removal of an
officer without cause shall be without prejudice to the officer's contract
rights, if any. The election or appointment of an officer shall not of itself
create contract rights.
5.5 Fidelity Bonds. The Corporation may secure the fidelity of any or
all of its officers or agents by bond or otherwise.
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25
5.6 Chairman. The Chairman, if one shall have been appointed, shall
preside at all meetings of the Board and shall exercise such powers and perform
such other duties as shall be determined from time to time by the Board.
5.7 Chief Executive Officer. The Chief Executive Officer shall be the
chief executive officer of the Corporation and shall have general supervision
over the business of the Corporation, subject, however, to the control of the
Board and of any duly authorized committee of Directors. The Chief Executive
Officer shall preside at all meetings of the Stockholders and at all meetings of
the Board at which the Chairman (if there be one) is not present. The Chief
Executive Officer may sign and execute in the name of the Corporation deeds,
mortgages, bonds, contracts and other instruments except in cases in which the
signing and execution thereof shall be expressly delegated by the Board or by
these By-laws to some other officer or agent of the Corporation or shall be
required by statute otherwise to be signed or executed and, in general, the
Chief Executive Officer shall perform all duties incident to the office of Chief
Executive Officer of a corporation and such other duties as may from time to
time be assigned to the Chief Executive Officer by the Board.
5.8 President. The President shall be the chief operational officer of
the Corporation and shall have general supervision over the day-to-day affairs
of the Corporation, subject, however, to the control of the Chief Executive
Officer, the Board and of any duly authorized committee of Directors. In the
absence of the Chief Executive Officer, the President shall preside at all
meetings of the Stockholders and at all meetings of the Board at which the
Chairman (if there be one) is not present. The President may
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sign and execute in the name of the Corporation deeds, mortgages, bonds,
contracts and other instruments except in cases in which the signing and
execution thereof shall be expressly delegated by the Board or by these By-laws
to some other officer or agent of the Corporation or shall be required by
statute otherwise to be signed or executed and, in general, the President shall
perform all duties incident to the office of President of a corporation and such
other duties as may from time to time be assigned to the President by the Board.
5.9 Chief Financial Officer. The Chief Financial Officer shall be the
chief financial officer of the Corporation and shall have general supervision
over the finances of the Corporation, subject, however, to the control of the
Chief Executive Officer, the President, the Board and of any duly authorized
committee of Directors. The Chief Financial Officer may sign and execute in the
name of the Corporation deeds, mortgages, bonds, contracts and other instruments
except in cases in which the signing and execution thereof shall be expressly
delegated by the Board or by these By-laws to some other officer or agent of the
Corporation or shall be required by statute otherwise to be signed or executed
and, in general, the Chief Financial Officer shall perform all duties incident
to the office of Chief Financial Officer of a corporation and such other duties
as may from time to time be assigned to the Chief Financial Officer by the
Board.
5.10 Vice Presidents. At the request of the Chief Executive Officer or
President, or, in the Chief Executive Officer's or the President's absence, at
the request of the Board, the Vice Presidents shall (in such order as may be
designated by the Board or, in the absence of any such designation, in order of
seniority based on age) perform all of
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the duties of the Chief Executive Officer and President and, in so performing,
shall have all the powers of, and be subject to all restrictions upon, the Chief
Executive Officer and President. Any Vice President may sign and execute in the
name of the Corporation deeds, mortgages, bonds, contracts or other instruments,
except in cases in which the signing and execution thereof shall be expressly
delegated by the Board or by these By-laws to some other officer or agent of the
Corporation, or shall be required by statute otherwise to be signed or executed,
and each Vice President shall perform such other duties as from time to time may
be assigned to such Vice President by the Board or by the Chief Executive
Officer or the President.
5.11 Secretary. The Secretary shall attend all meetings of the Board
and of the Stockholders and shall record all the proceedings of the meetings of
the Board and of the Stockholders in a book to be kept for that purpose, and
shall perform like duties for committees of the Board, when required. The
Secretary shall give, or cause to be given, notice of all special meetings of
the Board and of the Stockholders and shall perform such other duties as may be
prescribed by the Board or by the Chief Executive Officer or the President,
under whose supervision the Secretary shall be. The Secretary shall have custody
of the corporate seal of the Corporation, and the Secretary, or an Assistant
Secretary, shall have authority to impress the same on any instrument requiring
it, and when so impressed the seal may be attested by the signature of the
Secretary or by the signature of such Assistant Secretary. The Board may give
general authority to any other officer to impress the seal of the Corporation
and to attest the same by such officer's signature. The Secretary or an
Assistant Secretary may also attest all instruments signed
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by the Chief Executive Officer, the President, the Chief Financial Officer or
any Vice President. The Secretary shall have charge of all the books, records
and papers of the Corporation relating to its organization and management, shall
see that the reports, statements and other documents required by statute are
properly kept and filed and, in general, shall perform all duties incident to
the office of Secretary of a corporation and such other duties as may from time
to time be assigned to the Secretary by the Board or by the Chief Executive
Officer or the President.
5.12 Treasurer. Subject to the discretion of the Chief Financial
Officer, the Treasurer shall have charge and custody of, and be responsible for,
all funds, securities and notes of the Corporation; receive and give receipts
for moneys due and payable to the Corporation from any sources whatsoever;
deposit all such moneys and valuable effects in the name and to the credit of
the Corporation in such depositaries as may be designated by the Board; against
proper vouchers, cause such funds to be disbursed by checks or drafts on the
authorized depositaries of the Corporation signed in such manner as shall be
determined by the Board and be responsible for the accuracy of the amounts of
all moneys so disbursed; regularly enter or cause to be entered in books or
other records maintained for the purpose full and adequate account of all moneys
received or paid for the account of the Corporation; have the right to require
from time to time reports or statements giving such information as the Treasurer
may desire with respect to any and all financial transactions of the Corporation
from the officers or agents transacting the same; render to the Chief Executive
Officer, President, Chief Financial Officer or the Board, whenever such
Officer(s) or the Board shall require the Treasurer so to do, an account of the
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financial condition of the Corporation and of all financial transactions of the
Corporation; exhibit at all reasonable times the records and books of account to
any of the Directors upon application at the office of the Corporation where
such records and books are kept; disburse the funds of the Corporation as
ordered by the Board; and, in general, perform all duties incident to the office
of Treasurer of a corporation and such other duties as may from time to time be
assigned to the Treasurer by the Board or the President.
5.13 Assistant Secretaries and Assistant Treasurers. Assistant
Secretaries and Assistant Treasurers shall perform such duties as shall be
assigned to them by the Secretary or by the Treasurer, respectively, or by the
Board or by the Chief Executive Officer or the President.
ARTICLE 6
CONTRACTS, CHECKS, DRAFTS, BANK ACCOUNTS, ETC.
6.1 Execution of Contracts. The Board, except as otherwise provided in
these By-laws, may prospectively or retroactively authorize any officer or
officers, employee or employees or agent or agents, in the name and on behalf of
the Corporation, to enter into any contract or execute and deliver any
instrument, and any such authority may be general or confined to specific
instances, or otherwise limited.
6.2 Loans. The Board may prospectively or retroactively authorize the
Chief Executive Officer or the President or any other officer, employee or agent
of the Corporation to effect loans and advances at any time for the Corporation
from any bank, trust company or other institution, or from any firm, corporation
or individual, and for
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such loans and advances the person so authorized may make, execute and deliver
promissory notes, bonds or other certificates or evidences of indebtedness of
the Corporation, and, when authorized by the Board so to do, may pledge and
hypothecate or transfer any securities or other property of the Corporation as
security for any such loans or advances. Such authority conferred by the Board
may be general or confined to specific instances, or otherwise limited.
6.3 Checks, Drafts, Etc. All checks, drafts and other orders for the
payment of money out of the funds of the Corporation and all evidences of
indebtedness of the Corporation shall be signed on behalf of the Corporation in
such manner as shall from time to time be determined by resolution of the Board.
6.4 Deposits. The funds of the Corporation not otherwise employed shall
be deposited from time to time to the order of the Corporation with such banks,
trust companies, investment banking firms, financial institutions or other
depositaries as the Board may select or as may be selected by an officer,
employee or agent of the Corporation to whom such power to select may from time
to time be delegated by the Board.
ARTICLE 7
STOCK AND DIVIDENDS
7.1 Certificates Representing Shares. The shares of capital stock of
the Corporation shall be represented by certificates in such form (consistent
with the provisions of Article 158 of the General Corporation Law) as shall be
approved by the
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Board. Such certificates shall be signed by the Chairman, the Chief Executive
Officer, the President, the Chief Financial Officer or a Vice President and by
the Secretary or an Assistant Secretary or the Treasurer or an Assistant
Treasurer, and may be impressed with the seal of the Corporation or a facsimile
thereof. The signatures of the officers upon a certificate may be facsimiles, if
the certificate is countersigned by a transfer agent or registrar other than the
Corporation itself or its employee. In case any officer, transfer agent or
registrar who has signed or whose facsimile signature has been placed upon any
certificate shall have ceased to be such officer, transfer agent or registrar
before such certificate is issued, such certificate may, unless otherwise
ordered by the Board, be issued by the Corporation with the same effect as if
such person were such officer, transfer agent or registrar at the date of issue.
7.2 Transfer of Shares. Transfers of shares of capital stock of the
Corporation shall be made only on the books of the Corporation by the holder
thereof or by the holder's duly authorized attorney appointed by a power of
attorney duly executed and filed with the Secretary or a transfer agent of the
Corporation, and on surrender of the certificate or certificates representing
such shares of capital stock
properly endorsed for transfer and upon payment of all necessary transfer taxes.
Every certificate exchanged, returned or surrendered to the Corporation shall be
marked "Cancelled," with the date of cancellation, by the Secretary or an
Assistant Secretary or the transfer agent of the Corporation. A person in whose
name shares of capital stock shall stand on the books of the Corporation shall
be deemed the owner thereof to receive dividends, to vote as such owner and for
all other purposes as respects the Corporation. No transfer of shares of
<PAGE>
32
capital stock shall be valid as against the Corporation, its Stockholders and
creditors for any purpose, except to render the transferee liable for the debts
of the Corporation to the extent provided by law, until such transfer shall have
been entered on the books of the Corporation by an entry showing from and to
whom transferred.
7.3 Transfer and Registry Agents. The Corporation may from time to time
maintain one or more transfer offices or agents and registry offices or agents
at such place or places as may be determined from time to time by the Board.
7.4 Lost, Destroyed, Stolen and Mutilated Certificates. The holder of
any shares of capital stock of the Corporation shall immediately notify the
Corporation of any loss, destruction, theft or mutilation of the certificate
representing such shares, and the Corporation may issue a new certificate to
replace the certificate alleged to have been lost, destroyed, stolen or
mutilated. The Board may, in its discretion, as a condition to the issue of any
such new certificate, require the owner of the lost, destroyed, stolen or
mutilated certificate, or his or her legal representatives, to make proof
satisfactory to the Board of such loss, destruction, theft
or mutilation and to advertise such fact in such manner as the Board may
require, and to give the Corporation and its transfer agents and registrars, or
such of them as the Board may require, a bond in such form, in such sums and
with such surety or sureties as the Board may direct, to indemnify the
Corporation and its transfer agents and registrars against any claim that may be
made against any of them on account of the continued existence of any such
certificate so alleged to have been lost, destroyed, stolen or mutilated and
against any expense in connection with such claim.
<PAGE>
33
7.5 Rules and Regulations. The Board may make such rules and
regulations as it may deem expedient, not inconsistent with these By-laws or
with the Certificate of Incorporation, concerning the issue, transfer and
registration of certif icates representing shares of its capital stock.
7.6 Restriction on Transfer of Stock. A written restriction on the
transfer or registration of transfer of capital stock of the Corporation, if
permitted by Article 202 of the General Corporation Law and noted conspicuously
on the certificate representing such capital stock, may be enforced against the
holder of the restricted capital stock or any successor or transferee of the
holder, including an executor, administrator, trustee, guardian or other
fiduciary entrusted with like responsibility for the person or estate of the
holder. Unless noted conspicuously on the certificate representing such capital
stock, a restriction, even though permitted by Article 202 of the General
Corporation Law, shall be ineffective except against a person with actual
knowledge of the restriction. A restriction on the transfer or registration of
transfer of capital stock of the Corporation may be imposed either by the
Certificate of Incorporation or by an agreement among any number of Stockholders
or among such Stockholders and the Corporation. No restriction so imposed shall
be binding with respect to capital stock issued prior to the adoption of the
restriction unless the holders of such capital stock are parties to an agreement
or voted in favor of the restriction.
7.7 Dividends, Surplus, Etc. Subject to the provisions of the
Certificate of Incorporation and of law, the Board:
<PAGE>
34
7.7.1 may declare and pay dividends or make other distributions on
the outstanding shares of capital stock in such amounts and at such time or
times as it, in its discretion, shall deem advisable giving due consideration to
the condition of the affairs of the Corporation;
7.7.2 may use and apply, in its discretion, any of the surplus of
the Corporation in purchasing or acquiring any shares of capital stock of the
Corporation, or purchase warrants therefor, in accordance with law, or any of
its bonds, debentures, notes, scrip or other securities or evidences of
indebtedness; and
7.7.3 may set aside from time to time out of such surplus or net
profits such sum or sums as, in its discretion, it may think proper, as a
reserve fund to meet contingencies, or for equalizing dividends or for the
purpose of maintaining or increasing the property or business of the
Corporation, or for any purpose it may think conducive to the best interests of
the Corporation.
ARTICLE 8
INDEMNIFICATION
8.1 Indemnity Undertaking. To the extent not prohibited by law, the
Corporation shall indemnify any person who is or was made, or threatened to be
made, a party to any threatened, pending or completed action, suit or proceeding
(a "Proceeding"), whether civil, criminal, administrative or investigative,
including, without limitation, an action by or in the right of the Corporation
to procure a judgment in its favor, by reason of the fact that such person, or a
person of whom such person is the legal representative, is
<PAGE>
35
or was a Director or officer of the Corporation, or, at the request of the
Corporation, is or was serving as a director or officer of any other corporation
or in a capacity with comparable authority or responsibilities for any
partnership, limited liability company, joint venture, trust, employee benefit
plan or other enterprise (an "Other Entity"), against judgments, fines,
penalties, excise taxes, amounts paid in settlement and costs, charges and
expenses (including attorneys' fees, disbursements and other charges). Persons
who are not Directors or officers of the Corporation (or otherwise entitled to
indemnification pursuant to the preceding sentence) may be similarly indemnified
in respect of service to the Corporation or to an Other Entity at the request of
the Corporation to the extent the Board at any time specifies that such persons
are entitled to the benefits of this Article 8.
8.2 Advancement of Expenses. The Corporation shall, from time to time,
reimburse or advance to any Director or officer or other person entitled to
indemnification hereunder the funds necessary for payment of expenses, including
attorneys' fees and disbursements, incurred in connection with any Proceeding,
in advance of the final disposition of such Proceeding; provided, however, that,
if required by the General Corporation Law, such expenses incurred by or on
behalf of any Director or officer or other person may be paid in advance of the
final disposition of a Proceeding only upon receipt by the Corporation of an
undertaking, by or on behalf of such Director or officer (or other person
indemnified hereunder), to repay any such amount so advanced if it shall
ultimately be determined by final judicial decision from which there is no
further right of appeal that such Director, officer or other person is not
entitled to be indemnified for such expenses.
<PAGE>
36
8.3 Rights Not Exclusive. The rights to indemnification and
reimbursement or advancement of expenses provided by, or granted pursuant to,
this Article 8 shall not be deemed exclusive of any other rights to which a
person seeking indemnification or reimbursement or advancement of expenses may
have or hereafter be entitled under any statute, the Certificate of
Incorporation, these By-laws, any agreement, any vote of Stockholders or
disinterested Directors or otherwise, both as to action in his or her official
capacity and as to action in another capacity while holding such office.
8.4 Continuation of Benefits. The rights to indemnification and
reimbursement or advancement of expenses provided by, or granted pursuant to,
this Article 8 shall continue as to a person who has ceased to be a Director or
officer (or other person indemnified hereunder) and shall inure to the benefit
of the executors, administrators, legatees and distributees of such person.
8.5 Insurance. The Corporation shall have power to purchase and
maintain insurance on behalf of any person who 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 an Other Entity,
against any liability asserted against such person and incurred by such person
in any such capacity, or arising out of such person's status as such, whether or
not the Corporation would have the power to indemnify such person against such
liability under the provisions of this Article 8, the Certificate of
Incorporation or under Article 145 of the General Corporation Law or any other
provision of law.
<PAGE>
37
8.6 Binding Effect. The provisions of this Article 8 shall be a
contract between the Corporation, on the one hand, and each Director and officer
who serves in such capacity at any time while this Article 8 is in effect and
any other person entitled to indemnification hereunder, on the other hand,
pursuant to which the Corporation and each such Director, officer or other
person intend to be, and shall be, legally bound. No repeal or modification of
this Article 8 shall affect any rights or obligations with respect to any state
of facts then or theretofore existing or there after arising or any proceeding
theretofore or thereafter brought or threatened based in whole or in part upon
any such state of facts.
8.7 Procedural Rights. The rights to indemnification and reimbursement
or advancement of expenses provided by, or granted pursuant to, this Article 8
shall be enforceable by any person entitled to such indemnification or
reimbursement or advancement of expenses in any court of competent jurisdiction.
The burden of proving that such indemnification or reimbursement or advancement
of expenses is not appropriate shall be on the Corporation. Neither the failure
of the Corporation (including its Board of Directors, its independent legal
counsel and its Stockholders) to have made a determination prior to the
commencement of such action that such indemnification or reimbursement or
advancement of expenses is proper in the circumstances nor an actual
determination by the Corporation (including its Board of Directors, its
independent legal counsel and its Stockholders) that such person is not entitled
to such indemnification or reimbursement or advancement of expenses shall
constitute a defense to the action or create a presumption that such person is
not so
<PAGE>
38
entitled. Such a person shall also be indemnified for any expenses
incurred in connection with successfully establishing his or her right to such
indemnification or reimbursement or advancement of expenses, in whole or in
part, in any such proceeding.
8.8 Service Deemed at Corporation's Request. Any Director or officer of
the Corporation serving in any capacity (a) another corporation of which a
majority of the shares entitled to vote in the election of its directors is
held, directly or indirectly, by the Corporation or (b) any employee benefit
plan of the Corporation or any corporation referred to in clause (a) shall be
deemed to be doing so at the request of the Corporation.
8.9 Election of Applicable Law. Any person entitled to be indemni fied
or to reimbursement or advancement of expenses as a matter of right pursuant to
this Article 8 may elect to have the right to indemnification or reimbursement
or advancement of expenses interpreted on the basis of the applicable law in
effect at the time of the occurrence of the event or events giving rise to the
applicable Proceeding, to the extent permitted by law, or on the basis of the
applicable law in effect at the time such indemnification or reimbursement or
advancement of expenses is sought. Such election shall be made, by a notice in
writing to the Corporation, at the time indemnification or reimbursement or
advancement of expenses is sought; provided, however, that if no such notice is
given, the right to indemnification or reimbursement or advancement of expenses
shall be determined by the law in effect at the time indemnification or
reimbursement or advancement of expenses is sought.
<PAGE>
39
ARTICLE 9
BOOKS AND RECORDS
9.1 Books and Records. There shall be kept at the principal office of
the Corporation correct and complete records and books of account recording the
financial transactions of the Corporation and minutes of the proceedings of the
Stockholders, the Board and any committee of the Board. The Corporation shall
keep at its principal office, or at the office of the transfer agent or
registrar of the Corporation, a record containing the names and addresses of all
Stockholders, the number and class of shares held by each and the dates when
they respectively became the owners of record thereof.
9.2 Form of Records. Any records maintained by the Corporation in the
regular course of its business, including its stock ledger, books of account,
and minute books, may be kept on, or be in the form of, punch cards, magnetic
tape, photographs, microphotographs, or any other information storage device,
provided that the records so kept can be converted into clearly legible written
form within a reasonable time. The Corporation shall so convert any records so
kept upon the request of any person entitled to inspect the same.
9.3 Inspection of Books and Records. Except as otherwise provided by
law, the Board shall determine from time to time whether, and, if allowed, when
and under what conditions and regulations, the accounts, books, minutes and
other records of the Corporation, or any of them, shall be open to the
Stockholders for inspection.
<PAGE>
40
ARTICLE 10
SEAL
The corporate seal shall have inscribed thereon the name of the
Corporation, the year of its organization and the words "Corporate Seal,
Delaware." The seal may be used by causing it or a facsimile thereof to be
impressed or affixed or otherwise reproduced.
ARTICLE 11
FISCAL YEAR
The fiscal year of the Corporation shall be fixed, and may be changed, by
resolution of the Board.
ARTICLE 12
PROXIES AND CONSENTS
Unless otherwise directed by the Board, the Chairman, the Chief Executive
Officer, the President, the Chief Financial Officer, any Vice President, the
Secretary or the Treasurer, or any one of them, may execute and deliver on
behalf of the Corporation proxies respecting any and all shares or other
ownership interests of any Other Entity owned by the Corporation appointing such
person or persons as the officer executing the same shall deem proper to
represent and vote the shares or other ownership interests so owned at any and
all meetings of holders of shares or other ownership interests, whether general
or special, and/or to execute and deliver consents respecting such shares or
other ownership interests; or any of the aforesaid officers may attend any
meeting of the holders
<PAGE>
41
of shares or other ownership interests of such Other Entity and thereat vote or
exercise any or all other powers of the Corporation as the holder of such shares
or other ownership interests.
ARTICLE 13
EMERGENCY BY-LAWS
Unless the Certificate of Incorporation provides otherwise, the following
provisions of this Article 13 shall be effective during an emergency, which is
defined as when a quorum of the Corporation's Directors cannot be readily
assembled because of some catastrophic event. During such emergency:
13.1 Notice to Board Members. Any one member of the Board or any one of the
following officers: Chairman, the Chief Executive Officer, President, the Chief
Financial Officer, any Vice President, Secretary, or Treasurer, may call a
meeting of the Board. Notice of such meeting need be given only to those
Directors whom it is practicable to reach, and may be given in any practical
manner, including by publication and radio. Such notice shall be given at least
six hours prior to commencement of the meeting.
13.2 Temporary Directors and Quorum. One or more officers of the
Corporation present at the emergency Board meeting, as is necessary to achieve a
quorum, shall be considered to be Directors for the meeting, and shall so serve
in order of rank, and within the same rank, in order of seniority. In the event
that less than a quorum of the Directors are present (including any officers who
are to serve as Directors for the
<PAGE>
42
meeting), those Directors present (including the officers serving as Directors)
shall constitute a quorum.
13.3 Actions Permitted To Be Taken. The Board as constituted in Article
13.2, and after notice as set forth in Article 13.1 may:
13.3.1 prescribe emergency powers to any officer of the Corporation;
13.3.2 delegate to any officer or Director, any of the powers of the
Board;
13.3.3 designate lines of succession of officers and agents, in the
event that any of them are unable to discharge their duties;
13.3.4 relocate the principal place of business, or designate
successive or simultaneous principal places of business; and
13.3.5 take any other convenient, helpful or necessary action to carry
on the business of the Corporation.
ARTICLE 14
AMENDMENTS
These By-laws may be amended or repealed and new By-laws may be adopted by
a vote of the holders of shares entitled to vote in the election of Directors or
by the Board. Any By-laws adopted or amended by the Board may be amended or
repealed by the Stockholders entitled to vote thereon. Notwithstanding anything
to the contrary herein, Section 2.9 of these By-laws may not be amended or
repealed by the
<PAGE>
43
Stockholders without the affirmative vote of holders of not less
than 75% of the voting power of the outstanding shares of the Corporation
entitled to vote thereon, voting together as a single class.
COMMON STOCK COMMON STOCK
NUMBER SHARES
USFS
U.S. FRANCHISE SYSTEMS, INC.
INCORPORATED UNDER THE LAWS SEE REVERSE FOR
OF THE STATE OF DELAWARE CERTAIN DEFINITIONS
THIS IS TO CERTIFY THAT CUSIP 902956 10 1
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF CLASS A COMMON STOCK
OF THE PAR VALUE OF $0.01 PER SHARE OF
U.S. FRANCHISE SYSTEMS, INC.
transferable upon the books of the Corporation by the holder hereof in
person or by duly authorized attorney upon surrender of this Certificate
properly endorsed. This Certificate is not valid unless countersigned and
registered by the Transfer Agent and Registrar.
Witness the facsimile seal of the Corporation and the facsimile
signatures of its duly authorized officers.
Dated:
[Signature of Neal Aronson] [Signature of Michael A. Leven]
EXECUTIVE VICE PRESIDENT AND SECRETARY PRESIDENT AND CHIEF EXECUTIVE OFFICER
U.S. FRANCHISE SYSTEMS, INC.
CORPORATE
SEAL
1995
DELAWARE
*
COUNTERSIGNED AND REGISTERED:
WACHOVIA BANK OF NORTH CAROLINA, N.A.
(WINSTON-SALEM, NC) TRANSFER AGENT AND REGISTRAR
BY:
AUTHORIZED SIGNATURE
<PAGE>
The Corporation will furnish without charge to each stockholder who so
requests a statement of the powers, designations, preferences and relative,
participating, optional or other special rights of each lcass of stock or series
thereof and the qualificatiaons, limitations or restrictions of such preferences
and/or rights. Such request may be addressed to the Secretary of the Corporation
or to the Transfer Agent and Registrar named on the face of this Certificate.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM--as tenants in common
TEN ENT--as tenants by the entireties
JT TEN --as joint tenants with right of
survivorship and not as tenants
in common
UNIF GIFT MIN ACT--________ Custodian ________
(Cust) (Minor)
under Uniform Gifts to Minors
Act _______________________
(State)
Additional abbreviations may also be used though not in the above list.
For Value Received, _________________________________________ hereby sell,
assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
______________________________________
______________________________________
_______________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
_______________________________________________________________________________
_______________________________________________________________________________
________________________________________________________________________ Shares
of the capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint_____________________________________________
______________________________________________________________________ Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated __________________________________
Signature(s) Guaranteed: ______________________________
Signature
_________________________________________ ____________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY NOTICE: THE SIGNATURE(S) TO THIS
AN ELIGIBLE GUARANTOR INSTITUTION, AS ASSIGNMENT MUST CORRESPOND WITH THE
AS DEFINED IN RULE 17Ad-15 UNDER THE NAME(S) AS WRITTEN UPON THE FACE OF
SECURITIES AND EXCHANGE ACT OF 1934, AS THE CERTIFICATE IN EVERY PARTICULAR,
AMENDED. WITHOUT ALTERATION OR ENLARGEMENT OR
ANY CHANGE WHATEVER.
U. S. FRANCHISE SYSTEMS, INC.
RESTATED STOCKHOLDERS' AGREEMENT
<PAGE>
TABLE OF CONTENTS
Page
1. DEFINITIONS..............................................................1
2. THE TRANSFER OF STOCK....................................................4
3. STOCK REGISTRATION RIGHTS................................................5
4. INSURANCE...............................................................14
5. EFFECTIVENESS, TERMINATION AND AMENDMENT................................15
6. NOTICE..................................................................16
7. REMEDIES................................................................16
8. ATTORNEY-IN-FACT........................................................16
9. RATIFICATION AND ADOPTION OF CERTAIN ACTS AND
TRANSACTIONS............................................................17
10. INTERPRETATION; COORDINATION WITH MEMORANDUM
AND EMPLOYEE STOCK PURCHASE AGREEMENT...................................18
11. INDEMNIFICATION OF OFFICERS AND DIRECTORS...............................18
12. MISCELLANEOUS...........................................................19
13. ENTIRE AGREEMENT........................................................20
14. FAILURE TO EXERCISE RIGHTS..............................................20
i
<PAGE>
U.S. FRANCHISE SYSTEMS, INC.
RESTATED STOCKHOLDERS' AGREEMENT
Dated October 11, 1996
This Restated Stockholders' Agreement has been made as of October 11, 1996,
by and among U.S. FRANCHISE SYSTEMS, INC., a Delaware corporation, as the
"Corporation" hereunder, and those stockholders of the Corporation listed on
Exhibit A hereto (hereinafter, "Stockholder" or "Stockholders").
W I T N E S S E T H :
WHEREAS, on September 29, 1995, the Corporation and the Stockholders
entered into a Stockholders Agreement (the "Old Stockholders' Agreement");
WHEREAS, in connection with the proposed initial public offering of the
Corporation's common stock, the Corporation and the Stockholders, by a vote of
holders of at least 2/3 of the outstanding common stock, par value $.10 per
share, amended the Old Agreement, as permitted by Sections 9.3 and 17 thereof
(the "1996 Amendment");
WHEREAS, the following sets forth the Old Agreement, as restated to include
the amendments made by the 1996 Amendment;
NOW, THEREFORE, for and in consideration of the premises and the mutual
obligations contained in this Agreement and other good and valuable
consideration, the receipt, adequacy, and sufficiency of which are hereby
conclusively acknowledged, the parties hereto agree to amend and restate the Old
Agreement as follows:
1. DEFINITIONS.
In addition to any capitalized terms that are elsewhere defined in this
Agreement, whenever used in this Agreement, the following capitalized terms
shall have the meanings set forth below:
1.1 "Affiliate" or "Affiliated" shall mean that a person is an "Affiliate"
of another Person if (i) such other Person directly or indirectly controls, is
controlled by or is under common control with such Person; (ii) such other
Person owns voting securities of such Person constituting a controlling
interest; (iii) such other Person is an executive officer or director of such
Person; (iv) such other Person is the spouse, descendant, ancestor, or sibling
of such Person or any other such Person described in clauses (i), (ii) or (iii)
above; or (v) if such person is an "Affiliate" as defined in the
<PAGE>
Memorandum. For purposes of this Section 1.1, a Person shall be deemed to be in
control of another Person when such Person, either alone or with one or more
persons acting collectively as a group, possesses, directly or indirectly, the
power to direct or cause the direction of the management or policies of such
other Person, whether through the ownership of voting securities, by contract
or otherwise.
1.2 "Agreement" shall mean this Restated Stockholders' Agreement, together
with any amendments hereto made in the manner described in this Agreement.
1.3 "Commission" shall mean the United States Securities and Exchange
Commission and any successor federal agency having similar authority and powers.
1.4 "Corporation" shall mean U.S. Franchise Systems, Inc., a Delaware
corporation.
1.5 "Disposition" shall mean any sale, gift, pledge, alienation or other
transfer, whether outright or as security, inter vivos or at death, with or
without consideration, voluntary or involuntary, of all or any part of any
right, title, or interest (including but not limited to voting rights) in or to
any Stock. "Dispose" shall have the related meaning.
1.6 "Executive Officer" shall mean any of the Chairman, President, Chief
Executive Officer or Chief Financial Officer of the Corporation.
1.7 "Immediate Family Member" shall mean, with respect to any person, such
person's spouse, parents, children and grandchildren and the spouse of such
persons' parents, children and grandchildren.
1.8 "Management Stockholder" shall mean, at any time, any Stockholder who
is then employed by the Corporation on a full time basis as an Executive Officer
or other management employees as designated by the Stock Allocation Committee
from time to time.
1.9 "Memorandum" shall mean that certain Confidential Investment Memorandum
dated August 19, 1995 relating to the offer and sale of Units of interests in
the Corporation.
1.10 "Person" or "person" shall mean any individual, partnership, joint
venture, association, corporation, limited liability company, trust or any other
legal entity or organization.
1.11 "Piggyback Shares" shall mean the shares of Class A Common Stock, par
value $.01 per share (the "Class A Common Stock"), of the Company beneficially
owned by any Stockholder immediately following the initial public offering of
the
2
<PAGE>
Company's Class A Common Stock, and any voting common shares hereinafter issued
or distributed with respect to, or in exchange for, such Class A Common Stock,
by way of stock split or stock dividend or pursuant to a merger, consolidation,
reorganization, recapitalization, reclassification, conversion right or
otherwise, including without limitation, shares of Class A Common Stock issued
or issuable upon conversion of shares of Class B Common Stock, par value $.10
per share, of the Company, and which in each case, have not been offered or sold
to the public. Piggyback Shares shall cease to be such when (i) a registration
statement with respect to the sale of such shares shall have become effective
under the Securities Act and such shares may be disposed of in accordance with
such registration statement or (ii) such shares are immediately eligible for
sale and may be, in the opinion of counsel to the Corporation, sold pursuant to
Rule 144 (or any successor provision) under the Securities Act, and the free
transferability of such shares is not otherwise limited, restricted or
prohibited under Rule 144 (or any successor provision) by reason of volume
limitations or otherwise.
1.12 "Register," "Registered" and "Registration" shall refer to a
registration of common shares of the Corporation effected by preparing and
filing a registration statement in compliance with the Securities Act (and
applicable State law), and the declaration or ordering of the effectiveness of
such registration statement.
1.13 "Registration Expenses" shall mean all expenses incurred by the
Corporation in complying with Section 4 hereof, including, without limitation,
all registration and filing fees, printing expenses, fees and disbursements of
counsel for the Corporation, blue sky fees and expenses, fees of the National
Association of Securities Dealers, Inc. and accountants' expenses, including
without limitation, any special audits, "opinions" or "comfort" letters incident
to or required by any such registration, and any fees and disbursements of
underwriters customarily paid by issuers or sellers of securities, but excluding
underwriting discounts and commissions and transfer taxes, if any, attributable
to Piggyback Shares and the reasonable fees and disbursements of special or
other counsel retained by the holders of the Piggyback Shares being registered.
1.14 "Securities Act" shall mean the Securities Act of 1933, as amended.
1.15 "Stock" or "stock" shall mean all shares of the (i) Class A Common
Stock, (ii) Class B Common Stock and (iii) preferred stock of the Corporation
authorized in its Amended and Restated Certificate of Incorporation, as the same
may be amended from time to time, and the debentures issuable in exchange for
any preferred stock, which from time to time are issued and outstanding.
1.16 Capitalized terms not defined in this Agreement shall have the meaning
and intent ascribed to them in the Memorandum.
3
<PAGE>
2. THE TRANSFER OF STOCK.
2.1 General Restrictions Upon Transfer. No Stockholder shall make any
Disposition of Stock (or interest therein) beneficially owned by such
Stockholder on the date hereof if such action would constitute a violation of
any federal or state securities or "blue sky" laws and unless the Corporation
has been furnished with an opinion of counsel for the Stockholder (which opinion
and counsel shall be reasonably satisfactory to the Corporation and its counsel)
to the effect that such transfer is exempt from the registration provisions of
Section 5 of the Securities Act and the rules and regulations in effect
thereunder and that such Disposition can be effected without registration under
applicable "blue sky" laws.
2.2 Legend. Each certificate or instrument representing Stock beneficially
owned by any Stockholder on the date hereof shall bear the following (or
substantially similar) legend, in addition to any legends required under
applicable state securities or "blue sky" laws:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE (AND ANY INTEREST THEREIN)
MAY NOT BE TRANSFERRED, OFFERED, SOLD, ASSIGNED, PLEDGED, HYPOTHECATED,
ENCUMBERED OR OTHERWISE DISPOSED OF UNLESS SUCH TRANSFER, SALE, OFFER,
ASSIGNMENT, PLEDGE, HYPOTHECATION, ENCUMBERED OR OTHER DISPOSITION COMPLIES
WITH THE PROVISIONS OF THE RESTATED STOCKHOLDERS' AGREEMENT DATED AS OF
OCTOBER 11, 1996 (A COPY OF WHICH IS ON FILE WITH THE SECRETARY OF THE
CORPORATION AND WILL BE MAILED WITHOUT CHARGE 15 DAYS AFTER RECEIPT BY THE
CORPORATION OF A WRITTEN REQUEST THEREFOR). NO TRANSFER, OFFER, ASSIGNMENT,
PLEDGE, HYPOTHECATION, ENCUMBRANCE OR OTHER DISPOSITION OF THE SECURITIES
REPRESENTED BY THIS CERTIFICATE (OR INTEREST THEREIN) MAY BE MADE EXCEPT AS
OTHERWISE PROVIDED IN SUCH STOCKHOLDERS' AGREEMENT AND (A) PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 (THE
"ACT") AND ANY APPLICABLE STATE SECURITIES AND "BLUE SKY" LAWS, OR (B) IF
THE CORPORATION HAS BEEN FURNISHED WITH AN OPINION OF COUNSEL FOR THE
STOCKHOLDER, WHICH OPINION AND COUNSEL SHALL BE REASONABLY SATISFACTORY TO
THE CORPORATION AND ITS COUNSEL TO THE EFFECT THAT SUCH TRANSFER, SALE,
OFFER, ASSIGNMENT, PLEDGE, HYPOTHECATION, ENCUMBRANCE OR OTHER DISPOSITION
IS EXEMPT FROM THE REGISTRATION PROVISIONS OF SECTION 5 OF THE ACT AND THE
RULES AND REGULATIONS IN EFFECT THEREUNDER AND ANY SIMILAR REGISTRATION
REQUIREMENT UNDER SUCH STATE SECURITIES OR "BLUE SKY" LAWS.
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2.3 The parties to this Agreement intend that the legend conform to the
applicable provisions of the Uniform Commercial Code as adopted in the State of
Delaware. This legend may be modified from time to time by the Board of
Directors to conform to any amendments to this Agreement or to the Uniform
Commercial Code as adopted in the Corporation's state of incorporation.
3. STOCK REGISTRATION RIGHTS.
3.1 Piggyback Registration. At such time that greater than twenty percent
(20%) of the outstanding common shares of the Corporation are Registered for
public sale (the "IPO Date"), the provisions of this Section 3.1 shall be
applicable. If, at any time and from time to time thereafter, the Corporation
proposes a public Registration, whether or not for sale for its own account, of
any of its common shares under the Securities Act, on a form and in a manner
which would permit registration of common shares for sale to the public under
the Securities Act, it will each such time give prompt written notice to all
holders of Piggyback Shares of its intention to do so, describing such
securities and specifying the form and manner and the other relevant facts
involved in such proposed registration. The maximum amount of Piggyback Shares
held by each Stockholder to be registered (the "Registrable Piggyback Shares")
and included in the subsequent public offering shall be determined and
calculated by multiplying the (A) number of Piggyback Shares held by the
Stockholder, by (B) the fraction having (i) the number of common shares being
offered in such subsequent public offering as its numerator and (ii) the number
of all common shares to be outstanding after completion of such subsequent
public offering (excluding the Registrable Piggyback Shares) as its denominator.
3.1.1 Upon the written request of any holder of Registrable Piggyback
Shares delivered to the Corporation within fifteen (15) business days after the
giving of any such notice by the Corporation, the Corporation will commence to
use its best efforts to effect the registration under the Securities Act of all
Registrable Piggyback Shares (as requested by the respective holders thereof).
The Corporation will undertake its obligations hereunder in good faith, provided
that:
(i) if, at any time after giving such written notice of its
intention to register any of its securities under the Securities Act and prior
to the effective date of the registration statement filed in connection with
such registration, the Corporation shall determine for any reason not to
finalize the registration of such securities, the Corporation may, at its
election, give written notice of such determination to each holder of
Registrable Piggyback Shares and thereupon shall be relieved of its obligation
to register any Registrable Piggyback Shares in connection with such
registration (but not from its obligation with respect to any subsequent
registrations);
(ii) if (A) the registration so proposed by the Corporation
involves an underwritten offering of the securities so being
registered, whether
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or not for sale for the account of the Corporation, to be distributed
by or through one or more underwriters of recognized standing under
underwriting terms appropriate for such a transaction, (B) the
Corporation proposes that the securities to be registered in such
underwritten offering will include all of the Registrable Piggyback
Shares requested to be so included, and (C) the managing underwriter of
such underwritten offering shall advise the Corporation in writing
that, in its judgment, the distribution of all or a specified portion
of such Registrable Piggyback Shares concurrently with the securities
being distributed by such underwriters will materially adversely affect
the distribution of such securities by such underwriters (such written
advice to state the reasons therefor), then the Corporation will
promptly furnish each such holder of Registrable Piggyback Shares with
a copy of such written advice and may require, by written notice to
each such holder accompanying such written advice, that all or a
specified portion of such Registrable Piggyback Shares be excluded from
such distribution (in case of an exclusion of a portion of such
Registrable Piggyback Shares, such portion to be allocated among such
holders in proportion to the respective numbers of shares of
Registrable Piggyback Shares owned by such holders);
(iii) the Corporation shall not be obligated to effect any
registration of Piggyback Shares under this Section 3.1 incidental to
the registration of any of its securities in connection with mergers,
acquisitions, exchange offers, dividend reinvestment plans or stock
option or other employee benefit plans or incidental to the
registration of any non-voting securities or rights not convertible
into voting common shares; and
(iv) All terms, conditions, limitations and otherwise with respect
to any such subsequent public offering shall be as determined by the
Board of Directors of the Corporation at that time and from time to
time, and in compliance with all applicable federal and state statutes,
rules and regulations relating to the public registration and sale of
securities, generally. Any and all such piggyback rights shall be
applied on a nondiscriminatory basis and shall be uniform among all
eligible holders of Registrable Piggyback Shares, subject to applicable
statutes, rules and regulations.
3.1.2 Except as otherwise prohibited by applicable law, the
Corporation will pay all Registration Expenses in connection with each
registration of Piggyback Shares requested pursuant to this Section 3.1.
3.2 Registration Procedures. If and whenever the Corporation is
required to use its best efforts to effect the registration of any Registrable
Piggyback Shares under the Securities Act as provided in Section 3.1, the
Corporation will promptly:
(i) cooperate with any underwriters and the holders of such
Registrable Piggyback Shares, and will enter into a usual and customary
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underwriting agreement with respect thereto and take all such other
reasonable actions as are necessary or advisable to permit, expedite
and facilitate the disposition of such Registrable Piggyback Shares in
the manner contemplated by the related registration statement, and the
Corporation will provide to the holders of such Registrable Piggyback
Shares, any underwriter participating in any distribution thereof
pursuant to a registration statement, and any attorney, accountant or
other agent retained by any holder of Registrable Piggyback Shares or
underwriter, reasonable access to appropriate Corporation officers and
employees to answer questions and to supply information reasonably
requested by any such holders of Registrable Piggyback Shares,
underwriter, attorney, accountant or agent in connection with such
registration statement;
(ii) prepare and file with the Commission a registration statement
with respect to such Registrable Piggyback Shares and use its best
efforts to cause such registration statement to become effective;
(iii) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in
connection therewith as may be necessary to keep such registration
statement effective and to comply with the provisions of the Securities
Act with respect to the disposition of all Registrable Piggyback Shares
and other securities covered by such registration statement until the
earlier of such time as all of such Registrable Piggyback Shares and
securities have been disposed of in accordance with the intended
methods of disposition by the seller or sellers thereof set forth in
such registration statement or the expiration of 180 days after such
registration statement become effective; and will furnish, upon
request, to each such seller and each holder of an interest in such
Registrable Piggyback Shares who so requests ("Requesting Holder")
prior to the filing thereof of a copy of any amendment or supplement to
such registration statement or prospectus and shall not file any such
amendment or supplement to which any such seller or holder shall have
reasonably objected on the grounds that such amendment or supplement
does not comply in all material respects with the requirements of the
Securities Act or of the rules or regulations thereunder;
(iv) furnish to each seller of such Registrable Piggyback Shares
and each underwriter (if any) such number of conformed copies of such
registration statement and of each such amendment and supplement
thereto (in each case including all exhibits), such number of copies of
the prospectus included in such registration statement (including each
preliminary prospectus and any summary prospectus), in conformity with
the requirements of the Securities Act, such documents, if any,
incorporated by reference in such registration statement or prospectus,
and such other documents, as such seller or underwriter may reasonably
request;
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(v) use its best efforts to register or qualify all Registrable
Piggyback Shares and other securities covered by such registration
statement under such securities or blue sky laws of the states of the
United States as any seller representing more than 15% of the total
number of Registrable Piggyback Shares or the managing Underwriter
shall reasonably request, to keep such registration or qualification in
effect for so long as such registration statement remains in effect,
and do any and all other acts and things which may be necessary or
advisable to enable such seller to consummate the disposition in such
jurisdictions of its Registrable Piggyback Shares covered by such
registration statement, except that the Corporation shall not for any
such purpose be required to qualify generally to do business as a
foreign corporation in any jurisdiction wherein it would not but for
the requirements of this subdivision be obligated to be so qualified,
or to subject itself to taxation in any such jurisdiction, or to
consent to general service of process in any such jurisdiction;
(vi) immediately notify each seller of Registrable Piggyback
Shares, at any time when a prospectus relating thereto is required to
be delivered under the Securities Act, upon discovery that, or upon the
happening of any event as a result of which, the prospectus included in
such registration statement, as then in effect, includes an untrue
statement of a material fact or omits to state any material fact
required to be stated therein or necessary to make the statements
therein not misleading in the light of the circumstances then existing,
which untrue statement or omission requires amendment of the
registration statement or supplementation of the prospectus, and at the
request of any such seller, prepare and furnish to such seller a
reasonable number of copies of a supplement to or an amendment of such
prospectus as may be necessary so that, as thereafter delivered to the
purchasers of such Registrable Piggyback Shares, such prospectus shall
not include an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances
then existing; provided, however, that each holder of Registrable
Piggyback Shares registered pursuant to such registration statement
agrees that he or it will not sell any Registrable Piggyback Shares
pursuant to such registration statement during the time that the
Corporation is preparing and filing with the Commission a supplement to
or an amendment of such prospectus or registration statement;
(vii) in the event of the issuance of any stop order suspending the
effectiveness of any registration statement or of any order suspending
or preventing the use of any prospectus or suspending the qualification
of any Registrable Piggyback Shares for sale in any jurisdiction, use
its best efforts to obtain its withdrawal;
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(viii) otherwise use its best efforts to comply with all applicable
rules and regulations of the Commission, and make available to its
securities holders, as soon as reasonably practicable, an earnings
statement covering the period of at least twelve (12) months, but not
more than eighteen (18) months, beginning with the first month of the
first fiscal quarter after the effective date of such registration
statement, which earnings statement shall satisfy the provisions of
Section 11(a) of the Securities Act;
(ix) provide and cause to be maintained a transfer agent and
registrar for all Registrable Piggyback Shares covered by such
registration statement from and after a date not later than the
effective date of such registration statement; and
(x) use its best efforts to list all shares of Class A Common Stock
(including such shares into which the shares of Class B Common Stock
covered by such registration statement are convertible) on each
securities exchange or automated quotation system on which the
Corporation Class A Common Stock is then listed or quoted or, if the
Corporation's Class A Common Stock is not then quoted on NASDAQ or
listed on any national securities exchange, use its best efforts to
have such Class A Common Stock quoted on NASDAQ or, at the option of
the Corporation, listed on a national securities exchange.
The Corporation may require each seller of Registrable Piggyback Shares
as to which any registration is being effected to the Corporation such
information regarding such seller and the distribution of such securities as the
Corporation may from time to time reasonably request in writing and as shall be
required by law or by the Commission in connection therewith.
3.3 Underwritten Offerings.
3.3.1 If the Corporation at any time proposes to register any of
its securities under the Securities Act as contemplated by Section 3.1 and such
securities are to be distributed by or through one or more underwriters, the
Corporation will use its best efforts, if requested by any holder of Registrable
Piggyback Shares who requests incidental registration of Registrable Piggyback
Shares in connection therewith pursuant to Section 3.1, to arrange for such
underwriters to include the Registrable Piggyback Shares to be offered and sold
by such holder among the securities to be distributed by or through such
underwriters, provided that, for purposes of this sentence, best efforts shall
not require the Corporation to reduce the amount or sale price of such
securities proposed to be distributed by or through such underwriters. The
holders of Registrable Piggyback Shares to be distributed by such underwriters
shall be parties to the underwriting agreement between the Corporation and such
underwriters and the representations and warranties by, and the other agreements
on the part of, the Corporation to and for the benefit of such
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underwriters, shall also be made to and for the benefit of such holders of
Registrable Piggyback Shares, and the Corporation will cooperate with such
holders of Registrable Piggyback Shares under such underwriting agreement, which
shall not include conditions that are not customary in underwriting agreements
with respect to combined primary and secondary distributions and shall be
otherwise reasonably satisfactory to such holders. Such holders of Registrable
Piggyback Shares shall not be required by the Corporation to make any
representations or warranties to or agreements with the Corporation or the
underwriters other than reasonable representations, warranties or agreements
(including indemnity agreements customary in secondary offerings) regarding such
holder, such holder's Registrable Piggyback Shares and such holder's intended
method or methods of distribution and any other representation required by law.
3.3.2 (i) If any registration pursuant to Section 3.1 shall be in
connection with an underwritten public offering, each holder of
Registrable Piggyback Shares agrees, if so required by the managing
underwriter, not to effect any public sale or distribution of
Registrable Piggyback Shares or other Stock (other than as part of such
underwritten public offering) within twenty (20) days prior to the
effective date of such registration statement or ninety (90) days (or
such longer period, up to one hundred eighty (180) days, as the
managing underwriter may require) after the effective date of such
registration statement.
(ii) The Corporation agrees not to effect any private or public
sale or distribution of any of its equity securities or securities
convertible into or exchangeable or exercisable for any of such
securities during the seven (7) days prior to and during the ninety
(90) day period beginning on the date on which any underwritten
registration has become effective, except as part of such underwritten
registration and except pursuant to registrations on Form S-8 or Form
S-4 or any successor thereto or pursuant to the exercise of already
outstanding options.
3.4 Preparation: Reasonable Investigation. In connection with the
preparation and filing of each registration statement registering Registrable
Piggyback Shares under the Securities Act, the Corporation will give the holders
of Registrable Piggyback Shares on whose behalf such Registrable Piggyback
Shares are to be so registered, the opportunity to review such registration
statement, each prospectus included therein or filed with the Commission and
each amendment thereof or supplement thereto, and, in the event such offering of
Registrable Piggyback Shares is underwritten, will give each of them and the
underwriters and their counsel such access to its books and records and such
opportunities to discuss the business of the Corporation with its officers and
the independent public accountants who have certified its financial statements
as shall be reasonably necessary in the opinion of such holders and such
underwriters or their respective counsel, to conduct a reasonable investigation
within the meaning of the Securities Act. To minimize
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disruption and expense to the Corporation during the course of the registration
process, sellers of Registrable Piggyback Shares to be covered by any such
registration statement shall coordinate their investigation and due diligence
efforts hereunder and, to the extent practicable, will act through a single set
of counsel and a single set of accountants.
3.5 Indemnification.
3.5.1 In the event of any registration under the Securities Act, the
Corporation will, and hereby does, indemnify and hold harmless in the case of
any registration statement filed pursuant to Section 3.1, the seller of any
Registrable Piggyback Shares covered by such registration statement, its
directors, partners, members, trustees and officers, each other person who
participates as an underwriter in the offering or sale of such securities and
each other person, if any, who controls such seller or any such underwriter
within the meaning of the Securities Act against any losses, claims, damages,
liabilities or expenses, joint or several, arising out of or based upon (i) any
untrue statement or alleged untrue statement of any material fact contained in
any registration statement under which such securities were registered under the
Securities Act, any preliminary prospectus, final prospectus or summary
prospectus contained therein or (ii) any omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading and the Corporation will reimburse such seller and each such
director, partner, member, trustee, officer, participating person and
controlling person for any legal or any other expenses reasonably incurred by
them in connection with investigating or defending any such loss, claim,
liability, action or proceeding, provided that the Corporation shall not be
liable in any such case to the extent that any such loss, claim, damage,
liability or expense (or action or proceeding in respect thereof) arises out of
or is based upon an untrue statement or alleged untrue statement or omission or
alleged omission made in such registration statement, any such preliminary
prospectus, final prospectus, summary prospectus, amendment or supplement in
reliance upon and in conformity with information furnished in writing to the
Corporation by such seller or any such director, partner, member, trustee,
officer, participating person or controlling person specifically for use in the
preparation thereof. Such indemnity shall remain in full force and effect
regardless of any investigation made by or on behalf of such seller or any such
director, partner, member, trustee, officer, participating person or controlling
person and shall survive the transfer of such securities by such seller.
Notwithstanding the foregoing, the indemnification with respect to any
preliminary prospectus shall not inure to the benefit of the seller or any other
indemnified person if a copy of the final prospectus was not delivered on, prior
to or concurrently with the sale giving rise to such liability and the untrue
statement or alleged untrue statement or omission or alleged omission of a
material fact contained in the preliminary prospectus was corrected in the final
prospectus.
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3.5.2 The Corporation may require, as a condition to including any
Registrable Piggyback Shares in any registration statement filed pursuant to
Section 3.1 that each holder of any Registrable Piggyback Shares shall, by
acceptance thereof, severally and not jointly, indemnify and hold harmless the
Corporation, its directors officers, agents and each other person, if any, who
controls the Corporation, against any losses, claims, damages, costs, expenses
or liabilities, joint or several, to which the Corporation or any such director
or officer or any such person may become subject under the Securities Act or any
other statute or at common law, insofar as such losses, claims, damages, costs,
expenses or liabilities (or actions in respect thereof) arise out of or are
based upon (i) any alleged untrue statement of any material fact contained, on
the effective date thereof, in any registration statement under which
Registrable Piggyback Shares were registered under the Securities Act, or in any
preliminary prospectus or final prospectus contained therein, or any amendment
or supplement thereto or (ii) any alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which made, not misleading, in each case to
the extent, but only to the extent that such alleged untrue statement or alleged
omission was contained in written information furnished to the Corporation by
such holder specifically for use therein, and shall reimburse the Corporation or
such director, officer or other person for any legal or any other expenses
reasonably incurred in connection with investigating or defending any such loss,
claim, damage, liability or action. Notwithstanding the foregoing, the
obligations of any holder shall be limited to an amount equal to the proceeds
received by such holder from the Registrable Piggyback Shares sold pursuant to
the registration statement to which the losses, claims, liabilities or damages
relate.
3.5.3 Promptly after receipt by an indemnified party of notice of the
commencement of any action or proceeding involving a claim referred to in the
preceding subdivisions of this Section 3.5, such indemnified party will, if a
claim in respect thereof is to be made against an indemnifying party, give
written notice to the latter of the commencement of such action, provided that
the failure of any indemnified party to give notice as provided herein shall not
relieve the indemnifying party of its obligations under the preceding
subdivisions of this Section 3.5 except to the extent the indemnifying party is
actually prejudiced by such failure. In case any such action is brought against
an indemnified party, unless in such indemnified party's reasonable judgment a
conflict of interest between such indemnified and indemnifying parties may exist
in respect of such claim, the indemnifying party shall be entitled to assume the
defense thereof, jointly with any other indemnifying party similarly notified,
to the extent that it may wish, with counsel reasonably satisfactory to such
indemnified party. The indemnifying party shall be responsible for any legal or
other expenses subsequently incurred by the indemnified party in connection with
the defense thereof other than reasonable costs of investigation. No
indemnifying party shall, without the consent of the indemnified party (not to
be unreasonably withheld), consent to entry of any judgment or enter into any
settlement which does not include
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as an unconditional term thereof the giving by the claimant or plaintiff to such
indemnified party of a release from all liability in respect to such claim or
litigation.
3.6 Rule 144. For so long as the Corporation shall have any class of its
equity securities registered under Section 12(b) or Section 12(g) of the
Securities Exchange Act of 1934 (the "Exchange Act"), the Corporation shall take
such action as any holder of Stock subject to Rule 144 (or similar Rule) ("Rule
144 Stock") may reasonably request, all to the extent required from time to time
to enable such holder to sell shares of Stock without registration under the
Securities Act within the limitation of the exemptions provided by (a) Rule 144
under the Securities Act, as such Rule may be amended from time to time, or (b)
any similar rule or regulation hereafter adopted by the Commission. Upon the
request of any holder of 144 Stock, the Corporation will deliver such holder a
written statement as to whether it has complied with such requirements.
3.7 Demand Registration. At any time after September 29, 2000, any holder
or holders of a majority of the Piggyback Shares outstanding may make one
written request to the Corporation for registration of their Piggyback Shares
under the Securities Act, and the securities or blue sky laws of any
jurisdiction designated by such holder or holders (a "Demand Registration"). The
Corporation shall, subject to the terms and conditions hereof, use its best
efforts to effect a Demand Registration for such Piggyback Shares pursuant to
this Agreement. The request for Demand Registration shall specify the number of
Piggyback Shares proposed to be sold and shall also specify the intended method
of disposition thereof. Upon a request for a Demand Registration, the
Corporation shall (a) promptly take such steps as are necessary or appropriate
to prepare for the registration of the Piggyback Shares to be registered, and
(b) within ten (10) days from the receipt of such request for a Demand
Registration, give written notice of such Demand Registration request to all
holders of Piggyback Shares so that the Corporation may include in such
registration all Piggyback Shares with respect to which the Corporation receives
written requests for inclusion therein in accordance with Section 3 hereof. Each
such written request for inclusion shall also specify the number of Piggyback
Shares to be registered, the intended method of disposition thereof and the
jurisdictions in which registration is desired.
3.7.1 A registration shall not constitute a Demand Registration until
it has become effective. In any registration initiated as a Demand Registration,
the Corporation shall pay all Registration Expenses in connection therewith,
whether or not such Demand Registration becomes effective, unless such Demand
Registration fails to become effective as a result of the fault of the holders
of the Piggyback Shares for which a request for a Demand Registration has been
made.
3.7.2 If the holders of a majority of the Piggyback Shares to be
registered in a Demand Registration so elect, the offering of such Piggyback
Shares pursuant to such Demand Registration shall be in the form of an
underwritten offering
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and the managing underwriter or underwriters selected for such offering shall be
the Approved Underwriter (as defined below). In such event, if the Approved
Underwriter advises the holders of such Piggyback Shares in writing that in
their opinion the aggregate amount of such Piggyback Shares requested to be
included in such offering is sufficiently large to materially and adversely
affect the success of such offering, the Corporation shall include in such
registration only the aggregate amounts of such Piggyback Shares that in the
opinion of the Approved Underwriter may be sold without any such material
adverse effect, and such securities shall be allocated pro rata among the
holders of such Piggyback Shares in the proportion that the amount of such
Piggyback Shares initially requested to be included in such registration by
their holders bears to the aggregate number of such Piggyback Shares to be
included in such registration.
3.7.3 If any Demand Registration is in the form of an underwritten
offering, the holders of a majority of the Piggyback Shares to be registered
shall select and obtain the investment banker or investment bankers and manager
or managers that will administer the offering (the "Approved Underwriter");
provided that the Approved Underwriter shall be reasonably acceptable to the
Corporation.
3.7.4 The provision of Sections 3.2 through 3.5 are incorporated herein
by this reference. Wherever required in the meaning and context, "Section 3.7"
shall be substituted for "Section 3.1" and "Piggyback Shares" to be included in
the Demand Registration shall be substituted for "Registrable Piggyback Shares";
provided, nothing in this Section 3.7.4 is intended to expand the rights of
holders of Stock or Piggyback Shares beyond those rights expressly provided in
this Section 3.7.
3.7.5 Subject to Section 3.7.1, the Demand Registration set forth in
this Section 3.7 may be exercised once, and only once, during the term of this
Agreement.
4. INSURANCE.
4.1 Funding by Life Insurance. In order to assist the Corporation in
maintaining the continuity of effective management, the Corporation shall
purchase life insurance policies for the benefit of the Corporation covering the
life of Michael Leven in such amounts as the Board of Directors may determine;
however, this Agreement shall not impose any obligation on the Corporation to
purchase any such life insurance if such insurance cannot be purchased on
commercially reasonable terms. Upon the Corporation's request, Mr. Leven shall
make himself available for physical or other related examinations. Nothing
herein shall be construed to limit, alter, prohibit or restrict the right,
obligation and authority of the Corporation to obtain insurance covering the
life of Mr. Leven for his benefit where required or permitted under the
provision of a separate agreement and where available on commercially reasonable
terms.
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4.2 Other Insurance. The Corporation may elect to purchase disability
insurance policies covering the Management Stockholders in such amounts as the
Board of Directors may determine, if such insurance can be purchased on
commercially reasonable terms.
5. EFFECTIVENESS, TERMINATION AND AMENDMENT.
5.1 Effectiveness of 1996 Amendment. The 1996 Amendment and this Restated
Stockholders' Agreement, which includes the 1996 Amendment, shall not become
effective unless and until the closing of the initial public offering of the
Corporation's Class A Common Stock pursuant to the Corporation's Registration
Statement on Form S-1, which was filed with the Securities and Exchange
Commission (the "Commission") on September 5, 1996. Until such time, the Old
Agreement shall remain in full force and effect.
5.2 Termination. This Agreement shall terminate:
(i) on the date that all the Stock is owned by only one Stockholder;
(ii) on the date that the Corporation is adjudicated as bankrupt, the
Corporation executes an assignment for benefit of creditors, a receiver is
appointed for the Corporation, or the Corporation voluntarily or
involuntarily dissolves; and
(iii) on the date the holders of all the Stockholders agree to
terminate this Agreement.
In the event of termination, the Corporation and each Stockholder (or
former Stockholder) agree to abide by the provisions hereof which, by their
terms, contemplate survival.
5.3 Amendment. The Old Stockholders' Agreement was amended as of October
11, 1996 by a vote of holders of at least 2/3 of the then outstanding common
stock, par value $.10 per share, in accordance with Sections 9.3 and 17 of the
Old Stockholders' Agreement. This Agreement may not be amended or terminated
orally, and no amendment, termination, or attempted waiver shall be valid unless
in writing, unless adopted by the vote of two-thirds (2/3rds) in number (and not
in voting power) of the issued and outstanding Stock held by the Stockholders.
Such amendment, termination or waiver, where duly adopted shall be binding on
and inure to the benefit of all Stockholders and the Corporation. Provided,
notwithstanding the preceding sentence, no amendment, termination or waiver
which adversely effects the rights of a Management Stockholder shall be binding
or effective as to such Management Stockholder unless also approved by the CEO
and the CFO, respectively. Moreover, notwithstanding anything to the contrary in
this Section 5.3, no amendment, termination or waiver which acts to or purports
to single out or discriminate against
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any specific Stockholder shall be binding or effective unless approved by that
Stockholder.
6. NOTICE.
Any and all notices, offers, demands, or elections required or permitted to
be made under this Agreement shall be in writing, signed by the party giving
such notice, and shall be deemed to have been given only if and when (i)
personally delivered, or (ii) three (3) business days after mailing, postage
prepaid, by registered or certified mail, or (iii) when delivered (and receipted
for) by a major recognized overnight or express courier service, or (iv) when
first sent by telex, telecopier or other means of instantaneous communication
provided such communication is promptly confirmed by personal delivery, mail or
a major recognized overnight or express courier service as provided above,
appropriately addressed to the party to receive such notice utilizing the
address set forth below such party's signature to this Agreement, or at such
address as such party may hereafter designate in writing by written notice to
the other parties to this Agreement in conformity with the foregoing. Any and
all notices to the Corporation shall be conspicuously marked on the fact
thereof: "Attention: Secretary of the Corporation."
7. REMEDIES.
The parties acknowledge that they will be irreparably damaged if this
Agreement is not specifically enforced. The parties declare that it is
impossible to measure in money the damages that will accrue to a person having
rights under this Agreement because of a failure of another to perform any
obligation under this Agreement. Therefore, this Agreement shall be enforceable
by specific performance or other equitable remedy cumulative with and not
exclusive of any other remedy. If any person shall institute any action or
proceeding to enforce this Agreement, any person subject to this Agreement
against whom such action or proceeding is brought hereby waives the claim or
defense that the person instituting the action or proceeding has an adequate
remedy at law, and no person shall in any action or proceeding put forward the
claim or defense that an adequate remedy at law exists. Should any dispute
concerning the transfer of Stock arise under this Agreement, an injunction may
be issued restraining the transfer of such Stock until such dispute has been
resolved. No party need post bond or other surety as a condition or requirement
for obtaining any such equitable relief.
8. ATTORNEY-IN-FACT.
Each Stockholder irrevocably constitutes and appoints the Corporation, or
any present or future officer of the Corporation, its lawful attorney-in-fact,
with full power of substitution and revocation, to do all other acts and things
necessary to carry out such Stockholder's obligations under this Agreement. All
acts of said attorney-in-fact or designee are hereby authorized and ratified,
and said attorney-in-fact or
16
<PAGE>
designee shall not be liable for any acts of omission or commission, nor for any
error of judgment or a mistake of fact or law, unless resulting from the
Corporation's gross negligence or intentional misconduct.
9. RATIFICATION AND ADOPTION OF CERTAIN ACTS AND TRANSACTIONS.
9.1 Approval of Golden Parachute Payments. The Stockholders expressly agree
to and approve the "Golden Parachute Payments" which may be included (as defined
below) and made in and pursuant to (i) the Employee Stock Purchase Agreement
between the Corporation and Mr. Leven, (ii) the Employee Stock Purchase
Agreement between the Corporation and Mr. Aronson, (iii) the Employment
Agreement between the Corporation and Mr. Leven, and (iv) the Employment
Agreement between the Corporation and Mr. Aronson, as such agreements may be
amended from time to time. As used herein, "Golden Parachute Payments" means any
payment as that term is defined in Section 280G of the Internal Revenue Code of
1986, as amended (the "IRC") or any similar provisions.
9.1.1 The agreement, consent and approval of the Stockholders hereunder
shall be continuing, such that said approval by the Stockholders shall be deemed
to be made immediately before the control or asset change which gives rise to
the Golden Parachute Payments (the "Golden Parachute Event"). Mr. Leven or Mr.
Aronson, as the case may be, may request a specific vote of Stockholders
immediately prior to the Golden Parachute Event in order to comply with the
provisions of Section 280G of the Internal Revenue Code.
9.1.2 The Stockholders acknowledge and agree that they have received a
full, fair and adequate disclosure of all material facts and have granted their
approval and consent to the Golden Parachute Payments pursuant thereto, and
shall grant their approval upon the request of Mr. Leven and Mr. Aronson,
respectively. The Corporation shall cooperate and provide the stockholders with
"adequate disclosure" (as defined with respect to Section 280G) prior to any
requested Stockholder approval or vote for approval with respect to the Golden
Parachute Payments.
9.1.3 The intent of this Section 9.1 is to comply with the requirements
of IRC Section 280G such that the recipient of the Golden Parachute Payments, if
any, shall not be subject to an excise tax on such payments and that the
Corporation or an Affiliate(s) may take a deduction for federal income purposes
for such Golden Parachute Payments. Provided, in the event the approval and
consent of the Stockholders under this Section 9.1 is not a qualifying approval
under Section 280G, then, in that event, the provisions of this Section 9.1
shall not be applicable and the Stockholders shall vote to approve or not to
approve the Golden Parachute Payments after "adequate disclosure" under Section
280G of the IRC.
17
<PAGE>
10. INTERPRETATION; COORDINATION WITH MEMORANDUM
AND EMPLOYEE STOCK PURCHASE AGREEMENT.
10.1 Interpretation. Within this Agreement, the singular shall include the
plural and the plural shall include the singular, and any gender shall include
the other gender, all as the meaning in the context of this Agreement shall
require.
10.2 Coordination with Employee Stock Purchase Agreement. From time to
time, certain Management Stockholders, as employees of the Corporation, may be a
party to an agreement or agreements with the Corporation which provide for the
rights, benefits, options, obligations and otherwise of the parties relating to
the purchase, sale, call, repurchase, resale and otherwise of Stock (hereinafter
referred to as, and which agreement(s) may be actually titled as, the "Employee
Stock Purchase Agreement" or "ESPA"). It is the intent and understanding of the
parties that an ESPA shall be construed and applied in a consistent,
complimentary and supplementary manner with this Agreement; however, in the
event of any inconsistency or ambiguity where the terms of the ESPA may not be
construed to supplement the terms of this Agreement, the terms of this Agreement
shall supersede and control.
10.2.1 Without limiting the generality of Section 10.2, by way of
clarification but not limitation, nothing in this Agreement shall be construed
to impose, modify or alter a designation of Stock under the ESPA. Accordingly,
Stock which is subject to a restriction, call option, resale option or other
similar limitation under an ESPA may not be disposed under this Agreement unless
also permitted (or not prohibited) under the terms of the ESPA. By way of
further clarification but not limitation, (i) Management Stockholders may
transfer under Section 5.2 hereof Restricted, Earned, Unrestricted and/or
Reallocable Shares as also permitted under the ESPA, (ii) only Unrestricted
Shares which are not Reallocable under an ESPA are available for treatment under
this Agreement as Registrable Piggyback Shares under Section 3.1 hereof, or as
Rule 144 Stock under Section 3.6 hereof, and (iii) the terms and provisions of
an ESPA are subject to such other reasonable interpretations as may be necessary
or desirable to coordinate this Agreement with such an ESPA.
11. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
The Stockholders hereby agree that the Corporation shall indemnify and hold
harmless the officers and Directors of the Corporation from and against any and
all claims, demands, actions, causes of action, costs and expenses, including
reasonable attorneys' fees, expenses of litigation, court costs and damages,
which may be incurred by them as may be provided in the Certificate of
Incorporation and/or Bylaws of the Corporation, the respective employment
agreements, if any, and the fullest extent permitted by applicable law.
18
<PAGE>
12. MISCELLANEOUS.
12.1 Governing Law. This Agreement shall be construed and enforced in
accordance with the laws of the State of Delaware.
12.2 Captions. Titles or captions of sections contained in this Agreement
are inserted only as a matter of convenience and for reference, and in no way
define, limit, extend, or prescribe the scope of this Agreement or the intent of
any provision.
12.3 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same Agreement.
12.4 Further Acts. Each party agrees to perform any further acts and to
execute and deliver any instruments or documents that may be necessary or
reasonably deemed advisable to carry out the purposes of this Agreement.
12.5 Gender. Masculine, feminine, and neuter terms shall be interchangeable
(and shall include a corporation, a trust, or another entity), as shall be
singular and plural, where the context makes a change of gender or number
appropriate.
12.6 Severability. If any part of this Agreement shall be held void,
voidable, or otherwise unenforceable by any court of law or equity, nothing
contained in this Agreement shall limit the enforceability of any other part.
This Agreement and each provision hereof is severable and each shall be
"blue-penciled," judicially modified, and enforced to the fullest extent under
law and equity. The Corporation's rights and obligations to purchase its Stock
contained in this Agreement are subject to the restrictions contained in the
business corporation code adopted in the Corporation's state of incorporation,
and such other pertinent lawful restrictions are as now or may hereafter become
effective. If for any reason the Corporation should be prohibited from
exercising such rights, the Corporation shall be not deemed in breach of or
default under this Agreement and the remaining provisions of this Agreement
shall remain in full force and effect.
12.7 Successors and Assigns. This Agreement shall be binding upon and shall
inure to the benefit of the Stockholders and their respective heirs, successors,
and legal representatives. No party shall have the right to assign this
Agreement, or any interest under this Agreement, without the prior written
consent of the other parties and unless and until the acquirer thereof such
agrees in writing to accept and be bound by all the terms and conditions of this
Agreement, in which case all such terms and conditions shall inure to the
benefit of and be binding upon such acquirer and his heirs, successors and legal
representatives, to the same extent as if such acquirer had originally been a
party to this Agreement.
19
<PAGE>
13. ENTIRE AGREEMENT.
This Agreement and any amendments or exhibits attached hereto comprise all
the agreements, understandings, representations, conditions and warranties by
and between the parties. This Agreement may not be modified or amended except in
writing signed by the parties to this Agreement as set forth in Section 5.3
above.
14. FAILURE TO EXERCISE RIGHTS.
Failure on the part of the Corporation to exercise any rights or privileges
granted to it or to insist upon the full performance of all obligations
hereunder shall not be construed as waiving any such rights, privileges,
obligations or duties, or as creating any custom contrary thereto. A waiver by a
party of a breach of any provision of this Agreement must be in writing signed
by the party to be charged with such waiver and any such waiver shall not be
construed as a waiver of any subsequent breach thereof.
20
<PAGE>
Exhibit A
U.S. FRANCHISE SYSTEMS, INC.
LIST OF STOCKHOLDERS
(As of October 11, 1996)
ADELSON, MR. SHELDON G.
The Sands Hotel
3355 Las Vegas Boulevard South
Las Vegas, NV 89109
- --------------------------------------------------------------------------------
ALPINE MICROTEL, L.L.C.,
a New Jersey limited liability company
G2 Investment Partners, a New Jersey
general partnership, Member
1285 6th Avenue
21st Floor
New York, NY 10019
- --------------------------------------------------------------------------------
ARONSON, MR. NEAL K.
c/o U.S. Franchise Systems, Inc.
13 Corporate Square
Suite 250
Atlanta, GA 30329
- --------------------------------------------------------------------------------
BECK, MR. RONALD N.
830 Park Avenue
Apartment 2-A
New York, NY 10021
- --------------------------------------------------------------------------------
BRAVMAN, MR. LUDWIG
3333 Henry Hudson Parkway
Apt. 6E
Riverdale, NY 10463
- --------------------------------------------------------------------------------
CAMPBELL, MS. DEBBIE
1181 Village Cove
Atlanta, GA 30319
- --------------------------------------------------------------------------------
<PAGE>
CHAFETZ, MR. HOWARD
The Interface Group
300 First Avenue
Needham, MA 02194
- --------------------------------------------------------------------------------
CHAFETZ, MR. IRWIN
The Interface Group
300 First Avenue
Needham, MA 02194
- --------------------------------------------------------------------------------
CHAFETZ, MR. LAURENCE
The Interface Group
300 First Avenue
Needham, MA 02194
- --------------------------------------------------------------------------------
CRANOR, MR. JOHN M., III
534 Barberry Lane
Louisville, KY 40206
- --------------------------------------------------------------------------------
EILIAN, H. PIERRE, M.D.
945 Stonegate Drive
Highland Park, IL 60035
- --------------------------------------------------------------------------------
EILIAN, MR. JONATHAN D.
c/o Starwood Capital Group, L.P.
Three Pickwick Plaza
Suite 250
Greenwich, CT 06830
- --------------------------------------------------------------------------------
F3 PARTNERS,
a New York general partnership
c/o Mr. Jonathan F. Foster, General Partner
Lazard Freres & Co., LLC 30 Rockefeller Plaza New York, NY 10020
- --------------------------------------------------------------------------------
FEINGLASS,NANCY B.
AND HOWARD
161 West 61st Street
Apt. 25-C
New York, NY 10023-7461
- --------------------------------------------------------------------------------
FLYNN, MS. JULIA G.
335 Madison Avenue
26th Floor
New York, NY 10017
- --------------------------------------------------------------------------------
2
<PAGE>
G2 INVESTMENT PARTNERS
a New Jersey Partnership
c/o Richard D. Goldstein, General Partner
1285 Avenue of the Americas, 21st Floor
New York, NY 10019
- --------------------------------------------------------------------------------
GARDNER, MS. SONIA E.
335 Madison Avenue
26th Floor
New York, NY 10017
- --------------------------------------------------------------------------------
GLENBROOK PARTNERS, L.P.,
a Nevada limited partnership
ATTENTION: Mr. Peter R. Knapp
308 Dorla Court
P.O. Box 12219
Zephyr Cove, NV 89448
- --------------------------------------------------------------------------------
GOOLOCK ASSOCIATES,
a New York general partnership
c/o Oppenheimer & Co., Inc.
ATTENTION: Mr. William Finneran, G.P.
Mr. Nathan Gantcher, G.P.
One World Financial Center
200 Liberty Street
New York, NY 10281
- --------------------------------------------------------------------------------
INDENTURE OF TRUST F/B/O
ALYSSA MICHELLE BERL N
Lotte Bravmann and Carol Bravmann Berlin,
Trustees
3333 Henry Hudson Parkway
Apt. 6E
Riverdale, NY 10463
- --------------------------------------------------------------------------------
INDENTURE OF TRUST F/B/O
ELANA DANIELLE BERLIN
Lotte Bravmann and Carol Bravmann Berlin,
Trustees
3333 Henry Hudson Parkway
Apt. 6E
Riverdale, NY 10463
- --------------------------------------------------------------------------------
3
<PAGE>
INDENTURE OF TRUST F/B/O
NICOLE AMY BERLIN
Lotte Bravmann and Carol Bravmann Berlin,
Trustees
3333 Henry Hudson Parkway
Apt. 6E
Riverdale, NY 10463
- --------------------------------------------------------------------------------
INDENTURE OF TRUST F/B/O
JEREMY J. KAUFTHAL
Lotte Bravmann and Judith Kaufthal,
Trustees
3333 Henry Hudson Parkway
Apt. 6E
Riverdale, NY 10463
- --------------------------------------------------------------------------------
INDENTURE OF TRUST F/B/O
JONATHAN S. KAUFTHAL
Lotte Bravmann and Judith Kaufthal,
Trustees
3333 Henry Hudson Parkway
Apt. 6E
Riverdale, NY 10463
- --------------------------------------------------------------------------------
INDENTURE OF TRUST F/B/O
JOSHUA M. KAUFTHAL
Lotte Bravmann and Judith Kaufthal,
Trustees
3333 Henry Hudson Parkway
Apt. 6E
Riverdale, NY 10463
- --------------------------------------------------------------------------------
KEENAN, MR. JEFFREY J.
11 The High Road
Bronxville, NY 10708
- --------------------------------------------------------------------------------
KWAIT, MR. BRIAN
211 E. 70th Street
Apt. 164
New York, NY 10021
- --------------------------------------------------------------------------------
LASRY, MR. MARC
335 Madison Avenue
26th Floor
New York, NY 10017
- --------------------------------------------------------------------------------
4
<PAGE>
LEBLANC, MR. BRAD
295 Nesbit Entry Drive
Roswell, GA 30076
- --------------------------------------------------------------------------------
LEVEN, MR. ADAM
P.O. Box 2012
Jackson Hole, WY 83001
- --------------------------------------------------------------------------------
LEVEN, ANDREA
5 West Welsey Ridge
Atlanta, Georgia 30327
- --------------------------------------------------------------------------------
LEVEN, MR. JONATHAN
1051 Shady Valley Place
Atlanta, GA 30324
- --------------------------------------------------------------------------------
LEVEN, MR. MICHAEL A.
5 West Wesley Ridge
Atlanta, Georgia 30327
- --------------------------------------------------------------------------------
LEVEN, MR. ROBERT
1152 Oakbrook Way
Atlanta, GA 30319
- --------------------------------------------------------------------------------
LEVY, MR. LEON
c/o Odyssey Partners
31 West 52nd Street
17th Floor
New York, NY 10019
- --------------------------------------------------------------------------------
MGP INVESTMENT PARTNERS
c/o Mr. Alan J. Gold, General Partner
8115 Preston Road
Suite 240
Dallas, Texas 75225
- --------------------------------------------------------------------------------
MATHIS, MR. DON
4609 Westhampton Circle
Tucker, GA 30084
- --------------------------------------------------------------------------------
MICROTEL INVESTORS, L.P.
c/o Mr. James D. Halper,
Managing Member,
HIH Partners, L.L.C., General Partner
301 East 69th Street
New York, NY 10021
- --------------------------------------------------------------------------------
5
<PAGE>
MICROTOPP ASSOCIATES,
a New York general partnership
ATTENTION: Matthew J. Maryles, Esq.,
General Partner
c/o Oppenheimer & Co., Inc.
One World Financial Center
200 Liberty Street
New York, NY 10281
- --------------------------------------------------------------------------------
MINTZ, MR. DAVID A.
21 Goodhart Drive
Livingston, NJ 07039
- --------------------------------------------------------------------------------
MUIR, MR. MICHAEL
5711 Preston Oaks
Suite 1638
Dallas, TX 75240
- --------------------------------------------------------------------------------
MUIR, MR. TIMOTHY
c/o U.S. Franchise Systems, Inc.
13 Corporate Square, Suite 250
Atlanta, GA 30329
- --------------------------------------------------------------------------------
NASH, MR. JACK
c/o Odyssey Partners, L.P.
31 West 52nd Street
New York, NY 10019
- --------------------------------------------------------------------------------
NASH GRANDCHILDREN 1986
TRUST (5) 9/29/95 31,000
Mr. Leon Levy, Trustee
c/o Odyssey Partners, L.P.
31 West 52nd Street New York, NY 10019
- --------------------------------------------------------------------------------
NASH FAMILY PARTNERSHIP
ATTENTION: Mr. Joshua Nash,
General Partner
c/o Odyssey Partners, L.P.
31 West 52nd Street
New York, NY 10019
- --------------------------------------------------------------------------------
ODED ABOODI; 1989 TRUST
c/o Esther Aboodi, Trustee
1285 Avenue of the Americas
21st Floor
New York, NY 10019
6
<PAGE>
POOLE, MS. FRAN
270 Sheringham Drive
Roswell, GA 30076
- --------------------------------------------------------------------------------
RECHLER, MR. DONALD
Reckson Associates Realty Corp.
225 Broadhollow Road, CS5341
Melville, NY 11747
- --------------------------------------------------------------------------------
RECHLER, MR. GREGG
Reckson Associates Realty Corp.
225 Broadhollow Road, CS5341
Melville, NY 11747
- --------------------------------------------------------------------------------
RECHLER, MR. ROGER
Reckson Associates Realty Corp.
225 Broadhollow Road, CS5341
Melville, NY 11747
- --------------------------------------------------------------------------------
RECHLER, MR. SCOTT
Reckson Associates Realty Corp.
225 Broadhollow Road, CS5341
Melville, NY 11747
- --------------------------------------------------------------------------------
ROMANIELLO, MR. STEVEN
785 Springside Court
Atlanta, GA 30342
- --------------------------------------------------------------------------------
SCHWARTZ MICROTEL INVESTORS,
L.L.C.
660 Madison Avenue, 20th Floor
New York, NY 10021
- --------------------------------------------------------------------------------
SCOTTO, MR. ANTHONY P.
91-08 Colonial Road
Apt. #E-5
Brooklyn, NY 11209
- --------------------------------------------------------------------------------
SHAW, MR. DAVID E.
8710 Willowbrae Lane
Roswell, GA 30076
- --------------------------------------------------------------------------------
7
<PAGE>
SMITH BARNEY WORLDWIDE
SPECIAL FUND, N.V.
ATTN: Mr. Scott E. Kalb,
Managing Director
Smith Barney International Asset
Management
388 Greenwich Street
25th Floor
New York, NY 10013
- --------------------------------------------------------------------------------
SMITH BARNEY WORLDWIDE
SECURITIES LIMITED
ATTN: Scott E. Kalb, Managing Director
Smith Barney International Asset
Management
388 Greenwich Street
25th Floor
New York, New York 10013
- --------------------------------------------------------------------------------
STARWOOD OPPORTUNITY FUND II,
L.P.
ATTENTION: Mr. Jonathan Eilian, SVP
Three Pickwick Plaza
Suite 250
Greenwich, CT 06830
- --------------------------------------------------------------------------------
STERN, STEVEN E. AND
BONNIE B. (JTWROS)
760 Park Avenue
New York, NY 10021
- --------------------------------------------------------------------------------
TARTER, MR. FRED B.
210 East 39th Street
New York, NY 10016
- --------------------------------------------------------------------------------
WELCH, MR. GENO
70 Bentridge Court
Lawrenceville, GA 30243
- --------------------------------------------------------------------------------
8
U.S. FRANCHISE SYSTEMS, INC.
A Delaware Corporation
AMENDED AND RESTATED
EMPLOYER STOCK PURCHASE AGREEMENT
---------------------------------
Michael A. Leven
<PAGE>
TABLE OF CONTENTS
Page
1. Definitions............................................................3
2. Management Equity Participation........................................9
3. Representations of Employee...........................................14
4. Representations and Warranties of the Corporation.....................15
5. Limitations on Restricted Shares......................................16
6. Earned Shares.........................................................17
7. Redemption of Restricted Shares Not Earned............................17
8. Termination Forfeiture................................................18
9. Termination of Employment Without Cause or by Employee
for Good Reason.......................................................19
10. Death or Total Disability of Employee.................................19
11. Reissue of Forfeit Shares.............................................20
12. Performance Criteria..................................................20
13. Successors and Assigns................................................23
14. Sale of All or Substantially All Stock or Assets, or Merger...........23
15. Legends...............................................................24
16. Additional Covenants..................................................24
17. Withholding Taxes; Section 83(b) Election.............................25
18. Notices...............................................................26
19. Miscellaneous.........................................................27
20. Multiple Counterparts.................................................29
21. Record Owner..........................................................29
i
<PAGE>
THIS AMENDED AND RESTATED EMPLOYEE STOCK PURCHASE AGREEMENT AND THE SECURITIES
ISSUED UPON THE TERMS HEREOF, HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES LAWS, AND NEITHER THIS
AGREEMENT NOR THE UNDERLYING SECURITIES MAY BE ASSIGNED, HYPOTHECATED,
ENCUMBERED, PLEDGED, SOLD OR OTHERWISE TRANSFERRED EXCEPT AS PROVIDED BY THE
TERMS HEREOF, IN ACCORDANCE WITH THE TERMS OF A SEPARATE STOCKHOLDERS' AGREEMENT
DATED ON OR ABOUT THE DATE HEREOF, AS THE SAME MAY BE AMENDED FROM TIME TO TIME,
AND PURSUANT TO EITHER AN EFFECTIVE REGISTRATION STATEMENT OR IN A TRANSACTION
EXEMPT FROM REGISTRATION UNDER APPLICABLE FEDERAL AND STATE SECURITIES LAWS.
STATE OF GEORGIA
COUNTY OF FULTON
U.S. FRANCHISE SYSTEMS, INC.,
a Delaware corporation
AMENDED AND RESTATED
EMPLOYEE STOCK PURCHASE AGREEMENT
This Amended and Restated Employee Stock Purchase Agreement (as amended,
the "Agreement") is entered into as of the ___ day of _____________ 1996, by and
between U.S. FRANCHISE SYSTEMS, INC., a Delaware corporation (the
"Corporation"), and MICHAEL A. LEVEN, an individual resident of the State of
Georgia (the "Employee").
WHEREAS, on September 29, 1995, the Employee and the Corporation executed
an Employee Stock Purchase Agreement (the "Old Agreement"), pursuant to which
the Corporation issued to the Employee and to Neal K. Aronson (together, the
"Initial Management") a total of 567,245 shares of common stock, par value $.10
per share (the "Old Common Stock"), of the Corporation, constituting 51% of the
then issued and outstanding common shares of the Corporation;
<PAGE>
2
WHEREAS, as set forth in greater detail on Exhibit A hereto, 278,061 of
such shares, or 25% of the then outstanding common shares of the Corporation,
were acquired outright by Initial Management as Unrestricted Shares (as defined
in the Old Agreement) and 289,184 of such shares, or 26% of the then outstanding
common shares, were acquired by Initial Management as Restricted Shares (as
defined in the Old Agreement), subject to the terms and conditions and
provisions as set forth in the Old Agreement;
WHEREAS, with respect to the 26% of the then outstanding common shares that
were held by Initial Management as Restricted Shares (as defined in the Old
Agreement), the Old Agreement (i) limited the rights of Initial Management to
vote and to receive dividends with respect to such shares, (ii) imposed
substantial restrictions on the transferability of such shares until such shares
were "earned" by Initial Management by reason of the Corporation's satisfaction
of certain performance criteria set forth therein and (iii) provided that such
shares were subject to forfeiture in the event the employment of the Management
holder thereof was terminated in certain circumstances;
WHEREAS, the Corporation is considering an IPO (as defined below) with
respect to its common shares, as adjusted for the Reclassification (as defined
below);
WHEREAS, in connection with the IPO, the Corporation and the Employee have
agreed to eliminate some of the restrictions that were imposed on Restricted
Shares pursuant to the Old Agreement and to deem that certain shares designated
as Restricted Shares pursuant to the Old Agreement be redesignated as
Unrestricted Shares;
<PAGE>
3
NOW THEREFORE, FOR AND IN CONSIDERATION of the mutual covenants set forth
herein, and other good and valuable consideration, the receipt, adequacy and
sufficiency of which is hereby acknowledged, the parties do hereby agree to
amend and restate the Old Agreement, as so amended, as follows:
1. Definitions. For purposes hereof, the following terms shall be defined
as follows:
(a) "Adjusted EBITDA" for any fiscal year of the Corporation means (i)
consolidated earnings of the Corporation and its subsidiaries before
consolidated interest, taxes, depreciation, amortization, and other non-cash
charges, adjusted to exclude one-time or non-recurring expenses or credits (such
exclusions to include but not be limited to the payments to Hudson Hotels
Corporation (formerly known as Microtel Franchising and Development Corporation)
in the total amount of $4 million dollars pursuant to the terms of that certain
Joint Venture Agreement dated September 7, 1995) for such fiscal year, as
determined by the Corporation in good faith in accordance with generally
accepted accounting principles consistently applied, minus (ii) 10% of the
Transaction Consideration (as defined below) actually paid by the Corporation
and/or its subsidiaries in connection with a Transaction (as defined below)
closed after the closing of the IPO (provided that such consideration has not
been deducted in determining the amount referred to in clause (i) above). In the
event of any dispute or disagreement regarding the determination of the amount
of Adjusted EBITDA, then such dispute or disagreement shall be resolved by the
accounting firm regularly engaged to and providing auditing services to the
Corporation.
<PAGE>
4
(b) "Earned Shares" means those Shares that are designated herein as
Restricted Shares and are subsequently redesignated as Earned Shares in
accordance with the terms hereof due to the attainment by the Corporation of
certain performance standards as provided for herein.
(c) "Employee Shares" means the Restricted Shares and Unrestricted Shares
held by Employee under this Agreement.
(d) "Employment Agreement" means that certain agreement relating to the
employment of Employee with the Corporation dated October 1, 1995, as the same
may be amended from time to time.
(e) "Initial Management" means Employee and Neal K. Aronson.
(f) "IPO" shall mean the initial public offering of Shares pursuant to the
Securities Act of 1933, as amended.
(g) "Management" means the group of individuals (including Initial
Management) who are employees of the Corporation and who have been issued shares
of Class A Common Stock pursuant to the terms of the Old Agreement or a stock
purchase agreement substantially similar to the Old Agreement, as the same may
be amended from time to time (with such changes thereto as are authorized by the
Stock Reallocation Committee).
(h) "Management Shares" means Shares issued to and acquired by Management
(or their permitted designees and successors), including Unrestricted Shares,
Restricted Shares, Earned Shares, Reallocable Shares, shares acquired through
preemptive (or similar) rights or otherwise from or through the Corporation and
such shares that are transferred to other Management.
<PAGE>
5
(i) "Original Stockholders" or "Original Investors" means those persons who
are not employees of the Corporation and who were issued shares of Old Common
Stock pursuant to the offering described in the Confidential Investment
Memorandum of the Corporation, dated August 19, 1995, and their Permitted
Transferees (as such term is used in that certain Stockholders' Agreement among
the Corporation and the Original Investors, dated as of September 29, 1995).
(j) "Reallocable Shares" means those Restricted Shares and/or Unrestricted
Shares owned or held by Initial Management that were specifically designated at
the time of their original issue as Reallocable Shares and that, prior to the
date hereof, have been reallocated to other Management pursuant to the Old
Agreement. Such shares shall retain such designation regardless of whether they
are converted from Restricted Shares to Earned Shares (in the case of
Reallocable Restricted Shares), unless and until such shares become Forfeit
Shares and are redeemed or otherwise repurchased by the Corporation from the
Management holder (other than Initial Management) thereof.
(k) "Reclassification" means the conversion of each share of Old Common
Stock into 9.67 shares of Class A Common Stock, par value $.01 per share ("Class
A Common Stock"), of the Corporation pursuant to the Corporation's Amended and
Restated Certification of Incorporation, which is to be filed with the State of
Delaware prior to the consummation of the IPO.
(l) "Restricted Shares" means 144,592 Shares (prior to the
Reclassification), constituting 13% of the outstanding common stock of the
Corporation as of October 2, 1995), that were issued to Initial Management
pursuant to the Old Agreement and that were specifically designated at the time
of issue as Restricted Shares,
<PAGE>
6
as the same are reclassified pursuant to the Reclassification. Restricted Shares
are subject to repurchase (even if they have been converted to Earned Shares)
pursuant to a Termination Forfeiture. Restricted Shares are eligible for
conversion to Earned Shares upon attainment by the Corporation of certain
performance criteria as set forth herein. Restricted Shares that have not been
converted to Earned Shares by September 29, 2005 are subject to redemption by
the Corporation (and reissue to the Original Investors). If such shares are then
reissued to Original Investors, such shares shall automatically be converted to
and shall thereafter be deemed to be Unrestricted Shares.
(m) "Shares" means the shares of the Old Common Stock that were authorized
immediately prior to the Reclassification, as reclassified by the
Reclassification into Class A Common Stock and, to the extent set forth in
Section 2(b)(iv) hereof, exchanged for Class B Common Stock, par value $.01 per
share ("Class B Common Stock"), of the Corporation, all as the same may be
further reclassified from time to time.
(n) "Stock Reallocation Committee" means the committee appointed by the
Board of Directors of the Corporation from among its members to administer the
reallocation of Reallocable Shares hereunder.
(o) "Stockholders' Agreement" means that certain Stockholders' Agreement
dated as of September 29, 1995 by and between the Corporation and the
Stockholders named therein, as such agreement may be amended from time to time.
Employee acknowledges that all of the Shares held by Employee hereunder shall be
issued and held in accordance with the terms of the Stockholders' Agreement, in
addition to the terms and conditions hereof.
<PAGE>
7
(p) "Termination Forfeiture" means the redemption by the Corporation from
the Employee of Restricted Shares (whether or not converted to Earned Shares)
upon the occurrence of a Termination Forfeiture Event.
(q) "Termination Forfeiture Event" means the occurrence or happening of one
of the following during the period ending on September 29, 2005: (i) voluntary
resignation for other than Good Reason (as defined in the Employment Agreement)
of Employee; or (ii) termination of Employee by the Corporation for Cause (as
defined in the Employment Agreement).
(r) "Transaction Consideration" means the total consideration paid or to be
paid in connection with a Transaction, including, without limitation: (i) cash;
(ii) notes, securities and other property; (iii) indebtedness for borrowed money
assumed, refinanced or extinguished; (iv) amounts payable under consulting
agreements, agreements not to compete or similar arrangements; and (v)
contingent payments (whether or not related to future earnings or operations);
provided, that in the event debt financing is utilized to effect a Transaction,
proceeds from such debt financing shall no longer be considered as Transaction
Consideration as and to the extent such proceeds have been repaid to the lender
thereof. For purposes of determining the amount of consideration paid, non-cash
consideration shall be valued as follows: (x) publicly traded securities,
including capital stock of the Corporation, shall be valued at the average of
their closing prices (as reported in The Wall Street Journal) for the five
trading days prior to the closing of the Transaction and (y) any other non-cash
consideration shall be valued at the fair market value thereof as determined in
good faith by the Board of Directors of the Corporation.
<PAGE>
8
(s) "Transaction" means an acquisition by the Corporation and/or its
subsidiaries of another corporation or other entity, a business or a brand,
including, but not limited to, through a merger, consolidation, tender or
exchange offer, acquisition of securities or assets, or through a licensing
agreement, but excluding any investment in another corporation, joint venture or
other entity (an "entity") that represents less than 25% of the equity of such
entity.
(t) "Unrestricted Shares" means all Shares owned or held by the Initial
Management (or by other Management, in the case of Reallocable Shares, or by the
Permitted Transferees of Initial Management (as such term is defined in the
Stockholders' Agreement, prior to any amendment thereof)) that have not been
specifically designated herein as Restricted Shares, including but not limited
to Shares acquired for value from the Corporation pursuant to a voluntary
exchange (including the exchange referred to in Section 2(b)(iv) hereof) or
through preemptive (or similar) rights, stock splits or dividends with respect
to Unrestricted Shares and the like or other subsequently acquired shares.
Unrestricted Shares are held outright and subject to the terms and conditions
set forth in the Amended and Restated Certificate of Incorporation of the
Corporation, as the same may be amended from time to time, and in the
Stockholders' Agreement.
(u) Capitalized terms not defined in this Agreement shall have the meaning
and intent ascribed to them in the Stockholders' Agreement.
<PAGE>
9
2. Management Equity Participation.
(a) Stock Reallocation Committee. (i) Pursuant to the Old Agreement,
the Management Shares were initially issued, allocated, offered and divided
among Employee and Neal K. Aronson in the amounts and designations set forth in
Exhibit "A" attached hereto. Following the Reclassification, the IPO and
effectiveness of this amendment in accordance with Section 19 hereof, Management
(including Initial Management) will own Shares in the amounts and designations
set forth in Exhibit "B" attached hereto. Thereafter, subsequent offers, call
options, redemptions, and the like, in each case to the extent permitted
hereunder, shall be subject to the exclusive control and authority of the Stock
Reallocation Committee of the Corporation. The Stock Reallocation Committee
shall also have the authority to cause the Corporation to act with respect to
Management Shares that are forfeited by Management to the Corporation, subject
to the rights of Initial Management to have Forfeit Shares reoffered to them
under this Agreement.
(b) Unrestricted Shares.
(i) Thirty-eight percent (38%) of the total 51% of Shares acquired
by Initial Management pursuant to the Old Agreement are hereby designated as
Unrestricted Shares. 62,911 of such shares, or approximately 5.656% of the 38%
constituting Unrestricted Shares were designated as Reallocable Shares pursuant
to the Old Agreement and have heretofore been called and repurchased from time
to time at the direction of the Stock Reallocation Committee from Initial
Management (or their Permitted Transferees) and sold to other members of
Management. The Stock Reallocation Committee has had and shall continue to have
the authority to impose such
<PAGE>
10
terms, conditions, limitations and otherwise as it deems reasonable, desirable
or necessary with respect to Reallocable Shares held by Management other than
Initial Management; provided, however, that following the effectiveness of this
Agreement, no other Shares (including Shares that have been forfeited to the
Corporation and reissued to Initial Management, as contemplated by Section
2(a)(ii) hereof) shall be subject to call and repurchase from Initial Management
(or their Permitted Transferees) for offer, sale and/or transfer to other
Management; and provided further, the Stock Reallocation Committee may not
permit such Reallocable Shares to be held by other Management under terms,
conditions, limitations and otherwise which are more favorable, desirable or
beneficial than as imposed on Initial Management, other than the provisions with
respect to the duration of service after which the risk of Termination
Forfeiture may lapse. The remaining approximately 32.34% of the 38% constituting
Unrestricted Shares shall be held outright, free and clear by Initial Management
(or their Permitted Transferees), are not subject to call, purchase or
reallocation by the Stock Reallocation Committee or otherwise, shall not be
subject to the risk of Termination Forfeiture, and the holders thereof shall
enjoy all incidents of ownership to such shares (subject to any restrictions or
limitations set forth in the Stockholders' Agreement).
(ii) Notwithstanding anything to the contrary in this Agreement,
while the Employee is still employed by the Corporation, the Stock Reallocation
Committee shall offer to Employee the opportunity to repurchase any Reallocable
Shares (Restricted, Earned and/or Unrestricted) that have heretofore been
called, repurchased, reallocated from the Employee and sold by the Corporation
at the direction of the Stock Reallocation Committee to other Management, where,
thereafter, such Reallocable Shares
<PAGE>
11
are forfeited to the Corporation or repurchased or held by the Corporation for
any reason ("Forfeit Shares"). Such Forfeit Shares shall be reoffered to the
Employee at the original purchase price of $1.00 per share, as such price is
adjusted for the Reclassification (the "Adjusted Original Price"), and the right
to purchase such shares may be exercisable by Employee at any time. Forfeit
Shares reacquired by Employee shall not regain their status as Reallocable
Shares and therefore shall not be subject to call and redemption by the Stock
Reallocation Committee for purpose of reallocation to other Management.
(iii) Unless otherwise specifically set forth in this Agreement or
in a separate written agreement between the Corporation and the Employee, any
and all shares acquired by the Employee from the Corporation for value (other
than Restricted Shares), including through a voluntary exchange (including the
exchange referred to in Section 2(b)(iv) hereof (the "Exchange")) or pursuant to
the exercise of preemptive (or similar) rights, or from stock splits or stock
dividends as to Unrestricted Shares (but not acquired shares which are
attributable to Restricted Shares), shall be deemed Unrestricted Shares.
(iv) Immediately following the effectiveness of this Amendment, the
Corporation shall issue to Initial Management and Initial Management shall
purchase from the Corporation 2,706,557 shares of the Corporation's Class B
Common Stock (which shares shall be Unrestricted Shares) in exchange for the
same number of shares of the Corporation's Class A Common Stock.
(c) Restricted Shares.
(i) Shares designated herein as Restricted Shares are limited as to
their incidents of ownership and other rights as herein specifically set forth
(but shall
<PAGE>
12
retain all other rights including, without limitation, the right to vote and to
receive dividends with respect to such shares) until such time as the Restricted
Shares are deemed "Earned" and converted to Earned Shares in accordance with the
terms hereof.
(ii) Thirteen percent (13%), or 144,592 (pre-Reclassification), of
the 51% of Shares acquired by Initial Management pursuant to the Old Agreement
are hereby designated as Restricted Shares. Restricted Shares are subject to the
substantial restrictions on transferability and the substantial risks of
forfeiture as set forth under this Agreement. 22,593 shares
(pre-Reclassification) or 2.0315% of the 13% constituting Restricted Shares were
designated as Reallocable Shares pursuant to the Old Agreement and have
heretofore called and repurchased from Initial Management (or their Permitted
Transferees) and sold by the Corporation to other Management in the same manner
as the Reallocable Shares referred to in Section 2(b) hereof. While such
Reallocable Shares are held by Management other than Initial Management, such
Shares shall cease to be Reallocable (but shall remain Restricted (subject to
being "Earned")). The Stock Reallocation Committee has had and shall continue to
have the authority to impose such terms, conditions, limitations and otherwise
as it deems reasonable, desirable or necessary with respect to such Reallocable
Shares held by Management other than Initial Management; provided, however, that
following the effectiveness of this Agreement, no other Shares (including
Forfeit Shares) shall be subject to call and repurchase from Initial Management
(or their Permitted Transferees) for offer, sale and/or transfer to other
Management; and provided further, the Stock Reallocation Committee may not
permit such Reallocable Shares to be held by other Management under terms,
conditions, limitations and otherwise which are more favorable, desirable or
beneficial than as
<PAGE>
13
imposed on Initial Management, other than the provisions with respect to the
duration of service after which the risk of Termination Forfeiture may lapse.
(iii) Where certain performance criteria are attained by the
Corporation, Restricted Shares shall become Earned Shares such that the
substantial limitations on the holder's enjoyment of incidents of ownership in
the Restricted Shares will lapse and be suspended and the holder thereof will
become entitled to all incidents of ownership in the Earned Shares, subject only
to Termination Forfeiture and the restrictions on transfer hereinafter set
forth. The specific performance criteria and the related terms and conditions
whereby Restricted Shares may become Earned Shares are set forth in Sections 7
and 13 of this Agreement.
(d) Interpretation of "Percentage." Whenever this Agreement refers to a
"percentage" as to Shares, the percentage shall refer to a percentage based on
100%, and not based on the percentage of the stated percentage of such Shares.
By way of example and not limitation, a "percentage" of the 51%, 38% and/or 25%,
respectively, refers to said 51%, 38% and/or 25% being viewed as a total of 51,
38 and/or 25 increments of 1% each (and not to 100 increments of .51%, .38%
and/or .25%), respectively. By way of further example and not limitation, if the
total of 51% of issued and outstanding Management Shares (including all
Unrestricted, Restricted and Earned Shares) is represented by 510,000 Shares,
then 38% of the 51% shall refer to 380,000 Shares, 5% of the 38% shall refer to
50,000 Shares, and so forth.
<PAGE>
14
3. Representations of Employee. Employee hereby represents and warrants to
the Corporation that:
(a) Investment Intent. The Employee Shares (including those to be
acquired pursuant to the Exchange) were or will be acquired for Employee's own
account and not with a view to, or intention of, distribution thereof in
violation of the Securities Act of 1933, as amended (the "Securities Act"), or
any applicable state securities laws, and the Employee Shares shall not be
disposed of in contravention of the Securities Act or any applicable state
securities laws.
(b) Accredited Investor. Employee is an executive officer of the
Corporation and (i) is an "accredited investor" as defined in Rule 501(a) under
the Securities Act or (ii) by reason of Employee's business and financial
experience, and the business and financial experience of those retained by
Employee to advise Employee with respect to Employee's investment in the
Employee Shares purchased pursuant to the Old Agreement or the Exchange,
Employee, together with such advisors, has such knowledge, sophistication and
experience in business and financial matters so as to be capable of evaluating
the risks and benefits of the investment in the Employee Shares.
(c) Risk of Investment. Employee is able to bear the economic risk of
the investment in the Employee Shares, including the complete loss of such
investment in the Employee Shares, for an indefinite period of time because the
Employee Shares have not been registered under the Securities Act and,
therefore, cannot be sold unless subsequently registered under the Securities
Act or an exemption from such registration is available.
<PAGE>
15
(d) Adequate Information. Employee has had an opportunity to ask
questions and receive answers concerning the terms and conditions of the
offering of Employee Shares and has had full access to such other information
concerning the Corporation as Employee has requested.
(e) Binding Agreement. This Agreement constitutes the legal, valid and
binding obligation of Employee, enforceable against Employee in accordance with
its terms, except as enforceability may be limited by bankruptcy, insolvency,
reorganization, moratorium and other similar laws relating to or affecting
creditors' rights generally, by general equitable principles (regardless of
whether such enforceability is considered in a proceeding in equity or at law)
or by an implied covenant of good faith and fair dealing. The execution,
delivery and performance of this Agreement does not conflict with, violate or
cause a breach of any agreement, contract or instrument to which Employee is a
party or any judgment, order or decree to which Employee is subject.
4. Representations and Warranties of the Corporation. The Corporation
hereby represents and warrants to Employee that:
(a) Corporate Entity. The Corporation is a corporation duly organized,
validly existing and in good standing under the laws of Delaware.
(b) Binding Agreement. The execution, delivery and performance of this
Agreement has been duly authorized by the Corporation. This Agreement
constitutes a valid and binding obligation of the Corporation enforceable
against it in accordance with its terms, except as enforceability may be limited
by bankruptcy, insolvency, reorganization, moratorium and other similar laws
relating to or affecting creditors'
<PAGE>
16
rights generally, by general equitable principles (regardless of whether such
enforceability is considered in a proceeding in equity or at law) or by an
implied covenant of good faith and fair dealing.
(c) Fully Paid and Non-Assessable Shares. All Shares acquired by the
Employee pursuant to the Old Agreement have been validly issued, and Shares
acquired upon the Reclassification and the Exchange will be validly issued, and
all such Shares are or will be, as the case may be, fully paid and nonassessable
when issued.
5. Limitations on Restricted Shares. Employee will be entitled to enjoy all
incidents of ownership of the Restricted Shares, except that (i) such shares
shall be subject to the risk of Termination Forfeiture and (ii) may not be sold,
transferred, pledged or otherwise disposed of until September 29, 2005 other
than to an immediate family member of such holder or any trust or partnership of
which all of the beneficiaries or partners, as the case may be, are such holder
and/or immediate family members of such holder, so long as the transferee agrees
in writing to be bound by the restrictions set forth in this Agreement. All
Restricted Shares that have become Earned Shares subsequent to the date hereof
(i.e., not including the 13% deemed Unrestricted Shares by virtue of amendments
to the Old Agreement) shall become permanently vested with Employee or his
Permitted Transferees as Unrestricted Shares and shall no longer be subject to
any Termination Forfeiture on September 29, 2005. Restricted Shares not yet
earned and redesignated as Earned Shares by September 29, 2005 shall be called
and repurchased by the Corporation as set forth in Section 7 hereof.
<PAGE>
17
6. Earned Shares.
(a) Repurchase Upon Termination Forfeiture Event. Restricted Shares
will be deemed and become Earned Shares upon the Corporation's attaining the
Performance Criteria set forth in Section 13 hereof.
(b) Incidents of Ownership. Subject to the restrictions on transfer
contained herein and the risk of Termination Forfeiture, the holder of Earned
Shares will enjoy all incidents of ownership to such shares, including the right
to receive all dividends and to vote such shares.
7. Redemption of Restricted Shares Not Earned.
(a) Call and Repurchase by Corporation. Shares that remain Restricted
Shares on September 29, 2005 (i.e., which have not previously been converted to
Earned Shares) (the "Unearned Restricted Shares") shall be called and redeemed
by the Corporation at the Adjusted Original Price. The Board of Directors of the
Corporation may establish reasonable notice provisions, time frames, procedures
and otherwise as it deems reasonable or necessary to facilitate and effect the
transaction contemplated by this Section 7(a). Subject to Section 8(b), the
Corporation must call and purchase such shares from Employee within sixty (60)
days of September 29, 2005.
(b) Reoffer of Restricted Shares Not Earned. Subject to applicable
federal and state securities laws, Unearned Restricted Shares so acquired by the
Corporation shall be offered by the Corporation at the Adjusted Original Price
to the Original Investors pro rata with their holdings of shares of common
stock, par value $.10 per share, prior to the IPO.
<PAGE>
18
8. Termination Forfeiture.
(a) Termination for Cause; Resignation. If a Termination Forfeiture
Event occurs, then all Restricted Shares issued to Employee (whether or not then
converted to the status of Earned Shares) shall be called and repurchased by the
Corporation at the Adjusted Original Price, subject to Section 8(b) hereof.
(b) Deferral of Purchase by Corporation. In the event that any payment
by the Corporation under Section 7(a) or 8(a) for such shares would constitute a
default or an event of default or result in a mandatory prepayment requirement
under the terms of any agreement for indebtedness or other agreement to which
the Corporation or any of its subsidiaries is a party as of the date for such
purchase, the Corporation shall have the right, by delivery of written notice to
the Employee, to defer exercise of its call and purchase right until such
payment by the Corporation would no longer have such an effect; provided that
the Corporation's exercise of its purchase right may not be deferred for more
than six (6) months. The Corporation shall give Employee prompt written notice
of when it is no longer restricted from making such purchase, and the procedures
set forth in Section 7(a) or 8(a) hereof, as the case may be, shall apply as
though the date giving rise to the purchase right occurred on the date such
notice is given.
(c) Procedures. The Board of Directors of the Corporation may establish
reasonable notice provisions, time frames, procedures and otherwise as it deems
reasonable or necessary to facilitate and effect the transaction contemplated by
this Section; provided, the Corporation may not exercise its option and call the
Shares subject
<PAGE>
19
to the Termination Forfeiture later than ninety (90) days after the Corporation
receives written notice of the Termination Forfeiture Event.
9. Termination of Employment Without Cause or by Employee for Good Reason.
Upon termination of employment of Employee under the Employment Agreement by the
Corporation without Cause (as defined in the Employment Agreement) or by the
Employee for Good Reason (as defined in the Employment Agreement), all
limitations, restrictions, risks of forfeiture and conditions which relate to
Restricted Shares (as unearned Restricted Shares or Earned Restricted Shares)
held by Employee, including but not limited to risk of Termination Forfeiture,
limitations on transfer or risk of call by the Board for non-conversion to
Earned Shares, will automatically and permanently lapse and all Restricted
Shares and Earned Shares will permanently become Unrestricted Shares held by
Employee. The restrictions, terms and conditions of the Stockholders' Agreement
(or any other applicable agreement) then in effect shall remain in full force
and effect.
10. Death or Total Disability of Employee. Where termination of Employee is
due to Disability (as that term is defined in the Employee's Employment
Agreement) or death, (i) all risks of Termination Forfeiture shall immediately
lapse and terminate and (ii) as to any Restricted Shares held by Employee as of
the date of such event, the Disabled or deceased Employee (or his duly
authorized successors) will receive the benefit of the Corporation's performance
over the two (2) fiscal year ends immediately following such termination as to
the Corporation attaining the Performance Criteria such that Restricted Shares
may become Earned Shares and Unrestricted Shares. By way of clarification,
restrictions and risks of forfeiture as to Restricted Shares held by the
<PAGE>
20
Disabled or deceased Employee (or his successors) shall permanently lapse and
Restricted Shares shall become Earned (and therefore Unrestricted Shares) to the
extent that the Corporation attains the Adjusted EBITDA Performance Criteria set
forth herein at such two (2) fiscal year ends.
11. Reissue of Forfeit Shares. Forfeit Shares shall be reoffered by the
Corporation to Initial Management, pro rata based on their relative percentage
ownership of shares of common stock, par value $.10 per share, immediately
following the initial capitalization of the Company, at the Adjusted Original
Price per share, as the same may be further readjusted from time to time.
12. Performance Criteria. Restricted Shares may be earned and become Earned
Shares upon attainment by the Corporation of the following performance criteria
(the "Performance Criteria"):
(a) Adjusted EBITDA Threshold. One thirteenth (1/13) of the Restricted
Shares (allocated pro rata among Restricted Shares also designated Reallocable
and other Restricted Shares) will be redesignated as (and deemed to be earned
as) "Earned Shares" for every one million dollars ($1,000,000) of annual
Adjusted EBITDA earned by the Corporation, subject to the limitations set forth
in Section 12(b) hereof. Any incremental portion of Adjusted EBITDA less than
$1,000,000 will be disregarded for such calculation.
(b) Determination of Attained Thresholds and Earned Shares. The number
of Restricted Shares with respect to which restrictions and risk of forfeiture
will lapse shall be based on the highest annual Adjusted EBITDA of the
Corporation attained at any time and from time to time; provided, however,
Restricted Shares shall not be
<PAGE>
21
redesignated as Earned Shares until the Corporation's annual Adjusted EBITDA for
a fiscal year reaches or exceeds fourteen million dollars ($14,000,000). By way
of example and not limitation, where Adjusted EBITDA in a given year is
$13,300,000, then no restrictions or risk of forfeiture shall lapse and no
Restricted Shares shall become Earned Shares. If Adjusted EBITDA in a given year
is $14,000,000 (to $14,999,999.99), then Management shall be deemed to have
earned rights to 1/13 of the Restricted Shares, and such Restricted Shares
automatically shall become Earned Shares. Thereafter, if Adjusted EBITDA in a
given year is $20,000,000, then Management shall be deemed to have earned rights
to a total of 7/13 (i.e., an additional 6/13) of the Restricted Shares, and so
forth. Accordingly, Management's rights to have all Restricted Shares become
Earned Shares will not occur until such time as the Corporation realizes
Adjusted EBITDA of twenty-six million dollars ($26,000,000) or more in a given
fiscal year.
(c) Reduction in Adjusted EBITDA; Averaging. Once Restricted Shares are
earned, based upon the Corporation's annual Adjusted EBITDA for a given fiscal
year, and such Shares are redesignated as Earned Shares, such Earned Shares
shall not be affected by the fact that the Corporation's annual Adjusted EBITDA
may decline for any subsequent fiscal year. However, once Adjusted EBITDA of
$14,000,000 or more has been attained, if the Corporation's annual Adjusted
EBITDA declines in a subsequent fiscal year from the highest level at which
additional Restricted Shares become Earned Shares, additional Restricted Shares
will not become Earned Shares until the Corporation's average annual Adjusted
EBITDA for the fiscal years including and following the year of such decline in
annual Adjusted EBITDA is greater than the level
<PAGE>
22
of annual Adjusted EBITDA at which Restricted Shares were last earned. For
example, no additional Restricted Shares would be earned if annual Adjusted
EBITDA in the most recent year in which Restricted Shares were earned had been
$16,000,000, such annual Adjusted EBITDA declined to $14,000,000 in the
following year and thereafter increased to $17,000,000 in the subsequent year
(the average of $14,000,000 and $17,000,000 is $15,500,000, which does not
exceed $16,000,000, the level of annual Adjusted EBITDA for the most recent year
in which Restricted Shares were earned). Additional Restricted Shares would not
be earned in this example until such average annual Adjusted EBITDA was at least
$17,000,000. As is always the case, additional Restricted Shares are not earned
as Earned Shares until annual Adjusted EBITDA increases from the prior year to
the next $1,000,000 threshold of Adjusted EBITDA (and thereafter additional
Restricted Shares are earned for each $1,000,000 threshold).
(d) Resumption of Thresholds. After the average Adjusted EBITDA has
exceeded the Adjusted EBITDA for the year of Adjusted EBITDA at which Restricted
Shares were last earned, then no averaging shall be applicable for so long as
Adjusted EBITDA does not decrease from a prior year's.
(e) Pro Rata Conversion. Upon the Corporation's attaining the
Performance Criteria from time to time, Restricted Shares held by all Management
(and their Permitted Transferees) shall be converted pro rata into Earned
Shares, based on the number of all Restricted Shares then held by all Management
(and their Permitted Transferees). Provided, nothing herein shall be construed
to limit the authority or ability of the Stock Reallocation Committee to require
or impose additional, more strict or other conditions, restrictions,
requirements or limitations as to Restricted Shares held by other
<PAGE>
23
than Initial Management, such that vesting of and/or lapse of restrictions on
such Restricted Shares may be delayed, prohibited, limited or otherwise with
respect to Management other than Initial Management.
13. Successors and Assigns. The duly authorized Permitted Transferees (as
such term is defined in the Stockholders' Agreement prior to any amendment
thereof) and holders of Restricted Shares and Reallocable Shares originally held
from or through Management, including any transferee obtaining Restricted Shares
in accordance with Section 5 hereof, shall be subject to the same restrictions,
obligations, call rights, purchase options, benefits, put options, terms and
otherwise as would be applicable if such shares were held directly by
Management. All restrictions, forfeiture and repurchase provisions and other
terms and conditions relating to Restricted Shares and Reallocable Shares shall
be binding on and inure to the benefit of the transferees, successors and
assignees of those shares.
14. Sale of All or Substantially All Stock or Assets, or Merger. In the
event that all or substantially all of the Corporation's stock or all or
substantially all assets of the Corporation are transferred or sold, or upon a
merger or other business combination, then all Restricted Shares will become
Unrestricted Shares to the extent that value for the entire Corporation
indicated by the gross sale price as determined in good faith by the Board of
Directors in such transaction results in an internal rate of return to those
Original Investors who, at the time of such transaction, continue to be
stockholders of the Corporation, of at least 40% on a compounded annual basis
based upon such persons' original holdings in the Corporation (after taking into
account the amount and timing of all distributions and payments received by
those Original Investors from the Corporation,
<PAGE>
24
after considering Unrestricted and Earned Shares then held by Management, and
after giving effect to Restricted Shares that become Unrestricted Shares as
result of such sale, transfer or merger). Restricted Shares that do not become
Unrestricted Shares as a result of such sale, transfer or merger shall retain
their characteristics and potential benefits as Restricted Shares under this
Agreement, unless such issue is expressly addressed in the documentation with
respect to such sale, transfer or merger. The Corporation may, without the
consent of Employee, modify or eliminate the Restricted Share rights and
designation as to Restricted Shares not converted to Unrestricted Shares in the
documentation with respect to such sale, transfer or merger where the
Corporation agrees in writing to such matters as part of such sale, transfer or
merger.
15. Legends. Employees agrees that all share certificates representing
Shares issued to Employee under the Agreement shall have the legend required by
the Stockholders' Agreement or as otherwise may be reasonably be imposed by the
Corporation.
16. Additional Covenants.
(a) Stockholders' Agreement. Employee hereby acknowledges that the
Shares shall be subject to the terms and conditions of the Stockholders'
Agreement. Employee has received a copy of such Stockholders' Agreement and
Employee further acknowledges that such Stockholders' Agreement contains
provisions restricting the transferability of the Shares in addition to those
set forth herein.
(b) Dilution. All Shares held by Management (including Restricted
Shares) will be diluted under the same circumstances as and pro rata with any
Shares held by an Original Investor and all other stockholders of the
Corporation.
<PAGE>
25
(c) Not an Employment Agreement. This Agreement is not an employment
contract, the terms and conditions of which shall exclusively be controlled by
the provisions of the Employment Agreement.
(d) Stock Dividends, Stock Splits and Recapitalizations. If dividends
are declared and payable in kind, and in the event of a stock split,
recapitalization or other transaction which causes shares to be issued or
exchanged, the additional, issued, successor, substituted, and/or replacement
shares shall bear the same characteristics, restrictions, rights, obligations,
options and otherwise as the shares with respect to which such additional
issued, successor, substituted and/or replacement shares arose, for all purposes
and the Adjusted Original Price shall be further adjusted on a proportional
basis to reflect such change.
(e) Preemptive Shares. If shares are acquired pursuant to pre-emptive
(or substantially similar) rights by Employee, said acquired shares shall
possess and be subject to the same characteristics, restrictions, rights
obligations, options and otherwise as the shares giving rise to the acquisition
of such additional shares.
17. Withholding Taxes; Section 83(b) Election.
(a) Withholding Taxes. Employee shall be solely responsible for paying
the Corporation an amount necessary to satisfy the withholding and payment of
all applicable federal and state income tax withholdings, if any, including but
not limited to social security (FICA) and Medicare tax, at the applicable rates
in existence as of September 29, 1995. Employee hereby authorizes the
Corporation to withhold from any amounts otherwise payable to Employee such
taxes as may be required by law in connection with the issue to Employee of the
Shares. Employee agrees that if such
<PAGE>
26
amounts are insufficient Employee will pay or make arrangements satisfactory to
the Corporation for payment of such taxes.
(b) Section 83(b) Election. Employee has filed an election under I.R.C.
Section 83(b) and the parties hereto acknowledge and agree that withholding
taxes shall be computed as an amount equal to (1) the fair market value of the
Shares issued to the Employee pursuant to the Old Agreement as of September 29,
1995 less (2) any amount paid therefor. The Corporation shall assist Employee at
his request in the filing and perfecting of such I.R.C. Section 83(b) election.
18. Notices. All notices permitted or required hereunder shall be in
writing and shall be deemed to have been duly and properly given as of the
earlier of the date and time of actual delivery or three (3) days following the
date the same are deposited with the United States Postal Service, postage
prepaid, to be sent certified mail with return receipt requested, and addressed
to the Corporation, as follows:
U.S. Franchise Systems, Inc.
Attention: Neal Aronson
13 Corporate Square
Suite 250
Atlanta, Georgia 30329
and addressed to Employee, as follows:
Mr. Michael A. Leven
5 West Wesley Ridge
Atlanta, Georgia 30327
or at such other address as the Corporation or Employee may at any time and from
time to time specify to the other by notice as herein provided.
<PAGE>
27
19. Miscellaneous.
(a) This Amended and Restated Employee Stock Purchase Agreement shall
not be effective unless and until the closing of the IPO.
(b) Binding Effect. This Agreement shall be binding upon and inure to
the benefit of the parties and their respective agents, representatives,
successors and permitted assigns.
(c) Cooperation. The parties shall cooperate fully with each other and
their respective counsel and representatives in connection with all steps to be
taken as part of their obligations under this Agreement.
(d) Governing Law. This Agreement and the rights and duties of the
parties attendant hereto shall be construed and governed in accordance with the
internal laws (and not the conflict of laws) of the State of Georgia.
(e) No Waiver. The failure of either party to insist, in one or more
instances, on the performance by the other in strict compliance with the terms
and conditions of this Agreement, shall not be deemed a waiver or relinquishment
of any right granted hereunder or of any terms and conditions of this Agreement
unless such waiver is contained in a writing signed by the parties.
(f) Entire Agreement. This Agreement and any amendments or exhibits
attached hereto or related documents referenced herein comprise all the
agreement, understandings, representations, conditions and warranties by and
between the parties. This Agreement may not be modified or amended except in a
writing signed by the parties to this Agreement.
<PAGE>
28
(g) Survival. All representations, warranties and covenants contained
in this Agreement shall survive the execution and delivery of this Agreement and
all documents executed in performance of this Agreement.
(h) Interpretation. Within this Agreement, the singular shall include
the plural and the plural shall include the singular, and any gender shall
include the other gender, as the meaning in the context of this Agreement shall
require. Should any provision of this Agreement require judicial interpretation,
it is agreed that the court interpreting or construing the same shall not imply
a presumption that the terms hereof shall be more strictly construed against one
party by reason of the rule of construction that a document is to be construed
more strictly against the party who itself or through its agent prepared this
Agreement, it being agreed that all parties have had the opportunity to review
and understand this Agreement.
(i) Injunctive Relief. In the event of a breach or threatened breach by
a party of any of his obligations hereunder, the parties hereby acknowledge and
agree that the parties will not have an adequate remedy at law and shall be
entitled to such equitable and injunctive relief as may be available to restrain
a threatened or actual violation. Nothing herein shall be construed as
prohibiting a party from pursuing any other remedies available for such breach
or threatened breach, including without limitation the recovery of damages. All
remedies shall be cumulative. No party shall be required to post a bond or other
surety as a condition to obtaining such injunctive relief.
<PAGE>
29
20. Multiple Counterparts. This Agreement may be simultaneously executed in
several counterparts, each of which shall be an original and all of which shall
constitute but one and the same instrument.
21. Record Owner. The Corporation shall not be required (i) to transfer on
its books any shares that shall have been sold or otherwise transferred in
violation of any of the provisions set forth in this Agreement or the
Stockholders' Agreement or (ii) to treat the improper transferee as owner of
such shares or to accord to such improper transferee the right to vote, if any,
as such owner.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Amended and Restated
Stock Purchase Agreement on the date first above written.
CORPORATION:
U.S. FRANCHISE SYSTEMS, INC.
By:______________________________
Neal K. Aronson
Executive Vice President and
Chief Financial Officer
ATTEST:
By:_____________________________
____________ Secretary
EMPLOYEE:
---------------------------
MICHAEL A. LEVEN
<PAGE>
EXHIBIT "A"
EMPLOYEE SHARES
(as of September 29, 1995)
TOTAL Michael A. Neal K.
Leven Aronson
(a) Restricted Shares
(i) Reallocable 66,735 33,367 33,368
ii) Non-Reallocable 222,449 111,225 111,224
Total Restricted Shares 289,184 144,592 144,592
(b) Unrestricted Shares
(i) Reallocable 55,612 33,367 22,245
(ii) Non-Reallocable 222,449 133,470 88,979
Total Unrestricted 278,061 166,837 111,224
Shares
Total Shares Issued 567,245 311,429 255,816
Hereunder:
<PAGE>
EXHIBIT "B"
EMPLOYEE SHARES
(as of ____________ __, 1996)
U.S. FRANCHISE SYSTEMS, INC.,
a Delaware corporation
AMENDED AND RESTATED
EMPLOYEE STOCK PURCHASE AGREEMENT
---------------------------------
Neal K. Aronson
---------------
<PAGE>
TABLE OF CONTENTS
Page
1. Definitions.......................................................... 3
2. Management Equity Participation...................................... 9
3. Representations of Employee.......................................... 14
4. Representations and Warranties of the Corporation.................... 15
5. Limitations on Restricted Shares..................................... 16
6. Earned Shares........................................................ 17
7. Redemption of Restricted Shares Not Earned........................... 17
8. Termination Forfeiture............................................... 18
9. Termination of Employment Without Cause or by Employee for Good
Reason............................................................... 19
10. Death or Total Disability of Employee................................ 19
11. Reissue of Forfeit Shares............................................ 20
12. Performance Criteria................................................. 20
13. Successors and Assigns............................................... 23
14. Sale of All or Substantially All Stock or Assets, or Merger.......... 23
15. Legends.............................................................. 24
16. Additional Covenants................................................. 24
17. Withholding Taxes; Section 83(b) Election............................ 25
18. Notices.............................................................. 26
19. Miscellaneous........................................................ 27
20. Multiple Counterparts................................................ 29
21. Record Owner......................................................... 29
i
<PAGE>
THIS AMENDED AND RESTATED EMPLOYEE STOCK PURCHASE AGREEMENT AND THE SECURITIES
ISSUED UPON THE TERMS HEREOF, HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES LAWS, AND NEITHER THIS
AGREEMENT NOR THE UNDERLYING SECURITIES MAY BE ASSIGNED, HYPOTHECATED,
ENCUMBERED, PLEDGED, SOLD OR OTHERWISE TRANSFERRED EXCEPT AS PROVIDED BY THE
TERMS HEREOF, IN ACCORDANCE WITH THE TERMS OF A SEPARATE STOCKHOLDERS' AGREEMENT
DATED ON OR ABOUT THE DATE HEREOF, AS THE SAME MAY BE AMENDED FROM TIME TO TIME,
AND PURSUANT TO EITHER AN EFFECTIVE REGISTRATION STATEMENT OR IN A TRANSACTION
EXEMPT FROM REGISTRATION UNDER APPLICABLE FEDERAL AND STATE SECURITIES LAWS.
STATE OF GEORGIA
COUNTY OF FULTON
U.S. FRANCHISE SYSTEMS, INC.,
a Delaware corporation
AMENDED AND RESTATED
EMPLOYEE STOCK PURCHASE AGREEMENT
This Amended and Restated Employee Stock Purchase Agreement
(as amended, the "Agreement") is entered into as of the ___ day of _____________
1996, by and between U.S. FRANCHISE SYSTEMS, INC., a Delaware corporation (the
"Corporation"), and NEAL K. ARONSON, an individual resident of the State of
Georgia (the "Employee").
WHEREAS, on September 29, 1995, the Employee and the
Corporation executed an Employee Stock Purchase Agreement (the "Old Agreement"),
pursuant to which the Corporation issued to the Employee and to Michael A. Leven
(together, the "Initial Management") a total of 567,245 shares of common stock,
par value $.10 per share (the "Old Common Stock"), of the Corporation,
constituting 51% of the then issued and outstanding common shares of the
Corporation;
<PAGE>
2
WHEREAS, as set forth in greater detail on Exhibit A hereto,
278,061 of such shares, or 25% of the then outstanding common shares of the
Corporation, were acquired outright by Initial Management as Unrestricted Shares
(as defined in the Old Agreement) and 289,184 of such shares, or 26% of the then
outstanding common shares, were acquired by Initial Management as Restricted
Shares (as defined in the Old Agreement), subject to the terms and conditions
and provisions as set forth in the Old Agreement;
WHEREAS, with respect to the 26% of the then outstanding
common shares that were held by Initial Management as Restricted Shares (as
defined in the Old Agreement), the Old Agreement (i) limited the rights of
Initial Management to vote and to receive dividends with respect to such shares,
(ii) imposed substantial restrictions on the transferability of such shares
until such shares were "earned" by Initial Management by reason of the
Corporation's satisfaction of certain performance criteria set forth therein and
(iii) provided that such shares were subject to forfeiture in the event the
employment of the Management holder thereof was terminated in certain
circumstances;
WHEREAS, the Corporation is considering an IPO (as defined
below) with respect to its common shares, as adjusted for the Reclassification
(as defined below);
WHEREAS, in connection with the IPO, the Corporation and the
Employee have agreed to eliminate some of the restrictions that were imposed on
Restricted Shares pursuant to the Old Agreement and to deem that certain shares
designated as Restricted Shares pursuant to the Old Agreement be redesignated as
Unrestricted Shares;
NOW THEREFORE, FOR AND IN CONSIDERATION of the mutual
covenants set forth herein, and other good and valuable consideration, the
receipt,
<PAGE>
3
adequacy and sufficiency of which is hereby acknowledged, the parties do hereby
agree to amend and restate the Old Agreement, as so amended, as follows:
1. Definitions. For purposes hereof, the following terms shall be
defined as follows:
(a) "Adjusted EBITDA" for any fiscal year of the Corporation
means (i) consolidated earnings of the Corporation and its subsidiaries before
consolidated interest, taxes, depreciation, amortization, and other non-cash
charges, adjusted to exclude one-time or non-recurring expenses or credits (such
exclusions to include but not be limited to the payments to Hudson Hotels
Corporation (formerly known as Microtel Franchising and Development Corporation)
in the total amount of $4 million dollars pursuant to the terms of that certain
Joint Venture Agreement dated September 7, 1995) for such fiscal year, as
determined by the Corporation in good faith in accordance with generally
accepted accounting principles consistently applied, minus (ii) 10% of the
Transaction Consideration (as defined below) actually paid by the Corporation
and/or its subsidiaries in connection with a Transaction (as defined below)
closed after the closing of the IPO (provided that such consideration has not
been deducted in determining the amount referred to in clause (i) above). In the
event of any dispute or disagreement regarding the determination of the amount
of Adjusted EBITDA, then such dispute or disagreement shall be resolved by the
accounting firm regularly engaged to and providing auditing services to the
Corporation.
(b) "Earned Shares" means those Shares that are designated
herein as Restricted Shares and are subsequently redesignated as Earned Shares
in accordance with
<PAGE>
4
the terms hereof due to the attainment by the Corporation of certain performance
standards as provided for herein.
(c) "Employee Shares" means the Restricted Shares and Unrestricted
Shares held by Employee under this Agreement.
(d) "Employment Agreement" means that certain agreement
relating to the employment of Employee with the Corporation dated October 1,
1995, as the same may be amended from time to time.
(e) "Initial Management" means Employee and Michael A. Leven.
(f) "IPO" shall mean the initial public offering of Shares
pursuant to the Securities Act of 1933, as amended.
(g) "Management" means the group of individuals (including
Initial Management) who are employees of the Corporation and who have been
issued shares of Class A Common Stock pursuant to the terms of the Old Agreement
or a stock purchase agreement substantially similar to the Old Agreement, as the
same may be amended from time to time (with such changes thereto as are
authorized by the Stock Reallocation Committee).
(h) "Management Shares" means Shares issued to and acquired by
Management (or their permitted designees and successors), including Unrestricted
Shares, Restricted Shares, Earned Shares, Reallocable Shares, shares acquired
through preemptive (or similar) rights or otherwise from or through the
Corporation and such shares that are transferred to other Management.
(i) "Original Stockholders" or "Original Investors" means
those persons who are not employees of the Corporation and who were issued
shares of Old Common
<PAGE>
5
Stock pursuant to the offering described in the Confidential Investment
Memorandum of the Corporation, dated August 19, 1995, and their Permitted
Transferees (as such term is used in that certain Stockholders' Agreement among
the Corporation and the Original Investors, dated as of September 29, 1995).
(j) "Reallocable Shares" means those Restricted Shares and/or
Unrestricted Shares owned or held by Initial Management that were specifically
designated at the time of their original issue as Reallocable Shares and that,
prior to the date hereof, have been reallocated to other Management pursuant to
the Old Agreement. Such shares shall retain such designation regardless of
whether they are converted from Restricted Shares to Earned Shares (in the case
of Reallocable Restricted Shares), unless and until such shares become Forfeit
Shares and are redeemed or otherwise repurchased by the Corporation from the
Management holder (other than Initial Management) thereof.
(k) "Reclassification" means the conversion of each share of
Old Common Stock into 9.67 shares of Class A Common Stock, par value $.01 per
share ("Class A Common Stock"), of the Corporation pursuant to the Corporation's
Amended and Restated Certification of Incorporation, which is to be filed with
the State of Delaware prior to the consummation of the IPO.
(l) "Restricted Shares" means 144,592 Shares (prior to the
Reclassification), constituting 13% of the outstanding common stock of the
Corporation as of October 2, 1995), that were issued to Initial Management
pursuant to the Old Agreement and that were specifically designated at the time
of issue as Restricted Shares, as the same are reclassified pursuant to the
Reclassification. Restricted Shares are subject to repurchase (even if they have
been converted to Earned Shares) pursuant to a
<PAGE>
6
Termination Forfeiture. Restricted Shares are eligible for conversion to Earned
Shares upon attainment by the Corporation of certain performance criteria as set
forth herein. Restricted Shares that have not been converted to Earned Shares by
September 29, 2005 are subject to redemption by the Corporation (and reissue to
the Original Investors). If such shares are then reissued to Original Investors,
such shares shall automatically be converted to and shall thereafter be deemed
to be Unrestricted Shares.
(m) "Shares" means the shares of the Old Common Stock that
were authorized immediately prior to the Reclassification, as reclassified by
the Reclassification into Class A Common Stock and, to the extent set forth in
Section 2(b)(iv) hereof, exchanged for Class B Common Stock, par value $.01 per
share ("Class B Common Stock"), of the Corporation, all as the same may be
further reclassified from time to time.
(n) "Stock Reallocation Committee" means the committee
appointed by the Board of Directors of the Corporation from among its members to
administer the reallocation of Reallocable Shares hereunder.
(o) "Stockholders' Agreement" means that certain Stockholders'
Agreement dated as of September 29, 1995 by and between the Corporation and the
Stockholders named therein, as such agreement may be amended from time to time.
Employee acknowledges that all of the Shares held by Employee hereunder shall be
issued and held in accordance with the terms of the Stockholders' Agreement, in
addition to the terms and conditions hereof.
(p) "Termination Forfeiture" means the redemption by the
Corporation from the Employee of Restricted Shares (whether or not converted to
Earned Shares) upon the occurrence of a Termination Forfeiture Event.
<PAGE>
7
(q) "Termination Forfeiture Event" means the occurrence or
happening of one of the following during the period ending on September 29,
2005: (i) voluntary resignation for other than Good Reason (as defined in the
Employment Agreement) of Employee; or (ii) termination of Employee by the
Corporation for Cause (as defined in the Employment Agreement).
(r) "Transaction Consideration" means the total consideration
paid or to be paid in connection with a Transaction, including, without
limitation: (i) cash; (ii) notes, securities and other property; (iii)
indebtedness for borrowed money assumed, refinanced or extinguished; (iv)
amounts payable under consulting agreements, agreements not to compete or
similar arrangements; and (v) contingent payments (whether or not related to
future earnings or operations); provided, that in the event debt financing is
utilized to effect a Transaction, proceeds from such debt financing shall no
longer be considered as Transaction Consideration as and to the extent such
proceeds have been repaid to the lender thereof. For purposes of determining the
amount of consideration paid, non-cash consideration shall be valued as follows:
(x) publicly traded securities, including capital stock of the Corporation,
shall be valued at the average of their closing prices (as reported in The Wall
Street Journal) for the five trading days prior to the closing of the
Transaction and (y) any other non-cash consideration shall be valued at the fair
market value thereof as determined in good faith by the Board of Directors of
the Corporation.
(s) "Transaction" means an acquisition by the Corporation
and/or its subsidiaries of another corporation or other entity, a business or a
brand, including, but not limited to, through a merger, consolidation, tender or
exchange offer, acquisition of
<PAGE>
8
securities or assets, or through a licensing agreement, but excluding any
investment in another corporation, joint venture or other entity (an "entity")
that represents less than 25% of the equity of such entity.
(t) "Unrestricted Shares" means all Shares owned or held by
the Initial Management (or by other Management, in the case of Reallocable
Shares, or by the Permitted Transferees of Initial Management (as such term is
defined in the Stockholders' Agreement, prior to any amendment thereof)) that
have not been specifically designated herein as Restricted Shares, including but
not limited to Shares acquired for value from the Corporation pursuant to a
voluntary exchange (including the exchange referred to in Section 2(b)(iv)
hereof) or through preemptive (or similar) rights, stock splits or dividends
with respect to Unrestricted Shares and the like or other subsequently acquired
shares. Unrestricted Shares are held outright and subject to the terms and
conditions set forth in the Amended and Restated Certificate of Incorporation of
the Corporation, as the same may be amended from time to time, and in the
Stockholders' Agreement.
(u) Capitalized terms not defined in this Agreement shall have
the meaning and intent ascribed to them in the Stockholders' Agreement.
2. Management Equity Participation.
(a) Stock Reallocation Committee.
-----------------------------
(i) Pursuant to the Old Agreement, the Management
Shares were initially issued, allocated, offered and divided among Employee and
Michael A. Leven in the amounts and designations set forth in Exhibit "A"
attached hereto. Following the Reclassification, the IPO and effectiveness of
this amendment in accordance with Section 19 hereof, Management (including
Initial Management) will own Shares in the amounts and designations set forth in
Exhibit "B"
<PAGE>
9
attached hereto. Thereafter, subsequent offers, call options, redemptions, and
the like, in each case to the extent permitted hereunder, shall be subject to
the exclusive control and authority of the Stock Reallocation Committee of the
Corporation. The Stock Reallocation Committee shall also have the authority to
cause the Corporation to act with respect to Management Shares that are
forfeited by Management to the Corporation, subject to the rights of Initial
Management to have Forfeit Shares reoffered to them under this Agreement.
(b) Unrestricted Shares.
--------------------
(i) Thirty-eight percent (38%) of the total 51% of
Shares acquired by Initial Management pursuant to the Old Agreement are hereby
designated as Unrestricted Shares. 62,911 of such shares, or approximately
5.656% of the 38% constituting Unrestricted Shares were designated as
Reallocable Shares pursuant to the Old Agreement and have heretofore been called
and repurchased from time to time at the direction of the Stock Reallocation
Committee from Initial Management (or their Permitted Transferees) and sold to
other members of Management. The Stock Reallocation Committee has had and shall
continue to have the authority to impose such terms, conditions, limitations and
otherwise as it deems reasonable, desirable or necessary with respect to
Reallocable Shares held by Management other than Initial Management; provided,
however, that following the effectiveness of this Agreement, no other Shares
(including Shares that have been forfeited to the Corporation and reissued to
Initial Management, as contemplated by Section 2(a)(ii) hereof) shall be subject
to call and repurchase from Initial Management (or their Permitted Transferees)
for offer, sale and/or transfer to other Management; and provided further, the
Stock Reallocation Committee
<PAGE>
10
may not permit such Reallocable Shares to be held by other Management under
terms, conditions, limitations and otherwise which are more favorable, desirable
or beneficial than as imposed on Initial Management, other than the provisions
with respect to the duration of service after which the risk of Termination
Forfeiture may lapse. The remaining approximately 32.34% of the 38% constituting
Unrestricted Shares shall be held outright, free and clear by Initial Management
(or their Permitted Transferees), are not subject to call, purchase or
reallocation by the Stock Reallocation Committee or otherwise, shall not be
subject to the risk of Termination Forfeiture, and the holders thereof shall
enjoy all incidents of ownership to such shares (subject to any restrictions or
limitations set forth in the Stockholders' Agreement).
(ii) Notwithstanding anything to the contrary in this
Agreement, while the Employee is still employed by the Corporation, the Stock
Reallocation Committee shall offer to Employee the opportunity to repurchase any
Reallocable Shares (Restricted, Earned and/or Unrestricted) that have heretofore
been called, repurchased, reallocated from the Employee and sold by the
Corporation at the direction of the Stock Reallocation Committee to other
Management, where, thereafter, such Reallocable Shares are forfeited to the
Corporation or repurchased or held by the Corporation for any reason ("Forfeit
Shares"). Such Forfeit Shares shall be reoffered to the Employee at the original
purchase price of $1.00 per share, as such price is adjusted for the
Reclassification (the "Adjusted Original Price"), and the right to purchase such
shares may be exercisable by Employee at any time. Forfeit Shares reacquired by
Employee shall not regain their status as Reallocable Shares and therefore shall
not be subject to call and redemption by the Stock Reallocation Committee for
purpose of reallocation to other Management.
<PAGE>
11
(iii) Unless otherwise specifically set forth in this
Agreement or in a separate written agreement between the Corporation and the
Employee, any and all shares acquired by the Employee from the Corporation for
value (other than Restricted Shares), including through a voluntary exchange
(including the exchange referred to in Section 2(b)(iv) hereof (the "Exchange"))
or pursuant to the exercise of preemptive (or similar) rights, or from stock
splits or stock dividends as to Unrestricted Shares (but not acquired shares
which are attributable to Restricted Shares), shall be deemed Unrestricted
Shares.
(iv) Immediately following the effectiveness of this
Amendment, the Corporation shall issue to Initial Management and Initial
Management shall purchase from the Corporation 2,706,557 shares of the
Corporation's Class B Common Stock (which shares shall be Unrestricted Shares)
in exchange for the same number of shares of the Corporation's Class A Common
Stock.
(c) Restricted Shares.
------------------
(i) Shares designated herein as Restricted Shares are
limited as to their incidents of ownership and other rights as herein
specifically set forth (but shall retain all other rights including, without
limitation, the right to vote and to receive dividends with respect to such
shares) until such time as the Restricted Shares are deemed "Earned" and
converted to Earned Shares in accordance with the terms hereof.
(ii) Thirteen percent (13%), or 144,592
(pre-Reclassification), of the 51% of Shares acquired by Initial Management
pursuant to the Old Agreement are hereby designated as Restricted Shares.
Restricted Shares are subject to the substantial restrictions on transferability
and the substantial risks of forfeiture as set forth under this
<PAGE>
12
Agreement. 22,593 shares (pre-Reclassification) or 2.0315% of the 13%
constituting Restricted Shares were designated as Reallocable Shares pursuant to
the Old Agreement and have heretofore called and repurchased from Initial
Management (or their Permitted Transferees) and sold by the Corporation to other
Management in the same manner as the Reallocable Shares referred to in Section
2(b) hereof. While such Reallocable Shares are held by Management other than
Initial Management, such Shares shall cease to be Reallocable (but shall remain
Restricted (subject to being "Earned")). The Stock Reallocation Committee has
had and shall continue to have the authority to impose such terms, conditions,
limitations and otherwise as it deems reasonable, desirable or necessary with
respect to such Reallocable Shares held by Management other than Initial
Management; provided, however, that following the effectiveness of this
Agreement, no other Shares (including Forfeit Shares) shall be subject to call
and repurchase from Initial Management (or their Permitted Transferees) for
offer, sale and/or transfer to other Management; and provided further, the Stock
Reallocation Committee may not permit such Reallocable Shares to be held by
other Management under terms, conditions, limitations and otherwise which are
more favorable, desirable or beneficial than as imposed on Initial Management,
other than the provisions with respect to the duration of service after which
the risk of Termination Forfeiture may lapse.
(iii) Where certain performance criteria are attained
by the Corporation, Restricted Shares shall become Earned Shares such that the
substantial limitations on the holder's enjoyment of incidents of ownership in
the Restricted Shares will lapse and be suspended and the holder thereof will
become entitled to all incidents of ownership in the Earned Shares, subject only
to Termination Forfeiture and the restrictions
<PAGE>
13
on transfer hereinafter set forth. The specific performance criteria and the
related terms and conditions whereby Restricted Shares may become Earned Shares
are set forth in Sections 7 and 13 of this Agreement.
(d) Interpretation of "Percentage." Whenever this Agreement
refers to a "percentage" as to Shares, the percentage shall refer to a
percentage based on 100%, and not based on the percentage of the stated
percentage of such Shares. By way of example and not limitation, a "percentage"
of the 51%, 38% and/or 25%, respectively, refers to said 51%, 38% and/or 25%
being viewed as a total of 51, 38 and/or 25 increments of 1% each (and not to
100 increments of .51%, .38% and/or .25%), respectively. By way of further
example and not limitation, if the total of 51% of issued and outstanding
Management Shares (including all Unrestricted, Restricted and Earned Shares) is
represented by 510,000 Shares, then 38% of the 51% shall refer to 380,000
Shares, 5% of the 38% shall refer to 50,000 Shares, and so forth.
3. Representations of Employee. Employee hereby represents and warrants
to the Corporation that:
(a) Investment Intent. The Employee Shares (including those to
be acquired pursuant to the Exchange) were or will be acquired for Employee's
own account and not with a view to, or intention of, distribution thereof in
violation of the Securities Act of 1933, as amended (the "Securities Act"), or
any applicable state securities laws, and the Employee Shares shall not be
disposed of in contravention of the Securities Act or any applicable state
securities laws.
(b) Accredited Investor. Employee is an executive officer of
the Corporation and (i) is an "accredited investor" as defined in Rule 501(a)
under the
<PAGE>
14
Securities Act or (ii) by reason of Employee's business and financial
experience, and the business and financial experience of those retained by
Employee to advise Employee with respect to Employee's investment in the
Employee Shares purchased pursuant to the Old Agreement or the Exchange,
Employee, together with such advisors, has such knowledge, sophistication and
experience in business and financial matters so as to be capable of evaluating
the risks and benefits of the investment in the Employee Shares.
(c) Risk of Investment. Employee is able to bear the economic
risk of the investment in the Employee Shares, including the complete loss of
such investment in the Employee Shares, for an indefinite period of time because
the Employee Shares have not been registered under the Securities Act and,
therefore, cannot be sold unless subsequently registered under the Securities
Act or an exemption from such registration is available.
(d) Adequate Information. Employee has had an opportunity to
ask questions and receive answers concerning the terms and conditions of the
offering of Employee Shares and has had full access to such other information
concerning the Corporation as Employee has requested.
(e) Binding Agreement. This Agreement constitutes the legal,
valid and binding obligation of Employee, enforceable against Employee in
accordance with its terms, except as enforceability may be limited by
bankruptcy, insolvency, reorganization, moratorium and other similar laws
relating to or affecting creditors' rights generally, by general equitable
principles (regardless of whether such enforceability is considered in a
proceeding in equity or at law) or by an implied covenant of good faith and fair
dealing. The execution, delivery and performance of this Agreement does not
conflict with, violate
<PAGE>
15
or cause a breach of any agreement, contract or instrument to which Employee is
a party or any judgment, order or decree to which Employee is subject.
4. Representations and Warranties of the Corporation. The Corporation
hereby represents and warrants to Employee that:
(a) Corporate Entity. The Corporation is a corporation duly
organized, validly existing and in good standing under the laws of Delaware.
(b) Binding Agreement. The execution, delivery and performance
of this Agreement has been duly authorized by the Corporation. This Agreement
constitutes a valid and binding obligation of the Corporation enforceable
against it in accordance with its terms, except as enforceability may be limited
by bankruptcy, insolvency, reorganization, moratorium and other similar laws
relating to or affecting creditors' rights generally, by general equitable
principles (regardless of whether such enforceability is considered in a
proceeding in equity or at law) or by an implied covenant of good faith and fair
dealing.
(c) Fully Paid and Non-Assessable Shares. All Shares acquired
by the Employee pursuant to the Old Agreement have been validly issued, and
Shares acquired upon the Reclassification and the Exchange will be validly
issued, and all such Shares are or will be, as the case may be, fully paid and
nonassessable when issued.
5. Limitations on Restricted Shares. Employee will be entitled to enjoy
all incidents of ownership of the Restricted Shares, except that (i) such shares
shall be subject to the risk of Termination Forfeiture and (ii) may not be sold,
transferred, pledged or otherwise disposed of until September 29, 2005 other
than to an immediate family member of such holder or any trust or partnership of
which all of the beneficiaries or partners, as
<PAGE>
16
the case may be, are such holder and/or immediate family members of such holder,
so long as the transferee agrees in writing to be bound by the restrictions set
forth in this Agreement. All Restricted Shares that have become Earned Shares
subsequent to the date hereof (i.e., not including the 13% deemed Unrestricted
Shares by virtue of amendments to the Old Agreement) shall become permanently
vested with Employee or his Permitted Transferees as Unrestricted Shares and
shall no longer be subject to any Termination Forfeiture on September 29, 2005.
Restricted Shares not yet earned and redesignated as Earned Shares by September
29, 2005 shall be called and repurchased by the Corporation as set forth in
Section 7 hereof.
6. Earned Shares.
--------------
(a) Repurchase Upon Termination Forfeiture Event. Restricted
Shares will be deemed and become Earned Shares upon the Corporation's attaining
the Performance Criteria set forth in Section 13 hereof.
(b) Incidents of Ownership. Subject to the restrictions on
transfer contained herein and the risk of Termination Forfeiture, the holder of
Earned Shares will enjoy all incidents of ownership to such shares, including
the right to receive all dividends and to vote such shares.
7. Redemption of Restricted Shares Not Earned.
-------------------------------------------
(a) Call and Repurchase by Corporation. Shares that remain
Restricted Shares on September 29, 2005 (i.e., which have not previously been
converted to Earned Shares) (the "Unearned Restricted Shares") shall be called
and redeemed by the Corporation at the Adjusted Original Price. The Board of
Directors of the Corporation may establish reasonable notice provisions, time
frames, procedures and otherwise as it
<PAGE>
17
deems reasonable or necessary to facilitate and effect the transaction
contemplated by this Section 7(a). Subject to Section 8(b), the Corporation must
call and purchase such shares from Employee within sixty (60) days of September
29, 2005.
(b) Reoffer of Restricted Shares Not Earned. Subject to
applicable federal and state securities laws, Unearned Restricted Shares so
acquired by the Corporation shall be offered by the Corporation at the Adjusted
Original Price to the Original Investors pro rata with their holdings of shares
of common stock, par value $.10 per share, prior to the IPO.
8. Termination Forfeiture.
-----------------------
(a) Termination for Cause; Resignation. If a Termination
Forfeiture Event occurs, then all Restricted Shares issued to Employee (whether
or not then converted to the status of Earned Shares) shall be called and
repurchased by the Corporation at the Adjusted Original Price, subject to
Section 8(b) hereof.
(b) Deferral of Purchase by Corporation. In the event that any
payment by the Corporation under Section 7(a) or 8(a) for such shares would
constitute a default or an event of default or result in a mandatory prepayment
requirement under the terms of any agreement for indebtedness or other agreement
to which the Corporation or any of its subsidiaries is a party as of the date
for such purchase, the Corporation shall have the right, by delivery of written
notice to the Employee, to defer exercise of its call and purchase right until
such payment by the Corporation would no longer have such an effect; provided
that the Corporation's exercise of its purchase right may not be deferred for
more than six (6) months. The Corporation shall give Employee prompt written
notice of when it is no longer restricted from making such purchase, and the
procedures set forth
<PAGE>
18
in Section 7(a) or 8(a) hereof, as the case may be, shall apply as though the
date giving rise to the purchase right occurred on the date such notice is
given.
(c) Procedures. The Board of Directors of the Corporation may
establish reasonable notice provisions, time frames, procedures and otherwise as
it deems reasonable or necessary to facilitate and effect the transaction
contemplated by this Section; provided, the Corporation may not exercise its
option and call the Shares subject to the Termination Forfeiture later than
ninety (90) days after the Corporation receives written notice of the
Termination Forfeiture Event.
9. Termination of Employment Without Cause or by Employee for Good
Reason. Upon termination of employment of Employee under the Employment
Agreement by the Corporation without Cause (as defined in the Employment
Agreement) or by the Employee for Good Reason (as defined in the Employment
Agreement), all limitations, restrictions, risks of forfeiture and conditions
which relate to Restricted Shares (as unearned Restricted Shares or Earned
Restricted Shares) held by Employee, including but not limited to risk of
Termination Forfeiture, limitations on transfer or risk of call by the Board for
non-conversion to Earned Shares, will automatically and permanently lapse and
all Restricted Shares and Earned Shares will permanently become Unrestricted
Shares held by Employee. The restrictions, terms and conditions of the
Stockholders' Agreement (or any other applicable agreement) then in effect shall
remain in full force and effect.
10. Death or Total Disability of Employee. Where termination of
Employee is due to Disability (as that term is defined in the Employee's
Employment Agreement) or death, (i) all risks of Termination Forfeiture shall
immediately lapse and terminate and (ii) as to any Restricted Shares held by
Employee as of the date of such event, the Disabled
<PAGE>
19
or deceased Employee (or his duly authorized successors) will receive the
benefit of the Corporation's performance over the two (2) fiscal year ends
immediately following such termination as to the Corporation attaining the
Performance Criteria such that Restricted Shares may become Earned Shares and
Unrestricted Shares. By way of clarification, restrictions and risks of
forfeiture as to Restricted Shares held by the Disabled or deceased Employee (or
his successors) shall permanently lapse and Restricted Shares shall become
Earned (and therefore Unrestricted Shares) to the extent that the Corporation
attains the Adjusted EBITDA Performance Criteria set forth herein at such two
(2) fiscal year ends.
11. Reissue of Forfeit Shares. Forfeit Shares shall be reoffered by the
Corporation to Initial Management, pro rata based on their relative percentage
ownership of shares of common stock, par value $.10 per share, immediately
following the initial capitalization of the Company, at the Adjusted Original
Price per share, as the same may be further readjusted from time to time.
12. Performance Criteria. Restricted Shares may be earned and become
Earned Shares upon attainment by the Corporation of the following performance
criteria (the "Performance Criteria"):
(a) Adjusted EBITDA Threshold. One thirteenth (1/13) of the
Restricted Shares (allocated pro rata among Restricted Shares also designated
Reallocable and other Restricted Shares) will be redesignated as (and deemed to
be earned as) "Earned Shares" for every one million dollars ($1,000,000) of
annual Adjusted EBITDA earned by the Corporation, subject to the limitations set
forth in Section 12(b) hereof. Any incremental portion of Adjusted EBITDA less
than $1,000,000 will be disregarded for such calculation.
<PAGE>
20
(b) Determination of Attained Thresholds and Earned Shares.
The number of Restricted Shares with respect to which restrictions and risk of
forfeiture will lapse shall be based on the highest annual Adjusted EBITDA of
the Corporation attained at any time and from time to time; provided, however,
Restricted Shares shall not be redesignated as Earned Shares until the
Corporation's annual Adjusted EBITDA for a fiscal year reaches or exceeds
fourteen million dollars ($14,000,000). By way of example and not limitation,
where Adjusted EBITDA in a given year is $13,300,000, then no restrictions or
risk of forfeiture shall lapse and no Restricted Shares shall become Earned
Shares. If Adjusted EBITDA in a given year is $14,000,000 (to $14,999,999.99),
then Management shall be deemed to have earned rights to 1/13 of the Restricted
Shares, and such Restricted Shares automatically shall become Earned Shares.
Thereafter, if Adjusted EBITDA in a given year is $20,000,000, then Management
shall be deemed to have earned rights to a total of 7/13 (i.e., an additional
6/13) of the Restricted Shares, and so forth. Accordingly, Management's rights
to have all Restricted Shares become Earned Shares will not occur until such
time as the Corporation realizes Adjusted EBITDA of twenty-six million dollars
($26,000,000) or more in a given fiscal year.
(c) Reduction in Adjusted EBITDA; Averaging. Once Restricted
Shares are earned, based upon the Corporation's annual Adjusted EBITDA for a
given fiscal year, and such Shares are redesignated as Earned Shares, such
Earned Shares shall not be affected by the fact that the Corporation's annual
Adjusted EBITDA may decline for any subsequent fiscal year. However, once
Adjusted EBITDA of $14,000,000 or more has been attained, if the Corporation's
annual Adjusted EBITDA declines in a subsequent fiscal year from the highest
level at which additional Restricted Shares become Earned Shares,
<PAGE>
21
additional Restricted Shares will not become Earned Shares until the
Corporation's average annual Adjusted EBITDA for the fiscal years including and
following the year of such decline in annual Adjusted EBITDA is greater than the
level of annual Adjusted EBITDA at which Restricted Shares were last earned. For
example, no additional Restricted Shares would be earned if annual Adjusted
EBITDA in the most recent year in which Restricted Shares were earned had been
$16,000,000, such annual Adjusted EBITDA declined to $14,000,000 in the
following year and thereafter increased to $17,000,000 in the subsequent year
(the average of $14,000,000 and $17,000,000 is $15,500,000, which does not
exceed $16,000,000, the level of annual Adjusted EBITDA for the most recent year
in which Restricted Shares were earned). Additional Restricted Shares would not
be earned in this example until such average annual Adjusted EBITDA was at least
$17,000,000. As is always the case, additional Restricted Shares are not earned
as Earned Shares until annual Adjusted EBITDA increases from the prior year to
the next $1,000,000 threshold of Adjusted EBITDA (and thereafter additional
Restricted Shares are earned for each $1,000,000 threshold).
(d) Resumption of Thresholds. After the average Adjusted
EBITDA has exceeded the Adjusted EBITDA for the year of Adjusted EBITDA at which
Restricted Shares were last earned, then no averaging shall be applicable for so
long as Adjusted EBITDA does not decrease from a prior year's.
(e) Pro Rata Conversion. Upon the Corporation's attaining the
Performance Criteria from time to time, Restricted Shares held by all Management
(and their Permitted Transferees) shall be converted pro rata into Earned
Shares, based on the number of all Restricted Shares then held by all Management
(and their Permitted
<PAGE>
22
Transferees). Provided, nothing herein shall be construed to limit the authority
or ability of the Stock Reallocation Committee to require or impose additional,
more strict or other conditions, restrictions, requirements or limitations as to
Restricted Shares held by other than Initial Management, such that vesting of
and/or lapse of restrictions on such Restricted Shares may be delayed,
prohibited, limited or otherwise with respect to Management other than Initial
Management.
13. Successors and Assigns. The duly authorized Permitted Transferees
(as such term is defined in the Stockholders' Agreement prior to any amendment
thereof) and holders of Restricted Shares and Reallocable Shares originally held
from or through Management, including any transferee obtaining Restricted Shares
in accordance with Section 5 hereof, shall be subject to the same restrictions,
obligations, call rights, purchase options, benefits, put options, terms and
otherwise as would be applicable if such shares were held directly by
Management. All restrictions, forfeiture and repurchase provisions and other
terms and conditions relating to Restricted Shares and Reallocable Shares shall
be binding on and inure to the benefit of the transferees, successors and
assignees of those shares.
14. Sale of All or Substantially All Stock or Assets, or Merger. In the
event that all or substantially all of the Corporation's stock or all or
substantially all assets of the Corporation are transferred or sold, or upon a
merger or other business combination, then all Restricted Shares will become
Unrestricted Shares to the extent that value for the entire Corporation
indicated by the gross sale price as determined in good faith by the Board of
Directors in such transaction results in an internal rate of return to those
Original Investors who, at the time of such transaction, continue to be
stockholders of the Corporation, of at
<PAGE>
23
least 40% on a compounded annual basis based upon such persons' original
holdings in the Corporation (after taking into account the amount and timing of
all distributions and payments received by those Original Investors from the
Corporation, after considering Unrestricted and Earned Shares then held by
Management, and after giving effect to Restricted Shares that become
Unrestricted Shares as result of such sale, transfer or merger). Restricted
Shares that do not become Unrestricted Shares as a result of such sale, transfer
or merger shall retain their characteristics and potential benefits as
Restricted Shares under this Agreement, unless such issue is expressly addressed
in the documentation with respect to such sale, transfer or merger. The
Corporation may, without the consent of Employee, modify or eliminate the
Restricted Share rights and designation as to Restricted Shares not converted to
Unrestricted Shares in the documentation with respect to such sale, transfer or
merger where the Corporation agrees in writing to such matters as part of such
sale, transfer or merger.
15. Legends. Employees agrees that all share certificates representing
Shares issued to Employee under the Agreement shall have the legend required by
the Stockholders' Agreement or as otherwise may be reasonably be imposed by the
Corporation.
16. Additional Covenants.
---------------------
(a) Stockholders' Agreement. Employee hereby acknowledges that
the Shares shall be subject to the terms and conditions of the Stockholders'
Agreement. Employee has received a copy of such Stockholders' Agreement and
Employee further acknowledges that such Stockholders' Agreement contains
provisions restricting the transferability of the Shares in addition to those
set forth herein.
<PAGE>
24
(b) Dilution. All Shares held by Management (including
Restricted Shares) will be diluted under the same circumstances as and pro rata
with any Shares held by an Original Investor and all other stockholders of the
Corporation.
(c) Not an Employment Agreement. This Agreement is not an
employment contract, the terms and conditions of which shall exclusively be
controlled by the provisions of the Employment Agreement.
(d) Stock Dividends, Stock Splits and Recapitalizations. If
dividends are declared and payable in kind, and in the event of a stock split,
recapitalization or other transaction which causes shares to be issued or
exchanged, the additional, issued, successor, substituted, and/or replacement
shares shall bear the same characteristics, restrictions, rights, obligations,
options and otherwise as the shares with respect to which such additional
issued, successor, substituted and/or replacement shares arose, for all purposes
and the Adjusted Original Price shall be further adjusted on a proportional
basis to reflect such change.
(e) Preemptive Shares. If shares are acquired pursuant to
pre-emptive (or substantially similar) rights by Employee, said acquired shares
shall possess and be subject to the same characteristics, restrictions, rights
obligations, options and otherwise as the shares giving rise to the acquisition
of such additional shares.
17. Withholding Taxes; Section 83(b) Election.
------------------------------------------
(a) Withholding Taxes. Employee shall be solely responsible
for paying the Corporation an amount necessary to satisfy the withholding and
payment of all applicable federal and state income tax withholdings, if any,
including but not limited to social security (FICA) and Medicare tax, at the
applicable rates in existence as of
<PAGE>
25
September 29, 1995. Employee hereby authorizes the Corporation to withhold from
any amounts otherwise payable to Employee such taxes as may be required by law
in connection with the issue to Employee of the Shares. Employee agrees that if
such amounts are insufficient Employee will pay or make arrangements
satisfactory to the Corporation for payment of such taxes.
(b) Section 83(b) Election. Employee has filed an election
under I.R.C. Section 83(b) and the parties hereto acknowledge and agree that
withholding taxes shall be computed as an amount equal to (1) the fair market
value of the Shares issued to the Employee pursuant to the Old Agreement as of
September 29, 1995 less (2) any amount paid therefor. The Corporation shall
assist Employee at his request in the filing and perfecting of such I.R.C.
Section 83(b) election.
18. Notices. All notices permitted or required hereunder shall be in
writing and shall be deemed to have been duly and properly given as of the
earlier of the date and time of actual delivery or three (3) days following the
date the same are deposited with the United States Postal Service, postage
prepaid, to be sent certified mail with return receipt requested, and addressed
to the Corporation, as follows:
U.S. Franchise Systems, Inc.
Attention: Michael A. Leven
13 Corporate Square
Suite 250
Atlanta, Georgia 30329
and addressed to Employee, as follows:
Mr. Neal K. Aronson
c/o U.S. Franchise Systems, Inc.
13 Corporate Square
Suite 250
Atlanta, Georgia 30329
<PAGE>
26
or at such other address as the Corporation or Employee may at any time and from
time to time specify to the other by notice as herein provided.
19. Miscellaneous.
--------------
(a) This Amended and Restated Employee Stock Purchase
Agreement shall not be effective unless and until the closing of the IPO.
(b) Binding Effect. This Agreement shall be binding upon and
inure to the benefit of the parties and their respective agents,
representatives, successors and
permitted assigns.
(c) Cooperation. The parties shall cooperate fully with each
other and their respective counsel and representatives in connection with all
steps to be taken as part of their obligations under this Agreement.
(d) Governing Law. This Agreement and the rights and duties of
the parties attendant hereto shall be construed and governed in accordance with
the internal laws (and not the conflict of laws) of the State of Georgia.
(e) No Waiver. The failure of either party to insist, in one
or more instances, on the performance by the other in strict compliance with the
terms and conditions of this Agreement, shall not be deemed a waiver or
relinquishment of any right granted hereunder or of any terms and conditions of
this Agreement unless such waiver is contained in a writing signed by the
parties.
(f) Entire Agreement. This Agreement and any amendments or
exhibits attached hereto or related documents referenced herein comprise all the
agreement, understandings, representations, conditions and warranties by and
between the parties.
<PAGE>
27
This Agreement may not be modified or amended except in a writing signed by the
parties to this Agreement.
(g) Survival. All representations, warranties and covenants
contained in this Agreement shall survive the execution and delivery of this
Agreement and all documents executed in performance of this Agreement.
(h) Interpretation. Within this Agreement, the singular shall
include the plural and the plural shall include the singular, and any gender
shall include the other gender, as the meaning in the context of this Agreement
shall require. Should any provision of this Agreement require judicial
interpretation, it is agreed that the court interpreting or construing the same
shall not imply a presumption that the terms hereof shall be more strictly
construed against one party by reason of the rule of construction that a
document is to be construed more strictly against the party who itself or
through its agent prepared this Agreement, it being agreed that all parties have
had the opportunity to review and understand this Agreement.
(i) Injunctive Relief. In the event of a breach or threatened
breach by a party of any of his obligations hereunder, the parties hereby
acknowledge and agree that the parties will not have an adequate remedy at law
and shall be entitled to such equitable and injunctive relief as may be
available to restrain a threatened or actual violation. Nothing herein shall be
construed as prohibiting a party from pursuing any other remedies available for
such breach or threatened breach, including without limitation the recovery of
damages. All remedies shall be cumulative. No party shall be required to post a
bond or other surety as a condition to obtaining such injunctive relief.
<PAGE>
28
20. Multiple Counterparts. This Agreement may be simultaneously
executed in several counterparts, each of which shall be an original and all of
which shall constitute but one and the same instrument.
21. Record Owner. The Corporation shall not be required (i) to transfer
on its books any shares that shall have been sold or otherwise transferred in
violation of any of the provisions set forth in this Agreement or the
Stockholders' Agreement or (ii) to treat the improper transferee as owner of
such shares or to accord to such improper transferee the right to vote, if any,
as such owner.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Amended and Restated
Stock Purchase Agreement on the date first above written.
CORPORATION:
U.S. FRANCHISE SYSTEMS, INC.
By:______________________________
Michael A. Leven
Chairman, President and
Chief Executive Officer
ATTEST:
By:_____________________________
____________ Secretary
EMPLOYEE:
---------------------------
NEAL K. ARONSON
<PAGE>
EXHIBIT "A"
EMPLOYEE SHARES
(as of September 29, 1995)
Michael A. Neal K.
---------- -------
TOTAL Leven Aronson
----- ----- -------
(a) Restricted Shares
-----------------
(i) Reallocable 66,735 33,367 33,368
(ii) Non-Reallocable 222,449 111,225 111,224
Total Restricted Shares: 289,184 144,592 144,592
(b) Unrestricted Shares
-------------------
(i) Reallocable 55,612 33,367 22,245
(ii) Non-Reallocable 222,449 133,470 88,979
Total Unrestricted Shares: 278,061 166,837 111,224
Total Shares Issued Hereunder: 567,245 311,429 255,816
VOTING AGREEMENT
VOTING AGREEMENT, dated as of _____________ __, 1996 (this
"Agreement"), between MICHAEL A. LEVEN ("Leven") and NEAL K. ARONSON
("Aronson").
WHEREAS, as of the date hereof, Aronson owns 942,440 shares of
Class A Common Stock, par value $0.01 per share (the "Class A Common Stock"),
and 1,509,453 Class B Common Stock, par value $0.01 per share, of U.S. Franchise
Systems, Inc. (the "Company").
WHEREAS, in connection with the Company's proposed initial
public offering, and at the request of the Underwriters of such offering,
Aronson has agreed to enter into this Agreement with respect to 111,347 shares
of Class A Common Stock and 311,007 shares of Class B Common Stock now owned by
Aronson (the "Shares").
NOW, THEREFORE, in consideration of the foregoing and the
mutual covenants and agreements contained herein, and intending to be legally
bound hereby, the parties hereto hereby agree as follows:
ARTICLE I
VOTING AND PROXY
Section 1.1 Voting Agreement. Aronson hereby agrees that
during the time this Agreement is in effect, at any meeting of the stockholders
of the Company, however called, and in any action by consent of the stockholders
of the Company, Aronson shall vote the Shares as directed by Leven, and, to
effectuate such agreement, to grant to Leven an irrevocable proxy to vote the
Shares ("Proxy").
Section 1.2 Proxy. Attached hereto as Exhibit A is an
irrevocable proxy, which is coupled with an interest, granted by Aronson to
Leven to carry out Section 1.1.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF ARONSON AND LEVEN
Aronson hereby represents and warrants to Leven as follows:
Section 2.1 Authority Relative to This Agreement. Aronson has all
necessary power and authority to execute and deliver this Agreement and to
perform his obligations hereunder. This Agreement has been duly executed and
delivered by
<PAGE>
2
Aronson and, assuming the due authorization, execution and delivery by Leven,
constitutes a legal, valid and binding obligation of Aronson, enforceable
against Aronson in accordance with its terms except to the extent enforceability
may be limited by bankruptcy, insolvency, moratorium or other similar laws
affecting creditors' rights generally or by general principles governing the
availability of equitable remedies.
Section 2.2 No Conflict. (a) The execution and delivery of
this Agreement by Aronson does not, and the performance of this Agreement by
Aronson shall not, (i) conflict with or violate any law, rule, regulation,
order, judgment or decree applicable to Aronson or by which the Shares are bound
or affected or (ii) result in any breach of or constitute a default (or an event
that with notice or lapse or time or both would become a default) under, or give
to others any rights of termination, amendment, acceleration or cancellation of,
or result in the creation of a lien or encumbrance on any of the Shares pursuant
to, any note, bond, mortgage, indenture, contract, agreement, lease, license,
permit, franchise or other instrument or obligation to which Aronson is a party
or by which Aronson or the Shares are bound or affected.
(b) The execution and delivery of this Agreement by
Aronson does not, and the performance of this Agreement by Aronson shall not,
require any consent, approval, authorization or permit of, or filing with or
notification to, any governmental entity except for applicable requirements, if
any, under the federal securities laws.
Section 2.3 Title to the Shares. As of the date hereof,
Aronson is the record and beneficial owner of the Shares. The Shares are owned
free and clear of all security interests, liens, claims, pledges, options,
rights of first refusal, agreement, limitations on Aronson's voting rights,
charges and other encumbrances of any nature whatsoever, except as contemplated
by that certain Amended and Restated Employee Stock Purchase Agreement,
originally dated as of September 29, 1995, between Aronson and the Company.
Except with respect to the Proxy, the Stockholder has not appointed or granted
any proxy, which appointment or grant is still effective, with respect to the
Shares.
ARTICLE III
COVENANTS OF ARONSON
Section 3.1 No Inconsistent Agreement. Aronson hereby agrees
that, except as contemplated by this Agreement, Aronson shall not enter into any
voting agreement or grant a proxy or power of attorney with respect to the
Shares that is inconsistent with this Agreement.
<PAGE>
3
ARTICLE IV
MISCELLANEOUS
Section 4.1 Termination. This Agreement shall terminate on the
earlier of (a) the fifth anniversary hereof or (b) the transfer of the Shares to
a person that is not an "affiliate" of Aronson (as determined under the
Securities Exchange Act of 1934 and the rules promulgated thereunder), unless
earlier terminated in writing by the parties hereto.
Section 4.2 Specific Performance. The parties hereto agree
that irreparable damage would occur in the event any provision of this Agreement
was not performed in accordance with the terms hereof and that the parties shall
be entitled to specific performance of the terms hereof, in addition to any
other remedy at law or in equity.
Section 4.3 Entire Agreement. This Agreement and the Proxy
constitute the entire agreement between Aronson and Leven with respect to the
subject matter hereof and thereof and supersedes all prior agreements and
understandings, both written and oral, between Aronson and Leven with respect to
the subject matter hereof and thereof.
Section 4.4 Amendment. This Agreement may not be amended
except by an instrument in writing signed by the parties hereto.
Section 4.5 Governing Law. This Agreement shall be governed
by, and construed in accordance with, the laws of the State of Delaware
regardless of the laws that might otherwise govern under applicable principles
of conflicts of law.
Section 4.6 Assignability. This Agreement may not be assigned
by either party without the prior written consent of the other party.
<PAGE>
4
IN WITNESS WHEREOF, Leven and Aronson have executed this
Agreement on the date hereof.
--------------------------------
Michael A. Leven
--------------------------------
Neal K. Aronson
<PAGE>
EXHIBIT A
IRREVOCABLE PROXY
The undersigned hereby irrevocably appoints MICHAEL A. LEVEN
or any nominee of MR. LEVEN, with full power of substitution (the "Proxy
Holder"), as proxy for the undersigned, to vote 111,347 shares of Class A Common
Stock, par value $0.01 per share, and 311,007 shares of Class B Common Stock,
par value $0.01 per share, of U.S. Franchise Systems, Inc., a Delaware
corporation (the "Corporation") of the undersigned (such number of shares to be
automatically reduced by the number of any such shares sold by the undersigned
after the date hereof) (the "Shares"), for and in the name, place and stead of
the undersigned at any annual or special meeting of stockholders of the
Corporation, and any adjournment(s) thereof in any manner as such Proxy Holder
sees fit, and to execute written consents in lieu of any such meeting, until the
earlier of (a) the fifth anniversary hereof, (b) the transfer of the Shares to a
person who is not an "Affiliate" of the undersigned (within the meaning of the
Securities Exchange Act of 1934, as amended) (but only with respect to the
number of Shares so transferred) and (iii) the earlier termination hereof by
Aronson.
This proxy is being granted in connection with the execution
of a Voting Agreement, dated the date hereof, between the undersigned and Mr.
Leven. Consequently, the undersigned acknowledges that this proxy is coupled
with an interest, is not revocable by the undersigned and is perpetual.
Dated: ______________ __, 1996
--------------------------------
Neal K. Aronson
MEMORANDUM
To: Neal Aronson
From: Dan Abrams
Date: May 14, 1996
Subject: U.S. Franchise Systems ("USFS") -- Franchise Loan Program -- Revised
The following are the general terms upon which Nomura Asset Capital
Corporation ("NACC") would provide a comprehensive construction and permanent
loan program for eligible USFS franchisees, including both the Microtel and
Hawthorne Suites brands. Additional brand financing will be considered by NACC
as and when acquired by USFS.
<TABLE>
<CAPTION>
GENERAL
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<S> <C>
Commitment Term: 2 years
Facility Size: $200 million -- consideration will be given to expanding
facility based on experience and attainment of benchmarks to
be discussed
Lender: NACC -- all loans would be made directly by NACC to the
Borrowers; USFS would conduct Construction
Loan/Permanent Loan commitment due diligence and
underwriting based upon NACC standards: upon USFS's
delivery to NACC of complete underwriting package, NACC
will have 5 business days to approve/disapprove Borrower for
Construction Loan/Permanent Loan commitment; NACC will
be responsible for closing the transaction; closings will
generally occur within 30 days of NACC's approval of
Borrower
Closings: Provided that there are no regulatory or other legal
impediments, loans will be closed in Atlanta, GA, and will be
originated through an entity bearing a "USFS" designation
CONSTRUCTION LOAN PARAMETERS
- ----------------------------
Borrower: Special purpose entity
Loan to Cost: 70%
1
<PAGE>
Equity: 30% of Cost -- Borrower must demonstrate availability of
equity moneys, which may require posting of full amount in
cash, letter of credit or other adequate security, in NACC's
discretion: equity moneys must be expended prior to initial
draw on Construction Loan
Draws: Monthly, upon presentation of evidence of work completed in
accordance with approved plans and specifications, and
architect's certificate as to work completed and of adequate
funds to complete construction
Collateral: First mortgage lien on the land and improvements as built;
completion bond; Construction Loan will be recourse to the
principal economic entity or persons behind the SPE Borrower
until certificate of occupancy
Term: Construction draws must be completed within 9 months of first
draw. Entire Construction Loan term will not exceed 27
months for Microtels and 30 months for Hawthorne Suites
(inclusive of draw period)
Interest Rate: Floating at Prime plus 1.0% per annum; any additional spread
obtained by USFS will be shared 50/50 between NACC and
USFS; if NACC syndicates the entire Construction Loan, and
such syndication is at an effective yield of less than Prime plus
1.0%, NACC and USFS will share 50/50 in the differential in
interest between the syndication rate and Prime plus 1.0%
Amortization: None
Construction Loan
Commitment Fee: 0.50% of committed Construction Loan amount
Condition to Construction
Loan Commitment: Execution by Borrower and NACC of Permanent Loan
commitment letter and payment by Borrower of minimum
permanent loan commitment fee of 0.50%
Repayment: Construction Loan will automatically convert to Permanent
Loan at maturity (or earlier at Borrower's option once there
are 12 full months of operation)
PERMANENT LOAN PARAMETERS
- -------------------------
Borrower: Special purpose entity
2
<PAGE>
Amount: Maximum amount based on DSCR of 1.4:1 using NACC
underwritten NOI and debt service constant equal to the
greater of the actual constant and 10.48%; provided, that the
maximum amount will in no event exceed 90% of the cost to
build. For this purpose, "cost" may include all third-party hard
and soft costs, including financing fees, paid by the Borrower
relating to construction of the property. In addition, where
NACC has advanced the Construction Loan, NACC will
commit to fund proceeds at least sufficient to satisfy the entire
Construction Loan, such proceeds to take the form of the
Permanent Loan plus. If the proceeds of such loan are
insufficient, Mezzanine Financing, as described below
Mezzanine Financing: Mezzanine Financing will take the form of a preferred equity
interest in the Borrower entity; the term of the Mezzanine
Financing will be between 3-5 years; interest will accrue and
be payable at LIBOR plus (i) 450 bps for three-year term, (ii)
550 bps for four-year term or (iii) 650 bps for five-year term;
fully amortizing on a straight-line basis over term; Borrower
will be required to apply between 50% and 75% (as
determined by NACC in its discretion) of excess cash flow to
amortization
Funding: Borrower can request funding of the Permanent Loan at any
time following 12 full months of operation and no later than 27
or 30 months, as the case may be, following issuance of the
Permanent Loan commitment
Collateral: First mortgage lien on property: Borrower with more than one
funded property will be required to either (i) cross-default and
cross-collateralize all such properties (see below for reduction
in interest rates resulting from certain crossed situations) or if
loans to one borrower aggregate to greater than $15 million,
(ii) hold each property in a separate bankruptcy remote entity
and provide acceptable opinions of counsel relating to
substantive non-consolidation; Permanent Loan will be non-
recourse
Term/Amortization: 10-year term/20-year fully amortizing schedule or 11-year
term/22-year fully amortizing schedule
Interest Rate: 10-year US Treasury rate or 11-year interpolated US Treasury
rate (depending on selected term) plus indicated spread
DSCR Spread Crossed Spread
1.4:1 370 bps 355 bps
1.6:1 325 bps 310 bps
1.8:1 280 bps 270 bps
2.0:1 235 bps 225 bps
3
<PAGE>
Crossed spreads available for any pool of 4 or more
geographically diversified crossed properties
Underwritten NOI: Trailing 12-month actual cash flow adjusted, if necessary, to
reflect FF&E expenditures of 5% of gross revenues and 4%
management fee, NACC reserves the right to set forth other
pro forma adjustments to cash flow as it deems reasonably
necessary, such as to reflect the impact of future competitive
properties, and consistent with its hotel underwriting
procedures and practices at the time of the execution of the
Permanent Loan commitment
FF&E Reserves: The Borrower will be required to fund reserves on a monthly
basis equal to 2.5% in Year 1, 3.25% in Year 2 and 4.0% in
Year 3 and thereafter. Properties that are not new (Hawthorne
conversions) will require reserves of 4% of gross revenues
Debt Service Reserve/
Lockbox: 2 months debt service reserve will be required in lieu of a
lockbox for initial 9 or 10 years (depending on term selected);
lockbox will be instituted commencing in year 10 or 11
(depending on term selected); NACC will have the option to
initiate a lockbox in the event of a default under the loan;
Lockbox will be required if NACC funds Mezzanine
Financing (and until Mezzanine Financing is paid off)
Prepayment: Locked out for 2 years following securitization by NACC;
thereafter Treasury equivalent yield maintenance -- specific
procedure for prepayment to be discussed
Sale of Property: Loan may be assumed by qualified purchaser
Permanent Loan
Commitment Fee: If NACC is construction lender -- 0.5%
If NACC is not construction lender -- 1.0%
In each case payable to NACC at time of commitment, based
on amount of Construction Loan
Permanent Loan
Funding Fee: If NACC is construction lender -- 1.0%
If NACC is not construction lender -- 0.5%
In each case payable to NACC at time of funding, based on
amount of Permanent Loan actually funded (including make-
up if prior Permanent Loan commitment fee is based on a
lower projected amount for the Permanent Loan than actually
funded)
4
<PAGE>
Fee Arrangement: NACC and USFS will share on a 50/50 basis in the aggregate
Construction Loan/Permanent Loan commitment funding fees in
excess of either 1.25% or 1.00% (depending on whether the
NACC construction loan is issued), on a per Borrower basis, at
the time that the Borrower pays such fees -- with the initial 1.25%
or 1.00%, as the case may be, being retained by NACC and any
excess over such amounts being shared as on when paid by the
Borrower. Following is a summary of the loan fee structure and
sharing arrangements:
NACC No NACC
Const. Loan Const. Loan
Const. Loan Com. Fee 0.50% 0.00%
Perm. Loan Com. Fee 0.50% 1.0%
Perm. Loan Fund Fee 1.00% 0.50%
--------- ---------
2.00% 1.50%
Fees shared over 1.25% 1.00%
Firm Commitment: The Permanent Loan commitment would be binding on NACC
and the Borrower, including the principal economic entity or
persons behind the SPE
</TABLE>
1
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 1 to Registration Statement
No. 333-11427 of U.S. Franchise Systems, Inc. of our report dated August 9,
1996 (October 11, 1996 as to Note 11) appearing in the Prospectus, which is a
part of such Registration Statement, and to the reference to us under the
headings "Selected Financial Data" and "Experts" in such Prospectus.
DELOITTE & TOUCHE LLP
October 11, 1996
