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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED, EFFECTIVE
OCTOBER 7, 1996]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM __________TO __________
COMMISSION FILE NUMBER 0-28908
U.S. FRANCHISE SYSTEMS, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 58-2190911
(State or other jurisdiction of (I.R.S Employer Identification No.)
Incorporation or Organization)
13 CORPORATE SQUARE, SUITE 250
ATLANTA, GEORGIA 30329
(Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (404) 321-4045
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Class A Common Stock, $0.01 par value
TITLE OF EACH CLASS
Indicate by check mark whether the registrant: (1) has filed all reports
required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the outstanding shares of the registrant's
Class A Common Stock and Class B Common Stock held by non-affiliates of the
registrant was approximately $76,525,080 as of February 26, 1997. There were
9,872,476 shares of the registrant's Class A Common Stock and 2,707,919 shares
of the registrant's Class B Common Stock outstanding as of February 26, 1997.
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PART I
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Annual Report on Form 10-K (this "Form 10-K"),
including statements under "Item 1. Business" and "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations," that
are not historical facts constitute "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995 (the "Reform
Act"). Certain, but not necessarily all, of such forward-looking statements can
be identified by the use of forward-looking terminology such as "believes,"
"expects," "may," "will," "should," or "anticipates" or the negative thereof or
other variations thereon or comparable terminology, or by discussions of
strategy that involve risks and uncertainties. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors which may cause
the actual results, performance or achievements of U.S. Franchise Systems, Inc.
("USFS" or the "Company") and its subsidiaries to be materially different from
any future results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, but are not limited to, the
following: general economic and business conditions; competition in the lodging
and franchising industries; success of acquisitions and operating initiatives;
management of growth; dependence on senior management; brand awareness; general
risks of the lodging and franchising industries; development risk; risk relating
to the availability of financing for franchisees; the existence or absence of
adverse publicity; changes in business strategy or development plan;
availability, terms and deployment of capital; business abilities and judgment
of personnel; availability of qualified personnel; labor and employee benefit
costs; changes in, or failure to comply with, government regulations;
construction schedules; the costs and other effects of legal and administrative
proceedings; and other factors referenced in this Form 10-K. The Company will
not undertake and specifically declines any obligation to publicly release the
results of any revisions which may be made to any forward-looking statement to
reflect events or circumstances after the date of such statements or to reflect
the occurrence of anticipated or unanticipated events.
ITEM 1. BUSINESS
Certain statements under this caption "Business" constitute "forward-looking
statements" under the Reform Act. See "Special Note Regarding Forward-Looking
Statements."
GENERAL
USFS was formed in August 1995 to acquire, market and service well-positioned
brands with potential for rapid unit growth through franchising . The Company's
initial brands, which are in the lodging industry, are the Microtel(R) budget
hotel brand ("Microtel") and the Hawthorn Suites(R) upscale, extended-stay hotel
brand ("Hawthorn Suites"). The Company acquired the rights to these brands
because of their potential for significant growth, which reflects, among other
things, their profitability for franchisees at the property level and their
positions in attractive segments of the lodging industry.
The Company has assembled an experienced management team and sales force led by
Chairman, President and Chief Executive Officer, Michael A. Leven who has 36
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 (1990-1995) and
President and Chief Operating Officer of Days Inn of America, Inc. (1985-1990),
franchisors
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of the two largest lodging brands in the world. As of December 31, 1996, the
Company had a staff of 73 employees, including a 27-person sales force. 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 190 franchise agreements and accepted applications for an additional 76
hotels as of December 31, 1996, expanding the number of states in which
Microtels are or may be located from 10 to 45. 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 19 franchise agreements and
accepted applications for 14 additional hotel sites as of December 31, 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 the 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 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.
The Company was incorporated in Delaware in August 1995. Its executive offices
are located at 13 Corporate Square, Suite 250, Atlanta, Georgia 30329 and its
telephone number is (404) 321-4045.
Financial information about the Company may be found in "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Item 8. Financial Statements and Supplementary Data" of this Form 10-K.
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".
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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.
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 1996 the various segments and their respective ADRs were: budget
(approximately $40), economy (approximately $50), mid-price (approximately $64),
upscale (approximately $84) and luxury (approximately $122). 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 and economy segments of the limited-service
sectors through its Microtel brand and the upscale segment of the extended-stay
and transient suite sectors through its Hawthorn Suites brand.
THE COMPANY'S LODGING FRANCHISE SYSTEMS
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, which had an average daily room rate in 1996 of approximately
$38.01, operate in the budget or economy segments of the lodging industry,
which are the lowest priced segments in the industry . 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.
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.
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:
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<TABLE>
<CAPTION>
AS OF AS OF
DECEMBER 31, 1995 DECEMBER 31, 1996
----------------- -----------------
<S> <C> <C>
MICROTEL FRANCHISE DATA (1)
Properties Open 23 28
Properties Under Construction 0 25
Executed Franchise Agreements 3 190
Franchise Applications Accepted 10 76
</TABLE>
(1) The Company will not receive royalties from 27 of the 28 Microtels open as
of December 31, 1996 and from seven of the Microtels covered by executed
franchise agreements as of December 31, 1996, but does and will receive
marketing fees from the franchisees of these properties.
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, 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 reservations system for Hyatt hotels.
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. There can be no assurance, however, that Regency will continue to
service the Company's or Hyatt's reservations needs in the future or that the
Company will continue to use the reservation services of Regency.
The extended-stay segment, targeting travelers staying five or more consecutive
nights, is a growing segment of the lodging industry, as travelers' demand
better value and environments that feel more like home. 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-stay hotels.
According to lodging consultant D.K. Shifflet & Associates Ltd., approximately
318 million extended-stay room nights were sold in the United States in 1996,
representing over 35% of all hotel room
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nights sold in the United States during the year. However, dedicated
extended-stay rooms constituted only 1.5% of the lodging industry's total rooms
at the end of 1996.
According to an industry survey, in 1996 extended stay properties experienced an
average occupancy rate of 79.4%, compared to an overall average occupancy rate
for the lodging industry of 61.5%. 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.
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 27 people. 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. 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. 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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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 USA Today, Business Week and National Business Employment Weekly
(a subsidiary of The Wall Street Journal), as well as industry trade
publications such as Hotel & Motel Management, Hotel Business, Lodging, Lodging
Hospitality, Hotels, Travel Weekly and Real Estate Forum.
Training. The Company maintains mandatory training programs for its franchisees
that are designed to teach franchisees how to best utilize the Company's
reservations system and marketing programs, as well as the fundamentals of hotel
operations, such as recruiting, housekeeping, repairs and maintenance and
personnel policies. The Company also provides special on-site training upon
request. The Company has developed and maintains a library of training videos,
cassettes and tapes, as well as printed training material, which are available
to franchisees. In addition, each franchise sales person must complete a
structured initial training program and regular retraining.
Franchise Services. The franchise services department functions as a single
point of contact for all franchisees to call for support on all issues prior to,
during, and after construction. Franchise services acts as a liaison between the
franchisee and all departments of the Company. The Company recognizes the
personal service aspect of the franchising business and intends to assign a
designated member of the franchise service department to each franchisee.
Purchasing. The Company provides its franchisees with volume purchasing
discounts for products, services, furnishings, and equipment used in
construction and ongoing operations. The Company has established relationships
with vendors to the lodging industry and negotiates discounts for purchases by
its customers. In certain cases, the Company receives payments from the vendors
as well. Currently, the Company does not maintain inventory, directly supply any
of the products, or extend credit to franchisees for such purchases.
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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 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 Microtel 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:
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<TABLE>
<CAPTION>
Microtel Hawthorn Suites
FRANCHISE ROYALTY FEES -------- ---------------
- ----------------------
<S> <C> <C>
Year 1 4.0% 5.0%
Year 2 5.0% 5.0%
Year 3 and thereafter 6.0% 5.0%
RESERVATION AND MARKETING FEES
- ------------------------------
Year 1 3.0% 2.5%
Year 2 2.5% 2.5%
Year 3 and thereafter 2.0% 2.5%
TOTAL FRANCHISE FEES
- --------------------
Year 1 7.0% 7.5%
Year 2 7.5% 7.5%
Year 3 and thereafter 8.0% 7.5%
</TABLE>
During the first quarter of 1996, when the Company began its full-time franchise
sales efforts, prospective Microtel franchisees were offered a three month
royalty-free period during Year 1 as an inducement to join the Company's
franchise system. The Company is no longer offering this discount and currently
has no intention to do so in the future. With respect to Hawthorn Suites, a wide
range of incentives have been offered to various franchisees, from no discount
to a package consisting of a one point reduction for the first four years of
operations, a one-half point reduction for the fifth year and a 7.5% cap on
Total Franchise Fees for the term of the agreement. 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.
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 Hotels Corporation ("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").
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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 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 franchisees 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 seven 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:
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<TABLE>
<CAPTION>
NUMBER OF
YEAR MICROTEL PROPERTIES (1)
---- -----------------------
<S> <C>
1996 0
1997 50
1998 100
1999 175
2000 250
</TABLE>
(1) Excluding (i) the 27 Microtels that were open or under construction or
with respect to which franchise agreements had been executed or
applications accepted at the time of the Microtel Acquisition and (ii)
the 23 additional Microtels (with respect to which seven 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 complied 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 Properties, L.L.C. ("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
11
<PAGE> 12
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.
<TABLE>
<CAPTION>
DIVISION OF FRANCHISE ROYALTIES
ROOMS(1) HSA COMPANY
- -------- ----- -------
<S> <C> <C>
First 3,600 Rooms: 66.7% 33.3%
Next 3,150 Rooms: 50.0% 50.0%
Next 2,160 Rooms: 37.5% 62.5%
Next 4,410 Rooms: 33.3% 66.7%
Above 13,320 Rooms: 25.0% 75.0%
</TABLE>
(1) For this purpose, a suite is considered to be one "room".
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
the 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
12
<PAGE> 13
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 Uniform Franchise Offering Circulars ("UFOC") 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 licensees 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. The minimum development requirements are as
follows:
13
<PAGE> 14
DEVELOPMENT SCHEDULE
(Qualified License Agreements)
ROYALTY REDUCTION
<TABLE>
<CAPTION>
DATE STANDARD TERMINATION STANDARD
- ------------------ -------------- --------------------
<S> <C> <C>
June 27, 1997 20 10
December 27, 1997 30 N/A
June 27, 1998 40 20
June 27, 1999 65 40
June 27, 2000 90 60
June 27, 2001 115 80
June 27, 2002 140 100
</TABLE>
The Hawthorn Acquisition Agreement may also be terminated by the mutual
agreement of the parties or in various other circumstances, including, at the
election of HSA, on the death, disability, retirement, resignation or
termination of the employment of Michael A. Leven as Chief Executive Officer of
the Company prior to a permitted transfer of the Company's rights under such
agreement or, if earlier, prior to such time as the Royalty Reduction Standard
has been met or the Hawthorn Brand Saturation achieved. If the Hawthorn
Acquisition Agreement is terminated for any reason, HSA has the right to require
the Company to continue to administer the licenses for Hawthorn Suites brand
hotels then in effect as of the date of such termination for up to one year in
exchange for a fee equal to 0.5% of the gross room revenues of such hotels.
SEASONALITY
In the future, royalties generated by gross room revenues of franchised
properties are expected to be the principal source of revenue for the Company.
As a result, the Company expects to experience seasonal revenue patterns similar
to those experienced by the lodging industry generally. Accordingly, the summer
months, because of increase in leisure travel, are expected to produce higher
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
also may have an impact on the seasonality of 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.
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 revenue 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.
14
<PAGE> 15
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).
Hawthorn Suites hotels compete for consumers and potential franchisees with
Residence Inn(R), Homewood Suites(R), Summerfield Suites(R) and Woodfin
Suites(R). In the transient suites sector of the lodging industry, where the
company will be competing through its Hawthorn Suites LTD brand, the Company's
principal competitors will include AmeriSuites(R), Hampton Inn and Suites(R),
Fairfield Suites(sm), MainStay(sm), Candlewood(sm), Wingate Inn(sm),
Towne Place(sm) and Courtyard by Marriott(R), among others. Many of the
Company's competitors are affiliated with larger chains with substantially more
properties, greater marketing budgets and greater brand identity than the
Company.
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 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 have not been materially
adversely affected by such existing regulations, the Company cannot predict the
effect of any future legislation or regulation.
Additionally, various national, state, and local laws and regulations may affect
activities undertaken by the Company in connection with the Franchisee Financing
Facility (see -"Special Programs" for detail on each of these). 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 Nomura Asset Capital
Corporation ("NACC") or in the event the Company determines to make loans itself
to franchisees.
EMPLOYEES
As of December 31, 1996, the Company employed approximately 67 full time and 6
part time persons. None of the Company's employees are represented by unions.
Management considers its employee relations to be satisfactory.
15
<PAGE> 16
TRADEMARKS AND LICENSES
The Company owns and uses certain trademarks and service marks, including, among
others, US FRANCHISE SYSTEMS, U.S. Franchise Systems, Inc., US FUNDING CORP.,
MICROTEL, MICROTEL with design, MICROTEL INN, MICROTEL SUITES, MICROTEL INN &
SUITES, AMERICAN DREAM, AMERICAN DREAM with design, "FIRST THE HOTEL, THEN THE
MOTEL, NOW MICROTEL" and "SAVINGS YOU CAN SLEEP ON". The Company's rights to
such trademarks and service marks will last indefinitely so long as the Company
continues to use and police the marks and, with respect to registered marks, to
renew filings with the applicable government agencies.
Pursuant to the Hawthorn Acquisition Agreement, the Company is the exclusive
licensee of the Hawthorn Suites brand of hotels. Pursuant to such right, the
Company uses certain other marks, including, among others, HAWTHORN SUITES, the
tree logo, HAWTHORN SUITES with the tree logo and the Company's newly created
brand, HAWTHORN SUITES LTD. Upon the expiration of the 99-year term of the
Hawthorn Acquisition Agreement (unless sooner terminated), HSA will transfer all
of its right, interest and title in those marks to the Company.
The Company considers the foregoing marks to be material to its business and
certain of such marks are registered with or applications for registration are
pending in the United States Patent and Trademark Office. Certain of the marks
are also registered with or applications for registration are pending with
various state and foreign government agencies. The Company is not aware of any
adverse claim concerning its owned or licensed marks.
SPECIAL PROGRAMS
American Dream. The Company has developed this unique program to enable
potential first-time hotel owners with limited financial resources and/or little
or no building experience to lease and ultimately acquire a Microtel (the
"American Dream Program"). Under the American Dream Program, qualified potential
Microtel franchisees would lease a Microtel for an initial deposit and, at the
lessees' option, acquire the hotel for additional payments over a fixed period.
The American Dream Program is designed to accelerate the growth of the Microtel
system by permitting those who could not afford to build a Microtel an
opportunity to become a hotel owner. As of December 31, 1996 there were 19
executed American Dream licenses and 3 American Dream Microtel's were under
construction.
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. However, no specific amount of
capital has been committed to this 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.
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
16
<PAGE> 17
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, NACC is expected to provide eligible
franchisees with 27-30 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., a subsidiary of the Company, 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.
To date, no loans have been made to franchisees under the Franchisee Financing
Facility; however, nine commitment letters have been issued for an aggregate of
$15.9 million. There is no assurance that any of these commitments will turn
into loans. In addition, these commitment letters are subject to customary
closing conditions, including the execution and delivery of definitive loan
documentation. In some instances, USFS has agreed, and may in the future agree,
to provide subordinated loans or credit support for certain of these loans under
the Franchisee Financing Facility or otherwise. 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.
To the extent loans close under the Franchise Financing Facility, the Company
will earn revenues when its franchisees borrow under the Franchisee Financing
Facility. Specifically, the Company expects to receive 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. In addition to the Franchisee Financing Facility, the Company seeks to
arrange financing for franchisees under other programs and in doing so may
receive a marketing fee.
ITEM 2. PROPERTY
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 has determined that it
requires additional space which may result in relocation costs and costs
associated with terminating its current lease.
ITEM 3. LEGAL PROCEEDINGS.
The Company is and may become party to claims and litigations that arise in the
Company's normal course of business. It is the opinion of management that the
outcome of any currently pending matters will not have a material adverse effect
on the Company's consolidated financial statements.
17
<PAGE> 18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its 1996 Annual Meeting of Shareholders on October 11, 1996.
The matters acted upon by the shareholders at that meeting were reported on
pages 12-13 of the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Class A Common Stock is traded on the Nasdaq National Market under
the symbol USFS. As of February 26, 1997, there were 86 holders of record of the
Company's Class A Common Stock and 3 holders of record of the Company's Class B
Common Stock. The following table shows the range of reported high and low
closing prices per share of Class A Common Stock.
<TABLE>
<CAPTION>
FISCAL 1996 HIGH ($) LOW($)
-------------- -------- -----
<S> <C> <C>
First quarter N/A N/A
Second quarter N/A N/A
Third quarter N/A N/A
Fourth quarter 16.000 8.625
</TABLE>
Pursuant to the terms of a Restated Stockholders' Agreement dated October 11,
1996, the stockholders of the Company approved the creation of two classes of
common stock, Class A and Class B, each with a par value of $0.01. The
stockholders also agreed 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
exchanged such shares for the same number of shares of Class B Common Stock.
This exchange was exempt from registration under the Securities Act of 1933, as
amended, by virtue of Section 3 (a) (9) thereof. Shares of Class A Common Stock
and Class B Common Stock are identical in all respects except that (i) holders
of Class B Common Stock are entitled to ten votes per share and holders of Class
A Common Stock are entitled to one vote per share and (ii) the Class B Common
Stock are convertible into Class A Common Stock at the option of the holder and,
with limited exceptions, upon the transfer thereof. Following the
reclassification, there are 30 million shares of Class A Common Stock and 5
million shares of Class B Common Stock authorized for issuance. Information
concerning the reclassification and certain amendments to existing stock
purchase agreements were reported on page 7 of the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1996.
The Company has not declared or paid any cash dividends on its Class A Common
Stock or its Class B Common Stock. The Company currently intends to retain any
earnings for use in its business and therefore does not anticipate paying any
cash dividends in the foreseeable future. Any future determination to pay cash
dividends will be made by the Board of Directors in light of the Company's
earnings, financial position, capital requirements and such other factors as the
Board of Directors deems relevant.
18
<PAGE> 19
ITEM 6. SELECTED FINANCIAL DATA
Presented below is selected consolidated historical financial information of the
Company and its subsidiaries as of December 31, 1995 and 1996 and for the period
from August 28, 1995 (inception) to December 31, 1995 and the year ended
December 31, 1996. The selected financial data has been derived from the
consolidated financial statements which were audited by the Company's
independent public accountants and should be read in conjunction with the
Company's consolidated Financial Statements (and the related notes and schedules
thereto) under "Item 8 Financial Statements and Supplementary Data" of this
Annual Report on Form 10-K and "Item 7 Management's Discussion and Analysis of
Financial Condition and Results of Operations" of this Annual Report on Form
10-K.
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
PERIOD FROM
AUGUST 28, 1995
(inception) to YEAR,ENDED
DECEMBER 31, DECEMBER 31,
1995 1996
---------------- -------------
STATEMENT OF OPERATIONS DATA: (in thousands of dollars, except share and per share data)
<S> <C> <C>
Revenues $ -- $ 1,292
Operating expenses 1,327 8,628
Operating loss 1,327 7,336
Interest income 195 871
Interest expense 36 126
Net loss 1,168 6,591
Loss applicable to common stockholders 1,577 8,309
Net loss applicable to common stockholders per share 0.15 0.75
Weighted average number of common shares outstanding (1) 10,755,409 11,059,576
BALANCE SHEET DATA (AT PERIOD END):
Working capital $ 13,265 $ 28,115
Total assets 18,072 40,105
Total liabilities 1,845 9,022
Redeemable Preferred Stock (2) 16,759 18,477
Redeemable Common Stock 330 330
Stockholders' equity (deficit) (862) 12,276
</TABLE>
(1) Includes 3,186,280 shares of Class A Common Stock that are redeemable
under certain circumstances by the Company for reasons not under the
Company's control.
(2) On January 1, 1997, all the outstanding shares of Redeemable Preferred
Stock were converted into $18,477,000 aggregate principal amount of 10%
Subordinated Debentures due September 29, 2007 (the "Subordinated
Debentures").
19
<PAGE> 20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
GENERAL
This "Management's Discussion and Analysis of Financial Condition and Results of
Operations" should be read in conjunction with the consolidated financial
statements included herein of the Company and its subsidiaries. Certain
statements under this caption "Management's Discussion and Analysis of Financial
Condition and Results of Operations" constitute "forward-looking statements"
under the Reform Act. See "Special Note Regarding Forward-Looking Statements."
The Company was formed in August 1995, but did not begin operations until
October 1995. Accordingly, there are no comparable results of operations for the
year ended December 31, 1996. Comparisons have been made between the fourth
quarter of 1995, the fourth quarter of 1996 and the year ended December 31, 1996
for the purposes of the following discussion:
RESULTS OF OPERATIONS
REVENUE - The Company has had revenues from the following sources:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
FOURTH QUARTER FOURTH
ENDED QUARTER ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1996 1996
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Franchise Application, Royalty and Other Fees $ -- $ 52,000 $ 95,000
Marketing & Reservation Fees -- 376,000 1,197,000
-------------- -------------- ------------
TOTAL $ -- $ 428,000 $ 1,292,000
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
Franchise Applications and Royalty Fees (the "Fees") represent the Fees earned
for one hotel which opened during the third quarter of 1996. The Fees for a
hotel which opened in the fourth quarter of 1996 were waived.
The Company began collecting marketing and reservation fees from existing
Microtel and Hawthorn Suites franchisees in February and April 1996,
respectively. While the Company recognizes marketing and reservations fees as
revenue, such fees are intended to reimburse the Company for the expenses
associated with providing support services to its franchisees and do not
generate profit for the Company. During the three and twelve months ended
December 31, 1996, marketing and reservation fees were $376,000 and $1,197,000 ,
respectively.
During the fourth quarter of 1996, the company executed 68 new franchise
agreements and experienced the termination of 10 previously executed franchise
agreements for a net total of 209 new franchise agreements since the inception
of business in October 1995. During the fourth quarter of 1995, the Company
executed three new franchise agreements. The following chart summarizes the
quarterly franchise sales data:
20
<PAGE> 21
<TABLE>
<CAPTION>
FRANCHISE SALES DATA
====================================================================================================================
QUARTER ENDED: 12/31/96 09/30/96 06/30/96 03/31/96 12/31/95 CUMULATIVE
MICROTEL -------- -------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Gross Executed Agreements 54 59 48 44 3 208
Terminations (10) (6) (2) - - (18)
-------- -------- -------- -------- -------- ----------
Net Executed Agreements 44 53 46 44 3 190
====================================================================================================================
<CAPTION>
====================================================================================================================
QUARTER ENDED: 12/31/96 09/30/96 06/30/96 03/31/96 12/31/95 CUMULATIVE
HAWTHORN -------- -------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Gross Executed Agreements 14 5 - - - 19
Terminations - - - - - -
-------- -------- -------- -------- -------- ----------
Net Executed Agreements 14 5 - - - 19
====================================================================================================================
<CAPTION>
====================================================================================================================
QUARTER ENDED: 12/31/96 09/30/96 06/30/96 03/31/96 12/31/95 CUMULATIVE
TOTAL USFS -------- -------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Gross Executed Agreements 68 64 48 44 3 227
Terminations (10) (6) (2) - - (18)
-------- -------- -------- -------- -------- ----------
Net Executed Agreements 58 58 46 44 3 209
====================================================================================================================
</TABLE>
The Company received franchise application fees of $1,476,000 and $5,339,000 for
the fourth quarter of and year ended December 31, 1996, respectively. The
average fee for 1996 was approximately $26,000. During the fourth quarter of
1995, the Company received application fees of $120,000 for an average fee of
approximately $30,000. Such fees are recognized as revenue when the underlying
hotel opens; therefore, the Company did not recognize revenues related to such
fees during the applicable periods, except for one hotel which opened in the
third quarter of 1996 (the fees were waived on a hotel which opened during the
fourth quarter of 1996).
EXPENSES - The Company's expenses were as summarized below:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
FOURTH QUARTER FOURTH
ENDED QUARTER ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1996 1996
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Marketing and reservations $ 13,000 $ 397,000 $ 1,419,000
Other franchise sales and advertising 550,000 765,000 2,802,000
Corporate salaries, wages, and benefits 423,000 677,000 2,218,000
Other general and administrative 215,000 457,000 1,652,000
Depreciation and amortization 126,000 126,000 537,000
----------- ----------- -----------
TOTAL $ 1,327,000 $ 2,422,000 $ 8,628,000
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
21
<PAGE> 22
Marketing and reservation expenses were $397,000 and $1,419,000, for the fourth
quarter and year ended December 31, 1996, respectively, compared with $13,000
for the fourth quarter 1995. The increase in marketing and reservation expenses
is due to the following : (i) the Hawthorn Suites brand was not acquired until
April 1996, therefore there were no marketing and reservation expenses in 1995
for this brand and (ii) the Company commenced operations in October 1995
therefore limited national consumer advertising expenses were incurred for the
Microtel brand in the fourth quarter of 1995.
Other franchise sales and advertising expenses, which are non-commission costs
related to the Company's franchise sales effort, were $765,000 and $2,802,000
for the fourth quarter and year ended December 31, 1996 compared to $550,000 for
the fourth quarter of 1995. The increase is due primarily to the following
factors: (i) the Company commenced operations in October 1995 and the majority
of the sales staff did not start until December 1995 (ii) the Hawthorn Suites
brand was not acquired until April of 1996 and as a result, additional salesmen
and advertising and promotion costs were incurred, and (iii) advertising and
promotional expenses were incurred for the American Dream Program and the
Company's Franchisee Financing Facility Program which were introduced in 1996.
Corporate salaries, wages and benefits, which are non-selling personnel
expenses, were $677,000 and $2,218,000 for the fourth quarter and
year ended Defcember 31, 1996 compared to $423,000 for the fourth quarter of
1995. The increase is due to eighteen additional personnel hired in the
areas of training, franchise services, franchise administration and quality
control to handle the increased servicing requirements of additional executed
franchise agreements and newly introduced programs.
Other general and administrative expenses were $457,000 and $1,652,000 for the
fourth quarter and year ended December 31, 1996 compared to $215,000 for the
fourth quarter of 1995. The increase is primarily due to legal fees and other
general office expenses for the additional headcount in place during 1996 as
well as a $200,000 non-recurring charge related to the anticipated termination
of the Company's corporate office lease.
Depreciation and amortization expense includes (i) depreciation of equipment for
the corporate and regional sales offices, (ii) amortization for the cost of
acquiring the Microtel brand and the exclusive rights to franchise the Hawthorn
Suites brand, (iii) amortization of consulting payments made to Hudson under the
Microtel Acquisition Agreement, and (iv) amortization of costs related to the
formation of the Company.
Sales commissions of $836,000 and $1,922,000 were accrued during the fourth
quarter and year ended December 31, 1996, respectively, compared with $15,700
during the fourth quarter of 1995. The Sales commissions relate to 58 and 206
franchise agreements which were executed during the fourth quarter and year
ended December 31, 1996, respectively compared with three franchise agreements
executed during the fourth quarter of 1995. Such payments are recognized as
expenses when the underlying hotel opens.
22
<PAGE> 23
OTHER INCOME (EXPENSES) - Interest income was $334,000 and $871,000 for the
fourth quarter and year ended December 31, 1996, respectively and resulted from
investments in cash and marketable securities. Interest income for the fourth
quarter of 1995 was $195,000.
During the fourth quarter and year ended December 31, 1996, interest expense on
the note payable relating to the purchase of the Microtel brand was $18,000 and
$126,000, respectively, compared to interest expense of $36,000 for the fourth
quarter of 1995. The decrease in interest expense was a result of paying down
the note by $706,000 since the fourth quarter of 1995.
NET LOSS - A summary of operating results is as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
FOURTH QUARTER FOURTH
ENDED QUARTER ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1996 1996
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Loss $ 1,168,000 $ 1,678,000 $ 6,591,000
Loss applicable to common stockholders $ 1,577,000 $ 2,118,000 $ 8,309,000
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company had a net loss of $6,591,000 and a net loss applicable to common
stockholders of $8,309,000 (including $1,718,000 of accumulated but undeclared
and unpaid dividends on its 10% Cumulative Redeemable Exchangeable Preferred
Stock (the "Redeemable Preferred Stock")) for the year ended December 31, 1996.
For the fourth quarter of 1996, the net loss was $1,678,000 and the loss
applicable to common stockholders was $2,118,000 (including $440,000 of
accumulated but undeclared and unpaid dividends on the Redeemable Preferred
Stock). The Company had a net operating loss carryforward for income tax
purposes as of December 31, 1996 of $6,437,000. Given the limited operating
history of the Company, management has recorded a valuation allowance for the
full amount of the deferred tax asset as of December 31, 1996.
LIQUIDITY AND CAPITAL RESOURCES
From August 28, 1995 (inception) to October 24, 1996, the Company had financed
its operations primarily through a private placement of securities, franchise
application fees, and interest income. In October of 1995, the Company raised
approximately $17.5 million in gross proceeds through sales of shares of its old
common stock (i.e., stock prior to the reclassification of shares on October 11,
1996) and Redeemable Preferred Stock. Franchise application fees and interest
income generated cash of $4,383,000 and $871,000, respectively, for the twelve
months ended December 31, 1996. During the twelve months ended December 31,
1996, the Company had capital expenditures of $380,000, $117,000 of which was
spent primarily on legal costs relating to the Hawthorn Acquisition in April of
1996.
On October 24, 1996, the Company completed an initial public offering of
1,825,000 shares of Class A Common Stock at $13.50 per share (the "Offering").
Net proceeds to the Company from the Offering were approximately $21,391,000.
The remaining proceeds of the Offering are held
23
<PAGE> 24
either as cash or cash equivalents and will be used for working capital and
general corporate purposes, which may include (i) funding the Company's
remaining obligations (approximately $1 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 Franchising program until qualified lessees can be identified,
(iv) investing in financing programs developed by its wholly owned subsidiary,
US Funding Corp., (v) servicing interest on the Subordinated Debentures and (vi)
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 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. 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 approximately $700,000 as of December 31, 1996.
As of December 31, 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 in the Charter) 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
December 31, 1996 of $18,477,000.
On January 1, 1997, the Company exercised its option to exchange the Redeemable
Preferred Stock at the Liquidation Value of $18,477,000 into 10% Subordinated
Debentures due September 29, 2007. The Company is required to pay interest
expense by issuing additional debentures for 50% of the expense with the
remaining 50% to be paid in cash. Interest is payable semi-annually on the last
business day in June and December of each year. 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 Subordinated Debentures.
INFLATION. The rate of inflation has not had a material effect on the revenues
or operating results of the Company since its inception.
24
<PAGE> 25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
U.S. FRANCHISE SYSTEMS, INC.
AND SUBSIDIARIES
<TABLE>
<CAPTION>
TABLE OF CONTENTS
- ----------------------------------------------------------------------------------------------
PAGE
<S> <C>
INDEPENDENT AUDITORS' REPORT 26
CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1995 AND 1996 AND FOR THE
PERIOD FROM AUGUST 28, 1995 (INCEPTION) TO DECEMBER 31, 1995 AND FOR THE YEAR
ENDED DECEMBER 31, 1996:
Consolidated Statements of Financial Position 27
Consolidated Statements of Operations 28
Consolidated Statements of Stockholders' Equity (Deficit) 29
Consolidated Statements of Cash Flows 30
Notes to Consolidated Financial Statements 31
</TABLE>
25
<PAGE> 26
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
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 1996 and the related consolidated statements of operations,
stockholders' equity, and cash flows for the period from August 28, 1995
(inception) to December 31, 1995 and for the year ended December 31, 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 1996 and the results of its operations and its cash flows for the period
from August 28, 1995 (inception) to December 31, 1995 and for the year ended
December 31, 1996 in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche
Atlanta, Georgia
February 21, 1997
26
<PAGE> 27
U.S. FRANCHISE SYSTEMS, INC.
AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
DECEMBER 31, 1995 AND 1996
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS 1995 1996
----------- ------------
CURRENT ASSETS:
Cash and temporary cash investments $13,893,000 $ 31,188,000
Accounts receivable 114,000
Deposits 87,000 93,000
Prepaid expenses 399,000 494,000
Promissory notes receivable 784,000
Deferred commissions 1,261,000
----------- ------------
Total current assets 14,379,000 33,934,000
PROMISSORY NOTES RECEIVABLE 390,000
EQUIPMENT - Net 60,000 292,000
FRANCHISE RIGHTS 3,371,000 3,264,000
DEFERRED COMMISSIONS 41,000 1,492,000
OTHER ASSETS 221,000 733,000
----------- ------------
$18,072,000 $ 40,105,000
=========== ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 201,000 $ 679,000
Commissions payable 22,000 837,000
Deferred application fees 120,000 2,916,000
Accrued expenses 65,000 1,110,000
Due to Hudson Hotels Corporation 706,000 277,000
----------- ------------
Total current liabilities 1,114,000 5,819,000
DUE TO HUDSON HOTELS CORPORATION 731,000 454,000
DEFERRED APPLICATION FEES 2,749,000
----------- ------------
Total liabilities 1,845,000 9,022,000
REDEEMABLE STOCK:
Preferred shares, par value $0.01 per share; authorized 525,000 shares;
issued and outstanding 163,500 shares; cumulative, exchangeable (entitled
in liquidation to $16,759,000 and 18,477,000 at
December 31, 1995 and 1996, respectively) 16,759,000 18,477,000
Common shares, par value $.01 per share; issued and outstanding 3,186,280
Class A shares entitled in redemption (under certain conditions) to $330,000
at December 31, 1995 and 1996 330,000 330,000
COMMITMENTS AND CONTINGENCIES (Notes 5 and 12)
STOCKHOLDERS' EQUITY (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
at December 31, 1995 and 6,686,196 Class A shares and 2,707,919 Class B shares
at December 31, 1996 (See Note 9) 78,000 96,000
Capital in excess of par 228,000 20,547,000
Accumulated deficit (1,168,000) (8,367,000)
----------- ------------
Total stockholders' equity (deficit) (862,000) 12,276,000
----------- ------------
$18,072,000 $ 40,105,000
=========== ============
</TABLE>
See notes to consolidated financial statements.
27
<PAGE> 28
U.S. FRANCHISE SYSTEMS, INC.
AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
- -------------------------------------------------------------------------------------------------------------------
PERIOD
AUGUST 28, 1995
(INCEPTION) TO YEAR ENDED
DECEMBER 31, DECEMBER 31,
1995 1996
---- ----
<S> <C> <C>
REVENUES:
Marketing and reservation fees $ 1,197,000
Other 95,000
------------
1,292,000
EXPENSES:
Marketing and reservations $ 13,000 1,419,000
Other franchise sales and advertising 550,000 2,802,000
Corporate salaries, wages, and benefits 423,000 2,218,000
Other general and administrative 215,000 1,652,000
Depreciation and amortization 126,000 537,000
------------ ------------
1,327,000 8,628,000
------------ ------------
LOSS FROM OPERATIONS 1,327,000 7,336,000
OTHER INCOME (EXPENSE):
Interest income 195,000 871,000
Interest expense (36,000) (126,000)
------------ ------------
NET LOSS $ 1,168,000 $ 6,591,000
============ ============
LOSS APPLICABLE TO COMMON STOCKHOLDERS $ 1,577,000 $ 8,309,000
============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 10,755,409 11,059,576
============ ============
NET LOSS APPLICABLE TO COMMON
STOCKHOLDERS PER SHARE $ 0.15 $ 0.75
============ ============
</TABLE>
See notes to consolidated financial statements.
28
<PAGE> 29
U.S. FRANCHISE SYSTEMS, INC.
AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
PERIOD FROM AUGUST 28, 1995 (INCEPTION) TO
DECEMBER 31, 1995 AND FOR THE YEAR ENDED DECEMBER 31, 1996
- ------------------------------------------------------------------------------------------------------------------
Common Stock Capital in Total
-------------------- Excess of Accumulated Stockholders'
Shares Amount Par Deficit Equity (Deficit)
------ ------ --- ------- ----------------
<S> <C> <C> <C> <C> <C>
BALANCE - August 28, 1995 -- $ -- $ -- $ -- $ --
Issuance of capital stock 7,569,115 78,000 637,000 715,000
Undeclared dividends on redeemable
preferred stock (409,000) (409,000)
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 - other
management (1,149,502) (11,000) (108,000) (119,000)
Issuance of capital stock - other
management 1,149,502 11,000 111,000 122,000
Issuance of capital stock - initial
public offering proceeds, net 1,825,000 18,000 21,373,000 21,391,000
Undeclared dividends on
redeemable preferred stock (1,110,000) (608,000) (1,718,000)
Fair value of stock options granted 53,000 53,000
Net loss (6,591,000) (6,591,000)
--------- -------- ------------ ---------- ------------
BALANCE - December 31, 1996 9,394,115 $ 96,000 $ 20,547,000 (8,367,000) $ 12,276,000
========= ======== ============ ========== ============
</TABLE>
See notes to consolidated financial statements.
29
<PAGE> 30
U.S. FRANCHISE SYSTEMS, INC.
AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------------------------------------------
Period
August 28, 1995
(Inception) to Year Ended
December 31, December 31,
1995 1996
---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (1,168,000) (6,591,000)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 126,000 537,000
Increase in deposits and accounts receivable (87,000) (120,000)
Increase in prepaid expenses (457,000) (329,000)
Increase in promissory notes receivable (1,174,000)
Increase in deferred commissions (41,000) (2,712,000)
Increase in other assets (230,000) (560,000)
Increase in accounts payable 201,000 478,000
Increase in accrued expenses 65,000 1,045,000
Increase in commissions payable 22,000 815,000
Increase in deferred application fees 120,000 5,545,000
------------ ----------
Net cash used in operating activities (1,449,000) (3,066,000)
INVESTING ACTIVITIES:
Acquisition of equipment (62,000) (263,000)
Acquisition of franchise rights (1,991,000) (117,000)
------------ ----------
Net cash used in investing activities (2,053,000) (380,000)
FINANCING ACTIVITIES:
Issuance of redeemable preferred stock 16,350,000
Issuance of common stock, net 1,045,000 21,513,000
Redemption of common stock (119,000)
Stock options granted 53,000
Principal payments on borrowings (706,000)
------------ ----------
Net cash provided by financing activities 17,395,000 20,741,000
------------ ----------
NET INCREASE IN CASH AND TEMPORARY CASH INVESTMENTS 13,893,000 17,295,000
CASH AND TEMPORARY CASH INVESTMENTS:
Beginning of period 13,893,000
------------ ----------
End of period $ 13,893,000 $31,188,000
============ ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for interest -- $ 144,000
============ ===========
Noncash activities:
Undeclared dividends accrued on redeemable preferred stock $ 409,000 $ 1,718,000
============ ===========
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.
30
<PAGE> 31
U.S. FRANCHISE SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1995 AND 1996 AND
PERIOD FROM AUGUST 28, 1995 (INCEPTION)
TO DECEMBER 31, 1995 AND FOR THE
YEAR ENDED DECEMBER 31, 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.
On October 24, 1996, the Company completed an initial public offering of
1,825,000 shares of Class A Common Stock at $13.50 per share (the
"Offering"). Net proceeds to the Company from the Offering were
approximately $21,391,000. Had such Offering occurred on January 1, 1996,
pro forma loss applicable to common stockholders per share would have been
$.66 for the year ended December 31, 1996. Pro forma weighted average
shares of 12,580,409 are assumed outstanding for purposes of the pro forma
loss applicable to common stockholder per share calculation.
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 of December 31, 1996, the
Company had paid $150,000 with the remainder due by October 5, 1997. 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 12).
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 license others to
use, the Microtel Proprietary Marks in connection with the operation of
hotels under the Microtel hotel system.
31
<PAGE> 32
HAWTHORN SUITES FRANCHISING, INC.
On March 27, 1996, the Company entered into an agreement with HSA
Properties, LLC ("HSA") to acquire the exclusive worldwide franchising
rights with respect to the Hawthorn hotel system (the "Hawthorn
Agreement"). The Company made no payment to HSA at closing but agreed to
remit to HSA a portion of the royalties the Company actually receives from
future Hawthorn franchisees.
Pursuant to a Trademark, Service Mark, and System License Agreement which
expires in April 1998 (the "Hawthorn License Agreement"), the Company
granted to HSF, its wholly owned subsidiary, the exclusive right to use,
and license others to use, the Hawthorn Proprietary Marks in connection
with the Hawthorn hotel system (see Note 12).
MARKETING AND RESERVATION FUNDS
Marketing and reservation fees are collected from franchisees and used at
the Company's 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.
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 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 at
December 31, 1995 and 1996, respectively:
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Cash in bank deposit accounts $ 518,000 $ 2,355,000
Money market funds 13,375,000 28,833,000
-------------- ---------------
$ 13,893,000 $ 31,188,000
============== ==============
</TABLE>
Franchise Rights - Franchise rights represent the cost of acquiring such
rights and are amortized on a straight-line basis over 25 years.
Accumulated amortization is $57,000 and $281,000 at December 31, 1995 and
1996, respectively.
Impairment of Long-Lived Assets - The Company has adopted Statement of
Financial Accounting Standards ("SFAS") 121, "Accounting for the Impairment
of Long-Lived Assets and Long-Lived Assets to Be Disposed of," 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 SFAS 109,
"Accounting for Income Taxes," which requires the use of the asset and
liability approach in accounting for income taxes.
32
<PAGE> 33
Fair Value of Financial Instruments - The carrying amounts of cash and cash
equivalents, trade and notes receivables, other current assets, accounts
payable, accrueds, and notes payable meeting the definition of a financial
instrument approximate fair value.
Stock Plans - The Company has elected to account for stock plans in
accordance with SFAS 123, "Accounting for Stock-Based Compensation." Under
the provisions of SFAS 123, compensation is recognized for the fair value
of options granted over the vesting period.
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
dividends accreted on the redeemable preferred stock.
Management Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Reclassifications - Certain amounts in the prior year financial statements
have been reclassified to conform with the 1996 financial statement
presentation.
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 at
December 31, 1995 and 1996:
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Furniture and fixtures $ 25,000 $ 124,000
Computer equipment and software 16,000 144,000
Office equipment 21,000 56,000
--------- ----------
62,000 324,000
Less accumulated depreciation 2,000 32,000
--------- ----------
$ 60,000 $ 292,000
========= ==========
</TABLE>
33
<PAGE> 34
Computer software is depreciated on a straight-line basis over a period of
three years. Computer equipment is depreciated using the 200%
declining-balance method over a period of five years. The remaining fixed
assets are depreciated using the 200% declining-balance method over a
period of seven 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 (inception) to December 31, 1995 and $231,000
for the year ended December 31, 1996 . The future minimum rental
commitments under non-cancelable operating leases at December 31, 1996 were
as follows:
<TABLE>
<C> <C>
1997 $ 285,000
1998 229,000
1999 237,000
2000 192,000
----------
$ 943,000
==========
</TABLE>
6. DUE TO HUDSON HOTELS CORPORATION
The Company is required to pay Hudson $1,437,000 ($1,700,000 discounted at
a rate of 10%) of which $731,000 remains payable as of December 31, 1996
for the assets of the Microtel hotel system (see Note 1) and is payable on
October 5, annually, as follows:
<TABLE>
<S> <C>
1997 $ 277,000
1998 454,000
----------
731,000
Less current portion 277,000
----------
$ 454,000
==========
</TABLE>
7. PREPAID EXPENSES
Pursuant to the Microtel Agreement, Hudson is required, for a period of
three years, to consult with and assist in establishing the Company as an
operating entity in the business of selling and administering franchises
utilizing the Microtel hotel system. An initial payment in the amount of
$400,000 was made to Hudson in October 1995 and recorded as a prepaid
expense. The Company is obligated to pay an additional $150,000 in 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 $233,000 was charged to expense for the period from August 28,
1995 (inception) to December 31, 1995 and for the year ended December 31,
1996, respectively.
34
<PAGE> 35
8. STOCK PURCHASED BY EMPLOYEES
On October 5, 1995, as part of the initial capitalization of the Company,
two of its officers (the "Original Management Investors") purchased
5,485,259 shares of common stock (51% of the total issued) pursuant to
"Stock Purchase Agreements" for an aggregate purchase price of $567,245 or
$.1034 per share. In conjunction with the Company's initial public
offering, the Stock Purchase Agreements were amended to revise the vesting
requirements with respect to 50% of the Restricted Shares (as hereinafter
defined) (approximately 13% of the Common Stock outstanding before the
Offering). Such Restricted Shares were deemed earned and vested
notwithstanding the fact that performance criteria were not yet met by the
Company. Remaining Restricted Shares will be Class A Common Stock when
earned. As of December 31, 1996, 4,087,054 shares were unrestricted (the
"Unrestricted Shares") and 1,398,205 shares were restricted (the
"Restricted Shares").
Pursuant to the terms of the Stock Purchase Agreements, in February 1996,
the Company redeemed 826,833 shares, consisting of 608,359 Unrestricted
Shares and 218,474 Restricted Shares (collectively, the "Transferable
Shares"), from the Original Management Investors at $.1034 per share and
resold such shares to other members of management at the estimated fair
value at that time of $.1034 per share. In April 1996, the Company redeemed
322,669 Transferable Shares from certain other management at $.1034 per
share and subsequently resold such shares to the same members of other
management at the estimated fair value at that time of $.1137 per share.
Pursuant to the terms of their respective stock purchase agreements, all
members of management who own Transferable Shares must vote such shares in
the same manner as the Original Management Investors vote their shares.
Unrestricted Transferable Shares and restricted Transferable Shares are
subject to five-and ten-year vesting periods, respectively, in each case
provided that the management employee who purchased the shares remains
employed by the Company. Any Transferable Shares which are forfeited will
be repurchased by the Company and will be reoffered to the Original
Management Investors at $.1034 or $.1137 per share, as applicable, based on
the price paid by the management employee for the forfeited shares.
Compensation expense will be recorded to the extent the fair value of the
reoffered shares exceeds $.1034 or $.1137, as applicable.
All Restricted Shares are subject to the earnings test formula based upon
increases in the Company's earnings before interest, taxes, and
depreciation and are deemed earned upon the satisfaction of these
performance criteria (the "Earned Shares"). Earned Shares are subject to
forfeiture 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 (other than the Original Management Investors) pro rata based on
their original holdings of common stock. Restricted Shares held by the
Original Management Investors and all Transferable Shares held by other
members of management have been classified as redeemable common stock in
the balance sheet because they are redeemable by the Company in certain
circumstances for reasons not under the Company's control.
In the event that substantially all of the Company's stock or assets are
transferred or sold, or upon a business combination, Earned Shares
automatically become Unrestricted Shares. In addition, any remaining
Restricted Shares at the time of a merger or sale of the Company become
Unrestricted Shares 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.
35
<PAGE> 36
9. COMMON STOCK
On October 11, 1996, the stockholders approved the creation of two classes
of common stock: Class A Common Stock, par value $.01 per share and Class B
Common Stock, par value $.01 per share, and to split and reclassify each
share of its existing common stock, par value $.10 per share, into 9.67
shares of Class A Common Stock. In connection with the reclassification,
certain members of management and related stockholders holding 2,707,919
shares of Class A Common Stock exchanged such shares for the same number of
shares of Class B Common Stock. Shares of Class A Common Stock and Class B
Common Stock are identical in all respects except that (i) holders of Class
B Common Stock are entitled to ten votes per share and holders of Class A
Common Stock are entitled to one vote per share and (ii) the Class B Common
Stock are convertible into Class A Common Stock at the option of the holder
and, with limited exceptions, upon the transfer thereof. Following the
reclassification, there were 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.
10. STOCK OPTION PLANS
The Company has two option plans which reserve shares of Class A common
stock for officers, employees, consultants and advisors of the Company (the
"Employee Plan") and for its non-employee directors (the "Directors Plan").
Under the Employee Plan, the Company may grant options to its employees for
up to 325,000 shares of the Company's Class A common stock. The options
generally become exercisable in installments of 25% per year on each of the
first through the fourth anniversaries of the grant date and the option's
maximum life is seven years. Under the Directors Plan, the Company may
grant options to its directors for up to 125,000 shares of the Company's
Class A common stock. The options become exercisable on the first
anniversary of the grant date and the option's maximum life is ten years.
No options were exercisable at December 31, 1996.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumption: expected volatility of 30.4%, risk-free interest rate of 6.2%,
and expected lives of 3.6 years.
A summary of the status of the Company's two stock option plans as of
December 31, 1996 and changes during 1996 is presented below:
<TABLE>
<CAPTION>
Weighted Average
Fixed Options Shares Exercise Price
------------- ------ --------------
<S> <C> <C>
Outstanding at beginning of year $ -- $ --
Granted 179,100 13.48
Forfeited (600) 13.50
---------
Outstanding at end of year 178,500 13.48
=========
Weighted average fair value of options
granted during the year $ 4.23
=========
</TABLE>
The range of exercise prices for options outstanding were $10.50 to $13.50
per share.
36
<PAGE> 37
The fair value of options granted during the year was $558,000 which is
being amortized as compensation expense over the vesting period.
Compensation expense of $53,000 was recorded for the year ended December
31, 1996.
11. INCOME TAXES
Deferred income taxes in the accompanying consolidated statement of
financial position includes the following amounts of deferred tax assets
and liabilities at December 31, 1995 and 1996:
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Deferred tax liability $ (338,000)
Deferred tax asset $ 441,000 3,243,000
Valuation allowance (441,000) (2,905,000)
---------- ------------
Net deferred income taxes $ -- $ --
========== ============
</TABLE>
The deferred tax liability results primarily from the deferral of franchise
sales commissions for financial reporting purposes. The deferred tax asset
results from tax net operating loss carryforwards and the deferral of
initial franchise fees for financial reporting purposes. A valuation
allowance has been recorded for the tax effect of all the tax net operating
loss carryforwards.
For income tax purposes, as of December 31, 1996, the Company had
accumulated net operating loss carryforwards of $6,437,000 which begin to
expire in the year 2010.
The following is a reconciliation of the statutory rate to the effective
rate of the Company at December 31, 1995 and 1996:
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Statutory federal rate 34% 34%
Statutory state rate less federal effect 4 4
Effect of income not subject to tax (1)
Change in valuation allowance (38) (37)
--- ---
Effective tax rate --% --%
=== ===
</TABLE>
37
<PAGE> 38
12. COMMITMENTS
The Company, as part of the Microtel Agreement, is required to fulfill
certain obligations under such Agreement. These include the following:
- To execute franchise agreements and to have open or under development
the following number of Microtel hotels each December, annually:
<TABLE>
<CAPTION>
Number
Year of Hotels
---- ---------
<S> <C>
1997 50
1998 100
1999 175
2000 250
</TABLE>
- The above development schedule is considered to have been complied
with unless such schedule is not met for two consecutive years. If 75%
of the development level has been met, a fee of $1,000,000 may be paid
and upon such payment, the Company will be deemed to be in compliance
with such schedule.
- Hudson will retain the right to receive franchise application fees and
all franchise royalty payments under existing agreements at October 5,
1995 or under agreements for which franchise applications had been
received as of October 5, 1995, except for the reservation and
marketing fees, which are retained by the Company.
- As part of the Microtel Acquisition, Hudson retained the right to
franchise and to receive royalties on 60 franchises either issued or
which may be issued in the future to Hudson, its affiliates and
certain other persons. For each new franchise other than the 60 issued
or which may be issued to Hudson, its affiliates and such other
persons, the Company is required to remit to Hudson a continuing
monthly royalty equal to 1.0% of the revenues subject to royalties on
the first 100 properties opened by the Company, 0.75% for the next 150
properties, and 0.5% for each new property after the first 250
properties.
If any of the above obligations are not met, including the payment of
amounts due to Hudson (see Note 6), all of the rights to the Microtel
system will, at Hudson's discretion, revert back to Hudson. In the event
Hudson exercises its rights 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.
38
<PAGE> 39
The Company, as part of the Hawthorn Agreement, is required to fulfill
certain obligations under such agreement. These include the following:
- To execute qualified franchise agreements, as defined in the
Hawthorn Agreement, for the operation of the following number of
Hawthorn hotels (the "Termination Standard") on June 27, annually:
<TABLE>
<CAPTION>
NUMBER OF
YEAR HOTELS
---- ------
<S> <C>
1997 10
1998 20
1999 40
2000 60
2001 80
2002 100
</TABLE>
- If the above franchising schedule is not met, HSA has the right to
terminate the Hawthorne 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 and fees collected. The Company owns a 1%
interest in HSA which entitles the Company to receive 1% of the
gross revenues received by HSA from the Company with respect to all
new franchises. Royalties due to HSA on new Hawthorn hotels are
subject to increase if the royalties required to be paid under
franchise agreements are less than 4% of gross room revenues or if
the number of qualified franchise agreements for new Hawthorn
hotels on new franchises is less than the following:
<TABLE>
<CAPTION>
NUMBER OF
DATE HOTELS
---- ------
<S> <C>
June 27, 1997 20
December 27, 1997 30
June 27, 1998 40
June 27, 1999 65
June 27, 2000 90
June 27, 2001 115
June 27, 2002 140
</TABLE>
- The Company is required to employ at least 15 persons devoted to
the sales and promotion of the Hawthorn and Microtel brands and is
required to spend not less than $100,000 on marketing during each of
1996 and 1997 promoting the Hawthorn brand.
39
<PAGE> 40
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.
13. SELECTED QUARTERLY FINANCIAL DATA - (UNAUDITED)
<TABLE>
<CAPTION>
1996 FIRST SECOND THIRD FOURTH TOTAL YEAR
- ---- ----- ------ ----- ------ ----------
<S> <C> <C> <C> <C> <C>
Revenue $ 31,000 $ 364,000 $ 469,000 $ 428,000 $ 1,292,000
Loss from operations 1,537,000 1,917,000 1,888,000 1,994,000 7,336,000
Net loss 1,398,000 1,797,000 1,718,000 1,678,000 6,591,000
Loss applicable to common stockholders 1,817,000 2,216,000 2,158,000 2,118,000 8,309,000
Weighted average shares outstanding 10,755,409 10,755,409 10,755,409 11,059,576 11,059,576
Net loss applicable to common
stockholders per share (a) (b) $ 0.17 $ 0.21 $ .20 $ 0.19 $ 0.75
=========== =========== ============ =========== ===========
1995
Revenue $ -- $ --
Loss from operations 1,327,000 1,327,000
Net loss 1,168,000 1,168,000
Loss applicable to common stockholders 1,577,000 1,577,000
Weighted average shares outstanding 10,755,409 10,755,409
Net loss applicable to common
stockholders per share (a) $ 0.15 $ 0.15
=========== ===========
</TABLE>
(a) All per share information presented has been retroactively adjusted to
reflect the stock splits discussed in Note 9.
(b) Due to the changes in the numbers of shares outstanding, quarterly per
share amounts do not add to the total for the year.
14. SUBSEQUENT EVENT
On January 1, 1997, the Company exercised its option to exchange the
Redeemable Preferred Stock at the Liquidation Value of $18,477,000 into 10%
subordinated debentures due September 29, 2007 (see Note 3).
40
<PAGE> 41
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
There have been no disagreements on accounting and financial disclosure matters
which are required to be described by Item 304 of Regulation S-K.
PART III
ITEMS 10, 11, 12, and 13 to be furnished by amendment hereto on or prior to
April 30, 1997 or the Company will otherwise have filed a definitive Proxy
Statement involving the election of directors pursuant to Regulation 14A which
will contain such information.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
A) 1. FINANCIAL STATEMENTS:
See Table of Contents to Financial Statements ("Item 8. Financial Statements and
Supplementary Data").
2. FINANCIAL STATEMENT SCHEDULES:
All schedules have been omitted since they are either not applicable or the
information is contained elsewhere in "Item 8. Financial Statements and
Supplementary Data.".
3. EXHIBITS:
<TABLE>
<CAPTION>
Exhibit
Number Description
- ---------------------------------------------------------------------------------------------------------------------
<S> <C>
3.1 Amended and Restated Certificate of Incorporation of U.S. Franchise Systems, Inc. (incorporated by
reference from the Company's Registration Statement on Form S-1 (Registration No. 333-11427)).
3.2 Amended and Restated Bylaws of U.S. Franchise Systems, Inc. (incorporated by reference from the
Company's Registration Statement on Form S-1 (Registration No. 333-11427)).
4.1 Specimen Common Stock Certificate of U.S. Franchise Systems, Inc. (incorporated by reference from the
Company's Registration Statement on Form S-1 (Registration No. 333-11427)).
10.1 Form of License Agreement for Microtel brand hotels (incorporated by reference from the Company's
Registration Statement on Form S-1 (Registration No. 333-11427)).
10.2 Form of License Agreement for Hawthorn Suites brand hotels (incorporated by reference from the
Company's Registration Statement on Form S-1 (Registration No. 333-11427)).
</TABLE>
41
<PAGE> 42
<TABLE>
<S> <C>
10.3 Joint Venture Agreement between Microtel Franchise and Development Corporation and U.S. Franchise
Systems, Inc. dated as of September 7, 1995 (incorporated by reference from the Company's
Registration Statement on Form S-1 (Registration No. 333-11427)).
10.4 Master Franchise Agreement between HSA Properties, L.L.C. and U.S. Franchise Systems, Inc. dated as
of March 27, 1996 (incorporated by reference from the Company's Registration Statement on Form S-1
(Registration No. 333-11427)).
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 (incorporated by reference from the Company's
Registration Statement on Form S-1 (Registration No. 333-11427)).
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 October 24, 1996
(incorporated by reference from the Company's Registration Statement on Form S-1 (Registration No.
333-11427)).
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 October 24, 1996
(incorporated by reference from the Company's Registration Statement on Form S-1 (Registration No.
333-11427)).
10.8 Employment Agreement by and between U.S. Franchise Systems, Inc. and Michael A. Leven, dated October
1, 1995 (incorporated by reference from the Company's Registration Statement on Form S-1
(Registration No. 333-11427)).
10.9 Employment Agreement by and between U.S. Franchise Systems, Inc. and Neal K. Aronson, dated October
1, 1995 (incorporated by reference from the Company's Registration Statement on Form S-1
(Registration No. 333-11427)).
10.10 Voting Agreement between Michael A. Leven and Andrea Leven (incorporated by reference from the
Company's Registration Statement on Form S-1 (Registration No. 333-11427)).
10.11 Voting Agreement between Michael A. Leven and Neal K. Aronson (incorporated by reference from the
Company's Registration Statement on Form S-1 (Registration No. 333-11427)).
10.12 Office Lease Agreement between Hallwood Real Estate Investors Fund XV and U.S. Franchise Systems,
Inc., dated September 25, 1995 (incorporated by reference from the Company's Registration Statement
on Form S-1 (Registration No. 333-11427)).
10.13 First Amendment to Office Lease between Hallwood 95, L.P. and U.S. Franchise Systems, Inc., dated May
20, 1996 (incorporated by reference from the Company's Registration Statement on Form S-1
(Registration No. 333-11427)).
</TABLE>
42
<PAGE> 43
<TABLE>
<S> <C>
10.14* U.S. Franchise Systems, Inc. Amended and Restated 1996 Stock Option Plan.
10.15 U.S. Franchise Systems, Inc. 1996 Stock Option Plan for Non-Employee Directors (incorporated by reference from the
Company's Registration Statement on Form S-1 (Registration No. 333-11427).
10.16 Term Sheet, dated May 14, 1996, between the Company and NACC regarding the Franchise Financing Facility (incorporated
by reference from the Company's Registration Statement on Form S-1 (Registration No. 333-11427)).
13.1 Quarterly Report of U.S. Franchise Systems, Inc. for the Quarterly Period ended September 30, 1996
(SEC File No. 0-28908).
21.1* List of Subsidiaries of U.S. Franchise Systems, Inc.
27.1* Financial Data Schedule for the year ended December 31, 1996, submitted to the Securities and Exchange Commission in
electronic format. (for SEC use only).
</TABLE>
* Filed herewith.
Copies of the exhibits are available at a charge of $.25 per page upon written
request to the Secretary of the Company at 13 Corporate Square, Suite 250,
Atlanta, Georgia 30329.
B) REPORTS ON FORM 8-K
During the period from October 1, 1996 to December 31, 1996 the Company did not
file any report on Form 8-K.
43
<PAGE> 44
SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized. U.S. Franchise Systems,
Inc. (Registrant)
U.S. Franchise Systems, Inc.
(Registrant)
By /s/ Michael A. Leven
---------------------------------------
Michael A. Leven
Chairman of the Board, President
and Chief Executive Officer
Dated March 27, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below on March 27, 1997 by the following persons on behalf of
the Registrant in the capacities indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLES
<S> <C>
/s/ Michael A. Leven . . .. . . . . . . . . . . Chairman, President and Chief Executive Officer
- -------------------- and Director (Principal Executive Officer)
(Michael A. Leven)
/s/ Neal K. Aronson . . . . . . . . . . . . . . Executive Vice President, Chief Financial Officer
- ------------------- and Director (Principal Financial and Accounting
(Neal K. Aronson) Officer)
/s/ Dean Adler. . . . . . . . . . . . . . . . . Director
- --------------
(Dean Adler)
/s/ Irwin Chafetz . . . . . . . . . . . . . . . Director
- -----------------
(Irwin Chafetz)
/s/ Richard D. Goldstein. . . . . . . . . . . . Director
- ------------------------
(Richard D. Goldstein)
/s/ Jeffrey A. Sonnenfeld . . . . . . . . . . . Director
- -------------------------
(Jeffrey A. Sonnenfeld)
/s/ Barry Sternlicht. . . . . . . . . . . . . . Director
- --------------------
(Barry Sternlicht)
</TABLE>
44
<PAGE> 1
EXHIBIT 10.14
U.S. FRANCHISE SYSTEMS, INC.
AMENDED AND RESTATED 1996 STOCK OPTION PLAN
SECTION 1. Purpose. The purposes of this U.S. Franchise Systems, Inc. 1996
Stock Option Plan are to promote the interests of U.S. Franchise Systems, Inc.
("USFS" or the "Company") and its stockholders by (i) attracting and retaining
exceptional officers and other key employees of the Company and its
Subsidiaries, and consultants, advisors and others whom the Committee determines
possess skills that would be an asset to the Company or any of its Subsidiaries;
(ii) motivating such individuals by means of performance-related incentives to
achieve longer-range performance goals; and (iii) enabling such individuals to
participate in the long-term growth and financial success of the Company.
SECTION 2. Definitions. As used in the Plan, the following terms shall have
the meanings set forth below:
"Affiliate" shall mean (i) any entity that, directly or indirectly, is
controlled by or controls the Company and (ii) any entity in which the Company
has a significant equity interest, in either case as determined by the
Committee.
"Board" shall mean the Board of Directors of the Company.
"Change of Control" shall mean the occurrence of any of the following: (i)
the sale, lease, transfer, conveyance or other disposition, in one or a series
of related transactions, of all or substantially all of the assets of the
Company to any "person" or "group" (as such terms are used in Sections 13(d)(3)
and 14(d)(2) of the Exchange Act) other than the Permitted Holders, (ii) any
person or group, other than the Permitted Holders, is or becomes the "beneficial
owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act, except that
a person shall be deemed to have "beneficial ownership" of all shares that any
such person has the right to acquire, whether such right is exercisable
immediately or only after the passage of time), directly or indirectly, of more
than 50% of the total voting power of the voting stock of the Company, including
by way of merger, consolidation or otherwise or (iii) during any period of two
consecutive years, individuals who at the beginning of such period constituted
the Board (together with any new directors whose election by such Board or whose
nomination for election by the stockholders of the Company was approved by a
vote of a majority of the directors of the Company then still in office who were
either directors at the beginning of such period or whose election or nomination
for election was previously so approved) cease for any reason to constitute a
majority of the Board.
"Code" shall mean the Internal Revenue Code of 1986, as amended from time
to time.
<PAGE> 2
2
"Committee" shall mean (i) a committee of the Board designated by the Board
to administer the Plan and composed of not less two directors, each of whom is
intended to be a "Non-Employee Director" (within the meaning of Rule 16b-3) and
an "outside director" (within the meaning of Code section 162(m)) to the extent
Rule 16b-3 and Code section 162(m), respectively, are applicable to the Company
or (ii) if at any time such a committee has not been so designated by the Board,
the Board or any authorized committee thereof.
"Company" shall mean U.S. Franchise Systems, Inc., together with any
successor thereto.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended.
"Fair Market Value" shall mean, (A) with respect to any property other than
Shares, the fair market value of such property determined by such methods or
procedures as shall be established from time to time by the Committee and (B)
with respect to the Shares, as of any date, (i) the mean between the high and
low sales prices of the Shares as reported on the composite tape for securities
traded on the New York Stock Exchange for such date (or if not then trading on
the New York Stock Exchange, the mean between the high and low sales price of
the Shares on the stock exchange or over-the-counter market on which the Shares
are principally trading on such date), or if, there were no sales on such date,
on the closest preceding date on which there were sales of Shares or (ii) in the
event there shall be no public market for the Shares on such date, the fair
market value of the Shares as determined in good faith by the Committee.
"Incentive Stock Option" shall mean a right to purchase Shares from the
Company that is granted under Section 6 of the Plan and that is intended to meet
the requirements of Section 422 of the Code or any successor provision thereto.
"Non-Qualified Stock Option" shall mean a right to purchase Shares from the
Company that is granted under Section 6 of the Plan and that is not intended to
be an Incentive Stock Option.
"Option" shall mean an Incentive Stock Option or a Non-Qualified Stock
Option.
"Option Agreement" shall mean any written agreement, contract, or other
instrument or document evidencing any Option, which may, but need not, be
executed or acknowledged by a Participant.
"Participant" shall mean any officer or other key employee (including any
prospective officer or key employee) of the Company or its Subsidiaries, and any
consultant, advisor or other person whom the Committee determines possesses
skills that would be an asset to the Company or any of its Subsidiaries, in each
case who is
<PAGE> 3
3
eligible for an Option under Section 5 and selected by the Committee
to receive an Option under the Plan.
"Permitted Holders" shall mean, as of the date of determination, any and
all of Neal K. Aronson and Michael A. Leven, their spouses, their siblings and
their siblings' spouses, their parents and descendants of any of them (whether
natural or adopted) (collectively, the "Family Group") and (iii) any trust
established and maintained primarily for the benefit of any member of the Family
Group and any entity controlled by any member of the Family Group.
"Person" shall mean any individual, corporation, partnership, association,
joint-stock company, trust, unincorporated organization, government or political
subdivision thereof or other entity.
"Plan" shall mean this U.S. Franchise Systems, Inc. 1996 Stock Option Plan.
"Rule 16b-3" shall mean Rule 16b-3 as promulgated and interpreted by the
SEC under the Exchange Act, or any successor rule or regulation thereto as in
effect from time to time.
"SEC" shall mean the Securities and Exchange Commission or any successor
thereto and shall include the Staff thereof.
"Shares" shall mean shares of the Class A Common Stock of the Company, $.01
par value, or such other securities of the Company (i) into which such common
shares shall be changed by reason of a recapitalization, merger, consolidation,
split-up, combination, exchange of shares or other similar transaction or (ii)
as may be determined by the Committee pursuant to Section 4(b).
"Subsidiary" shall mean (i) any entity that, directly or indirectly, is
controlled by the Company and (ii) any entity in which the Company has a
significant equity interest, in either case as determined by the Committee
"Substitute Awards" shall have the meaning specified in Section 4(c).
SECTION 3. Administration. (a) The Plan shall be administered by the
Committee. Subject to the terms of the Plan and applicable law, and in addition
to other express powers and authorizations conferred on the Committee by the
Plan, the Committee shall have full power and authority to: (i) designate
Participants; (ii) determine the type or types of Options to be granted to a
Participant; (iii) determine the number of Shares to be covered by, or with
respect to which payments, rights, or other
<PAGE> 4
4
matters are to be calculated in connection with, Options; (iv) determine the
terms and conditions of any Option; (v) determine whether, to what extent, and
under what circumstances Options may be settled or exercised in cash, Shares,
other securities, or other property, or canceled, forfeited, or suspended and
the method or methods by which Options may be settled, exercised, canceled,
forfeited, or suspended; (vi) determine whether, to what extent, and under what
circumstances cash, Shares, other securities, other property, and other amounts
payable with respect to an Option shall be deferred either automatically or at
the election of the holder thereof or of the Committee; (vii) interpret,
administer reconcile any inconsistency, correct any default and/or supply any
omission in the Plan and any instrument or agreement relating to, or Option made
under, the Plan; (viii) establish, amend, suspend, or waive such rules and
regulations and appoint such agents as it shall deem appropriate for the proper
administration of the Plan; and (ix) make any other determination and take any
other action that the Committee deems necessary or desirable for the
administration of the Plan.
(b) Unless otherwise expressly provided in the Plan, all designations,
determinations, interpretations, and other decisions under or with respect to
the Plan or any Option shall be within the sole discretion of the Committee, may
be made at any time and shall be final, conclusive, and binding upon all
Persons, including the Company, any Affiliate, any Participant, any holder or
beneficiary of any Option, and any shareholder.
(c) The mere fact that a Committee member shall fail to qualify as a
"Non-Employee Director" or "outside director" within the meaning of Rule 16b-3
and Code section 162(m), respectively, shall not invalidate any Option granted
by the Committee which Option is otherwise validly made under the Plan.
(d) No member of the Committee shall be liable for any action or
determination made in good faith with respect to the Plan or any Option granted
hereunder.
SECTION 4. Shares Available for Options.
(a) Shares Available. Subject to adjustment as provided in Section 4(b),
the aggregate number of Shares with respect to which Options may be granted
under the Plan shall be 325,000 and the maximum number of Shares with respect to
which Options may be granted to any Participant in any fiscal year shall be
250,000. If, after the effective date of the Plan, any Shares covered by an
Option granted under the Plan, or to which such an Option relates, are
forfeited, or if an Option has expired, terminated or been canceled for any
reason whatsoever (other than by reason of exercise or vesting) and in either
such case a Participant has received no benefits of
<PAGE> 5
5
ownership with respect to the forfeited Shares or the Shares to which such
expired, terminated or canceled Option relates (other than voting rights and
dividends that were forfeited in connection with such forfeiture, expiration,
termination or cancellation), then the Shares covered by such Option shall, to
the maximum extent permitted under Section 162(m) of the Code during any period
when Section 162(m) is applicable to the Company, again be, or shall become,
Shares with respect to which Options may be granted hereunder.
(b) Adjustments. In the event that the Committee determines that any
dividend or other distribution (whether in the form of cash, Shares, other
securities, or other property), recapitalization, stock split, reverse stock
split, reorganization, merger, consolidation, split-up, spin-off, combination,
repurchase, or exchange of Shares or other securities of the Company, issuance
of warrants or other rights to purchase Shares or other securities of the
Company, or other similar corporate transaction or event affects the Shares such
that an adjustment is determined by the Committee in its discretion to be
appropriate in order to prevent dilution or enlargement of the benefits or
potential benefits intended to be made available under the Plan, then the
Committee shall, in such manner as it may deem equitable, adjust any or all of
(i) the number of Shares or other securities of the Company (or number and kind
of other securities or property) with respect to which Options may be granted,
(ii) the number of Shares or other securities of the Company (or number and kind
of other securities or property) subject to outstanding Options, and (iii) the
grant or exercise price with respect to any Option or, if deemed appropriate,
make provision for a cash payment to the holder of an outstanding Option in
consideration for the cancellation of such Option.
(c) Substitute Awards. Options may, in the discretion of the Committee, be
made under the Plan in assumption of, or in substitution for, outstanding awards
previously granted by the Company or its Affiliates or a company acquired by the
Company or with which the Company combines ("Substitute Awards"). The number of
Shares underlying any Substitute Awards shall be counted against the aggregate
number of Shares available for Options under the Plan.
(d) Sources of Shares Deliverable Under Options. Any Shares delivered
pursuant to an Option may consist, in whole or in part, of authorized and
unissued Shares or of treasury Shares.
SECTION 5. Eligibility. Any officer or other key employee of the Company or
any of its Subsidiaries (including any prospective officer or key employee), and
any consultant, advisor or other person whom the Committee determines possesses
skills that would be an asset to the Company or any of its Subsidiaries, who is
not a member of the Committee, shall be eligible to be designated
<PAGE> 6
6
a Participant.
SECTION 6. Stock Options.
(a) Grant. Subject to the provisions of the Plan, the Committee shall have
sole and complete authority to determine the Participants to whom Options shall
be granted, the number of Shares to be covered by each Option, the exercise
price therefor and the conditions and limitations applicable to the exercise of
the Option. The Committee shall have the authority to grant Incentive Stock
Options, or to grant Non-Qualified Stock Options, or to grant both types of
Options. In the case of Incentive Stock Options, the terms and conditions of
such grants shall be subject to and comply with such rules as may be prescribed
by Section 422 of the Code, as from time to time amended, and any regulations
implementing such statute. All Options when granted under the Plan are intended
to be Non-Qualified Stock Options, unless the applicable Option Agreement
expressly states that the Option is intended to be an Incentive Stock Option. If
an Option is intended to be an Incentive Stock Option, and if for any reason
such Option (or any portion thereof) shall not qualify as an Incentive Stock
Option, then, to the extent of such nonqualification, such Option (or portion
thereof) shall be regarded as a Non-Qualified Stock Option appropriately granted
under the Plan; provided that such Option (or portion thereof) otherwise
complies with the Plan's requirements relating to Non-Qualified Stock Options.
(b) Exercise Price. The Committee shall establish the exercise price at the
time each Option is granted, which exercise price shall be set forth in the
applicable Option Agreement.
(c) Exercise. Each Option shall be exercisable at such times and subject to
such terms and conditions as the Committee may, in its sole discretion, specify
in the applicable Option Agreement or thereafter. The Committee may impose such
conditions with respect to the exercise of Options, including without
limitation, any relating to the application of federal or state securities laws,
as it may deem necessary or advisable;
(d) Payment. No Shares shall be delivered pursuant to any exercise of an
Option until payment in full of the aggregate exercise price therefor is
received by the Company. Such payment may be made in cash, or its equivalent,
or, if and to the extent permitted by the Committee, (i) by exchanging Shares
owned by the optionee (which are not the subject of any pledge or other security
interest and which have been owned by such optionee for at least six months) or
(ii) if permitted by and subject to such rules as may be established by the
Committee, through delivery of irrevocable instructions to a broker to sell such
Shares and deliver promptly to the Company an amount equal to the aggregate
exercise price, or by a combination of the foregoing, provided that the combined
value of all cash and cash equivalents and the Fair Market
<PAGE> 7
7
Value of any such Shares so tendered to the Company as of the date of such
tender is at least equal to such aggregate exercise price.
SECTION 7. Amendment and Termination.
(a) Amendments to the Plan. The Board may amend, alter, suspend,
discontinue, or terminate the Plan or any portion thereof at any time; provided
that no such amendment, alteration, suspension, discontinuation or termination
shall be made without shareholder approval if such approval is necessary to
comply with any tax or regulatory requirement, including for these purposes any
approval requirement which is a prerequisite for exemptive relief from Section
16(b) of the Exchange Act or necessary to qualify the options granted hereunder
as performance based compensation for purposes of Code Section 162(m) (provided
that the Company is subject to the requirements of Section 16 of the Exchange
Act or Code Section 162(m), as the case may be, as of the date of such action).
(b) Amendments to Options. The Committee may waive any conditions or rights
under, amend any terms of, or alter, suspend, discontinue, cancel or terminate,
any Option theretofore granted, prospectively or retroactively; provided that
any such waiver, amendment, alteration, suspension, discontinuance, cancellation
or termination that would impair the rights of any Participant or any holder or
beneficiary of any Option theretofore granted shall not to that extent be
effective without the consent of the affected Participant, holder or
beneficiary.
(c) Adjustment of Options Upon the Occurrence of Certain Unusual or
Nonrecurring Events. The Committee is hereby authorized to make adjustments in
the terms and conditions of, and the criteria included in, Options in
recognition of unusual or nonrecurring events (including, without limitation,
the events described in Section 4(b) hereof) affecting the Company, any
Affiliate, or the financial statements of the Company or any Affiliate, or of
changes in applicable laws, regulations, or accounting principles, whenever the
Committee determines that such adjustments are appropriate in order to prevent
dilution or enlargement of the benefits or potential benefits intended to be
made available under the Plan.
SECTION 8. Change of Control. In the event of a Change of Control after the
date of the adoption of this Plan, any outstanding Options then held by
Participants which are unexercisable or otherwise unvested shall automatically
be deemed exercisable or otherwise vested, as the case may be, as of immediately
prior to such Change of Control.
SECTION 9. General Provisions.
<PAGE> 8
8
(a) Nontransferability. Each Option and each right under any Option shall
be exercisable only by the Participant during the Participant's lifetime, or, if
permissible under applicable law, by the Participant's legal guardian or
representative. No Option may be assigned, alienated, pledged, attached, sold or
otherwise transferred or encumbered by a Participant otherwise than by will or
by the laws of descent and distribution and any such purported assignment,
alienation, pledge, attachment, sale, transfer or encumbrance shall be void and
unenforceable against the Company or any Affiliate; provided that the
designation of a beneficiary shall not constitute an assignment, alienation,
pledge, attachment, sale, transfer or encumbrance.
(b) No Rights to Options. No Participant or other Person shall have any
claim to be granted any Option, and there is no obligation for uniformity of
treatment of Participants, or holders or beneficiaries of Options. The terms and
conditions of Options and the Committee's determinations and interpretations
with respect thereto need not be the same with respect to each Participant
(whether or not such Participants are similarly situated).
(c) Share Certificates. All certificates for Shares or other securities of
the Company or any Affiliate delivered under the Plan pursuant to any Option or
the exercise thereof shall be subject to such stop transfer orders and other
restrictions as the Committee may deem advisable under the Plan or the rules,
regulations, and other requirements of the Securities and Exchange Commission,
any stock exchange upon which such Shares or other securities are then listed,
and any applicable Federal or state laws, and the Committee may cause a legend
or legends to be put on any such certificates to make appropriate reference to
such restrictions.
(d) Withholding. A Participant may be required to pay to the Company or any
Affiliate and the Company or any Affiliate shall have the right and is hereby
authorized to withhold from any Option, from any payment due or transfer made
under any Option or under the Plan or from any compensation or other amount
owing to a Participant the amount (in cash, Shares, other securities, or other
property) of any applicable withholding taxes in respect of an Option, its
exercise, or any payment or transfer under an Option or under the Plan and to
take such other action as may be necessary in the opinion of the Company to
satisfy all obligations for the payment of such taxes.
(e) Option Agreements. Each Option hereunder shall be evidenced by an
Option Agreement which shall be delivered to the Participant and shall specify
the terms and conditions of the Option and any rules applicable thereto,
including but not limited to the effect on such Option of the death, disability
or termination of employment or service of a Participant and the effect, if any,
of such other events as may be determined by the Committee.
<PAGE> 9
9
(f) No Limit on Other Compensation Arrangements. Nothing contained in the
Plan shall prevent the Company or any Affiliate from adopting or continuing in
effect other compensation arrangements, which may, but need not, provide for the
grant of options (subject to shareholder approval if such approval is required),
and such arrangements may be either generally applicable or applicable only in
specific cases.
(g) No Right to Employment. The grant of an Option shall not be construed
as giving a Participant the right to be retained in the employ of, or in any
consulting relationship to, the Company or any Affiliate. Further, the Company
or an Affiliate may at any time dismiss a Participant from employment or
discontinue any consulting relationship, free from any liability or any claim
under the Plan, unless otherwise expressly provided in the Plan or in any Option
Agreement.
(h) No Rights as Stockholder. Subject to the provisions of the applicable
Option, no Participant or holder or beneficiary of any Option shall have any
rights as a stockholder with respect to any Shares to be distributed under the
Plan until he or she has become the holder of such Shares.
(i) Governing Law. The validity, construction, and effect of the Plan and
any rules and regulations relating to the Plan and any Option Agreement shall be
determined in accordance with the laws of the State of Delaware.
(j) Severability. If any provision of the Plan or any Option is or becomes
or is deemed to be invalid, illegal, or unenforceable in any jurisdiction or as
to any Person or Option, or would disqualify the Plan or any Option under any
law deemed applicable by the Committee, such provision shall be construed or
deemed amended to conform the applicable laws, or if it cannot be construed or
deemed amended without, in the determination of the Committee, materially
altering the intent of the Plan or the Option, such provision shall be stricken
as to such jurisdiction, Person or Option and the remainder of the Plan and any
such Option shall remain in full force and effect.
(k) Other Laws. The Committee may refuse to issue or transfer any Shares or
other consideration under an Option if, acting in its sole discretion, it
determines that the issuance or transfer of such Shares or such other
consideration might violate any applicable law or regulation or entitle the
Company to recover the same under Section 16(b) of the Exchange Act, and any
payment tendered to the Company by a Participant, other holder or beneficiary in
connection with the exercise of such Option shall be promptly refunded to the
relevant Participant, holder or beneficiary. Without limiting the generality of
the foregoing, no Option granted hereunder shall be construed as an offer to
sell securities of the Company, and no such offer shall be outstanding, unless
and until the Committee in its sole discretion has
<PAGE> 10
10
determined that any such offer, if made, would be in compliance with all
applicable requirements of the U.S. federal and any other applicable securities
laws.
(l) No Trust or Fund Created. Neither the Plan nor any Option shall create
or be construed to create a trust or separate fund of any kind or a fiduciary
relationship between the Company or any Affiliate and a Participant or any other
Person. To the extent that any Person acquires a right to receive payments from
the Company or any Affiliate pursuant to an Option, such right shall be no
greater than the right of any unsecured general creditor of the Company or any
Affiliate.
(m) No Fractional Shares. No fractional Shares shall be issued or delivered
pursuant to the Plan or any Option, and the Committee shall determine whether
cash, other securities, or other property shall be paid or transferred in lieu
of any fractional Shares or whether such fractional Shares or any rights thereto
shall be canceled, terminated, or otherwise eliminated.
(n) Headings. Headings are given to the Sections and subsections of the
Plan solely as a convenience to facilitate reference. Such headings shall not be
deemed in any way material or relevant to the construction or interpretation of
the Plan or any provision thereof.
SECTION 16. Term of the Plan.
(a) Effective Date. The Plan shall be effective as of the date of its
approval by the shareholders of the Company.
(b) Expiration Date. No Option shall be granted under the Plan after
October 24, 2003. Unless otherwise expressly provided in the Plan or in an
applicable Option Agreement, any Option granted hereunder may, and the authority
of the Board or the Committee to amend, alter, adjust, suspend, discontinue, or
terminate any such Option or to waive any conditions or rights under any such
Option shall, continue after October 24, 2003.
<PAGE> 1
EXHIBIT 21.1
LIST OF SUBSIDIARIES OF U.S. FRANCHISE SYSTEMS, INC.
AS OF MARCH 27, 1997
<TABLE>
<CAPTION>
LIST OF SUBSIDIARIES STATE OF INCORPORATION
<S> <C>
1. Microtel Inns and Suites Franchising, Inc. Georgia
2. Hawthorn Suites Franchising, Inc. Georgia
3. Microtel Inns Realty Corp. Georgia
4. Microtel International, Inc. Georgia
5. US Funding Corp. . Georgia
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM U.S.
FRANCHISE SYSTEMS, INC. CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED
DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 31,188
<SECURITIES> 0
<RECEIVABLES> 114
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 33,934
<PP&E> 324
<DEPRECIATION> 32
<TOTAL-ASSETS> 40,105
<CURRENT-LIABILITIES> 5,189
<BONDS> 0
18,477
0
<COMMON> 415 <F1>
<OTHER-SE> 12,180
<TOTAL-LIABILITY-AND-EQUITY> 40,105
<SALES> 1,292
<TOTAL-REVENUES> 1,292
<CGS> 8,628
<TOTAL-COSTS> 8,628
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 126
<INCOME-PRETAX> (6,591)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,591)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,591)
<EPS-PRIMARY> (.75)<F2>
<EPS-DILUTED> (.75)<F2>
<FN>
<F1>INCLUDES 3,186,280 SHARES OF CLASS A COMMON STOCK THAT ARE REDEEMABLE UNDER
CERTAIN CIRCUMSTANCES BY THE COMPANY FOR REASONS NOT UNDER THE COMPANY'S
CONTROL.
<F2>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 DIVIDENDS ACCRETED ON THE
REDEEMABLE PREFERRED STOCK.
</FN>
</TABLE>
