<PAGE> 1
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES EXCHANGE ACT OF
1934 (AMENDMENT NO. __)
Filed by the Registrant [x]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-b(e)(2))
[x] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or Section
240.14a-12
U.S. FRANCHISE SYSTEMS, INC.
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(Name of Registrant as Specified in Its Charter)
NOT APPLICABLE
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(Name of Person(s) Filing Proxy Statement if other than Registrant)
Payment of Filing Fee (Check the appropriate box):
[x] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and
0-11.
1) Title of each class of securities to which transaction
applies:
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2) Aggregate number of securities to which transaction applies:
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3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0- 11(1):
---------------
4) Proposed maximum aggregate value of transaction:
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5) Total fee paid:
------------------------------------------------
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
----------------------------------------
2) Form, Schedule or Registration Statement No.:
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3) Filing Party:
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4) Date Filed:
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(1) Set forth the amount on which the filing fee is calculated and state
how it was determined.
<PAGE> 2
U.S. FRANCHISE SYSTEMS, INC.
13 CORPORATE SQUARE, SUITE 250
ATLANTA, GEORGIA 30329
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD MAY 30, 1997
The annual meeting of shareholders of U.S. Franchise Systems, Inc.
(the "Company") will be held on Friday, May 30, 1997 at 4:00 p.m., at the
Company's offices, 13 Corporate Square, Suite 250, Atlanta, Georgia 30329, for
the following purposes:
(1) To elect seven (7) directors to constitute the Board of
Directors, to serve for a term of one year and until their successors are
elected and qualified; and
(2) To transact such other business as may properly come before
the meeting or any adjournments or postponements thereof.
Only shareholders of record at the close of business on April 10, 1997
will be entitled to notice of and to vote at the meeting or any adjournments or
postponements thereof.
A Proxy Statement and a proxy solicited by the Board of Directors are
enclosed herewith. Please sign, date and return the proxy promptly. If you
attend the meeting, you may, if you wish, withdraw your proxy and vote in
person.
By Order of the Board of Directors,
Michael A. Leven, Chairman of the Board
Atlanta, Georgia
April 28, 1997
PLEASE COMPLETE AND RETURN THE ENCLOSED PROXY PROMPTLY SO THAT YOUR VOTE MAY BE
RECORDED AT THE MEETING IF YOU DO NOT ATTEND PERSONALLY.
<PAGE> 3
U.S. FRANCHISE SYSTEMS, INC.
13 CORPORATE SQUARE, SUITE 250
ATLANTA, GEORGIA 30329
ANNUAL MEETING OF SHAREHOLDERS
MAY 30, 1997
-----------------------
PROXY STATEMENT
-----------------------
This Proxy Statement is furnished in connection with the solicitation
of proxies by the Board of Directors of U.S. Franchise Systems, Inc. (the
"Company") for the Annual Meeting of Shareholders to be held on Friday, May 30,
1997, and any adjournments or postponements thereof, at the time and place and
for the purposes set forth in the accompanying notice of the meeting. The
expense of this solicitation, including the cost of preparing and mailing this
Proxy Statement, will be paid by the Company. In addition to solicitations by
mail, officers and regular employees of the Company, at no additional
compensation, may assist in soliciting proxies by telephone. This Proxy
Statement and the accompanying proxy are first being mailed to shareholders on
or about April 28, 1997. The address of the principal executive offices of the
Company is 13 Corporate Square, Suite 250, Atlanta, Georgia 30329.
Any proxy given pursuant to this solicitation may be revoked by any
shareholder who attends the meeting and gives oral notice of his election to
vote in person, without compliance with any other formalities. In addition,
any proxy given pursuant to this solicitation may be revoked prior to the
meeting by delivering to the Secretary of the Company an instrument revoking it
or a duly executed proxy for the same shares bearing a later date. Proxies
which are returned properly executed and not revoked will be voted and will be
voted in accordance with the shareholder's directions specified thereon.
Where no direction is specified, proxies will be voted for the election of the
nominees named below to constitute the entire Board of Directors. Abstentions
and broker non-votes will not be counted as votes either in favor of or against
the matter with respect to which the abstention or broker non-vote relates.
The record of shareholders entitled to vote at the annual meeting was
taken on April 10, 1997. On that date the Company had outstanding and entitled
to vote 9,872,476 shares of Class A Common Stock, $.01 par value per share (the
"Class A Common Stock"), and 2,707,919 shares of Class B Common Stock $.01 par
value per share (the "Class B Common Stock," collectively the Class A Common
Stock and the Class B Common Stock are hereinafter referred to as the "Common
Stock"). Each share of Class A Common Stock is entitled to one vote and each
share of Class B Common Stock is entitled to ten votes.
<PAGE> 4
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of the Company's Class A Common Stock and Class B Common
Stock as of March 15, 1997 by (i) each person known by the Company to be the
beneficial owner of more than five percent (5%) of the outstanding Common
Stock; (ii) each director of the Company; (iii) the Named Executive Officers
(as defined herein); and (iv) all directors and executive officers of the
Company as a group. Each share of Class B Common Stock is entitled to ten
votes per share.
<TABLE>
<CAPTION>
Name of Shares of Shares of Percent
Class A Percent of Class B Percent of of Total
Beneficial Owner Common Stock(1) Class Common Stock(1) Class Voting Power
- --------------------- ------------ ---------- ------------ ---------- --------------
<S> <C> <C> <C> <C> <C>
Michael A. Leven . . . . . . 942,430(2) 9.5 1,509,473(3) 55.7 43.4
Neal K. Aronson . . . . . . 942,440(4) 9.5 1,509,473(5) 55.7 43.4
Dean Adler . . . . . . . . . 7,000 * 0 0 *
Irwin Chafetz . . . . . . . 290,100 2.9 0 0 *
Richard D. Goldstein(6) . . . 159,555 1.6 0 0 *
Andrea Leven . . . . . . . . 233,032(7) 2.4 770,801(8) 28.5 *
Jeffrey A. Sonnenfeld . . . . 5,000 * 0 0 *
Barry S. Sternlicht(9). . . . 299,770 3.0 0 0 *
Steven Romaniello . . . . . 193,216(10) 2.0 0 0 *
David E. Shaw, Sr. . . . . . 108,749(11) 1.1 0 0 *
All officers and directors
as a group (10 persons)** . 2,948,260 29.9 2,707,919 100.0 81.3
</TABLE>
- -----------------------
* Represents less than 1% of the outstanding shares, both in number and
in terms of voting power.
** Duplications eliminated.
(1) "Beneficial Ownership" includes shares for which an individual,
directly or indirectly, has or shares voting or investment power or
both and also includes options which are exercisable within sixty days
of the date of this Proxy Statement. All of the listed persons have
sole voting and investment power over the shares listed opposite their
names unless otherwise indicated in the notes below.
(2) Consists of (i) 123,805 Restricted Shares (as defined herein) held
directly by Mr. Leven and as to which Mr. Leven has sole voting
power, (ii) 233,032 Restricted Shares held by Mr. Leven's wife, which
are voted by Mr. Leven, (iii) 365,012 Unrestricted Shares (as defined
herein), which have been reallocated to other members of management
and are voted in the same manner that Mr. Leven votes his shares, (iv)
109,234 shares that were designated as Restricted Shares pursuant to
Mr. Leven's Old Stock Purchase Agreement (as defined herein), which
have been reallocated to other members of management and by virtue of
the 1996 Amendment (as defined herein) are voted in the same manner
that Mr. Leven votes his Unrestricted Shares, and (v) 111,347
Restricted Shares owned by Mr. Aronson, which are voted by Mr. Leven.
Mr. Leven's address is 13 Corporate Square, Suite 250, Atlanta,
Georgia 30329.
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<PAGE> 5
(3) Consists of (i) 427,665 Unrestricted Shares, as to which Mr. Leven has
sole voting power, (ii) 770,801 shares held by Mr. Leven's wife as
Unrestricted Shares, which are voted by Mr. Leven, and (iii) 311,007
Unrestricted Shares owned by Mr. Aronson, which are voted by Mr.
Leven.
(4) Consists of (i) 589,865 Restricted Shares held directly by Mr. Aronson
and as to which Mr. Aronson has sole voting power, (ii) 109,234 shares
that were designated as Restricted Shares pursuant to Mr. Aronson's
Old Stock Purchase Agreement, which have been reallocated to other
members of management and by virtue of the 1996 Amendment are voted by
them in the same manner that Mr. Aronson votes his shares and (iii)
243,341 shares that were designated as Unrestricted Shares under the
Old Stock Purchase Agreements, which have been reallocated to other
members of management and are voted by them in the same manner that
Mr. Aronson votes his shares. Mr. Aronson has transferred voting
power to Mr. Leven with respect to 111,347 of such shares. Mr.
Aronson's address is 13 Corporate Square, Suite 250, Atlanta, Georgia
30329.
(5) Consists of 1,509,473 shares designated as Unrestricted Shares, of
which Mr. Aronson has sole voting power as to 1,198,466 shares and has
transferred voting power to Mr. Leven as to 311,007 shares.
(6) Such shares are owned by G2 Investment Partners, an investment
partnership of which Mr. Goldstein is a general partner. Mr.
Goldstein shares voting and investment power with respect to such
shares.
(7) Represents shares that were designated under Mr. Leven's Old Stock
Purchase Agreement as Restricted Shares and which have been
transferred to Mrs. Leven. Pursuant to a voting agreement, Mrs. Leven
has transferred voting power with respect to these shares to Mr.
Leven. Mrs. Leven's address is 13 Corporate Square, Suite 250,
Atlanta, Georgia 30329, c/o U.S. Franchise Systems, Inc.
(8) Represents shares of Class B Common Stock that were originally
designated as Unrestricted Shares under Mr. Leven's Old Stock
Purchase Agreement, which were subsequently transferred to Mrs. Leven
and which, pursuant to a voting agreement, are voted by Mr. Leven.
(9) Such shares are owned by Starwood Opportunity Fund II, L.P., a
Delaware limited partnership whose general partner is Starwood
Capital, which is indirectly controlled by Mr. Sternlicht.
(10) Consists of (i) 1,200 shares as to which Mr. Shaw has sole voting and
investment power, (ii) 80,662 Unrestricted Shares, of which 48,397
shares must be voted in the same manner as Mr. Leven votes his shares
and 32,265 shares which must be voted in the same manner as Mr.
Aronson votes his shares and (iii) 26,887 Restricted Shares, of which
13,444 shares must be voted in the same manner as Mr. Leven votes his
shares and 13,443 shares which must be voted in the same manner as Mr.
Aronson votes his shares.
(11) Consists of (i) 5,000 shares as to which Mr. Romaniello has sole
voting and investment power, (ii) 147,883 Unrestricted Shares, of
which 88,730 shares must be voted in the same manner as Mr. Leven
votes his shares and 59,153 shares which must be voted in the same
manner as Mr. Aronson votes his shares and (iii) 40,333 Restricted
Shares, of which 20,167 shares must be voted in the same manner as
Mr. Leven votes his shares and 20,166 shares which must be voted in
the same manner as Mr. Aronson votes his shares.
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<PAGE> 6
MANAGEMENT'S SHARES OF COMMON STOCK
Background. On October 5, 1995, Messrs. Leven and Aronson purchased
5,485,259 shares or 51% of the Class A Common Stock then outstanding for an
aggregate purchase price of $567,245 or $.1034 per share (the "Original Issue
Price"). Twenty-five percent (25%) of such Class A Common Stock was acquired by
Messrs. Leven and Aronson outright (i.e., without restriction on their ability
to vote or receive dividends with respect to such shares and free of any risk
of forfeiture), although a limited number of such shares could be repurchased
from Messrs. Leven and Aronson and reissued to other employees under certain
circumstances described below (the "Unrestricted Shares"). Immediately
following such acquisition, Mr. Leven owned 15% and Mr. Aronson owned 10% of
the then outstanding Class A Common Stock in the form of Unrestricted Shares.
The remaining shares of Class A Common Stock acquired by Messrs. Leven and
Aronson, representing 26% of such Class A Common Stock at the time of such
acquisition, were subject to significant restrictions with respect to voting
and dividend rights and substantial risks of forfeiture (the "Restricted
Shares"), as described below. Mr. Leven and Mr. Aronson each acquired 13% of
the then outstanding Class A Common Stock in the form of Restricted Shares. On
August 23, 1996, the Board of Directors voted to amend the respective Employee
Stock Purchase Agreements pursuant to which Messrs. Leven and Aronson purchased
the Class A Common Stock (the "Old Stock Purchase Agreements") to eliminate the
restrictions with respect to one-half of the Restricted Shares (the "1996
Amendment"). See "-- 1996 Amendment" below for a description of the amendment.
Resale of Shares to Other Management. The Old Stock Purchase
Agreements provide that Unrestricted Shares representing 5% of the Class A
Common Stock then outstanding and Restricted Shares representing 6% of the
Class A Common Stock then outstanding could be repurchased by the Company from
Messrs. Leven and Aronson at $.1034 per share and then reissued to other
members of the Company's management at fair market value. As of April 1, 1997,
a total of approximately 826,833 shares of outstanding Class A Common Stock
have been repurchased from Messrs. Leven and Aronson and reissued to other
members of management. By virtue of the 1996 Amendment, members of management
who acquired these shares are required to vote those shares that are Restricted
Shares, on a one vote per share basis, one-half in the same manner as Mr. Leven
votes his shares and one-half as Mr. Aronson votes his shares. With respect to
those shares that are Unrestricted Shares, the management holders continue to
be required to vote 60% of such shares in the manner that Mr. Leven votes his
shares and 40% in the manner that Mr. Aronson votes his shares. The Company's
right to cause the redemption and reissuance of the remaining shares was
eliminated by the 1996 Amendment. All shares which have been repurchased from
Messrs. Leven and Aronson and reissued to other members of management pursuant
to the Old Stock Purchase Agreements are subject to a vesting schedule, which
provides that Unrestricted Shares vest over a five year period and Restricted
Shares vest over a 10 year period, in each case provided that the management
employee remains employed by the Company (and with Restricted Shares subject to
further vesting requirements based on the Company's performance). Any unvested
shares that are forfeited upon the termination of such employment are to be
repurchased by the Company and resold to Mr. Leven or Mr. Aronson, as the case
may be (depending on who owned the shares originally), at the Original Issue
Price. In the event any of such shares are forfeited and reissued to Messrs.
Leven or Aronson at the Original Issue Price, the Company will recognize
compensation expense for the difference between the Original Issue Price and
the market value of the stock on the date such shares are repurchased by
Messrs. Leven and Aronson. Upon such resale, the shares will continue as
Unrestricted Shares or Restricted Shares in the same manner as had they not
been so forfeited.
Unrestricted Shares. Following the 1996 Amendment, there are no
restrictions on the Unrestricted Shares of other management, and such shares
may not be repurchased from Messrs. Leven and Aronson and reissued to other
members of management.
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<PAGE> 7
Restricted Shares. The Old Stock Purchase Agreements imposed, and the
Old Stock Purchase Agreements as amended by the 1996 Amendment (the "Amended
Stock Purchase Agreements") impose substantial risks of forfeiture on
Restricted Shares. Messrs. Leven and Aronson are entitled to vote all
Restricted Shares (on a one vote per share basis), including Restricted Shares
which have been reallocated to other members of management as provided above,
prior to such shares being "earned" by the holders thereof, and to receive
dividends thereon. See "--1996 Amendment".
Under both the Old Stock Purchase Agreements and the Amended Stock
Purchase Agreements, Restricted Shares become "Earned Shares" upon the
Company's attaining certain performance criteria. However, notwithstanding that
they have been "earned," Earned Shares (other than the Class A Common Stock
that was deemed to have been earned by virtue of the 1996 Amendment) will be
forfeited if the management holder of such shares (including either of Messrs.
Leven or Aronson) resigns from his or her employment with the Company without
"good reason" or is terminated for "cause" prior to the tenth anniversary of
the date such shares were acquired by the holder thereof from the Company
("Termination Forfeiture"). See "--1996 Amendment."
Pursuant to the 1996 Amendment, one-half of the Restricted Shares were
deemed to be Unrestricted Shares.
Under both the Old Stock Purchase Agreements and the Amended Stock
Purchase Agreements, Earned Shares will be permanently vested (i.e., they will
no longer be subject to Termination Forfeiture) on September 29, 2005. Any
Restricted Shares that have not become Earned Shares by September 29, 2005 will
be redeemed by the Company at the Original Issue Price and offered to the
original investors (the "Original Investors") of the Company (other than
Messrs. Leven and Aronson) pro rata at the Original Issue Price based on their
original holdings of Old Common Stock.
Under both the Old Stock Purchase Agreements and the Amended Stock
Purchase Agreements, in the event that all or substantially all of the
Company's stock or all or substantially all assets are transferred or sold, or
upon a merger or other business combination, Earned Shares automatically become
Unrestricted Shares. In addition, under both the Old Stock Purchase Agreements
and the Amended Stock Purchase Agreements, any remaining Restricted Shares will
automatically become Unrestricted Shares to the extent that value for the
entire Company indicated by the gross sale price in such transaction results in
an internal rate of return to the Original Investors of at least 40% on a
compounded annual basis (after taking into account the amount and timing of all
distributions and payments received by such Original Investors from the
Company, after considering Unrestricted and Earned Shares then held by Messrs.
Leven and Aronson, and after giving effect to Restricted Shares that become
Unrestricted Shares as a result of such transaction).
1996 Amendment. On October 30, 1996, the Company and Messrs. Leven
and Aronson amended their respective Old Stock Purchase Agreements. The 1996
Amendment provided that (i) one-half of their Restricted Shares will be deemed
to be Unrestricted Shares, notwithstanding the fact that certain performance
criteria had not been met, (ii) their remaining Restricted Shares will become
Earned Shares at the rate of 1/13 of all of the remaining number of Restricted
Shares (including the Restricted Shares held by other members of management)
for every $1,000,000 of annual Adjusted EBITDA of the Company (defined as
earnings before interest, taxes, depreciation, amortization and other non-cash
charges, adjusted to exclude one-time or non-recurring expenses or credits),
but only after Adjusted EBITDA for a fiscal year equals or exceeds $14,000,000,
(iii) the Unrestricted Shares held by Messrs. Leven and Aronson and by Mr.
Leven's wife, including the Unrestricted Shares referred to in clause (i)
above, will be shares of Class B Common Stock (with ten votes per share), (iv)
the remaining Restricted Shares held by Messrs. Leven and Aronson will be
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<PAGE> 8
Class A Common Stock (with one vote per share), including if and when such
shares become Earned Shares, and will continue to be subject to Termination
Forfeiture, (v) Messrs. Leven and Aronson will have the right to vote their
Restricted Shares and to receive dividends, if any, declared thereon before
they become Earned Shares, (vi) no additional shares will be repurchased from
Messrs. Leven and Aronson and reissued to other members of management and (vii)
in calculating Adjusted EBITDA for any given year, there generally shall be
subtracted 10% of the consideration paid by the Company in connection with any
future acquisitions by the Company and/or its subsidiaries of another
corporation or other entity. As part of the 1996 Amendment, one-half of the
Restricted Shares previously allocated to other members of management were also
be deemed to be Unrestricted Shares. Such shares, representing approximately
1.6% of the Class A Common Stock outstanding as of April 1, 1997, will be voted
by the management holders thereof 60% in the same manner that Mr. Leven votes
his shares, and 40% in the same manner that Mr. Aronson votes his shares. As to
any Restricted Shares still held by such management holders, 50% of such shares
will be voted by the management holders thereof in the same manner that Mr.
Leven votes his shares and 50% will be voted in the same manner Mr. Aronson
votes his shares.
AGENDA ITEM ONE
ELECTION OF DIRECTORS
The Board of Directors of the Company consists of seven directors.
The Company's By-Laws provide that the Board of Directors shall consist of
seven members, or such other number as may be fixed from time to time by the
Board of Directors. The number of directors has been set at seven by the
Board. The Board of Directors recommends the election of the seven nominees
listed below. Each of the nominees, other than Dean Adler and Jeffrey A.
Sonnenfeld, has served as a director since September 30, 1995. Messrs. Adler
and Sonnenfeld were elected to the Board of Directors on October 11, 1996.
Each of the nominees has consented to being named in this Proxy
Statement and to serve as a director of the Company if elected. In the event
that any nominee withdraws or for any reason is not able to serve as a
director, the proxy will be voted for such other person as may be designated by
the Board of Directors, but in no event will the proxy be voted for more than
seven nominees. The affirmative vote of a plurality of all votes cast at the
meeting by the holders of the Common Stock is required for the election of the
seven nominees standing for election. Management of the Company has no reason
to believe that any nominee will not serve if elected.
Each of the following persons has been nominated by management for
election to the Board of Directors to succeed themselves for a term of one year
and until their successors are elected and qualified:
Michael A. Leven. Mr. Leven, age 59, has been Chairman, President and
Chief Executive Officer of the Company since October 1995. From October 1990
to September 1995, Mr. Leven was President and Chief Operating Officer for
Holiday Inn Worldwide in Atlanta, Georgia. From April 1985 to May 1990, he was
President and Chief Operating Officer of Days Inn of America, Inc. in Atlanta,
Georgia. Mr. Leven is a Director of Starwood Lodging Trust, one of the nation's
largest hotel REITs. Mr. Leven is also a member of the Board of Governors of
the American Red Cross, a Director and Vice Chair of the Biomedical Services
Board of the American Red Cross and a Trustee of National Realty Trust, the
largest franchisee of Coldwell Banker Corporation, a subsidiary of HFS
Incorporated. Mr. Leven is an uncle of Mr. Aronson.
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<PAGE> 9
Neal K. Aronson. Mr. Aronson, age 32, has been Executive Vice
President and Chief Financial Officer of the Company since October 1995. Mr.
Aronson was founding partner of Growth Capital Partners in New York, New York,
and was with the partnership from September 1994 to October 1995. From
December 1993 to September 1994, he was Managing Director of Rosecliff, Inc., a
private equity investment group in New York, New York. From January 1992 to
December 1993, he was principal of Odyssey Partners, L.P. in New York, New
York. From June 1989 to December 1991, Mr. Aronson was a principal of Acadia
Partners, L.P. in New York, New York. Mr. Aronson is a nephew of Michael A.
Leven.
Dean S. Adler. Mr. Adler, age 40, is currently a principal of
Lubert-Adler Partners, L.P., a private equity group specializing in the
acquisition of real estate and operating companies. From 1988 to 1996, Mr.
Adler was a principal and Managing Director of private equity investments for
CMS Companies ("CMS"), a Philadelphia based investment firm that manages
approximately $1.7 billion of assets. Mr. Adler is a member of the Board of
Directors of the Lane Company, which specializes in management and development
of multifamily housing, Jacoby Development, Inc., which specializes in shopping
center development, RMS Technologies, a leading provider of information
technology services to federal and other governmental institutions, and
Transworld Entertainment, a NYSE company which owns music retail stores.
Irwin Chafetz. Since 1990, Mr. Chafetz, age 61, has been the
President and a Director of Interface Group- Massachusetts, Inc., a privately
held company that owns and operates GWV International, New England's largest
tour operator. From 1990 until April 1995, Mr. Chafetz was a Vice President and
Director of the Interface Group-Nevada, Inc., which owned and operated COMDEX,
a computer trade show that is the largest American trade show. From 1989 to
1995, Mr. Chafetz was also a Vice President and a Director of Las Vegas Sands,
Inc., which owned the Sands Hotel and Casino in Las Vegas and the adjacent
Sands Expo and Convention Center.
Richard D. Goldstein. Since 1990, Mr. Goldstein, age 45, has been a
Managing Director and then a Senior Managing Director of Alpine Capital Group
Inc., a specialized investment-merchant banking firm located in New York, and
related entities. Prior to joining Alpine, Mr. Goldstein was a partner at the
law firm of Paul, Weiss, Rifkind, Wharton & Garrison. Mr. Goldstein serves as
Trustee, member of the Executive Committee and Treasurer of the Queens College
Foundation, Trustee of the North Shore Hospital System and as Chairman of the
Corporate Advisory Board of the State University of New York at Stony Brook.
Jeffrey A. Sonnenfeld. Since 1989, Mr. Sonnenfeld, age 43, has been a
Professor of Organization and Management at the Goizueta Business School of
Emory University in Atlanta, Georgia, where Mr. Sonnenfeld is currently the
Director of the Center for Leadership & Career Studies. Mr. Sonnenfeld has
published five books and numerous articles in the areas of career management,
executive training and development, and the management of corporate social
performance. Mr. Sonnenfeld serves on the Board of Directors of the American
Association of Retired Persons, Moseley Securities Corporation, National
Council on the Aging, Transmedia-CBS, Inc., and the Hyatt Executive Travel
Council.
Barry S. Sternlicht. Since 1993, Mr. Sternlicht, age 36, has been the
President and Chief Executive Officer of Starwood Capital Group, L.P.
("Starwood Capital"), a real estate investment firm that he founded in 1993.
From 1991 to 1993, Mr. Sternlicht was the President of Starwood Capital
Partners, L.P., predecessor of Starwood Capital. Mr. Sternlicht is the
Chairman of the Board of Starwood Lodging Trust, one of the nation's largest
hotel REITs, in which Starwood Capital controls 30% of the stock. He is the
co-Chairman of the Board of Westin Hotel & Resorts Company, which Starwood
purchased in 1995 for $537 million. Mr. Sternlicht is also a trustee of Equity
Residential Properties Trust, a multi-family REIT, and of Angeles Participating
Mortgage Trust, which is also a REIT.
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<PAGE> 10
Except as disclosed above, there are no family relationships between
any director or executive officer and any other director or executive officer
of the Company.
AGREEMENTS REGARDING BOARD POSITIONS
Pursuant to the terms of a Stockholders' Agreement entered into in
connection with the initial capitalization of the Company (the "Old
Stockholders' Agreement"), the original investors (the "Original Investors"),
which included Messrs. Leven and Aronson, agreed to cause the Board of
Directors to consist of five members and to vote their shares of common stock
to elect as a director the stockholder of the Company or his nominee (other
than Messrs. Leven and Aronson) holding, together with his immediate family
members, the largest number of shares of Old Common Stock. Irwin Chafetz,
together with his two sons, had been the largest stockholder of the Company
(other than Messrs. Leven and Aronson) since the initial capitalization of the
Company and was elected to the Board pursuant to this provision. Pursuant to
the Old Stockholders' Agreement, the Original Investors also agreed to vote
their shares of common stock in favor of the election of Messrs. Leven and
Aronson as directors of the Company and granted Mr. Leven the right to nominate
persons to fill the remaining two board positions. Pursuant to this provision,
Mr. Leven nominated Messrs. Goldstein and Sternlicht to serve as directors, who
were then elected to serve as such by the Original Investors. The foregoing
governance provisions were deleted as part of recent amendments to the Old
Stockholders' Agreement that became effective on October 11, 1996. See
"Certain Relationships and Related Transactions -- Transactions Entered into in
Connection with the Offering-- Restated Stockholders' Agreement."
SECTION 16(A) BENEFICIAL OWNERSHIP COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors, executive officers and persons who own more than 10% of
the outstanding Common Stock of the Company to file with the Securities and
Exchange Commission reports of changes in ownership of the Common Stock of the
Company held by such persons. Officers, directors and greater than 10%
shareholders are also required to furnish the Company with copies of all forms
they file under this regulation. To the Company's knowledge, based solely on a
review of the copies of such reports furnished to the Company and
representations that no other reports were required, during the year ended
December 31, 1996, all Section 16(a) filing requirements applicable to its
officers, directors and greater than 10% shareholders were complied with except
as follows: Richard D. Goldstein (failed to file on a timely basis one report
relating to one transaction); Irwin Chafetz (failed to file on a timely basis
one report relating to a total of one transaction); Barry S. Sternlicht (failed
to file on a timely basis one report relating to one transaction); and Dean S.
Adler (failed to file on a timely basis one report relating to one
transaction). In addition, Irwin Chafetz, Jeffrey A. Sonnenfeld, Dean S.
Adler, David E. Shaw, Jr., Barry S. Sternlicht, Richard D. Goldstein and Steven
Romaniello each failed to file an Initial Statement of Beneficial Ownership (or
amendments thereto) on a timely basis.
Although it is not the Company's obligation to make filings pursuant
to Section 16 of the Securities Exchange Act of 1934 (the "Exchange Act"), the
Company has adopted a policy requiring all Section 16 reporting persons to
report monthly to the Legal Services Manager of the Company as to whether any
transactions in the Company's securities occurred during the previous month.
-8-
<PAGE> 11
MEETINGS OF THE BOARD OF DIRECTORS AND COMMITTEES OF THE BOARD
The Board of Directors held four meetings during the year ended
December 31, 1996. Each director attended at least 75% or more of the
aggregate number of meetings held by the Board of Directors. In early 1997,
the Company's Board of Directors established three standing committees -- the
Audit Committee, the Compensation Committee and the Stock Option Committee.
The Board of Directors does not have a standing nominating committee, such
function being reserved to the full Board of Directors.
The Audit Committee presently consists of Richard D. Goldstein and
Dean S. Adler, outside directors of the Company. The functions of the Audit
Committee include (i) the review of the professional services and independence
of the Company's independent auditors and the scope of the annual external
audit as recommended by the independent auditors; (ii) the review, in
consultation with the independent auditors and the Company's chief internal
auditor, of the plan and results of the annual audit and the adequacy of the
Company's internal accounting controls; (iii) the review, in consultation with
management and the independent auditors, of the Company's annual financial
statements and the results of each external audit; and (iv) the review, in
consultation with the Company's independent auditors and the Company's
principal financial officer and principal accounting officer, of the auditing
and accounting principles and practices to be used in the preparation of the
Company's financial statements. The Audit Committee has the authority to
consider the qualification of the Company's independent auditors and make
recommendations to the Board of Directors as to their selection, and review and
resolve any differences of opinion between such independent auditors and
management relating to the preparation of the annual financial statements.
The Compensation Committee presently consists of Michael A. Leven,
Irwin Chafetz and Jeffrey A. Sonnenfeld. The Compensation Committee has been
assigned the functions of approving and monitoring the remuneration
arrangements for senior management and establishing the targets that determine
performance bonuses payable to the Company's officers.
The Stock Option Committee presently consists of Barry S. Sternlicht,
Irwin Chafetz and Jeffrey A. Sonnenfeld, outside directors of the Company. The
Stock Option Committee has been assigned the functions of administering the
Company's 1996 Stock Option Plan and granting options thereunder.
EXECUTIVE OFFICERS
The executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION HELD
---- --- -------------
<S> <C> <C>
Michael A. Leven 59 Chairman of the Board and Chief Executive Officer
Neal K. Aronson 32 Executive Vice President, Chief Financial Officer and
Director
David E. Shaw, Sr. 54 Executive Vice President - Administration
Steven Romaniello 30 Executive Vice President - Franchise Sales and
Development
James Darby 40 Executive Vice President - Franchise Operations
</TABLE>
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<PAGE> 12
Executive officers are chosen by and serve at the discretion of the
Board of Directors of the Company. Executive officers will devote their full
time to the affairs of the Company. See "Election of Directors" for
information with respect to Michael A. Leven and Neal K. Aronson.
David E. Shaw, Sr. Mr. Shaw has been Executive Vice President,
Administration of the Company since October 1995. From January 1991 to
September 1995 he was Vice President of Operations Administration for Holiday
Inn Worldwide in Atlanta, Georgia. From July 1990 to January 1991, Mr. Shaw
was Executive Vice President, Administration for Hospitality Franchise Systems,
Inc. (now known as HFS Incorporated) in Wayne, New Jersey.
Steven Romaniello. Mr. Romaniello has been Executive Vice President,
Franchise Sales and Development of the Company since October 1996. From
October 1995 through September 1996, he served as Senior Vice President,
Franchise Sales and Development of the Company. From March 1991 through
September 1995, Mr. Romaniello was Vice President, Franchise Sales and Services
for Holiday Inn Worldwide in Atlanta, Georgia. From December 1988 to March
1991 he was Regional Vice President, Franchise Sales for Days Inn of America,
Inc. in Atlanta, Georgia and in Boston, Massachusetts.
James Darby. Mr. Darby has been Executive Vice President-Franchise
Operations of the Company since January 1997. From March 1991 to January 1997,
Mr. Darby served in various capacities with Holiday Inn Worldwide, including
most recently as Vice President of Franchise Services and Administration.
EXECUTIVE COMPENSATION
The following table provides certain summary information for the fiscal
years ended December 31, 1996 and 1995 concerning compensation paid or accrued
by the Company to or on behalf of the Company's Chief Executive Officer and the
other executive officers of the Company whose total annual salary and bonus
exceeded $100,000 during the year ended December 31, 1996 (the "Named Executive
Officers").
<TABLE>
<CAPTION>
Summary Compensation Table
LONG TERM
Annual Compensation COMPENSATION
-------------------------------------------------- ------------
OTHER NUMBER OF
NAME AND ANNUAL OPTIONS
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION AWARDED
- ------------------ ---- ------ ----- ------------ -------
<S> <C> <C> <C> <C> <C>
Michael A. Leven . . . . . . 1996 $375,000 $140,497 $33,327 --
Chairman of the Board, 1995(1) 93,750 153,000(2)(3) 3,000 --
President and Chief Executive
Officer
Neal K. Aronson . . . . . . . 1996 $200,000 $ 70,298 $11,517 --
Executive Vice President and 1995(1) 50,000 151,500(2)(3) 2,250 --
Chief Financial Officer
David E. Shaw, Sr. . . . . . 1996 $150,000 $ 25,000 $ 2,316 3,000
Executive Vice President - 1995(1) 37,500 -- -- --
Administration
Steven Romaniello . . . . . . 1996 $101,667 $213,600 $ 2,316 6,000
Executive Vice President - 1995(1) 25,000 3,600 -- --
Franchise Sales and
Development
</TABLE>
-10-
<PAGE> 13
- ----------------------------
(1) Includes the period from August 28, 1995, the date of the Company's
inception, through December 31, 1995.
(2) Mr. Leven and Mr. Aronson each received a transaction bonus of $150,000
for their efforts in organizing the Company and successfully
negotiating and completing the acquisition of the Microtel brand hotels
on behalf of the Company.
(3) Mr. Leven and Mr. Aronson, pursuant to the terms of their respective
employment agreements with the Company, are each entitled to receive
bonuses based upon the number of franchises sold each year. See
"-Employment Agreements." During 1995, neither Mr. Leven nor Mr.
Aronson received a bonus for the three franchises sold during 1995,
although the Company accrued $3,000 and $1,500 for bonuses owed to Mr.
Leven and Mr. Aronson, respectively, with respect to such franchise
agreements.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with Messrs. Leven and
Aronson, the material terms of which are described below.
Michael A. Leven. Mr. Leven's employment agreement with the Company provides
for his employment as Chairman of the Board of Directors, President and Chief
Executive Officer of the Company for a ten year term expiring on September 30,
2005. Mr. Leven is entitled to a base salary of at least $375,000 per year,
subject to annual cost of living increases and other annual increases
determined by the Company based on the performance of Mr. Leven and the Company
and on prevailing economic circumstances.
Certain insurance benefits, if available on commercially reasonable terms,
are to be provided to Mr. Leven under his Employment Agreement, including term
life insurance in the amount of $1,500,000, executive health, dental and
medical insurance, long term disability and long term home care. The Company
has obtained all of the foregoing benefits for Mr. Leven. In addition, Mr.
Leven is entitled to a monthly automobile allowance in the amount of $1,000.
Mr. Leven's employment agreement provides for a performance bonus of (i)
$1,000 for each franchise agreement executed in a given Year (defined as each
12 month period commencing October 1st and ending on September 30th of each
year during the term of such agreement) up to 150 franchise agreements and (ii)
$2,000 for each franchise agreement above the first 150 franchise agreements
entered into in a given Year.
Mr. Leven's employment agreement also contains confidentiality provisions
that prohibit him from disclosing Company trade secrets at any time in the
future and from disclosing any confidential information relating to the Company
for a period extending five years after the termination of his employment
agreement. In addition, the agreement contains non- competition provisions that
prohibit Mr. Leven from competing in the franchising business generally and in
the business of franchising, operating or managing of hotels and motels for a
period of five years following the termination of his employment for "cause" or
his resignation without "good reason." The enforceability of these
non-disclosure and non- competition provisions under Georgia law, which governs
Mr. Leven's agreement, is uncertain.
In addition to allowing Mr. Leven to resign at any time for "good reason,"
his employment agreement provides that, after the first five years of such
agreement and provided the redeemable preferred stock sold to Mr. Leven has
been redeemed, Mr. Leven may resign at any time upon six months notice. If his
resignation is without "good reason," the Company is required to pay Mr. Leven
only his base salary, unused vacation time, and performance bonus actually
earned through the effective date of resignation. The employment
-11-
<PAGE> 14
agreement further provides that if Mr. Leven resigns without good reason during
the first five years, he will not be liable for any consequential damages or
damages for loss of economic opportunity or profits to the Company. If Mr.
Leven resigns for "good reason," or if his employment is terminated "without
cause," he is entitled to severance pay in accordance with the terms of his
employment agreement. For the purpose of Mr. Leven's employment agreement,
"good reason" includes, but is not limited to, the failure to elect and
continue Mr. Leven's membership on the Board of Directors of the Company or his
involuntary relocation outside of Atlanta, Georgia. In addition, pursuant to
the Company's By-Laws, Mr. Leven's employment agreement may not be terminated
without the approval of 75% of the Board of Directors (excluding Mr. Leven).
Neal K. Aronson. Mr. Aronson's employment agreement, pursuant to which he
serves as Chief Financial Officer of the Company, is substantially similar to
Mr. Leven's agreement, except that (i) his base salary is $200,000 per year,
(ii) the term life insurance benefit is $500,000, (iii) his automobile
allowance is $750 per month, (iv) the bonus is $500 for each franchise
agreement executed within a Year (as defined above) up to 150 franchise
agreements, and $1,000 for each agreement executed in any Year in excess of 150
and (v) Mr. Aronson is not entitled to receive long-term disability or
long-term home care insurance coverage from the Company. Pursuant to the
Company's By-Laws, Mr. Aronson's employment agreement may not be terminated
without the approval of 75% of the Board of Directors (excluding Mr. Aronson).
See "Security Ownership Of Certain Beneficial Owners and Management
- --Management's Shares of Common Stock" as to the effect of termination of
employment on the Class A Common Stock held by Messrs. Leven and Aronson.
COMPENSATION OF DIRECTORS
On October 24, 1996 each non-employee director of the Company received
an option to purchase 2,000 shares of Class A Common Stock exercisable at a
price of $13.50 per share. In addition, each non-employee director of the
Company receives an automatic grant of options to purchase 2,000 shares of
Class A Common Stock on January 1st of each calendar year, commencing on
January 1, 1998.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board of Directors is currently
comprised of Michael A. Leven, Irwin Chafetz and Jeffrey A. Sonnenfeld. With
the exception of Mr. Leven, who serves as Chairman of the Board, President and
Chief Executive Officer of the Company, none of the members of the Compensation
Committee served as an officer or employee of the Company or any of its
subsidiaries during fiscal 1996. There were no material transactions between
the Company and any of the members of the Compensation Committee during fiscal
1996.
Michael A. Leven, the Chairman of the Board and Chief Executive
Officer of the Company, serves as a director of Starwood Lodging Trust. Barry
S. Sternlicht, a director of the Company, serves as Chairman of the Board of
Starwood Lodging Trust.
STOCK OPTION PLANS
1996 Stock Option Plan. On September 27, 1996, the Board of Directors
of the Company (the "Board") adopted, subject to the approval of the Company's
stockholders, the U.S. Franchise Systems, Inc. 1996 Stock Option Plan (the
"Option Plan"). The Company's stockholders approved the Option Plan on
-12-
<PAGE> 15
October 11, 1996. The purpose of the Option Plan is to promote the interests
of the Company and its stockholders by (i) attracting and retaining exceptional
officers and other key employees of the Company and its subsidiaries, and
consultants, advisors and others whose skills would be an asset to the Company
or any of its subsidiaries; (ii) motivating such individuals by means of
performance-related incentives to achieve long-range performance goals; and
(iii) enabling such individuals to participate in the long-term growth and
financial success of the Company. Any officer or other key employee of the
Company or any of its subsidiaries who is not a member of the committee that
administers the Option Plan (the "Option Committee") shall be eligible to
participate under the Option Plan. The Option Plan authorizes the grant of
awards to participants of a maximum of 325,000 shares of the Company's Class A
Common Stock, which maximum number is subject to adjustment in certain
circumstances to prevent dilution or enlargement.
Directors Plan. On September 27, 1996, the Board of Directors adopted,
subject to the approval of the Company's stockholders, the U.S. Franchise
Systems, Inc. 1996 Stock Option Plan for Non-Employee Directors (the "Directors
Plan"). The Directors Plan was approved by the Company's stockholders on
October 11, 1996. The purpose of the Directors Plan is to secure for the
Company the benefits of the additional incentive inherent in the ownership of
Shares by non-employee directors of the Company and to help the Company secure
and retain the services of such non-employee directors. The Directors Plan is
intended to be a self-governing formula plan. To this end, the Directors Plan
requires minimal discretionary action by any administrative body with regard to
any transaction under the Directors Plan. To the extent, if any, that questions
of administration arise, such issues will be resolved by the Board of
Directors. Eligible persons under the Directors Plan are directors of the
Company who are not employees of the Company or any affiliate of the Company
("Outside Directors"). A maximum of 125,000 shares of Class A Common Stock
has been reserved by the Company for issuance pursuant to options under the
Directors Plan, which number is subject to adjustment in certain circumstances
in order to prevent dilution or enlargement. On October 24, 1996, each Outside
Director was granted an option to purchase 2,000 shares of Class A Common
Stock. Thereafter, each person who is an Outside Director as of January 1st of
each calendar year beginning January 1, 1998 during the term of the Directors
Plan shall receive an option to purchase 2,000 shares of Class A Common Stock
as of such date. All options granted under the Directors Plan shall be
"nonqualified" stock options subject to the provisions of section 83 of the
Code.
The following table provides certain information concerning individual
grants of stock options under the Company's Option Plan made during the year
ended December 31, 1996 to the Named Executive Officers:
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
---------------------------------
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
% OF TOTAL VALUE AT ASSUMED ANNUAL
OPTIONS EXERCISE RATES OF STOCK PRICE
GRANTED TO OR BASE APPRECIATION FOR
OPTIONS EMPLOYEES IN PRICE OPTION TERM(1)
GRANTED FISCAL ($ PER EXPIRATION -----------------------
NAME (#) YEAR SHARE) DATE 5% 10%
---- --------- ---------- ------ ---------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Michael A. Leven . . . -- -- -- -- -- --
Neal K. Aronson . . . . -- -- -- -- -- --
David E. Shaw, Sr. . . 3,000(2) 2.2 $13.50 10/25/03 $16,488 $38,423
Steven Romaniello . . . 6,000(3) 4.3 $13.50 10/25/03 $32,975 $76,846
</TABLE>
-13-
<PAGE> 16
- --------------------------
(1) The dollar amounts under these columns represent the potential realizable
value of each grant of option assuming that the market price of the
Company's Common Stock appreciates in value from the date of grant at the
5% and 10% annual rates prescribed by the SEC and therefore are not
intended to forecast possible future appreciation, if any, of the price of
the Company's Common Stock.
(2) Options vest in increments of 25% per year commencing on October 25, 1997.
(3) Options vest in increments of 25% per year commencing on October 25, 1997.
Does not include options to purchase 3,000 shares of Common Stock granted
during fiscal 1996 to Mr. Romaniello's wife, who serves as the Company's
Director of Franchise Administration.
The following table provides certain information concerning options
exercised during fiscal 1996 and the value of unexercised options held by the
Named Executive Officers under the Company's Option Plan as of December 31,
1996. No stock options were exercised by the Named Executive Officers and
there were no SARs outstanding during fiscal 1996.
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED OPTIONS VALUE OF UNEXERCISED IN-THE-MONEY
AT FISCAL YEAR END OPTIONS AT FISCAL YEAR-END (A)
----------------------------------- --------------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Michael A. Leven . . . . . . . . . . -- -- -- --
Neal K. Aronson . . . . . . . . . . . -- -- -- --
David E. Shaw, Sr. . . . . . . . . . -- 3,000 -- --
Steven Romaniello . . . . . . . . . . -- 6,000 -- --
- ---------------------------
</TABLE>
(a) Dollar values were calculated by determining the difference between the
closing price of the Common Stock on December 31, 1996 as reported on the
Nasdaq National Market ($10.13 per share) and the exercise price of the
options.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TRANSACTIONS ENTERED INTO IN CONNECTION WITH THE OFFERING
Reclassification. In connection with the Company's initial public offering
in October 1996 (the "Offering"), the Company effected a reclassification (the
"Reclassification") of its common stock outstanding prior to the Offering (the
"Old Common Stock"). Pursuant to the Reclassification, each share of Old
Common Stock was converted into 9.67 shares of Class A Common Stock. Also in
connection with the Offering, pursuant to the 1996 Amendment (see "Security
Ownership of Certain Beneficial Owners and Management--Management's Shares of
Common Stock"), Mr. Leven, his wife, Andrea Leven, and Mr. Aronson exchanged
2,707,919 shares of Class A Common Stock held directly by them (which shares do
not include those shares of Class A Common Stock that continue to be held as
Restricted Shares (as defined herein) pursuant to the 1996 Amendment) for the
same number of shares of Class B Common Stock.
-14-
<PAGE> 17
Voting. Simultaneously with the completion of the Offering, Mr. Leven
entered into a voting agreement with his wife, Andrea, pursuant to which she
granted him the right to vote all of the 233,032 shares of Class A Common Stock
and all of the 770,801 shares of Class B Common Stock owned by her following
the Offering. At the same time, Mr. Leven entered into a voting agreement with
Mr. Aronson, pursuant to which Mr. Aronson granted Mr. Leven the right to vote
111,347 shares of his Class A Common Stock and 311,007 shares of his Class B
Common Stock. Mr. Aronson will continue to vote the remaining 1,198,466 shares
of his Class B Common Stock. As a result of these agreements, Mr. Leven will
vote a total of 942,430 shares of Class A Common Stock and 1,509,473 shares of
Class B Common Stock, which shares together represent approximately 43.4% of
the total outstanding voting power of the Company.
Messrs. Leven and Aronson have the right to vote a total of 1,773,523
shares of Class A Common Stock and 2,707,919 shares of Class B Common Stock,
which represents approximately 78% of the outstanding voting power of the
Common Stock. Accordingly, Messrs. Leven and Aronson will be able to (i) elect
all of the Company's directors, (ii) amend the Certificate of Incorporation
with respect to most matters, (iii) effect a merger, sale of assets or other
major corporate transaction, (iv) defeat an unsolicited takeover attempt and
(v) generally direct the affairs of the Company. However, Mr. Leven and Mr.
Aronson do not have any agreements or other obligations to vote together on
matters involving the Company. See "Security Ownership of Certain Beneficial
Owners and Management--Management's Shares of Common Stock".
Restated Stockholders' Agreement. Simultaneously with the closing of the
Offering, the Company amended and restated the Old Stockholders' Agreement that
was entered into with the Original Investors in connection with the initial
capitalization of the Company (the "Restated Stockholders' Agreement"). The
purpose of the amendment was to remove certain voting and corporate governance
provisions that were determined to be more suitable for a private company,
including provisions (i) restricting the transfer of shares of Old Common
Stock, (ii) authorizing each of the Original Investors to cause the Company's
remaining stockholders to sell their interests in the Company in certain
circumstances, (iii) that generally prohibited Messrs. Leven and Aronson from
transferring their shares of Old Common Stock for a three-year period ending in
September 1998 and (iv) granting the Original Investors preemptive rights in
certain circumstances. The Restated Stockholders' Agreement continues only to
grant the Original Investors certain piggy-back registration rights, although
such rights are not exercisable until 20% of the Company's outstanding Common
Stock has been registered under the Securities Act, and the right to cause the
Company to file a registration statement under the Securities Act on one
occasion, commencing September 29, 2000.
1996 Amendment. See "Security Ownership of Certain Beneficial Owners and
Management--Management's Shares of Common Stock--1996 Amendment" for a
description of amendments to Messrs. Leven's and Aronson's Old Stock Purchase
Agreements and those of certain other executive officers of the Company.
MISCELLANEOUS
In consideration for their efforts in organizing the Company and
negotiating and consummating the Microtel Acquisition, Messrs. Leven and
Aronson each received a bonus of $150,000 from the Company.
The Company has obtained $15 million of key man life insurance on the life
of Mr. Leven.
To date, the Company has invested approximately $7,000 in the general
partner of Equity Partners, L.P., a limited partnership which invests from time
to time in certain Microtel and Hawthorn Suites franchisees with a successful
track record of multi-unit development. Dean Adler, a director of the Company,
owns a profits interest in CMS Entrepreneurial Associates, L.P., one of the
limited partners of Equity Partners, L.P.
-15-
<PAGE> 18
STOCKHOLDER RETURN PERFORMANCE GRAPH
Set forth below is a line graph comparing the percentage change in the
cumulative total stockholder return on the Company's Class A Common Stock
against the cumulative total return of the Nasdaq Stock Market Index and the
S&P Lodging - Hotels Index for the period commencing on October 25, 1996 (the
date of the Company's initial public offering of Class A Common Stock) and
ending December 31, 1996 (the "Measuring Period"). The graph assumes that the
value of the investment in the Company's Class A Common Stock and each index
was $100 on October 25, 1996. The change in cumulative total return is
measured by dividing (i) the sum of (a) the cumulative amount of dividends for
the Measuring Period, assuming dividend reinvestment, and (b) the change in
share price between the beginning and end of the Measuring Period, by (ii) the
share price at the beginning of the Measuring Period. The Company has not paid
any cash dividends.
COMPARISON OF CUMULATIVE TOTAL RETURN AMONG
U.S. FRANCHISE SYSTEMS, INC., NASDAQ STOCK MARKET INDEX AND
S&P LODGING - HOTELS INDEX
<TABLE>
<CAPTION>
October 25, 1996 December 31, 1996
<S> <C> <C>
US Franchise Systems $100 $ 75
NASDAQ Stock Market Index $100 $106
S&P Lodging-Hotels Index $100 $ 95
</TABLE>
ASSUMES $100 INVESTED ON OCTOBER 25, 1996 IN U.S. FRANCHISE SYSTEMS, INC.
CLASS A COMMON STOCK, NASDAQ STOCK MARKET INDEX AND
S&P LODGING - HOTELS INDEX
-16-
<PAGE> 19
REPORT OF BOARD OF DIRECTORS ON EXECUTIVE COMPENSATION
During the year ended December 31, 1996, the Board of Directors was
responsible for: (i) setting the Company's compensation philosophy and
policies; (ii) setting the terms and the administration of compensation plans
for officers of the Company; (iii) review and approval of pay recommendations
for the executive officers of the Company; and (iv) initiation of all
compensation actions for the Chief Executive Officer of the Company.
The Company's compensation policies have been designed to align the
financial interests of the Company's management with those of its stockholders,
and reflect the nature of the Company by taking into account the Company's
operating environment and the expectations for growth and future profitability.
Compensation for each of the Company's executive officers consists of a base
salary, discretionary performance bonus and, in some cases, stock options. The
Company does not currently provide executive officers with other long term
incentive compensation other than the ability to contribute their earnings to
the Company's 401(k) Plan.
The Board's philosophy is that a significant portion of an executive's
compensation should be based directly upon performance bonuses. The Board
believes that providing executives with cash bonuses based on the performance
of the Company as well as with the opportunities to acquire significant stakes
in the growth and prosperity of the Company, while maintaining other elements
of the Company's compensation program at conservative levels, will enable the
Company to attract and retain executives with the outstanding management
abilities and entrepreneurial spirit which are essential to the Company's
ongoing success. Furthermore, the Board believes that this approach to
compensation motivates executives to perform to their full potential.
At least annually, the members of the Board review salary recommendations
for the Company's executives and then approve such recommendations, with any
modifications they deem appropriate. The annual salary recommendations are
made based on evaluations of the individual executive's past and expected
future performance. Although the base compensation of the Chief Executive
Officer and of the Chief Financial Officer are set by the terms of employment
agreements entered into with such executive officers, the Board may adjust the
base salary of the Chief Executive Officer and the Chief Financial Officer
based on a review of such officers overall compensation packages and the
Board's assessment of their past performance and its expectation as to future
performance on behalf of the Company.
The members of the Board also determine, based upon discussions with
management, the annual bonus, if any, to be paid to executive officers (other
than the Chief Executive Officer and the Chief Financial Officer). The amount
of each individual bonus is determined based upon an evaluation of such factors
as individual performance, increases in the Company's revenue and market
penetration, as well as improvements in operating efficiencies. The assessment
of performance achievement is considered in relation to the maximum normal
bonus opportunity, which is paid for achieving outstanding levels of
performance. The annual performance bonus to be paid to the Chief Executive
Officer and the Chief Financial Officer is set by the terms of their respective
employment agreements. See "Executive Compensation - Employment Agreements."
The Board continually evaluates the Company's compensation policies and
procedures with respect to executives. Although the Compensation Committee
believes that current compensation policies have been successful in aligning
the financial interests of executive officers with those of the Company's
stockholders
-17-
<PAGE> 20
and with Company performance, it continues to examine what modifications, if
any, should be implemented to further link executive compensation with both
individual and Company performance.
Michael A. Leven Richard D. Goldstein
Neal K. Aronson Jeffrey A. Sonnenfeld
Dean S. Adler Barry S. Sternlicht
Irwin Chafetz
Notwithstanding anything to the contrary set forth in any of the Company's
previous filings under the Securities Act of 1933, as amended, or the Exchange
Act, that might incorporate future filings, including this Proxy Statement, in
whole or in part, the foregoing Report of Compensation Committee on Executive
Compensation and the Stockholder Return Performance Graph shall not be
incorporated by reference into any such filings.
INDEPENDENT PUBLIC ACCOUNTANTS
Deloitte & Touche LLP has served as independent auditors of the Company for
the fiscal year ended December 31, 1996 and have been selected by the Board of
Directors to serve as independent auditors of the Company for the year ending
December 31, 1997. Representatives of Deloitte & Touche LLP are expected to be
present at the shareholders' meeting and will have the opportunity to make a
statement if they desire to do so and to respond to appropriate questions.
ANNUAL REPORT ON FORM 10-K
The Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1996, as filed with the Securities and Exchange Commission, is available to
shareholders who make written request therefor to the Company's Public
Relations Department, 13 Corporate Square, Suite 250, Atlanta, Georgia 30329.
Copies of exhibits and basic documents filed with that report or referenced
therein will be furnished to shareholders of record upon request.
SHAREHOLDER PROPOSALS
Proposals of shareholders intended to be presented at the Company's 1998
annual meeting must be received at the Company's principal executive offices by
December 31, 1997 in order to be eligible for inclusion in the Company's proxy
statement and form of proxy for that meeting.
OTHER MATTERS
The Board of Directors knows of no other matters to be brought before the
annual meeting. However, if other matters should come before the annual
meeting it is the intention of the persons named in the enclosed form of Proxy
to vote the Proxy in accordance with their judgment of what is in the best
interest of the Company.
By Order of the Board of Directors,
Michael A. Leven, Chairman of the Board
Atlanta, Georgia
April 28, 1997
-18-
<PAGE> 21
APPENDIX
U.S. FRANCHISE SYSTEMS, INC.
13 Corporate Square, Suite 250
Atlanta, Georgia 30329
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS FOR THE
1997 ANNUAL MEETING OF SHAREHOLDERS.
The undersigned hereby appoints Michael A. Leven and Neal K. Aronson, or
either of them, with power of substitution to each, the proxies of the
undersigned to vote the Common Stock of the undersigned at the Annual Meeting
of Shareholders of U.S. FRANCHISE SYSTEMS, INC. to be held on Friday, May 30,
1997, at 4:00 p.m. at the Company's offices, 13 Corporate Square, Suite 250,
Atlanta, Georgia 30329, and any adjournments or postponements thereof:
1. To elect seven (7) directors for a term of one year and until their
successors are elected and have qualified.
/ / FOR all nominees listed / / WITHHOLD AUTHORITY to vote
below (except as marked for all nominees listed
to the contrary below) below.
MICHAEL A. LEVEN, NEAL K. ARONSON, DEAN S. ADLER, IRWIN
CHAFETZ, RICHARD D. GOLDSTEIN, JEFFREY A. SONNENFELD and
BARRY S. STERNLICHT
- --------------------------------------------------------------------------------
INSTRUCTION: To withhold authority to vote for any individual nominee write
that nominee's name in the space provided below.
- --------------------------------------------------------------------------------
2. To vote in accordance with their best judgement with respect to any
other matters that may properly come before the meeting and any
adjournments or postponements thereof.
<PAGE> 22
THE BOARD OF DIRECTORS FAVORS A VOTE "FOR" THE ABOVE PROPOSALS AND UNLESS
INSTRUCTIONS TO THE CONTRARY ARE INDICATED IN THE SPACE PROVIDED, THIS PROXY
WILL BE SO VOTED.
Please date and sign this Proxy exactly as name(s)
appears on the mailing label.
__________________________________________________
__________________________________________________
Print Name(s):____________________________________
NOTE: When signing as an attorney, trustee, executor,
administrator or guardian, please give your title
as such. If a corporation or partnership, give
full name by authorized officer. In the case of joint
tenants, each joint owner must sign.
Dated:____________________________________________
