<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 12, 1998
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
USFS HAWTHORN, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 7011 58-2361501
(State or other jurisdiction of (Primary Standard Industrial (IRS Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
---------------------
13 CORPORATE SQUARE, SUITE 250
ATLANTA, GEORGIA 30329
(404) 235-7444
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
NEAL K. ARONSON
PRESIDENT
USFS HAWTHORN, INC.
13 CORPORATE SQUARE, SUITE 250
ATLANTA, GEORGIA 30329
(404) 235-7444
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------------
COPY TO:
PAUL D. GINSBERG
PAUL, WEISS, RIFKIND, WHARTON & GARRISON
1285 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10019-6064
212-373-3000
---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO
PUBLIC: As soon as practicable after this Registration Statement becomes
effective and upon consummation of the Merger described in the enclosed Proxy
Statement/Prospectus.
---------------------
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number for the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
=================================================================================================================================
PROPOSED PROPOSED
AMOUNT MAXIMUM MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF TO BE OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED PER SHARE OFFERING PRICE FEE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A Common Stock, par value $0.01 per
share....................................... 9,844,972 shares(1) $10.34375(2) $101,833,929(2) $30,041.01(2)(3)
- --------------------------------------------------------------------------------------------------------------------------------
Class B Common Stock, par value $.01 per
share....................................... 2,707,919 shares(1) $ 1.54(4) $ 4,170,195(4) $ 1,230.21(4)(3)
- --------------------------------------------------------------------------------------------------------------------------------
Total......................................... $31,271.22
================================================================================================================================
</TABLE>
(1) Based upon the maximum number of shares that may be issued in the Merger
described herein.
(2) The registration fee for the securities registered hereby has been
calculated pursuant to Rule 457(f)(1) under the Securities Act as follows:
.000295 of (A) the product of (i) $10.34375, the average of the high and low
prices of U.S. Franchise Systems, Inc. Class A Common Stock reported on The
NASDAQ National Market on February 5, 1998, multiplied by (ii) 9,844,972,
the maximum number of shares of U.S. Franchise Systems, Inc. Class A Common
Stock which may be exchanged upon the consummation of the Merger.
(3) A fee of $19,770.80 was paid on behalf of U.S. Franchise Systems, Inc. with
respect to the transaction on December 19, 1997, pursuant to a filing under
Rule 14a-6(a) of a Schedule 14A. Pursuant to Rule 457(b) promulgated under
the Securities Act and Section 14(g)(1)(B) and Rule 0-11 promulgated under
the Securities Exchange Act of 1934, as amended, the amount of such
previously paid fee has been credited against the registration fee which
would otherwise be payable in connection with this filing. Accordingly, an
additional filing fee of $11,500.42 is required to be paid in connection
with this filing.
(4) The registration fee for the securities registered hereby has been
calculated pursuant to Rule 457(f)(2) under the Securities Act as follows:
.000295 of (i) the book value of U.S. Franchise Systems, Inc. Class B Common
Stock multiplied by (ii) 2,707,919, the maximum number of shares of U.S.
Franchise Systems, Inc. Class B Common Stock which may be exchanged upon the
consummation of the Merger.
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE> 2
USFG LOGO
To our Stockholders:
You are cordially invited to attend a Special Meeting of Stockholders (the
"Special Meeting") of U.S. Franchise Systems, Inc. ("USFS"), which will be held
on March 11, 1998, at 4:00 p.m., local time, at USFS's offices, 13 Corporate
Square, Suite 250, Atlanta, Georgia 30329. At the Special Meeting, you will be
asked to consider a series of proposed transactions designed to enable USFS to
acquire (the "Acquisition") the entire interest in USFS's Hawthorn Suites brand
of hotels currently owned by Hawthorn Suites Associates, an Illinois joint
venture ("HSA"), and HSA Properties, Inc., a Delaware corporation ("HPI"),
through their ownership collectively of a 99% membership interest in HSA
Properties, L.L.C., a Delaware limited liability company ("HSA LLC"). The
Acquisition will be accomplished by a merger (the "Merger") of USFS with and
into USFS Hawthorn, Inc., a newly formed Delaware corporation ("USH" or the
"Company"). USH will be the surviving corporation in the Merger. At the Special
Meeting, shareholders of USFS will be asked to approve the Merger. HOLDERS OF
SHARES OF USFS'S COMMON STOCK, INCLUDING MYSELF AND NEAL ARONSON, USFS'S
EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER, REPRESENTING 80.72% OF THE
TOTAL OUTSTANDING VOTING POWER OF USFS, HAVE INDICATED TO USFS THEIR INTENTION
TO APPROVE THE ACQUISITION AND THE MERGER. USFS has decided not to seek a
fairness opinion from an investment banking firm with respect to the
consideration being paid by it for the acquisition of HSA LLC. The terms of the
Merger and the related transactions are described in detail in the accompanying
Proxy Statement/Prospectus.
Immediately prior to the Merger, pursuant to a Contribution Agreement (the
"Contribution Agreement"), dated as of December 9, 1997, by and among HSA, HPI,
USH and USFS, HSA and HPI will transfer to USH (the "Transfer") all of their
respective membership interests in HSA LLC, on the terms, and subject to the
conditions, contained in the Contribution Agreement. Pursuant to the Transfer,
HPI will acquire 22,447 shares of Class A common stock, par value $.01 per
share, of USH (the "Company Class A Common Stock"), and HSA will acquire
2,199,775 shares of Company Class A Common Stock. The terms of the Contribution
Agreement are described in detail in the accompanying Proxy
Statement/Prospectus.
In the Merger, pursuant to the Agreement and Plan of Merger, dated as of
December 9, 1997 (the "Merger Agreement"), between USFS and USH, each share of
Class A Common Stock, par value $.01 per share, of USFS (the "USFS Class A
Common Stock"), and Class B Common Stock, par value $.01 per share, of USFS (the
"USFS Class B Common Stock" and, together with the USFS Class A Common Stock,
collectively, the "USFS Common Stock") issued and outstanding immediately prior
to the effective time of the Merger will be converted into the right to receive
one share of Company Class A Common Stock or Company Class B Common Stock, par
value $.01 per share (the "Company Class B Common Stock," and, together with the
Company Class A Common Stock, the "Company Common Stock"), as applicable. Each
share of Company Class A Common Stock issued to HSA and HPI pursuant to the
Contribution Agreement will remain outstanding following consummation of the
Merger. Company Common Stock will be identical to USFS Common Stock in all
material respects, including voting rights, dividend and liquidation
participation, pre-emptive rights and conversion rights and restrictions. The
terms of the Merger Agreement are described in detail in the accompanying Proxy
Statement/Prospectus.
YOUR BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE MERGER AND RECOMMENDS
A VOTE FOR APPROVAL OF THE MERGER. HOLDERS OF SHARES REPRESENTING A MAJORITY OF
USFS'S OUTSTANDING VOTING POWER HAVE INDICATED TO USFS THEIR INTENTION TO VOTE
IN FAVOR OF THE MERGER.
<PAGE> 3
Upon consummation of the Merger, HSA and HPI will, collectively, own
approximately 15.04% of the outstanding shares of Company Common Stock,
representing approximately 5.68% of the voting power of the outstanding shares
of Company Common Stock, while existing stockholders of USFS will own
approximately 84.96% of the outstanding shares of Company Common Stock,
representing approximately 94.32% of the voting power of the outstanding shares
of Company Common Stock (in each case based upon the number of outstanding
shares of USFS Common Stock as of the date hereof, which number is subject to
change prior to completion of the Merger). The 2,222,222 shares of Company
Common Stock to be issued to HSA and HPI in the Acquisition were valued at
$17,777,776 on the date the Merger was publicly announced (based on the closing
price of USFS's Common Stock on such date). Based on the closing price of USFS's
Common Stock as of February 6, 1998, such shares would be valued at $23,333,331.
By virtue of the Merger and the Contribution Agreement, USFS will acquire
the remaining 99% interest in HSA LLC which it does not already own. Currently,
USFS and HSA LLC are parties to the Master Franchise Agreement, dated as of
March 27, 1996 (the "Hawthorn Acquisition Agreement"), pursuant to which USFS
acquired the exclusive, worldwide rights to franchise and to control the
development and operation of the Hawthorn Suites brand of hotels. The Hawthorn
Acquisition Agreement requires that a percentage of royalties received by USFS
from the franchising of Hawthorn Suites hotels be remitted to HSA LLC and also
contains certain restrictions on USFS's operations and imposes standards
relating to the development of the Hawthorn Suites brand of hotels. Accordingly,
the Board of Directors of USFS has approved the acquisition of HSA LLC through
the Merger, the Contribution Agreement and the Shareholders Agreement referred
to below, in order to eliminate these provisions and has determined that the
terms of the Merger Agreement and the transactions contemplated thereby are fair
to, and in the best interests of, USFS and its stockholders.
In addition, in connection with the Merger, HSA, HPI, USH and I and Neal K.
Aronson, in our capacity as shareholders of USH, will enter into a Shareholders
Agreement (the "Shareholders Agreement") pursuant to which HSA and HPI will be
granted certain customary registration rights and "tag along" rights and
pursuant to which HSA and HPI will agree not to enter into certain transactions
regarding the Company's ownership or management and, for a specified period of
time and subject to certain exceptions, not to transfer the shares of Company
Class A Common Stock they will acquire under the Contribution Agreement.
Furthermore, the Shareholders Agreement will provide that one representative of
HSA will be nominated for election to the Company's Board of Directors provided
that HSA and HPI maintain a specified level of ownership in the Company. The
terms of the Shareholders Agreement are described in detail in the accompanying
Proxy Statement/Prospectus.
The attached Notice of Special Meeting and Proxy Statement/Prospectus
contain detailed information concerning the Special Meeting. Please read the
Notice and the Proxy Statement/Prospectus and consider this information
carefully.
Returning the proxy does NOT deprive you of your right to attend the
Special Meeting and to vote your shares in person with respect to the matters to
be acted upon at the Special Meeting. This solicitation is made on behalf of the
Board of Directors of USFS.
PLEASE DO NOT SEND ANY STOCK CERTIFICATES WITH YOUR PROXY CARD.
We look forward to your attendance at the Special Meeting. Thank you for
your consideration and your continued support.
Sincerely,
/s/ MICHAEL A. LEVEN
--------------------------------------
Michael A. Leven
Chairman
<PAGE> 4
U.S. FRANCHISE SYSTEMS, INC.
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON MARCH 11, 1998
TO THE STOCKHOLDERS OF
U.S. FRANCHISE SYSTEMS, INC.:
Notice is hereby given that a Special Meeting of Stockholders of U.S.
Franchise Systems, Inc., a Delaware corporation ("USFS"), will be held on March
11, 1998, 4:00 p.m., local time, at USFS's offices, 13 Corporate Square, Suite
250, Atlanta, Georgia 30329 for the following purposes:
(i) To consider and vote upon the approval of the Agreement and Plan
of Merger, dated as of December 9, 1997 (the "Merger Agreement"), between
USFS Hawthorn, Inc., a Delaware corporation (the "Company" or "USH"), and
USFS, that provides for the merger of USFS with and into the Company (the
"Merger"). After the effective time of the Merger, the Company will be the
surviving corporation.
(ii) To transact such other business as may properly come before the
Special Meeting or any adjournment or postponement thereof. USFS does not
currently intend to bring any business other than the approval of the
Merger Agreement and the Merger before the Special Meeting or any
adjournments or postponements thereof.
The Merger is to be effected in connection with a series of transactions
designed to enable USFS to acquire the entire interest in USFS's Hawthorn Suites
brand of hotels currently owned by Hawthorn Suites Associates, an Illinois joint
venture ("HSA"), and HSA Properties, Inc., a Delaware corporation ("HPI"),
through their ownership collectively of a 99% membership interest in HSA
Properties, L.L.C., a Delaware limited liability company ("HSA LLC").
Immediately prior to the Merger, pursuant to a Contribution Agreement (the
"Contribution Agreement"), dated as of December 9, 1997, by and among HSA, HPI,
USH and USFS, HSA and HPI will transfer to USH (the "Transfer") all of their
respective membership interests in HSA LLC, on the terms, and subject to the
conditions, contained in the Contribution Agreement. Pursuant to the Transfer,
HPI will acquire 22,447 shares of Class A common stock, par value $.01 per
share, of the Company (the "Company Class A Common Stock"), and HSA will acquire
2,199,775 shares of Company Class A Common Stock. The terms of the Contribution
Agreement are described in detail in the accompanying Proxy
Statement/Prospectus.
In the Merger, each share of Class A Common Stock, par value $.01 per share
of USFS (the "USFS Class A Common Stock"), and Class B Common Stock, par value
$.01 per share, of USFS (the "USFS Class B Common Stock" and, together with the
USFS Class A Common Stock, the "USFS Common Stock") issued and outstanding
immediately prior to the effective time of the Merger will be converted into the
right to receive one share of Company Class A Common Stock or Class B common
stock, par value $.01 per share of USH (the "Company Class B Common Stock" and
together with the Company Class A Common Stock, collectively, the "Company
Common Stock"), respectively. Each share of Company Class A Common Stock issued
to HSA and HPI pursuant to the Contribution Agreement will remain outstanding
following consummation of the Merger. Company Common Stock is identical to USFS
Common Stock in all material respects, including voting rights, dividend and
liquidation participation, pre-emptive rights and conversion rights and
restrictions. The terms of the Merger and the Merger Agreement are described in
detail in the accompanying Proxy Statement/Prospectus.
Upon consummation of the Merger, HSA and HPI will, collectively, own
approximately 15.04% of the outstanding shares of Company Common Stock,
representing approximately 5.68% of the voting power of the outstanding shares
of Company Common Stock, while existing stockholders of USFS will own
approximately 84.96% of the outstanding shares of Company Common Stock,
representing approximately 94.32% of the voting power of the outstanding shares
of Company Common Stock (in each case based upon the number of outstanding
shares of USFS Common Stock as of the date hereof, which number is subject to
change prior to
<PAGE> 5
completion of the Merger). The 2,222,222 shares of Company Common Stock to be
issued to HSA and HPI in the Acquisition were valued at $17,777,776 on the date
the Merger was publicly announced (based on the closing price of USFS's Common
Stock on such date). Based on the closing price of USFS's Common Stock as of
February 6, 1998, such shares would be valued at $23,333,331.
By virtue of the Merger and the Contribution Agreement, USFS will acquire
the remaining 99% interest in HSA LLC which it does not already own. Currently,
USFS and HSA LLC are parties to a Master Franchise Agreement, dated as of March
27, 1996 (the "Hawthorn Acquisition Agreement"), pursuant to which USFS acquired
the exclusive, worldwide rights to franchise and to control the development and
operation of the Hawthorn Suites brand of hotels. The Hawthorn Acquisition
Agreement requires that a percentage of royalties received by USFS from the
franchising of Hawthorn Suites hotels be remitted to HSA LLC and also contains
certain restrictions on USFS's operations and imposes standards relating to the
development of the Hawthorn Suites brand of hotels. The Board of Directors of
USFS has approved the acquisition of HSA LLC through the Merger, the
Contribution Agreement and the Shareholders Agreement referred to below, in
order to eliminate these provisions.
In addition, in connection with the Merger, HSA, HPI, USH and I and Neal K.
Aronson, in our capacity as shareholders of USH, will enter into a Shareholders
Agreement (the "Shareholders Agreement") pursuant to which HSA and HPI will be
granted certain customary registration rights and "tag along" rights and
pursuant to which HSA and HPI will agree not to enter into certain transactions
regarding the Company's ownership or management and, for a specified period of
time and subject to certain exceptions, not to transfer the shares of Company
Class A Common Stock they will acquire under the Contribution Agreement.
Furthermore, the Shareholders Agreement will provide that one representative of
HSA will be nominated for election to the Company's Board of Directors provided
that HSA and HPI maintain a specified level of ownership in the Company. The
terms of the Shareholders Agreement are described in detail in the accompanying
Proxy Statement/Prospectus.
Only stockholders of record at the close of business on January 30, 1998
are entitled to notice of, and to vote at, the Special Meeting and any
adjournments or postponements thereof.
THE BOARD OF DIRECTORS OF USFS HAS UNANIMOUSLY APPROVED THE MERGER AND
BELIEVES THAT THE TERMS OF THE MERGER ARE FAIR TO, AND IN THE BEST INTERESTS OF,
USFS AND ITS STOCKHOLDERS. THE BOARD OF DIRECTORS OF USFS RECOMMENDS UNANIMOUSLY
THAT USFS STOCKHOLDERS VOTE FOR APPROVAL OF THE MERGER AGREEMENT AND THE MERGER
AT THE SPECIAL MEETING. HOLDERS OF SHARES REPRESENTING A MAJORITY OF USFS'S
OUTSTANDING VOTING POWER HAVE INDICATED TO USFS THEIR INTENTION TO VOTE IN FAVOR
OF THE MERGER.
Holders of USFS Common Stock are not entitled to rights of appraisal or
other dissenter's rights under Delaware law with respect to the Merger or any
transactions contemplated by the Merger Agreement.
The accompanying Proxy Statement/Prospectus describes in detail the Merger
and the transactions contemplated by the Merger Agreement and the Contribution
Agreement and contains certain other information regarding USFS and the Company.
Please read the Proxy Statement/Prospectus carefully and then complete, sign and
date the enclosed proxy card and return it promptly in the enclosed
self-addressed postage prepaid reply envelope whether or not you plan to attend
the Special Meeting.
By Order of the Board of Directors,
/s/ MICHAEL A. LEVEN
--------------------------------------
Michael A. Leven
Chairman of the Board
February 13, 1998
<PAGE> 6
---------------------
ALL STOCKHOLDERS ARE CORDIALLY INVITED TO ATTEND THE SPECIAL MEETING IN
PERSON. WHETHER OR NOT YOU PLAN TO ATTEND, PLEASE MARK, SIGN, DATE AND RETURN
THE ENCLOSED PROXY CARD PROMPTLY IN THE ENCLOSED POSTAGE PREPAID REPLY ENVELOPE.
YOU MAY VOTE IN PERSON AT THE SPECIAL MEETING EVEN IF YOU HAVE PREVIOUSLY
RETURNED A PROXY CARD.
---------------------
PLEASE DO NOT SEND ANY STOCK CERTIFICATES WITH YOUR PROXY CARD.
<PAGE> 7
PROXY STATEMENT/PROSPECTUS
USFG LOGO
---------------------
PROXY STATEMENT FOR SPECIAL MEETING OF STOCKHOLDERS
OF U.S. FRANCHISE SYSTEMS, INC. TO BE HELD ON MARCH 11, 1998
---------------------
PROSPECTUS OF USFS HAWTHORN, INC.
9,844,972 SHARES OF CLASS A COMMON STOCK, PAR VALUE $.01 PER SHARE
2,707,919 SHARES OF CLASS B COMMON STOCK, PAR VALUE $.01 PER SHARE
---------------------
This Proxy Statement/Prospectus ("Proxy Statement/Prospectus") is being
furnished to the stockholders of U.S. Franchise, Systems, Inc., a Delaware
corporation ("USFS"), in connection with the solicitation of proxies by the
Board of Directors of USFS (the "Board") for use at the Special Meeting of
Stockholders of USFS to be held on March 11, 1998 at 4:00 p.m., local time, at
USFS's offices, 13 Corporate Square, Suite 250, Atlanta, Georgia 30329, or any
adjournments or postponements thereof (the "Special Meeting").
At the Special Meeting, holders of shares of Class A Common Stock, par
value $.01 per share, of USFS ("USFS Class A Common Stock"), and holders of
Class B Common Stock, par value $.01 per share, of USFS ("USFS Class B Common
Stock" and, together with the USFS Class A Common Stock, collectively, the "USFS
Common Stock") will vote upon a proposal to approve the Agreement and Plan of
Merger dated as of December 9, 1997 (the "Merger Agreement"), between USFS and
USFS Hawthorn, Inc., a Delaware corporation ("USH"), pursuant to which USFS will
merge with and into USH (the "Merger"). USH will be the surviving corporation of
the Merger. The term "the Company," when used in this Proxy Statement/
Prospectus refers to USFS before the Merger and, following the completion of the
Merger, to USH as the surviving corporation in the Merger and as the successor
to the business of USFS.
The Merger is to be effected in connection with the series of transactions
(the "Merger Transactions") designed to enable USFS to acquire the entire
interest in USFS's Hawthorn Suites brand of hotels currently owned by Hawthorn
Suites Associates, an Illinois joint venture ("HSA"), and HSA Properties, Inc.,
a Delaware corporation ("HPI"), through their ownership collectively of a 99%
membership interest in HSA Properties, L.L.C., a Delaware limited liability
company ("HSA LLC"). USFS currently owns the remaining 1% membership interest in
HSA LLC. Immediately prior to the Merger, pursuant to a Contribution
(continued on next page)
---------------------
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY INVESTORS
IN EVALUATING THE MERGER AND THE SECURITIES OFFERED HEREBY, SEE "RISK FACTORS,"
BEGINNING ON PAGE 18>.
---------------------
This Proxy Statement/Prospectus also constitutes the prospectus for the
shares of Company Common Stock to be issued in the Merger. USH has filed a
Registration Statement on Form S-4 (together with any amendments thereto, the
"Registration Statement") with the Securities and Exchange Commission (the
"Commission") regarding the registration of such shares, of which this Proxy
Statement/Prospectus is a part.
THE SHARES OF COMPANY COMMON STOCK TO BE ISSUED IN THE MERGER HAVE NOT BEEN
APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROXY
STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
This Proxy Statement/Prospectus is first being mailed to USFS stockholders
on or about February 13, 1998.
---------------------
The date of this Proxy Statement/Prospectus is February 12, 1998.
<PAGE> 8
Agreement (the "Contribution Agreement"), dated as of December 9, 1997, by and
among HSA, HPI, USH and USFS, HSA and HPI will assign, transfer and convey to
USH (the "Transfer") all of their respective ownership interests in HSA LLC, on
the terms, and subject to the conditions, contained in the Contribution
Agreement. Pursuant to the Transfer, HPI will acquire 22,447 shares of Class A
common stock, par value $.01 per share, of USH (the "Company Class A Common
Stock"), and HSA will acquire 2,199,775 shares of Company Class A Common Stock.
In the Merger, each share of USFS Class A Common Stock and USFS Class B Common
Stock issued and outstanding immediately prior to the effective time of the
Merger will be converted into the right to receive one share of Company Class A
Common Stock or one share of Class B Common Stock, par value $.01 per share, of
USH (the "Company Class B Common Stock," and, together with the Company Class A
Common Stock, collectively, the "Company Common Stock"), respectively. Each
share of Company Class A Common Stock issued to HSA and HPI pursuant to the
Contribution Agreement will remain outstanding following consummation of the
Merger. Company Common Stock is identical to USFS Common Stock in all material
respects, including voting rights, dividend and liquidation participation,
pre-emptive rights and conversion rights and restrictions.
Upon consummation of the Merger, HSA and HPI will, collectively, own
approximately 15.04% of the outstanding shares of Company Common Stock,
representing approximately 5.68% of the aggregate voting power of the
outstanding shares of Company Common Stock, while existing stockholders of USFS
will own approximately 84.96% of the outstanding shares of Company Common Stock,
representing approximately 94.32% of the aggregate voting power of the
outstanding shares of Company Common Stock (in each case based upon the number
of outstanding shares of USFS Common Stock as of the date hereof, which number
is subject to change prior to completion of the Merger). The 2,222,222 shares of
Company Common Stock to be issued to HSA and HPI in the Acquisition were valued
at $17,777,776 on the date the Merger was publicly announced (based on the
closing price of USFS's Common Stock on such date). Based on the closing price
of USFS's Common Stock as of February 6, 1998, such shares would have been
valued at $23,333,331.
By virtue of the Merger and the Contribution Agreement, USFS will acquire
the remaining 99% interest in HSA LLC which it does not already own. Currently,
USFS and HSA LLC are parties to the Master Franchise Agreement, dated as of
March 27, 1996 (the "Hawthorn Acquisition Agreement"), pursuant to which USFS
acquired the exclusive, worldwide rights to franchise and to control the
development and operation of the Hawthorn Suites brand of hotels. The Hawthorn
Acquisition Agreement requires that a percentage of royalties received by USFS
from the franchising of Hawthorn Suites hotels be remitted to HSA LLC and also
contains certain restrictions on USFS's operations and imposes certain standards
relating to the development of the Hawthorn Suites brand of hotels. Accordingly,
the Board has approved the acquisition of HSA LLC through the Merger, the
Contribution Agreement, and the Shareholders Agreement referred to below, in
order to eliminate these provisions and has determined that the terms of the
Merger Agreement and the transactions contemplated thereby are fair to, and in
the best interests of, USFS and its stockholders.
In addition, in connection with the Merger, HSA, HPI, USH and Michael A.
Leven and Neal K. Aronson, in their capacity as stockholders of USH, will enter
into a Shareholders Agreement (the "Shareholders Agreement") pursuant to which
HSA and HPI will be granted certain customary registration rights and "tag
along" rights and pursuant to which HSA and HPI will agree not to enter into
certain transactions with regard to the Company's ownership or management and,
for a specified period of time and subject to certain exceptions, not to
transfer the shares of Company Class A Common Stock they will acquire under the
Contribution Agreement. Furthermore, the Shareholders Agreement will provide
that a representative of HSA will be nominated for election to the Company's
Board of Directors provided that HSA and HPI maintain a specified level of
ownership in the Company.
At the Special Meeting, stockholders of USFS also will be asked to consider
and vote upon such other business, if any, as may properly be brought before the
Special Meeting or any adjournments or postponements thereof. Neither USFS nor
the Board currently intends to bring any business other than the approval of the
Merger Agreement and the Merger before the Special Meeting or any adjournments
or postponements thereof. HOLDERS OF SHARES REPRESENTING APPROXIMATELY 80.72% OF
USFS'S OUTSTANDING VOTING POWER, PRINCIPALLY, MICHAEL A. LEVEN, USFS'S CHAIRMAN,
CHIEF EXECUTIVE OFFICER AND PRESIDENT, AND NEAL K. ARONSON, USFS'S EXECUTIVE
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER, HAVE INDICATED TO USFS THEIR
INTENTION TO VOTE IN FAVOR OF THE MERGER.
2
<PAGE> 9
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
AVAILABLE INFORMATION....................................... 3
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING
STATEMENTS................................................ 4
SUMMARY..................................................... 5
THE COMPANIES............................................. 5
THE SPECIAL MEETING OF STOCKHOLDERS OF USFS............... 7
THE PROPOSED MERGER AND RELATED TRANSACTIONS.............. 9
MANAGEMENT................................................ 12
COMPARATIVE MARKET PRICES AND DIVIDENDS -- USFS AND USH... 12
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA OF USFS... 14
SUMMARY OF HISTORICAL ROYALTY AND OTHER PAYMENTS.......... 15
HISTORICAL AND PRO FORMA PER SHARE DATA................... 16
RISK FACTORS................................................ 18
Limited Operating History; Net Losses..................... 18
No Rights to Certain Royalties............................ 18
Dependence On, and Obstacles to, Hotel Openings........... 18
Management, By Virtue of Ownership of Supervoting Class B
Common Stock, Will Control
The Company Following the Merger....................... 19
Management of Growth...................................... 19
Successful Completion and Integration Acquisitions........ 19
Dependence on Senior Management........................... 19
Risks Relating to Microtel Acquisition Agreement.......... 20
Competition for New Franchise Properties and Hotel
Guests................................................. 20
General Risks of the Lodging Industry..................... 21
Development and Ownership Risk............................ 21
Risks Relating to the Financing of Franchisees............ 22
Regulation................................................ 22
Mandatory Redemption of Subordinated Debentures........... 22
Absence of Dividends...................................... 22
Anti-Takeover Devices..................................... 23
Certain Federal Income Tax Consequences................... 23
Limited Trading Volume of Common Stock.................... 23
THE COMPANY................................................. 24
General................................................... 24
Recent Developments....................................... 25
Business Strategy......................................... 25
The Hotel Franchising and Lodging Industries.............. 26
The Company's Lodging Franchise Systems................... 26
Franchise Agreements...................................... 31
Acquisition of the Microtel and Hawthorn Suites Systems... 32
Seasonality............................................... 34
Competition............................................... 34
Regulation................................................ 35
Employees................................................. 35
Trademarks and Licenses................................... 35
Properties................................................ 36
Legal Proceedings......................................... 36
USFS Hawthorn, Inc........................................ 36
HSA Properties, LLC....................................... 36
</TABLE>
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<TABLE>
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<S> <C>
THE SPECIAL MEETING......................................... 37
General................................................... 37
Matters to Be Considered.................................. 37
Vote Required............................................. 37
Record Date; Proxies...................................... 38
Solicitation of Proxies................................... 38
THE PROPOSED MERGER AND RELATED TRANSACTIONS................ 39
General................................................... 39
Background of the Merger and the Merger Transactions...... 39
USFS's Reasons for the Merger; Recommendation of USFS's
Board of Directors..................................... 40
Effective Time............................................ 41
Conversion of Shares of USFS Common Stock................. 42
Certain Federal Income Tax Consequences................... 42
Accounting Treatment...................................... 43
Resale of Company Common Stock by Affiliates.............. 43
Regulatory Approvals...................................... 43
NASDAQ National Market.................................... 44
Management of the Company After the Merger................ 44
Operations of the Company................................. 44
THE MERGER AGREEMENT AND RELATED AGREEMENTS................. 45
Conversion of Securities.................................. 45
Contribution Agreement.................................... 45
Exchange Procedures....................................... 47
Distributions with Respect to Unexchanged Shares.......... 48
No Further Rights in USFS Common Stock.................... 48
USFS Stock Options........................................ 48
Certain Representations and Warranties.................... 48
Conduct of Businesses Pending the Merger.................. 49
Conditions to Consummation of the Merger.................. 50
Termination............................................... 51
Procedure and Effect of Termination....................... 51
Fees and Expenses......................................... 51
Amendment and Waiver...................................... 51
Shareholders Agreement.................................... 52
RIGHTS OF APPRAISAL/DISSENTERS' RIGHTS...................... 54
MANAGEMENT OF THE COMPANY................................... 55
Executive Officers and Directors of the Company........... 55
Agreements Regarding Board Positions...................... 57
Executive Compensation.................................... 57
Employment Agreements..................................... 58
Compensation of Directors................................. 59
Compensation Committee Interlocks and Insider
Participation.......................................... 60
Stock Option Plans........................................ 60
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 62
Transactions Entered into in Connection with the Company's
Initial Public Offering................................ 62
Miscellaneous............................................. 63
</TABLE>
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<TABLE>
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<S> <C>
DESCRIPTION OF THE COMPANY'S CAPITAL STOCK.................. 63
Common Stock.............................................. 63
Preferred Stock........................................... 64
Certain Effects of Authorized but Unissued Stock.......... 64
Delaware Law and Certain Charter and By-Law Provisions.... 64
Indemnification of Officers and Directors................. 65
PRINCIPAL HOLDERS OF COMMON STOCK........................... 67
Management's Shares of Common Stock....................... 68
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS....... 71
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET.............. 72
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS... 73
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS........... 75
SELECTED HISTORICAL FINANCIAL DATA OF USFS AND
SUBSIDIARIES.............................................. 76
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF THE COMPANY.................. 77
General................................................... 77
Results of Operations..................................... 77
Liquidity and Capital Resources........................... 83
Seasonality............................................... 84
Inflation................................................. 84
CAPITALIZATION OF THE COMPANY............................... 85
LEGAL MATTERS............................................... 85
EXPERTS..................................................... 85
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS.................. F-1
Appendix A -- Agreement and Plan of Merger dated December 9, 1997
Appendix B-1 -- Contribution Agreement dated December 9, 1997
Appendix B-2 -- Form of Shareholders Agreement
Appendix C -- Form of Short-Form Tax Opinion of Paul, Weiss,
Rifkind, Wharton & Garrison
</TABLE>
iii
<PAGE> 12
LIST OF DEFINED TERMS
<TABLE>
<CAPTION>
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<S> <C>
1996 Amendment.............................................. 69
ADR......................................................... 26
AH&MA....................................................... 57
Amended Stock Purchase Agreements........................... 69
Aronson..................................................... 52
Assignors................................................... 45
Best hotels................................................. 6
Board....................................................... cover
Certificates................................................ 47
Closing Date................................................ 41
CMS......................................................... 56
Code........................................................ 11
Commission.................................................. cover
Company..................................................... cover
Company Board............................................... 60
Company Class A Common Stock................................ 2
Company Class B Common Stock................................ 2
Company Common Stock........................................ 2
Consent Termination......................................... 51
Contribution Agreement...................................... 2
CSC......................................................... 28
Debentures.................................................. 22
Designated Holder........................................... 52
DGCL........................................................ 10
Directors Plan.............................................. 60
Effective Time.............................................. 9
Equity Interests............................................ 45
Exchange Act................................................ 3
Exchange Agent.............................................. 47
Fees........................................................ 79
FTC......................................................... 22
GDS......................................................... 28
Hawthorn Acquisition Agreement.............................. 2
Hawthorn Suites............................................. 5
HPI......................................................... cover
HSA......................................................... cover
HSA LLC..................................................... cover
HSA LLC Agreement........................................... 45
HSR Act..................................................... 47
Hudson...................................................... 18
Hyatt....................................................... 28
Indemnification Agreements.................................. 66
Intellectual Property....................................... 6
Leven....................................................... 52
Lockup Period............................................... 52
Losses...................................................... 66
Merger...................................................... cover
Merger Agreement............................................ cover
Merger Transactions......................................... cover
Microtel.................................................... 5
Microtel Acquisition........................................ 32
Microtel Acquisition Agreement.............................. 18
</TABLE>
iv
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<TABLE>
<CAPTION>
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<S> <C>
Microtel Properties......................................... 33
Named Executive Officers.................................... 57
NASDAQ...................................................... 3
Offering.................................................... 62
Old Common Stock............................................ 62
Old Stock Purchase Agreements............................... 69
Option Committee............................................ 60
Option Plan................................................. 60
Optional Termination........................................ 51
Original Investors.......................................... 70
Original Issue Price........................................ 68
Outside Directors........................................... 60
Preferred Stock............................................. 64
Principal Stockholders...................................... 52
Proprietary Marks........................................... 32
Proxy Statement/Prospectus.................................. cover
Reclassification............................................ 62
Record Date................................................. 8
Redeemable Preferred Stock.................................. 82
Registration Statement...................................... cover
Restated Stockholders' Agreement............................ 62
Restricted Shares........................................... 69
Rockwood.................................................... 46
Sabre....................................................... 28
Section 262................................................. 54
Securities Act.............................................. 3
Securityholders............................................. 52
Seller...................................................... 6
Shareholders Agreement...................................... 2
Shares...................................................... 52
Special Meeting............................................. cover
Spirit...................................................... 28
Spirit System Letter........................................ 47
Starwood Capital............................................ 56
Substitute Option........................................... 48
Termination Forfeiture...................................... 70
Third Party Buyer........................................... 6
Transactions................................................ 40
Transfer.................................................... 2
UFOC........................................................ 35
Unrestricted Shares......................................... 68
USFS........................................................ cover
USFS Bylaws................................................. 12
USFS Charter................................................ 12
USFS Class A Common Stock................................... cover
USFS Class B Common Stock................................... cover
USFS Common Stock........................................... cover
USFS Indemnitees............................................ 46
USFS Options................................................ 9
USH......................................................... cover
USH Charter................................................. 12
Voting Securities........................................... 52
</TABLE>
v
<PAGE> 14
AVAILABLE INFORMATION
USFS is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Commission (No. 0-29808). The reports, proxy statements and other information
filed by USFS with the Commission may be inspected and copied at the public
reference facilities maintained by the Commission at Judiciary Plaza, Room 1024,
450 Fifth Street, N.W., Washington, D.C. 20549, and should be available at the
Commission's Regional Offices at 7 World Trade Center, 13th Floor, New York, New
York 10048, Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511 and 1801 California Street, Suite 4800, Denver, Colorado
80202-2648. Copies of such material also can be obtained at prescribed rates
from the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549. The Commission maintains a site on the world wide web
that contains reports, proxy and information statements and other information on
registrants, such as USFS, who must file such material with the Commission
electronically. The Commission's internet address on the world wide web is
http://www.sec.gov. USFS Class A Common Stock is quoted on the NASDAQ National
Market System ("NASDAQ"), and certain of USFS's reports, proxy materials and
other information may be available for inspection at the offices of NASDAQ at
1735 K Street, N.W., Washington, D.C. 20006.
USH has filed with the Commission a Registration Statement on Form S-4
under the Securities Act of 1933, as amended (the "Securities Act"), with
respect to the Company Common Stock to be issued pursuant to the Merger. This
Proxy Statement/Prospectus does not contain all of the information set forth in
the Registration Statement and the exhibits thereto, certain parts of which were
omitted as permitted by the rules and regulations of the Commission. Such
additional information may be obtained from the Commission's principal office in
Washington, D.C. Statements contained in this Proxy Statement/Prospectus
pertaining to the content of any contract or other document referred to herein
or therein are not necessarily complete, and in each instance reference is made
to the copy of such contract or other document filed as an exhibit to the
Registration Statement or such other document, each such statement being
qualified in all respects by such reference.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROXY STATEMENT/PROSPECTUS IN CONNECTION
WITH THE SOLICITATION AND THE OFFERING MADE HEREBY AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION SHOULD NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY USFS OR USH. THIS PROXY STATEMENT/PROSPECTUS DOES NOT CONSTITUTE
AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO PURCHASE, THE SECURITIES
OFFERED BY THIS PROXY STATEMENT/PROSPECTUS OR THE SOLICITATION OF A PROXY FROM
ANY PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR
PROXY SOLICITATION.
NEITHER THE DELIVERY OF THIS PROXY STATEMENT/PROSPECTUS NOR ANY
DISTRIBUTION OF THE SECURITIES MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE AN IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE INFORMATION SET
FORTH HEREIN OR IN THE AFFAIRS OF USFS OR USH OR ANY OF THEIR AFFILIATES OR
SUBSIDIARIES SINCE THE DATE OF THIS PROXY STATEMENT/PROSPECTUS.
3
<PAGE> 15
CAUTIONARY STATEMENT CONCERNING
FORWARD-LOOKING STATEMENTS
This Proxy Statement/Prospectus contains forward-looking statements,
including, most importantly, information concerning possible or assumed future
results of operations of the Company set forth under "Risk Factors," "The
Company" and "The Proposed Merger and Related Transactions," and those preceded
by, followed by or that include the words "may," "believes," "expects,"
"anticipates" or the negation thereof, or similar expressions. The achievement
of the outcomes described in such forward-looking statements is subject to both
known and unknown risks, uncertainties and other factors which may cause the
actual results, performance or achievements of the industries in which they
operate generally, and of the Company in particular, to be materially different
from any outcomes expressed or implied by such forward-looking statements. For
those statements, USFS claims the protection of the safe harbor for
forward-looking statements contained in the Private Securities Litigation Reform
Act of 1995; the safe harbor, though, is unavailable to USH (including as the
surviving company in the Merger) and to HSA LLC. Several important factors, in
addition to those discussed under "Risk Factors" herein and elsewhere in this
document, could affect the future results of the Company, and could cause those
results to differ materially from those expressed in the forward-looking
statements contained herein. Such additional factors include, among other
things: 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 franchises; the existence 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; other
factors referenced in this Proxy Statement/Prospectus; and other risks and
uncertainties affecting the Company and its competitors, all of which are
difficult or impossible to predict accurately and many of which are beyond the
control of the Company. The Company will not undertake and specifically
disclaims any obligation to publicly release the result of any revisions which
may be made to any forward-looking statements to reflect events or circumstances
after the date of such statements or to reflect the occurrence of anticipated or
unanticipated events.
4
<PAGE> 16
SUMMARY
The following is a summary of certain information contained elsewhere in
this Proxy Statement/Prospectus and the Exhibits hereto. This Summary is not
intended to be complete, and is qualified in its entirety by the more detailed
information and financial statements and related notes appearing elsewhere in
this Proxy Statement/Prospectus or the Exhibits hereto. Stockholders are urged
to read carefully this Proxy Statement/Prospectus and the Exhibits hereto, and
in particular the section herein entitled "Risk Factors," in their entirety. The
term "the Company," when used in this Prospectus, refers to USFS before the
Merger, and, following the completion of the Merger, to USH as the surviving
corporation in the Merger and as the successor to the business of USFS. The
following trademarks, which are referenced throughout this Proxy
Statement/Prospectus, are registered to the Company (or HSA LLC and thus will be
registered to the Company following the Merger): Microtel Inn(R), Microtel Inn &
Suites(R), Microtel Suites(R), MicroSuites(R), Hawthorn Suites(R) and Hawthorn
Suites LTD(R).
THE COMPANIES
U.S. FRANCHISE SYSTEMS,
INC.
13 Corporate Square,
Suite 250
Atlanta, Georgia 30329
(404) 321-4045 USFS was formed in August 1995 to acquire, market
and service well-positioned brands with potential
for rapid growth through franchising. USFS'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"). USFS acquired the
rights to these brands because of their potential
for significant growth, which reflects, among other
things, their potential profitability for
franchisees at the property level and their
positions in attractive segments of the lodging
industry.
At the time of acquisition of the Microtel brand in
October 1995, there were 23 hotels open and 4 under
development. As of January 22, 1998, the brand had
371 hotels open or under development, consisting of
64 open, 58 under construction and 249 executed
franchise agreements relating to hotels not yet
under construction. In addition, as of January 22,
1998, the Company had accepted franchise
applications for an additional 81 franchises. This
expands the number of states in which Microtel
brand hotels are or may be located from 10 in 1995
to 48 as of such date. Based upon the Company's
limited historical experience to date, 22% of
accepted applications for Microtel hotels have
terminated prior to resulting in open hotels. There
can be no assurances that hotels under development
or for which applications have been accepted will
result in open hotels. See "Risk
Factors -- Dependence on, and Obstacles to, Hotel
Openings."
At the time of acquisition of the Hawthorn Suites
brand in March 1996, there were 17 Hawthorn Suites
brand hotels open and under development. As of
January 22, 1998, the brand had 98 hotels open or
under development, consisting of 27 open, 19 under
construction and 48 executed franchise agreements
relating to hotels not yet under construction. In
addition, as of January 22, 1998, the Company had
accepted franchise applications for an additional
23 franchises. Based upon the Company's limited
historical experience to date, 26% of accepted
applications for Hawthorn Suites brand hotels have
terminated prior to resulting in open hotels. There
can be no assurances that hotels under development
or for which applications have been accepted will
result in open hotels. See "Risk
Factors -- Dependence on Hotel Openings."
5
<PAGE> 17
On December 15, 1997 USFS signed a definitive
agreement with the seller (the "Seller") to acquire
the exclusive worldwide franchise rights to the
Best Inns and Suites of America hotel brands ("Best
hotels") along with the assets of the company that
provides fee-based management services to 28
existing Best hotels. In connection with this
acquisition, the Company expects to complete the
following transactions with Highend Hospitality
Partners, LLC (the "Third Party Buyer") if the
Third Party Buyer agrees to acquire from the Seller
17 Best hotels, although the Company and the Third
Party Buyer have not yet entered into definitive
documentation: (i) the Company expects to make a
$5,000,000 subordinated loan at an interest rate of
12% per annum to, or a $5,000,000 equity investment
in, the Third Party Buyer, (ii) the Company expects
to issue to the Third Party Buyer 200,000 shares of
USFS Class A Common Stock (or Company Class A
Common Stock if the Merger has been consummated by
such date) at a cash price per share equal to $8.00
(the closing price of USFS Class A Common Stock on
December 15, 1997), and (iii) the Company expects
to issue for no additional cash consideration an
additional 150,000 shares of USFS Class A Common
Stock (or Company Class A Common Stock, as the case
may be) to the Third Party Buyer, making the Third
Party Buyer's total holdings an aggregate of
350,000 shares of USFS Class A Common Stock (or
Company Class A Common Stock, as the case may be).
The Company expects to issue such additional shares
in lieu of issuing, as originally requested by the
Third Party Buyer, a warrant to acquire a greater
number of shares of USFS Class A Common Stock (or
Company Class A Common Stock, as the case may be).
No officer, director or, to the best of the
Company's knowledge, 5% or greater shareholder of
USFS or HSA LLC currently is a member, officer or
director of the Third Party Buyer. The transaction
is subject to the Company's completion to its
satisfaction of its due diligence review, the
execution and delivery of definitive documentation
by the Company and the Third Party Buyer, and other
customary conditions and no assurances can be made
that the transaction will be completed on these
terms or at all.
USFS was incorporated in Delaware in August 1995.
USFS HAWTHORN, INC.
13 Corporate Square, Suite
250
Atlanta, Georgia 30329
(404)321-4045 USH was incorporated in Delaware in November 1997
solely for the purpose of effecting the Merger
Transactions. Immediately prior to the Merger,
pursuant to the Contribution Agreement, by and
among HSA, HPI, USH and USFS, HSA and HPI will
Transfer to USH all of their respective membership
interests in HSA LLC on the terms, and subject to
the conditions, contained in the Contribution
Agreement. Pursuant to the Transfer, HPI will
acquire 22,447 shares of Company Class A Common
Stock and HSA will acquire 2,199,775 shares of
Company Class A Common Stock. Upon consummation of
the Merger, USFS will be merged into USH with USH
as the surviving company; USFS's separate corporate
existence will thereupon cease. In connection with
the Merger, USH will change its name to "U.S.
Franchise Systems, Inc."
HSA LLC is a single purpose entity that owns all of
the trademarks, copyrights and other intellectual
property related to the Hawthorn Suites hotel brand
(the "Intellectual Property"). HSA LLC has no
employees, owns no properties other than the
Intellectual Property and is a party to no material
agreements that will not be terminated in
connection with
6
<PAGE> 18
the Merger other than the Hawthorn Acquisition
Agreement. Currently, HSA LLC licenses the
Intellectual Property and certain other assets to
USFS pursuant to the Hawthorn Acquisition
Agreement. The membership interests of HSA LLC are
owned 98% by HSA, 1% by HPI and 1% by USFS.
THE SPECIAL MEETING OF
STOCKHOLDERS OF USFS
Time and Place............. The Special Meeting is scheduled to be held on
March 11, 1998, at 4:00 p.m., local time, at the
Company's offices, 13 Corporate Square, Suite 250,
Atlanta, Georgia 30329.
Matters To Be Considered... At the Special Meeting, holders of USFS Common
Stock will consider and vote upon a proposal to
approve the Merger Agreement and the Merger, and
such other matters as may properly be brought
before the Special Meeting or any adjournments or
postponements thereof. USFS does not currently
intend to bring any business other than the
approval of the Merger Agreement and the Merger
before the Special Meeting or any adjournments or
postponements thereof.
Vote Required.............. Approval of the Merger Agreement and the Merger
requires the affirmative vote of a majority of the
voting power of the outstanding shares of USFS
Common Stock. HOLDERS OF APPROXIMATELY 80.72% OF
SUCH VOTING POWER, PRINCIPALLY MICHAEL A. LEVEN,
USFS'S CHAIRMAN, CHIEF EXECUTIVE OFFICER AND
PRESIDENT, AND NEAL K. ARONSON, USFS'S EXECUTIVE
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER, HAVE
INDICATED TO USFS THAT THEY INTEND TO VOTE IN FAVOR
OF THE MERGER.
In determining whether the proposal regarding the
Merger Agreement and the Merger has been approved,
abstentions and broker nonvotes will be counted and
will have the same effect as a vote against such
proposal.
Holders of USFS Class A Common Stock are entitled
to one vote at the Special Meeting for each share
of USFS Class A Common Stock held of record at the
close of business on the Record Date (as defined in
"-- Record Date; Shares Entitled to Vote" below).
Holders of USFS Class B Common Stock are entitled
to ten votes at the Special Meeting for each share
of USFS Class B Common Stock held of record at the
close of business on the Record Date. Michael A.
Leven and Neal K. Aronson beneficially own all of
the outstanding shares of USFS Class B Common
Stock.
As of the Record Date, directors and executive
officers of USFS and their affiliates, in the
aggregate, were entitled to vote 2,483,276 shares
of USFS Class A Common Stock and 2,707,919 shares
of USFS Class B Common Stock, representing
approximately 80.06% of the total voting power of
USFS Common Stock entitled to vote at the Special
Meeting.
Voting of Proxies.......... A proxy in the form accompanying this Proxy
Statement/Prospectus is being solicited on behalf
of the Board of USFS. Shares of USFS Common Stock
represented by properly executed proxy cards
received prior to the vote at the Special Meeting
and that have not been revoked will be voted in
accordance with the instructions indicated thereon.
IF NO INSTRUCTIONS ARE INDICATED, SUCH PROXIES WILL
BE VOTED FOR APPROVAL OF THE MERGER AGREEMENT
7
<PAGE> 19
AND THE MERGER AND IN THE DISCRETION OF THE PROXY
HOLDER, AS TO ANY OTHER MATTER THAT MAY PROPERLY
COME BEFORE THE SPECIAL MEETING. In the event that
a vote to adjourn the Special Meeting is taken at
the Special Meeting, proxies voting AGAINST the
Merger Agreement and the Merger will not be voted
by management FOR adjournment pursuant to its
discretionary authority.
Revocability of Proxies.... A USFS stockholder who has given a proxy may revoke
such proxy at any time before it has been voted at
the Special Meeting by (i) giving written notice of
revocation bearing a later date than the proxy to
the Secretary of USFS, (ii) properly submitting to
USFS a duly executed proxy card relating to the
same shares of USFS Common Stock and bearing a
later date, or (iii) attending the Special Meeting
and voting in person. Attendance at the Special
Meeting will not in and of itself revoke a proxy.
All written notices of revocation and other
communications with respect to revocation of
proxies by USFS stockholders should be addressed as
follows: U.S. Franchise, Systems, Inc., 13
Corporate Square, Suite 250, Atlanta, Georgia
30329, Attention: Neal K. Aronson, or hand-
delivered to Neal K. Aronson at USFS before the
vote is taken at the Special Meeting.
Solicitation of Proxies.... USFS will bear the expense of the proxy
solicitation. In addition to the solicitation of
proxies by mail, the directors, officers and
employees of USFS may solicit proxies from
stockholders personally or by telephone, telegraph
or facsimile transmission. Such directors, officers
and employees will not be compensated for such
solicitation, but may be reimbursed for reasonable
out-of-pocket expenses. Arrangements will also be
made with banks, brokerage houses and other
custodians, nominees and fiduciaries for forwarding
proxy solicitation materials to beneficial owners
of shares held of record by such persons, and USFS
will reimburse such custodians, nominees and
fiduciaries for their reasonable out-of-pocket
expenses in connection therewith. See "The Special
Meeting -- Solicitation of Proxies."
Record Date; Shares
Entitled to Vote....... The close of business on January 30, 1998 has been
fixed as the record date (the "Record Date") for
determining the holders of shares of USFS Common
Stock entitled to notice of and to vote at the
Special Meeting. As of the Record Date, 9,844,972
shares of USFS Class A Common Stock were issued and
outstanding and held of record by 95 holders and
2,707,919 shares of USFS Class B Common Stock were
outstanding and held of record by 3 holders.
Quorum..................... The presence, in person or by proxy, of the holders
of one-third of the outstanding shares of USFS
Common Stock is necessary to constitute a quorum
for the transaction of business at the Special
Meeting. The Special Meeting may be adjourned if a
quorum is not present for the purpose of obtaining
additional proxies or votes or for any other
purpose and, at any subsequent reconvening of the
Special Meeting, all proxies will be voted in the
same manner as such proxies would have been voted
at the original convening of the Special Meeting
(except for any proxies that have theretofore been
revoked or withdrawn), notwithstanding that they
may have been voted on at the same or any other
matter at a previous meeting.
8
<PAGE> 20
THE PROPOSED MERGER AND RELATED TRANSACTIONS
Terms of the Merger........ The Merger is part of a series of transactions
designed to enable USFS to acquire the entire
membership interests in HSA LLC, the entity through
which HSA and HPI own an interest in USFS's
Hawthorn Suites brand of hotels. At the effective
time of the Merger (the "Effective Time"), USFS
will merge into USH, with USH to be the surviving
corporation. Thereafter, HSA LLC will become a
wholly owned subsidiary of the Company. The Merger
Agreement is attached as Appendix A to this Proxy
Statement/Prospectus and is incorporated herein by
reference. See "The Proposed Merger and Related
Transactions."
Each share of USFS Class A Common Stock and USFS
Class B Common Stock issued and outstanding
immediately prior to the Effective Time will be
converted into the right to receive one share of
Company Class A Common Stock or one share of Class
B Common Stock, as applicable.
At the Effective Time, all outstanding options to
purchase USFS Class A Common Stock (the "USFS
Options"), whether or not vested or exercisable at
the Effective Time will, by virtue of the Merger
and without any further action on the part of USFS
or the holder thereof, be assumed by the Company,
and each USFS Option assumed by the Company will
become and represent an option exercisable for
shares of Company Class A Common Stock with the
same vesting schedules, if any, and expiration
dates as existed with respect to such USFS Option
immediately prior to the Effective Time. The
Company will file as soon as practicable after the
Effective Time, but in no event later than 45 days
after the Effective Time, and keep current, one or
more registration statements on Form S-8 (or any
successor or appropriate form) with respect to the
shares of Company Common Stock subject to such
substitute options so long as such options remain
outstanding. At the Effective Time, each share of
USFS Common Stock held in treasury by USFS
immediately prior to the Effective Time shall, by
virtue of the Merger, be converted into a share of
Company Class A Common Stock held in treasury by
the Company.
On a pro forma basis (assuming consummation of the
Merger Transactions as of September 30, 1997), USH
(including HSA LLC) would have accounted for
approximately 34% of the total assets of the
Company and 36% of the total revenues of the
Company for the nine months ended September 30,
1997. In addition, during the nine months ended
September 30, 1997, USH had operating income of
$1,065,188 as compared to the operating loss of
$6,870,000 for USFS during such period.
The Board of USFS has determined that the terms of
the Merger Agreement are fair to, and in the best
interests of, USFS and its stockholders.
Accordingly, the Board of USFS has unanimously
approved the Merger Agreement and the Merger and
unanimously recommends that the stockholders of
USFS vote FOR approval of the Merger Agreement and
the Merger. The USFS Board's recommendation is
based on the factors described in "The Proposed
Merger and Related Matters -- USFS's Reasons for
the Merger; Recommendation of USFS's Board of
Directors," and "-- Background of the Merger."
9
<PAGE> 21
HOLDERS OF SHARES OF USFS COMMON STOCK ARE URGED
TO, AND SHOULD, READ SUCH SECTIONS IN THEIR
ENTIRETY.
Contribution of HSA LLC.... Immediately prior to the Merger, and pursuant to
the Contribution Agreement, the 99% membership
interests in HSA LLC owned collectively by HPI and
HSA will be contributed to USH in exchange for an
aggregate of 2,222,222 shares of the Company Class
A Common Stock. As a result of the Merger
Transactions, HSA LLC will become a wholly owned
subsidiary of the Company and, consequently, all of
the rights to, and Intellectual Property associated
with, the Hawthorn Suites hotel brand will be owned
entirely by the Company.
Effective Time of the
Merger..................... The Effective Time will occur as promptly as
practicable after the requisite approval of the
Merger Agreement and the Merger by USFS's
stockholders and the satisfaction or waiver of all
other conditions to the Merger but in no event
later than 10:00 a.m. New York City time on the
first business day after the date on which the
satisfaction or waiver of each of such conditions
has occurred, or at such other time or on such
other date as USFS and USH may mutually agree. Upon
the terms and subject to the conditions of the
Merger Agreement, the Effective Time will occur at
such time as the Certificate of Merger, in
accordance with the relevant provisions of the
General Corporation Law of the State of Delaware
(the "DGCL"), shall be duly filed with the
Secretary of State of the State of Delaware (or at
such later time as agreed to by the parties to the
Merger Agreement and specified in the Certificate
of Merger).
Conditions to Consummation
of the Merger.............. The obligations of USH and USFS to consummate the
Merger are subject to various conditions, including
the approval of the Merger Agreement by USFS's
stockholders in accordance with the DGCL and the
consummation of the transactions contemplated by
the Contribution Agreement. See "The Merger
Agreement and Related Agreements -- Conditions to
Consummation of the Merger."
Termination................ The Merger Agreement may be terminated and the
Merger may be abandoned at any time prior to the
Effective Time (regardless of whether the
stockholders of USFS have approved the Merger
Agreement): (a) by the mutual written consent of
each of USH and USFS; (b) by either USH or USFS if
(i) the Effective Time has not occurred on or
before April 30, 1998, provided that the right to
so terminate the Merger Agreement will not be
available to any party whose failure to fulfill any
obligation under the Merger Agreement has been the
cause of, or resulted in, the failure of the
Effective Time to occur on or before such date,
(ii) any governmental authority has issued an order
or taken any other action, in each case permanently
restraining, enjoining or otherwise prohibiting the
Merger and such order or other action shall have
become final and non-appealable, or (iii) if there
has been a material breach of any representation,
warranty, covenant or agreement on the part of USH,
HSA or HPI, on the one hand, or USFS, on the other
hand, as the case may be, set forth in the Merger
Agreement or the Contribution Agreement, which
breach, if not a willful breach, has not been cured
within ten (10) business days following receipt by
the breaching party of notice of such breach; and
(c) by USFS if the Merger Agreement and the Merger
10
<PAGE> 22
have not been approved at the Special Meeting by
the requisite vote of the stockholders of USFS.
Pursuant to the Contribution Agreement, USFS and
USH have agreed not to take any action to terminate
the Merger Agreement without the prior written
consent of HSA and HPI, which consent may not be
unreasonably withheld.
Fees and Expenses.......... All costs and expenses incurred in connection with
the Merger Agreement and the Merger will be paid by
the party incurring such costs and expenses,
whether or not the Merger is consummated. See "The
Merger Agreement and Related Agreements -- Fees and
Expenses."
NASDAQ National Market
Quotation.............. USH will file an application to approve the shares
of Company Common Stock to be issued in connection
with the Merger for quotation and trading on the
NASDAQ National Market. Approval of such quotation
and trading, subject to official notice of
issuance, is a condition to consummation of the
Merger.
Regulatory Approvals....... Other than the Commission declaring effective the
Registration Statement containing this
Prospectus/Proxy Statement, approvals in connection
with compliance with applicable Blue Sky or state
securities laws and the filing of the Certificate
of Merger with the Secretary of State of the State
of Delaware, none of the managements of USH, USFS,
HPI or HSA believes that any filing with or
approval of any governmental authority is necessary
in connection with the consummation of the Merger
Transactions.
Appraisal Rights........... Holders of record of USFS Class A Common Stock are
not entitled to rights of appraisal or other
dissenters' rights under Delaware law with respect
to the Merger or any transactions contemplated by
the Merger Agreement.
Accounting Treatment....... The Merger will be accounted for as the "reverse
acquisition" of USH by USFS. Accordingly, USFS will
account for the Merger under the "purchase" method
of accounting in accordance with generally accepted
accounting principles. Therefore, the fair value of
the shares of USH Class A Common Stock to be issued
to HSA and HPI and the estimated costs of the
Merger incurred by USFS will be allocated to the
USH assets acquired and liabilities assumed based
on their fair values, and the results of operations
of USH will be included in the results of
operations of USFS only for the periods subsequent
to the Effective Time. See "The Proposed Merger and
Related Transactions -- Accounting Treatment" and
"Unaudited Pro Forma Consolidated Financial
Statements."
Certain Federal Income Tax
Consequences............. The Merger is intended to qualify for federal
income tax purposes as a "reorganization" within
the meaning of Section 368(a) of the Internal
Revenue Code of 1986, as amended (the "Code"), so
that no gain or loss would be recognized by USFS
stockholders on the exchange of their USFS Common
Stock for Company Common Stock. No ruling has been
(or will be) sought from the Internal Revenue
Service as to the anticipated federal income tax
consequences of the Merger. Under the Merger
Agreement, USFS's obligation to consummate the
Merger is conditioned on the receipt of an opinion
from Paul, Weiss, Rifkind,
11
<PAGE> 23
Wharton & Garrison, to the effect that the Merger
will constitute a reorganization within the meaning
of Section 368(a) of the Code.
ALL STOCKHOLDERS SHOULD READ CAREFULLY THE
DISCUSSION UNDER "THE PROPOSED MERGER AND RELATED
MATTERS -- CERTAIN FEDERAL INCOME TAX
CONSEQUENCES." IN VIEW OF THE COMPLEXITIES OF
FEDERAL INCOME AND OTHER TAX LAWS, EACH USFS
STOCKHOLDER SHOULD CONSULT WITH HIS OR HER TAX
ADVISOR REGARDING, AMONG OTHER THINGS, THE FEDERAL,
STATE AND LOCAL INCOME TAX CONSEQUENCES OF THE
MERGER APPLICABLE TO HIS OR HER SPECIFIC
CIRCUMSTANCES.
Comparison of Rights of
Stockholders of USH and
USFS..................... Upon the consummation of the Merger, USFS
stockholders will become stockholders of USH and
their rights as such will be governed by the USH's
certificate of incorporation (the "USH Charter"),
which will be identical in all material respects to
USFS's certificate of incorporation (the "USFS
Charter"), and by USFS's bylaws (the "USFS
Bylaws"), as well as by Delaware law.
RISK FACTORS............... STOCKHOLDERS OF USFS SHOULD CAREFULLY
EVALUATE THE MATTERS SET FORTH UNDER "RISK
FACTORS."
MANAGEMENT
Directors.................. At the Effective Time, the directors of USFS will
become the directors of the Company. In addition,
pursuant to the Shareholders Agreement, the Board
of Directors of the Company will increase the size
of the Board by one director and one nominee
designated by HSA will be elected by the Board of
Directors to serve as a director of the Company.
See "The Proposed Merger and Related
Transactions -- Management of the Company after the
Merger" and "Management of the Company."
Officers................... At the Effective Time, the officers of USFS will
become the officers of the Company.
COMPARATIVE MARKET
PRICES AND
DIVIDENDS --
USFS AND USH............. The following tables set forth, for the quarters
indicated (ended March 31, June 30, September 30
and December 31), the high and low sales prices per
share of USFS Class A Common Stock as reported.
Shares of USFS Class A Common Stock are quoted on
the NASDAQ National Market under the symbol "USFS."
12
<PAGE> 24
USFS CLASS A COMMON STOCK
<TABLE>
<CAPTION>
HIGH ($) LOW ($)
-------- -------
<S> <C> <C>
FISCAL YEAR 1996
1st Quarter............................. N/A N/A
2nd Quarter............................. N/A N/A
3rd Quarter............................. N/A N/A
4th Quarter (commencing October 25,
1996)................................ 16 8 5/8
FISCAL YEAR 1997
1st Quarter............................. 10 1/2 7 5/8
2nd Quarter............................. 10 1/4 5
3rd Quarter............................. 10 1/8 7
4th Quarter............................. 10 7 1/8
</TABLE>
As of December 9, 1997 the last full trading day
preceding the day of the public announcement of the
execution of the Merger Agreement, the closing sale
price per share of USFS Class A Common Stock was
$7.875. As of February 11, 1998, the last full
trading day preceding the date of this Proxy
Statement/Prospectus, the closing sale price per
share of USFS Class A Common Stock was $10.375.
USFS has not paid a dividend on USFS Common Stock
since its incorporation. The Company intends to
retain any earnings to finance its growth and for
general corporate purposes and therefore does not
anticipate paying any cash dividends in the
foreseeable future. In addition, future financing
agreements may contain, limitations on the payment
of cash dividends or other distributions of assets
to the holders of Company Common Stock.
USH was formed on November 26, 1997. Currently, USH
has 1,000 shares of USH Common Stock issued and
outstanding, none of which are publicly traded.
13
<PAGE> 25
SUMMARY HISTORICAL AND PRO FORMA
FINANCIAL DATA OF USFS
The following tables set forth summary historical consolidated financial
data of USFS and its subsidiaries for the periods and as of the dates indicated
and summary consolidated pro forma financial data of the Company and its
subsidiaries after giving effect to the Merger Transactions. The summary
historical consolidated financial data of USFS and its subsidiaries as of
December 31, 1996 and December 31, 1995 and for the periods then ended are
derived from the consolidated financial statements of USFS and its subsidiaries
audited by Deloitte & Touche LLP included elsewhere herein and should be read in
conjunction therewith. The summary consolidated financial data of USFS and its
subsidiaries as of and for the nine month periods ended September 30, 1997 and
September 30, 1996 are derived from the unaudited consolidated financial
statements of USFS and its subsidiaries included elsewhere herein and should be
read in conjunction therewith. In the opinion of management, the unaudited
financial statements include all adjustments (consisting only of normal
recurring adjustments) necessary to present fairly the information set forth
therein. The historical results for the nine months ended September 30, 1996 and
1997 are not necessarily indicative of the results for a full year. The summary
consolidated pro forma financial data of the Company and its subsidiaries are
derived from the Unaudited Pro Forma Consolidated Financial Statements included
elsewhere herein and should be read in conjunction therewith.
<TABLE>
<CAPTION>
PERIOD FROM ACTUAL PRO FORMA
AUGUST 28, NINE ACTUAL NINE NINE
1995 ACTUAL PRO FORMA MONTHS MONTHS MONTHS
(INCEPTION) YEAR ENDED YEAR ENDED ENDED ENDED ENDED
TO DECEMBER DECEMBER SEPTEMBER SEPTEMBER SEPTEMBER
DECEMBER 31, 31, 31, 30, 30, 30,
1995 1996 1996 1996 1997 1997
--------------- ------------ ------------ ------------- ------------- -------------
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues........................ $ -- $ 1,292 $ 3,069 $ 864 $ 2,614 $ 4,090
Operating Expenses.............. 1,327 8,628 9,233 6,206 9,129 9,540
Operating Loss.................. (1,327) (7,336) (6,164) (5,342) (6,515) (5,450)
Interest Income................. 195 871 871 537 1,097 1,097
Interest Expense................ 36 126 126 108 1,452 1,452
Net Loss........................ (1,168) (6,591) (5,419) (4,913) (6,870) (5,805)
Loss Applicable to Common
Stockholders.................. (1,577) (8,309) (7,137) (6,191) (6,870) (5,805)
Net Loss applicable to Common
Stockholders Per Share........ $ (0.15) $ (0.75) $ (0.54) $ (0.58) $ (0.55) $ (0.39)
Weighted Average Number of
Common Shares
Outstanding(1)................ 10,755,409 11,059,576 13,281,798 10,755,409 12,567,398 14,789,620
Balance Sheet Data (at period
end):
Working Capital................. $ 13,265 $ 28,115 $ 9,368 $ 19,519 $ 18,547
Total Assets.................... 18,072 40,105 18,817 36,515 55,265
Total Liabilities............... 1,845 9,022 7,500 30,565 31,537
Redeemable Preferred Stock(2)... 16,759 18,477 18,037 -- --
Redeemable Common Stock......... 330 330 330 330 330
Stockholders' Equity
(deficit)..................... $ (862) $ 12,276 $ (7,050) $ 5,620 $ 23,398
</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").
14
<PAGE> 26
SUMMARY OF HISTORICAL
ROYALTY AND OTHER PAYMENTS
The following table sets forth unaudited historical royalty and other
payment data with respect to royalties and other payments made by USFS to HSA
LLC in accordance with the terms of the Hawthorn Acquisition Agreement during
the periods indicated.
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 27, 1996 (DATE OF
THE HAWTHORN ACQUISITION
AGREEMENT) TO
DECEMBER 31, NINE MONTHS ENDED
1996 SEPTEMBER 30, 1997
------------------------ ------------------
<S> <C> <C>
Royalties and Other Payments......................... $1,776,634 $1,518,817
</TABLE>
15
<PAGE> 27
HISTORICAL AND PRO FORMA
PER SHARE DATA
The following table sets forth certain historical and pro forma unaudited
information giving effect to the Merger Transactions (see "Unaudited Pro Forma
Consolidated Financial Statements"). The data is based on the historical and pro
forma unaudited financial statements included elsewhere herein and should be
read in conjunction therewith.
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1996 SEPTEMBER 30, 1997
------------------------- -------------------------
HISTORICAL PRO FORMA(1) HISTORICAL PRO FORMA(2)
---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Per share(3)
Net loss applicable to common stockholders per
share........................................ $(0.75) $(0.54) $(0.55) $(0.39)
Book value per share of common stock (including
redeemable shares)........................... 1.00 2.12 0.47 1.75
Book value per share of common stock (excluding
redeemable shares)........................... 1.31 2.67 0.60 2.20
</TABLE>
- ---------------
(1) The pro forma weighted average shares outstanding during the year ended
December 31, 1996 and the outstanding shares at December 31, 1996 used to
complete the pro forma data after giving effect to the Merger Transactions
was 13,281,798 and 11,059,576, respectively.
(2) The pro forma weighted average shares outstanding during the nine months
ended September 30, 1997 and the outstanding shares at September 30, 1997
used to compute the pro forma data after giving effect to the Merger
Transactions was 14,789,620 and 12,567,398, respectively.
(3) USFS did not make any cash distributions for the periods presented.
16
<PAGE> 28
CHART OF ORGANIZATIONAL STRUCTURE PRIOR TO
MERGER TRANSACTIONS AND CHART OF ORGANIZATIONAL STRUCTURE AFTER
MERGER TRANSACTIONS.
17
<PAGE> 29
RISK FACTORS
This Proxy Statement/Prospectus contains forward-looking statements that
involve risks and uncertainties. See "Cautionary Statement Concerning
Forward-Looking Statements." Holders of USFS Common Stock should consider
carefully all the information contained in this Proxy Statement/Prospectus and,
in particular, the following risk factors:
LIMITED OPERATING HISTORY; NET LOSSES
The Company began operating in October 1995 and therefore has a very
limited operating history upon which investors can evaluate its performance.
While the Company believes that it has a well-conceived strategy and that it has
assembled an experienced and well-qualified management team to implement this
strategy, the Company has incurred losses to date and there can be no assurance
that it will be profitable in the future. As of September 30, 1997, USFS had an
accumulated deficit of $15,237,000. Additionally, the Company reported net
losses applicable to common stockholders of $6,870,000 for the nine month period
ended September 30, 1997, $8,309,000 for the fiscal year 1996 and $1,577,000 for
the period from August 28, 1995 (inception date) to December 31, 1995. On a pro
forma basis, assuming consummation of the Merger Transactions, the Company would
have had operating losses and net losses applicable to common stockholders of
$6,164,204 and $7,137,204, respectively, for the fiscal year 1996, and
$5,449,812 and $5,804,812, respectively, for the nine months ended September 30,
1997. There can be no assurance that the Company's operating results will
improve in future periods.
NO RIGHTS TO CERTAIN ROYALTIES
The terms of the agreement pursuant to which the Company acquired the
rights to franchise the Microtel brand (the "Microtel Acquisition Agreement")
expressly provide that the Company is not entitled to royalties with respect to
Microtel hotels that were open or under construction, or with respect to which
franchise agreements had been executed or applications accepted, at the time of
the acquisition by the Company of the right to franchise this brand. Similarly,
the Company is not currently entitled to royalties with respect to the 22
additional Microtels and the 10 Microtel all-suites hotels that Hudson Hotels
Corporation, the entity from which the Company acquired the Microtel brand
("Hudson"), its affiliates and certain other persons are entitled to franchise
pursuant to the terms of the Microtel Acquisition Agreement. Of the existing
Microtel properties, the Company is entitled to receive royalty fees from 36
Microtels. Accordingly, the Company will be dependent upon future hotel openings
to recognize franchise application fees as revenue and to generate franchise
royalty fees. See "-- Dependence On, and Obstacles to, Hotel Openings."
DEPENDENCE ON, AND OBSTACLES TO, HOTEL OPENINGS
The Company expects that in the future a principal source of revenues will
be royalty fees received from its franchisees. Accordingly, future revenues will
be highly dependant on the number of open hotels. There are numerous factors
beyond the control of the Company which affect the probability of a hotel
opening. These factors include, but are not limited to, the ability of a
potential hotel owner to (i) secure adequate financing or satisfy financing
payments during the construction period, (ii) locate an appropriate site for a
hotel, and (iii) obtain all necessary state and local construction, occupancy or
other permits and approvals. As a result, based on the Company's limited
historical experience, the current average time from the initial filing of an
application to the opening of a hotel is approximately 14 months for a Microtel
and seven months for a Hawthorn Suites brand hotel. The Company expects that,
consistent with historical rates, approximately 22% of accepted applications for
Microtels and approximately 26% of accepted applications for Hawthorn Suites
brand hotels will not result in an open hotel, although there can be no
assurances, based on various factors including the Company's limited operating
history, that the percentage of accepted applications not resulting in an open
hotel will not be higher than the historical rates. Accordingly, there can be no
assurance that accepted franchise applications will result in executed franchise
agreements or that executed franchise agreements will result in open properties.
18
<PAGE> 30
MANAGEMENT, BY VIRTUE OF OWNERSHIP OF SUPERVOTING CLASS B COMMON STOCK, WILL
CONTROL THE COMPANY FOLLOWING THE MERGER
Following the Merger, holders of Company Class A Common Stock will be
entitled to one vote per share and holders of Company Class B Common Stock will
be entitled to ten votes per share. Each share of Company Class B Common Stock
will be convertible at any time into one share of the Company Class A Common
Stock and, with limited exceptions, will convert automatically upon any transfer
thereof. Immediately after the Merger, Mr. Leven and Mr. Aronson will have the
right to vote all of the outstanding shares of Company Class B Common Stock,
which, together with shares of Company Class A Common Stock which they
beneficially own, will represent approximately 73.56% of the combined voting
power of the outstanding Company Common Stock. By reason of their right to vote
the Company Class B Common Stock, Messrs. Leven and Aronson will be able to (i)
elect all of the Company's directors (except as otherwise contractually
provided), (ii) amend the Charter with respect to most matters, (iii) effect a
merger, sale of assets or other major corporate transaction, (iv) defeat an
unsolicited takeover attempt and (v) generally direct the affairs of the Company
(including in a manner that may benefit themselves disproportionately relative
to other shareholders). For instance, on October 30, 1996, USFS and Messrs.
Leven and Aronson amended the respective agreements pursuant to which Messrs.
Leven and Aronson had previously been issued, cumulatively, 51% of the shares of
USFS and which agreements contained significant vesting and forfeiture
provisions. These amendments, in part, relaxed certain of the vesting provisions
for some of their shares, eliminated the vesting and forfeiture provisions for
others of their shares, converted certain of their shares into the then newly
created USFS Class B Common Stock and eliminated the ability of USFS to compel
the repurchase of shares from Messrs. Leven and Aronson in order to reissue such
shares to other members of management. See "Principal Holders of Common
Stock -- Management's Shares of Common Stock -- 1996 Amendment." However, Mr.
Leven and Mr. Aronson do not have any agreements or other obligations to vote
together on matters involving the Company (although Mr. Aronson has granted Mr.
Leven the right to vote some of his shares of Company Class A Common Stock and
some of his shares of Company Class B Common Stock). See "Description of the
Company's Capital Stock," and "Principal Holders of Common Stock."
MANAGEMENT OF GROWTH
The Company has experienced rapid growth in the number of its employees and
the scope of its operations since its inception. This growth has resulted in,
and is expected to continue to create, new and increased responsibilities for
management personnel, as well as added demands on the Company's operating and
financial systems. The Company's success will depend on its ability to manage
this growth while implementing its strategy. The efforts of key management
personnel and the Company's ability to attract or develop new management
personnel and to integrate these new employees into its overall operations will
be crucial to continued growth. If the Company is unable to manage growth
effectively, the Company's business and results of operations could be
materially and adversely affected. See "Management of the Company."
SUCCESSFUL COMPLETION AND INTEGRATION ACQUISITIONS
One element of the Company's business strategy is to continuously evaluate
acquisitions and business combinations to augment its businesses. These
acquisitions may be of brands that the Company would expect to franchise, which
may be in the lodging industry or in other industries, or of businesses that the
Company does not expect to franchise, which would require the Company to develop
expertise in areas that it does not currently operate. There can be no assurance
that the Company will identify and complete suitable acquisitions or if
completed, that such acquisitions will be successfully integrated. Acquisitions
involve numerous risks, including difficulties assimilating new operations and
brands. There can be no assurance that any acquisitions would result in
long-term benefits to the Company or that management would be able to manage
effectively the resulting business.
DEPENDENCE ON SENIOR MANAGEMENT
The success of the Company is largely dependent on the efforts and
abilities of its senior management and certain other key personnel, particularly
Mr. Leven, Chairman, President and Chief Executive Officer,
19
<PAGE> 31
Mr. Aronson, Executive Vice President and Chief Financial Officer, David E.
Shaw, Executive Vice President -- Administration, Steve Romaniello, Executive
Vice President, Franchise Sales and Development, and James Darby, Executive Vice
President -- Franchise Operations. The Company's success will depend in large
part on its ability to retain these individuals and other current members of its
senior management team and to attract and retain qualified personnel in the
future. The loss of members of senior management or of certain other key
employees or the Company's inability to retain other qualified employees could
have an adverse impact on the Company's business and results of operations. As
of February 23, 1998 the Company will not maintain key person life insurance on
behalf of the lives of any of its officers or employees. See "Management of the
Company."
RISKS RELATING TO MICROTEL ACQUISITION AGREEMENT
The Microtel Acquisition Agreement obligates the Company to execute new
franchise agreements and have open or under construction a specified number of
Microtels each year. Specifically, the Microtel Acquisition Agreement requires
that there are, on a cumulative basis, at least 50 new Microtels open or under
construction by December 1997, 100 by December 1998, 175 by December 1999, and
250 by December 2000. As of January 22, 1998, there were 122 Microtels open or
under construction. The Microtel Acquisition Agreement further provides that if
the Company is unable to comply with the development schedule for two
consecutive years but opens or has under construction at least 75% of the number
of Microtels required by such schedule, the Company may cure the default by
paying a $1 million penalty within 30 days of notice of such default. If the
Company fails to comply with this development schedule and to make the requisite
cure payment or payments, all rights to the Microtel system automatically revert
to Hudson. Accordingly, the Company's ability to comply with the development
schedule will depend on its ability to attract franchisees that are willing to
invest in lodging properties. See "-- General Risks of the Lodging Industry."
There can be no assurance that the Company will comply with the foregoing
development schedule, and the Company's failure to meet such schedule or to pay
the requisite cure payments would have a material adverse effect on the Company.
See "The Company -- Acquisition of the Microtel and Hawthorn Suites Systems."
COMPETITION FOR NEW FRANCHISE PROPERTIES AND HOTEL GUESTS
Competition among national brand franchisors and smaller chains in the
lodging industry to grow their franchise systems is intense. The management of
the Company believes that competition for the sale of lodging franchises is
based principally upon (i) the perceived value and quality of the brand, (ii)
the nature and quality of services provided to franchisees, (iii) the
franchisees' view of the relationship of building or conversion costs and
operating expenses to the potential for revenues and profitability during
operation and upon sale and (iv) the franchisee's ability to finance and buy or
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
will affect the profitability of the Company, as the Company's receipt of
royalty fees under its franchise agreements is tied directly to the gross room
revenues earned by its franchisees.
In choosing a particular hotel or motel, consumers consider differences in
room rates, quality and condition of accommodations, name recognition,
availability of alternative lodging (including short-term lease apartments),
service levels, reputation, safety, reservation systems and convenience of
location.
Both among consumers and potential franchisees, Microtel competes with
budget and economy hotels such as Comfort Inn(R), Days Inn(R), Econo Lodge(R),
Fairfield Inn(R), Sleep Inn(R), Red Roof Inn(R), Budgetel Inn(R), Super 8(R),
Ramada Limited(R), Motel 6(R), Jameson Inns(R), Travelodge(R), Thriftlodge(R),
Knights Inn(R), Red Carpet Inn(R) and Scottish Inns(R). In the upscale,
extended-stay sector, Hawthorn Suites hotels compete for consumers and/or
potential franchisees with Residence Inn(R), Homewood Suites(R), Summerfield
Suites(R) and Woodfin Suite(R). In the transient suites sector of the lodging
industry, where the Company competes through its Hawthorn Suites LTD brand, the
Company's principal competitors include AmeriSuites(R), Hampton Inn and
Suites(R), Fairfield Suites(SM), MainStay(SM), Candlewood(SM), Wingate Inn(SM),
Towne Place(SM) and Courtyard by Marriott(R) among others. Many of the Company's
competitors are affiliated with larger chains with substantially more
properties, greater marketing budgets and greater brand identity than the
Company. There
20
<PAGE> 32
can be no assurance that the Company can franchise a sufficient number of
properties to generate operating efficiencies that will enable it to compete
with these larger chains.
GENERAL RISKS OF THE LODGING INDUSTRY
Although the Company does not currently own any operating hotel properties,
because the Company's revenues vary directly with its franchisees' gross room
revenues, the Company's business is, and will be, impacted by the effects of
risks experienced by hotel operators generally. Additionally, the Company owns
three Microtel properties currently under construction which it expects to sell
after completion. However, no assurances can be given that such sales will take
place. The Company has contracted to lease, as tenant, two Microtel properties
currently under construction. It intends to assign these leases to suitable
tenants, but no assurances can be given that such assignments will occur. In the
future, the Company may acquire ownership interests in additional hotel
properties or develop additional hotels. It may also enter into management
contracts under which the Company operates hotel properties in exchange for a
management fee. The budget, extended-stay and transient suite segments of the
lodging industry, the segments in which hotels franchised under the Company's
brands currently operate or plan to operate, may be adversely affected by
changes in national or local economic conditions and other local market
conditions, such as an oversupply of or a reduction in demand for lodging or a
scarcity of potential sites in a geographic area, changes in travel patterns,
extreme weather conditions, changes in governmental regulations that influence
or determine wages, prices, construction costs or methods of operation, changes
in interest rates, the availability of financing for operating or capital needs
and changes in real estate tax rates and other operating expenses. In addition,
due in part to the strong correlation between the lodging industry's performance
and economic conditions, the lodging industry is subject to cyclical changes in
revenues and profits. These risks may be exacerbated by the relatively illiquid
nature of real estate holdings. Downturns or prolonged adverse conditions in
real estate or capital markets or in national or local economies could have a
material adverse impact on the Company's ability to locate new franchisees. In
addition to the aforementioned risks associated with the budget, extended-stay
and transient suite segments of the lodging industry, the Company's current and
potential future ownership of hotel properties creates a risk of decreased
earnings due to losses related to start-up expenses or ongoing losses due to
shortfalls in expected performance of a hotel. In addition, any guaranty
required to secure construction or permanent loan financing could adversely
affect the Company's financial condition.
The Company expects to experience seasonal revenue patterns similar to
those experienced by participants in the lodging industry generally.
Accordingly, the summer months, because of increases in leisure travel, are
expected to produce higher franchise royalty revenues for the Company than other
periods during the year. In addition, developers of new hotels typically
attempt, when feasible, to schedule the opening of a new property to occur prior
to the spring and summer seasons. This may have a seasonal impact on the
Company's revenues, a significant portion of which is not recognized until the
opening of a property. Accordingly, the Company may experience lower revenues
and profits in the first and fourth quarters and higher revenues and profits in
the second and third quarters.
DEVELOPMENT AND OWNERSHIP RISK
Although the Company does not currently own any operating hotel properties,
because its revenues are dependent on the revenues of its franchisees, the
Company is subject to risks associated with developing hotel properties. In
addition, the Company owns three Microtel properties currently under
construction which it expects to sell after completion. However, no assurances
can be given that such sales will take place. The Company has contracted to
lease, as tenant, two Microtel properties currently under construction. It
intends to assign these leases to suitable tenants, but no assurances can be
given that such assignments will occur. In the future, the Company may acquire
ownership interests in additional hotel properties or develop additional hotels.
These risks, which are applicable to Microtels as new construction properties
and Hawthorn Suites as both new construction and conversion properties, include
delays in completion of construction, failure to obtain all necessary zoning and
construction permits, discovery of environmental hazards, unavailability of
financing on favorable terms, if at all, the failure of developed properties to
achieve desired revenue or profitability levels once opened, competition for
suitable development sites from competing franchise chains,
21
<PAGE> 33
the risk of incurring substantial costs in the event a development project must
be abandoned prior to completion, changes in governmental rules, regulations and
interpretations and general economic and business conditions. The Company's
revenues may also be adversely affected by increases in interest rates, which
could increase the costs of financing new hotel construction or the conversion
of existing hotels. Any one of these risks could discourage or prohibit
potential franchisees from beginning or completing hotel projects. To the extent
the Company leases and/or owns hotel properties it would be subject to risks
experienced by hotel operators generally. In addition to the aforementioned
risks associated with the budget, extended-stay and transient suite segments of
the lodging industry, the Company's current and potential future ownership of
hotel properties creates a risk of decreased earnings due to losses related to
start-up expenses or ongoing losses due to shortfalls in expected performance of
a hotel. In addition, any guaranty required to secure construction or permanent
loan financing could adversely affect the Company's financial condition.
RISKS RELATING TO THE FINANCING OF FRANCHISEES
The Company participates, from time to time, in construction loans, equity
investments, and long-term mortgage loans made to franchisees. In such cases,
the Company would be subject to the risks experienced by lenders generally,
including risks of franchisee/borrower defaults and bankruptcies and as an
equity investor. In the event of a default under such loans, the Company, as a
lender, would bear the risk of loss of principal to the extent the value of the
collateral was not sufficient to pay lenders which may be more senior in the
capital structure. See "-- Regulation."
REGULATION
The sale of franchises is regulated by various state laws, as well as by
the Federal Trade Commission (the "FTC"). The FTC requires that franchisors make
extensive disclosure to prospective franchisees, although it does not require
registration of offers to prospective franchisees. A number of states require
registration and disclosure in connection with franchise offers and sales. In
addition, several states have "franchise relationship laws" that limit the
ability of franchisors to terminate franchise agreements or to withhold consent
to the renewal or transfer of these agreements. While the Company's franchising
operations currently are not materially adversely affected by such regulations,
the Company cannot predict the effect any future legislation or regulation may
have on its business operations or financial condition.
Additionally, various national, state and local laws and regulations may
affect activities undertaken by the Company in connection with providing
financing to franchisees. In particular, the Company may be required to obtain a
license or to register in certain states in order to arrange loans to be made to
franchisees. See "The Company -- Regulation."
MANDATORY REDEMPTION OF SUBORDINATED DEBENTURES
On January 1, 1997, USFS exercised its option to exchange its 10%
Cumulative Redeemable Exchangeable Preferred Stock at the Liquidation Value of
$18,477,000 into 10% Subordinated Debentures due September 29, 2007 (the
"Debentures"). 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. Michael A. Leven's employment with the Company
terminates for any reason or the Company were to otherwise experience a Change
of Control (which includes the termination for any reason of Michael A. Leven's
employment), the Company would be obligated to redeem all outstanding
Subordinated Debentures. Failure to make payments of interest and principal on
the Debentures when due could have a material adverse effect on the Company.
ABSENCE OF DIVIDENDS
USFS has not paid a dividend on USFS Common Stock since its inception. The
Company intends to retain any earnings to finance its growth and for general
corporate purposes and therefore does not anticipate paying any cash dividends
in the foreseeable future. In addition, future financing agreements may contain
22
<PAGE> 34
limitations on the payment of cash dividends or other distributions of assets to
the holders of Company Common Stock.
ANTI-TAKEOVER DEVICES
Certain identical provisions of the Charter and the By-Laws of USH and USFS
may be deemed to have anti-takeover effects and may delay, deter or prevent a
change in control of the Company that stockholders might otherwise consider in
their best interests. These provisions (i) allow only the Board of Directors,
the Chairman of the Board of Directors or the Chief Executive Officer of the
Company to call special meetings of the stockholders, (ii) eliminate the ability
of stockholders to take any action without a meeting, (iii) establish certain
advance notice procedures for nomination of candidates for election as directors
and for stockholder proposals to be considered at stockholders' meetings, (iv)
generally authorize the issuance of one or more classes of "blank check"
preferred stock, with such designations, rights and preferences as may be
determined from time to time by the Board of Directors, (v) require approval of
holders of 75% of the outstanding Company Class B Common Stock for the Board of
Directors to create a series of Preferred Stock with general voting rights or
with the right to elect a majority of directors under any circumstances and (vi)
require approval of holders of 75% of the outstanding voting power to amend or
repeal items (i), (ii), (v) and (vi) above.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The Merger is expected to be a tax-free reorganization within the meaning
of Section 368(a) of the Code for federal income tax purposes, so that no gain
or loss will be recognized by USFS's stockholders on the exchange of USFS Common
Stock for Company Common Stock. Although counsel to the Company will render an
opinion that the Merger will qualify as a tax-free reorganization within the
meaning of Section 368(a), no ruling will be obtained from the Internal Revenue
Service. If the Merger is not treated as a tax-free reorganization within the
meaning of Section 368(a), USFS stockholders would recognize taxable gain or
loss with respect to each share of USFS Common Stock surrendered equal to the
difference between the stockholder's tax basis in such share and the fair market
value, as of the Effective Time, of the Company Common Stock received in
exchange therefor. See "The Proposed Merger and Related Transactions -- Certain
Federal Income Tax Consequences."
LIMITED TRADING VOLUME OF COMMON STOCK
Historically, the shares of the USFS Common Stock have had relatively low
trading volume in the public markets. During the four week period ended December
1, 1997, for example, the weekly trading volume averaged 21,660 shares. There
can be no assurance that the trading volume for the Company Class A Common Stock
will increase or remain constant after the Merger. Low trading volume can
influence the trading price of a security, hamper the liquidity of an investment
in a security and result in volatility of the price of a security.
23
<PAGE> 35
THE COMPANY
GENERAL
The Company was formed in August 1995 to acquire, market and service
well-positioned brands with potential for rapid unit growth primarily through
franchising. The Company's initial brands, which are in the lodging industry,
are the Microtel and Hawthorn Suites brands. The Company acquired the rights to
these brands because of their potential for significant growth, which reflects,
among other things, their potential profitability for franchisees at the
property level and their positions in attractive segments of the lodging
industry.
At the time of the acquisition of the Microtel brand in October 1995, there
were 27 hotels open or under development, consisting of 23 that were open and 4
that were under construction. As of January 22, 1998, the brand had 371 hotels
open or under development, consisting of 64 that were open, 58 that were under
construction and 249 for which franchise agreements had been executed but that
were not under construction. In addition, as of January 22, 1998, the Company
had accepted applications from prospective franchisees for an additional 81
franchises. The hotels open or under development or for which franchise
applications had been accepted expands the number of states in which Microtel
hotels are or may be located from 10 in 1995 to 48 as of January 22, 1998. Based
upon the Company's limited historical experience to date, 22% of accepted
applications for Microtel hotels have terminated prior to resulting in open
hotels. Accordingly, there can be no assurances that hotels under development or
for which applications have been accepted will result in open hotels. See "Risk
Factors -- Dependence on, and Obstacles to, Hotel Openings."
At the time of the acquisition of the Hawthorn Suites brand in March 1996,
there were 18 hotels open or under development, consisting of 17 that were open
and 1 that was under construction. As of January 22, 1998, the brand had 98
hotels open or under development, consisting of 27 that were open, 19 under
construction and 48 for which franchise agreements had been executed but that
were not under construction. In addition, the Company had accepted applications
from prospective franchisees for an additional 23 franchises. Based upon the
Company's limited historical experience to date, 26% of accepted applications
for Hawthorn Suites brand hotels have terminated prior to resulting in open
hotels. Accordingly, there can be no assurances that hotels under development or
for which applications have been accepted will result in open hotels. See "Risk
Factors -- Dependence on, and Obstacles to, Hotel Openings."
As a franchisor, the Company 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), quality standards, training
programs, national reservations systems, national and local advertising and
promotional campaigns and volume purchasing discounts.
During the nine months ended September 30, 1997, approximately 40% of the
Company's revenues was from franchise royalty fees and franchise application
fees, approximately 54% was from reservation and marketing fees and
approximately 6% was from various fees and other revenues including from the
Company's own lending or investment, or from third-party financing arranged by
the Company for its franchisees. In addition, the Company in the future may
acquire ownership interests in hotel and other properties in brands that it
franchises or otherwise may operate franchised or other properties pursuant to
management contracts under which it would receive a management fee. The Company
currently owns three Microtel properties currently under construction which it
expects to sell after completion. However, no assurances can be given that such
sales will take place. The Company has contracted to lease, as tenant, two
Microtel properties currently under construction. It intends to assign these
leases to suitable tenants, but no assurances can be given that such assignments
will occur. 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.
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<PAGE> 36
The Company's predecessor, USFS, was incorporated in Delaware in August
1995. The Company's executive offices are located at 13 Corporate Square, Suite
250, Atlanta, Georgia 30329 and its telephone number is (404) 321-4045.
RECENT DEVELOPMENTS
On December 15, 1997 USFS signed a definitive agreement with the Seller to
acquire the exclusive worldwide franchise rights to the Best Inns and Suites of
America hotel brands. In addition, USFS will acquire the assets of the company
that provides fee-based management services to 28 existing Best hotels. In the
proposed transaction, each of the 34 existing Best properties will enter into
franchise agreements and management contracts with USFS. In connection with this
acquisition, USFS expects to complete the following transactions with Highend
Hospitality Partners, LLC, (the "Third Party Buyer") if the Third Party Buyer
agrees to acquire from the Seller 17 Best hotels, although the Company and the
Third Party Buyer have not yet entered into definitive documentation: (i) the
Company expects to make a $5,000,000 subordinated loan at an interest rate of
12% per annum to, or a $5,000,000 equity investment in, the Third Party Buyer,
(ii) the Company expects to issue to the Third Party Buyer 200,000 shares of
USFS Class A Common Stock (or Company Class A Common Stock if the Merger has
been consummated by such date) at a cash price per share equal to $8.00 (the
closing price of the USFS Class A Common Stock on December 15, 1997), and (iii)
the Company expects to issue an additional 150,000 shares of Class A Common
Stock (or Company Class A Common Stock, as the case may be) to the Third Party
Buyer for no additional cash consideration, making its total holdings an
aggregate of 350,000 shares of USFS Class A Common Stock (or Company Class A
Common Stock, as the case may be). The Company expects to issue such additional
shares in lieu of issuing, as originally requested by the Third Party Buyer, a
warrant to acquire a greater number of shares of USFS Class A Common Stock (or
Company Class A Common Stock, as the case may be). No officer, director or, to
the best of the Company's knowledge, 5% or greater shareholder of USFS or HSA
LLC is a partner, officer or director of the Third Party Buyer. USFS expects to
extend the loan to, or make the investment in, the Third Party Buyer and to
issue the shares to the Third Party Buyer in order to induce it to purchase from
the Seller 17 of the existing Best hotels, which is a condition to USFS's
ability to acquire the assets it proposes to acquire in the transaction. The
Seller has imposed this condition because it wishes to sell all of its Best
hotels assets, but the Company wished only to purchase the franchise rights and
management service company assets. The transaction is subject to the Company's
completion to its satisfaction of its due diligence review, the execution and
delivery of definitive documentation by the Company and the Third Party Buyer,
and other customary conditions and no assurances can be made that the
transaction will be completed or that it will be completed on the foregoing
terms.
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
successfully accomplish the growth strategy, the responsibilities of the
Company's franchise service personnel include, among other things, supporting
franchisees in their efforts to develop, construct and open hotels. For example,
the Company's franchise services department reviews site plans and construction
drawings and aids franchisees in the areas of public relations, marketing,
finance, national accounts purchasing and training. The Company also, from time
to time, may make loans and/or equity investments in certain hotels in order to
assist a franchisee with its financing needs. The Company expects to use its
existing cash balance to fund these activities during 1998.
Additionally, the Company intends to continually examine acquisition
opportunities that have the potential to expand its portfolio of franchised
brands both inside and outside of the lodging industry. No assurances can be
made, however, that the Company will consummate any acquisitions. Such
acquisitions would be financed through combinations of the Company's cash
reserves, the issuance of equity securities
25
<PAGE> 37
and/or debt financing provided by third party lenders, although there can be no
assurances that financing would be available on terms acceptable to the Company
or at all.
In addition, the Company, from time to time, may acquire ownership
interests in properties, certain of which may operate under brands franchised by
the Company and may in the future enter into management contracts to operate
properties, certain of which may be franchised by the Company.
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"). These
categories include, in descending order of ADR, luxury, upscale, mid-price,
economy and budget. 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,
the upscale segment of the extended-stay and transient suite sectors through its
Hawthorn Suites brand and the mid-priced segment through its Hawthorn Suites LTD
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 for the 10 months
ended October 31, 1997 of approximately $40.85, 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. There is no minimum capital requirement for new
franchises. Each franchise application is reviewed on an individual basis.
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<PAGE> 38
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:
MICROTEL FRANCHISE DATA*
<TABLE>
<CAPTION>
AS OF AS OF AS OF AS OF
DECEMBER 31, 1996 DECEMBER 31, 1995 SEPTEMBER 30, 1997 JANUARY 22, 1998
----------------- ----------------- ------------------ ----------------
<S> <C> <C> <C> <C>
Hotels Open............. 23 28 58 64
Hotels Under
Development:
Executed, Under
Constr............. 4 25 40 58
Executed, not Under
Constr............. 3 169 224 249
Total Under
Development........... 7 194 264 307
Applications Accepted... 12 82 92 81
-- --- --- ---
Total Under Develop.
and
Accepted
Applications....... 19 276 356 388
Total Open, Under
Develop. and Accepted
Applications.......... 42 304 414 452
</TABLE>
- ---------------
* The Company will not receive royalties from 28 of the 64 open hotels as of
January 22, 1998 (it does and will receive marketing and reservation fees from
the franchisees of these properties). The Company will not receive royalties
from four of the 249 executed but not under construction locations when and if
opened. All of the properties currently under construction will pay royalties
to the Company. Only one of the 107 accepted applications falls into the
non-royalty paying category. There can be no assurances that hotels under
development or for which applications have been accepted will result in open
hotels. See "Risk Factors -- Dependence on, and Obstacles to, Hotel Openings."
MICROTEL INNS AND SUITES
ANALYSIS OF ADR, OCCUPANCY, AND REVPAR*
YEARS ENDED DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 YEAR ENDED DECEMBER 31, 1996
----------------------------------------- -----------------------------------------
AVERAGE REVENUE AVERAGE REVENUE
NUMBER AVERAGE PER NUMBER AVERAGE PER
OF AVERAGE DAILY AVAILABLE OF AVERAGE DAILY AVAILABLE
ROOMS OCCUPANCY RATE ROOM ROOMS OCCUPANCY RATE ROOM
------- --------- ------- --------- ------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
South East(1)......................... 96 69.5% $42.71 $29.70 96 68.2% $41.09 $28.01
North Central(2)...................... 96 67.7% $38.02 $25.73 96 70.3% $37.33 $26.26
South Central(3)...................... 100 66.6% $37.87 $25.22 100 65.9% $36.55 $24.08
North East(4)......................... 100 74.0% $38.23 $28.27 100 73.1% $37.34 $27.28
Total................................. 99 69.9% $39.22 $27.42 99 69.4% $37.91 $26.31
</TABLE>
- ---------------
* Data presented is for 27 properties open more than one year.
(1) Consists of a total of 7 properties located in Georgia, North Carolina and
West Virginia.
(2) Consists of a total of 2 properties located in Ohio.
(3) Consists of a total of 9 properties located in Alabama, Kentucky, Tennessee
and Texas.
(4) Consists of a total of 9 properties located in New York and Pennsylvania.
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,
27
<PAGE> 39
will also be part of newly constructed Hawthorn Suites hotels. There is no
minimum capital requirement for new franchises. Each franchise application is
reviewed on an individual basis.
In addition to participating in the upscale, extended-stay segment through
its Hawthorn Suites brand, the Company also franchises Hawthorn Suites LTD, a
mid-price, all suites hotel brand that is designed to meet the needs of both the
extended-stay and transient guests. 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"). Spirit is operated under contract with Hyatt
Hotels Corporation ("Hyatt") by CSC Outsourcing, Inc. ("CSC") and Sabre
Technology Solutions ("Sabre"). Spirit 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. Spirit also currently operates
the reservations system for Hyatt hotels. Hyatt manages the voice and Global
Distribution System ("GDS") reservation activities for both Hawthorn Suites and
Hyatt through the Spirit Reservation Center located in Omaha, Nebraska. 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 nearest Hawthorn
Suites hotel. There can be no assurance, however, that CSC and Sabre will
continue to service the Hawthorn Suites' reservation needs in the future.
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 increased 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. 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.
HAWTHORN SUITES DATA*
<TABLE>
<CAPTION>
AS OF AS OF AS OF AS OF
MARCH 31, DECEMBER 31, SEPTEMBER 30, JANUARY 22,
1996** 1996 1997 1998
--------- ------------ -------------- -----------
<S> <C> <C> <C> <C>
Hotels Open..................................... 17 19 22 27
Hotels Under Development:
Executed, Under Constr........................ 0 2 9 19
Executed, not Under Constr.................... 0 17 51 48
Total Under Development....................... 0 19 60 67
Applications Accepted........................... 0 19 23 23
-- -- --- ---
Total Under Develop. and Applications
Accepted................................... 0 38 83 90
Total Open, Under Develop. and Applications
Accepted...................................... 17 57 105 117
</TABLE>
- ---------------
* The Company will not receive royalties from 19 of 27 open hotels as of
January 22, 1998 (it does and will receive marketing and reservation fees
from the franchisees of these properties). There can be no assurances the
hotels under development or for which applications have been accepted will
result in open hotels. See "Risk Factors -- Dependence On, and Obstacles to,
Hotel Openings."
** The Hawthorn Suites brand was not franchised by USFS until March 27, 1996.
28
<PAGE> 40
HAWTHORN SUITES ANALYSIS OF ADR, OCCUPANCY AND REVPAR*
YEARS ENDED DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 YEAR ENDED DECEMBER 31, 1996
----------------------------------------- -----------------------------------------
AVERAGE REVENUE AVERAGE REVENUE
NUMBER AVERAGE PER NUMBER AVERAGE PER
OF AVERAGE DAILY AVAILABLE OF AVERAGE DAILY AVAILABLE
ROOMS OCCUPANCY RATE ROOM ROOMS OCCUPANCY RATE ROOM
------- --------- ------- --------- ------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
South East(1)......................... 178 71.4% $92.85 $66.34 178 76.0% $92.88 $70.58
North Central(2)...................... 118 80.7% $85.17 $68.69 118 81.2% $82.32 $66.85
South Central(3)...................... 111 76.6% $75.84 $58.08 111 75.6% $75.47 $57.05
North East(4)......................... 151 68.0% $75.69 $51.44 151 76.1% $72.63 $55.25
West(5)............................... 113 78.6% $93.66 $73.66 113 70.9% $81.98 $58.16
Total................................. 129 75.3% $83.64 $63.02 129 76.3% $81.40 $62.11
</TABLE>
- ---------------
* Data presented is for 19 properties open more than one year.
(1) Consists of a total of 4 properties located in Florida, Georgia, North
Carolina and South Carolina.
(2) Consists of a total of 3 properties located in Illinois, Minnesota and
Nebraska.
(3) Consists of a total of 9 properties located in Oklahoma and Texas.
(4) Consists of a total of 1 property located in Pennsylvania.
(5) Consists of a total of 2 properties in Washington.
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 39 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 terminate the license. Since the Company
acquired the Microtel brand, two properties have been terminated from the
Microtel system due to quality deficiencies.
Marketing. Among the franchise community, the focus of the Company's
marketing and advertising support is on publications that target the hospitality
industry, direct mail and attendance at industry shows. To reach consumers,
franchisees are supplied with a detailed marketing guide, print advertising,
local radio spots, outdoor billboard designs and rack cards. In addition, in the
case of Hawthorn Suites, direct sales plays a
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<PAGE> 41
significant role, with advertising and marketing materials targeted to travel
agents, planners and buyers of extended-stay accommodations, print advertising
runs in Business Travel News, and targeted human resources, training and
relocation publications. Separate Microtel and Hawthorn directories are
published twice annually and distributed via direct mail and to existing
properties.
In addition, Microtel's media plan is designed to reach the maximum number
of travelers, garner the most impressions and give the brand a local, regional
and national presence. 1997 highlights include:
- USA Today -- 110 insertions appeared throughout 1997 to reinforce the
message, "There's Room for Everyone."
- The "Microtel Get To Know US Tour" was introduced as, the Company
believes, the hospitality industry's first replica on wheels to include
full-size models of the chain's single, double and suite
accommodations. The 60-foot trailer on wheels covers the U.S. to give
franchisees' local customer base a look inside a Microtel before it is
actually built.
- Truckside Advertising -- Microtel uses this innovative moving
billboard concept on 16 trucks traveling 34 interstate highways through
24 states, to reach travelers every month.
- AAA Tour Books -- an official appointment ran for every open Microtel
in these trade books. In 1998, Microtel expects to advertise on the
prominent inside front cover of the AAA Triple-A Road Atlas.
- The Internet -- Microtel's web site at www.microtelinn.com includes
its "Travelers Disability Survey" plus the "Micro PI Game." In
addition, consumers and other travel decision-makers can now make
reservations for Hawthorn Suites at www.hawthorn.com. Both sites offer
visitors a full directory of property listings with information and
maps for every location.
Public Relations. A targeted public relations program supports marketing
and franchise sales efforts by promoting awareness of the Company as the Company
becomes a more significant participant in the lodging industry. The public
relations department works with all facets of the corporate organization, from
sales and franchise services to design and construction to the franchisees
themselves to establish the Company in the industry and in the minds of
consumers.
The Company's public relations efforts focus on the lodging industry trade
publications. The Company works closely with such publications as Hotel
Business, Hotel & Motel Management, Lodging, Lodging Hospitality, Business
Travel News, The Cornell Quarterly, AAHOA (the magazine dedicated to Asian
American hoteliers) and Franchise Times. Such outlets communicate the Company's
news to the lodging community and to the many top name travel writers and
newspaper journalists who read the trades regularly as well. In 1997, trade
publications have covered many facets of the Company's rapid growth, including
the opening of its 50th hotel, the debut of the brand extension, Hawthorn Suites
LTD., "FIRST" (the Company's new central reservations system, initially intended
to support the Microtel brand and any other brands of the Company not supported
by Spirit), the expansion of its sales staff, its international expansion, its
presence at airports around the country, and the Company's second anniversary
celebration.
The Company has reached traveling consumers via advertisements or news
stories in the Wall Street Journal, and USA Today's "Business Travel Today"
column. No less important have been the Company's placements at the local level,
where daily and business publications report on individual property ground
breaks and grand openings.
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.
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<PAGE> 42
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 certain products, services, furnishings, and equipment used in
construction and ongoing operations. The Company has established relationships
with vendors to the lodging industry and negotiates discounts for purchases by
its customers. In certain cases, the Company receives payments from the vendors
as well. Currently, the Company does not maintain inventory, directly supply any
of the products, or extend credit to franchisees for such purchases.
FRANCHISE AGREEMENTS
The Company's franchise agreements grant hotel owners the right to utilize
one of the brand names associated with the Microtel or Hawthorn Suites hotel
systems under long-term franchise agreements. In order to qualify for a
franchise from the Company, a candidate must undergo a screening process, which
typically includes a review of the potential franchisee's operational ability
and financial condition and the proposed lodging location. A representative of
the Company conducts a site inspection to determine whether the location meets
standards and whether the brand name selected is appropriate at that location.
The Company considers such factors as accessibility, visibility, location,
economics, demographics, the extent of commercial development and, in the case
of Hawthorn Suites conversions, facility condition. When executed, both Microtel
and Hawthorn Suites franchise agreements offer an area of exclusivity to each
location, the degree of which is negotiated individually with each franchisee.
The Company's current standard agreements are for 20-year terms for new
construction properties and 10-year terms for conversion properties (in the case
of Hawthorn Suites only). The standard franchise agreements generally require
franchisees to satisfy certain development milestones, including a requirement
that construction begin within six to nine months of execution of the franchise
agreement, although generally there exists a 30-day cure period. Franchisees are
required to pay royalty fees to the Company based upon the gross room revenues
of the franchised hotel during the term of the agreement and an application fee.
Franchise application fees are non-refundable and are generally collected from
potential franchisees upon execution of the franchise agreement.
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 (and could result in a
loss) 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 currently 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.
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<PAGE> 43
The terms of the Company's current standard forms of franchise agreements
state that, by year of operation, franchisees are required to pay the following
ongoing royalty fees and reservation and marketing fees (each, as a percentage
of gross room revenues), although the actual fees may vary:
<TABLE>
<CAPTION>
MICROTEL HAWTHORN
-------- --------
<S> <C> <C>
SUITES
FRANCHISE ROYALTY FEES
Year 1.................................................... 4.0% 5.0%
Year 2.................................................... 5.0% 5.0%
Year 3 and thereafter..................................... 6.0% 5.0%
RESERVATION AND MARKETING FEES
Year 1.................................................... 3.0% 2.5%
Year 2.................................................... 2.5% 2.5%
Year 3 and thereafter..................................... 2.0% 2.5%
TOTAL FRANCHISE FEES
Year 1.................................................... 7.0% 7.5%
Year 2.................................................... 7.5% 7.5%
Year 3 and thereafter..................................... 8.0% 7.5%
</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 one 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, although no
assurances can be given that such incentives will be offered in the future. 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 believes that it has a franchisee-friendly franchise agreement,
making the Company's franchises 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 "Microtel Acquisition"). The purchase price for these franchise rights and
operating assets was $3,037,000, of which the Company paid $1,600,000 at the
closing on October 5, 1995 and agreed to pay a total of $1,437,000 plus interest
at 10% over the following three years (for a total payment of approximately
$1,700,000). In addition, royalties are payable to Hudson, as described below,
for the right to all trade names, trademarks, service marks and other
intellectual property used in connection with the Microtel business, including
the Microtel name (the "Proprietary Marks").
The operating assets of the Microtel system acquired from Hudson included
(i) all prototype architectural plans and designs used in connection with the
Microtel business and (ii) the Microtel reservation referral system,
directories, manuals and marketing materials.
Pursuant to the Microtel Acquisition, the Company also acquired Hudson's
rights under then existing Microtel franchising agreements relating to the 27
Microtels open or under development at the time of the acquisition. Although the
Company acquired the existing franchises from Hudson and is obligated to fulfill
all the obligations of the franchisor thereunder, Hudson retained the right to
receive all franchise royalties and
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<PAGE> 44
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 (which do not result in any profit,
and could result in a loss, to the Company) 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 the right to retain
franchise fees and royalty payments from a total of 50 Microtels and an
additional 10 Microtel all-suites hotels provided Hudson, its affiliates or such
other persons own and operate the hotels covered by such franchises. In addition
to the 27 existing hotels either open or under construction as of October 5,
1995, Hudson, its affiliates and certain other persons had the right to acquire
from the Company up to an additional 23 Microtel hotel franchises and up to an
additional 10 Microtel all-suites hotels. As of January 22, 1998, two of the
original 27 agreements had been terminated and three additional agreements had
been executed and opened. Thus, the Company will not receive royalties from 28
open hotels and Hudson currently retains the right to acquire an additional 22
Microtel franchises and 10 additional Microtel all-suite hotels. Four of these
additional 22 Microtel franchise agreements have been executed as of January 22,
1998, but none of the properties subject thereto are currently under
construction.
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 in cash to Hudson as follows: 1.0% of the "revenues subject to
royalties" on the first 100 Microtels Properties opened after the closing, 0.75%
of such revenues for the next 150 Microtels Properties opened, and 0.50% of such
revenues for each Microtel Property opened after the first 250 have opened.
"Revenues subject to royalties" generally are those payable by the franchisees
to the Company based on gross room revenues, as well as other royalty payments
payable by such franchisees under the applicable franchise agreement. The
Company is entitled to all other fees (other than termination fees, which must
be shared with Hudson) payable by the Microtel franchisees, including the
franchise application fees, all of the remaining royalties, reservation and
marketing fees and fees applicable to any financing arranged through the
Company.
The Microtel Acquisition Agreement requires the Company to satisfy a
development schedule, which requires that new Microtel Properties be opened or
under construction in the following numbers, on a cumulative basis, by December
of each of the following years:
<TABLE>
<CAPTION>
NUMBER OF
YEAR MICROTEL PROPERTIES(*)
- ---- ----------------------
<S> <C>
1997................................................... 50
1998................................................... 100
1999................................................... 175
2000................................................... 250
</TABLE>
- ---------------
* Excludes the 28 open Microtel Properties not currently paying royalties to the
Company and the additional 22 Microtel Properties and ten Microtel all-suite
hotels that are currently entitled to be franchised without the payment of
royalties to the Company pursuant to the Microtel Acquisition Agreement. As of
December 12, 1997, five franchise agreements in respect of these additional
properties had been executed.
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
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<PAGE> 45
development schedule for such two year period (including determination of
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, none of which have been exercised. The
warrants expire on September 1, 2000.
Hawthorn Acquisition. On March 27, 1996, the Company entered into the
Hawthorn Acquisition Agreement with HSA LLC, an entity indirectly controlled by
trustees of trusts for the benefit of members of the Pritzker family, pursuant
to which the Company acquired the exclusive rights to franchise and to control
the development and operation of the Hawthorn Suites brand of hotels. At such
time, all of the intellectual property related to the Hawthorn Suites brand was
transferred to HSA LLC, a newly-formed Delaware limited liability company, and
USFS was issued a 1% membership interest in HSA LLC to permit it to vote on
certain matters related to the operation of HSA LLC. As a result of the Merger
Transactions, HSA LLC will become a wholly owned subsidiary of the Company and
the Hawthorn Acquisition Agreement will be terminated. Thereafter, the Company
will have the exclusive right to franchise the Hawthorn Suites brand of hotels
and to retain 100% of the royalties derived therefrom without the restrictions
contained in the Hawthorn Acquisition Agreement.
SEASONALITY
Royalties generated by gross room revenues of franchised properties are
expected to be the principal source of revenue for the Company for the immediate
future, although the Company may in the future franchise non-lodging brands and
may derive revenues from other activities, such as management fees and returns
on debt and equity investments in properties. During 1996 and the nine months
ended September 30, 1997, such royalty revenues were $5,000 and $191,000,
respectively. 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 expand 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 buy or sell the property. The
Company's franchisees compete for guests with franchisees of, and properties
owned or operated by, other hotel chains, independent properties and owner-
34
<PAGE> 46
operated chains. The success of the Company's franchisees affects the
profitability of the Company, as the Company's receipt of royalty fees under its
franchise agreements is tied directly to the gross room revenues earned by its
franchisees.
In choosing a particular hotel, consumers consider differences in room
rates, quality and condition of accommodations, name recognition, availability
of alternative lodging (including short-term lease apartments), service levels,
reputation, safety, reservation systems and 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/or 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 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 Uniform
Franchise Offering Circular ("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 federal, state, and local laws and regulations may
affect activities undertaken by the Company in connection with the financing of
franchisees that the Company may undertake. 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 third party lenders or in the event
the Company determines to make loans itself to franchisees.
EMPLOYEES
As of January 22, 1998 the Company employed approximately 87 full time and
3 part time persons. None of the Company's employees are represented by unions.
Management considers its employee relations to be satisfactory.
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, MICROTEL INN with
design, MICROINN, MICROTEL INN & SUITES with design, MICROTEL SUITES with
design, MICROSUITES, US TRAINING INSTITUTE 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.
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<PAGE> 47
Currently, the Company is the exclusive licensee of the Hawthorn Suites
brand of hotels and, upon consummation of the Merger Transactions, will own the
marks and other intellectual property used in the Hawthorn Suites brand,
including, among others, the trademarks HAWTHORN SUITES, the tree logo, HAWTHORN
SUITES with the tree logo and HAWTHORN SUITES LTD. with design.
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.
PROPERTIES
The principal executive and administrative offices of the Company are
located at 13 Corporate Square, Suite 250, Atlanta, Georgia 30329. The Company
currently leases a total of 12,667 square feet of office space at the foregoing
address, pursuant to a lease and a sublease that expire on September 30, 2000
and June 30, 1999, respectively.
LEGAL PROCEEDINGS
The Company is not a party to any material litigation. However, claims and
litigation may arise in the normal course of business.
USFS HAWTHORN, INC.
USFS Hawthorn, Inc. was formed in Delaware on November 26, 1997 solely for
the purpose of effecting the Merger. Immediately prior to the Merger, pursuant
to the Contribution Agreement among HSA, HPI, USH and USFS, it is anticipated
that HSA and HPI will transfer to USH all of their respective membership
interests in HSA LLC on the terms, and subject to the conditions, contained in
the Contribution Agreement. Pursuant to the Transfer, HPI shall acquire 22,447
shares of Company Class A Common Stock and HSA shall acquire 2,199,775 shares of
Company Class A Common Stock. Upon consummation of the Merger, USFS will be
merged into USH with USH as the Surviving Company; USFS's separate corporate
existence will thereupon cease. As part of the Merger, the Company will change
its name to "U.S. Franchise Systems, Inc." The mailing address of the Company's
principal executive offices is 13 Corporate Square, Suite 250, Atlanta, Georgia
30329, and its telephone number is (404) 321-4045.
HSA PROPERTIES, LLC
HSA Properties, LLC is a Delaware limited liability company formed in March
1996, the sole members of which are HSA, HPI and USFS. The sole material assets
of HSA LLC consist of the trademarks, service marks, designs, logos, trade
names, brand names, copyrights and other items of intellectual property related
to the Hawthorn Suites brand of hotels, all of which HSA LLC licenses to USFS
exclusively for its use as franchisor of the Hawthorn Suites hotel brand. HSA
LLC has no other properties or operations, no employees and is not a party to
any other material agreement that will not be terminated on or prior to the
consummation of the Merger. HSA LLC has had no material revenues since its
formation from any source other than payments by USFS under the Hawthorn
Acquisition Agreement.
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<PAGE> 48
THE SPECIAL MEETING
GENERAL
This Proxy Statement/Prospectus is being furnished to stockholders of USFS
in connection with the solicitation of proxies by the Board of Directors of USFS
for use at the Special Meeting to be held on March 11, 1998 at 4:00 p.m., local
time, at the Company's Offices, 13 Corporate Square, Suite 250, Atlanta, Georgia
30329, and any adjournments or postponements thereof.
MATTERS TO BE CONSIDERED
At the Special Meeting, holders of USFS Common Stock will consider and vote
upon a proposal to approve the Merger Agreement, which provides for the merger
of USFS into USH with USH being the surviving corporation, and such other
matters as may properly be brought before the Special Meeting or any
adjournments or postponements thereof. Neither the Board nor USFS currently
intends to bring any business other than the approval of the Merger Agreement
and the Merger before the Special Meeting or any adjournments or postponements
thereof. See "The Proposed Merger and Related Transactions."
VOTE REQUIRED
Approval of the Merger Agreement and the Merger requires the affirmative
vote of a majority of the outstanding voting power of the USFS Common Stock. A
vote by a stockholder of USFS to approve the Merger Agreement will constitute a
vote to approve the terms of, and the transactions contemplated by, the Merger
Agreement (including the Merger). Holders of shares representing a majority of
the outstanding voting power of USFS, principally consisting of Michael A. Leven
and Neal K. Aronson, have indicated to the Company their intention to vote in
favor of the Merger.
One-third of the shares entitled to vote at the Special Meeting,
represented in person or by proxy, constitutes a quorum. The Special Meeting may
be adjourned if a quorum is not present for the purpose of obtaining additional
proxies or votes or for any other purpose, and, at any subsequent reconvening of
the Special Meeting, all proxies will be voted in the same manner as such
proxies would have been voted at the original convening of the Special Meeting
(except for any proxies that have theretofore been revoked or withdrawn),
notwithstanding that they may have been voted on the same or any other matter at
a previous meeting. In the event that a vote to adjourn the Special Meeting is
taken at the Special Meeting, proxies voting AGAINST the Merger Agreement and
the Merger will not be voted by management FOR adjournment pursuant to its
discretionary authority.
Under the DGCL, in determining whether the proposal regarding the approval
of the Merger Agreement has received the requisite number of affirmative votes,
abstentions and broker nonvotes will be counted and will have the same effect as
a vote against such proposal. Holders of USFS Class A Common Stock are entitled
to one vote at the Special Meeting for each share of USFS Class A Common Stock
held of record at the close of business on the Record Date. Holders of USFS
Class B Common Stock are entitled to ten votes at the Special Meeting for each
share of USFS Class B Common Stock held of record at the close of business on
the Record Date. As of the Record Date, directors and executive officers of USFS
and their affiliates who, in the aggregate, were entitled to vote 2,483,276
shares of USFS Class A Common Stock and 2,707,919 of USFS Class B Common Stock,
representing approximately 80.06% of the total shares entitled to vote at the
Special Meeting.
THE BOARD OF DIRECTORS OF USFS HAS UNANIMOUSLY APPROVED THE TERMS OF THE
MERGER AGREEMENT AND THE MERGER AND RECOMMENDS THAT THE STOCKHOLDERS OF USFS
VOTE FOR APPROVAL OF THE MERGER AGREEMENT AND THE MERGER. HOLDERS OF A MAJORITY
OF THE OUTSTANDING VOTING POWER OF USFS HAVE INDICATED TO USFS THEIR INTENTION
TO VOTE IN FAVOR OF THE MERGER.
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RECORD DATE; PROXIES
The Board of Directors of USFS has fixed the close of business on January
30, 1998 as the Record Date for determining the stockholders of USFS entitled to
notice of and to vote at the Special Meeting. At the close of business on the
Record Date, there were 9,844,972 shares of USFS Class A Common Stock
outstanding and entitled to vote, held of record by 95 holders and 2,707,919
shares of USFS Class B Common Stock outstanding and entitled to vote, held of
record by 3 holders. Holders of shares of USFS Common Stock entitled to vote at
the Special Meeting (including any adjournments or postponements thereof) and
which are represented by properly executed proxies in the form enclosed with
this Proxy Statement/Prospectus will, unless such proxies have previously been
revoked, be voted in accordance with the instructions indicated in such proxies.
To the extent instructions are not indicated on an otherwise properly executed
proxy, shares will be voted in favor of the approval of the Merger Agreement and
the Merger and in the discretion of the proxy holder as to any other matter that
may properly come before the Special Meeting. A USFS stockholder who has given a
proxy may revoke such proxy at any time prior to its exercise at the Special
Meeting by (i) giving written notice of revocation bearing a later date than the
proxy to the Secretary of USFS, (ii) properly submitting to USFS a duly executed
proxy card relating to the same shares bearing a later date or (iii) attending
the Special Meeting and voting in person. Attendance at the Special Meeting will
not in and of itself revoke a proxy. All written notices of revocation and other
communications with respect to the revocation of proxies by USFS stockholders
should be addressed as follows: U.S. Franchise Systems, Inc., 13 Corporate
Square, Suite 250, Atlanta, Georgia 30329, Attention: Secretary, or
hand-delivered to the Secretary of USFS before the vote is taken at the Special
Meeting.
HOLDERS OF USFS COMMON STOCK SHOULD NOT SEND ANY STOCK CERTIFICATES WITH
THEIR PROXY CARDS. IF THE MERGER AGREEMENT AND THE MERGER ARE APPROVED, HOLDERS
OF USFS COMMON STOCK WILL BE SENT A LETTER OF TRANSMITTAL WITH INSTRUCTIONS FOR
SURRENDERING THEIR CERTIFICATES REPRESENTING SHARES OF USFS COMMON STOCK.
SOLICITATION OF PROXIES
USFS will bear the expense of the proxy solicitation. In addition to
solicitation of proxies by mail, the directors, officers and employees of USFS
may solicit proxies from stockholders personally or by telephone, telegraph or
facsimile transmission. Such directors, officers and employees will not be
compensated for such solicitation but may be reimbursed for reasonable
out-of-pocket expenses. Arrangements will also be made with banks, brokerage
houses and other custodians, nominees and fiduciaries for forwarding proxy
solicitation materials to beneficial owners of shares held of record by such
persons, and USFS will reimburse such custodians, nominees and fiduciaries for
their reasonable out-of-pocket expenses in connection therewith.
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THE PROPOSED MERGER AND RELATED TRANSACTIONS
GENERAL
The discussion in this Proxy Statement/Prospectus of the Merger Agreement,
the Merger and the Merger Transactions and the description of the principal
terms of the Merger Agreement, the Contribution Agreement and the Shareholders
Agreement are subject to and qualified in their entirety by reference to the
Merger Agreement, the Contribution Agreement and the form of the Shareholders
Agreement, copies of which are attached to this Proxy Statement/Prospectus as
Appendices A, B-1 and B-2, respectively, and are incorporated herein by
reference.
BACKGROUND OF THE MERGER AND THE MERGER TRANSACTIONS
The terms and conditions of the Merger and the Merger Transactions were
agreed upon as a result of arm's-length negotiations between the senior
management and Board of Directors of USFS and senior management and
representatives of HSA and HPI, the owners of 99% of the membership interests of
HSA LLC. The Merger Transactions were structured to include as a "reverse
merger" of USFS into USH so that the acquisition by USFS of HSA LLC not result
in taxable gain to HSA or HPI. The following is a summary of the primary
contacts, meetings and negotiations which occurred in connection with this
transaction:
In late summer 1996, shortly before the Company filed a registration
statement in connection with its initial public offering of its Class A Common
Stock, representatives of USFS contacted a representative of HSA and HPI to
explore a transaction in which the Company's continuing obligations under the
Hawthorn Acquisition Agreement would be terminated in exchange for shares of the
Company's Class A Common Stock. In response, the representative of HSA and HPI
proposed a transaction in which 15% of the fully diluted shares of the Company's
common stock would be exchanged for termination of the Company's continuing
obligations under the Hawthorn Acquisition Agreement. The USFS Board of
Directors rejected this proposal, having considered the number of shares
requested to be too numerous based upon the Company's relatively short
experience with the operations of the Hawthorn Suites brand.
In September 1997, representatives of HSA, HPI and USFS, renewed
discussions. The discussions focused primarily on the considerations outlined
below, including, but not limited to, potential Board representation, tag-along
rights and the number of shares of USFS Class A Common Stock to be transferred
to HSA and HPI and the related stock price per share. The Company's Board of
Directors had concluded that the Company's experience with the Hawthorn Suites
brand since the summer of 1996 made it attractive to pursue the transaction
previously proposed by the HSA and HPI. Such factors included the acceleration
of the Company's franchise sales efforts for the Hawthorn Suites brand, the
breaking of ground for several new hotels, and the realization that certain
restrictions imposed by the Hawthorn Acquisition Agreement were potentially
hindering USFS's growth plans by precluding it from franchising or acquiring
certain other hotel brands. The Company faxed a new proposal to a representative
of HSA and HPI on October 8, 1997. The new proposal offered 2.08 million shares
consisting of 1.25 million shares of USFS Class A Common Stock plus $10 million
of preferred stock exchangeable into 0.83 million shares of USFS Class A Common
Stock at a conversion price based upon a 50% premium to the then current stock
price. HSA and HPI responded to the Company's proposal on October 17, 1997 and a
series of conversations ensued and resulted in a revised proposal being
submitted by the Company on October 20, 1997. The revised proposal increased the
number of shares of USFS Class A Common Stock to 2.25 million based upon a
reduced conversion premium of 25%. The revised proposal also offered a USFS
Board seat to a representative of HSA and HPI and certain tag-along and
piggyback registration rights. The final proposal introduced the "reverse
merger" structure, eliminated the preferred stock component, fixed the number of
shares at 2.22 million shares of USFS Class A Common Stock, offered a USFS Board
seat to Mr. Doug Geoga or the then current president of Hyatt Hotels Corporation
and resolved all remaining issues relating to standstill provisions, tag-along
provisions and registration rights. Further discussions among the parties
resulted in an agreement in principle being reached on November 6, 1997 and
definitive documentation being executed on December 9, 1997.
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USFS'S REASONS FOR THE MERGER;
RECOMMENDATION OF USFS'S BOARD OF DIRECTORS
USFS has determined that the terms of the Merger Agreement and the
transactions contemplated thereby (the "Transactions") are fair to, and in the
best interests of, USFS and its stockholders. Accordingly, the USFS Board of
Directors has unanimously approved the Merger Agreement and recommends
unanimously that the stockholders of USFS vote FOR approval of the Merger
Agreement and the Merger. In reaching its determination, the USFS Board
consulted with USFS's management, as well as its special legal counsel, Paul,
Weiss, Rifkind, Wharton and Garrison and considered the following material
factors:
1. the Merger Transactions will result in the Company owning all of
the rights to, and intellectual property associated with, the Hawthorn
Suites hotel brand and permit the Company to terminate the Hawthorn
Acquisition Agreement;
2. the Merger Transactions will permit the Company to retain the
revenue stream currently required to be paid to HSA LLC in the form of
franchise royalty fees, which currently is 66.7% of the franchise royalty
fees paid to the Company by franchisees of Hawthorn Suites brand hotels;
3. the Merger Transactions will eliminate certain restrictions
contained in the Hawthorn Acquisition Agreement which prevent the Company
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;
4. the Merger Transactions will eliminate the risk that the Company
will be required to pay additional royalty fees to HSA LLC as a result of
the failure to achieve certain development milestones contained in the
Hawthorn Acquisition Agreement;
5. the Merger Transactions will eliminate the risk that the Company
will be required to forfeit the right to franchise Hawthorn Suites brand
hotels, such forfeiture which may be triggered by, among other things, the
death, disability, retirement, resignation or termination of the employment
of Mr. Leven as Chief Executive Officer of the Company prior to the
attainment of certain development milestones contained in the Hawthorn
Acquisition Agreement; and
6. certain financial analyses prepared by management of the Company.
The financial analysis prepared by management consisted of a determination
of the present value, based upon a discounted cash flow analysis, of the
royalty payments that management projects that the Company will during the
next 25 years pay to HSA LLC under the Hawthorn Acquisition Agreement in
respect of (a) Hawthorn Suites hotels that are currently franchised by USFS
and (b) Hawthorn Suites hotels that are projected to be franchised by the
Company in the future. Management's valuation was based upon the following
assumptions: (a) three of the 18 Hawthorn Suites hotels currently
franchised will in 1998, 2004 and 2005, respectively, cease to be
franchisees of USFS, (b) the remaining 15 currently franchised Hawthorn
Suites hotels will renew their license agreements upon expiration for a
period of 15 additional years upon terms and conditions similar to those
currently in effect, and (c) USFS will begin paying taxes on its projected
royalty stream during the year 2000. In its analysis, management utilized a
discount rate of 15%. Management's valuation with respect to Hawthorn
Suites hotels that are projected to be franchised in the future was based
upon the Company's projections concerning the timing and number of such
openings and the amount of future payments projected to be payable to HSA
LLC under the Hawthorn Acquisition Agreement in respect of such properties.
Based on this analysis, management calculated a valuation of greater than
$20 million with respect to the royalty obligation to HSA LLC that would be
eliminated as a result of the Merger Transactions. Management, however, did
not seek to quantify the additional benefits to the Company that will
result from the elimination of certain restrictions on the Company's
franchising activities contained in the Hawthorn Acquisition Agreement.
While discounted cash flow analysis is a widely used valuation methodology,
it relies on numerous assumptions regarding the future performance of the
Company and the future economic environment, all of which are inherently
uncertain because they are predicated upon future events and circumstances not
under
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the Company's control. Additionally, the selection of an appropriate discount
rate is an inherently subjective process and is affected by such factors as the
Company's cost of capital, the uncertainty associated with achieving the
projections referred to and transaction risk generally. The discounted cash flow
analysis was the only financial analysis undertaken by USFS.
For a number of reasons, the Management and the Board of Directors of USFS
decided that it was unnecessary to seek a fairness opinion from an investment
banking firm in support of its approval and recommendation of the Merger
Transactions. First, although the Merger Transactions are structured as a
"reverse merger" of USFS into USH, the Board of Directors noted that the Merger
Transactions do not result in a transfer of control of USFS and are more
properly viewed not as a sale of USFS but rather as the acquisition by USFS of
HSA LLC in exchange for the issuance of shares representing approximately 15% of
USFS's Common Stock. Second, the value of the assets to be acquired, essentially
the Intellectual Property associated with the Hawthorn Suites brand, is directly
and entirely dependent upon the Company's success in franchising Hawthorn Suites
hotels. As a result, the Board concluded that Managements's financial and other
analysis of the Merger Transaction, which were based on Management's extensive
experience in the lodging industry and its specific experiences with the
Hawthorn Suites brand, was sufficient to enable the Board to evaluate the Merger
Transactions.
In view of the wide variety of factors considered by the USFS Board, it did
not find it practicable to quantify, or otherwise attempt to assign relative
priorities or weights to the factors listed above. Consequently, the USFS Board
did not quantify the assumptions and results of its analysis in reaching its
determination that the terms of the Merger Agreement and the Merger Transactions
are fair to, and in the best interests of, USFS and its stockholders. THE USFS
BOARD UNANIMOUSLY RECOMMENDS THAT USFS STOCKHOLDERS VOTE FOR APPROVAL OF THE
MERGER AGREEMENT AND THE MERGER.
EFFECTIVE TIME
If the Merger Agreement and the Merger are approved by the requisite vote
of USFS's stockholders and all other conditions to the Merger are satisfied or
waived (other than those conditions that can be satisfied on the closing date),
the Merger will be consummated and effected at such time as the Certificate of
Merger, in accordance with the relevant provisions of the DGCL, shall have been
accepted for filing by the Secretary of State of the State of Delaware (or at
such later time as agreed to by the parties to the Merger Agreement and
specified in the Certificate of Merger). The Merger Agreement provides that USH
and USFS will cause the closing of the Merger (the "Closing Date") to occur as
promptly as practicable following the satisfaction or waiver of all of the
conditions (other than those conditions that can be satisfied on the Closing
Date) set forth in the Merger Agreement, subject to receipt of consent of HSA
and HPI pursuant to the Contribution Agreement, but in no event later than 10:00
a.m. New York City time on the first business day after the date on which the
satisfaction or waiver of each of such conditions has occurred, or at such other
time or on such other date as USH and USFS may mutually agree. The Merger
Agreement also provides that the officers and directors of USFS immediately
prior to the Effective Time will be the officers and directors of the surviving
corporation, in each case until their respective successors are duly elected or
appointed and qualified in the manner provided in the Certificate of
Incorporation and By-Laws of the surviving corporation. Subject to the terms of
the Merger Agreement, at the Effective Time, (a) the USH Charter, as in effect
immediately prior to the Effective Time, shall become the Certificate of
Incorporation of the surviving corporation (except that the name of USH shall be
changed to "U.S. Franchise Systems, Inc.") and (b) the USH Bylaws, as in effect
immediately prior to the Effective Time, shall become the Bylaws of the
surviving corporation until thereafter amended as provided by law and such
Bylaws. The Merger Agreement may be terminated prior to the Effective Time by
either USH or USFS in certain circumstances, whether before or after approval of
the Merger Agreement by the USFS stockholders (subject to receipt of consent of
HSA and HPI pursuant to the Contribution Agreement). See "The Merger Agreement
and Related Agreements -- Termination."
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CONVERSION OF SHARES OF USFS COMMON STOCK
If the Merger Agreement and the Merger are approved by the requisite vote
of USFS's stockholders and all other conditions to the Merger are satisfied or
waived, then USFS will be merged into USH, which will be the Surviving
Corporation. In the Merger, each share of USFS Class A Common Stock outstanding
immediately prior to the Effective Time will be converted into the right to
receive one share of Company Class A Common Stock, and each share of USFS Class
B Common Stock outstanding immediately prior to the Effective Time will be
converted into the right to receive one share of Company Class B Common Stock.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following describes the material federal income tax consequences of the
Merger to USFS and holders of USFS Common Stock who are citizens or residents of
the United States. It does not discuss all the tax consequences that may be
relevant to USFS stockholders in special tax situations (such as insurance
companies, financial institutions, dealers in securities, tax-exempt
organizations or non-U.S. persons) or to USFS's stockholders who acquired their
shares of USFS Common Stock pursuant to the exercise of employee stock options
or warrants, or otherwise as compensation. It also does not discuss tax
consequences to holders of outstanding USFS stock options. Finally it does not
discuss the consequences of the transactions to HPI, HSA or their owners.
Neither USH nor USFS has obtained a ruling from the IRS with regard to any
of the federal income tax consequences of the Merger. The opinion of counsel to
USFS as to the federal income tax consequences of the Merger set forth in the
next paragraph will not be binding on the IRS or the courts.
Paul, Weiss, Rifkind, Wharton & Garrison, special tax counsel to USFS, is
of the opinion that, under present federal income tax law, and based on (i)
certain representations regarding factual matters and certain covenants as to
future actions made by USH, USFS and major holders of USFS Common Stock, and
(ii) the assumption that the Merger and related transactions will take place as
described in the Merger Agreement, the Merger will constitute a reorganization
for federal income tax purposes within the meaning of Section 368(a) of the
Code. USFS stockholders should be aware that if these representations are
incorrect, if these covenants are not complied with, or if the transactions do
not occur as described in the Merger Agreement, the conclusions reached by
counsel in its opinion might be jeopardized. Under the Merger Agreement, it is a
condition precedent to USFS's obligation to consummate the Merger that Paul,
Weiss, Rifkind, Wharton & Garrison, counsel to USH, deliver to USFS an opinion
to the effect of the foregoing.
Provided that the Merger qualifies as a reorganization, (i) USFS will not
recognize any taxable gain or loss as a result of the Merger, (ii) no gain or
loss will be recognized by USFS's stockholders upon the conversion of their
shares of USFS Common Stock into shares of Company Common Stock pursuant to the
terms of the Merger, (iii) the aggregate tax basis of the shares of Company
Common Stock into which shares of USFS Common Stock are converted pursuant to
the Merger will be the same as the aggregate tax basis of such USFS Common Stock
surrendered in the exchange and (iv) the holding period for shares of Company
Common Stock into which shares of USFS Common Stock are converted pursuant to
the Merger will include the period that such shares of USFS Common Stock were
held by the holder, provided that such shares were held as a capital asset by
the holder at the Effective Time.
A successful IRS challenge to the reorganization status of the Merger would
result in USFS stockholders recognizing taxable gain or loss with respect to
each share of USFS Common Stock surrendered equal to the difference between the
stockholder's tax basis in such share and the fair market value, as of the
Effective Time, of the Company Common Stock received in exchange therefor. In
such event, a stockholder's aggregate basis in the Company Common Stock so
received would equal the fair market value of such stock as of the Effective
Time, and the stockholder's holding period for such stock would begin the day
after the Effective Time.
THE DISCUSSION SET FORTH ABOVE IS BASED ON CURRENTLY EXISTING PROVISIONS OF
THE CODE, EXISTING AND PROPOSED TREASURY REGULATIONS, AND CURRENT ADMINISTRATIVE
RULINGS AND COURT DECISIONS. ALL THE FOREGOING IS
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SUBJECT TO CHANGE, AND ANY SUCH CHANGE COULD AFFECT THE CONTINUING VALIDITY OF
THIS DISCUSSION. NO INFORMATION IS PROVIDED WITH RESPECT TO THE TAX
CONSEQUENCES, IF ANY, OF THE MERGER UNDER APPLICABLE FOREIGN, STATE AND LOCAL
LAWS. USFS'S STOCKHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE
SPECIFIC TAX CONSEQUENCES TO THEM OF THE MERGER, INCLUDING TAX RETURN REPORTING
REQUIREMENTS, THE APPLICABILITY AND EFFECT OF FOREIGN, STATE, LOCAL AND OTHER
APPLICABLE TAX LAWS AND THE POSSIBLE EFFECT OF ANY PROPOSED CHANGES IN THE TAX
LAWS.
ACCOUNTING TREATMENT
The Merger will be accounted for as the "reverse acquisition" of USH by
USFS. Accordingly, USFS will account for the Merger under the "purchase" method
of accounting in accordance with generally accepted accounting principles.
Therefore, the fair value of USFS's Class A Common Stock at the date the Merger
was announced to be issued to HSA and HPI (approximately $17.8 million) and the
estimated costs of the Merger incurred by USFS will be allocated to the USH
assets acquired and liabilities assumed based on their fair values and the
results of operations of USH will be included in the results of operations of
USFS only for the periods subsequent to the Effective Time.
RESALE OF COMPANY COMMON STOCK BY AFFILIATES
The shares of Company Common Stock to be issued in the Merger will be
registered under the Securities Act pursuant to the Registration Statement of
which this Proxy Statement/Prospectus is a part, thereby allowing such shares of
Company Common Stock to be freely transferable under the Securities Act, except
for shares issued pursuant to the terms of the Merger Agreement to any holder of
USFS Common Stock who may be deemed to be an "affiliate" of USFS or USH for
purposes of Rule 145 under the Securities Act. Such affiliates may not sell
their shares of Company Common Stock acquired in connection with the Merger,
except pursuant to an effective registration statement under the Securities Act
covering such shares, or in compliance with Rule 145, Rule 144 or another
applicable exemption from the registration requirements of the Securities Act.
Persons who may be deemed to be affiliates of an entity generally include
individuals or entities that control, are controlled by or are under common
control with such entity, and may include the directors, the executive officers
and the principal stockholders of such entity.
In addition to the restrictions described in the previous paragraph, 35.24%
of the number of shares of currently outstanding USFS Common Stock which are
currently beneficially owned or voted by Messrs. Leven and Aronson are, and
after the Merger Transactions will continue to be, subject to certain
contractual restrictions on transfer and forfeiture provisions contained in an
Amended and Restated Employee Stock Purchase Agreement between USFS and Michael
A. Leven, dated as of October 30, 1996, and an Amended and Restated Employee
Stock Purchase Agreement between USFS and Neal K. Aronson, dated as of October
30, 1996. This Proxy Statement/Prospectus cannot be used for resales of Company
Common Stock received by any person who may be deemed an affiliate of the
Company.
REGULATORY APPROVALS
Other than the Commission declaring effective the Registration Statement
containing this Proxy Statement/Prospectus, approvals in connection with
compliance with applicable Blue Sky or state securities laws and the filing of
the Certificate of Merger with the Secretary of State of the State of Delaware
and the expiration or termination of applicable waiting periods under the HSR
Act, neither the management of USH nor the management of USFS believes that any
filing with or approval of any governmental authority is necessary in connection
with the consummation of the Merger. Pursuant to the Merger Agreement, USH and
USFS have each agreed to take all reasonable actions necessary to comply
promptly with all legal requirements which may be imposed on it with respect to
the Merger Agreement and the consummation of the Merger. Each of USH and USFS
have agreed to take, and cause their subsidiaries to take, all reasonable
actions necessary to obtain any consent, authorization, order or approval of,
any governmental authority or
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other third party required to be obtained or made by USH or USFS in connection
with the Merger and the transactions contemplated by the Merger Agreement.
NASDAQ NATIONAL MARKET
USH will file an application for the shares of Company Common Stock to be
issued in connection with the Merger to be approved for quotation and trading on
the NASDAQ National Market. Such approval, subject to official notice of
issuance, is a condition to consummation of the Merger.
MANAGEMENT OF THE COMPANY AFTER THE MERGER
The Merger Agreement provides that the directors and officers of the
Company at the Effective Time shall be the directors and officers of USFS
immediately prior to the Effective Time. The term of office of all directors
will expire at the 1998 annual meeting of stockholders when their successors are
duly elected and qualified.
In addition, the Shareholders Agreement provides that, as long as HSA and
HPI maintain a specified minimum ownership in the Company, HSA may propose a
nominee for director of the Company and the Company will use its best efforts to
cause such nominee's election. Pursuant to the terms of the Shareholders
Agreement, it is expected that on the date of the Effective Time HPI and HSA
shall nominate, and the Board of the Company shall elect, Mr. Doug Geoga to the
Board of the Company. See "The Merger Agreement and Related
Agreements -- Shareholders Agreement."
For biographical information with respect to the proposed directors and
proposed officers of the Company, see "Management of the Company."
OPERATIONS OF THE COMPANY
The business and operations of the Company will be substantially the same
as the business and operations of USFS prior to the Merger.
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THE MERGER AGREEMENT AND RELATED AGREEMENTS
The following is a summary of the material provisions of the Merger
Agreement, the Contribution Agreement and the Shareholders Agreement not
summarized elsewhere in this Proxy Statement/Prospectus. The Merger Agreement,
the Contribution Agreement and the form of the Shareholders Agreement are
attached as Appendices A, B-1 and B-2 to this Proxy Statement/Prospectus and are
incorporated herein by reference. This summary is qualified in its entirety by
reference to such agreements.
CONVERSION OF SECURITIES
At the Effective Time, by virtue of the Merger and without any action on
the part of USH, USFS or the holders of any of USFS's securities, each share of
USFS Class A Common Stock and USFS Class B Common Stock issued and outstanding
immediately prior to the Effective Time will be converted into the right to
receive one share of Company Class A Common Stock or Company Class B Common
Stock, respectively. At the Effective Time, each share of USFS Common Stock held
in the treasury of USFS immediately prior to the Effective Time will, by virtue
of the Merger, be converted into a share of Company Class A Common Stock held in
treasury by the Company.
CONTRIBUTION AGREEMENT
In connection with the Merger, HSA, HPI, USH, and USFS have entered into
the Contribution Agreement. Under the Contribution Agreement, each of HPI and
HSA (together the "Assignors") have agreed to sell, assign, transfer, convey,
grant and set over to the Company all of its rights, title, and interest in and
to their one percent (1%) and ninety-eight percent (98%) membership interest,
respectively, in HSA LLC as well as all of their rights as members in HSA LLC
(collectively, the "Equity Interests"), other than the right to receive
allocations of income, gain, loss, deduction, credit and similar items and
distributions in respect of the period prior to the Closing Date.
Correspondingly, USH has agreed to accept, assume, take over and succeed to all
of the Assignors' right, title and interest in and to the Equity Interests and
has agreed to assume and perform and discharge in full, when due, all of the
obligations and commitments of the Assignors related thereto pursuant to the
terms of the Operating Agreement of HSA Properties L.L.C., dated as of March 27,
1996 ("HSA LLC Agreement"), and to be bound by all of the provisions of the HSA
LLC Agreement. In exchange for the Equity Interests, on the Closing Date, USH
will issue to the Assignors an aggregate of 2,222,222 shares of Company Class A
Common Stock. The closing of the transactions contemplated under the
Contribution Agreement is to take place on the day of, and immediately prior to,
the Effective Time.
In the Contribution Agreement, USFS and USH have made certain
representations and warranties to the Assignors including, without limitation,
representations and warranties as to the truthfulness and correctness of the
representation and warranties contained in Articles 3 and 4 of the Merger
Agreement; the due authorization, valid issuance, full payment and
non-assessability of the shares of Company Class A Common Stock to be issued
pursuant to the Agreement; due incorporation of USFS and USH and the
capitalization of USH; and liabilities of USH.
In the Contribution Agreement, each Assignor has made certain
representations and warranties to the Company and USFS including, without
limitation, as to the title to the Equity Interests; the capitalization of HSA
LLC; the validity of the HSA LLC Agreement; numerous aspects of the Intellectual
Property (as defined in the Contribution Agreement) owned by HSA LLC; compliance
with laws, including the receipt of all material licenses, permits, orders or
approvals of any governmental authority necessary for the conduct of the
Hawthorn System as now conducted; the financial statements of HSA LLC; the
absence of any undisclosed liabilities; and the accuracy of the information
relating to HSA LLC supplied or to be supplied by HSA LLC or the Assignors for
inclusion in the Registration Statement (including this Proxy
Statement/Prospectus). Notwithstanding any of the representations and warranties
made by the Assignors in the Contribution Agreement, the Company and USFS have
agreed that neither of the Assignors shall have any liability or obligation
(including indemnification obligations described below) for any inaccuracies
contained in, or omissions from, any of the representations and warranties
(including the schedules and other deliveries
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contemplated thereby) to the extent that such (a) arise or result from or were
or are caused by any act or omission of USFS or any of its Affiliates (as
defined the Contribution Agreement) since the date of the Hawthorn Acquisition
Agreement in respect of the management, control, franchising, licensing or
operation of the Hawthorn Brand or Hawthorn System (each as defined in the
Contribution Agreement) and/or in USFS's capacity as a member of HSA LLC, or (b)
are actually known to USFS or any of its Affiliates on the date hereof or as of
the Closing Date.
In the Contribution Agreement, the Assignors jointly and severally have
agreed to indemnify USH and USFS (and its officers, directors, shareholders,
employees, agents, successors, permitted assigns and affiliates) (collectively,
the "USFS Indemnitees") from Losses (as defined in the Contribution Agreement)
arising under or relating to: (i) any representation or warranty of HSA LLC
contained in the Hawthorn Acquisition Agreement being untrue or incorrect as of
the date of the Hawthorn Acquisition Agreement; (ii) any representation or
warranty of an Assignor therein contained being untrue or incorrect as of the
date made or as of the Closing Date; (iii) the failure of HSA LLC to have
performed or complied with any of its covenants, agreements contained in the
Hawthorn Acquisition Agreement to have been performed or complied with on or
prior to the Closing Date; (iv) the failure of an Assignor to have performed or
complied with any of its covenants or agreements contained in the Contribution
Agreement; (v) the operation of the Hawthorn System, including without
limitation any matters pertaining to the Existing Licenses (as defined in the
Contribution Agreement), prior to the date of the Hawthorn Acquisition
Agreement; (vi) the grant of any Hawthorn License (as defined in the
Contribution Agreement), or the execution of any agreement, by HSA LLC or any of
its Affiliates prior to the date of the Hawthorn Acquisition Agreement; (vii)
any Restrictive Agreements (as defined in the Hawthorn Acquisition Agreement)
that relates to or that is asserted against any Hawthorn Brand hotel for which
Deemed Approval (as defined in the Hawthorn Acquisition Agreement) was given
under Section 2.4(b) of the Hawthorn Acquisition Agreement or which is not on
Schedule I to the Hawthorn Acquisition Agreement; (viii) any matters pertaining
to any UFOC prepared or delivered by USH, USFS or any of their Affiliates (as
defined in the Contribution Agreement) or the Registration Statement (as defined
in the Contribution Agreement), in each case solely to the extent such losses
are the result of information that was provided by HSA LLC, HSA, HPI or their
Affiliates to USH or USFS or any of their Affiliates for inclusion therein; (ix)
the operation of HSA LLC on or prior to the Closing Date; or (x) any claim made
by any Affiliate, shareholder or joint venture partner of HSA or HPI in respect
of the transactions contemplated thereby or the operation of HSA LLC on or prior
to the Closing Date except in each case to the extent that such arise or result
from or were or are caused by any act or omission of USFS or any of its
Affiliates since the date of the Hawthorn Acquisition Agreement in respect of
the management, control, franchising, licensing or operation of the Hawthorn
Brand or Hawthorn System or in USFS's capacity as a Member of HSA LLC (other
than an act or omission taken or not taken, as the case may be, in reliance on
any representation, warranty, covenant or agreement of HSA LLC under the
Hawthorn Acquisition Agreement).
In addition, Rockwood & Co. ("Rockwood"), an affiliate of the Assignors,
has agreed to indemnify the USFS Indemnitees against certain Losses for which
indemnification is also available from the Assignors.
The indemnification obligations of the Assignors and Rockwood are subject
to a $200,000 deductible, with certain exceptions, and a cap of $20 million.
Claims for indemnification must be brought prior to the first anniversary of the
Closing Date, except for certain claims, which must be brought prior to the
fifth anniversary of the Closing Date.
In addition, USH and USFS, jointly and severally have agreed to indemnify,
defend and hold HSA and HPI (and officers, directors, shareholders, employees,
agents, successors, permitted assigns and Affiliates) completely free and
harmless from any and all manner of Losses arising under or relating to the
operation of the Hawthorn System or any other acts or omissions of USH, USFS or
their affiliates, with respect to the Hawthorn Brand or the Hawthorn System, to
the extent the same relates to matters occurring or events arising or otherwise
in any respect relating to the period on and after the date of the Hawthorn
Acquisition Agreement, except for such matters that entitle USH to indemnity
from HSA, HPI pursuant to the Contribution Agreement.
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The obligations of USH to complete the transaction contemplated in the
Contribution Agreement are subject to the fulfillment of the following
conditions: (a) the Assignors shall have assigned, transferred and set over
their respective Equity Interests to the Assignee; (b) all required filings and
all consents, approvals, permits and authorizations required to be obtained from
governmental entities shall have been made or obtained and all Hart-Scott-Rodino
Antitrust Improvement Acts of 1976 (the "HSR Act"), as amended, waiting periods
shall have expired or been terminated; (c) the representations and warranties of
the Assignors shall be true and correct as of the Closing Date as if made at
such time; (d) the conditions to the Merger contained in the Merger Agreement in
accordance with their terms; (e) the Assignors shall have executed and delivered
the Shareholders Agreement; (f) USH and USFS shall have received the opinion of
Neal, Gerber & Eisenberg, in the form reasonably acceptable to the parties to
the Contribution Agreement; and (g) Hyatt Hotels Corporation shall have
delivered a letter to the Company substantially in the form of the letter dated
March 27, 1996 (the "Spirit System Letter"), addressed to USFS, confirming the
matters contained in the Spirit System Letter. The obligations of the Assignors
to complete the transactions in the Contribution Agreement are subject to the
following conditions: (a) the Assignors shall have been issued the shares of
Company Class A Common Stock of USH pursuant to the Contribution Agreement; (b)
all required filings and all consents, approvals, permits and authorizations
required to be obtained from governmental entities will have been made or
obtained and all HSR Act waiting periods, if any, shall have expired or been
terminated; (c) the representations and warranties of USH contained in the
Contribution Agreement shall be true and correct as of the Closing Date as if
made at such time; (d) the conditions to the Merger Agreement shall have been
satisfied in accordance with their terms (without waiver or modification); (e)
the Assignors shall have received the opinion of Paul, Weiss, Rifkind, Wharton &
Garrison dated the Closing Date in the form reasonably acceptable to the parties
to the Contribution Agreement; (f) the Company, Michael A. Leven and Neal K.
Aronson shall have duly executed and delivered the Shareholders Agreement; (g)
USFS shall have duly executed and delivered a Release Agreement and Covenant Not
to Sue, in the form reasonably acceptable to the parties to the Contribution
Agreement, releasing Rockwood from all liabilities and obligations arising under
or related to the Hawthorn Acquisition Agreement (other than as otherwise
provided in Section 6.1(b) of the Contribution Agreement); and (h) USFS shall
have duly executed and delivered an Estoppel Certificate, in the form reasonably
acceptable to the parties.
EXCHANGE PROCEDURES
As of the Effective Time, USH will deposit, or will cause to be deposited,
with Wachovia Bank of North Carolina, N.A. or such other bank or trust company
as may be designated by USH and approved by USFS (the "Exchange Agent"), for the
benefit of the holders of USFS Common Stock, for exchange in accordance with the
exchange procedures of the Merger Agreement through the Exchange Agent,
certificates evidencing such number of shares of Company Class A Common Stock
and Company Class B Common Stock in order to enable the Exchange Agent to effect
the exchange of certificates as contemplated in the Merger Agreement.
As soon as reasonably practicable after the Closing Date, the Company will
instruct the Exchange Agent to deliver to each holder of a certificate or
certificates which immediately prior to the Effective Time represented
outstanding shares of USFS Common Stock (collectively, the "Certificates") (i) a
letter of transmittal (which specifies that delivery shall be effected, and risk
of loss and title to the Certificates shall pass, only upon delivery of the
Certificates to the Exchange Agent and shall be in such form and have such other
provisions as the Company may reasonably specify), and (ii) instructions for the
procedure for effecting the surrender of the Certificates in exchange for
certificates representing shares of Company Common Stock. Upon surrender to the
Exchange Agent of a Certificate for cancellation, together with such letter of
transmittal, duly executed and completed in accordance with the instructions
thereon, and such other documents as may be reasonably required pursuant to such
instructions, the holder of such Certificate will be entitled to receive in
exchange therefor a certificate representing that number of shares of Company
Common Stock which such holder has the right to receive in respect of the shares
of USFS Common Stock formerly represented by such Certificate (after taking into
account all shares of USFS Common Stock then held by such holder), and the
Certificate so surrendered will then be canceled. At the Effective Time, the
USFS Common Stock transfer books will be closed and no further transfer of
shares of USFS Common Stock will be made thereafter, other than transfers of
shares of USFS Common Stock that have occurred prior to the
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Effective Time. Until surrendered as contemplated by these provisions of the
Merger Agreement, each Certificate will be deemed at any time after the
Effective Time to represent only the right to receive that number of shares of
Company Common Stock into which shares USFS Common Stock evidenced thereby have
been converted pursuant to the Merger Agreement. Any shares of USH Common Stock
that have not been paid to any holder of shares of USFS Common Stock pursuant to
these exchange provisions prior to the second anniversary of the Effective Time
shall be paid to the Company and any stockholder who has not theretofore
complied with these exchange provisions thereafter shall look, subject to
escheat and other similar laws, solely to the Company for payment of such shares
of Surviving Company Common Stock to which they are entitled under the Merger
Agreement.
DISTRIBUTIONS WITH RESPECT TO UNEXCHANGED SHARES
No dividends or other distributions declared or made after the Effective
Time with respect to Company Common Stock with a record date at or after the
Effective Time will be paid to the holder of any unsurrendered Certificate with
respect to the shares of USFS Common Stock represented thereby, until the holder
of such Certificate surrenders such Certificate. Upon surrender of any such
Certificate, there will be paid to the person in whose name the shares of
Company Common Stock is issued in exchange therefor, without interest, the
amount of any dividends which will have become payable with respect to such
shares of Company Common Stock between the Effective Time and the time of such
surrender and at the appropriate payment date, the amount of dividends or other
distributions, with a record date at or after the Effective Time but prior to
surrender and a payment date occurring after surrender, payable with respect to
such whole shares of Company Common Stock, subject in each case to deductions
required by applicable law to be withheld and any applicable escheat laws or
unclaimed property laws.
NO FURTHER RIGHTS IN USFS COMMON STOCK
All shares of Company Common Stock issued upon conversion of the shares of
USFS Common Stock in accordance with the terms of the Merger Agreement will be
deemed to have been issued in full satisfaction of all rights pertaining to such
shares of USFS Common Stock.
USFS STOCK OPTIONS
Each USFS Option issued by USFS that is exercisable for USFS Class A Common
Stock and outstanding immediately prior to the Effective Time shall, effective
as of the Effective Time, and without any action on the part of the holder
thereof, be assumed by USH and become and represent an option exercisable for an
equal number of shares of Company Class A Common Stock (a "Substitute Option")
on the same terms and conditions as such USFS Option immediately prior to the
Effective Time.
CERTAIN REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various representations and warranties of USH
and USFS relating to, among other things, the following matters (which
representations and warranties are subject, in certain cases, to specified
exceptions): (i) the due organization, valid existence, power, authority and
good standing of, capitalization of, and similar corporate matters with respect
to, each of USH and USFS and, with respect to USH, its subsidiaries; (ii) the
authorization, execution, delivery, performance and enforceability of the Merger
Agreement by each party thereto; and (iii) with respect to the Merger Agreement
and the Merger, the absence of conflict with the certificate of incorporation
and bylaws of each of USFS and its subsidiaries, the certificate of
incorporation and bylaws of USH and with applicable law or any material
contracts to which USFS or USH, as the case may be, is a party or by which they
may be bound.
In addition, the Merger Agreement contains certain additional
representations and warranties of USFS and its subsidiaries relating to, among
other things, (i) the reports and other documents filed with the Commission and
other regulatory authorities by USFS, the financial statements included therein
and the accuracy of the information contained in each of them; (ii) the absence
of certain changes or events since September 30, 1997 having a material adverse
effect with respect to USFS; (iii) its subsidiaries;
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(iv) compliance with laws; and (v) the absence of pending or threatened
litigation affecting USFS or any of its subsidiaries.
Unless otherwise provided for in the Merger Agreement, the respective
representations and warranties of USFS and USH contained in the Merger Agreement
or in any certificates or other documents delivered prior to or at the Closing
shall survive the execution and delivery of the Merger Agreement and shall
terminate at the Effective Time.
CONDUCT OF BUSINESSES PENDING THE MERGER
Pursuant to the Merger Agreement, USH has agreed that, prior to the
Effective Time, it shall not engage in any activity or business, other than
executing and delivering the Merger Agreement and the Contribution Agreement and
consummating the transactions contemplated hereby and thereby.
Each of USH and USFS has made certain covenants to each other, including
(i) to take all action necessary in accordance with applicable law to convene
the Special Meeting as promptly as practicable to consider and vote upon the
Merger Agreement and the transactions contemplated thereby (and USFS agreed,
through its Board of Directors, to recommend that its stockholders vote in favor
of the adoption of the Merger Agreement and the transactions contemplated
thereby and USH agreed to obtain the approval of its stockholders of the Merger
Agreement and the transactions contemplated thereby); (ii) upon the terms and
subject to the conditions of the Merger Agreement, to use all reasonable efforts
to take, or cause to be taken, all action, and to do or cause to be done, and to
assist and cooperate with the other parties in doing, all things necessary,
proper or advisable to consummate and make effective as promptly as practicable
the transactions contemplated by the Merger Agreement, including using all
reasonable efforts to (a) obtain all consents, amendments to or waivers under
the terms of any of their respected borrowing or other contractual arrangements
required by the transactions contemplated by the Merger Agreement (other than
consents, amendments or waivers the failure of which to obtain could not,
individually or in the aggregate, reasonably be expected to result in a Material
Adverse Effect (as defined in the Merger Agreement)), (b) effect promptly all
necessary or appropriate registrations and filings with Governmental Entities
(as defined in the Merger Agreement), including, without limitation, filings and
submissions pursuant to the HSR Act, the Securities Act, the Exchange Act, the
DGCL and state "Blue Sky" laws (it being agreed that a copy of each of such
registration and filing shall be delivered to HSA and HPI), (c) defend any
lawsuits or other legal proceedings, whether judicial or administrative,
challenging this Agreement or the consummation of the transactions contemplated
hereby and (d) fulfill or cause the fulfillment of the conditions to closing set
forth in the Merger Agreement; (iii) if, at any time after the Effective Time,
the Company determines or is advised that any deeds, bills of sale, assignments,
assurances or any other actions or things are necessary or desirable to vest,
perfect or confirm of record or otherwise in the Company the right, title or
interest in, to or under any of the rights, properties or assets of USFS or its
subsidiaries acquired or to be acquired by the Company as a result of, or in
connection with, the Merger or otherwise to carry out the Merger Agreement, to
authorize the officers and directors of the Company to execute and deliver, in
the name and on behalf of USFS or its subsidiaries or otherwise, all such deeds,
bills of sale, assignments and assurances and to take and do, in the name and on
behalf of USFS or its subsidiaries or otherwise, all such other actions and
things as may be necessary or desirable to vest, perfect or confirm any and all
right, title and interest in, to and under such rights, properties or assets in
the Company or otherwise to carry out the Merger Agreement; and (iv) to give
notice to each other (and to HSA and HPI) of the receipt of any communications
that would adversely affect the Merger or of any material adverse change in
their businesses, including any nascent claims, actions, procedures or
investigations, or of any occurrence, or failure to occur, of any event, which
occurrence or failure to occur has caused or could reasonably be expected to
cause any representation or warranty in the Merger Agreement to be untrue or
inaccurate in any material respect at any time after the date hereof and prior
to the Effective Time or any material failure on its part to comply with or
satisfy any covenant, condition or agreement to be complied with or satisfied by
it thereunder. In addition, USH agreed to use its reasonable best efforts to
cause the shares of Company Class A Common Stock to be issued in the Merger to
be approved for quotation and trading on the NASDAQ National Market, subject
only to official notice of issuance thereof. In addition, each of the Company
and USFS agreed that through the Effective Time, except as contemplated by the
Merger
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Agreement and the Contribution Agreement or as otherwise disclosed to HSA and
HPI or pursuant to the Repurchase Option (as defined in the Merger Agreement) or
any employee or director stock option plan described in the USFS SEC Filings (as
defined in the Merger Agreement), it shall not (a) issue, or authorize the
issuance of, any additional shares of its capital stock, (b) grant, or agree to
grant, any options, warrants, rights, contract, calls, put, rights to subscribe,
conversion rights or enter into, or agree to enter into, any other agreements or
commitments providing for the issuance, disposition or acquisition of any shares
of its capital stock, (c) grant, or agree to grant, any stock appreciation,
phantom stock or similar rights with respect to shares of its capital stock, (d)
enter into, or agree to enter into, any voting trusts, proxies or any other
agreements or understandings with respect to the voting of its capital sock, (e)
incur any obligation (contingent or otherwise) to repurchase or otherwise
acquire or retire any shares of its capital stock or (f) declare or distribute
any cash dividend.
CONDITIONS TO CONSUMMATION OF THE MERGER
The obligations of USFS and USH to consummate the Merger are subject to the
satisfaction or, if permitted by applicable law, waiver at the Effective Time of
the following conditions: (i) the Merger Agreement and the Merger shall have
been approved and adopted by the affirmative vote of the stockholders of USFS
and USH in accordance with applicable law, (ii) no Legal Requirements (as
defined in the Merger Agreement) have been enacted, entered, promulgated or
enforced by any Government Entity (as defined in the Merger Agreement) that
prohibits or prevents consummation of the Merger; (iii) the Registration
Statement shall have been declared effective, and no stop order suspending the
effectiveness of the Registration Statement will be in effect and no proceedings
for such purpose will have been initiated or threatened by the Commission; (iv)
any waiting period applicable to the Merger under the HSR Act shall have expired
or been terminated; (v) all actions by or in respect of or filing with any
Governmental Entity required to permit the consummation of the Merger will have
been obtained or made (as the case may be) and such approval shall be in full
force and effect, except for those the failure to obtain will not have a
material adverse effect on the business, assets, properties, condition
(financial or otherwise) or the results of operations of USFS or USH; (vi) all
required consents or approvals of any person to the Merger or the transactions
contemplated thereby shall have been obtained and be in full force and effect,
except for those the failure to obtain would not have a material adverse effect
on the business, assets, properties, financial condition or the results of
operations of the Company and its subsidiaries taken as a whole; (vii) the
shares of Company Common Stock to be issued in the Merger shall have been
approved for quotation and trading on the NASDAQ National Market, subject to
official notice of issuance; and (viii) all approvals required under state
securities or "Blue Sky" laws shall have been obtained.
The obligation of USFS to consummate the Merger is subject to the
satisfaction or, if permitted by applicable law, waiver at the Effective Time of
the following further conditions: (i) USH shall have performed in all material
respects all of its respective covenants and obligations under the Merger
Agreement required to be performed by it at or prior to the Effective Time; (ii)
each of USH, HSA and HPI shall have performed in all material respects the
covenants and obligations required to be performed by it under the Contribution
Agreement, at or prior to the Effective Time; (iii) each of the representations
and warranties of USH contained in the Merger Agreement shall be true and
correct, in each case as of the Effective Time as if made at and as of such time
(except for those representations and warranties that address matters only as of
a particular date which need only be true and accurate as of such date); (iv)
each of representations and warranties of HSA and HPI contained in the
Contribution Agreement shall be true and correct in all material respects, in
each case as of the Closing (as defined in the Contribution Agreement) as if
made at and as of such time (except for those representations or warranties that
address matters only as of a particular date which need only be true and correct
as of such date); (v) the transactions contemplated by the Contribution
Agreement shall have been consummated in accordance with its terms; (vi) USFS
shall have received a certificate signed by an executive officer of (y) USH to
the effect of clauses (i), (ii) and (iii) above, and (z) HSA and HPI to the
effect of paragraphs (iv) and (v) above; (vii) HSA and HPI shall have executed
and delivered to the Company the Shareholders Agreement; and (viii) USFS shall
have received the opinion of Paul, Weiss, Rifkind, Wharton & Garrison, dated the
Closing Date, that, under federal income tax law, and based on (x) certain
representations regarding factual matters and certain covenants as to future
actions made
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by the Company, USFS and major holders of USFS Common Stock, and (y) the
assumption that the Merger and related transactions will take place as described
herein, the Merger will constitute a reorganization for federal income tax
purposes within the meaning of Section 368(a) of the Code.
The obligations of USH to consummate the Merger are subject to the
satisfaction or, if permitted by applicable law, waiver at the Effective Time of
the following further conditions: (i) USFS will have performed in all material
respects all of its covenants and obligations under the Merger Agreement
required to be performed by it at or prior to the Effective Time; (ii) each of
the representations and warranties of USFS contained in the Merger Agreement
will be true and correct as of the Effective Time as if made at and as of such
time; (iii) the Company shall have received a certificate signed by an executive
officer of USFS to the effect of clauses (i) and (ii) above; and (iv) Michael A.
Leven and Neal K. Aronson shall have executed and delivered to the Company the
Shareholders Agreement.
TERMINATION
Subject to receipt of prior approval of HSA and HPI (which approval may not
be unreasonably withheld), the Merger Agreement may be terminated and the Merger
may be abandoned at any time prior to the Effective Time, whether before or
after the stockholders of USFS have approved the Merger Agreement, (i) by the
mutual written consent of USH and USFS (a "Consent Termination"); (ii) by either
USH or USFS (in each case, an "Optional Termination"), if (A) the Effective Time
has not occurred on or before April 30, 1998, provided that the right to so
terminate the Merger Agreement will not be available to any party whose failure
to fulfill any obligation under the Merger Agreement has been the cause of, or
resulted in, the failure of the Effective Time to occur on or before such date,
(B) any governmental authority has issued an order or taken any other action, in
each case permanently restraining, enjoining or otherwise prohibiting the
Merger, and such order or other action shall have become final and
non-appealable, or (C) if there has been a material breach of any
representation, warranty, covenant or agreement on the part of USH, HSA or HPI,
on the one hand, or USFS, on the other hand, as the case may be, set forth in
the Merger Agreement or the Contribution Agreement which breach, if not a
willful breach, has not been cured within ten (10) Business Days following
receipt by the breaching party of notice of such breach; or (iii) by USFS if the
Merger Agreement and the Merger have not been approved at the Special Meeting by
the requisite vote of the stockholders of USFS.
PROCEDURE AND EFFECT OF TERMINATION
Except as otherwise provided in the Merger Agreement, in the event that the
Merger Agreement is terminated and the Merger is abandoned by USFS, on the one
hand, or by USH, on the other hand, written notice of such termination and
abandonment shall forthwith be given to the other party (and to HSA and HPI) and
the Merger Agreement shall terminate and the Merger shall be abandoned without
any further action. If the Merger Agreement is terminated as provided herein, no
party hereto shall have any liability or further obligation to any other party
under the terms of the Merger Agreement except with respect to the willful
breach by any party.
FEES AND EXPENSES
All costs and expenses incurred in connection with the Merger Agreement and
the Merger will be paid by the party incurring such costs and expenses, whether
or not the Merger is consummated.
AMENDMENT AND WAIVER
Subject to applicable law and the provisions of the Contribution Agreement
requiring the prior written consent of HSA and HPI, the Merger Agreement may be
amended by a written agreement signed by each of the parties to the Merger at
any time prior to the Effective Time; provided, however, that after the approval
of the Merger Agreement by the stockholders of USFS, no amendment or
modification may be made which would alter or change the amount or kind of the
consideration to be received in exchange for or on conversion of all or any of
the capital stock of USFS, alter or change any term of the certificate of
incorporation of the
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Company (other than as contemplated in the Merger Agreement) to be effected by
the Merger, or alter or change any of the terms and conditions of the Merger
Agreement if such alteration or change would adversely affect the holders of the
capital stock of USFS.
Any failure of USFS, on the one hand, or USH, on the other hand, to comply
with any obligation, covenant, agreement or condition set forth in the Merger
Agreement may be waived by USFS or USH (with the prior consent, in either case,
of HSA and HPI), respectively, only by a written instrument signed by the party
granting such waiver, but such waiver or failure to insist upon strict
compliance with such obligation, covenant, agreement or condition shall not
operate as a waiver of, or estoppel with respect to, any subsequent or other
failure.
SHAREHOLDERS AGREEMENT
In connection with the Merger, HSA and HPI (the "Securityholders" and with
certain permitted transferees, the "Designated Holders"), Michael A. Leven
("Leven"), Neal K. Aronson ("Aronson"), and USH will enter into the Shareholders
Agreement pursuant to which each Designated Holder will agree, subject to
certain exceptions, not to, directly or indirectly, offer, sell, exchange,
pledge, hypothecate, encumber, transfer, assign or otherwise dispose of any of
the shares of Company Class A Common Stock which it received in the Contribution
Agreement (the "Shares") for a period of two years from the Closing Date (the
"Lockup Period").
The Shareholders Agreement also provides that the Company shall have
certain rights of first refusal with respect to certain transfers during the
Lockup Period, and that HSA and HPI will have certain tag-along rights on
certain sales of Company Common Stock made by either or both of Aronson and/or
Leven or certain of their permitted transferees.
Pursuant to the Shareholders Agreement, during such period as (x) Leven is
Chairman, Chief Executive Officer or President of the Company and (y) Leven and
Aronson and their Included Transferees (as defined in the Shareholders
Agreement), in the aggregate, own at least one-half of the shares of Company
Common Stock owned by such entities, in the aggregate, on the Closing Date, each
of the Designated Holders will agree not to and to use its reasonable best
efforts to cause each of its affiliates not to, directly or indirectly,
participate in the following activities without the prior written consent of the
Board of Directors of the Company specifically expressed in a resolution adopted
by a majority of the directors of the Company who are not affiliates of the
Designated Holders: (i) acquire, announce an intention to acquire, offer or
propose to acquire, or agree to acquire (except, in any case, by way of stock,
dividends or other distributions or offerings made available to holders of any
Company Common Stock generally, provided, that any such securities shall be
subject to the provisions thereof), directly or indirectly, whether by purchase,
tender or exchange offer, through the acquisition of control of another Person
(as defined in the Shareholders Agreement), by joining a partnership, limited
partnership, syndicate or other "group" (within the meaning of Section 13(d)(3)
of the Exchange Act) or otherwise, any equity securities of the Company that
would result in such Designated Holder and its Affiliates, in the aggregate,
owning Voting Securities (as defined below) representing a greater amount of the
voting power of the Company than would be held by any other entity or "group"
(within the meaning of Section 13(d)(3) of the Exchange Act) following such
transaction other than Michael A. Leven and/or Neal K. Aronson (the "Principal
Stockholders"), their Included Transferees or a "group" which includes any of
the Principal Stockholders or their Included Transferees; (ii) make, or in any
way participate, directly or indirectly, in any "solicitation" (as such term is
used in the proxy rules of the Commission as of the Closing Date) of proxies or
consents (whether or not relating to the election or removal of directors), seek
to advise, encourage or influence any person with respect to the voting of any
securities of the Company entitled to vote generally in the election of
directors ("Voting Securities"), initiate, propose or otherwise "solicit" (as
such term is used in the proxy rules of the Commission as of the Closing Date)
stockholders of the Company for the approval of stockholder proposals made
pursuant to Rule 14a-8 of the Exchange Act, or induce or attempt to induce any
other person to initiate any such stockholder proposal; (iii) seek, propose, or
make any statement (whether written or oral) with respect to, any merger,
consolidation, business combination, tender or exchange offer, sale or purchase
of assets, sale or purchase of securities (except as and to the extent
specifically permitted in the Shareholders Agreement), dissolution, liquidation,
restructuring, recapitalization
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<PAGE> 64
or similar transactions of or involving the Company or any of its affiliates or
solicit or encourage any other person to make any such statement or proposal;
(iv) form, join or in any way participate in a "group" (within the meaning of
Section 13(d)(3) of the Exchange Act) with respect to any Voting Securities,
other than groups consisting solely of one or more of the Securityholders,
directors of the Company, other parties thereto and their respective Affiliates;
(v) deposit any Voting Securities in any voting trust or subject any Voting
Securities to any arrangement or agreement with respect to the voting of any
Voting Securities (except as otherwise set forth in Section 5 of the
Shareholders Agreement); (vi) execute any written consent with respect to the
Company or its Voting Securities (except as set forth in Section 5 of the
Shareholders Agreement); (vii) otherwise act, alone or in concert with others,
to control or seek to control or influence or seek to influence the management,
Board of Directors or policies of the Company; (viii) seek, alone or in concert
with others, representation on the Board of Directors of the Company or seek the
removal of any member of the Board of Directors; (ix) make any publicly
disclosed proposal or enter into any discussion regarding any of the foregoing;
(x) make any proposal, statement or inquiry, or disclose any intention, plan or
arrangement (whether written or oral) inconsistent with the foregoing, or make
or disclose any request to amend, waive or terminate any provision of the
Shareholders Agreement or the certificate of incorporation or by-laws of the
Company; (xi) have any discussions or communications or enter into any
arrangements, understandings or agreements (whether written or oral) with, or
advise, finance, assist or encourage, any other person in connection with any of
the foregoing, or make any investment in or enter into any arrangement with, any
other person that engages, or offers or proposes to engage, in any of the
foregoing; or (xii) request the Company (or its directors, officers, employees
or agents), directly or indirectly, to amend or waive any provisions of the
Shareholders Agreement or take any action which might require the other party to
make a public announcement regarding the possibility of a merger, consolidation,
tender or exchange offer or other business combination or extraordinary
transaction.
The Shareholders Agreement will provide that the Securityholders and their
affiliates may acquire Voting Securities and other securities of the Company
without regard to the foregoing limitations if any of the following events shall
occur: (A) a tender or exchange offer is made by any person or 13D Group (as
defined below) (other than an affiliate of, or any person acting in concert
with, a Securityholder or any of its affiliates and, any affiliate thereof or
13D Group including, which person or 13D Group has the financial wherewithal to
consummate such a transaction) to acquire Voting Securities in an amount which,
together with Voting Securities (if any) already owned by such person or 13D
Group, would represent more than 50% of the total combined voting power of all
Voting Securities then outstanding or (B) it is publicly disclosed that Voting
Securities representing more than 50% of the total combined voting power of all
Voting Securities then outstanding have been acquired subsequent to the Closing
Date by a person or 13D Group (other than the Securityholders or any of their
respective affiliates and other than Leven and/or Aronson, any affiliate thereof
or 13D Group including Leven and/or Aronson). As used herein, the term "13D
Group" shall mean any group of persons formed for the purpose of acquiring,
holding, voting or disposing of Voting Securities which would be required under
Section 13(d) of the Exchange Act and the rules and regulations thereunder (as
now in effect) to file a statement on Schedule 13D with the Commission as a
"person" within the meaning of Section 13(d)(3) of the Exchange Act if such
group beneficially owned Voting Securities representing more than 5% of the
total combined voting power of all Voting Securities then outstanding.
In addition, the Securityholders will agree in the Shareholder Agreement
that, except with respect to transfers pursuant to the tag-along provisions,
they shall not effect any transfer of any of the Shares to any person who such
Securityholder believes, after due inquiry, would, after giving effect to such
transfer, beneficially own, together with its affiliates, more than 5% of the
total combined voting power of all Voting Securities then outstanding unless it
shall have obtained prior to such transfer a written instrument from such
transferee agreeing to be bound by the standstill provisions described above.
In the Shareholders Agreement, the Designated Holders will agree, so long
as they or any of their respective Affiliates beneficially own any Voting
Securities, to vote in accordance with the Board of Directors' recommendation on
all stockholder proposals made pursuant to Rule 14a-8 under the Exchange Act.
The Shareholders Agreement also will provide the Designated Holders with
certain "demand" and "piggyback" registration rights.
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<PAGE> 65
The Shareholders Agreement will provide that as long as the Securityholders
and/or their affiliates beneficially own more than 1,100,000 shares of Company
Common Stock (such number of shares which shall be adjusted to take into account
any stock splits or reverse stock splits, reclassifications and other similar
transactions or adjustments) the Securityholders shall be entitled to nominate a
candidate to serve on the Board of Directors of the Company, and the Company
will use its best efforts to cause such person to be elected by the stockholders
of the Company and also solicit proxies in favor of such nominee. The
Shareholders Agreement will provide that Mr. Doug Geoga is to be elected as a
director of the Company by the Company's Board of Directors on the Closing Date.
The Shareholders Agreement contains mutual standard representations and
warranties by and to each of the parties thereto as to, among other things, due
authorization, execution, delivery and enforceability of the Shareholders
Agreement.
RIGHTS OF APPRAISAL/DISSENTERS' RIGHTS
Pursuant to Section 262 of the DGCL ("Section 262") holders of USFS Class A
Common Stock are not entitled to rights of appraisal or other dissenters' rights
with respect to the Merger or any transactions contemplated by the Merger
Agreement.
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MANAGEMENT OF THE COMPANY
EXECUTIVE OFFICERS AND DIRECTORS OF THE COMPANY
Pursuant to the Merger Agreement, the officers and directors of USFS
immediately prior to the Effective Time will become the officers and directors
of the Company, each to hold office in accordance with the certificate of
incorporation and bylaws of the Company then in effect and until the successor
of each is duly elected and qualified. In addition, pursuant to the Shareholders
Agreement, Mr. Doug Geoga will be elected to the Board of Directors of the
Company.
The following table sets forth certain information regarding those persons
who will serve as the executive officers and directors of the Company.
<TABLE>
<CAPTION>
NAME AGE OFFICE OR POSITION HELD
---- --- -----------------------
<S> <C> <C>
Michael A. Leven....................... 60 Chairman, President and Chief Executive Officer
Neal K. Aronson........................ 33 Executive Vice President, Chief Financial Officer and
Director
David E. Shaw.......................... 54 Executive Vice President -- Administration
Steven Romaniello...................... 31 Executive Vice President -- Franchise Sales and
Development
James Darby............................ 41 Executive Vice President -- Franchise Operations
Dean S. Adler.......................... 40 Director
Irwin Chafetz.......................... 61 Director
Richard D. Goldstein................... 46 Director
Jeffrey A. Sonnenfeld.................. 43 Director
Barry S. Sternlicht.................... 37 Director
Doug Geoga............................. 42 Director (to be effective upon completion of the
Merger).
</TABLE>
Each director is elected to serve until a successor is elected and
qualified or, if earlier, until the director's death, resignation or removal.
Officers, subject to the terms of their respective employment agreements, serve
at the pleasure of the Board of Directors. Each of the directors of the Company,
other than Dean Adler, Jeffrey A. Sonnenfeld and Doug Geoga has served as such
since September 30, 1995. Messrs. Adler and Sonnenfeld were elected to the Board
of Directors on October 11, 1996, effective as of October 30, 1996.
Michael A. Leven. Mr. Leven, age 60, has been Chairman, President and
Chief Executive Officer of USFS 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 both Starwood Lodging Trust, one of the nation's
largest hotel REITs, and Servico, Inc., a publicly traded hotel and resort
company which owns and manages a portfolio of hotels. Mr. Leven is also a member
of the Board of Governors of the American Red Cross, Chairman of the Biomedical
Services Board of the American Red Cross, a Trustee of National Realty Trust,
the largest franchisee of Coldwell Banker Corporation and a member of the Board
of Directors of The Fourth Network, a private company which provides internet
services to the hotel industry. Mr. Leven is an uncle of Mr. Aronson.
Neal K. Aronson. Mr. Aronson, age 33, has been Executive Vice President
and Chief Financial Officer of USFS 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.
David E. Shaw. Mr. Shaw has been Executive Vice President, Administration
of USFS 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
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<PAGE> 67
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 USFS since October 1996. From October 1995
through September 1996, he served as Senior Vice President, Franchise Sales and
Development of USFS. 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 both Atlanta,
Georgia and Boston, Massachusetts.
James Darby. Mr. Darby has been Executive Vice President -- Franchise
Operations of USFS 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.
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,
Developers Diversified, a leading shopping center real estate investment trust,
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 vacation charter tour
operator. From 1982 until April 1995, Mr. Chafetz was a Vice President and
Director of the Interface Group-Nevada, Inc., which owned and operated COMDEX, a
computer industry exposition and conference 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. From 1984 to 1990, Mr. Chafetz
was President of Five Star Airlines, a charter air carrier owning and operating
Lockhead L-1011 aircraft. Mr. Chafetz is a director of Back Bay Restaurant
Group, a publicly held NASDAQ listed company.
Richard D. Goldstein. Since 1990, Mr. Goldstein, age 46, 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 and member of the Executive Committee of the Queens College Foundation,
Trustee of the North Shore-Long Island Jewish Health System and as Chairman of
the Corporate Advisory Board of the State University of New York at Stony Brook.
Jeffrey A. Sonnenfeld. Currently, Mr. Sonnenfeld is the Chairman and
President of The Chief Executive Institute, a non-profit leadership school. From
1989 to 1997, Dr. Sonnenfeld, age 43, was a Professor of Organization and
Management at the Robert C. Goizueta Business School of Emory University in
Atlanta, Georgia, where he was the Director of the Center for Leadership and
Career Studies. Previously, Dr. Sonnenfeld was at Harvard University for 18
years, serving as a Professor at the Harvard Business School for 10 years. Dr.
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. Dr. Sonnenfeld serves on the board of Magellan Health
Services, 360 Communications, the National Council on the Aging, the Governors
Personnel Oversight Commission in Georgia, and has served on additional boards
such as, Mosley Securities Corporation and Norwegian Cruise Lines.
Barry S. Sternlicht. Since 1993, Mr. Sternlicht, age 37, 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 and
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<PAGE> 68
Corporation, the nation's largest hotel REIT, and is the owner 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 is Chairman of the Board of Angeles Participating
Mortgage Trust, which is also a REIT.
Doug Geoga. Since 1994, Mr. Geoga, age 42, has been President of Hyatt
Hotels Corporation, operator of Hyatt Hotels & Resorts in the United States,
Canada and the Caribbean. From 1983 to 1994, Mr. Geoga held various positions
with Hyatt Development Corporation, the development/transactional arm of the
Hyatt chain domestically, most recently as its Executive Vice President. Mr.
Geoga is a director of United Way of Suburban Chicago, a trustee of the
Educational Institute of the American Hotel & Motel Association ("AH&MA"),
chairman of the Government Affairs Committee of the AH&MA, a director of the
National Tourism Organization, Inc., and a director of various closely-held
companies affiliated with Hyatt.
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
The Shareholders Agreement will provide that, subject to HSA and HPI and/or
their affiliates together owning more than 1,100,000 million shares of Company
Common Stock (as adjusted for stock splits, reverse stock splits,
reclassifications and other similar transactions or adjustments), HSA and HPI
may propose a nominee for director of the Company and the Company will use its
best efforts to cause such nominee's election. Pursuant to the terms of the
Shareholders Agreement, it is expected that at the Effective Time, HPI and HSA
shall nominate, and the Board of the Company shall elect, Mr. Doug Geoga to the
Board of the Company. At such time that a successor to Mr. Geoga no longer is a
director of the Company, HSA and HPI may propose to the Company as a nominee for
election as a director of the Company a person who (i) has recognized standing
in the business community, (ii) is not a former director, officer or employee of
the Company and (iii) does not have a conflict of interest with the Company and
is at such time either the President of Hyatt Hotels Corporation or a person who
is otherwise reasonably acceptable to the Company.
EXECUTIVE COMPENSATION
The following table provides certain summary information for the fiscal
years ended December 31, 1997, 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, 1997 (the "Named
Executive Officers").
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<PAGE> 69
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-----------------------------------------------
OTHER NUMBER OF
ANNUAL OPTIONS
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1) AWARDED
--------------------------- ---- -------- -------- --------------- ---------
<S> <C> <C> <C> <C> <C>
Michael A. Leven.................... 1997 $389,063 $184,725 $37,971 --
Chairman of the Board, 1996 $375,000 $140,497 $33,327 --
President and Chief 1995(2) $ 93,750 $153,000(3)(4) $ 3,000 --
Executive Officer
Neal K. Aronson..................... 1997 $207,500 $ 92,363 $11,588 --
Executive Vice President 1996 $200,000 $ 70,298 $11,517 --
and Chief Financial Officer 1995(2) $ 50,000 $151,500(3)(4) $ 2,250 --
David E. Shaw....................... 1997 $155,625 $ 25,000 $ 2,384 1,000
Executive Vice President -- 1996 $150,000 $ 25,000 $ 2,316 3,000
Administration 1995(2) $ 37,500 -- -- --
Steven Romaniello................... 1997 $110,000 $265,200 $ 2,384 2,000
Executive Vice President -- 1996 $101,667 $213,600 $ 2,316 6,000
Franchise Sales and 1995(2) $ 25,000 $ 3,600 -- --
Development
James Darby......................... 1997 $142,708 $ 22,000 $ 2,384 27,000
Executive Vice
President -- Franchise Operations
</TABLE>
- ---------------
(1) Includes: life insurance, health insurance, long-term disability insurance,
automobile allowance and/or long-term home care.
(2) Includes the period from August 28, 1995, the date of USFS's inception,
through December 31, 1995.
(3) Mr. Leven and Mr. Aronson each received a transaction bonus of $150,000 for
their efforts in organizing USFS and successfully negotiating and completing
the acquisition of the Microtel brand hotels on behalf of USFS.
(4) Mr. Leven and Mr. Aronson, pursuant to the terms of their respective
employment agreements with USFS, 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 USFS accrued $3,000 and
$1,500 for bonuses owed to Mr. Leven and Mr. Aronson, respectively, with
respect to such franchise agreements.
EMPLOYMENT AGREEMENTS
USFS 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. USFS has obtained all
of the foregoing benefits for Mr. Leven. In addition, Mr. Leven is entitled to a
monthly automobile allowance in the amount of $1,000.
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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 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). Except as noted
above concerning Mr. Leven's right to resign for "good reason" if he is not
re-elected to the Board, Mr. Leven's employment agreement does not contain any
change of control provisions.
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
(subject to annual cost of living increases and other annual increases
determined by the Company, based on the performance of Mr. Aronson and the
Company and on prevailing economic circumstances), (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
supplemental 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). Mr. Aronson's employment agreement does not
contain any change of control provisions.
See "Principal Holders of Common Stock -- Management's Shares of Common
Stock" as to the effect of termination of employment on the Company 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
and each new non-employee director shall receive a grant of options to purchase
2,000 shares of Class A Common Stock on the date such person becomes a director.
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<PAGE> 71
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.
Howard and Lawrence Chafetz, sons of Irwin Chafetz, a Director of the
Company, have established a limited liability company to acquire and operate
Microtels. To date, the limited liability company has entered into three
franchise agreements with the Company regarding the same.
Michael A. Leven, the Chairman of the Board and Chief Executive Officer of
the Company, serves as a director of Starwood Lodging Trust and also serves on
its Compensation Committee. 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 "Company Board") adopted, subject to the approval of the
Company's stockholders, the U.S. Franchise Systems, Inc. 1996 Stock Option Plan
(the "Option Plan"). The Company's stockholders approved the Option Plan on
October 11, 1996. The 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 USFS's Class A Common
Stock, which maximum number is subject to adjustment in certain circumstances to
prevent dilution or enlargement. After the Effective Time, the Option Plan, by
virtue of the Merger, shall be assumed by the Company with the same terms and
conditions as the Option Plan immediately prior to the Effective Time.
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 USFS's stockholders on October 11,
1996. The purpose of the Directors Plan is to secure for USFS the benefits of
the additional incentive inherent in the ownership of Shares by non-employee
directors of USFS and to help USFS 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 USFS who are not employees of USFS or any
affiliate of USFS ("Outside Directors"). A maximum of 125,000 shares of Class A
Common Stock has been reserved by USFS 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. After the Effective Time, the Directors Plan, by virtue of the Merger,
shall be assumed by the Company with the same terms and conditions as the
Directors Plan immediately prior to the Effective Time.
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<PAGE> 72
The following table provides certain information concerning individual
grants of stock options under USFS's Option Plan made during the year ended
December 31, 1997 to the Named Executive Officers:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------- POTENTIAL REALIZABLE
% OF TOTAL VALUE AT ASSUMED
OPTIONS ANNUAL RATES OF STOCK
GRANTED TO PRICE APPRECIATION FOR
OPTIONS EMPLOYEES EXERCISE OR OPTION TERM(1)
GRANTED IN FISCAL BASE PRICE EXPIRATION ----------------------
NAME (#) YEAR ($ PER SHARE) DATE 5% 10%
- ---- ------- ---------- ------------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Michael A. Leven................... -- -- -- -- -- --
Neal K. Aronson.................... -- -- -- -- -- --
James Darby........................ 25,000(2) 30.1 $9.63 01/20/04 $98,000 $228,400
2,000(3) 2.4 $8.13 12/01/04 $ 6,619 $ 15,426
Steven Romaniello.................. 2,000(4) 2.4 $8.13 12/01/04 $ 6,619 $ 15,426
David E. Shaw...................... 1,000(5) 1.2 $8.13 12/01/04 $ 3,310 $ 7,713
</TABLE>
- ---------------
(1) The dollar amounts under these columns represent the potential realizable
value of each grant of option assuming that the market price of USFS'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 USFS's Common
Stock.
(2) Options vest in increments of 25% per year commencing on January 20, 1998.
(3) Options vest in increments of 25% per year commencing on December 1, 1998.
(4) Options vest in increments of 25% per year commencing on December 1, 1998.
(5) Options vest in increments of 25% per year commencing on December 1, 1998.
The following table provides certain information concerning options
exercised during fiscal 1997 and the value of unexercised options held by the
Named Executive Officers under USFS's Option Plan as of December 31, 1997. No
stock options were exercised by the Named Executive Officers and there were no
SARs outstanding during fiscal 1997.
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS AT
OPTIONS AT FISCAL YEAR END FISCAL YEAR-END(A)
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Michael A. Leven................................. -- -- -- --
Neal K. Aronson.................................. -- -- -- --
James Darby...................................... 6,250 20,750 $2,312.50 $10,677.50
Steven Romaniello................................ 1,500 6,500 $ 0.00 $ 3,740.00
David E. Shaw.................................... 750 3,250 $ 0.00 $ 1,870.00
</TABLE>
- ---------------
(a) Dollar values were calculated by determining the difference between the
closing price of the Common Stock on December 31, 1997 as reported on the
NASDAQ National Market ($10.00 per share) and the exercise price of the
options.
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<PAGE> 73
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TRANSACTIONS ENTERED INTO IN CONNECTION WITH THE COMPANY'S INITIAL PUBLIC
OFFERING
Reclassification. In connection with the Company's initial public offering
completed in October 1996 (the "Offering"), USFS 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 USFS Class A Common Stock. Also
in connection with the Offering, pursuant to the 1996 Amendment (see "Principal
Holders of Common Stock -- Management's Shares of Common Stock"), Mr. Leven, his
wife, Andrea Leven, and Mr. Aronson exchanged 2,707,919 shares of USFS Class A
Common Stock held directly by them (which shares do not include those shares of
USFS 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
USFS Class B Common Stock.
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 Company Class A
Common Stock and all of the 770,801 shares of Company 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 Company Class A Common Stock and 311,007
shares of his Company Class B Common Stock. Mr. Aronson will continue to vote
the remaining 1,198,466 shares of his Company Class B Common Stock. As a result
of these agreements, Mr. Leven currently votes a total of 910,617 shares of
Company Class A Common Stock and 1,509,473 shares of Company Class B Common
Stock, which shares together represent approximately 43.4% of the total
outstanding voting power of USFS.
Messrs. Leven and Aronson currently beneficially own a total of 1,715,721
shares of Company Class A Common Stock and 2,707,919 shares of Company Class B
Common Stock, which represents approximately 77.98% of the outstanding voting
power of the Company Common Stock. Accordingly, Messrs. Leven and Aronson will
be able to (i) elect all of USFS'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,
notwithstanding the voting agreement granting Mr. Leven the right to vote
certain of Mr. Aronson's shares of Company Common Stock, Mr. Leven and Mr.
Aronson do not have any agreements or other obligations to vote together on
matters involving the Company. See "Principal Holders of Common
Stock -- Management's Shares of Common Stock."
Restated Stockholders' Agreement. Simultaneously with the closing of the
Offering, USFS amended and restated the Old Stockholders' Agreement that was
entered into with the Original Investors (as defined below) in connection with
the initial capitalization of USFS (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 USFS's outstanding Common Stock has been
registered under the Securities Act, and the right to cause USFS to file a
registration statement under the Securities Act on one occasion, commencing
September 29, 2000.
1996 Amendment. On October 30, 1996, USFS and Messrs. Leven and Aronson
amended the respective agreements pursuant to which Messrs. Leven and Aronson
had previously been issued, cumulatively, 51% of the shares of USFS and which
agreements contained significant vesting and forfeiture provisions. These
amendments, in part, relaxed certain of the vesting provisions for some of their
shares, eliminated the vesting and forfeiture provisions for others of their
shares, converted certain of their shares into
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<PAGE> 74
the then newly created USFS Class B Common Stock and eliminated the ability of
USFS to compel the repurchase of shares from Messrs. Leven and Aronson in order
to reissue such shares to other members of management.
MISCELLANEOUS
In consideration for their efforts in organizing USFS and negotiating and
consummating the Microtel Acquisition, Messrs. Leven and Aronson each received a
bonus of $150,000 from USFS in 1995.
To date, the Company has invested $6,237 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 USFS, owns a profits interest
in CMS Entrepreneurial Associates, L.P., one of the limited partners of Equity
Partners, L.P.
DESCRIPTION OF THE COMPANY'S CAPITAL STOCK
At the Effective Time, the authorized capital stock of the Company will
consist of 30,000,000 shares of Company Class A Common Stock of which 12,067,194
shares will be issued and outstanding and 57,807 are treasury shares, 5,000,000
shares of Company Class B Common Stock, of which 2,707,919 shares will be issued
and outstanding, and 1,000,000 shares of Preferred Stock, none of which will be
issued and outstanding.
THE RELATIVE PREFERENCES AND RIGHTS OF THE COMPANY'S CAPITAL STOCK ARE SET
FORTH IN THE COMPANY'S CHARTER. SET FORTH BELOW IS A SUMMARY DESCRIPTION OF SUCH
RIGHTS AND PREFERENCES. THIS SUMMARY DOES NOT PURPORT TO BE COMPLETE AND IS
QUALIFIED BY REFERENCE TO THE COMPANY'S CHARTER.
COMMON STOCK
Holders of Company Class A Common Stock are entitled to one vote per share
and holders of Company Class B Common Stock are entitled to ten votes per share
on all matters to be voted upon by the stockholders. Holders of Company Class A
Common Stock and Company Class B Common Stock do not have cumulative voting
rights and, therefore, holders of shares possessing a majority of the voting
power can elect all of the directors. In such event, the holders of the
remaining shares will not be able to elect any directors.
Holders of Company Class A Common Stock and Company Class B Common Stock
are entitled to share ratably such dividends as may be declared from time to
time by the Board of Directors out of funds legally available therefor, subject
to the terms of the Redeemable Preferred stock and of agreements governing the
Company's indebtedness. The Company does not anticipate paying cash dividends in
the foreseeable future. In the event of the liquidation, dissolution or winding
up of the Company, the holders of the Company's Class A Common Stock and Class B
Common stock are entitled to share ratably in all assets remaining after payment
of liabilities and the liquidation preference and any accrued but unpaid
dividends with respect to any then outstanding Preferred Stock.
In the event of any merger or consolidation of the Company with or into any
other corporation pursuant to which shares of Company Class A Common Stock and
Company Class B Common Stock are converted into other securities, cash or other
property, shares of Company Class A Common Stock and shares of Company Class B
Common Stock shall be converted into the identical consideration at the same
rate per share, except that any voting securities into which Company Class B
Common Stock shall be converted shall have ten times the voting power of any
otherwise identical securities into which Company Class A Common Stock is
converted, unless the holders of a majority of the shares of each class shall
have approved such merger or consolidation.
Shares of Company Class B Common Stock are convertible at the option of the
holder into shares of the Company Class A. Common Stock on a share-for-share
basis. In addition, shares of Company Class B Common Stock will automatically
convert into shares of Company Class A Common Stock upon any transfer thereof,
other than a transfer by a holder of Company Class B Common Stock to (i) an
immediate family member of such holder or (ii) any trust or partnership of which
all of the beneficiaries or partners as the case
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<PAGE> 75
may be, are such holder and/or immediate family members of such holder, so long
as the transferee authorizes Mr. Leven or Mr. Aronson to vote such transferred
shares. Holders of Company Class A Common Stock and Company Class B Common Stock
have no preemptive or redemption rights and are not subject to further calls or
assessments by the Company, except as otherwise provided in the Amended Stock
Purchase Agreements.
Application has been made to have the Company Class A Common Stock approved
for quotation and trading on the National Market system of the NASDAQ Stock
Market under the symbol "USFS."
PREFERRED STOCK
The Board of Directors has the authority, without any vote or action by the
stockholders, to issue Preferred Stock in one or more series and to fix the
designations, preferences, rights, qualifications, limitations, and restrictions
thereof, including the voting rights, dividend rights, dividend rate, conversion
rights, terms of redemption (including sinking fund provisions), redemption
price or prices, liquidation preferences and the number of shares constituting
any series; provided, however, that the Board of Directors may not create a
series of Preferred Stock with general voting rights or with the right to elect
more than 50% of the Board under any circumstances without the approval of
holders of 75% of the outstanding Company Class B Common Stock.
On September 29, 1995, pursuant to the "blank-check" authority vested in
the Board by the Company's Charter, the Board of Directors adopted a resolution
creating the Redeemable Preferred Stock, consisting of up to 525,000 shares
(which number may be decreased, but not increased, by the Board without a vote
of the stockholders). By its terms, the Redeemable Preferred Stock ranks prior
to the Common Stock and all other classes of the Company's capital stock with
respect to dividend rights and rights upon the liquidation, dissolution or
winding up of the Company Shares of Redeemable Preferred Stock accrue dividends
cumulatively in additional shares of Redeemable Stock at an annual rate of 10%
on the $100 liquidation preference. 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.
CERTAIN EFFECTS OF AUTHORIZED BUT UNISSUED STOCK
Authorized but unissued shares of Company Common Stock and Preferred Stock
are available for future issuance without stockholder approval, except as may
otherwise be required under NASDAQ rules or Delaware law. These additional
shares may be utilized for a variety of corporate purposes, including future
public offerings to raise additional capital, corporate acquisitions and
employee benefit plans.
The existence of authorized but unissued and unreserved Company Common
Stock and Preferred Stock may enable the Board of Directors to issue shares to
persons friendly to current management, which could render more difficult or
discourage an attempt to obtain control of the Company by means of a proxy
contest, tender offer, merger, or otherwise, and thereby protect the continuity
of the Company's management.
DELAWARE LAW AND CERTAIN CHARTER AND BY-LAW PROVISIONS
The Company is a Delaware corporation and is subject to Section 203 of the
DGCL. In general, Section 203 prevents an "interested stockholder" (defined
generally as a person owning 15% or more of a corporation's outstanding voting
stock) from engaging in a "business combination" (as defined in such section)
with a Delaware corporation for three years following the date such person
became an interested stockholder unless (i) before such person became an
interested stockholder, the board of directors of the corporation approved the
transaction in which the interested stockholder became an interested stockholder
or approved the business combination; (ii) upon consummation of the transaction
that resulted in the interested stockholder becoming an interested stockholder,
the interested stockholder owns at least 85% of the voting stock of the
corporation outstanding at the time the transaction commenced (excluding shares
owned by persons who are both officers and directors of the corporation, and
held by certain employee stock ownership plans) or (iii) following the
transaction in which such person became an interested stockholder, the business
combination is approved by the board of directors of the corporation and
authorized at a meeting of stockholders by the affirmative vote of the holders
of at least two-thirds of the outstanding voting stock of the
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<PAGE> 76
corporation not owned by the interested stockholder. Messrs. Leven and Aronson
are interested stockholders under the DGCL. However, since their acquisition of
the Company's securities was approved in advance by the Board, they would not be
prohibited from engaging in a business combination with the Company.
In addition, certain provisions of the Company's Charter and By-laws
summarized in the following paragraphs will become operative prior to or
simultaneously with the completion of the Offering and may be deemed to have an
anti-takeover effect and may delay, defer or prevent an attempt to obtain
control of the Company by means of a proxy contest, tender offer, merger or
other transaction that a stockholder might consider in its best interest,
including those attempts that might result in a premium over the market price
for the shares held by stockholders.
Special Meeting of Stockholders. The Company's Charter provides that
special meetings of stockholders of the Company may be called only by the Board
of Directors, the Chairman of the Board of Directors or the Chief Executive
Officer. This provision will make it more difficult for stockholders to take
actions opposed by the Board of Directors. This provision may not be amended or
repealed without the approval of holders of at least 75% of the outstanding
voting power of the Company. This provision of the Charter may not be amended or
repealed without the approval of holders of at least 75% of the outstanding
voting power of the Company.
Stockholder Action by Written Consent. The Company's Charter provides that
no action required or permitted to be taken at any annual or special meeting of
the stockholders of the Company may be taken without a meeting, and the power of
stockholders of the Company to consent in writing, without a meeting, to the
taking of any action is specifically denied. This provision may not be amended
or repealed without the approval of holders of at least 75% of the outstanding
voting power of the Company. This provision of the Charter may not be amended or
repealed without the approval of holders of at least 75% of the outstanding
voting power of the Company.
Prohibition on Issuance of Voting Preferred Stock. The Company's Charter
provides that the Board of Directors cannot create a series of Preferred Stock
with general voting rights or with the right to elect more than 50% of the Board
under any circumstances without the approval of holders of 75% of the
outstanding Class B Common Stock. This provision may not be amended or repealed
without the approval of holders of at least 75% of the outstanding voting power
of the Company.
Advance Notice Requirements for Stockholder Proposals and Director
Nominations. The Company's By-laws provide that stockholders seeking to bring
business before an annual meeting of stockholders, or to nominate candidates for
election as directors at an annual or special meeting of stockholders, must
provide timely notice thereof in writing. To be timely, a stockholder's notice
must be delivered to or mailed and received at the principal executive offices
of the Company not less than 70 days nor more than 90 days prior to the meeting;
provided, however, that in the event that the date of the annual meeting is
advanced by more than 20 days or delayed by more than 70 days from such
anniversary date, notice by the stockholder to be timely must be received no
earlier than the close of business on the ninetieth day prior to such annual
meeting and not later than the close of business on the later of the seventieth
day prior to such annual meeting or the tenth day following the day on which
public announcement of the date of such meeting is first made. The Company's
By-laws also specify certain requirements for a stockholder's notice to be in
proper written form. These provisions may preclude some stockholders from
bringing matters before the stockholders at an annual or special meeting or from
making nominations for directors at an annual or special meeting.
Termination of Employment Agreements. The Company's By-laws provide that
approval of 75% of the Board of Directors is required to terminate the
employment agreements of Messrs. Leven or Aronson.
INDEMNIFICATION OF OFFICERS AND DIRECTORS
The USFS Charter provides that to the fullest extent permitted by the DGCL,
a director of USFS shall not be liable to USFS or its stockholders for monetary
damages for breach of fiduciary duty as a director. Under current Delaware law,
liability of a director may not be limited (i) for any breach of the director's
duty of loyalty to USFS or its stockholders, (ii) for acts or omissions not in
good faith or that involve intentional
65
<PAGE> 77
misconduct or a knowing violation of law, (iii) in respect of certain unlawful
dividend payments or stock redemptions or repurchases and (iv) for any
transaction from which the director derives an improper personal benefit. The
effect of the provision of the USFS Charter is to eliminate the rights of USFS
and its stockholders (through stockholders' derivative suits on behalf of USFS)
to recover monetary damages against a director for breach of the fiduciary duty
of care as a director (including breaches resulting from negligent or grossly
negligent behavior) except in the situations described in clauses (i) through
(iv) above. This provision does not limit or eliminate the rights of USFS or any
stockholder to seek nonmonetary relief such as an injunction or rescission in
the event of a breach of a director's duty of care. In addition, the Charter
provides that USFS shall indemnify its directors, officers, employees and agents
to the extent not prohibited by Delaware law.
In addition, USFS has entered into agreements (the "Indemnification
Agreements") with each of the directors of USFS pursuant to which USFS has
agreed to indemnify each such director against claims, liabilities, damages,
expenses, losses, costs, penalties or amounts paid in settlement (collectively,
"Losses") incurred by such director and arising out of his capacity as a
director, executive officer, employee and/or agent of USFS to the maximum extent
permitted by applicable law. In addition, such director or officer shall be
entitled to an advance of expenses to the maximum extent authorized or permitted
by law to meet the obligations indemnified against. The Indemnification
Agreements also obligate USFS to purchase and maintain insurance for the benefit
and on behalf of its directors insuring against all liabilities that may be
incurred by such director in or arising out of his capacity as a director,
officer, employee and/or agent of USFS. It is anticipated that a similar
agreement will be entered into with Mr. Doug Geoga and that similar contracts
may be entered into, from time to time, with future directors and with executive
officers of USFS.
To the extent that the Board of Directors or the stockholders of USFS may
in the future wish to limit or repeal the ability of USFS to indemnify
directors, such repeal or limitation may not be effective as to directors who
are currently parties to the Indemnification Agreements, because their rights to
full protection are contractually assured by the Indemnification Agreements.
All of the indemnification provisions discussed above are equally
applicable to the Company.
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<PAGE> 78
PRINCIPAL HOLDERS OF COMMON STOCK
The following table sets the beneficial ownership as of by each person
known by USFS to be the beneficial owner of more than 5% of the outstanding
shares of USFS Common Stock, each director and "named executive officer" (as
defined in Item 402(a)(3) of Regulation S-K) of USFS as of December 10, 1997,
and all directors and officers of USFS as a group:
Each share of USFS Class B Common Stock is entitled to ten votes per share.
<TABLE>
<CAPTION>
SHARES OF SHARES OF
CLASS A CLASS B PERCENT OF
COMMON PERCENT COMMON PERCENT TOTAL VOTING
NAME OF BENEFICIAL OWNER STOCK(1) OF CLASS STOCK(1) OF CLASS POWER
- ------------------------ --------- -------- --------- -------- ------------
<S> <C> <C> <C> <C> <C>
Michael A. Leven........................ 910,617(2) 9.3 1,509,473(3) 55.7 43.4
Neal K. Aronson......................... 916,811(4) 9.3 1,509,473(5) 55.7 43.4
Dean Adler.............................. 9,000(6) * 0 0 *
Irwin Chafetz........................... 292,100(6) 3.0 0 0 *
James Darby............................. 6,250(7) * * 0 *
Richard D. Goldstein.................... 161,555(8) 1.6 0 0 *
Andrea Leven............................ 233,032(9) 2.4 770,801(10) 28.5 *
Jeffrey A. Sonnenfeld................... 7,000(6) * 0 0 *
Barry S. Sternlicht..................... 301,770(11) 3.1 0 0 *
Steven Romaniello....................... 194,716(12) 2.0 0 0 *
David E. Shaw, Sr....................... 109,499(13) 1.1 0 0 *
All officers and directors as a group
(10 persons)**........................ 2,501,776 25.41 2,707,919 100.0 80.11
</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) 346,461 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) 95,972 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.
(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) 95,972 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) 230,974 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.
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<PAGE> 79
(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) Includes stock options for 2,000 shares of Class A Common Stock at $13.50
per share which are fully vested.
(7) Consists of stock options for 6,250 shares of Class A Common Stock
exercisable at a price of $9.63 per share which vested on January 20, 1998.
(8) Such shares consist of (i) 159,555 shares owned by G2 Investment Partners,
an investment partnership of which Mr. Goldstein is a general partner and
(ii) 2,000 shares of underlying currently exercisable stock options
personally owned by Mr. Goldstein. Mr. Goldstein shares voting and
investment power with respect to shares owned by G2 Investment Partners.
(9) 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.
(10) 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.
(11) Such shares consist of (i) 299,770 shares 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 and (ii)
2,000 shares of underlying currently exercisable stock options personally
owned by Mr. Sternlicht.
(12) 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, (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 and
(iv) 1,500 shares underlying currently exercisable stock options owned by
Mr. Romaniello.
(13) 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, (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 and
(iv) 750 shares underlying currently exercisable stock options owned by Mr.
Shaw.
MANAGEMENT'S SHARES OF COMMON STOCK
Effect of the Merger. Messrs. Leven and Aronson are parties to certain
agreements, described below, which among other things, govern the voting of, and
impose forfeiture provisions upon, shares of USFS Common Stock which USFS has
issued to them (some of which shares have since been repurchased by USFS and
reissued to members of management). After the Merger, to the extent these
agreements are currently in effect, they will remain operative and continue to
govern the shares of USH Common Stock which Messrs. Leven and Aronson receive in
the Merger (as well as shares of USH Common Stock other members of management
receive in the Merger in exchange for shares of USFS Common Stock such members
of management received that were originally repurchased by USFS from Messrs.
Leven and Aronson).
Background. On October 5, 1995, Messrs. Leven and Aronson purchased
5,485,259 shares or 51% of the USFS 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 USFS 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,
68
<PAGE> 80
Mr. Leven owned 15% and Mr. Aronson owned 10% of the then outstanding USFS Class
A Common Stock in the form of Unrestricted Shares. The remaining shares of USFS
Class A Common Stock acquired by Messrs. Leven and Aronson, representing 26% of
such USFS 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 USFS 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 USFS 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
"Principal Holders of Common Stock -- Management's Shares of Common Stock --
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 USFS Class A Common
Stock then outstanding and Restricted Shares representing 6% of the USFS Class A
Common Stock then outstanding could be repurchased by USFS from Messrs. Leven
and Aronson at $.1034 per share and then reissued to other members of USFS's
management at fair market value. As of April 1, 1997, a total of approximately
826,833 shares of outstanding USFS 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. USFS'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. As of December 1, 1997, 57,807
unvested shares have been repurchased by the Company and are currently being
held as treasury shares pending resale to Messrs. Leven and Aronson. 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.
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 "Principal Holders of Common Stock -- Management's Shares of Common
Stock -- 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 USFS Class A Common Stock that was
deemed to have been earned by virtue of the 1996 Amendment) will be forfeited if
69
<PAGE> 81
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 "Principal Holders of Common Stock -- Management's Shares of
Common Stock -- 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 USFS (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, 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 USFS, 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, USFS 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 USFS (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 USFS Class B Common Stock (with ten votes per share), (iv) the
remaining Restricted Shares held by Messrs. Leven and Aronson will be USFS 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 USFS 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 USFS 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.
70
<PAGE> 82
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma consolidated balance sheet of the Company
and its subsidiaries as of September 30, 1997 and unaudited pro forma
consolidated statement of operations of the Company and its subsidiaries for the
year ended December 31, 1996 and for the nine months ended September 30, 1997
have been prepared by adjusting the related historical financial statements of
USFS and its subsidiaries as at such dates and for such periods to reflect the
consummation of the Merger Transactions as if they had occurred as of the date
presented, in the case of the balance sheet, and as of January 1, 1996, in the
case of the statements of operations.
The Merger will be accounted for as the "reverse acquisition" of USH by
USFS. Accordingly, USFS will account for the Merger under the "purchase" method
of accounting in accordance with generally accepted accounting principles.
Therefore, the fair value of USFS's Class A Common Stock at the date the Merger
was announced to be issued to HSA and HPI (approximately $17.8 million) and the
estimated costs of the Merger incurred by USFS will be allocated to the USH
assets acquired and liabilities assumed based on their fair values. The
allocation of the purchase price of the acquisition of USH on the pro forma
consolidated balance sheet and the effect thereof on the pro forma adjustments
to the pro forma consolidated statements of operations are based on preliminary
estimates and are subject to finalization. See "-- Notes to Unaudited Pro Forma
Financial Statements." Such pro forma adjustments are described in the
accompanying notes to the pro forma consolidated balance sheet and statements of
operations which should be read in conjunction with such statements. The
unaudited pro forma consolidated financial statements should also be read in
conjunction with USFS's audited and unaudited consolidated financial statements
and Management's Discussion and Analysis of Financial Condition and Results of
Operations included elsewhere herein. The unaudited pro forma consolidated
financial statements do not purport to be indicative of the actual consolidated
financial position or consolidated results of operations of the Company and its
subsidiaries had such transactions actually been consummated on the dates
assumed or of the future consolidated financial position or consolidated results
of operations of the Company.
71
<PAGE> 83
UNAUDITED PRO FORMA CONSOLIDATED
BALANCE SHEET
<TABLE>
<CAPTION>
USFS
HISTORICAL PRO FORMA PRO FORMA
SEPTEMBER 30, 1997 ADJUSTMENTS SEPTEMBER 30, 1997
------------------ ----------- ------------------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and temporary cash investments................ $21,740,000 $21,740,000
Accounts receivable................................ 195,000 195,000
Deposits........................................... 106,000 106,000
Prepaid expenses................................... 529,000 529,000
Promissory notes receivable........................ 1,381,000 1,381,000
Deferred Commissions............................... 1,775,000 1,775,000
----------- -----------
Total current assets........................ 25,726,000 25,726,000
PROMISSORY NOTES RECEIVABLE.......................... 1,532,000 1,532,000
EQUIPMENT -- Net..................................... 849,000 849,000
FRANCHISE RIGHTS..................................... 3,140,000 18,750,000(1) 21,890,000
DEFERRED COMMISSIONS................................. 2,827,000 2,827,000
OTHER ASSETS......................................... 2,441,000 2,441,000
----------- -----------
$36,515,000 $55,265,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable................................... $ 216,000 $ 216,000
Commissions payable................................ 1,022,000 1,022,000
Deferred application fees.......................... 3,301,000 3,301,000
Accrued expenses................................... 1,391,000 972,224(2) 2,363,224
Due to Hudson Hotels Corporation................... 277,000 277,000
----------- -----------
Total current liabilities........................ 6,207,000 7,179,224
DUE TO HUDSON HOTELS CORPORATION..................... 454,000 454,000
DEFERRED APPLICATION FEES............................ 4,729,000 4,729,000
SUBORDINATED DEBENTURES.............................. 19,175,000 19,175,000
----------- -----------
Total liabilities........................... 30,565,000 31,537,224
REDEEMABLE STOCK:
Preferred shares................................... 0 0
Common shares...................................... 330,000 330,000
STOCKHOLDERS' EQUITY
Common shares...................................... 96,000 22,000(3) 118,222
Treasury stock..................................... (4,000) (4,000)
Capital in excess of par........................... 20,765,000 17,755,554(3) 38,520,554
Accumulated deficit................................ (15,237,000) (15,237,000)
----------- -----------
Total stockholders' equity.................. 5,620,000 23,397,776
----------- -----------
$36,515,000 $55,265,000
=========== ===========
LOSS APPLICABLE TO COMMON STOCKHOLDERS............... $(8,309,000) $(7,137,204)
=========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING........................................ 11,059,576 2,222,222(4) 13,281,798
=========== ===========
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS PER
SHARE.............................................. $ (0.75) $ (0.54)
=========== ===========
</TABLE>
72
<PAGE> 84
UNAUDITED PRO FORMA CONSOLIDATED
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
USFS
HISTORICAL PRO FORMA PRO FORMA
SEPTEMBER 30, 1997 ADJUSTMENTS SEPTEMBER 30, 1997
------------------ ----------- ------------------
<S> <C> <C> <C>
REVENUES:
Marketing and reservation fees............... $ 1,409,000 $ 1,409,000
Franchise application and royalty fees....... 1,057,000 1,475,998(5) 2,532,998
Other........................................ 148,000 148,000
----------- -----------
2,614,000 4,089,998
EXPENSES:
Marketing and reservations................... 1,447,000 1,447,000
Royalties paid to third parties.............. 73,000 (42,819)(6) 30,181
Franchise sales commissions.................. 496,000 496,000
Other franchise sales and advertising........ 2,237,000 2,237,000
Corporate salaries, wages, and benefits...... 2,519,000 2,519,000
Other general and administrative............. 1,948,000 1,948,000
Depreciation and amortization................ 409,000 453,629(7) 862,629
----------- -----------
9,129,000 9,539,810
----------- -----------
LOSS FROM OPERATIONS........................... (6,515,000) (5,449,812)
OTHER INCOME (EXPENSE):
Interest income.............................. 1,097,000 1,097,000
Interest expense............................. (1,452,000) (1,452,000)
----------- -----------
NET LOSS....................................... $(6,870,000) $(5,804,812)
=========== ===========
LOSS APPLICABLE TO COMMON STOCKHOLDERS......... $(6,870,000) $(5,804,812)
=========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING.................................. 12,567,398 2,222,222(4) 14,789,620
=========== ===========
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS PER
SHARE........................................ $ (0.55) $ (0.39)
=========== ===========
</TABLE>
73
<PAGE> 85
UNAUDITED PRO FORMA CONSOLIDATED
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
USFS
HISTORICAL PRO FORMA PRO FORMA
DECEMBER 31, 1996 ADJUSTMENTS DECEMBER 31, 1997
----------------- ----------- -----------------
<S> <C> <C> <C>
REVENUES:
Marketing and reservation fees............... $ 1,197,000 $ 1,197,000
Franchise application and royalty fees....... 20,000 1,776,634(5) 1,796,634
Other........................................ 75,000 75,000
----------- -----------
1,292,000 3,068,634
EXPENSES:
Marketing and reservations................... 1,419,000 1,419,000
Royalties paid to third parties.............. 1,000 1,000
Franchise sales commissions.................. 29,000 29,000
Other franchise sales and advertising........ 2,772,000 2,772,000
Corporate salaries, wages, and benefits...... 2,218,000 2,218,000
Other general and administrative............. 1,652,000 1,652,000
Depreciation and amortization................ 537,000 604,838(7) 1,141,838
----------- -----------
8,628,000 9,232,838
----------- -----------
LOSS FROM OPERATIONS........................... (7,336,000) (6,164,204)
OTHER INCOME (EXPENSE):
Interest income.............................. 871,000 871,000
Interest expense............................. (126,000) (126,000)
----------- -----------
NET LOSS....................................... $(6,591,000) $(5,419,204)
=========== ===========
LOSS APPLICABLE TO COMMON STOCKHOLDERS......... $(8,309,000) $(7,137,204)
=========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING.................................. 11,059,576 2,222,222(4) 13,281,798
=========== ===========
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS PER
SHARE........................................ $ (0.75) $ (0.54)
=========== ===========
</TABLE>
74
<PAGE> 86
NOTES TO UNAUDITED PRO FORMA
FINANCIAL STATEMENTS
(1) Reflects the allocation of the purchase price of the "reverse acquisition"
of USH by USFS. Such purchase price is the fair value of the shares of USH
Class A Common Stock (which is based on the fair value of USFS Class A
Common Stock) on the date the Merger was announced (November 6, 1997) to be
issued to HSA and HPI and the estimated costs of the Merger incurred by
USFS. The determination of the final purchase price allocation is expected
to be completed once all transaction expenses have been determined
(currently estimated to be $1 million) which is expected to be within 60
days after the Closing of the Merger and is not expected to be materially
different from the preliminary allocation.
(2) Reflects the estimated costs of the Merger incurred by USFS.
(3) Reflects the fair value of the shares of USH Class A Common Stock (which is
based on the fair value of USFS Class A Common Stock) to be issued to HSA
and HPI.
(4) Reflects the shares of USH Class A Common Stock to be issued to HSA and HPI
as if the Merger had occurred effective January 1, 1996.
(5) Reflects the franchise revenue which was paid to HSA LLC related to the 18
franchise arrangements that had been executed at the time of USFS's
acquisition of certain rights to the Hawthorn Suites brand in March 1996.
(6) Reflects the elimination of royalties paid by USFS to HSA LLC related to
franchise arrangements executed subsequent to USFS's acquisition of certain
rights to the Hawthorn Suites brand in March 1996.
(7) Reflects the amortization of the franchise rights acquired in the Merger
over their estimated life of 31 years.
75
<PAGE> 87
SELECTED HISTORICAL FINANCIAL DATA
OF USFS
AND SUBSIDIARIES
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
PERIOD FROM
AUGUST 28,
1995 NINE MONTHS NINE MONTHS
(INCEPTION) TO YEAR ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1995 1996 1996 1997
-------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Statement of Operations Data:
Revenues................................... $ -- $ 1,292 $ 864 $ 2,614
Operating Expenses......................... 1,327 8,628 6,206 9,129
Operating Loss............................. (1,327) (7,336) (5,342) (6,515)
Interest Income............................ 195 871 537 1,097
Interest Expense........................... 36 126 108 1,452
Net Loss................................... (1,168) (6,591) (4,913) (6,870)
Loss Applicable to Common Stockholders..... (1,577) (8,309) (6,191) (6,870)
Net Loss applicable to Common Stockholders
Per Share............................... $ (0.15) $ (0.75) $ (0.58) $ (0.55)
Weighted Average Number of Common Shares
Outstanding(1).......................... 10,755,409 11,059,576 10,755,409 12,567,398
Balance Sheet Data (at period end):
Working Capital............................ $ 13,265 $ 28,115 $ 9,368 $ 19,519
Total Assets............................... 18,072 40,105 18,817 36,515
Total Liabilities.......................... 1,845 9,022 7,500 30,565
Redeemable Preferred Stock(2).............. 16,759 18,477 18,037 --
Redeemable Common Stock.................... 330 330 330 330
Stockholders' Equity (deficit)............. (862) 12,276 (7,050) 5,620
</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").
76
<PAGE> 88
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF THE COMPANY
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 and the Hawthorn Suites brands. The Company acquired the rights to
these brands because of their potential for significant growth, which reflects,
among other things, their potential profitability for franchisees at the
property level and their positions in attractive segments of the lodging
industry.
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 and (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.
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. The Company's
executive offices are located at 13 Corporate Square, Suite 250, Atlanta,
Georgia 30329 and its telephone number is (404) 321-4045.
Comparisons have been made between the three and nine months ended
September 30, 1996 and the three and nine months ended September 30, 1997 and
between the fourth quarter ended December 31, 1995 and the fiscal year ended
December 31, 1996 for the purposes of the following discussion:
RESULTS OF OPERATIONS
FRANCHISE SALES GROWTH -- Since acquiring the Microtel brand in October
1995 and establishing its sales force by January 1996, USFS has realized
franchise sales growth as follows:
<TABLE>
<CAPTION>
AS OF AS OF AS OF
MICROTEL FRANCHISE DATA SEPTEMBER 30, 1996 DECEMBER 31, 1996 SEPTEMBER 30, 1997
- ----------------------- ------------------ ----------------- ------------------
<S> <C> <C> <C>
Properties open(1).................... 27 28 58
Executed agreements & under
construction(2).................. 10 25 40
Executed franchise agreements but
not under construction(3)........ 140 168 224
Accepted applications(4)............ 80 82 92
--- --- ---
Total under development and accepted
applications(5)..................... 230 275 356
OPEN PLUS UNDER DEVELOPMENT PLUS
ACCEPTED APPLICATIONS............... 257 303 414
</TABLE>
- ---------------
(1) The Company does not receive royalties from 26, 27, and 28 hotels open as of
September 30, 1996, December 31, 1996, and September 30, 1997, respectively.
77
<PAGE> 89
(2) The Company will not receive royalties from three, two, and zero of the
hotels under construction as of September 30, 1996, December 31, 1996, and
September 30, 1997, respectively.
(3) The Company will not receive royalties from, two, two and five of the
executed franchise agreements as of September 30,1996, December 31,1996, and
September 30, 1997, respectively.
(4) The Company will not receive royalties from six, six, and two of the
franchise applications accepted as of September 30, 1996, December 31, 1996,
and September 30, 1997, respectively.
(5) There can be no assurances that properties under development or for which
applications have been accepted will result in open hotels. See "Risk
Factors -- Dependence on, and Obstacles to, Hotel Openings."
Since acquiring the Hawthorn Suites brand in March 1996 and establishing
its sales force by July 1996, the Company has realized franchise sales growth as
follows:
<TABLE>
<CAPTION>
AS OF AS OF AS OF
HAWTHORN SUITES FRANCHISE DATA SEPTEMBER 30, 1996 DECEMBER 31, 1996 SEPTEMBER 30, 1997
- ------------------------------ ------------------ ----------------- ------------------
(INCEPTION TO DATE)
<S> <C> <C> <C>
Properties open(1).................... 18 19 22
Executed agreements & under
construction(2)..................... 2 2 9
Executed franchise agreements but not
under construction(3)............... 4 17 51
Accepted applications................. 16 14 23
-- -- --
Total under development and accepted
applications(4)..................... 22 33 83
OPEN PLUS UNDER DEVELOPMENT PLUS
ACCEPTED APPLICATIONS............... 40 52 105
</TABLE>
- ---------------
(1) The Company does not receive royalties from 18 hotels open as of September
30 1996, December 31, 1996, and September 30, 1997.
(2) The Company will not receive royalties from zero, one, and one of the hotels
under construction as of September 30 1996, December 31, 1996, and September
30, 1997, respectively.
(3) The Company will not receive royalties from one, zero, and zero of the
executed franchise agreements as of September 30 1996, December 31, 1996,
and September 30, 1997, respectively.
(4) There can be no assurances that properties under development or for which
applications have been accepted will result in open hotels. See "Risk
Factors -- Dependence on, and Obstacles to, Hotel Openings."
The average franchise application fee was $28,000 and $26,000 for the nine
months ended September 30, 1996 and year ended December 31, 1996, respectively,
compared to $24,000 for the nine months ended September 30, 1997. Such fees are
recognized as revenue when the underlying hotel opens.
78
<PAGE> 90
REVENUE -- USFS has had revenues from the following sources:
<TABLE>
<CAPTION>
THREE THREE THREE
MONTHS MONTHS NINE MONTHS NINE MONTHS MONTHS FISCAL YEAR
ENDED ENDED ENDED ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
1996 1997 1996 1997 1995 1996
------------- ------------- ------------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Franchise application
and royalty fees... $ 15,000 $ 551,000 $ 15,000 $1,057,000 $ 0 $ 20,000
Other fees........... 2,000 73,000 2,000 148,000 0 75,000
Marketing and
reservation fees... 452,000 552,000 847,000 1,409,000 0 1,197,000
-------- ---------- -------- ---------- ---- ----------
TOTAL................ $469,000 $1,176,000 $864,000 $2,614,000 $ 0 $1,292,000
-------- ---------- -------- ---------- ---- ----------
</TABLE>
Three and nine months ended September 30, 1996 to three and nine months
ended September 30, 1997.
Franchise application and royalty fees (the "Fees") were $551,000 and
$1,057,000 for the three and nine months ended September 30, 1997, respectively
compared with $15,000 for the three and nine months ended September 30, 1996.
Fees for the three months ended September 30, 1997 represent application fees
from seventeen of the eighteen properties opened during the quarter, and
royalties received from twenty-five of the eighty hotels which were open as of
September 30, 1997. The Fees earned for the nine months ended September 30,
1997, in addition to the above, included application fees from fourteen hotel
openings and one transfer fee received during the first two quarters of 1997.
The Fees earned for the three and nine months ended September 30, 1996 are the
application fees from one hotel which opened during the third quarter of 1996.
Other fee income was $73,000 and $148,000 for the three and nine months
ended September 30, 1997, respectively, compared to $2,000 for the three and
nine months ended September 30, 1996.
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. Marketing and reservation fees were $552,000
and $1,409,000 for the three and nine months ended September 30, 1997,
respectively, compared to $452,000 and $847,000 for the respective periods in
1996.
Three months ended December 31, 1995 to fiscal year ended December 31,
1996.
Fees represent the Fees earned for one hotel which opened during the third
quarter of 1996 and one hotel which opened in the fourth quarter of 1996.
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 twelve months ended December 31,
1996, marketing and reservation fees were $1,197,000.
The Company received franchise application fees of $5,339,000 for the year
ended December 31, 1996. 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 and one hotel which
opened during the fourth quarter of 1996.
79
<PAGE> 91
EXPENSES -- USFS's expenses were as summarized below:
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS THREE MONTHS FISCAL YEAR
ENDED ENDED ENDED ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
1996 1997 1996 1997 1995 1996
------------- ------------- ------------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Marketing and
reservations....... $ 532,000 $ 535,000 $1,022,000 $1,447,000 $ 13,000 $1,419,000
Royalties paid to
third parties...... 0 35,000 0 73,000 0 0
Franchise sales
commission......... 17,000 259,000 17,000 496,000 0 0
Other franchise sales
and advertising.... 757,000 749,000 2,020,000 2,237,000 550,000 2,802,000
Corporate salaries,
wages and
benefits........... 548,000 850,000 1,541,000 2,519,000 423,000 2,218,000
Other general and
administrative..... 360,000 634,000 1,195,000 1,948,000 215,000 1,652,000
Depreciation and
amortization....... 143,000 142,000 411,000 409,000 126,000 537,000
---------- ---------- ---------- ---------- ---------- ----------
TOTAL................ $2,357,000 $3,204,000 $6,206,000 $9,129,000 $1,327,000 $8,628,000
---------- ---------- ---------- ---------- ---------- ----------
</TABLE>
Three and nine months ended September 30, 1996 to three and nine months
ended September 30, 1997.
Marketing and reservation expenses were $535,000 and $1,447,000, for the
three and nine months ended September 30, 1997, respectively, compared to
$532,000 and $1,022,000 for the respective periods in 1996. The increase in
marketing and reservation expenses for the nine months ended September 30, 1997
is primarily due to the fact that the Hawthorn Suites brand was not acquired
until March 27, 1996. Therefore, there were no marketing and reservation
expenses for the Hawthorn brand during the first quarter of 1996.
Royalties paid to third parties were $35,000 and $73,000 for the three and
nine months ended September 30, 1997, respectively. No royalties were paid in
the respective periods in 1996. The Company is required to pay monthly royalties
to Hudson for each new Microtel property opened and to HSA LLC for each new
Hawthorn property opened.
Franchise sales commissions were $259,000 and $496,000 for the three and
nine months ended September 30, 1997, respectively, compared to $17,000 for the
respective periods in 1996. Commissions were expensed for the 18 and 34 hotels
which opened during the three and nine months ended September 30, 1997,
respectively. The commission expense for the three and nine months ended
September 30, 1996 is due to the opening of one hotel and the execution of an
international master franchise agreement.
Other franchise sales and advertising expenses, which are costs related to
the Company's franchise sales effort, were $749,000 and $2,237,000 for the three
and nine months ended September 30, 1997, respectively, compared to $757,000 and
$2,020,000 for the respective periods in 1996. The increase for the nine months
ended September 30, 1997 was due primarily to the following factors: (i) a
larger Microtel sales force was in place which resulted in additional salary and
benefit expenses as well as other sales related costs (e.g. travel and
telephone) (approximately $460,000 for the nine months ended September 30,
1997), (ii) the Hawthorn Suites brand was not acquired until April of 1996 and
as a result, additional sales and advertising costs were incurred (approximately
$27,000 for the nine months ended September 30, 1997), (iii) the first franchise
conference was held in 1997 (approximately $52,000 for the nine months ended
September 30, 1997), and (iv) a program was initiated in 1997 in which a replica
of a Microtel room, constructed such that it can be transported across the
country, was present when each hotel broke ground (expenses include lease
payments for the truck, driving and driver expenses) (approximately $74,000 for
the nine months ended September 30, 1997). The increase in these expenses was
partially offset by the following: (i) there were less advertising and
promotions expenses (approximately $159,000 for the nine months ended September
30, 1997), (ii) a lower volume of potential franchisees were brought in to the
corporate offices for education and tours of the products (approximately $43,000
for the nine months ended September 30, 1997) and (iii) lower expenses were
80
<PAGE> 92
incurred by the sales department on printing and mailings (approximately
$160,000 for the nine months ended September 30, 1997).
Corporate salaries, wages and benefits, which are non-selling personnel
expenses, were $850,000 and $2,519,000 for the three and nine months ended
September 30, 1997, respectively, compared to $548,000 and $1,541,000 for the
respective periods in 1996. The increase since September 30, 1996 is primarily
due to (i) additional personnel hired to handle the increased servicing
requirements of additional executed franchise agreements and newly introduced
programs (approximately $924,000 for the nine months ended September 30, 1997)
and (ii) expenses related to the Company's Stock Option plans which were adopted
in October 1996 (approximately $54,000 for the nine months ended September 30,
1997).
Other general and administrative expenses were $634,000 and $1,948,000 for
the three and nine months ended September 30, 1997, respectively, compared to
$360,000 and $1,195,000 (including a $200,000 non-recurring charge related to
the anticipated termination of the Company's corporate office lease) for the
respective periods in 1996. The increase is primarily due to (i) general office
and travel expenses for the additional staff in place during 1997 (approximately
$597,000 for the nine months ended September 30, 1997), (ii) legal costs related
to the Hawthorn Suites brand which was not acquired until March 27, 1996
(approximately $21,000 for the nine months ended September 30, 1997), and (iii)
expenses related to the Company's having become a publicly traded company in
October 1996 (approximately $255,000 for the nine months ended September 30,
1997).
Depreciation and amortization expense includes (i) depreciation of
equipment for the corporate and regional sales offices (approximately $83,000
for the nine months ended September 30, 1997), (ii) amortization for the cost of
acquiring the Microtel brand and the exclusive rights to franchise the Hawthorn
Suites brand (approximately $123,000 for the nine months ended September 30,
1997), (iii) amortization of consulting payments made to Hudson under the
Microtel Acquisition Agreement (approximately $175,000 for the nine months ended
September 30, 1997), and (iv) amortization of costs related to the formation of
the Company (approximately $25,000 for the nine months ended September 30,
1997).
OTHER INCOME (EXPENSES) -- Interest income resulting from investments in
cash and marketable securities was $339,000 and $1,097,000 for the three and
nine months ended September 30, 1997, respectively, compared to $206,000 and
$537,000 for the respective periods in 1996. The increase was due to the
additional interest earned on the cash received from the initial public offering
in October of 1996.
During the three and nine months ended September 30, 1997 interest expense
was $492,000 and $1,452,000, respectively, compared to $36,000 and $108,000 for
the respective periods in 1996. The interest expense in 1996 related to the note
payable for purchasing the Microtel brand while the 1997 expense also includes
the subordinated debentures (see footnote 3 to the notes to consolidated
financial statements of USFS and subsidiaries attached hereto).
Three months ended December 31, 1995 to fiscal year ended December 31,
1996.
Marketing and reservation expenses were $1,419,000, for the year ended
December 31, 1996, 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 March 27, 1996, therefore there
were no marketing and reservation expenses in 1995 for this brand (approximately
$988,000) 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 (approximately $418,000).
Other franchise sales and advertising expenses, which are non-commission
costs related to the Company's franchise sales effort, were $2,802,000 for the
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 (approximately $1,131,777), (ii) the Hawthorn Suites
brand was not acquired until March 27, 1996 and as a result, additional salesmen
and advertising and promotion costs were incurred (approximately $537,350), and
81
<PAGE> 93
(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 (approximately $233,589).
Corporate salaries, wages and benefits, which are non-selling personnel
expenses, were $2,218,000 for the year ended December 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 $1,652,000 for the 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 (approximately $1,237,000) 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 (approximately $49,000),
(ii) amortization for the cost of acquiring the Microtel brand and the exclusive
rights to franchise the Hawthorn Suites brand (approximately $222,000), (iii)
amortization of consulting payments made to Hudson under the Microtel
Acquisition Agreement (approximately $233,000), and (iv) amortization of costs
related to the formation of the Company (approximately $33,000).
Sales commissions of $1,922,000 were accrued during the year ended December
31, 1996, compared with $15,700 during the fourth quarter of 1995. The Sales
commissions relate to 206 franchise agreements which were executed year ended
December 31, 1996 compared with three franchise agreements executed during the
fourth quarter of 1995. Such payments are recognized as expenses when the
underlying hotel opens.
OTHER INCOME (EXPENSES) -- Interest income was $871,000 for the year ended
December 31, 1996, resulting from investments in cash and marketable securities.
Interest income for the fourth quarter of 1995 was $195,000.
During the year ended December 31, 1996, interest expense on the note
payable relating to the purchase of the Microtel brand was $126,000, 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>
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS THREE MONTHS FISCAL YEAR
ENDED ENDED ENDED ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
1996 1997 1996 1997 1995 1996
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Net Loss............. $1,718,000 $2,181,000 $4,913,000 $6,870,000 $1,168,000 $6,591,000
Loss appl. to common
stockholders....... $2,158,000 $2,181,000 $6,191,000 $6,870,000 $1,577,000 $8,309,000
</TABLE>
Three and nine months ended September 30, 1996 to three and nine months
ended September 30, 1997.
The Company had net losses of $2,181,000 and $6,870,000 for the three and
nine months ended September 30, 1997, respectively, compared to $1,718,000 and
$4,913,000 for the respective periods in 1996.
The Company had a net loss applicable to common stockholders of $2,181,000
and $6,870,000 for the three and nine months ended September 30, 1997,
respectively, compared to $2,158,000 and $6,191,000 for the respective periods
in 1996. The net loss applicable to common stockholders includes $440,000 and
$1,278,000 of accumulated but undeclared and unpaid dividends on its 10%
Cumulative Redeemable Exchangeable Preferred Stock (the "Redeemable Preferred
Stock") for the three and nine months ended September 30, 1996, respectively.
The Company had a net operating loss carryforward for income tax purposes
as of September 30, 1997 of $10,472,000 compared to $3,707,000 as of September
30, 1996. Given the limited operating history of the
82
<PAGE> 94
Company, management recorded a valuation allowance for the full amount of the
deferred tax asset as of September 30, 1997.
Three months ended December 31, 1995 to fiscal year ended December 31,
1996.
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 Redeemable Preferred Stock) for the year
ended December 31, 1996. 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, USFS financed its
operations primarily through a private placement of securities, franchise
application fees, and interest income. In October of 1995, USFS 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.
On October 24, 1996, USFS completed an Offering of 1,825,000 shares of
Class A Common Stock at $13.50 per share. Net proceeds to USFS from the Offering
were approximately $21,391,000. The remaining proceeds of the Offering are held
either as cash or cash equivalents and will be used for working capital and
general corporate purposes, which may include (i) approximately $1,000,000 to
fund USFS's remaining obligations under the Microtel Acquisition Agreement, (ii)
approximately $10,000,000 to acquire additional lodging or other
service-oriented brands or exclusive franchise rights (to the extent permitted
under the Hawthorn Acquisition Agreement), (iii) approximately $1,000,000 to
invest in financing programs developed by its wholly owned subsidiary, US
Funding Corp., (iv) approximately $3,000,000 to service interest on the
Subordinated Debentures, (v) approximately $4,000,000 to build hotel properties,
and (vi) approximately $2,300,000 to invest in entities that make equity
investments in hotel properties built and managed by certain franchisees with
the potential for multi-unit development. Cash and cash equivalents were
$21,740,000 as of September 30, 1997. In Management's opinion, based on the
Company's current operations, the Company's capital resources are sufficient to
fund operations for the next twelve months.
On January 1, 1997, USFS 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. USFS 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. Michael A. Leven's employment terminates
for any reason, USFS would be obligated to redeem all outstanding Subordinated
Debentures. USFS also had outstanding indebtedness related to the Microtel
Acquisition of approximately $805,000 in principal and interest as of September
30, 1997.
The Company has no outstanding lines of credit in place. The Company uses
cash and its own stock as its capital resources.
For the nine months ended September 30, 1997, USFS had a net loss of
$6,870,000. The net cash used in operating activities was $8,823,000. The net
cash used was a result of increases in promissory notes receivable related to
the application fees on executed franchise agreements, increases in deferred
commissions paid to salesmen for executed franchise agreements and increases in
other assets which primarily relate to loans issued to franchisees to aid them
in the development of building hotels. Net cash used was partially offset by
cash inflows of application fees for executed franchise agreements, depreciation
and amortization, deferred compensation amortization related to the Company's
stock option plan and decreases in accrued expenses and commissions payable.
For the nine months ended September 30, 1997, net cash used in investing
activities was $621,000 which was a result of acquiring additional office
furniture, office equipment and costs related to the construction and
implementation of a national reservations system.
83
<PAGE> 95
For the nine months ended September 30, 1997, net cash used by financing
activities was $4,000 which was a result of the Company purchasing restricted
stock from certain members of management who left the Company during the period.
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 increased leisure travel, are expected to produce higher
revenues for the Company than other periods during the year. 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.
INFLATION
The rate of inflation has not had a material effect on the revenues or
operating results of the Company since its inception.
84
<PAGE> 96
CAPITALIZATION OF THE COMPANY
The following table sets forth the unaudited historical consolidated
capitalization of USFS as of September 30, 1997 and the pro forma consolidated
capitalization of the Company adjusted to give effect to the Merger
Transactions. The adjustments made to USFS's historical consolidated
capitalization to arrive at the adjusted consolidated capitalization are
described under "Unaudited Pro Forma Consolidated Financial Statements." This
table should be read in conjunction with the consolidated financial statements
of USFS and its subsidiaries included elsewhere herein and the "Unaudited Pro
Forma Consolidated Financial Statements" and related notes thereto included
elsewhere in this Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
---------------------------
COMPANY
PRO FORMA
FOR MERGER
USFS ACTUAL TRANSACTIONS
----------- ------------
(IN THOUSANDS)
<S> <C> <C>
Current portion of long-term debt:
Due to Hudson Hotels Corporation.......................... $ 277 $ 277
Other.....................................................
------- -------
Total current portion of long term debt........... 277 277
Long-term debt:
Due to Hudson Hotels Corp................................. 454 454
Subordinated Debentures................................... 19,175 19,175
------- -------
Total long-term debt.............................. 19,629 19,629
------- -------
Redeemable stock............................................ 330 330
------- -------
Stockholders' equity........................................ 5,624 23,398
------- -------
Total capitalization........................................ $25,860 $43,634
======= =======
</TABLE>
LEGAL MATTERS
The legality of the Company Common Stock being offered hereby will be
passed upon for the Company by Paul, Weiss, Rifkind, Wharton & Garrison, New
York, New York. The federal income tax consequences in connection with the
Merger will be passed upon by Paul, Weiss, Rifkind, Wharton & Garrison.
EXPERTS
The consolidated financial statements of U.S. Franchise Systems, Inc. and
its subsidiaries as of December 31, 1995 and 1996 and for the periods August 28,
1995 (Inception) to December 31, 1995 and the year ended December 31, 1996, and
the balance sheet of USFS Hawthorn, Inc. as of December 12, 1997 included in
this Proxy Statement/Prospectus have been audited by Deloitte & Touche LLP,
independent auditors as stated in their reports included herein, and are
included in reliance upon the report of such firm given upon their authority as
experts in accounting and auditing.
85
<PAGE> 97
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
U.S. FRANCHISE SYSTEMS, INC. AND SUBSIDIARIES:
Consolidated Statements of Financial Position as of December
31, 1996 and September 30, 1997 (Unaudited)............... F-2
Consolidated Statements of Operations for the three and nine
months ended September 30, 1996 and 1997 (Unaudited)...... F-3
Consolidated Statements of Cash Flows for the Nine Months
ended September 30, 1996 and 1997 (Unaudited)............. F-4
Notes to Consolidated Financial Statements (Unaudited)...... F-5
Independent Auditors' Report................................ F-6
Consolidated Statements of Financial Position as of December
31, 1995 and 1996......................................... F-7
Consolidated Statements of Operations for the period from
August 28, 1995 (inception) to December 31, 1995 and for
the year ended December 31, 1996.......................... F-8
Consolidated Statements of Stockholders' Equity (Deficit)
for the period from August 28, 1995 (inception) to
December 31, 1995 and for the year ended December 31,
1996...................................................... F-9
Consolidated Statements of Cash Flows for the period from
August 28, 1995 (inception) to December 31, 1995 and for
the year ended December 31, 1996.......................... F-10
Notes to Consolidated Financial Statements.................. F-11
USFS HAWTHORN, INC.:
Independent Auditors' Report................................ F-20
Balance Sheet as of December 12, 1997....................... F-21
Notes to Balance Sheet...................................... F-22
ROYALTY AND OTHER PAYMENTS FROM U.S. FRANCHISE SYSTEMS, INC.
TO HSA PROPERTIES, L.L.C.:
Statement of Royalties and Other Payments (Unaudited)....... F-23
</TABLE>
F-1
<PAGE> 98
U.S. FRANCHISE SYSTEMS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
DECEMBER 31, 1995 AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(UNAUDITED)
DECEMBER 31, 1996 SEPTEMBER 30, 1997
----------------- ------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $31,188,000 $ 21,740,000
Accounts receivable 114,000 195,000
Deposits 93,000 106,000
Prepaid expenses 494,000 529,000
Promissory notes receivable 784,000 1,381,000
Deferred commissions 1,261,000 1,775,000
----------- ------------
Total current assets 33,934,000 25,726,000
PROMISSORY NOTES RECEIVABLE 390,000 1,532,000
EQUIPMENT -- Net 292,000 849,000
FRANCHISE RIGHTS 3,264,000 3,140,000
DEFERRED COMMISSIONS 1,492,000 2,827,000
OTHER ASSETS 733,000 2,441,000
----------- ------------
Total Assets $40,105,000 $ 36,515,000
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 679,000 $ 216,000
Commissions payable 837,000 1,022,000
Deferred application fees 2,916,000 3,301,000
Accrued expenses 1,110,000 1,391,000
Due to Hudson Hotels Corporation 277,000 277,000
----------- ------------
Total current liabilities 5,819,000 6,207,000
DUE TO HUDSON HOTELS CORPORATION 454,000 454,000
DEFERRED APPLICATION FEES 2,749,000 4,729,000
SUBORDINATED DEBENTURES 19,175,000
----------- ------------
Total liabilities $ 9,022,000 $ 30,565,000
=========== ============
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
$18,477,000 at December 31, 1996) 18,477,000 --
Common shares, par value $0.01 per share; issued and
outstanding 3,186,280 Class A shares entitled in
redemption (under certain conditions) to $330,000 at
December 31, 1996 and September 30, 1997 330,000 330,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
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
6,686,196 Class A shares and 2,707,919 Class B shares at
December 31, 1996; issued and outstanding 6,647,206
Class A shares and 2,707,919 Class B shares at September
30, 1997 96,000 96,000
Treasury Stock (4,000)
Capital in excess of par 20,547,000 20,765,000
Accumulated deficit (8,367,000) (15,237,000)
----------- ------------
Total stockholders' equity 12,276,000 5,620,000
----------- ------------
$40,105,000 $ 36,515,000
=========== ============
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE> 99
U.S. FRANCHISE SYSTEMS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
3 MONTHS ENDED 3 MONTHS ENDED 9 MONTHS ENDED 9 MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1996 1997 1996 1997
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
REVENUES:
Marketing and reservation fees $ 452,000 $ 552,000 $ 847,000 $ 1,409,000
Franchise application and royalty
fees 15,000 551,000 15,000 1,057,000
Other 2,000 73,000 2,000 148,000
-----------------------------------------------------------------
469,000 1,176,000 864,000 2,614,000
=================================================================
Marketing and reservations $ 532,000 $ 535,000 $ 1,022,000 $ 1,447,000
Royalties paid to third parties -- 35,000 -- 73,000
Franchise sales commissions 17,000 259,000 17,000 496,000
Other franchise sales and
advertising 757,000 749,000 2,020,000 2,237,000
Corporate salaries, wages, and
benefits 548,000 850,000 1,541,000 2,519,000
Other general and administrative 360,000 634,000 1,195,000 1,948,000
Depreciation and amortization 143,000 142,000 411,000 409,000
-----------------------------------------------------------------
2,357,000 3,204,000 6,206,000 9,129,000
-----------------------------------------------------------------
LOSS FROM OPERATIONS (1,888,000) (2,028,000) (5,342,000) (6,515,000)
OTHER INCOME (EXPENSE):
Interest income 206,000 339,000 537,000 1,097,000
Interest expense (36,000) (492,000) (108,000) (1,452,000)
-----------------------------------------------------------------
NET LOSS $(1,718,000) $(2,181,000) $(4,913,000) $(6,870,000)
=================================================================
LOSS APPLICABLE TO COMMON STOCKHOLDERS $(2,158,000) $(2,181,000) $(6,191,000) $(6,870,000)
=================================================================
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 10,755,409 12,541,405 10,755,409 12,567,398
=================================================================
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS PER
SHARE $ (0.20) $ (0.17) $ (0.58) $ (0.55)
=================================================================
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 100
U.S. FRANCHISE SYSTEMS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
1996 1997
-------------------- --------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net Loss $(4,913,000) $(6,870,000)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 409,000 409,000
Deferred compensation amortization -- 218,000
Increase in deposits and accounts receivable (153,000) (94,000)
Increase in prepaid expenses (131,000) (210,000)
Increase in promissory notes receivable (1,022,000) (1,739,000)
Increase in deferred commissions (1,847,000) (1,849,000)
Increase in other assets (618,000) (1,755,000)
Increase (decrease) in accounts payable 124,000 (463,000)
Decrease in accrued expenses 952,000 282,000
Increase (decrease) in commissions payable 541,000 185,000
Increase in deferred application fees 4,069,000 2,365,000
Increase in royalties due to HSA properties 321,000 --
Decrease in liability to Hudson Hotels Corporation (352,000) --
Increase in subordinated debentures paid in kind -- 698,000
----------- -----------
Net cash used in operating activities (2,620,000) (8,823,000)
INVESTING ACTIVITIES:
Acquisition of equipment (382,000) (621,000)
Acquisition of franchise rights (117,000) --
----------- -----------
Net cash used in investing activities (499,000) (621,000)
FINANCING ACTIVITIES:
Issuance of capital stock 122,000 --
Redemption of capital stock (119,000) --
Treasury stock -- (4,000)
----------- -----------
Net cash provided by financing activities 3,000 (4,000)
NET DECREASE IN CASH AND CASH EQUIVALENTS (3,116,000) (9,448,000)
CASH AND CASH EQUIVALENTS:
Beginning of period 13,893,000 31,188,000
----------- -----------
End of period $10,777,000 $21,740,000
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Noncash activities:
Undeclared dividends accrued on redeemable preferred
stock $ 1,278,000
===========
Exchange of redeemable preferred stock for
subordinated debentures $18,477,000
===========
Portion of purchase price due to Hudson Hotels
Corporation in future years, discounted at 10% $ 454,000
===========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 101
U.S. FRANCHISE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared pursuant
to the rules and regulations of the Securities and Exchange Commission for
reporting on Form 10-Q. Accordingly, certain information and footnotes
required by generally accepted accounting principles for complete financial
statements have been omitted. In the opinion of management, all adjustments,
consisting of normal recurring adjustments, which are necessary for a fair
presentation of financial position and results of operations have been made.
These interim financial statements should be read in conjunction with the
consolidated financial statements and notes thereto, presented in the
Company's Annual Report on Form 10-K for the year ended December 31, 1996,
filed with the Securities and Exchange Commission. The results of operations
for the nine months ended September 30, 1997 are not necessarily indicative
of results that may be expected for the full year.
2. EARNINGS PER SHARE
Earnings per share for the three and nine months ended September 30, 1996
and 1997 have been calculated by dividing the loss applicable to common
shareholders by the weighted average shares outstanding. Weighted averaged
shares include redeemable common shares outstanding. Loss applicable to
common stockholders for the three and nine months ended September 30, 1996
represents net loss adjusted for accrued dividends on the redeemable
preferred stock.
3. SUBORDINATED DEBENTURES
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. Michael
A. 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.
F-5
<PAGE> 102
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 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 LLP
Atlanta, Georgia
February 21, 1997
F-6
<PAGE> 103
U.S. FRANCHISE SYSTEMS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
DECEMBER 31, 1995 AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
ASSETS
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 $0.01 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.
F-7
<PAGE> 104
U.S. FRANCHISE SYSTEMS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
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.
F-8
<PAGE> 105
U.S. FRANCHISE SYSTEMS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
PERIOD FROM AUGUST 28, 1995 (INCEPTION) TO
DECEMBER 31, 1995 AND FOR THE YEAR ENDED DECEMBER 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
-------------------- CAPITAL IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT EXCESS OF 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.
F-9
<PAGE> 106
U.S. FRANCHISE SYSTEMS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD
AUGUST 28, 1995
(INCEPTION) TO YEAR ENDED
DECEMBER 31, 1995 DECEMBER 31, 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.
F-10
<PAGE> 107
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.
HAWTHORN SUITES FRANCHISING, INC.
On March 27, 1996, the Company entered into an agreement with HSA
Properties, LLC ("HSA") to acquire the exclusive 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.
F-11
<PAGE> 108
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.
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
F-12
<PAGE> 109
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>
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>
<S> <C>
1997........................................................ $285,000
1998........................................................ 229,000
1999........................................................ 237,000
2000........................................................ 192,000
--------
$943,000
========
</TABLE>
F-13
<PAGE> 110
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.
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 Restricting 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.
F-14
<PAGE> 111
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.
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.
F-15
<PAGE> 112
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.
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>
F-16
<PAGE> 113
12. COMMITMENTS
The Company, as part of the Mictrotel 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 Mictrotel
system will, at Hudson's discretion, revert back to Hudson. In the event
Hudson exercises its rights to the Microtel system, the Company, through
Mictrotel Inns and Suites Franchising, Inc. will retain the rights to any
franchise royalty payments due under franchises granted by the Company and
its subsidiary, less certain processing fees due to Hudson.
The Company, as part of the Hawthorn Agreement, is required to fulfill
certain obligations under such agreement. These include the following:
- To execute qualified franchise agreements, as defined in the Hawthorn
Agreement, for the operation of the following number of Hawthorn hotels
(the "Termination Standard") on June 27, annually:
<TABLE>
<CAPTION>
NUMBER
YEAR OF HOTELS
- ---- ---------
<S> <C>
1997.................................................. 10
1998.................................................. 20
1999.................................................. 40
2000.................................................. 60
2001.................................................. 80
2002.................................................. 100
</TABLE>
If the above franchising schedule is not met, HSA has the right to terminate
the Hawthorn Agreement, at which time the Company would lose its right to
franchise the Hawthorn brand. The Company will retain
F-17
<PAGE> 114
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
DATE OF 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.
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 $ 0.20 $ 0.19 $ 0.75
=========== =========== =========== =========== ===========
</TABLE>
F-18
<PAGE> 115
<TABLE>
<CAPTION>
1995 FOURTH TOTAL YEAR
- ---- ----------- -----------
<S> <C> <C> <C> <C> <C>
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).
F-19
<PAGE> 116
INDEPENDENT AUDITORS' REPORT
Board of Directors
USFS Hawthorn, Inc.:
We have audited the accompanying balance sheet of USFS Hawthorn, Inc. (the
"Company") as of December 12, 1997. This financial statement is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet. 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 audit provides a reasonable basis for our opinion.
In our opinion, such balance sheet presents fairly, in all material
respects, the financial position of the Company as of December 12, 1997 in
conformity with generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
Atlanta, Georgia
December 12, 1997
F-20
<PAGE> 117
USFS HAWTHORN, INC.
BALANCE SHEET
DECEMBER 12, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
CASH AND CASH EQUIVALENTS $10
===
SHAREHOLDER'S EQUITY
PREFERRED STOCK -- $.01 par value, 1,000,000 shares
authorized, no shares issued and outstanding $--
CLASS A COMMON STOCK -- $.01 par value, 5,000,000 shares
authorized, 1,000 issued and outstanding 10
CLASS B COMMON STOCK -- $.01 par value, 30,000,000 shares
authorized, no shares issued and outstanding --
---
$10
===
</TABLE>
See accompanying notes to balance sheet
F-21
<PAGE> 118
USFS HAWTHORN, INC.
NOTES TO BALANCE SHEET AS OF DECEMBER 12, 1997
- --------------------------------------------------------------------------------
1. ORGANIZATION
USFS Hawthorn, Inc. (the "Company") was incorporated in Delaware on November
26, 1997, and has had no operations during the period to December 12, 1997.
2. COMMITMENTS AND CONTINGENCIES
At December 12, 1997, the Company had no operating lease commitments,
capital commitments or contingent liabilities.
3. SHAREHOLDERS' EQUITY
Holders of the Company's Class A Common Stock are entitled to one vote per
share and holders of the Company's Class B Common Stock are entitled to ten
votes per share. Each share of Class B Common Stock is convertible at any
time into one share of Class A Common Stock and, with limited exceptions,
converts automatically upon any transfer thereof.
4. PROPOSED MERGER
U.S. Franchise Systems, Inc. ("USFS"), Hawthorn Suites Associates ("HSA")
and HSA Properties, Inc. ("HPI") have proposed a series of transactions
whereby all of the ownership interests of HSA Properties LLC ("HSA LLC"), a
joint venture among USFS, HPI and HSA which owns an interest in the Hawthorn
Suites brand of hotels, would be contributed to the Company in return for
the issuance of shares of Class A Common Stock of the Company, and USFS
would then merge into the Company. Under the proposed transactions, HSA and
HPI would receive 22,447 and 2,199,775 Shares of Class A Common Stock,
respectively. In addition, the holders of Class A Common Stock of USFS and
Class B Common Stock of USFS will receive an equivalent number of the
Company's Class A Common Stock and Class B Common Stock, as applicable.
Currently, USFS and HSA LLC are parties to the Master Franchise Agreement,
dated as of March 27, 1996 (the "Hawthorn Acquisition Agreement"), pursuant
to which USFS acquired the exclusive worldwide rights to franchise and to
control the development and operation of the Hawthorn Suites brand of
hotels. The Hawthorn Acquisition Agreement requires that a percentage of
royalties received by USFS from the franchising of Hawthorn Suites Hotels be
remitted to HSA LLC and also contains certain restrictions on USFS's
operations and imposes standards relating to the development of the Hawthorn
Suites brand of hotels. The merger of USFS with and into the Company as
contemplated will permit the Company to acquire all of the trademarks,
copyrights and other intellectual property related to the Hawthorn Suites
hotel brand and, as a related consequence, eliminate the aforementioned
royalty payments and restrictive provisions currently governed by the
Hawthorn Acquisition Agreement.
The merger will be accounted for as the "reverse acquisition" of the Company
by USFS. Accordingly, USFS will account for the merger under the "purchase"
method of accounting in accordance with generally accepted accounting
principles. Therefore, the fair value of USFS's stock at the date the merger
was announced to be issued to HSA and HPI (approximately $17.8 million) and
the estimated costs of the merger incurred by USFS will be allocated to the
Company's assets acquired and the liabilities assumed based on their fair
values and the results of operations of the Company will be included in the
results of operations of USFS only for the periods subsequent to the merger.
HSA LLC does not possess and thus the Company will not acquire any of the
following in connection with the acquisition of the ownership interests of
HSA LLC: physical facilities, employee base, sales force, production
techniques or an existing customer base.
F-22
<PAGE> 119
UNAUDITED STATEMENT OF ROYALTIES
AND OTHER PAYMENTS
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 27, 1996 (DATE OF THE
HAWTHORN ACQUISITION
AGREEMENT) TO NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
1996 1997
--------------------------- -----------------
<S> <C> <C>
Royalties and Other Payments......................... $1,776,634 $1,518,817
</TABLE>
F-23
<PAGE> 120
APPENDIX A
================================================================================
AGREEMENT AND PLAN OF MERGER
BY AND BETWEEN
U.S. FRANCHISE SYSTEMS, INC.
AND
USFS HAWTHORN, INC.
------------------
DECEMBER 9, 1997
------------------
================================================================================
<PAGE> 121
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
ARTICLE 1
THE MERGER......................................................................................2
1.1 The Merger.........................................................................2
1.2 Closing; Effective Time............................................................2
1.3 Certificate of Incorporation.......................................................3
1.4 By-laws............................................................................4
1.5 Directors and Officers.............................................................4
1.6 Meeting of USFS Stockholders.......................................................4
1.7 SEC Filings........................................................................5
ARTICLE 2
CONVERSION OF SECURITIES........................................................................7
2.1 Company Common Stock...............................................................7
2.2 USFS Common Stock..................................................................7
2.3 Effect on USFS Company Options.....................................................7
2.4 Treasury Shares....................................................................8
2.5 Exchange of Certificates...........................................................8
ARTICLE 3
REPRESENTATIONS AND WARRANTIES
OF THE COMPANY.................................................................................10
3.1 Organization......................................................................10
3.2 Capital Structure.................................................................10
3.3 Authorization; Binding Agreement..................................................11
3.4 Noncontravention..................................................................12
3.5 Governmental Approvals; Required Consents.........................................13
ARTICLE 4
REPRESENTATIONS AND WARRANTIES
OF USFS........................................................................................14
4.1 Organization......................................................................14
4.2 Capitalization....................................................................15
4.3 Subsidiaries......................................................................16
4.4 Authorization; Binding Agreement..................................................16
4.5 Noncontravention..................................................................17
4.6 Governmental Approvals; Required Consents.........................................18
4.7 SEC Filings; Financial Statements.................................................19
4.8 Absence of Certain Changes or Events..............................................20
4.9 Absence of Litigation.............................................................20
4.10 Compliance........................................................................21
</TABLE>
i
<PAGE> 122
<TABLE>
<CAPTION>
Page
<S> <C>
ARTICLE 5
COVENANTS......................................................................................21
5.1 Operation of the Company..........................................................21
5.2 Stockholder Approval; Proxy Statement.............................................22
5.3 Reasonable Best Efforts; Additional Actions.......................................22
5.4 Notification of Certain Matters...................................................24
5.5 Stock Exchange Listing............................................................25
5.6 Issuance of Additional Securities; Etc............................................25
ARTICLE 6
CONDITIONS.....................................................................................26
6.1 Conditions to Each Party's Obligations............................................26
6.2 Conditions to Obligation of USFS..................................................28
6.3 Conditions to Obligation of the Company...........................................29
ARTICLE 7
TERMINATION....................................................................................30
7.1 Termination.......................................................................30
7.2 Procedure for and Effect of Termination...........................................31
ARTICLE 8
MISCELLANEOUS..................................................................................32
8.1 Certain Definitions...............................................................32
8.2 Amendment and Modification........................................................33
8.3 Waiver of Compliance; Consents....................................................34
8.4 Survival of Representations and Warranties........................................34
8.5 Notices...........................................................................34
8.6 Assignment........................................................................36
8.7 Expenses..........................................................................37
8.8 Governing Law.....................................................................37
8.9 Counterparts......................................................................37
8.10 Interpretation....................................................................37
8.11 Entire Agreement..................................................................37
8.12 Third Party Beneficiaries.........................................................38
SCHEDULES
Schedule 4.3 Subsidiaries
EXHIBITS
Exhibit A Contribution Agreement
Exhibit B Shareholders Agreement
</TABLE>
ii
<PAGE> 123
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER dated as of December 9, 1997 (the
"Agreement") by and between U.S. FRANCHISE SYSTEMS, INC., a Delaware corporation
("USFS"), and USFS HAWTHORN, INC., a Delaware corporation (the "Company").
WHEREAS, the respective boards of directors of USFS and the
Company have approved this Agreement pursuant to which, among other things, USFS
will be merged with and into the Company (the "Merger") on the terms and
conditions contained herein and in accordance with the General Corporation Law
of the State of Delaware, as amended (the "DGCL");
WHEREAS, the Company, USFS, Hawthorn Suites Associates, an
Illinois joint venture ("HSA"), and HSA Properties, Inc., a Delaware corporation
("HPI"), have entered into the Contribution Agreement, dated as of the date
hereof (the "Contribution Agreement"), a copy of which is attached hereto as
Exhibit A, pursuant to which HSA and HPI shall sell, assign, transfer, convey,
grant and set over to the Company, immediately prior to the Effective Time (as
defined in Section 1.2), all of their right, title and interest to their
respective membership interests in HSA Properties, LLC, a Delaware limited
liability company (the "LLC Company"), which collectively constitute 99% of the
membership interests of the LLC Company (collectively, the "LLC Interest");
<PAGE> 124
2
WHEREAS, USFS and the Company desire to make certain
representations, warranties, covenants and agreements in connection with the
Merger and to prescribe various conditions to the Merger; and
WHEREAS, it is the express intention of the Company and USFS
and their respective stockholders and holders of options that the Merger
constitute a tax-free reorganization for federal income tax purposes under the
Internal Revenue Code of 1986, as amended (the "Code"), and the regulations
thereunder.
NOW THEREFORE, in consideration of the representations,
warranties, covenants and agreements contained herein, and intending to be
legally bound hereby, the parties hereto agree as follows:
ARTICLE 1
THE MERGER
1.1 The Merger. Upon the terms and subject to the conditions
of this Agreement, at the Effective Time and in accordance with the DGCL, USFS
shall be merged with and into the Company, which shall be the surviving
corporation in the Merger (the "Surviving Corporation"). At the Effective Time,
the separate existence of USFS shall cease and the other effects of the Merger
shall be as set forth in Section 259 of the DGCL.
1.2 Closing; Effective Time. Subject to the provisions
of Article 6, the closing of the Merger (the "Closing") shall take place in New
York City at the offices of Paul, Weiss, Rifkind, Wharton & Garrison, as soon as
practicable but in no event later than 10:00 a.m. New York City time on the
first business day after the
<PAGE> 125
3
date on which each of the conditions set forth in Article 6 have been satisfied
or waived by the party or parties entitled to the benefit of such conditions,
or, subject to receipt of consent of HSA and HPI pursuant to the Contribution
Agreement, at such other place, at such other time or on such other date as USFS
and the Company may mutually agree. The date on which the Closing actually
occurs is hereinafter referred to as the "Closing Date." At the Closing, USFS
and the Company shall cause a certificate of merger (the "Certificate of
Merger") to be executed and filed with the Secretary of State of the State of
Delaware in accordance with the DGCL and the parties hereto shall take all such
other and further actions as may be required by law to make the Merger
effective. The Merger shall become effective at such time as the Certificate of
Merger is duly filed with the Secretary of State of the State of Delaware, or at
such other time as is specified in the Certificate of Merger (the "Effective
Time").
1.3 Certificate of Incorporation. The certificate of
incorporation of the Company, as in effect immediately prior to the Effective
Time, shall become, from and after the Effective Time, the certificate of
incorporation of the Surviving Corporation, until thereafter altered, amended or
repealed as provided therein and in accordance with applicable law, except that
Section 1 of the Certificate of Incorporation of the Company shall be amended
and restated in its entirety as follows:
"1. Name. The name of the Corporation is "U.S. Franchise Systems,
Inc. (the 'Corporation')."
<PAGE> 126
4
1.4 By-laws. The by-laws of the Company, as in effect
immediately prior to the Effective Time, shall become, from and after the
Effective time, the by-laws of the Surviving Corporation, until thereafter
altered, amended or repealed as provided therein and in accordance with
applicable law.
1.5 Directors and Officers. The directors and officers of the
Surviving Corporation at the Effective Time shall be the directors and officers
of USFS immediately prior to the Effective Time each of whom shall hold office
from the Effective Time until their respective successors are duly elected or
appointed and qualify in the manner provided in the Certificate of Incorporation
and By-Laws of the Surviving Corporation.
1.6 Meeting of USFS Stockholders. USFS hereby covenants and
agrees that it shall, as promptly as practicable, use its reasonable best
efforts to take all necessary action in accordance with applicable law to
convene a meeting of its stockholders and shall use its reasonable best efforts
to hold such meeting as promptly as reasonably practicable after the date
hereof. The purpose of such meeting shall be, among other things, to consider
and vote upon this Agreement and the transactions contemplated hereby
(including, without limitation, the Merger). The Board of Directors of USFS has
approved this Agreement and the transactions contemplated hereby (including,
without limitation, the Merger) and will recommend that USFS stockholders vote
in favor of the Merger and the transactions contemplated hereby.
<PAGE> 127
5
1.7 SEC Filings.
(a) As soon as practicable after the date
hereof, the Company and USFS shall prepare and file with the Securities and
Exchange Commission (the "SEC") a Registration Statement on Form S-4 (such
Registration Statement at the time it becomes effective, together with all
amendments and exhibits thereto is referred to as the "Registration Statement")
under the Securities Act of 1933, as amended (the "Securities Act"), and the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), which
registers the shares of Company Common Stock (as defined in Section 2.2) to be
issued pursuant to the Merger and which relates to the vote of USFS stockholders
to approve the Merger and which shall contain a prospectus (the "Prospectus")
which will be in the form of a Proxy Statement.
(b) Each of the Company and USFS, as applicable,
shall use its reasonable best efforts to (i) respond to any comments of the SEC,
(ii) have the Registration Statement declared effective under the Securities Act
as promptly as practicable after such filing and to keep the Registration
Statement effective as long as is necessary to consummate the Merger and (iii)
cause the Prospectus to be mailed to the stockholders of USFS as promptly as
practicable after the Registration Statement is declared effective under the
Securities Act; provided that, the Company and USFS may, upon prior written
notice to each of HSA and HPI, delay the effectiveness and mailing of the
Registration Statement if any event occurs and is continuing which causes the
Registration Statement to contain an untrue statement of a material fact or
<PAGE> 128
6
omit to state a material fact necessary in order to make the statements made
therein, in light of the circumstances under which they were made, not
misleading and the Company and USFS determine that the disclosure of such events
at such time would adversely affect their interests. Each of the Company and
USFS shall notify the other (and shall notify each of HSA and HPI) promptly of
the receipt of any comments from the SEC and of any requests by the SEC for
amendments or supplements to the Registration Statement or for additional
information and will supply the other (and HSA and HPI) with copies of all
correspondence between such party or any of its representatives and the SEC,
with respect to the Registration Statement. The Registration Statement shall
comply in all material respects with all applicable requirements of law. The
Company shall take any action required to be taken under state blue sky or
securities laws in connection with the Merger and the issuance of the Merger
consideration in connection therewith.
(c) No amendment or supplement to the
Registration Statement will be made without the approval of the Company and USFS
and each of HSA and HPI, which approval will not be unreasonably withheld or
delayed. Each of the Company and USFS will advise each other (and each of HSA
and HPI) promptly after it receives notice thereof, of the time when the
Registration Statement or any amendment thereto has become effective, or the
issuance of any stop order, or the suspension of the qualification of the
Company Common Stock to be issued in the Merger for offering or sale in any
jurisdiction or of any request by the Nasdaq Stock Market, Inc. for amendment of
the Registration Statement.
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ARTICLE 2
CONVERSION OF SECURITIES
2.1 Company Common Stock. Each share of common stock of
Company issued and outstanding immediately prior to the Effective Time shall
remain outstanding.
2.2 USFS Common Stock. Each share of Class A Common Stock, par
value $.01 per share, ("USFS Class A Stock"), and Class B Common Stock, par
value $.01 per share ("USFS Class B Stock" and together with the USFS Class A
Stock, collectively, the "USFS Common Stock"), of USFS issued and outstanding
immediately prior to the Effective Time shall, by virtue of the Merger and
without any action on the part of the holder thereof, be converted into the
right to receive one share of Class A Common Stock, par value $.01 per share
("Company Class A Stock"), or one share of Class B Common Stock, par value $.01
per share ("Company Class B Stock" and together with the Company Class A Stock,
collectively, the "Company Common Stock"), of the Company, respectively (the
"Merger Consideration").
2.3 Effect on USFS Company Options. At the Effective Time,
each holder of an issued and outstanding option ("USFS Options") exercisable for
shares of USFS Class A Stock will be entitled, by virtue of the Merger and
without any action on the part of the holder thereof, to exercise such option
for an equal number of shares of Company Class A Stock on the same terms and
conditions as such USFS Options immediately prior to the Effective Time.
<PAGE> 130
8
2.4 Treasury Shares. At the Effective Time each share of
USFS Common Stock held in treasury by USFS immediately prior to the Effective
Time shall, by virtue of the Merger, be converted into a share of Company Class
A Stock held in treasury by the Company.
2.5 Exchange of Certificates.
2.5.1 Prior to the Closing Date, the Company shall
appoint Wachovia Bank of North Carolina, N.A. or another agent mutually
acceptable to USFS, HSA and HPI to act as exchange agent (the "Exchange Agent")
for the Merger. Promptly after the Closing Date, the Company shall deposit, or
cause to be deposited, with the Exchange Agent such certificates evidencing such
number of shares of Company Class A Stock and Company Class B Stock in order to
enable the Exchange Agent to effect the exchange of certificates contemplated by
Section 2.2.
2.5.2 As soon as reasonably practicable following
the Closing Date, the Company and USFS shall instruct the Exchange Agent to
deliver to each holder of record of a certificate or certificates, which
immediately prior to the Effective Time represented outstanding shares of USFS
Common Stock (collectively, the "Certificates"), (i) a letter of transmittal
(which shall specify that delivery shall be effected, and risk of loss and title
to the Certificates shall pass, only upon delivery of the Certificates to the
Exchange Agent and shall be in such form and have such other provisions as the
Company may reasonably specify), and (ii) instructions for use in effecting the
surrender of the Certificates in exchange for certificates representing the
Merger Consideration.
<PAGE> 131
9
2.5.3 After the Effective Time, each holder of
Shares of USFS Common Stock shall surrender and deliver the Certificates to the
Exchange Agent together with a duly completed and executed transmittal letter.
Upon such surrender and delivery, the holder shall receive a certificate
representing the number of shares of Company Common Stock into which such
holder's shares of USFS Common Stock have been converted pursuant to this
Agreement. Until so surrendered and exchanged, each outstanding Certificate
after the Effective Time shall be deemed for all purposes to evidence the right
to receive that number of shares of Company Common Stock into which the shares
of USFS Common Stock evidenced thereby have been converted pursuant to this
Agreement.
2.5.4 At the Effective Time, the stock transfer
books of USFS shall be closed and no transfer of shares USFS Common Stock shall
be made thereafter, other than transfers of shares of USFS Common Stock that
have occurred prior to the Effective Time. In the event that, after the
Effective Time, Certificates are presented to the Surviving Corporation, they
shall be canceled and exchanged for shares of Company Common Stock as provided
in Section 2.2.
2.5.5 Any portion of the Merger Consideration that
shall not have been paid to any holder of shares of USFS Common Stock pursuant
to this Section 2.5 prior to the second anniversary of the Effective Time shall
be paid to the Company and any stockholder who has not theretofore complied with
this Section 2.5 thereafter shall look, subject to escheat and other similar
laws, solely to the Company
<PAGE> 132
10
for payment of the Merger Consideration to which they are entitled under this
Agreement.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES
OF THE COMPANY
The Company represents and warrants to USFS as follows:
3.1 Organization. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware and has all requisite corporate power and authority to own, lease and
operate its properties and to carry on its business as now being conducted. The
Company is duly qualified or licensed to do business and in good standing in
each jurisdiction in which the property owned, leased or operated by it or the
nature of the business conducted by it makes such qualification or licensing
necessary, except for such failures to be so duly qualified or licensed that,
individually or in the aggregate, could not reasonably be expected to result in
a Material Adverse Effect (as defined in Section 8.1.e) with respect to the
Company. The Company has previously delivered or made available to USFS correct
and complete copies of its certificate of incorporation and by-laws, as
currently in effect.
3.2 Capital Structure. On the date hereof, the Company
has no subsidiaries or any interest in any person or entity. The Company has
conducted no business or other activity other than the execution and delivery of
this Agreement and the Contribution Agreement and the consummation of the
transactions contemplated
<PAGE> 133
11
hereby and thereby. Immediately prior to the Effective Time, the authorized
capital stock of the Company will consist of 30,000,000 shares of Company Class
A Stock of which 2,222,222 shares will be issued and outstanding (after giving
effect to the redemption at $.01 per share of the 1,000 shares of Company Class
A Stock held by Neal K. Aronson, to occur immediately prior to the Effective
Time), 5,000,000 shares of Company Class B Stock, none of which shares will be
issued and outstanding, and 1,000,000 shares of Preferred Stock, par value $.01
per share, none of which will be issued and outstanding. At the Effective Time,
the Company will have good title to the LLC Interest, free and clear of any
claim, charge or encumbrance ("Lien"), and the LLC Interest will have been duly
authorized and validly issued, and will be fully paid and non-assessable. There
are no outstanding options to purchase, or any rights or warrants to subscribe
for, or any commitments or agreements to issue or sell, or any securities or
obligations convertible into, or any powers of attorney relating to, shares of
the capital stock of the Company. Except for the Shareholders Agreement, there
are no outstanding agreements or instruments binding upon any of the Company or
its stockholders relating to the ownership of its shares of capital stock. The
shares of Company Common Stock to be exchanged for shares of USFS Common Stock
in the Merger have been duly authorized and, when issued and delivered in
accordance with the terms of this Agreement, will have been validly issued and
will be fully paid and non-assessable and free of preemptive rights.
3.3 Authorization; Binding Agreement. The Company has
full corporate power and authority to execute and deliver this Agreement and to
<PAGE> 134
12
consummate the transactions contemplated hereby. The execution and delivery of
this Agreement and the consummation of the transactions contemplated hereby have
been duly and validly authorized by all necessary corporate action on the part
of the Company, subject to any required approval by the Company's stockholders
of the issuance of Company Common Stock in connection with the Merger (which
will be obtained prior to the Effective Time). This Agreement has been duly and
validly executed and delivered by the Company and, subject to any required
approval by the Company's stockholders of the issuance of Company Common Stock
in connection with the Merger (which will be obtained prior to the Effective
Time), constitutes a legal, valid and binding agreement of the Company,
enforceable against the Company in accordance with its terms, except as such
enforcement may be limited by bankruptcy, fraudulent conveyance, fraudulent
transfer, insolvency, reorganization, liquidation, conservatorship, moratorium
and other similar laws relating to or affecting creditors' rights or the
collection of debtors' obligations generally and any general equitable
principles (regardless of whether enforcement is considered in a proceeding in
equity or at law) and the discretion of any court before which any proceedings
therefor may be brought.
3.4 Noncontravention. Neither the execution and delivery of
this Agreement nor the consummation of the transactions contemplated hereby will
(a) conflict with or result in any breach of any provision of the certificate of
incorporation or by-laws of the Company, (b) require any consent, approval or
notice under or conflict with or result in a violation or breach of, or
constitute (with or
<PAGE> 135
13
without notice or lapse of time or both) a default (or give rise to any right of
termination, cancellation or acceleration) under, any of the terms, conditions
or provisions of any note, bond, mortgage, indenture, license, agreement or
other instrument or obligation (collectively, "Contracts and Other Agreements")
to which the Company is a party or by which it or any material portion of its
properties or assets is bound or (c) violate any order, judgment, writ,
injunction, determination, award, decree, law, statute, rule or regulation
(collectively, "Legal Requirements") applicable to the Company or any material
portion of its properties or assets, provided that no representation or warranty
is made in foregoing clauses (b) and (c) with respect to matters that,
individually or in the aggregate, could not reasonably be expected to result in
a Material Adverse Effect with respect to the Company.
3.5 Governmental Approvals; Required Consents .
(i) No consent, approval or authorization of or
declaration or filing with any foreign, federal, state, municipal or other
governmental department, commission, board, bureau, agency or instrumentality
(each, a "Governmental Entity") on the part of the Company that has not been
obtained or made is required in connection with the execution or delivery by the
Company of this Agreement or the consummation by the Company of the transactions
contemplated hereby, other than (a) the filing of the Certificate of Merger with
the Secretary of State of the State of Delaware, (b) filings and other
applicable requirements under the Hart-Scott-Rodino Antitrust Improvements Act
of 1976, as amended (the "HSR Act"), the Securities Act, the Exchange Act, and
under state securities or "Blue Sky" laws; and
<PAGE> 136
14
(c) consents, approvals, authorizations, declarations or filings that, if not
obtained or made, could not, individually or in the aggregate, reasonably be
expected to result in a Material Adverse Effect with respect to the Company or
prevent the Company from consummating the transactions contemplated hereby.
(ii) No consent, approval or action of, or filing with,
or notice to, any Person (other than a Governmental Entity) shall be required in
connection with the execution or delivery by the Company of this Agreement,
consummation by the Company of the transactions contemplated hereby or
compliance by the Company with the provisions hereof (the "Company Required
Consents"), other than consents, approvals, actions, filings or notices which
would not have a Material Adverse Effect with respect to the Company.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES
OF USFS
USFS represents and warrants to the Company as follows:
4.1 Organization. Each of USFS and its subsidiaries is a
Person duly organized, validly existing and in good standing under the laws of
its jurisdiction of organization and has all requisite corporate or limited
liability company power and authority to own, lease and operate its properties
and to carry on its business as now being conducted. Each of USFS and its
subsidiaries is duly qualified or licensed to do business and in good standing
in each jurisdiction in which the property owned, leased or operated by it or
the nature of the business conducted by it make such
<PAGE> 137
15
qualification or licensing necessary, except for such failures to be so duly
qualified or licensed and in good standing that could not reasonably be expected
to result, individually or in the aggregate, in a Material Adverse Effect with
respect to USFS. USFS has previously delivered or made available to the Company
correct and complete copies of its certificate of incorporation and by-laws, as
currently in effect.
4.2 Capitalization. Immediately prior to the Effective Time,
except as provided in the Disclosure Letter, the authorized capital stock of
USFS will consist of 30,000,000 shares of USFS Class A Stock, of which 9,844,972
shares will be issued and outstanding (and 57,807 shares will be held in
treasury), 5,000,000 shares of USFS Class B Stock, of which 2,707,919 shares
will be issued and outstanding, and 1,000,000 shares of preferred stock, par
value $.01 per share, none of which will be issued and outstanding. USFS has
good title to all of the shares or other equity interests of each of its
subsidiaries, free and clear in each case of any lien, restriction or
encumbrance. Except as disclosed in the USFS SEC Filings (as defined in Section
4.7) and except for 57,807 shares of USFS Class A Stock that Michael Leven and
Neal Aronson collectively have the right to purchase from USFS (the "Repurchase
Option"), pursuant to those certain Amended and Restated Employee Stock Purchase
Agreements, dated October 30, 1996, in the forms previously delivered to USH,
HSA and HPI, and except for options granted under the U.S. Franchise Systems,
Inc. 1996 Stock Option Plan and the U.S. Franchise Systems, Inc. 1996 Stock
Option Plan for Non-Employee Directors, there are no outstanding options to
purchase, or any rights or warrants to subscribe for, or any
<PAGE> 138
16
commitments or agreements to issue or sell, or any securities or obligations
convertible into, or any powers of attorney relating to, shares of the capital
stock of USFS or any of its subsidiaries. There are no outstanding agreements or
instruments binding upon USFS or its subsidiaries relating to the ownership of
shares of their respective capital stock or other equity interests, as the case
may be. All issued and outstanding shares of USFS Common Stock have been duly
authorized and validly issued, fully paid, non-assessable and free of preemptive
rights.
4.3 Subsidiaries. Except as disclosed in the USFS SEC Filings
or as set forth on Schedule 4.3, USFS does not own, directly or indirectly, (a)
any shares of capital stock or other equity securities of any subsidiary of USFS
or (b) any other equity interest in any person, domestic or foreign. All of the
outstanding shares of capital stock or other equity securities of each of USFS's
subsidiaries that are owned by USFS or any other subsidiary of USFS
(collectively, the "USFS Subsidiary Shares") have been duly authorized and are
validly issued, fully paid and nonassessable and free of preemptive rights.
There are no irrevocable proxies or similar obligations or restrictions with
respect to any of the USFS Subsidiary Shares and all of the USFS Subsidiary
Shares are owned by USFS free and clear of all Liens.
4.4 Authorization; Binding Agreement. USFS has the full
corporate power and authority to execute and deliver this Agreement and, subject
to obtaining any necessary approval of its stockholders as contemplated by
Section 1.6 hereof with respect to the Merger, to consummate the transactions
contemplated hereby. The
<PAGE> 139
17
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly and validly authorized by all
necessary corporate action on the part of USFS subject to the adoption of this
Agreement by the stockholders of USFS in accordance with the DGCL and the
certificate of incorporation and by-laws of USFS. This Agreement has been duly
and validly exe cuted and delivered by USFS and subject to the adoption of this
Agreement by the stockholders of USFS in accordance with the DGCL and the
certificate of incorporation and by-laws of USFS constitutes a legal, valid and
binding agreement of USFS enforceable against USFS in accordance with its terms,
except as such enforcement may be limited by bankruptcy, fraudulent conveyance,
fraudulent transfer, insolvency, reorganization, liquidation, conservatorship,
moratorium and other similar laws relating to or affecting creditors' rights or
the collection of debtors' obligations generally and any general equitable
principles (regardless of whether enforcement is considered in a proceeding in
equity or at law) and the discretion of any court before which any proceedings
therefor may be brought.
4.5 Noncontravention. Neither the execution and delivery of
this Agreement nor the consummation of the transactions contemplated hereby will
(a) conflict with or result in any breach of any provision of the certificate of
incorporation or by-laws of USFS, (b) require any consent, approval or notice
under or conflict with or result in a violation or breach of, or constitute
(with or without notice or lapse of time or both) a default (or give rise to any
right of termination, cancellation or acceleration) under, any of the terms,
conditions or provisions of any
<PAGE> 140
18
Contracts and Other Agreements to which USFS is a party or by which USFS or any
material portion of its properties or assets may be bound or (c) violate any
Legal Requirements applicable to USFS or any material portion of its properties
or assets; provided that no representation or warranty is made in the foregoing
clauses (b) and (c) with respect to matters that, individually or in the
aggregate, could not reasonably be expected to result in a Material Adverse
Effect with respect to USFS.
4.6 Governmental Approvals; Required Consents.
(i) No consent, approval or authorization of, or
declaration or filing with, any Governmental Entity on the part of USFS that has
not been obtained or made is required in connection with the execution or
delivery by USFS of this Agreement or the consummation by USFS of the
transactions contemplated hereby, other than (a) the filing of the Certificate
of Merger with the Secretary of State of the State of Delaware, (b) filings
under the HSR Act, the Securities Act, the Exchange Act and state securities or
"Blue Sky" laws, and (c) consents, approvals, authorizations, declarations or
filings that, if not obtained or made, could not, individually or in the
aggregate, reasonably be expected to result in a Material Adverse Effect with
respect to USFS or prevent USFS from consummating the transactions contemplated
hereby.
(ii) No consent, approval or action of, or filing with,
or notice to, any Person (other than a Governmental Entity) shall be required in
connection with the execution or delivery by USFS of this Agreement,
consummation by USFS of the transactions contemplated hereby or compliance by
USFS with the provisions hereof
<PAGE> 141
19
(the "USFS Required Consents") other than consents, approvals, actions, filings
or notices which would not have, individually or in the aggregate, a Material
Adverse Effect with respect to USFS.
4.7 SEC Filings; Financial Statements. USFS has delivered or
made available to the Company, HSA and HPI, correct and complete copies of
USFS's (a) Annual Report on Form 10-K for the year ended December 31, 1996 (the
"USFS 1996 Form 10-K"), as filed with the SEC, (b) proxy statements relating to
all of USFS's meetings of stockholders (whether annual or special) since October
30, 1996 and (c) all other reports, statements and registration statements
(including Quarterly Reports on Form 10-Q and Current Reports on Form 8-K) filed
by USFS with the SEC since October 30, 1996 (collectively, and in each case
including all exhibits and schedules thereto and documents incorporated by
reference therein, and as such documents have been amended or supplemented since
their time of filing, the "USFS SEC Filings"). As of their respective dates or,
if amended or supplemented, as of the date of the last such amendment or
supplement, the USFS SEC Filings did not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading. The consolidated financial statements of
USFS and its subsidiaries included in the USFS 1996 Form 10-K and USFS's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1997 have been
prepared in accordance with generally accepted accounting principles applied on
a consistent basis during the periods involved (except
<PAGE> 142
20
as may be indicated in the notes to such financial statements) and fairly
present in all material respects the consolidated financial position of USFS and
its subsidiaries at the respective dates thereof and the consolidated results of
operations and cash flows for the respective periods then ended (subject, in the
case of unaudited interim financial statements, to normal year-end adjustments).
4.8 Absence of Certain Changes or Events. Except as disclosed
in the USFS SEC Filings or the Disclosure Letter, since September 30, 1997 USFS
and its subsidiaries have conducted their respective businesses in the normal
and ordinary course consistent with past practice and there has not been any
condition, event or occurrence that has resulted, or could reasonably be
expected to result, individually or in the aggregate, in a Material Adverse
Effect with respect to USFS (without regard, however, to changes in conditions
generally applicable to the industries in which USFS and its subsidiaries are
involved or general economic condition in the jurisdictions in which USFS or its
subsidiaries conduct business, and any changes in the condition, business,
operations or financial results of USFS and its subsidiaries taken as a whole
that are caused primarily or substantially by such changes or events or as a
result of the announcement of this Agreement and the transactions contemplated
hereby including the payment of any costs, expenses, fees or similar charges
incurred by USFS's contemplation, negotiation, execution or consummation of this
Agreement).
4.9 Absence of Litigation. Except as disclosed in the
USFS SEC Filings, as of the date hereof there are no claims, actions or
proceedings pending or,
<PAGE> 143
21
to the knowledge of USFS, threatened against USFS or any of its subsidiaries or
any material portion of their properties or assets before any court or
Governmental Entity that could reasonably be expected to result, individually or
in the aggregate, in a Material Adverse Effect with respect to USFS. As of the
date hereof, neither USFS nor any of its subsidiaries nor any material portion
of their properties or assets is subject to any order of any court or
Governmental Entity.
4.10 Compliance. Except as disclosed in the USFS SEC Filings,
neither USFS nor any of its subsidiaries is in default or violation of any term,
condition or provision of (a) its certificate of incorporation or by-laws (or
equivalent governing instruments), (b) any Contracts and Other Agreements to
which USFS or any of its subsidiaries is a party or by which any of them or any
material portion of their properties or assets may be bound or (c) any Legal
Requirements applicable to USFS or any of its subsidiaries or any material
portion of their properties or assets; provided that no representation or
warranty is made in the foregoing clauses (b) and (c) with respect to matters
that have not had or could not reasonably be expected to result, individually or
in the aggregate, in a Material Adverse Effect with respect to USFS.
ARTICLE 5
COVENANTS
5.1 Operation of the Company. Prior to the Effective
Time the Company shall not engage in any activity or business, other than
executing and
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22
delivering this Agreement and the Contribution Agreement and consummating the
transactions contemplated hereby and thereby.
5.2 Stockholder Approval; Proxy Statement. Each of the Company
and USFS shall take all action necessary in accordance with applicable law to
convene the USFS Stockholders' Meeting as promptly as practicable after the date
hereof to consider and vote upon this Agreement and the transactions
contemplated hereby. USFS shall, through its Board of Directors (the "USFS
Board"), recommend that its stockholders vote in favor of the adoption of this
Agreement and the transactions contemplated hereby. The Company shall obtain the
approval of its stockholders of this Agreement and the transactions contemplated
hereby.
5.3 Reasonable Best Efforts; Additional Actions.
5.3.1 Upon the terms and subject to the conditions
of this Agreement, each of the parties hereto shall use all reasonable best
efforts to take, or cause to be taken, all action, and to do or cause to be
done, and to assist and cooperate with the other parties in doing, all things
necessary, proper or advisable to consummate and make effective as promptly as
practicable the transactions contemplated by this Agreement, including using all
reasonable best efforts to (a) obtain all consents, amendments to or waivers
under the terms of any of the Company's and USFS's borrowing or other
contractual arrangements required by the transactions contemplated by this
Agreement (other than consents, amendments or waivers the failure of which to
obtain could not, individually or in the aggregate, reasonably be expected to
result in a Material Adverse Effect), (b) effect promptly all
<PAGE> 145
23
necessary or appropriate registrations and filings with Governmental Entities,
including, without limitation, filings and submissions pursuant to the HSR Act,
the Securities Act, the Exchange Act, the DGCL and state "Blue Sky" laws (it
being agreed that a copy of each of such registration and filing shall be
delivered to HSA and HPI), (c) defend any lawsuits or other legal proceedings,
whether judicial or administrative, challenging this Agreement or the
consummation of the transactions contemplated hereby and (d) fulfill or cause
the fulfillment of the conditions to Closing set forth in Article 6.
5.3.2 If, at any time after the Effective Time,
the Surviving Corporation shall determine or be advised that any deeds, bills of
sale, assignments, assurances or any other actions or things are necessary or
desirable to vest, perfect or confirm of record or otherwise in the Surviving
Corporation the right, title or interest in, to or under any of the rights,
properties or assets of USFS or its subsidiaries acquired or to be acquired by
the Surviving Corporation as a result of, or in connection with, the Merger or
otherwise to carry out this Agreement, the officers and directors of the
Surviving Corporation shall be authorized to execute and deliver, in the name
and on behalf of USFS or its subsidiaries or otherwise, all such deeds, bills of
sale, assignments and assurances and to take and do, in the name and on behalf
of USFS or its subsidiaries or otherwise, all such other actions and things as
may be necessary or desirable to vest, perfect or confirm any and all right,
title and interest in, to and under such rights, properties or assets in the
Surviving Corporation or otherwise to carry out this Agreement.
<PAGE> 146
24
5.4 Notification of Certain Matters. Each of the Company and
USFS shall give prompt notice to the other party (and to HSA and HPI) of: (i)
any notice of, or other communication relating to, a default or event which,
with notice or lapse of time or both, would become a default under any
agreement, indenture or instrument material to the business, assets, property,
condition (financial or otherwise) or the results of operations of the Company
or of USFS and its subsidiaries, taken as a whole, as the case may be, to which
the Company or USFS or any of its subsidiaries, as the case may be, is a party
or is subject; (ii) any notice or other communication from any third party
alleging that the consent of such third party is or may be required in
connection with the transactions contemplated by the Contribution Agreement or
this Agreement including the Merger; (iii) any notice or other communication
from any regulatory authority, the Nasdaq Stock Market, Inc. or national
securities exchange in connection with the transactions contemplated by the
Contribution Agreement or this Agreement, including the Merger; (iv) any
material adverse change in the business, assets, financial condition or results
of operations of the Company or of USFS and its subsidiaries, taken as a whole,
as the case may be, or the occurrence of an event which, so far as reasonably
can be foreseen at the time of its occurrence, would result in any such change;
(v) any claims, actions, proceedings or investigations commenced or, to the best
of its knowledge, threatened, involving or affecting the Company or USFS or any
of its subsidiaries, as the case may be, or any of their respective property or
assets, or, to the best of its knowledge, any employee, director or officer, in
his or her capacity as such, of the Company or
<PAGE> 147
25
any of its subsidiaries or USFS, as the case may be, which, if pending on the
date hereof, would have been required to have been disclosed in a Schedule
pursuant to this Agreement or which relates to the consummation of the Merger;
(vi) any occurrence, or failure to occur, of any event, which occurrence or
failure to occur has caused or could reasonably be expected to cause any
representation or warranty in this Agreement to be untrue or inaccurate in any
material respect at any time after the date hereof and prior to the Effective
Time and (vii) any material failure on its part to comply with or satisfy any
covenant, condition or agreement to be complied with or satisfied by it
hereunder; provided that the delivery of any notice pursuant to this Section 5.4
shall not limit or otherwise affect the remedies available hereunder to the
party receiving such notice.
5.5 Stock Exchange Listing. The Company shall use its
reasonable best efforts to cause the shares of Company Class A Stock to be
issued in the Merger to be listed on the Nasdaq National Market, subject only to
official notice of issuance thereof.
5.6 Issuance of Additional Securities; Etc. Each of the
Company and USFS hereby agrees that from and after the date of this Agreement
through the Effective Time, except as contemplated by this Agreement, the
Contribution Agreement or the Disclosure Letter or pursuant to the Repurchase
Option or any employee or director stock option plan described in the USFS SEC
Filings, it shall not (a) issue, or authorize the issuance of, any additional
shares of its capital stock, (b) grant, or agree to grant, any options,
warrants, rights, contract, calls, put, rights
<PAGE> 148
26
to subscribe, conversion rights or enter into, or agree to enter into, any other
agreements or commitments providing for the issuance, disposition or acquisition
of any shares of its capital stock, (c) grant, or agree to grant, any stock
appreciation, phantom stock or similar rights with respect to shares of its
capital stock, (d) enter into, or agree to enter into, any voting trusts,
proxies or any other agreements or understandings with respect to the voting of
its capital stock, (e) incur any obligation (contingent or otherwise) to
repurchase or otherwise acquire or retire any shares of its capital stock except
as otherwise contemplated by Section 3.2 hereto or (f) declare or distribute any
cash dividend.
ARTICLE 6
CONDITIONS
6.1 Conditions to Each Party's Obligations. The respective
obligations of each party to effect the Merger shall be subject to the
fulfillment or waiver at or prior to the Effective Time of the following
conditions:
(a) This Agreement shall have been adopted by
the affirmative vote of the stockholders of USFS and the Company by the
requisite vote in accordance with applicable law;
(b) No Legal Requirements shall have been
enacted, entered, promulgated or enforced by any court or Governmental Entity
that prohibit or prevent the consummation of the Merger;
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27
(c) The Registration Statement shall have become
effective under the Securities Act and shall not be the subject of any stop
order or proceedings seeking a stop order;
(d) All approvals required under state
securities or "Blue Sky" laws shall have been obtained;
(e) The Company Common Stock to be issued in
the Merger pursuant to this Agreement shall have been authorized for listing on
the Nasdaq National Market, subject to official notice of issuance;
(f) (i) All consents, authorizations, orders and
approvals of (or filings or registrations with) any Governmental Entity required
in connection with the execution, delivery and performance of this Agreement
shall have been obtained or made (as the case may be), except for filings in
connection with the Merger and any other documents required to be filed after
the Effective Time and except where the failure to have obtained or made any
such consent, authorization, order, approval, filing or registration would not
have a Material Adverse Effect with respect to the Company or USFS and (ii) such
consents, authorizations, orders and approvals shall be subject to no conditions
other than conditions that could not reasonably be expected to have a Material
Adverse Effect with respect to the Company and USFS, taken as a whole;
(g) Any required consents or approvals of any
person to the Merger or the transactions contemplated hereby shall have been
obtained and be in full force and effect, except for those the failure to obtain
will not have a material
<PAGE> 150
28
adverse effect on the business, assets, properties, financial condition or the
results of operations of the Surviving Corporation and its subsidiaries taken as
a whole; and
(h) Any waiting period applicable to the Merger
under the HSR Act shall have expired or been terminated.
6.2 Conditions to Obligation of USFS. The obligation of USFS
to effect the Merger shall be subject to the fulfillment or waiver at the
Effective Time of the following additional conditions:
(a) The Company shall have performed in all
material respects the covenants and obligations required to be performed by it
under this Agreement on or prior to the Effective Time;
(b) Each party to the Contribution Agreement
shall have performed in all material respect the covenants and obligations
required to be performed by it under the Contribution Agreement on or prior to
the Effective Time;
(c) The representations and warranties of the
Company contained in this Agreement shall be true and correct in all material
respects on and as of the Effective Time as if made on and as of such date
(except to the extent that any such representation or warranty had by its terms
been made as of a specific date in which case such representation or warranty
shall have been true and correct as of such specific date);
(d) The representations and warranties of HSA
and HPI contained in the Contribution Agreement shall be true and correct in all
material respects on and as of the Closing (as defined in the Contribution
Agreement) as if
<PAGE> 151
29
made on and as of such time (except to the extent that any such representation
or warranty had by its terms been made as of a specific date in which case such
representation or warranty shall have been true and correct as of such specific
date);
(e) The transactions contemplated by the
Contribution Agreement shall have been consummated in accordance with its terms;
(f) USFS shall have received a certificate
signed by an executive officer of (i) the Company to the effect of Sections
6.2(a), (b) and (c) and (ii) of HSA and HPI to the effect of Sections 6.2(d) and
(e);
(g) HSA and HPI shall have executed and
delivered to the Company the Shareholders Agreement (the "Shareholders
Agreement") substantially in the form of Exhibit B hereto; and
(h) USFS shall have received the opinion of
Paul, Weiss, Rifkind, Wharton & Garrison, dated the Closing Date, that, under
federal income tax law, and based on (i) certain representations regarding
factual matters and certain covenants as to future actions made by the Company,
USFS and major holders of USFS Common Stock, and (ii) the assumption that the
Merger and related transactions will take place as described herein, the Merger
will constitute a reorganization for federal income tax purposes within the
meaning of Section 368(a) of the Code.
6.3 Conditions to Obligation of the Company. The
obligation of the Company to effect the Merger shall be subject to the
fulfillment or waiver at the Effective Time of the following additional
conditions:
<PAGE> 152
30
(a) USFS shall have performed in all material
respects the covenants and obligations required to be performed by it under this
Agreement on or prior to the Effective Time;
(b) The representations and warranties of USFS
contained in this Agreement shall be true and correct in all material respects
on and as of the Effective Time as if made on and as of such date;
(c) The Company shall have received a
certificate signed by an executive officer of USFS to the effect of Sections 6.3
(a) and (b); and
(d) Michael A. Leven and Neal K. Aronson shall
have executed and delivered to the Company the Shareholders Agreement.
ARTICLE 7
TERMINATION
7.1 Termination. Subject to the provisions of Section 4.6 of
the Contribution Agreement, this Agreement may be terminated and the Merger
contemplated hereby may be abandoned at any time prior to the Effective Time,
whether before or after adoption by the stockholders of the Company:
(a) By the mutual written consent of USFS and
the Company;
(b) By USFS or the Company:
(i) if there has been a material breach of
any representation, warranty, covenant or agreement on the part of the
Company, HSA or HPI, on the one hand, or USFS, on the other hand, as
the case may
<PAGE> 153
31
be, set forth in this Agreement or the Contribution Agreement which
breach, if not a willful breach, has not been cured within ten (10)
Business Days following receipt by the breaching party of notice of
such breach;
(ii) if a court of competent jurisdiction or
other Governmental Entity shall have issued an order or taken any other
action permanently restraining, enjoining or otherwise prohibiting the
Merger and such order or other action shall have become final and
nonappealable; or
(iii) if the Effective Time shall not have
occurred on or before April 30, 1998 provided, however, that the right
to terminate this Agreement under this Section 7.1(b)(iii) shall not be
available to any party whose failure to fulfill materially any covenant
or obligation under this Agreement has been the cause of, or resulted
in, the failure of the Effective Time to occur on or before such date;
and
(c) by USFS, if the approval of USFS's
stockholders shall not have been obtained by reason of the failure to obtain the
requisite vote at a duly held meeting of such stockholders or at any adjournment
thereof.
7.2 Procedure for and Effect of Termination. In the event that
this Agreement is terminated and the Merger is abandoned by USFS, on the one
hand, or by the Company, on the other hand, pursuant to Section 7.1, written
notice of such termination and abandonment shall forthwith be given to the other
party (and to HSA and HPI) and this Agreement shall terminate and the Merger
shall be abandoned without any further action. If this Agreement is terminated
as provided herein, no
<PAGE> 154
32
party hereto shall have any liability or further obligation to any other party
under the terms of this Agreement except with respect to the willful breach by
any party hereto and except that the provisions of this Section 7.2 and Article
8 shall survive the termination of this Agreement.
ARTICLE 8
MISCELLANEOUS
8.1 Certain Definitions. For purposes of this Agreement,
the following terms shall have the meanings ascribed to them in this Section
8.1:
(a) "affiliate," with respect to any person,
shall mean any person controlling, controlled by or under common control with
such person;
(b) "Business Day" means any day other than a
day on which (i) banks in the State of Delaware are authorized or obligated to
be closed or (ii) the Nasdaq National Market is closed;
(c) "Disclosure Letter" means the letter dated
the date hereof, from USFS to HPI and HSA.
(d) "knowledge," with respect to the Company or
USFS, shall mean the actual knowledge of any executive officer or director of
the Company or USFS, respectively;
(e) "Material Adverse Effect," with respect to
any Person, shall mean a material adverse effect on the business, assets,
properties, financial condition or results of operations of such Person and its
subsidiaries taken as a whole;
<PAGE> 155
33
(f) "Person" shall mean and include an
individual, a partnership, a joint venture, a limited liability company or
partnership, a corporation, a trust, an unincorporated organization and a
government or any department or agency thereof; and
(g) "subsidiary," with respect to any Person,
shall mean any corporation 50% or more of the outstanding voting power of which,
or any partnership, joint venture, limited liability company or other entity 50%
or more of the total equity interest of which, is directly or indirectly owned
by such Person. For purposes of this Agreement, all references to "subsidiaries"
of a Person shall be deemed to mean "subsidiary" if such person has only one
subsidiary.
8.2 Amendment and Modification. Subject to applicable law and
the provisions of the Contribution Agreement requiring the prior written consent
of HSA and HPI, this Agreement may be amended, modified or supplemented only by
a written agreement signed by each of the parties hereto at any time prior to
the Effective Time with respect to any of the terms contained herein; provided,
however, that after this Agreement is adopted by USFS's stockholders, no such
amendment or modification shall (a) alter or change the amount or kind of the
consideration to be delivered to the stockholders of USFS, (b) alter or change
any term of the certificate of incorporation of the Surviving Corporation (other
than as contemplated pursuant to Section 1.3 hereof) or (c) alter or change any
of the terms or conditions of this Agreement if such alteration or change would
adversely affect the stockholders of USFS.
<PAGE> 156
34
8.3 Waiver of Compliance; Consents. Any failure of USFS, on
the one hand, or the Company, on the other hand, to comply with any obligation,
covenant, agreement or condition herein may be waived by USFS or the Company
(with the prior written consent, in either case, of HSA and HPI), respectively,
only by a written instrument signed by the party granting such waiver, but such
waiver or failure to insist upon strict compliance with such obligation,
covenant, agreement or condition shall not operate as a waiver of, or estoppel
with respect to, any subsequent or other failure. Whenever this Agreement
requires or permits consent by or on behalf of any party hereto, such consent
shall be given in writing in a manner consistent with the requirements for a
waiver of compliance as set forth in this Section 8.3.
8.4 Survival of Representations and Warranties. Unless
otherwise provided for herein, the respective representations and warranties of
USFS and the Company contained herein or in any certificates or other documents
delivered prior to or at the Closing shall survive the execution and delivery of
this Agreement and shall terminate at the Effective Time.
8.5 Notices. All notices and other communications hereunder
shall be in writing and shall be deemed to have been duly given when delivered
in person, by telecopier (with a confirmed receipt thereof) or registered or
certified mail (postage prepaid, return receipt requested), and on the next
business day when sent by overnight courier service, to the parties at the
following addresses (or at such other address for a party as shall be specified
by like notice):
<PAGE> 157
35
(a) if to USFS, to:
U.S. Franchise Systems, Inc.
13 Corporate Square, Suite 250
Atlanta, Georgia 30329
Attention: Neal K. Aronson
Telecopier: (404) 235-7448
with copies to:
Paul Weiss, Rifkind, Wharton & Garrison
1285 Avenue of the Americas
New York, New York 10019
Attention: Paul D. Ginsberg
Telecopier: (212) 757-3990
and
HSA Properties, Inc.
200 West Madison Street
Suite 3800
Chicago, Illinois 60606
Attention: Harold S. Handelsman, Esq.
Telecopier: (312) 750-8545
and
Neal, Gerber & Eisenberg
Two North LaSalle Street
Suite 2200
Chicago, Illinois 60602
Attention: Michael A. Pucker, Esq.
Telecopier: (312) 269-1747
(b) if to the Company, to:
c/o USFS Hawthorn, Inc.
U.S. Franchise Systems, Inc.
13 Corporate Square, Suite 250
Atlanta, Georgia 30329
Attention: Neal K. Aronson
Telecopier: (404) 235-7448
<PAGE> 158
36
with copies to:
Paul Weiss, Rifkind, Wharton & Garrison
1285 Avenue of the Americas
New York, New York 10019
Attention: Paul D. Ginsberg
Telecopier: (212) 757-3990
and
HSA Properties, Inc.
200 West Madison Street
Suite 3800
Chicago, Illinois 60606
Attention: Harold S. Handelsman, Esq.
Telecopier: (312) 750-8545
and
Neal, Gerber & Eisenberg
Two North LaSalle Street
Suite 2200
Chicago, Illinois 60602
Attention: Michael A. Pucker, Esq.
Telecopier: (312) 269-1747
8.6 Assignment. This Agreement and all of the provisions
hereof shall be binding upon and inure to the benefit of the parties hereto and
their respective successors and permitted assigns, but neither this Agreement
nor any of the rights, interests or obligations hereunder shall be assigned by
any of the parties hereto without the prior written consent of the other
parties. This Agreement is not intended to confer upon any other person except
the parties hereto and HSA and HPI any rights or remedies hereunder.
<PAGE> 159
37
8.7 Expenses. Whether or not the Merger is consummated, all
fees, charges and expenses incurred in connection with this Agreement and the
transactions contemplated hereby shall be paid by the party incurring such fees,
charges or expenses.
8.8 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware applicable to
agreements made and to be performed entirely within such State, without regard
to the choice of law principles thereof.
8.9 Counterparts. This Agreement may be executed in one or
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
8.10 Interpretation. The article and section headings
contained in this Agreement are solely for the purpose of reference, are not
part of the agreement of the parties and shall not in any way affect the meaning
or interpretation of this Agreement.
8.11 Entire Agreement. This Agreement, the Contribution
Agreement and the Shareholders Agreement (including the schedules, exhibits,
documents or instruments referred to herein and therein), embodies entire
agreement and understanding of the parties hereto in respect of the subject
matter hereof and thereof and supersede all prior agreements and understandings,
both written and oral, among the parties, or between any of them, with respect
to the subject matter hereof and thereof.
<PAGE> 160
38
8.12 Third Party Beneficiaries. This Agreement is not
intended to, and does not, create any rights or benefits of any party other
than the parties hereto and HSA and HPI.
<PAGE> 161
39
IN WITNESS WHEREOF, USFS and the Company have caused this
Agreement to be signed by their respective duly authorized officers as of the
date first above written.
U.S. FRANCHISE SYSTEMS, INC.
By /s/ Michael A. Leven
----------------------------------------
Name: Michael A. Leven
Title: Chief Executive Officer and
President
USFS HAWTHORN, INC.
By /s/ Neal K. Aronson
----------------------------------------
Name: Neal K. Aronson
Title: President
<PAGE> 162
40
SCHEDULE 4.3 (1 of 2)
U.S. FRANCHISE SYSTEMS, INC.
***
List of Subsidiaries/Affiliates
Revised December 3, 1997
<TABLE>
<CAPTION>
Subsidiary State of Incorporation Stockholder(s) Number of Shares
- ---------- ---------------------- -------------- ----------------
<S> <C> <C> <C>
Microtel Inns and Suites
Franchising, Inc. Georgia U.S. Franchise Systems, Inc. 1,000
Hawthorn Suites
Franchising, Inc. Georgia U.S. Franchise Systems, Inc. 1,000
Microtel Inns Realty Corp.
("MIRC") (sub of Microtel)
(makes equity investments in Microtel Inns and Suites
land/hotels) Georgia Franchising, Inc. 1,000
Microtel International, Inc.
(sub of Microtel) Microtel Inns and Suites
(international licensing) Georgia Franchising, Inc. 1,000
U.S. Funding Corp. (sub of
USFS) (receives fees from
Nomura) Georgia U.S. Franchise Systems, Inc. 10,000
U.S. Franchise Capital, Inc.
(sub of USFS) (loans money
to franchisees) Georgia U.S. Franchise Systems, Inc. 10,000
Equity Partners, L.P. USFS Equity, L.L.C. (General
(affiliate) Delaware Partner)
</TABLE>
<PAGE> 163
41
SCHEDULE 4.3 (2 of 2)
<TABLE>
<CAPTION>
Subsidiary State of Incorporation Stockholder(s) Number of Shares
- ---------- ---------------------- -------------- ----------------
<S> <C> <C> <C>
USFS Equity, L.L.C. (sub
of USFS) (general partner of U.S. Franchise Systems, Inc.
Equity Partners) Delaware (Managing Member)
CMS Hotel Associates, L.P.
(Member)
Tempe Inns Realty Corp. Georgia Microtel Inns Realty Corp. 100
(sub of MIRC) (not being
used at this time)
Chandler Inns Realty Corp. Georgia Microtel Inns Realty Corp. 100
(sub of MIRC) (not being
used at this time)
Tempe Holdings, LLC (sub Microtel Inns Realty Corp.
of MIRC) (borrower under Arizona LLC (Managing Member) 100% interest
construction loan for Tempe,
Arizona Microtel)
Chandler Holdings, LLC Microtel Inns Realty Corp.
(sub of MIRC) (borrower Arizona LLC (Managing Member) 100% interest
under construction loan for
Tempe, Arizona Microtel)
</TABLE>
<PAGE> 164
Appendix B-1
CONTRIBUTION AGREEMENT
THIS CONTRIBUTION AGREEMENT (this "AGREEMENT"), dated as of
December 9, 1997, by and among Hawthorn Suites Associates, an Illinois joint
venture ("HSA"), HSA Properties, Inc., a Delaware corporation ("HPI," and
together with HSA, the "ASSIGNORS"), USFS Hawthorn, Inc., a Delaware corporation
(the "COMPANY"), and U.S. Franchise Systems, Inc., a Delaware corporation
("USFS").
WHEREAS, HSA owns a 98% percentage interest (the "HSA INTEREST"),
and HPI owns a 1% percentage interest (the "HPI INTEREST" and together with the
HSA Interest collectively, the "EQUITY INTERESTS"), in HSA Properties, L.L.C., a
Delaware limited liability company ("HSA LLC"); and
WHEREAS, in order to induce the Company and USFS to enter into the
Agreement and Plan of Merger (the "MERGER AGREEMENT"), dated as of the date
hereof, by and between USFS and the Company, the Assignors are entering into
this Agreement pursuant to which the Assignors and the Company will consummate
the transactions contemplated hereby immediately prior to the Effective Time of
the Merger (each as defined in the Merger Agreement), on the terms and
conditions set forth herein.
NOW THEREFORE, in consideration of good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties agree as follows:
<PAGE> 165
2
SECTION I
DEFINED TERMS
1.1 Defined Terms. Except as otherwise herein expressly provided,
defined terms when used in this Agreement shall have the meanings set forth in
Section 8.1.
SECTION II
CONTRIBUTION AND ISSUANCE; CLOSING
2.1 Contribution. Upon the terms and subject to the conditions set
forth herein, on the Closing Date (as defined in Section 2.4), each of the
Assignors shall sell, assign, transfer, convey, grant and set over to the
Company all of its rights, title and interest in and to the Equity Interests,
free and clear of all liens, encumbrances and claims (collectively, "LIENS"),
including, without limitation, all of the Assignors' rights to receive
allocations of income, gain, loss, deduction, credit and similar items and
distributions by reason of the Assignors' interest in HSA LLC in respect of all
periods subsequent to the Closing Date (it being agreed that the Assignors shall
receive and be entitled to distribute all allocations of income, gain, loss,
deduction, credit and similar items and distributions of HSA LLC to which they
are otherwise entitled through the Closing Date), as well as all of the
Assignors' rights as members in HSA LLC, with the intent that on the Closing
Date the Company shall become a member in HSA LLC, to the extent of the Equity
Interests conveyed.
2.2 Assumption. Upon the terms and subject to the conditions set forth
herein, on the Closing Date the Company shall accept, assume, take over and
<PAGE> 166
3
succeed to all of the Assignors' rights, title and interest in and to the Equity
Interests and shall assume and agree to perform and discharge in full, when due,
all of the obligations and commitments of the Assignors related thereto pursuant
to the terms of the Operating Agreement of HSA Properties, L.L.C., dated as of
March 27, 1996 ("HSA LLC AGREEMENT"), in the form previously delivered to the
parties hereto, or otherwise and to be bound by all of the provisions of the HSA
LLC Agreement.
2.3 Subscription. Upon the terms and subject to the conditions set
forth herein, and in consideration for the Equity Interests, on the Closing Date
the Company shall issue to the Assignors an aggregate of 2,222,222 shares of
Class A common stock, par value $.01 per share (the "CLASS A STOCK"), of the
Company to be allocated between the Assignors as specified on Schedule 1 hereto.
Such shares of Class A Stock shall be issued on the Closing Date and when issued
shall be duly authorized, validly issued, fully paid and non-assessable and the
certificates therefor shall so state.
2.4 Closing. The closing of the transactions contemplated by this
Section 2 (the "CLOSING") shall take place on the day of (the "CLOSING DATE"),
and immediately prior to, the Effective Time of the Merger at the offices of
Paul, Weiss, Rifkind, Wharton & Garrison, 1285 Avenue of the Americas, New York,
New York. At the Closing, in addition to the other deliveries specified in this
Agreement, each Assignor shall deliver to the Company such good and sufficient
instruments of conveyance and assignment as the Company and its counsel shall
deem reasonably necessary or appropriate to vest in the Company good title in
and to the Equity Interests, respectively owned by each such Assignor, free and
clear of all Liens.
<PAGE> 167
4
SECTION III
REPRESENTATIONS AND WARRANTIES 3.1
3.1 Representations and Warranties of the Company and USFS. The
Company and USFS, severally and jointly, represent and warrant to the Assignors
that:
(a) Merger Agreement. The representations and warranties
contained in Articles 3 and 4 of the Merger Agreement are true and correct.
(b) Due Authorization and Validity. Each of the Company and
USFS has all requisite corporate power and authority to enter into this
Agreement and consummate the transactions contemplated hereby. This Agreement
has been duly authorized, executed and delivered by each of the Company and USFS
and constitutes the legal, valid and binding obligation of each of the Company
and USFS enforceable against the Company and USFS, respectively, in accordance
with its terms, except as such enforcement may be limited by bankruptcy,
fraudulent conveyance, fraudulent transfer, insolvency, reorganization,
liquidation, conservatorship, moratorium and other similar laws relating to or
affecting creditors' rights or the collection of debtors' obligations generally
and any general equitable principles (regardless of whether enforcement is
considered in a proceeding in equity or at law) and the discretion of any court
before which any proceedings therefor may be brought.
(c) Non-Contravention. The execution, delivery and performance
by each of the Company and USFS of this Agreement and the issuance by the
Company of the shares of Class A Stock pursuant hereto do not and will not
conflict with or result in a breach or violation of any agreement to which the
<PAGE> 168
5
Company or USFS is a party or is otherwise bound or subject and do not and will
not result in any violation of the Certificate of Incorporation or By-laws of
the Company or USFS or any statute, order, rule or regulation of any foreign,
federal, state, municipal or other court, commission or governmental agency or
body (each, a "Governmental Authority") having jurisdiction over the Company or
USFS or any of their respective properties.
(d) Shares Issued Free and Clear of Liens. All of the shares of
Class A Stock to be issued to each Assignor pursuant to this Agreement shall be
duly authorized, validly issued, fully paid and nonassessable, and issued free
and clear of any Liens.
(e) Due Incorporation. Each of the Company and USFS is a
corporation duly incorporated and validly existing in good standing under the
laws of the State of Delaware.
(f) Certificate of Incorporation and By-Laws of the Company.
Each of the Certificate of Incorporation and By-Laws of the Company is in full
force and effect in the form previously delivered to the Assignors and has not
been amended, modified, revoked or rescinded since the date thereof.
(g) Capitalization of the Company; Subsidiaries. The authorized
capital stock of the Company consists of 30,000,000 shares of Class A Stock, of
which, as of the date hereof, 1,000 shares are issued and outstanding, and
5,000,000 shares of Class B common stock, par value $.01 per share (the "Class B
Stock"), of which, as of the date hereof, no shares are issued and outstanding,
and 1,000,000 shares of Preferred Stock, par value $.01 per share (the
"Preferred Stock"
<PAGE> 169
6
and together with the Class A Stock and the Class B Stock, the "Company Stock"),
of which, as of the date hereof, no shares are issued and outstanding. As of the
date hereof, Neal K. Aronson is the sole record and beneficial owner of all of
the issued and outstanding shares of Class A Stock. All of the issued and
outstanding shares of Common Stock have been duly authorized, are validly
issued, fully paid and nonassessable, are not subject to, nor were they issued
in violation of, any preemptive rights. Except for this Agreement and the Merger
Agreement, as of the date hereof, there are no outstanding or authorized
options, warrants, rights, contracts, calls, puts, rights to subscribe,
conversion rights or other agreements or commitments to which the Company is a
party or which are binding on the Company providing for the issuance,
disposition or acquisition of any shares of its capital stock. As of the date
hereof, there are no outstanding or authorized stock appreciation, phantom stock
or similar rights with respect to the Company. As of the date hereof, there are
no voting trusts, proxies or any other agreements or understandings with respect
to the voting of the capital stock of the Company. Except for the redemption at
$.01 per share of the 1,000 shares of Class A Stock owned by Neal K. Aronson to
occur at the Closing, the Company is not subject to any obligation (contingent
or otherwise) to repurchase or otherwise acquire or retire any shares of its
capital stock. The Company does not own or hold, directly or indirectly, any
shares of capital stock, partnership or membership interests, or other ownership
of any entity.
(h) Liabilities. The Company does not have any direct or
indirect indebtedness, liability, claim, loss, damage, deficiency, obligation or
responsibility, fixed or unfixed, choate or inchoate, liquidated or
unliquidated, secured or unsecured, accrued, absolute, contingent or otherwise.
<PAGE> 170
7
3.2 Representations and Warranties of Assignors. Subject to Section
3.3, each Assignor hereby represents and warrants, severally and jointly, to
the Company and USFS that:
(a) Due Organization. It is an organization duly organized and
validly existing in good standing under the laws of its jurisdiction of
organization.
(b) Due Authorization and Validity. Such Assignor has full
right, power and authority to enter into this Agreement and consummate the
transactions contemplated hereby. This Agreement has been duly authorized,
executed and delivered by such Assignor and constitutes the legal, valid and
binding obligation of such Assignor, enforceable against such Assignor in
accordance with its terms, except as such enforcement may be limited by
bankruptcy, fraudulent conveyance, fraudulent transfer, insolvency,
reorganization, liquidation, conservatorship, moratorium and other similar laws
relating to or affecting creditors' rights or the collection of debtors'
obligations generally and any general equitable principles (regardless of
whether enforcement is considered in a proceeding in equity or at law) and the
discretion of any court before which any proceedings therefor may be brought.
(c) Non-Contravention. The execution, delivery and performance
by such Assignor of this Agreement and the consummation of the transactions
contemplated hereby do not and will not conflict with or result in any breach or
violation of any agreement to which such Assignor is a party or is otherwise
bound or subject and do not and will not result in any violation of the
organizational documents of such Assignor or any statute, order, rule or
regulation of
<PAGE> 171
8
any Governmental Authority having jurisdiction over such Assignor or any of its
properties.
(d) Title to Equity Interests. Such Assignor is the legal,
beneficial and record owner of the Equity Interests opposite its name on
Schedule 1, free and clear of any Liens.
(e) Due Formation of HSA LLC. HSA LLC is a limited liability
company, duly formed, validly existing and in good standing under the laws of
the State of Delaware and has full right, power and authority to own and license
the Hawthorn Brand. HSA LLC, at the time of the Master Franchise Agreement, had
the full right, power and authority to execute, deliver and perform the Existing
Licenses and the assignment thereof to USFS. The authorized and issued and
outstanding limited liability company interests of HSA LLC are as described on
Schedule 2 hereto.
(f) Investment. Such Assignor or such Assignor's
representatives has had an opportunity to ask questions of and receive answers
from officers of the Company and USFS, or a person or persons acting on their
behalf, concerning the terms and conditions of this investment. Such Assignor is
an "accredited investor" as such term is defined in Regulation 501 promulgated
under the Securities Act of 1933, as amended (the "ACT"), and has such knowledge
and experience in financial and business matters to evaluate the risks of
investment in the Company. The shares of Class A Stock are being acquired by
such Assignor for the Assignor's own benefit and account for investment and not
with a view to, or for resale in connection with, a public offering or
distribution. Such Assignor
<PAGE> 172
9
acknowledges that such Assignor has been advised that the shares being acquired
by it hereunder have not been registered under the Act and, accordingly, that
such Assignor may not be able to sell or otherwise dispose of such shares when
such Assignor wishes to do so. Such Assignor agrees that such shares will not be
resold (a) without registration thereof under the Act (unless an exemption from
such registration is available) or (b) in violation of any law; and the
certificate or certif icates representing such shares may be endorsed with a
legend indicating that such shares are not registered under the Act and reciting
that transfer thereof is restricted.
(g) Intellectual Property.
(1) To the Knowledge of the Assignors, HSA LLC owns or
is exclusively licensed or otherwise has the exclusive right to use, practice,
sell, license and dispose of, without restriction, all Intellectual Property
reasonably necessary for the operation of the business relating to the Hawthorn
System as conducted on the date of the Master Franchise Agreement, without
violation or infringement of any rights of HSA LLC, the Assignors or USFS.
(2) Schedule 3.2(g)(2) hereto sets forth all Trademarks,
Patents and Copyrights which, to the Knowledge of the Assignors, are owned by
HSA LLC and used by HSA LLC in connection with the Hawthorn System which
Schedule 3.2(g)(2) specifies, as to each item of Trademark, Patent or Copyright:
(w) the nature of the item, including the title or description; (x) the
jurisdictions by or in which the item is, to Knowledge of the Assignors, issued
or registered, or in which an application for issuance or registration has been
filed, including the respective registration or application numbers; (y) the
issue date and
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expiration date of the item, and (z) with respect to each Trademark, the class
or classes of goods or services on which such Trademark is or is intended to be
used.
(3) Schedule 3.2(g)(3) sets forth all licenses,
sublicenses and other agreements ("IP LICENSES") under which HSA LLC is a
licensee or otherwise is authorized to use or practice any Intellectual Property
and all IP Licenses under which HSA LLC is a licensor or otherwise authorizes
any Person to use or practice Intellectual Property, other than the Master
Franchise Agreement.
(4) To the Knowledge of the Assignors, HSA LLC
possesses all right, title and interest in and to the Intellectual Property,
free and clear of any lien or other restriction (other than the Master Franchise
Agreement and the IP Licenses), and has received no notice from any third party
to the contrary.
(5) To the Knowledge of the Assignors, HSA LLC is
not, and, as a result of the execution and delivery of this Agreement or the
performance of its obligations hereunder and subsequent to the completion of the
transactions contemplated herein, will not be, in violation of, and will not
lose any rights pursuant to, any instrument or agreement governing Intellectual
Property. Each IP License is now, to the Knowledge of the Assignors, valid and
enforceable and in full force and effect (except as such enforcement may be
limited by bankruptcy, fraudulent conveyance, fraudulent transfer, insolvency,
reorganization, liquidation, conservatorship, moratorium and other similar laws
relating to or affecting creditors' rights or the collection of debtors'
obligations generally and any general equitable principles (regardless of
whether enforcement is considered in a proceeding in equity or at law) and the
discretion of any court before which any proceedings therefor may
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be brought) and will continue to be so on identical terms following the
execution and delivery of this Agreement, in accordance with the terms of each
such IP License.
(6) To the Knowledge of the Assignors, no other
party is in breach or default under any IP License in any material respect, nor
does any condition exist which with notice or lapse of time or both would
constitute a material breach or default by any such third party, or permit
termination, modification or acceleration thereunder, and no such third party
has repudiated any provision thereof. HSA LLC has not received from any third
party any notice, and has no actual knowledge of the existence of, any breach or
default under any IP License in any material respect, nor, to the Knowledge of
the Assignors, does any condition exist which with notice or the lapse of time
or both would constitute a material breach or default by HSA LLC or permit
termination, modification or acceleration thereunder, or give rise to a right of
repudiation, by any other party to any such IP License.
(7) No litigation is pending or, to the Knowledge
of the Assignors, threatened that challenges the validity, enforceability,
ownership or right to use, sell, license or dispose of any item of Intellectual
Property, and no item of Intellectual Property is subject to any outstanding
order, ruling, judgment, decree, stipulation, charge or agreement (other than
the Master Franchise Agreement) restricting in any manner the use or licensing
thereof by HSA LLC or the sublicensing thereof by USFS.
(8) HSA LLC has received no notice of any claim,
charge, complaint, demand or notice alleging any infringement upon or other
violation of the intellectual property rights of third parties, and, to the
Knowledge of the
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Assignors, no basis for any such claim exists. To the Knowledge of the
Assignors, the use of the Intellectual Property by USFS in the manner
contemplated by the Master Franchise Agreement will not infringe upon or
otherwise violate any intellectual property right of third parties.
(9) To the Knowledge of the Assignors, no third party is
infringing upon or otherwise violating any of its rights to the Intellectual
Property.
(10) "Intellectual Property" shall mean each of the
following, except, in each case, to the extent such description refers to
commercially available "canned" or off-the-shelf software:
(i) United States and foreign trademarks, service
marks, trade names, brand names, trade dress, designs and logos, and
product or service identifiers, whether registered or unregistered, and
all registrations and applications for registration thereof, that were,
as of the date of the Master Franchise Agreement, and that are as, of the
date hereof, used by HSA LLC in connection with the Hawthorn System (the
"TRADEMARKS");
(ii) Patents and patent applications throughout
the world that were, as of the date of the Master Franchise Agreement,
and that are, as of the date hereof, actually used by HSA LLC in
connection with the Hawthorn System (the "PATENTS");
(iii) Copyrights, registered or unregistered,
throughout the world that were, as of the date of the Master Franchise
Agreement and that are, as of the date hereof, actually used by HSA LLC
in connection with the Hawthorn System (the "COPYRIGHTS");
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(iv) Trade secrets (if any) actually used by
HSA LLC in connection with the Hawthorn System and other confidential and
proprietary intellectual property information in the possession of HSA
LLC concerning the Hawthorn System that is not generally available to the
public and that is treated as confidential or proprietary by HSA LLC
(excluding information regarding financial performance and employees);
(v) Computer software programs, source
code, object code, date and documentation to the extent owned by HSA LLC
that were, as of the date of the Master Franchise Agreement, and that
are, as of the date hereof, actually used in connection with the Hawthorn
System;
(vi) All transferable permits, grants and
licenses or other rights running to or from HSA LLC relating to any of
the foregoing; and
(vii) Any other similar intellectual property
rights actually used in connection with the Hawthorn Brand.
(h) Non-Contravention of HSA LLC. Except as set forth on
Schedule 3.2(h), neither the execution and delivery of this Agreement by the
Assignors or any other agreement or instrument contemplated hereby, nor the
consummation of the transactions contemplated hereby, nor the performance of
this Agreement or any other agreement or instrument contemplated hereby in
accordance with their respective terms and conditions, by the Assignors will (i)
require HSA LLC to obtain any consent, approval or action of, or make any filing
with or give any notice to, any Governmental Authority or other person, (ii)
conflict with or result in any breach or violation of any of the terms and
conditions of, or constitute (with or
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14
without notice or lapse of time or both), to the Knowledge of the Assignors, a
default under, the certificate of formation of HSA LLC, the HSA LLC Agreement or
any law, statute, rule or regulation, order, writ, injunction, determination,
award, judgment or decree applicable to HSA LLC or, to the Knowledge of the
Assignors, the Hawthorn System, or any material instrument, contract, franchise
agreement or other agreement to which HSA LLC is a party or by which HSA LLC or,
to the Knowledge of the Assignors, the Hawthorn System may be bound or subject,
or (iii) require any consent, approval or written notice under or result in a
violation or breach of, or a material modification of the effect of, or
constitute (with or without due notice or lapse of time or both) a default (or
give rise to any right of termination, cancellation or acceleration) under, any
of the terms, conditions or provisions of any material note, bond, mortgage,
indenture or any agreement, instrument, license or obligation to which HSA LLC
is a party or by which HSA LLC or, to the Knowledge of the Assignors, the
Hawthorn System may be bound, provided that no representation or warranty is
made in foregoing clauses (i), (ii) or (iii) with respect to matters that could
not reasonably be expected, individually or in the aggregate, to have a Material
Adverse Effect with respect to HSA LLC.
(i) No Claims. To the Knowledge of the Assignors, there
are no outstanding orders, writs, injunctions, determinations, awards, judgments
or decrees against HSA LLC relating to the Hawthorn System, and there are no
actions, suits, claims or legal administrative or arbitral proceedings or
investigations (collectively, "CLAIMS"), pending or, to the Knowledge of the
Assignors, threatened against HSA LLC provided that no representation or
warranty is made in this subsection 3.2(i) with respect to matters that could
not reasonably be expected,
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15
individually or in the aggregate, to result in a Material Adverse Effect with
respect to HSA LLC.
(j) Compliance with Laws. To the Knowledge of the
Assignors, HSA LLC is in material compliance with all laws (including, without
limitation, all federal and state franchise laws and regulations), ordinances,
regulations and orders, judgments, injunctions, awards or decrees as presently
enacted and in force, of any governmental authority relating to HSA LLC. To the
Knowledge of the Assignors, HSA LLC has all material licenses, permits, orders
or approvals (excluding any licenses, permits, orders or approvals that relate
to the offer and sale by USFS of franchises) of any governmental authority
(collectively, "PERMITS") that are necessary for the conduct of the Hawthorn
System as now conducted and Schedule 3.2(j) contains a true and complete list of
all Permits currently in effect and held by HSA LLC. To the Knowledge of the
Assignors, HSA LLC has received no written notice from any governmental
authority of any material violation of any Permit and no proceeding is pending,
or to the Knowledge of the Assignors, threatened, to revoke or limit any Permit.
(k) Contracts. Schedule 3.2(k) sets forth a true and
complete list of all material agreements, contracts, commitments or undertakings
entered into by HSA LLC or any of its Affiliates with respect to the Hawthorn
System (the "CONTRACTS"). HSA LLC has delivered or made available to the Company
and/or USFS true and complete copies of each of the Contracts. Each of the
Contracts is, to the Knowledge of the Assignors, legal, valid, binding and
enforceable and in full force and effect and will continue to be so on identical
terms after the consummation of the transactions contemplated hereby (except as
such enforcement
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16
may be limited by bankruptcy, fraudulent conveyance, fraudulent transfer,
insolvency, reorganization, liquidation, conservatorship, moratorium and other
similar laws relating to or affecting creditors' rights or the collection of
debtors' obligations generally and any general equitable principles (regardless
of whether enforcement is considered in a proceeding in equity or at law) and
the discretion of any court before which any proceedings therefor may be
brought). To the Knowledge of the Assignors, no party is in breach or default
under any Contract in any material respect, nor, to the Knowledge of the
Assignors, does any condition exist which with notice or lapse of time or both
would constitute a material breach or default or permit termination,
modification or acceleration thereunder, and no party has repudiated any
provision thereof.
(l) Financial Statements. The unaudited balance sheets
of HSA LLC as of December 31, 1996 and September 30, 1997 and the unaudited
related statements of earnings, members' equity (deficit), and unaudited cash
flows for the periods ended on such dates, have been prepared in accordance with
United States generally accepted accounting principles in effect for the periods
covered thereby, and present fairly the financial position of HSA LLC at such
dates and the results of HSA LLC's operations for such periods (subject, in the
case of interim financial statements, to normal year-end adjustments). Since
September 30, 1997, there has been no material adverse change in the condition,
financial or otherwise, of HSA LLC, except changes in the ordinary course of
business, which individually or in the aggregate, could not reasonably be
expected to have a material adverse effect on the business, assets, properties,
prospects or condition (financial or otherwise) of HSA LLC.
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17
(m) Liabilities. Except as reflected in the most recent
financial statements referred to in Section 3.2(l), or the notes thereto, and
subject to normal year-end adjustments, HSA LLC does not have any direct or
indirect indebtedness, liability, claim, loss, damage, deficiency, obligation or
responsibility, fixed or unfixed, choate or inchoate, liquidated or
unliquidated, secured or unsecured, accrued, absolute, contingent or otherwise
("LIABILITIES"), whether or not of a kind required by generally accepted
accounting principles to be set forth in a financial statement. HSA LLC does not
have any (i) obligations in respect of borrowed money, (ii) obligations
evidenced by bonds, debentures, notes or other similar instru ments, (iii)
obligations which would be required by generally accepted accounting principles
to be classified as "capital leases," (iv) obligations to pay the deferred
purchase price of property or services and (v) any guaranties of any obligations
of any other person. Prior to the Closing Date, the contracts and other
agreements, including without limitation, management agreements, and commitments
between HSA LLC and either of the Assignors or any of their Affiliates set forth
on Schedule 3.2(m) shall be terminated without any liability to HSA LLC and all
amounts owing thereunder by HSA LLC shall have been paid in full or shall have
been forgiven (it being understood that, notwithstanding the foregoing, the
Assignors shall be entitled to receive all allocations of income, gain, loss,
deduction, credit and similar items and distributions of HSA LLC to which they
are otherwise entitled through the Closing Date).
(n) Information Supplied. None of the information
relating to HSA LLC supplied or to be supplied in writing by HSA LLC or the
Assignors for inclusion or incorporation by reference in the Registration
Statement (as defined in the
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Merger Agreement) will, at the time the Registration Statement becomes effective
under the Act or at the time the proxy statement included therein is mailed to
USFS stockholders, contain any untrue statement of a material fact or omit to
state a material fact necessary in order to make the statements made, in light
of the circumstances under which they were made, not misleading.
3.3 Agreement Regarding Representations and Warranties of Assignors.
Notwithstanding any of the representations and warranties made by the Assignors
in Section 3.2 hereof, the Company and USFS hereby agree that neither of the
Assignors shall have any liability or obligation (including indemnification
obligations under Section 6.1 hereof) for any inaccuracies contained in, or
omissions from, any of the representations and warranties set forth in such
Section 3.2 (including the Schedules and other deliveries contemplated thereby)
to the extent that such (a) arise or result from or were or are caused by any
act or omission of USFS or any of its Affiliates since the date of the Master
Franchise Agreement in respect of the management, control, franchising,
licensing or operation of the Hawthorn Brand or Hawthorn System and/or in USFS's
capacity as a member of HSA LLC, or (b) are actually known to USFS or any of its
Affiliates on the date hereof or as of the date of Closing.
SECTION IV
COVENANTS
4.1 Cooperation. The parties mutually covenant and agree to cooperate
with each other and promptly to take such other action and to execute and
deliver, or use their reasonable best efforts to cause to be executed or
delivered, such
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other and further documents as may be reasonable and necessary to give effect to
the transactions contemplated by this Agreement and the Merger Agreement
including, but not limited to, any amendments to limited liability company
agreements necessary to provide for the admission of the Company as a member
thereof, as the case may be and the preparation and filing of the Registration
Statement. Between the date of this Agreement and the Closing Date, the
Assignors shall use their reasonable best efforts to cause HSA LLC to afford the
Company, and the Company and USFS shall afford the Assignors and their
respective authorized representatives (including its accountants, financial
advisors and legal counsel) reasonable access during normal business hours to
all of the properties, personnel, contracts and other agreements, books and
records of HSA LLC, the Company and/or USFS, as the case may be, and shall
promptly deliver or make available to the Company or the Assignors, as
applicable, all information concerning the business, properties, assets and
personnel of HSA LLC, the Company and/or USFS, as the case may be, as the
Company or the Assignors, respectively, may from time to time reasonably
request. In furtherance of the above, the parties shall use their reasonable
best efforts to ensure that their accountants (and the accountants for HSA LLC)
cooperate in a timely manner including, but not limited to, in the preparation
of financial information for inclusion in the Registration Statement.
4.2 Shareholders Agreement. At or prior to the Closing, HSA, HPI and
the Company shall execute and deliver the Shareholders Agreement substantially
in the form previously delivered to the parties hereto (the "SHAREHOLDERS
AGREEMENT").
4.3 Operations. During the period commencing on the date hereof and
ending at the Effective Time, the Assignors shall use their reasonable best
efforts
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20
to cause HSA LLC to conduct its operations according to its ordinary course of
business consistent with past practice.
4.4 Operation of the Company. Prior to the Effective Time (as defined
in the Merger Agreement), the Company shall not, and USFS shall not cause or
permit the Company to, engage in any business or activity other than executing
and delivering this Agreement, the Merger Agreement and the Shareholders
Agreement and consummating the transactions contemplated hereby and thereby.
4.5 Certificate of Incorporation and By-Laws. Prior to the Closing
Date, the Company shall not, and USFS shall not cause or permit the Company to,
take any action to amend, modify, revoke or rescind its Certificate of
Incorporation or By-Laws.
4.6 Merger and Merger Agreement. Immediately after the closing of the
transactions contemplated hereby, USFS and the Company hereby agree with the
Assignors that they shall consummate the Merger in accordance with, and subject
to, the terms and conditions of the Merger Agreement, in the form previously
delivered to the parties hereto. Neither the Company nor USFS shall take any
action to amend, modify or terminate the Merger Agreement, without the prior
written consent of the Assignors, which shall not be unreasonably withheld.
4.7 Reasonable Efforts; Additional Actions.
(a) Upon the terms and subject to the conditions of this
Agreement, and in addition to the covenants contained in Section 4.1, each of
the parties hereto shall use all reasonable best efforts, and the Assignors
shall use their reasonable best efforts to cause HSA LLC, to take, or cause to
be taken, all action, and to do or cause to be done, and to assist and cooperate
with the other parties in
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21
doing, all things necessary, proper or advisable to consummate and make
effective as promptly as practicable the transactions contemplated by this
Agreement, including using all reasonable efforts to (a) obtain all consents,
amendments to or waivers under the terms of any of the parties' or HSA LLC's
borrowing or other contractual arrangements required by the transactions
contemplated by this Agreement (other than consents, amendments or waivers the
failure of which to obtain could not, individually or in the aggregate,
reasonably be expected to result in a Material Adverse Effect on HSA LLC or the
Company or the consummation of the transactions contemplated hereby), (b) effect
promptly all necessary or appropriate registrations and filings with any
Governmental Authority, including, without limitation, filings and submissions
pursuant to the HSR Act (as defined in Section 7.1(b)), the Act, the Securities
Exchange Act of 1934, as amended, the General Corporation Law of the State of
Delaware and state "blue sky" laws, (c) defend any lawsuits or other legal
proceedings, whether judicial or administrative, challenging this Agreement or
the consummation of the transactions contemplated hereby and (d) fulfill or
cause the fulfillment of the conditions to Closing set forth in Article 7.
(b) If, at any time after the Effective Time (as defined in the
Merger Agreement), the Company shall determine or be advised that any deeds,
bills of sale, assignments, assurances or any other actions or things are
necessary or desirable to vest, perfect or confirm in the Company the right,
title or interest in, to or under any of the rights, properties or assets of, or
Equity Interests to, HSA LLC, acquired or to be acquired by the Company as a
result of, or in connection with, the Merger, this Agreement or any of the
transactions contemplated hereby or thereby or otherwise to carry out this
Agreement, the officers and directors of the Company shall
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22
be authorized to execute and deliver, in the name and on behalf HSA LLC, all
such deeds, bills of sale, assignments and assurances and to take and do, in the
name and on behalf of HSA LLC and the Assignors, all such other actions and
things as may be reasonably necessary or desirable to vest, perfect or confirm
any and all right, title and interest in, to and under such rights, properties
or assets of, or Equity Interests in, HSA LLC or to carry out this Agreement.
4.8 Notification of Certain Matters. Each of the parties hereto shall
give prompt notice (and provide copies) to each other party of: (i) any notice
of, or other communication relating to, a default or event which, with notice or
lapse of time or both, would become a default under any agreement, indenture or
instrument material to the business, assets, property, condition (financial or
otherwise) or the results of operations of such party or HSA LLC, as the case
may be, to which such party or HSA LLC or any of their respective subsidiaries,
as the case may be, is a party or is otherwise bound or subject; (ii) any notice
or other communication from any third party alleging that the consent of such
third party is or may be required in connection with the transactions
contemplated by the Merger Agreement or this Agreement, including the Merger;
(iii) any notice or other communication from any regulatory authority, the
Nasdaq Stock Market, Inc. or national securities exchange in connection with the
transactions contemplated by the Merger Agreement or this Agreement, including
the Merger; (iv) any material adverse change in the business, assets, financial
condition or results of operations of such parties and their subsidiaries, taken
as a whole, as the case may be, or the occurrence of an event which, so far as
reasonably can be foreseen at the time of its occurrence, would result in any
such change; (v) any claims, actions, proceedings or investigations commenced
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23
or, to the best of its knowledge, threatened, involving or affecting such party
or HSA LLC, or any of their respective property or assets, or, to the best of
its knowledge, any employee, director or officer, in his or her capacity as
such, of such party or HSA LLC, as the case may be, which, if pending on the
date hereof, would have been required to have been disclosed in a Schedule
pursuant to this Agreement or would otherwise render inaccurate any
representation or warranty contained herein or which relates to the consummation
of the transactions contemplated by this Agreement; (vi) any occurrence, or
failure to occur, of any event, which occurrence or failure to occur has caused
or could reasonably be expected to cause any representation or warranty in this
Agreement to be untrue or inaccurate in any material respect at any time after
the date hereof and prior to the Closing Date and (vii) any material failure on
its part to comply with or satisfy any covenant, condition or agreement to be
complied with or satisfied by it hereunder; provided that the delivery of any
notice pursuant to this Section 4.8 shall not limit or otherwise affect the
remedies available hereunder to the party receiving such notice.
4.9 Provision of Additional Information. Each of the Company and USFS
hereby agrees to provide, or cause to be provided, to each of the Assignors,
copies of all documents contemplated by the Merger Agreement, including,
without, limitation, the Proxy Statement/Registration Statement on Form S-4, and
submissions pursuant to the HSR Act (as defined in Section 7.1(b)).
4.10 Confidentiality. At all times, both during the term of this
Agreement and after the Closing Date, each party (including, without limitation,
their agents, representatives, attorneys, accountants, financial advisors and
employees) shall not use or disclose any non-public, confidential or proprietary
information in the
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possession of or known by the parties hereto in connection with their respective
business or operations, or any of their respective subsidiaries, except as
required by law (provided that before making any disclosure by reason of legal
requirement the party seeking to make such disclosure shall give prior notice to
each other party hereunder, and use its best efforts to provide such parties an
opportunity to obtain appropriate protective orders or confidentiality
undertakings). Each party agrees that it shall not divulge, furnish or make
accessible any such knowledge or information to anyone except their or another
party's attorneys, accountants and advisors who are aware of and bound by the
requirements of confidentiality provisions set forth herein, or as authorized in
writing by the appropriate other party hereto and they shall not use any such
knowledge or information in any trade or business. The provisions of this
Section 4.10 shall survive the Closing or any termination of this Agreement.
SECTION V
SURVIVAL OF REPRESENTATIONS AND WARRANTIES
The representations and warranties of the Company contained in
Section 3.1 of this Agreement (including the Schedules and other deliveries
contemplated thereby) and of HSA and HPI contained in Section 3.2 of this
Agreement (including the Schedules and other deliveries contemplated thereby)
shall survive the execution and delivery of this Agreement and the consummation
of the transactions contemplated hereby for a period of one year following the
Closing Date, except that those contained in Sections 3.2(d), 3.2(m) and 3.2(n)
shall survive for a period of five years following the Closing Date and those
fraudulently made shall survive indefinitely.
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SECTION VI
INDEMNIFICATION
6.1 Indemnity by Assignors and Rockwood.
(a) The Assignors, jointly and severally, do hereby indemnify
and agree to defend and hold each of the Company and USFS, its officers,
directors, shareholders, employees, agents, successors, permitted assigns and
Affiliates completely free and harmless from any and all manner of claim, loss,
damage, liability or expense (including, without limitation, reasonable legal
fees and expenses) (collectively, the "LOSSES") arising under or relating to:
(i) any representation or warranty of HSA LLC contained in the Master Franchise
Agreement being untrue or incorrect as of the date of the Master Franchise
Agreement; (ii) any representation and warranty of an Assignor herein contained
being untrue or incorrect as of the date made or as of the Closing Date; (iii)
the failure of HSA LLC to have performed or complied with any of its covenants
or agreements contained in the Master Franchise Agreement to have been performed
or complied with on or prior to the Closing Date; (iv) the failure of an
Assignor to perform or comply with any of its covenants or agreements contained
in this Agreement; (v) the operation of the Hawthorn System, including, without
limitation, any matters pertaining to the Existing Licenses (including without
limitation the administration of the Ad Fund), prior to the date of the Master
Franchise Agreement; (vi) the grant of any Hawthorn License, or the execution of
any agreement, by HSA LLC or any of its Affiliates prior to the date of the
Master Franchise Agreement; (vii) any Restrictive Agreement (as defined in the
Master Franchise Agreement) that relates to or is asserted against any Hawthorn
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26
Brand hotel for which Deemed Approval (as defined in the Master Franchise
Agreement) was given under Section 2.4(b) of the Master Franchise Agreement or
which is not listed on Schedule I to the Master Franchise Agreement; (viii) any
matters pertaining to any UFOC prepared or delivered by the Company, USFS or any
of their Affiliates or the Registration Statement, in each case solely to the
extent such losses are the result of information that was provided in writing by
HSA LLC, HSA, HPI or their Affiliates to the Company, USFS or any of their
Affiliates for inclusion therein; (ix) the operation of HSA LLC on or prior to
the Closing Date; or (x) any claim made by any Affiliate, shareholder or joint
venture partner of HSA or HPI, in respect of the transactions contemplated
hereby or the operation of HSA LLC on or prior to the Closing Date, except in
each case to the extent that such arise or result from or were or are caused by
any act or omission of USFS or any of its Affiliates since the date of the
Master Franchise Agreement in respect of the management, control, franchising,
licensing or operation of the Hawthorn Brand or Hawthorn System or in USFS's
capacity as a member of HSA LLC (other than an act or omission taken or not
taken, as the case may be, in reliance on any representation, warranty, covenant
or agreement of HSA LLC under the Master Franchise Agreement).
(b) Rockwood & Co. ("Rockwood") does hereby indemnify and agree
to defend and hold each of the Company and USFS, its officers, directors,
shareholders, employees, agents, successors, permitted assigns and Affiliates
completely free and harmless from any and all Losses arising under or relating
to: (i) any representation or warranty contained in Section 3.2(d), 3.2(m)
(solely to the extent such Losses exceed the Basket Amount) or 3.2(n) of this
Agreement being
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27
untrue or incorrect as of the date made or as of the Closing Date or any other
representation and warranty of the Assignors contained in this Agreement that
was fraudulently made; (ii) any Restrictive Agreement that relates to or is
asserted against any Hawthorn Brand hotel for which Deemed Approval was given
under Section 2.4(b) of the Master Franchise Agreement or which is not listed on
Schedule I to the Master Franchise Agreement; (iii) any Losses resulting from
the Registration Statement solely to the extent such Losses are the result of
information that was provided in writing by HSA LLC, HSA, HPI or their
Affiliates to the Company, USFS or their Affiliates for inclusion therein; (iv)
the operation of HSA LLC on or prior to the Closing Date (solely to the extent
such Losses exceed the Basket Amount); or (v) any claim made by any Affiliate,
shareholder or joint venture partner of HSA or HPI, in respect to the
transactions contemplated hereby or the operation of HSA LLC on or prior to the
Closing Date, except in each case to the extent that such arise or result from
or were or are caused by any act or omission of USFS or any of its Affiliates
since the date of the Master Franchise Agreement in respect of the management,
control, franchising, licensing or operation of the Hawthorn Brand or Hawthorn
System or in USFS's capacity as a member of HSA LLC (other than an act or
omission taken or not taken, as the case may be, in reliance on any
representation, warranty, covenant or agreement of HSA LLC under the Master
Franchise Agreement).
6.2 Indemnity by the Company and USFS. The Company and USFS, jointly
and severally, hereby agree to indemnify, defend and hold HSA and HPI, their
officers, directors, shareholders, employees, agents, successors, permitted
assigns and Affiliates completely free and harmless from any and all manner of
<PAGE> 191
28
Losses arising under or relating to the operation of the Hawthorn System, or any
other acts or omissions of the Company, USFS or their Affiliates, with respect
to the Hawthorn Brand or the Hawthorn System, to the extent the same relates to
matters occurring or events arising or otherwise in any respect relating to the
period on and after the date of the Master Franchise Agreement (except for such
matters that entitle the Company to indemnity from HSA and HPI under Section
6.1). Without in any way eliminating the generality of the foregoing, the
aforesaid indemnity shall relate to: (i) any representation or warranty of the
Company or USFS herein contained being untrue or incorrect in any material
respect as of the date made or as of the Closing Date; (ii) failure of the
Company or USFS to perform and comply in any material respect with any of its
covenants or agreements contained in this Agreement or the Merger Agreement;
(iii) the operation of the Hawthorn System after the date of the Master
Franchise Agreement; (iv) the grant of any Hawthorn License after the date of
the Master Franchise Agreement; or (v) any matters pertaining to any UFOC
prepared or delivered by USFS or the Company or any of their Affiliates other
than any matters included therein relating to or arising out of information that
was provided in writing by HSA LLC (prior to the Closing Date), HSA or HPI or
their Affiliates for inclusion therein.
6.3 Limitations on Indemnification. (a) The Assignors shall not be
obligated to pay any amounts for indemnification under Section 6.1(a) in respect
of any Loss (except those based upon, arising out of or otherwise in respect of
a matter for which indemnification is available under Section 6.1(b) (the
"Basket Exclusions")), until the aggregate amounts of such Losses, exclusive of
those based on the Basket Exclusions, equals $200,000 (the "Basket Amount"),
whereupon the
<PAGE> 192
29
Assignors shall be obligated to pay in full the amount of all such Losses in
excess of the Basket Amount.
(b) The Assignors and Rockwood shall be obligated to pay any
amounts for indemnification based on the Basket Exclusions in accordance with
Section 6.1(a) and 6.1(b) without regard to whether all other indemnification
payments shall have exceeded, in the aggregate, the Basket Amount.
(c) The Assignors shall not be obligated to make any payment
for indemnification under Section 6.1(a) to the extent that such payment,
together with all prior indemnifications made by the Assignors under Section
6.1(a) in respect of Losses that are not Basket Exclusions exceeds Twenty
Million Dollars ($20,000,000).
(d) Except in the case of fraud, no claim for indemnification
shall be made unless notice thereof shall have been delivered to the
indemnifying party (i) in the case of a claim under 6.1(a), 6.1(b)(i) (with
respect to representations and warranties contained in Sections 3.2(m) or (n)),
6.1(b)(ii)-(iv), or 6.2, on or prior to the first anniversary of the Closing
Date or (ii) in the case of a claim under Section 6.1(b)(i) (with respect to
representations and warranties contained in Section 3.2(d)) or 6.1(b)(v), on or
prior to the fifth anniversary of the Closing Date.
6.4 Indemnification Procedures. Any party that proposes to assert the
right to be indemnified under Section VI shall, promptly after receipt of notice
of commencement or threatened commencement of any action against such party in
respect of which a claim is to be or may be made against an indemnifying party
or parties under Section VI, notify the indemnifying party of the commencement
or threatened commencement of such action, enclosing a copy of all papers
served, it
<PAGE> 193
30
being understood and agreed, however, that the failure so to notify promptly the
indemnifying party will not relieve the indemnifying party from any liability it
may have to any indemnified party under such Section unless, and only to the
extent that, such omission results in the forfeiture of substantive rights or
defenses by the indemnifying party or otherwise materially adversely affects the
ability of the indemnifying party to defend against or diminish the losses
arising out of such claim, action or proceeding. If any such action is brought
against any indemnified party and it notifies the indemnifying party of its
commencement, the indemnifying party will be entitled to participate in and, to
the extent that it elects by delivering written notice to the indemnified party
promptly after receiving notice of the commencement of the action from the
indemnified party, to assume the defense of the action, with counsel selected by
the indemnified party. After notice from the indemnifying party to the
indemnified party of its election to assume the defense, the indemnifying party
will not be liable to the indemnified party for any legal or other expenses
except as provided below. It is understood and agreed that the indemnifying
party or parties shall not, in connection with any proceeding or related
proceedings in the same jurisdiction, be liable for the reasonable fees,
disbursements and other charges of more than one separate firm of counsel
(together with local counsel in each applicable jurisdiction) at any one time
for all such indemnified party or parties. All such fees, disbursements and
other charges will be paid or reimbursed by the indemnifying party promptly as
they are incurred. An indemnifying party who has assumed the defense of any
claim or action pursuant to this Section 6.4 will not be liable for any
settlement of any action or claim effected without its written consent. If the
indemnifying party assumes the defense of any claim or action pursuant to this
<PAGE> 194
31
Section 6.4, the indemnified party shall make available to the indemnifying
party any books, records or other documents within its control that are
reasonably necessary for such defense.
6.5 Indemnification Payments by Assignor(s). In the event that the
Assignors, or either of them, is required to make any payments pursuant to this
Section VI, such payments may be made, in the sole discretion of such
Assignor(s), by the delivery of shares of Class A Stock to the party entitled to
receive such payment (subject to compliance with all applicable laws and the
terms of the Shareholders Agreement referred to in Section 4.2 hereof). Any
shares of Class A Stock delivered by the Assignor(s) in satisfaction of its or
their obligations pursuant to this Section VI shall have a value per share equal
to the average of the closing trade prices for the Class A Stock as reported on
the NASDAQ National Market for the five (5) trading days immediately prior to
such payment.
6.6 Exclusive Remedy. Except as such claim may arise as a result of
fraud, the indemnification provisions of this Section VI shall be the exclusive
remedies of the parties hereto for any breach of representation or warranty
contained herein.
SECTION VII
CLOSING CONDITIONS
7.1 Conditions to the Company's Obligations. The obligations of the
Company to complete the transactions contemplated in this Agreement are subject
to the fulfillment of the following conditions on or before the Closing Date:
<PAGE> 195
32
(a) the Assignors shall have assigned, transferred and set over
their respective Equity Interests (in accordance with Schedule 1) to the
Assignee.
(b) All filings required to be made prior to the Closing Date
with, and all consents, approvals, permits and authorizations required to be
obtained prior to the Closing Date from, governmental entities, including,
without limitation, any such filings under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended, and the rules and regulations promulgated
thereunder (the "HSR ACT"), in connection with the execution and delivery of
this Agreement and the consummation of the transactions contemplated hereby the
Company will have been made or obtained (as the case may be) and all HSR Act
waiting periods shall have expired or been terminated.
(c) The representations and warranties of the Assignors
contained in this Agreement shall be true and correct as of the Closing Date as
if made at such time.
(d) The conditions to the Merger contained in the Merger
Agreement shall have been satisfied in accordance with their terms.
(e) The Assignors shall have duly executed and delivered the
Shareholders Agreement referenced in Section 4.2 hereof.
(f) The Company and USFS shall have received the opinion of
Neal, Gerber & Eisenberg, dated the Closing Date, in the form reasonably
acceptable to the parties.
(g) Hyatt Hotels Corporation shall have delivered a letter to
the Company substantially in the form of the letter dated March 27, 1996 (the
"SPIRIT
<PAGE> 196
33
SYSTEM LETTER"), addressed to USFS, confirming the matters contained in the
Spirit System Letter.
7.2 Condition to the Obligations of Assignors. The obligations of the
Assignors to complete the transactions contemplated in this Agreement are
subject to the fulfillment of the following conditions on or before the Closing
Date:
(a) The Assignors shall have been issued the shares of Class A
Stock pursuant to Section 2.3.
(b) All filings required to be made prior to the Closing Date
with, and all consents, approvals, permits and authorizations required to be
obtained prior to the Closing Date from, governmental entities, including,
without limitation any such filings under the HSR Act, in connection with the
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby will have been made or obtained (as the case
may be) and all HSR Act waiting periods shall have expired or been terminated.
(c) The representations and warranties of the Company and USFS
contained in this Agreement shall be true and correct as of the Closing Date as
if made at such time.
(d) The conditions to the Merger contained in the Merger
Agreement shall have been satisfied in accordance with their terms (without
waiver or modification).
(e) The Assignors shall have received the opinion of Paul,
Weiss, Rifkind, Wharton & Garrison, dated the Closing Date, in the form
reasonably acceptable to the parties.
<PAGE> 197
34
(f) The Company, Michael A. Leven and Neal K. Aronson shall
have duly executed and delivered the Shareholders Agreement referred to in
Section 4.2 hereof.
(g) USFS shall have duly executed and delivered a Release
Agreement and Covenant Not to Sue, in the form reasonably acceptable to the
parties, releasing Rockwood & Co. from all liabilities and obligations arising
under or related to the Master Franchise Agreement (other than as provided in
Section 6.1(b)).
(h) USFS shall have duly executed and delivered an Estoppel
Certificate, in the form reasonably acceptable to the parties, certifying that,
on and as of the Closing Date, (i) USFS is not in breach or default of any of
the terms or conditions of the Master Franchise Agreement, and (ii) to the best
of USFS's and USFS's Affiliates actual knowledge, (A) neither of the Assignors
is in breach or default of any of the terms or conditions of the Master
Franchise Agreement, and (B) there does not exist any condition (with or without
notice or lapse of time or both) which would constitute a breach or default of
the Master Franchise Agreement by either or both of the Assignors and (c) the
Assignors are not in breach of any representation or warranty contained in
Section 3.2 of this Agreement.
SECTION VIII
MISCELLANEOUS
8.1 Certain Definitions.
(a) "Affiliate," with respect to any person, shall mean any
person controlling, controlled or under common control with such person.
<PAGE> 198
(b) "Hawthorn Brand" shall mean the trade names "Hawthorn,"
"Hawthorn Suites" and any other trade names, trademarks, copyrights and other
Intellectual Property now used, or which may hereafter be developed for use, in
connection with the operation of hotels under the "Hawthorn" brand.
(c) "Hawthorn System" shall mean the Hawthorn Brand, together
with the system of operation now existing with respect thereto, including,
without limitation, the system of licensing, reservations, training, marketing
and advertising, prototype plans, specifications and working drawings, and
operations, used or associated with the use and operation of hotels operated
under the Hawthorn Brand, and together with the rights and interests of HSA LLC
under the Reservation Agreement (referred to in the Master Franchise Agreement)
and the Contracts.
(d) "Knowledge of the Assignors" shall mean the actual (as
opposed to imputed or constructive) knowledge of any of Nicholas J. Pritzker,
any other member of the Pritzker family, Douglas G. Geoga, Harold S. Handlesman
or John Lyons.
(e) "Master Franchise Agreement" shall mean the Master
Franchise Agreement, dated as of March 27, 1996, between HSA Properties, L.L.C.
and U.S. Franchise Systems, Inc.
(f) "Material Adverse Effect," with respect to any Person,
shall mean a material adverse effect on the business, assets, properties,
financial condition or results of operations of such Person and its subsidiaries
taken as a whole;
(g) "Person" shall mean and include an individual, a
partnership, a joint venture, a limited liability company or partnership, a
corporation,
<PAGE> 199
35
a trust, an unincorporated organization and a government or any department or
agency thereof.
8.2 Consent. The Assignors and USFS hereby provide such consents and
waivers as may be necessary under the HSA LLC Agreement to permit the completion
of the transactions contemplated in this Agreement.
8.3 Expenses. All fees, charges and expenses incurred in connection
with this Agreement and the transactions contemplated hereby shall be paid by
the party incurring such fees, charges or expenses.
8.4 Notices. All notices and other communications hereunder shall be
in writing and shall be deemed to have been duly given when delivered in person,
by telecopier (with a confirmed receipt thereof) or registered or certified mail
(postage prepaid, return receipt requested), and on the next business day when
sent by overnight courier service, to the parties at the following addresses (or
at such other address for a party as shall be specified by like notice):
(a) If to the Company or USFS, to:
U.S. Franchise Systems, Inc.
13 Corporate Square, Suite 250
Atlanta, Georgia 30329
Attention: Mr. Neal K. Aronson
Telecopier: (404) 235-7448
With a copy to:
Paul, Weiss, Rifkind, Wharton & Garrison
1285 Avenue of the Americas
New York, New York 10019
Attention: Paul D. Ginsberg, Esq.
Telecopier: (212) 757-3990
<PAGE> 200
37
(b) If to HSA or HPI, to:
c/o HSA Properties, Inc.
200 West Madison Street
Suite 3800
Chicago, Illinois 60606
Attention: Harold S. Handelsman, Esq.
Telecopier: (312) 750-8545
With copies to:
Neal, Gerber & Eisenberg
Two North LaSalle Street
Suite 2200
Chicago, Illinois 60602
Attention: Michael A. Pucker, Esq.
Telecopier: (312) 269-1747
8.5 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
8.6 Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective successors and
assigns for the uses and purposes set forth and referred to herein, effective as
of the date hereof.
8.7 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED
IN ACCORDANCE WITH, THE LAWS OF THE STATE OF DELAWARE WITHOUT REGARD TO CONFLICT
OF LAWS PROVISIONS.
8.8 Amendments; Waivers. This Agreement may not be amended,
supplemented or discharged, and no provision hereof may be modified or waived,
except expressly by an instrument in writing signed by all of the parties. No
waiver of any provision hereof by any party shall be deemed a waiver by any
other party nor
<PAGE> 201
38
shall any waiver by any party be deemed a continuing waiver of any matter by
such party.
8.9 Severability. If any provision hereof or any application thereof
shall be invalid or unenforceable, the remainder hereof and any other
application of such provision shall not be affected thereby.
8.10 Termination. This Agreement may be terminated by mutual written
consent of the Company and the Assignors or, at the election of any of the
<PAGE> 202
39
Assignors or the Company, if the Closing Date has not occurred on or prior to
April 30, 1998.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be duly executed and delivered as of the date first above written.
HAWTHORN SUITES ASSOCIATES
By: Meridian Associates, L.P.,
its managing venturer
By: Meridian Investments, Inc.,
its general partner
By: /s/ Glen Miller
---------------------------------------
Name: Glen Miller
Title: Vice President
HSA PROPERTIES, INC.
By: /s/ Glen Miller
---------------------------------------
Name: Glen Miller
Title: Vice President
USFS HAWTHORN, INC.
By: /s/ Neal K. Aronson
---------------------------------------
Name: Neal K. Aronson
Title: President
U.S. FRANCHISE SYSTEMS, INC.
By: /s/ Michael A. Leven
---------------------------------------
Name: Michael A. Leven
Title: Chief Executive Officer and
President
<PAGE> 203
40
JOINDER OF ROCKWOOD & CO.
The undersigned, Rockwood & Co., a Delaware corporation, for
valuable consideration which is hereby acknowledged, hereby joins in the
execution and delivery of this Agreement solely for purposes of binding itself
to the provisions of Section VI.
Notwithstanding the foregoing, the liability of the undersigned
hereunder shall be limited to the periods specified in Section 6.3(d) of this
Agreement and shall be limited to an aggregate amount of Twenty Million Dollars
($20,000,000) (the "GUARANTEE AMOUNT"). At such time as the undersigned has
paid, in the aggregate (and without consideration of interest or other carrying
charges), the Guarantee Amount, whether or not as a result of any single or
group of related occurrences, this Joinder shall terminate and the undersigned
shall have no further liability or obligation hereunder.
The provisions of this Joinder are intended solely for the benefit
of the Company and USFS and their successors in interest under the above
Agreement, and are not intended for the benefit of, and may not be enforced by,
any third party.
ROCKWOOD & CO.,
a Delaware corporation
By: /s/ Glen Miller
-----------------------
Name: Glen Miller
Title: Vice President
<PAGE> 204
SCHEDULE 1
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
NUMBER OF SHARES OF CLASS A
COMMON STOCK OF USFS/
NAME OF ASSIGNOR EQUITY INTERESTS HAWTHORN, INC.
- --------------------------------------------------------------------------------
<S> <C> <C>
Hawthorn Suites 98% membership interest 2,199,775
Associates in HSA Properties, LLC
- --------------------------------------------------------------------------------
HSA Properties, Inc. 1% membership interest 22,447
in HSA Properties, LLC
- --------------------------------------------------------------------------------
</TABLE>
<PAGE> 205
SCHEDULE 2
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
NAME OF MEMBER EQUITY INTEREST
- --------------------------------------------------------------------------------
<S> <C>
Hawthorn Suites Associates 98% membership interest of HSA
Properties, LLC
- --------------------------------------------------------------------------------
HSA Properties, Inc. 1% membership interest of HSA Properties,
LLC
- --------------------------------------------------------------------------------
U.S. Franchise Systems, Inc. 1% membership interest of HSA Properties,
LLC
- --------------------------------------------------------------------------------
</TABLE>
<PAGE> 206
ASSIGNORS' SCHEDULES TO
CONTRIBUTION AGREEMENT
General Comments
While the Assignors have endeavored to identify under each Section and
Section subheading the particular items relevant thereto, items listed under one
Section or under one Section subheading may be relevant to another Section or
Section subheading of the following schedules. Accordingly, items listed under
each Section and Section subheading are hereby incorporated by reference in each
other Section and Section subheading.
The inclusion of a matter herein is not an admission by and does not
reflect a judgment on the part of either of the Assignors or its partners,
officers or employees that such matter is material to the business of HSA
Properties, L.L.C. or that it does or may have a material adverse effect.
Capitalized terms used herein and not otherwise defined have the
meanings specified in the Contribution Agreement.
In addition, please note that the attached schedules may not include or
reflect matters that have arisen since the date of the Master Franchise
Agreement and were the result of any act or omission of U.S. Franchise Systems,
Inc. Please refer to Section 3.3 of the Contribution Agreement with respect to
such matters.
<PAGE> 207
SCHEDULE 3.2(g)(2)
TRADEMARKS, PATENTS AND COPYRIGHTS
1. See attached chart showing Trademarks, Patents and Copyrights assigned
to HSA Properties, L.L.C. in connection with the Master Franchise
Agreement.
2. HSA Properties, L.L.C. may have limited common law trademark rights to
the marks HAWTHORN SUITES HAPPENINGS, HAWTHORN SUITES HOTELS and IT'S
SO MUCH LIKE HOME.
3. As of the date of the Master Franchise Agreement, Riverview Marketing
had compiled information in a database for Hawthorn Suites Associates.
NOTE: NEITHER OF THE ASSIGNORS NOR HSA PROPERTIES, L.L.C. HAS TAKEN
ANY ACTION WITH RESPECT TO ANY TRADEMARKS, PATENTS OR
COPYRIGHTS HELD BY HSA PROPERTIES, L.L.C. SINCE THE DATE OF
THE MASTER FRANCHISE AGREEMENT, EXCEPT AT THE REQUEST OF USFS.
<PAGE> 208
SCHEDULE 3.2(g)(2)
HSA PROPERTIES, L.L.C.
TRADEMARKS, PATENTS AND COPYRIGHTS
ASSIGNED TO HSA PROPERTIES, L.L.C. IN CONNECTION WITH
THE MASTER FRANCHISE AGREEMENT
<TABLE>
<CAPTION>
===============================================================================================================================
MARK/COUNTRY APPLICATION/ PRIORITY DATES GOODS/SERVICES
REGISTRATION
NO.
<S> <C> <C> <C>
HAWTHORN SUITES Reg. No. 1,401,695 1st use alleged 10/7/85; Hotel services, namely providing
application filed 11/13/85; lodging and restaurant services in
registered 7/15/86 hotels
United States
HAWTHORN SUITES Application No. Application filed 3/13/87 (ITU) Operation of a business providing
Canada 579,986 hotel, food and cocktail services
TREE LOGO Reg. No. 1st use alleged 11/02/86; Hotel, restaurant and bar services;
United States 1,534,742 application filed 3/23/87; hotel management and reservation
registered 4/11/89 services
TREE LOGO Application No. Application filed Operation of a business providing
Canada 579,955 3/13/87 (ITU) hotel, food and cocktail services
HAWTHORN SUITES Reg. No. 1,531,365 1st use alleged 11/02/86; Hotel, restaurant and bar services;
AND TREE LOGO application filed 3/23/87; hotel management and reservation
United States registered 3/21/89; services
HAWTHORN SUITES Reg. No. Application filed 3/22/91; Hotel, food and cocktail services
AND TREE LOGO 426,084 registered 11/24/92
Mexico
THE SUITE Application No. Application filed Operation of a business of providing
OPPORTUNITY 579,979 3/13/87 (ITU) hotel services and providing food and
Canada cocktail services, namely the
operation of restaurants, provisions of
banquet facilities and operation of
cocktail lounges
HAWTHORN SUITES Reg. No. 1st use alleged 5/16/89; Entertainment services, namely,
CARES ABOUT KIDS 1,626,350 application filed 6/5/89; providing children's activities
United States registered 12/4/90 programs featuring games, beverages,
food and sound events at a hotel
STAY A LITTLE Reg. No. 1st use alleged 5/87; application Rendering technical aid and
CLOSER TO HOME 1,512,029 filed 7/2/87; registered 11/8/88 assistance in the establishment and/or
United States operation of hotels and restaurants
===============================================================================================================================
</TABLE>
<PAGE> 209
SCHEDULE 3.2(g)(3)
INTELLECTUAL PROPERTY LICENSES
None
<PAGE> 210
SCHEDULE 3.2(h)
EXCEPTIONS TO NON-CONTRAVENTION
REPRESENTATION OF HSA PROPERTIES, L.L.C.
As of December 9, 1997, HSA Properties, L.L.C. was not in good standing in the
State of Delaware solely as a result of the failure to file its Annual Report
and pay the required franchise fee. A Certificate to Restore Good Standing with
respect to this entity was filed with the Secretary of State of the State of
Delaware on December 9, 1997. According to the Office of the Secretary of State
of the State of Delaware, the amount required to restore the company to good
standing is approximately $211.00.
<PAGE> 211
SCHEDULE 3.2(j)
PERMITS
None (1)
(1) Please refer to Schedule 7.2(i) of the Master Franchise Agreement for
permits held by Hawthorn Suites Associates as of the date of that
agreement.
<PAGE> 212
SCHEDULE 3.2(k)
CONTRACTS
HSA Properties, L.L.C. or its Affiliates have entered into (or acknowledged) the
following contracts:
1. Reservation Agreement, dated as of March 27, 1996, between
Hyatt Corporation d/b/a Regency Systems Solutions, Inc. and
HSA Properties, L.L.C. (1)
2. Master Franchise Agreement, dated as of March 27, 1996,
between HSA Properties, L.L.C. and U.S. Franchise Systems,
Inc., together with the Side Letter (re: Naperville License)
of even date therewith.
3. Assignment of Existing Licenses from HSA Properties, L.L.C. to
Hawthorn Suites Franchising Inc.
4. Assignment of Contracts from HSA Properties, L.L.C. to
Hawthorn Suites Franchising Inc.
5. License Agreement, dated March 27, 1996, between HSA
Properties, L.L.C. and Hawthorn Suites Associates.
6. Fee Agreement, dated as of March 27, 1996, between Rockwood &
Co., Inc. and HSA Properties, L.L.C.
7. Shared Space and Services Agreement, dated as of March 27,
1996, among Hawthorn Suites Associates, HSA Properties, Inc.
and HSA Properties, L.L.C.
8. Hawthorn Suites Hotel's Master Development Strategic Alliance
Agreement, dated December 23, 1996, among USFS, Hawthorn
Suites Franchising, Inc. and Sunstone Hotel Investors, L.P.
(acknowledged by HSA Properties, L.L.C., January 20, 1997).
NOTE: With respect to the Existing Licenses (as defined in
the Master Franchise Agreement), neither of the
Assignors nor HSA Properties, L.L.C. has taken any
action since the date of the Master Franchise
Agreement, except at the direction of, or as
disclosed to, USFS.
(1) As set forth in the attached letter from Peter D. Connolly, Senior Vice
President and General Counsel of Hyatt Hotels Corporation, certain
aspects of the reservation system have been outsourced to CSC
Outsourcing, Inc.
<PAGE> 213
Peter D. Connolly
Senior Vice President
and General Counsel
Hyatt Hotels Corporation
200 West Madison
Chicago, IL 60606 USA
Telephone: 312.750.8105
Telex: 687 1520
FAX: 312.750.8581
December 10, 1997
Michael Pucker, Esquire
Neal, Gerber & Eisenberg
Two North LaSalle
Suite 2300
Chicago, Illinois 60602
Re: Reservation Services
Dear Michael:
You have requested that I summarize for you the impact, if any, of the
Outsourcing Agreement between Hyatt and CSC Outsourcing, Inc. dated June 30,
1996 and effective August 1, 1996, on the obligations of Hyatt to provide
central reservations services to Hawthorn Suites, pursuant to the Reservations
Agreement between the latter two entities.
The Outsourcing Agreement specifies a series of particular services
which CSCO and its subcontractor, the Sabre Group, are obligated to provide to
Hyatt and members of the Hyatt Organization (which defined term includes
Hawthorn Suites). These services include the maintenance, enhancement and future
development of the hardware, software, data bases and network configurations
which comprise the SPIRIT reservation system. Hyatt ultimately maintains
direction and control over the services provided, which activities are measured
against a series of minimum acceptable service levels. Hyatt continues to
operate the call center activities at the Omaha Reservation Center with Hyatt
employees, as those functions were not outsourced. Thus, in shorthand, CSCO
maintains the box and Hyatt answers the phone.
Nothing in the Outsourcing Agreement should impact Hawthorn Suites'
rights to continue to receive reservations services under the terms and
conditions of the Reservations Agreement. If you need further information
concerning the Outsourcing Agreement or related issues, please don't hesitate to
call me.
Very truly yours,
/s/ Peter D. Connolly
<PAGE> 214
SCHEDULE 3.2(m)
CONTRACTS TO BE TERMINATED PRIOR TO CLOSING
1. Fee Agreement, dated as of March 27, 1996, between Rockwood &
Co., Inc. and HSA Properties, L.L.C.
2. Shared Space and Services Agreement, dated as of March 27,
1996, among Hawthorn Suites Associates, HSA Properties, Inc.
and HSA Properties, L.L.C.
<PAGE> 215
Appendix B-2
FORM OF SHAREHOLDERS AGREEMENT
THIS SHAREHOLDERS AGREEMENT, dated as of _________, 1998 (the
"Agreement") by and among Hawthorn Suites Associates, an Illinois joint venture
("HSA"), HSA Properties, Inc., a Delaware corporation ("HPI", and together with
HSA, the "Securityholders"), Michael A. Leven ("Leven"), Neal K. Aronson
("Aronson"), and U.S. Franchise Systems, Inc. (formerly known as USFS Hawthorn,
Inc.), a Delaware corporation (the "Company").
WHEREAS, concurrently herewith, pursuant to a Contribution
Agreement, by and among the Securityholders, the Company and Old USFS (as
defined below), dated as of December __, 1997 (the "Contribution Agreement"),
HSA shall acquire 2,199,775 shares of Class A Common Stock, $.01 par value per
share, of the Company ("Class A Stock"), and HPI shall acquire 22,447 shares of
Class A Stock (such shares hereinafter referred to as the "Shares"), and the
Securityholders shall contribute, assign, transfer and convey (the "Transfer")
all of their respective interests in HSA Properties, L.L.C., a Delaware limited
liability company ("HSA LLC"), on the terms, and subject to the conditions,
contained in the Contribution Agreement;
WHEREAS, on the date hereof, immediately upon the consummation of
the Transfer, U.S. Franchise Systems, Inc., a Delaware corporation ("Old USFS"),
shall merge with and into the Company with the Company as the surviving
corporation (the "Merger"), pursuant to the Agreement and Plan of Merger, dated
as of December __, 1997 (the "Merger Agreement"), between the Company and Old
USFS. In the Merger, each outstanding share of Class A Common Stock, par value
$.01 per share, and Class B Common Stock, par value $.01 per share, of Old USFS
shall be converted into the right to receive a share of Class A Stock or Class B
Common Stock, par value $.01 per share ("Class B Stock" and together with the
Class A Stock, collectively, the "Common Stock"), of the Company, respectively,
and the Shares will remain outstanding; and
WHEREAS, it is a condition to the consummation of the transactions
contemplated by each of the Merger Agreement and the Contribution Agreement that
the parties hereto execute and deliver this Agreement.
NOW THEREFORE, in consideration of the mutual covenants and
agreements set forth herein and for good and valuable consideration, the receipt
of which is hereby acknowledged, the parties agree as follows.
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2
Section 1. Definitions. As used in this Agreement, the following terms
shall have the following respective meanings:
"Affiliate" means, with respect to any Person, any Person that,
directly or indirectly, controls, is controlled by or is under common control
with the Person in question. In addition to the foregoing, with respect to the
Securityholders, "Affiliate" shall mean the lineal descendants of Nicholas J.
Pritzker, deceased, and their immediate family members, trusts primarily for the
benefit of such individuals and Persons controlled, directly or indirectly, by
such individuals and/or trusts.
"Commission" means the Securities and Exchange Commission or any
similar agency then having jurisdiction to enforce the Securities Act and the
Exchange Act.
"Common Stock" means shares of Class A Common Stock, par value
$.01 each, of the Company and shares of Class B Common Stock, par value $.01
each, of the Company.
"control" (including, with correlative meanings, the terms
"controlled by" and "under common control with") shall mean the possession,
directly or indirectly, of the power to direct or cause the direction of the
management and policies of such Person, whether through the ownership of voting
securities or by contract or otherwise.
"Designated Holder" means each of the Securityholders and their
permitted transferees under Section 2(b)(i).
"Exchange Act" means the Securities Exchange Act of 1934, as
amended, and the rules and regulations of the Commission promulgated thereunder.
"Included Transferee" means, with respect to a Principal
Stockholder, an immediate family member (which shall mean, with respect to such
person, such person's spouse, parents, children and grandchildren and the spouse
of such person's children and grandchildren) of such Principal Stockholder, and
any trust or partnership of which all the beneficiaries or partners, as the case
may be, are Principal Stockholders and/or an immediate family member of such
Principal Stockholder.
"Lockup Period" means the period commencing on the date hereof and
ending on the second anniversary of the date hereof.
"Person" means an individual or a corporation, partnership,
limited liability company or partnership, trust, incorporated or unincorporated
association, joint venture, joint stock company, government (or an agency or
political subdivision thereof) or other entity of any kind.
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3
"Principal Stockholder" means each of Michael A. Leven and Neal K.
Aronson.
"Registrable Securities" means each of the following: (a) any and
all Shares owned by the Designated Holders and (b) any shares of Class A Stock
issued or issuable to any of the Designated Holders with respect to the Shares
by way of stock dividend or stock split or in connection with a combination of
shares, recapitalization, merger, consolidation or other reorganization or
otherwise and shares of Common Stock or other equity securities of the Company
issuable upon conversion, exercise or exchange thereof. Registrable Securities
will cease to be Registrable Securities when (i) a Registration Statement
covering such Registrable Securities has been declared effective under the
Securities Act by the Commission and such Registrable Securities have been
disposed of pursuant to such effective Registration Statement, (ii) such
securities shall have been sold pursuant to Rule 144 (or any successor
provision) under the Securities Act and in compliance with the requirements of
paragraphs (c) (e), (f) and (g) of Rule 144 (notwithstanding the provisions of
paragraph (k) of such Rule), or (iii) the Registrable Securities are sold or
distributed by a Person not entitled to the registration rights granted by this
Agreement.
"Registration Expenses" means all expenses arising from or
incident to the Company's performance of, or compliance with, this Agreement,
including, without limitation, all registration, filing and listing fees; all
fees and expenses of complying with state securities or "blue sky" laws
(including reasonable fees and disbursements of counsel in connection with "blue
sky" qualifications of Registrable Securities); all printing, messenger and
delivery expenses; the fees and disbursements of counsel for the Company and its
independent public accountants; the fees and disbursements of one firm of
counsel (other than in-house counsel) retained by the holders of Registrable
Securities being registered; the expenses of any special audits required by or
incident to such performance and compliance; and any liability insurance or
other premiums for insurance obtained in connection with any registration
pursuant to the terms of this Agreement.
"Registration Statement" means a registration statement filed
pursuant to the Securities Act.
"Securities Act" means the Securities Act of 1933, as amended, and
the rules and regulations of the Commission promulgated thereunder.
"Voting Securities" shall mean the shares of Common Stock and any
other securities of the Company entitled to vote generally in the election of
directors.
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4
Section 2. Transfer of Shares.
(a) Restrictions on Transfer. Each Designated Holder agrees
that such Designated Holder will not, directly or indirectly, offer, sell,
exchange, pledge, hypothecate, encumber, transfer, assign or otherwise dispose
of (collectively, a "transfer") any of its Shares, except as provided in Section
2(b).
(b) Exceptions to Restrictions. Subject to Section 4(e), the
provisions of Section 2(a) shall not apply to any of the following transfers:
(i) from any Designated Holder to the Company or to any
Affiliate of such Designated Holder, provided that, each such Affiliate
shall execute an agreement in form and substance reasonably satisfactory
to the Company pursuant to which such Affiliate shall agree to comply
with, and shall be bound by, the terms of this Agreement;
(ii) pursuant to Section 3;
(iii) pursuant to a registered offering in which either of
the Principal Stockholders or an Included Transferee is participating;
provided that the Designated Holder's shares of Common Stock included in
such offering do not represent a greater percentage of the total shares
of Common Stock owned by such Designated Holder then the shares of Common
Stock being sold by such Principal Stockholder or Included Transferee
represents of his total shares of Common Stock owned;
(iv) pursuant to a tender offer, exchange offer, merger,
consolidation or other business combination involving the Company, or a
sale of all or substantially all of the outstanding shares of Common
Stock of the Company with a third party not an Affiliate of the Company
(x) which the Board of Directors of the Company does not oppose or (y)
which the Board of Directors of the Company opposes (an "Opposed
Tender"); provided that, no indication or arrangement to tender the
Shares may be made in the case of an Opposed Tender until twenty-four
hours prior to the expiration of any time after which securities tendered
may be treated less favorably than securities tendered prior to such
time;
(v) after the expiration the Lockup Period;
(vi) to the extent necessary to obtain or maintain,
without suspension or threatened revocation, any
gaming license, permit or approval of any Affiliate of any
Securityholder; provided that, in the event of any such proposed transfer
the transferor shall have complied with the right of first refusal
contained in Section 2(c); provided further that, the transferee shall
execute an agreement in form and substance reasonably satisfactory to the
<PAGE> 219
5
Company pursuant to which such transferee shall agree to comply with,
and be bound by, the terms of this Agreement; or
(vii) as contemplated by Section VI of the Contribution
Agreement; provided that, prior to the expiration of the Lockup Period
each transferee (other than the Company ) shall execute an agreement in
form and substance reasonably satisfactory to the Company pursuant to
which such transferee shall agree to comply with, and be bound by, the
terms of this Agreement.
Notwithstanding the foregoing, no transfer shall be permitted
under Section 2(b),(i), (ii), (iii), (iv) or (vi) prior to the first anniversary
of the date of this Agreement unless HSA and/or HPI, as the case may be, shall
have agreed, in a written instrument reasonably acceptable to the Company not to
transfer any of the net (pre-tax) proceeds received in such transfer prior to
the first anniversary of the date of this Agreement.
(c) Right of First Refusal.
(i) If during the Lockup Period any Designated
Holder (a "Selling Stockholder") desires to transfer all or any
portion to its Shares to any Person (a "Third Party Offeror")
pursuant to Section 2(b)(vi) and has received a bona fide offer
from such Third Party Offeror to buy all of such Shares (a "Third
Party Offer"), such Selling Stockholder shall send written notice
(a "Notice") to the Company, which shall state (a) the number of
Shares proposed to be transferred (the "Offered Securities"), (b)
the proposed purchase price per Share to be paid by the Third
Party Offeror (the "Offer Price"), which shall be payable solely
in cash, (c) the name of the Third Party Offeror, (d) that the
proposed purchase of the Offered Securities shall be consummated
after the expiration or termination of the Option Period (as
defined below) but on or prior to the first business day which
occurs after the later of sixty (60) days after delivery of the
Notice and the date which is five (5) days after the expiration or
waiver of any applicable waiting period under the HSR Act (as
defined below), and (e) that the Third Party Offer has been
accepted by the Selling Stockholder subject to the rights of the
Company contained in this Section 2(c). The Offering Notice shall
also state any other material terms and conditions of the Third
Party Offer and shall include a copy of all writings between the
Third Party Offeror and the Selling Stockholder necessary to
establish the terms of the Third Party Offer.
(ii) For a period of ten (10) days after the
delivery of the Notice (the "Option Period"), the Company or its
designee shall have the right to elect to purchase all (but not
less than all) of the Offered Securities at a purchase price equal
to the Offer Price and upon the terms and conditions of the Third
Party Offer. The election of the Company or its designee under
this
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6
Section 2(c) shall be exercisable by delivering written notice of
the exercise thereof, prior to the expiration of the Option
Period, to the Selling Stockholder. The failure of the Company or
its designee to respond within the Option Period to the Selling
Stockholder shall be deemed to be a waiver of its rights under
this Section 2(c).
(iii) The closing of the purchase of Offered
Securities to be purchased by the Company or its designee under
this Section 2(c) shall be held at the principal office of the
Company at 11:00 a.m., local time, on the date that is the later
of sixty (60) days after delivery of the Notice and the date which
is five (5) days after the expiration or waiver of any applicable
waiting period under the HSR Act or at such other time and place
as the parties to the transaction may agree. At such closing, the
Selling Stockholder shall deliver to the Company or its designee
certificates representing the Offered Securities, duly endorsed
for transfer and accompanied by all requisite transfer taxes, if
any, and such Offered Securities shall be free and clear of any
liens, claims, options, charges, encumbrances or rights (other
than those arising hereunder), and the Selling Stockholder shall
so represent and warrant, and shall further represent and warrant
that it is the beneficial and record owner of such Offered
Securities. The Company or its designee shall, at the closing,
deliver to the Selling Stockholder payment in full in immediately
available funds for the Offered Securities purchased by it. At
such closing, all of the parties to the transaction shall execute
such additional documents as are otherwise necessary or
appropriate.
(iv) Unless the Company or its designee elects to
purchase all of the Offered Securities pursuant to Section 2(c),
the Selling Stockholder may sell all (but not less than all) the
Offered Securities to the Third Party Offeror on the terms and
conditions of the Third Party Offer; provided, however, that such
sale is bona fide and made prior to or the date that is the later
of ninety (90) days after delivery of the Notice and five (5) days
after the expiration or waiver of any applicable waiting period
under the HSR Act. If such sale is not completed prior to such
date, for any reason, then the restrictions provided for herein
shall again become effective, and no transfer of such Offered
Securities may be made thereafter under Section 2(b)(vi) without
again offering the same to the Company in accordance with this
Section 2(c).
(d) Endorsement on Certificates, etc.
(i) Upon the execution of this Agreement, in
addition to any other legend which the Company may deem advisable
under the Securities Act and certain state securities laws, all
certificates representing issued and outstanding Shares and shares
of Common Stock owned by the Principal Stockholders shall be
endorsed as follows:
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7
THIS CERTIFICATE IS SUBJECT TO, AND IS TRANSFERABLE ONLY
UPON COMPLIANCE WITH, THE PROVISIONS OF A SHAREHOLDERS
AGREEMENT DATED AS OF ___________, 1998, AMONG THE COMPANY
AND CERTAIN OF ITS SHAREHOLDERS. A COPY OF THE
ABOVE-REFERENCED AGREEMENT IS ON FILE AT THE PRINCIPAL
OFFICE OF THE COMPANY.
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY
NOT BE SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT, OR AN EXEMPTION FROM REGISTRATION UNDER SAID ACT
AS EVIDENCED BY AN OPINION OF COUNSEL THAT REGISTRATION IS
NOT REQUIRED.
(ii) Except as otherwise expressly provided in
this Agreement, all certificates or other instruments representing
shares of Common Stock hereafter issued to or acquired by any of
the Designated Holders or their successors, assigns or transferees
shall bear the legends set forth above, and the shares of Common
Stock represented by such certificates or instruments shall be
subject to the applicable provisions of this Agreement.
(iii) Notwithstanding any other provision of this
Agreement, no transfer of the Shares may be made unless (a) the
transfer complies in all material respects with the applicable
provisions of this Agreement and applicable federal and state
securities laws, including without limitation, the Securities Act
and (b) if requested by the Company, an opinion of counsel to such
transferring Securityholder shall be supplied to the Company, at
such transferring Securityholder's expense, to the effect that
such transfer complies in all material respects with, or is
otherwise exempt from the provisions of, all applicable federal
and state securities laws. The second paragraph of the legend set
forth in clause (i) of this Section 2(d) shall be removed from a
particular certificate representing shares of Common Stock when an
opinion of counsel has been delivered to the Company to the effect
that any such security may be freely sold to the public without
compliance with the registration provisions of the Securities Act.
Counsel referred to in this Section 2(d)(iii) shall be reasonably
acceptable to the Company and may include an attorney who is an
employee of a Securityholder.
(iv) Whenever the restrictions imposed by this
Agreement shall terminate as to any particular shares of Common
Stock, the
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8
holder thereof shall be entitled to receive from the Company, without
expense, upon delivery to the Company of the existing certificate
representing such shares of Common Stock, a new certificate not bearing
the restrictive legends otherwise required pursuant to this Section 2(d).
(e) Improper Transfer. Any attempt to transfer or encumber any
shares of Common Stock other than in accordance with the terms of this Agreement
shall be null and void and neither the Company nor any transfer agent of such
securities shall give any effect to such attempted transfer or encumbrance in
its stock records.
Section 3. Tag-Along Rights.
(a) If a Principal Stockholder or his Included Transferees
desires to transfer (such transferring stockholder(s) being referred to as the
"Transferor(s)") to any Person, (i) at any time during the Lockup Period, any
shares of Common Stock, or (ii) at any time after the Lockup Period, shares of
Common Stock that, together with any shares of Common Stock sold by the
Principal Stockholders and their Included Transferees in such transaction or
series of related transactions, that would result in a transfer of "control" of
the Company, the Transferors shall, in the case of clauses (i) and (ii), prior
to making any such transfer, first notify each of the Securityholders of such
transfer. Such notice (the "Transferors' Notice") shall specify the proposed
transferee thereof, the number of shares of Common Stock to be transferred, and
the amount and type of consideration to be received therefor, and shall contain
the Participation Offer set forth in Section 3(c).
(b) Notwithstanding Section 3(a), a Transferor shall not be
obligated to deliver a Transferors' Notice in respect of, and the provisions of
this Section 3 shall not apply to, (i) any transfers made to a Principal
Stockholder or an Included Transferee, (ii) any transfers made pursuant to a
registered public offering for which the Securityholders have been provided
registration rights under Section 6 and (iii) any transfers made by a Transferor
to a Person not a Principal Stockholder or an Included Transferee of shares of
Common Stock that, together with each other transfer of such type since the date
of this Agreement, constitute less than 5% of the number of shares owned as of
the date of this Agreement by the Principal Stockholders and the Included
Transferees.
(c) The Transferors shall offer (the "Participation Offer") to
include in the proposed transfer: a number of shares of Common Stock designated
by each Designated Holder, not to exceed, in respect of any such Designated
Holder the number of shares of Common Stock equal to the product of (x) the
aggregate number of shares of Common Stock proposed to be transferred pursuant
to the Transferors' Notice and (y) a fraction, the numerator of which is equal
to the number of shares of Common Stock owned by such Designated Holder and the
denominator of which is
<PAGE> 223
9
the total number of shares of Common Stock held by the Transferors and all
holders (including the Designated Holder) of Common Stock who are exercising
tag-along rights in connection with such transfer, in each case, as of the date
of the Transferors' Notice. The Participation Offer shall be conditioned upon
the Transferors consummating a transfer on the terms described in the
Transferors' Notice (which they shall not be obligated to do) to the transferee
named in the Transferors' Notice.
(d) Any Designated Holder which does not accept the
Participation Offer by written notice to the Transferors within 5 business days
after such Designated Holder has received notice thereof shall be deemed to have
waived its rights under this Section 3 (for purposes only of the particular
transfer described in the Transferors' Notice), and the Transferors and, if any
Designated Holder accepts the Participation Offer, such Designated Holder (the
Transferors and each such accepting Securityholder being hereinafter sometimes
called "Sellers") may transfer the shares described in the Transferors' Notice
and the shares included by such Designated Holder pursuant to the Participation
Offer to the proposed transferee, in accordance with the terms of such transfer
set forth in the Transferors' Notice, so long as such transfer occurs on or
before the later of 90 days after the date the Transferors' Notice was received
by the other Designated Holder and the date which is five days after the
expiration or waiver of any applicable waiting period to such proposed transfer
pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended
(the "HSR Act"). The price per share, form of consideration and other terms and
conditions for sales of Common Stock made pursuant to this Section 3 shall be
the same for the Transferors and each Designated Holder accepting the
Participation Offer; provided, however, that any indemnification obligations of
any Designated Holder which accepts the Participation Offer shall be made
severally, and not jointly, and shall, in any event, be limited to a maximum
amount equal to the net (pre-tax) proceeds actually received by such Designated
Holder in connection with the transfer subject to the Participation Offer.
Section 4. Standstill.
(a) During such period as (x) Leven is Chairman, Chief
Executive Officer or President of the Company and (y) the Principal Stockholders
and their Included Transferees, in the aggregate, own at least one-half of the
shares of Common Stock owned by such Persons, in the aggregate, on the date
hereof, the Designated Holders each agree, without the prior written consent of
the Board of Directors of the Company specifically expressed in a resolution
adopted by a majority of the directors of the Company who are not Affiliates of
the Designated Holders, that the Designated Holders, acting either individually
or together, will not, and the Designated Holders will use their reasonable best
efforts to cause each of its Affiliates not to, directly or indirectly:
(i) acquire, announce an intention to acquire, offer or
propose to acquire, or agree to acquire (except, in any case, by way of
stock
<PAGE> 224
10
dividends or other distributions or offerings made available to holders
of any Common Stock generally, provided, that any such securities shall
be subject to the provisions hereof), directly or indirectly, whether by
purchase, tender or exchange offer, through the acquisition of control of
another Person (as hereinafter defined), by joining a partnership,
limited partnership, syndicate or other "group" (within the meaning of
Section 13(d)(3) of the Exchange Act) or otherwise, any equity securities
of the Company that would result in such Designated Holder and its
Affiliates, in the aggregate, owning Voting Securities representing a
greater amount of the voting power of the Company than would be held by
any Nonexcluded Person following such transaction. "Nonexcluded Person"
means any Person or "group" (within the meaning of Section 13(d)(3) of
the Exchange Act), other than the Principal Stockholders, the Included
Transferees or a "group" which includes any of the Principal Stockholders
or Included Transferees;
(ii) make, or in any way participate, directly or
indirectly, in any "solicitation" (as such term is used in the proxy
rules of the Commission as in effect on the date hereof) of proxies or
consents (whether or not relating to the election or removal of
directors), seek to advise, encourage or influence any Person with
respect to the voting of any Voting Securities, initiate, propose or
otherwise "solicit" (as such term is used in the proxy rules of the
Commission as in effect on the date hereof) stockholders of the Company
for the approval of stockholder proposals made pursuant to Rule 14a-8 of
the Exchange Act, or induce or attempt to induce any other Person to
initiate any such stockholder proposal;
(iii) seek, propose, or make any statement (whether
written or oral) with respect to, any merger, consolidation, business
combination, tender or exchange offer, sale or purchase of assets, sale
or purchase of securities (except as and to the extent specifically
permitted hereby), dissolution, liquidation, restructuring,
recapitalization or similar transactions of or involving the Company or
any of its Affiliates or solicit or encourage any other person to make
any such statement or proposal;
(iv) form, join or in any way participate in a "group"
(within the meaning of Section 13(d)(3) of the Exchange Act) with respect
to any Voting Securities, other than groups consisting solely of one or
more of the Securityholders, directors of the Company, other parties
hereto and their respective Affiliates;
(v) deposit any Voting Securities in any voting trust or
subject any Voting Securities to any arrangement or agreement with
respect to the voting of any Voting Securities except a set forth in
Section 5 hereof;
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11
(vi) execute any written consent with respect to the
Company or its Voting Securities, except as set forth in Section 5
hereof;
(vii) otherwise act, alone or in concert with others, to
control or seek to control or influence or seek to influence the
management, Board of Directors or policies of the Company;
(viii) seek, alone or in concert with others,
representation on the Board of Directors of the Company or seek the
removal of any member of the Board of Directors;
(ix) make any publicly disclosed proposal or enter into
any discussion regarding any of the foregoing;
(x) make any proposal, statement or inquiry, or disclose
any intention, plan or arrangement (whether written or oral) inconsistent
with the foregoing, or make or disclose any request to amend, waive or
terminate any provision of this Agreement or the Certificate of
Incorporation or By-laws of the Company;
(xi) have any discussions or communications or enter into
any arrangements, understandings or agreements (whether written or oral)
with, or advise, finance, assist or encourage, any other Person in
connection with any of the foregoing, or make any investment in or enter
into any arrangement with, any other Person that engages, or offers or
proposes to engage, in any of the foregoing; or
(xii) request the Company (or its directors, officers,
employees or agents), directly or indirectly, to amend or waive any
provisions of this Agreement or take any action which might require the
other party to make a public announcement regarding the possibility of a
merger, consolidation, tender or exchange offer or other business
combination or extraordinary transaction.
(b) The Securityholders and their Affiliates may acquire Voting
Securities and other securities of the Company without regard to the foregoing
limitation if any of the following events shall occur: (A) a tender or exchange
offer is made by any Person or 13D Group (as hereinafter defined) (other than an
Affiliate of, or any Person acting in concert with, a Securityholder or any of
its Affiliates and other than a Principal Stockholder, any Affiliate thereof or
13D Group including a Principal Stockholder), which Person or 13D Group has the
financial wherewithal to consummate such a transaction, to acquire Voting
Securities in an amount which, together with Voting Securities (if any) already
owned by such person or 13D Group, would represent more than 50% of the total
combined voting power of all Voting Securities then outstanding or (B) it is
publicly disclosed that Voting Securities
<PAGE> 226
12
representing more than 50% of the total combined voting power of all Voting
Securities then outstanding have been acquired subsequent to the Closing Date by
an Person or 13D Group (other than the Securityholders or any of their
respective Affiliates and other than a Principal Stockholder, any Affiliate
thereof or 13D Group including a Principal Stockholder). As used herein, the
term "13D Group" shall mean any group of Persons formed for the purpose of
acquiring, holding, voting or disposing of Voting Securities which would be
required under Section 13(d) of the Exchange Act and the rules and regulations
thereunder (as now in effect) to file a statement on Schedule 13D with the
Securities and Exchange Commission as a "person" within the meaning of Section
13(d)(3) of the Exchange Act if such group beneficially owned Voting Securities
representing more than 5% of the total combined voting power of all Voting
Securities then outstanding.
(c) Nothing in this Section 4 shall prohibit any Person who is
serving as a director of the Company as contemplated by Section 7 of this
Agreement from, solely in his or her capacity as director, (a) taking any action
or making any statement at any meeting of the Board of Directors of the Company
or any committee thereof or (b) making any statement to any director, officer or
agent of the Company. In addition, nothing in this Section 4 shall restrict any
private communications between the Securityholders and any Person designated by
the Securityholders as a director, provided that all such communications by such
Person remain subject to the fiduciary duties of such Person as a director.
(d) Notwithstanding anything contained in this Section 4, the
Securityholders shall have the right in their sole discretion to vote any Voting
Securities owned by them as they shall determine in connection with any
Significant Event. "Significant Event" shall mean any event other than the
election of directors or appointment of auditors or approval of any stockholder
proposal made pursuant to Rule 14a-8 of the Exchange Act.
(e) Except in connection with a transfer made pursuant to
Section 3, the Securityholders each agree that they shall not effect any
transfer of any of the Shares to any Person who such Securityholder believes,
after due inquiry, would, after giving effect to such transfer beneficially own,
together with its Affiliates, more than 5% of the total combined voting power of
all Voting Securities then outstanding unless it shall have obtained prior to
such transfer a written instrument from such transferee agreeing to be bound by
this Section 4, in form and substance satisfactory to the Company.
Section 5. Voting. The Designated Holders each agree that so long as
they or any of their respective Affiliates beneficially own any Voting
Securities, it will, and will cause its Affiliates to, (a) be present, in person
or represented by proxy, at all properly noticed annual and special meetings of
stockholders of the Company so that all Voting Securities beneficially owned by
such Securityholder and its Affiliates then entitled to vote may be counted for
the purpose of determining the
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13
presence of a quorum at such meetings, (b) support each nominee on the slate of
nominees proposed by the Board of Directors of the Company and vote all Voting
Securities which it is then entitled to vote in favor of the election of each
such nominee, and (c) vote in accordance with the Board of Directors'
recommendation on all stockholder proposals made pursuant to Rule 14a-8 under
the Exchange Act.
Section 6. Registration Rights.
(a) Incidental Registration.
(i) If the Company, at any time or from time to time,
(1) after the Lockup Period proposes to register any of its shares of
Common Stock for its own account under the Securities Act (other than (i)
a registration of an employee stock ownership, stock option, stock
purchase or other employee compensation plan or arrangement adopted in
the ordinary course of business on Form S-8 (or any successor form), or
any dividend reinvestment plan or (ii) a registration of securities on
Form S-4 (or any successor form), including, without limitation, in
connection with a proposed issuance in exchange for securities or assets
of, or in connection with a merger or consolidation with, another
corporation or (2) during the Lockup Period so proposes to register any
of its shares of Common Stock and such Registration Statement also
includes the registration of shares of Common Stock owned by either or
both of the Principal Stockholders or their Included Transferees, then it
will at each such time give written notice (given at least 30 days prior
to the proposed filing date) describing the proposed registration and
distribution to each of the Designated Holders of its intention to do so
and, upon the written request of each of the Designated Holders, made
within 30 days after the receipt of any such notice (which request shall
specify the amount of Registrable Securities proposed to be sold by such
Designated Holder and the intended method of disposition thereof), the
Company will, as provided in this Section 6, use its reasonable best
efforts to effect the registration under the Securities Act of all of the
Registrable Securities that the Company has been so requested to register
by the Designated Holders, to the extent required to permit the
disposition (in accordance with the intended methods thereof as
aforesaid) of the Registrable Securities to be registered (each, an
"Incidental Registration"); provided, however, that if, at any time after
giving written notice of its intention to register any of its shares of
Common Stock and prior to the effective date of the Registration
Statement filed in connection with such Incidental Registration, the
Company shall determine for any reason not to register such shares of
Common Stock, the Company may, at its election, give written notice of
such determination to each of the Designated Holders and, thereupon,
shall be relieved from its obligation to register any Registrable
Securities in connection with such Incidental Registration. In connection
with any Incidental Registration under this Section 6(a) involving an
underwriter, or a distribution with the assistance of a selling agent,
the right of any Designated
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14
Holder to participate in such Incidental Registration shall be
conditioned upon such Designated Holder's participation in such
underwriting or distribution on terms not less favorable than those
available to other stockholders participating therein.
(ii) Notwithstanding anything to the contrary set
forth in Section 6(a), if a proposed Incidental Registration is for a
registered public offering involving an underwriting and the
representative of the underwriters advises the Company in writing that
the registration of all or part of the shares of Common Stock to be
underwritten in such Incidental Registration would adversely effect such
offering, then the Company shall so advise the Designated Holders and any
other holders of shares of Common Stock requesting registration in such
Incidental Registration, and the number of shares of Common Stock that
are entitled to be included in the Incidental Registration shall be
allocated (i) first, to the Company for shares of Common Stock being sold
for its own account, (ii) second, among the Principal Stockholders, the
Designated Holders and any other holders of shares of Common Stock
entitled to "incidental" registration rights and requesting inclusion of
shares of Common Stock in such Incidental Registration, pro rata on the
basis of the number of shares of Common Stock requested to be included in
such Incidental Registration, and (iii) third, any other shares of Common
Stock requested to be included in such Incidental Registration.
(b) Demand Registrations.
(i) At any time after the expiration of the
Lockup Period, the Designated Holders holding a majority of the then
Registrable Securities may request registration under the Securities Act
of all or any portion of their Registrable Securities in accordance with
the provisions of this Section 6(b). All registrations requested pursuant
to this Section 6(b) are referred to herein as "Demand Registrations."
Each request for a Demand Registration shall specify the number of
Registrable Securities requested to be registered. Within ten days after
receipt of any such request, the Company shall give written notice of
such requested registration to all other holders of Registrable
Securities and shall include in such registration all Registrable
Securities with respect to which the Company has received written
requests for inclusion therein within fifteen (15) days after the receipt
of the Company's notice.
(ii) The Designated Holders of Registrable
Securities shall be entitled to request no more than three Demand
Registrations in accordance with this Section 6(b). The aggregate
offering value of the Registrable Securities requested to be registered
in any Demand Registration must, in the good faith judgment of the
holders thereof, equal at least $5,000,000. A registration shall not
count as one of the permitted Demand
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15
Registrations until it has become effective (unless the holders of a
majority of the Registrable Securities included in such registration have
agreed to abandon such registration after a registration statement has
been filed with the Commission).
(iii) If a Demand Registration is an underwritten
offering and the managing underwriters advise the Company in writing that
in their opinion the number of Registrable Securities and other
securities requested to be included in such offering exceeds the number
of Registrable Securities and other securities, if any, which can be sold
in an orderly manner in such offering within a price range acceptable to
the holders of a majority of the Registrable Securities included in such
registration, the Company shall include in such registration prior to the
inclusion of any securities which are not Registrable Securities the
number of Registrable Securities requested to be included which in the
opinion of such underwriters can be sold in an orderly manner within the
price range of such offering, pro rata among the respective holders
thereof on the basis of the amount of securities requested to be included
therein by each such holder.
(iv) The Company shall not be obligated to effect
more than one Demand Registration in any twelve-month period, and the
Company shall not be obligated to effect any Demand Registration within
60 days after the effective date of a previous offering of Common Stock
registered under the Securities Act. The Company may postpone for up to
180 days the filing or the effectiveness of a registration statement for
a Demand Registration if the Company's board of directors determines in
its reasonable good faith judgment that such Demand Registration would
reasonably be expected to have a material adverse effect on any proposal
or plan by the Company or any of its subsidiaries to engage in any
acquisition (other than in the ordinary course of business) or any
merger, consolidation, tender offer, reorganization or similar
transaction; provided that (a) the Company may exercise its right to
delay a Demand Registration only once in any twelve-month period and (b)
if a Demand Registration is delayed hereunder, the holders of Registrable
Securities initially requesting such Demand Registration shall be
entitled to withdraw such request and, if such request is withdrawn, such
Demand Registration shall not count as one of the permitted Demand
Registrations hereunder and the Company shall pay all Registration
Expenses in connection with such registration. Notwithstanding anything
to the contrary in this Section 6(b)(iv), (x) the Company may not
prevent, delay or postpone any Demand Registration and (y) the
Securityholders shall not be subject to any lockup or similar agreements
following any Demand Registration for more than 270 days during any
360-day period.
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16
(v) The Designated Holders shall have the right
to select the investment banker(s) and manager(s) to administer the
offering, subject to the approval of the Company in its sole discretion.
(c) Expenses. The Company shall pay all Registration
Expenses in connection with any registration pursuant to this Section 6, whether
or not such registration becomes effective; provided, that all underwriting
discount and selling commissions applicable to the Registrable Securities shall
be borne by the holders selling such Registrable Securities, in proportion to
the number of Registrable Securities sold by each such holder; provided further
that, the Designated Holders that have requested to include Registrable
Securities that may, in the reasonable opinion of counsel to the Company
delivered to such Designated Holders, be distributed to the public without
limitation as to volume pursuant to Rule 144 (or any successor provision of the
Securities Act), in any Registration Statement that does not also cover shares
of Common Stock owned by any of the Principal Stockholders or any of their
Included Transferees, shall pay their pro rata portion of all Registration
Expenses incurred in connection with such offering.
(d) Holdback Agreements. Each of the Designated Holders
agrees not to effect any public sale or distribution of any Registrable
Securities being registered or of any securities convertible into or
exchangeable or exercisable for such Registrable Securities, including a sale
pursuant to Rule 144 under the Securities Act (i) during the 90 day period
beginning on the effective date of such Registration Statement (except as part
of such registration), in the case of a non-underwritten public offering, or
(ii) during the reasonable period, if any, requested by the underwriters, in the
case of an underwritten public offering, provided, in each case, that all
directors of the Company, Principal Stockholders and other 5% or greater
beneficial owners of shares of the Common Stock of the Company (other than
institutional shareholders in respect of shares of Common Stock not acquired
directly from the Company) seeking to include shares of Common Stock in such
Registration Statement are similarly restricted.
(e) Seller Information. The Company may require each
seller of Registrable Securities as to which any registration is being effected
to furnish to the Company such information regarding the distribution of such
securities as the Company may from time to time reasonably request in writing
and as shall be required by law in connection therewith.
(f) Notice to Discontinue. Each Designated Holder of
Registrable Securities agrees that, upon receipt of any notice from the Company
of the happening of any event that causes the Registration Statement to include
an untrue statement of a material fact or to omit to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading in light of the circumstances then existing, such Designated Holder
shall forthwith discontinue disposition of Registrable Securities pursuant to
the Registration Statement covering
<PAGE> 231
17
such Registrable Securities until such Designated Holder's receipt of the copies
of a supplemented or amended prospectus and, if so directed by the Company, such
Designated Holder shall deliver to the Company all copies, of the prospectus
covering such Registrable Securities that is current at the time of receipt of
such notice.
(g) Registration Procedures. Whenever the Designated
Holders of Registrable Securities have requested that any Registrable Securities
be registered pursuant to this Agreement, the Company shall use its reasonable
best efforts to effect the registration and the sale of such Registrable
Securities in accordance with the intended method of disposition thereof, and
pursuant thereto the Company shall as expeditiously as reasonably practicable:
(i) prepare and file with the Commission within
90 days after the request or demand therefor a Registration Statement
with respect to such Registrable Securities and use its reasonable best
efforts to cause such Registration Statement to become effective
(provided that before filing a Registration Statement or prospectus or
any amendments or supplements thereto, the Company shall furnish to the
counsel selected by the holders of a majority of the Registrable
Securities covered by such Registration Statement copies of all such
documents proposed to be filed);
(ii) notify each holder of Registrable Securities
of the effectiveness of each Registration Statement filed hereunder and
prepare and file with the Securities and Exchange Commission such
amendments and supplements to such Registration Statement and the
prospectus used in connection therewith as may be necessary to keep such
Registration Statement effective for a period of not less than 180 days
and comply with the provisions of the Securities Act with respect to the
disposition of all securities covered by such Registration Statement
during such period in accordance with the intended methods of disposition
by the sellers thereof set forth in such Registration Statement;
(iii) furnish to each seller of Registrable
Securities such number of copies of such Registration Statement, each
amendment and supplement thereto, the prospectus included in such
Registration Statement (including each preliminary prospectus) and such
other documents as such seller may reasonably request in order to
facilitate the disposition of the Registrable Securities owned by such
seller;
(iv) use its reasonable best efforts to register
or qualify such Registrable Securities under such other securities or
blue sky laws of such jurisdictions as any seller reasonably requests and
do any and all other acts and things which may be reasonably necessary or
advisable to enable such seller to consummate the disposition in such
jurisdictions of the Registrable Securities owned by such seller
(provided that the Company shall not be
<PAGE> 232
18
required to (a) qualify generally to do business in any jurisdiction
where it would not otherwise be required to qualify but for this
subparagraph, (b) subject itself to taxation in any such jurisdiction or
(c) consent to general service of process in any such jurisdiction);
(v) notify each seller of such Registrable
Securities, at any time when a prospectus relating thereto is required to
be delivered under the Securities Act, of the happening of any event as a
result of which the prospectus included in such Registration Statement
contains an untrue statement of a material fact or omits any fact
necessary to make the statements therein not misleading, and, at the
request of any such seller, the Company shall prepare a supplement or
amendment to such prospectus so that, as thereafter delivered to the
purchasers of such Registrable Securities, such prospectus shall not
contain an untrue statement of a material fact or omit to state any fact
necessary to make the statements therein not misleading;
(vi) cause all such Registrable Securities to be
listed on each securities exchange on which similar securities issued by
the Company are then listed and, if not so listed, to be listed on the
NASD automated quotation system and, if listed on the NASD automated
quotation system, use its reasonable best efforts to secure designation
of all such Registrable Securities covered by such Registration Statement
as a NASDAQ "national market system security" within the meaning of Rule
llAa2-1 of the Commission or, failing that, to secure NASDAQ
authorization for such Registrable Securities;
(vii) provide a transfer agent and registrar for
all such Registrable Securities not later than the effective date of such
Registration Statement;
(viii) enter into such customary agreements
(including underwriting agreements in customary form) and take all such
other actions as the holders of a majority of the Registrable Securities
being sold or the underwriters, if any, reasonably request in order to
expedite or facilitate the disposition of such Registrable Securities;
(ix) make available for inspection by any seller
of Registrable Securities, any underwriter participating in any
disposition pursuant to such Registration Statement and any attorney,
accountant or other agent retained by any such seller or underwriter, all
financial and other records, pertinent corporate documents and properties
of the Company, and cause the Company's officers, directors, employees
and independent accountants to supply all information reasonably
requested by any such seller, underwriter, attorney, accountant or other
agent in connection with such Registration Statement;
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19
(x) cause its employees to participate in "road
shows" and other presentations as reasonably requested by the
underwriters in connection with any registered offering; and
(xi) otherwise use its reasonable best efforts to
comply with all applicable rules and regulations of the Securities and
Exchange Commission, and make available to its security holders, as soon
as reasonably practicable, an earnings statement covering the period of
at least twelve months beginning with the first day of the Company's
first full calendar quarter after the effective date of the Registration
Statement, which earnings statement shall satisfy the provisions of
Section 11(a) of the Securities Act and Rule 158 thereunder.
(h) Indemnification; Contribution.
(i) In the event of any registration of any
Registrable Securities pursuant to the terms of Section 6, the Company
will indemnify and hold harmless, to the fullest extent permitted by law,
each of the Designated Holders and their respective Affiliates,
directors, officers, partners, trustees, employees, legal counsel,
accountants, financial advisors and agents, and each other Person, if
any, who controls (within the meaning of the Securities Act and the
Exchange Act) such Designated Holder or any such directors, officers,
partners, trustees, employees, legal counsel, accountants, financial
advisors and agents (each of the foregoing, a "designated indemnified
party") against any and all losses, claims, damages, liabilities and
expenses (including reasonable costs of investigation), joint or several,
to which such designated indemnified party may become subject under the
Securities Act or otherwise, insofar as such losses, claims, damages,
liabilities or expenses (or actions or proceedings in respect thereof)
arise out of or are based upon (x) any untrue statement or alleged untrue
statement of any material fact or (y) any omission or alleged omission to
state therein a material fact required to be stated therein or necessary
to make the statements therein not misleading contained in any
Registration Statement under which such Registrable Securities were
registered under the Securities Act, provided, however, that the Company
shall not be liable in any such case to the extent that any such loss,
claim, damage or liability (or actions or proceedings in respect thereof)
arises out of or is based upon (x) any untrue statement of any material
fact or (y) any omission to state a material fact required to be stated
therein or necessary to make the state ments therein not misleading in
such Registration Statement, or amendment or supplement thereto, in
reliance upon and in conformity with written informa tion concerning such
Designated Holder and furnished to the Company for use in the preparation
thereof.
(ii) The Company may require, as a condition to
including any Registrable Securities in any Registration Statement filed
<PAGE> 234
20
pursuant to Section 6, that the Company shall have received an
undertaking from each Designated Holder selling such Registrable
Securities, severally and not jointly, to indemnify and hold harmless the
Company, its directors, officers, legal counsel, accountants and
financial advisors and each other Person, if any, who controls (within
the meaning of the Securities Act and the Exchange Act) the Company or
any such directors, officers, legal counsel, accountants and financial
advisors (each of the foregoing, a "Company Indemnified Party") against
any losses, claims, damages, liabilities or expenses, joint or several,
to which such Company Indemnified Party may become subject under the
Securities Act or otherwise, insofar as such losses, claims, damages,
liabilities or expenses (or actions or proceedings in respect thereof)
arise out of or are based upon (x) any untrue statement or alleged untrue
statement of a material fact or (y) any omission or alleged omission to
state a material fact required to be stated therein or necessary to make
the statements therein not misleading contained in any Registration
Statement under which such Registrable Securities were registered under
the Securities Act or any amendment or supplement thereto, if such
statement or omission was made in reliance upon and in conformity with
written information concerning such Designated Holder and furnished to
the Company; provided, in each instance, that any Designated Holder's
maximum liability in respect of such indemnification obligations shall be
limited to the amount of net (pre-tax) proceeds actually received by such
Designated Holder pursuant to the sale of such Registrable Securities.
(iii) Promptly after receipt by any designated
Indemnified Party or Company Indemnified Party (each, an "Indemnified
Party") of notice of the commencement of any action, suit, proceeding or
investigation or threatened thereof in writing for which the Indemnified
Party intends to claim indemnification or contribution pursuant to this
Agreement, such Indemnified Party will give written notice thereof to the
Indemnifying Party; provided, however, that the failure of any
Indemnified Party to give notice as provided herein shall not relieve the
Indemnifying Party of its obligations under this Agreement, except to the
extent that the Indemnifying Party is actually prejudiced by such failure
to give notice. If notice of commencement of any such action is brought
against an Indemnified Party, the Indemnifying Party may, at its expense,
participate in and assume the defense thereof, with counsel reasonably
satisfactory to such Indemnified Party. The Indemnified Party shall have
the right to employ separate counsel in any such action and participate
in the defense thereof, but the fees and expenses of such counsel shall
be paid by the Indemnified Party unless (i) the Indemnifying Party agrees
to pay the same, (ii) the Indemnifying Party fails to assume the defense
of such action with counsel satisfactory to the Indemnified Party in its
reasonable judgment or (iii) the named parties to any such action
(including any impleaded parties) have been advised by such counsel in
writing that either (x) representation of such Indemnified Party and the
Indemnifying Party by the
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21
same counsel would be inappropriate under applicable standards of
professional conduct or (y) there may be one or more legal defenses
available to the Indemnified Party which are different from or additional
to those available to the Indemnifying Party. In no event shall the
Indemnifying Party be responsible for the fees of more than one counsel
(in addition to local counsel) for all Indemnified Parties. No
Indemnifying Party or Indemnified Party shall consent to entry of any
judgment or enter into any settlement without the written consent of the
other.
(i) If the indemnification provided for in this Section 6 from
the Indemnifying Party is unavailable to an Indemnified Party hereunder in
respect of any losses, claims, damages, liabilities or expenses referred to
therein, then the Indemnifying Party, in lieu of indemnifying such Indemnified
Party, shall contribute to the amount paid or payable by such Indemnified Party
as a result of such losses, claims, damages, liabilities or expenses in such
proportion as is appropriate to reflect the relative fault of the Indemnifying
Party and Indemnified Party in connection with the actions which resulted in
such losses, claims, damages, liabilities or expenses, as well as any other
relevant equitable considerations. The relative faults of such Indemnifying
Party and Indemnified Party shall be determined by reference to, among other
things, whether any action in question, including any untrue or alleged untrue
statement of a material fact or omission or alleged omission to state a material
fact, has been made by, or relates to information supplied by, such Indemnifying
Party or Indemnified Party, and the parties' relative intent, knowledge, access
to information and opportunity to correct or prevent such action. The amount
paid or payable by a party as a result of the losses, claims, damages,
liabilities and expenses referred to above shall be deemed to include any legal
or other fees, charges or expenses reasonably incurred by such party in
connection with any investigation or proceeding.
The parties hereto agree that it would not be just and equitable
if contribution pursuant to this Section 6 were determined by pro rata
allocation or by any other method of allocation that does not take account of
the equitable considerations referred to in the immediately preceding paragraph.
No person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any Person.
Section 7. Board Representation.
(a) On the Closing Date, Mr. Doug Geoga shall be elected as a
director of the Company by the Company's Board of Directors. Subject to its
fiduciary duties, the Company's Board of Directors will nominate Mr. Geoga (or,
if Mr. Geoga is unable or unwilling to serve, a successor as contemplated by
this Section 7) for election at each meeting (or in each action by written
consent in lieu of a meeting) of stockholders of the Company for the election of
directors during the term of this Agreement so long as the Securityholders
and/or their Affiliates beneficially own (as such term is defined in Rule 13d-3
of the Exchange Act) more
<PAGE> 236
22
than 1.1 million shares of Common Stock (as such number of shares of Common
Stock shall be adjusted to take into account any stock splits, reverse stock
splits, reclassifications and other similar transactions or adjustments).
(b) If Mr. Doug Geoga (or such a successor) is no longer
a director of the Company as contemplated by paragraph (a) of this Section 7,
the Securityholders may propose to the Company as a nominee for election as a
director of the Company a person who (i) has recognized standing in the business
community, (ii) is not a former director, officer or employee of the Company,
(iii) does not have a conflict of interest with the Company and (iv) is at such
time either the President of Hyatt Hotels Corp. or a person who is otherwise
reasonably acceptable to USFS.
(c) The Company will use its best efforts to cause Mr.
Doug Geoga or any successor nominated as provided in this Section 7 to be
elected by the stockholders of the Company and will solicit proxies in favor of
Mr. Geoga or any such successor at each meeting (or in each action by written
consent in lieu of a meeting) of stockholders of the Company.
(d) If the Company does not accept a Securityholders'
designee as provided in paragraph (b) of this Section 7, the process set forth
therein shall be repeated so long as reasonably appropriate to find a successor
candidate acceptable to both Securityholders and the Company.
Section 8. Notification as to Certain Matters. Each Designated Holder
shall notify the Company of any change in such Designated Holder's beneficial
ownership of shares of Voting Securities not later than two business days after
such change and from time to time, upon request, shall notify the Company of the
number of shares of Voting Securities beneficially owned by such Designated
Holder and of the names and addresses of all Affiliates to whom such Designated
Holder shall have transferred shares in accordance with Section 2(b)(i).
Section 9. Representations and Warranties.
(a) Each Securityholder, severally and not jointly, represents
and warrants to the other parties hereto as follows:
(i) Such Securityholder has full right, power and
authority to enter into this Agreement and consummate the transactions
contemplated hereby. This Agreement has been duly authorized, executed
and delivered by such Securityholder and constitutes the legal, valid and
binding obligation of such Securityholder, enforceable against such
Securityholder in accordance with its terms, except that such enforcement
may be limited by bankruptcy, fraudulent conveyance, fraudulent transfer,
insolvency, reorganization, liquidation, conservatorship, moratorium and
other similar laws relating to or affecting creditors' rights or the
collection of debtors' obligations
<PAGE> 237
23
generally and any general equitable principles (regardless of whether
enforcement is considered in a proceeding in equity or at law) and the
discretion of any court before which any proceedings therefor may be
brought.
(ii) The execution, delivery and performance by
such Securityholder of this Agreement and the consummation of the
transactions contemplated hereby do not and will not conflict with or
result in any breach or violation of any material agreement to which such
Securityholder is a party or is otherwise bound or subject and do not and
will not result in any material violation of the organizational documents
of such Securityholder or any statute, order, rule or regulation of any
court or governmental agency or body having jurisdiction over such
Securityholder or any of its properties.
(b) The Company represents and warrants to the other
parties as follows:
(i) The Company has all requisite corporate power
and authority to enter into this Agreement and consummate the
transactions contemplated hereby. This Agreement has been duly
authorized, executed and delivered by the Company and constitutes a
legal, valid and binding obligation of the Company enforceable against it
in accordance with its terms, except that such enforcement may be limited
by bankruptcy, fraudulent conveyance, fraudulent transfer, insolvency,
reorganization, liquidation, conservatorship, moratorium and other
similar laws relating to or affecting creditors' rights or the collection
of debtors' obligations generally and any general equitable principles
(regardless of whether an enforcement is considered in a proceeding in
equity or at law) and the discretion of any court before which any
proceedings therefor may be brought.
(ii) The execution, delivery and performance by
the Company of this Agreement do not and will not conflict with or result
in a breach or violation of any agreement to which the Company is bound
or subject and do not and will not result in any violation of the
Certificate of Incorporation or Bylaws of the Company or any statute,
order, rule or regulation of any court or governmental agency or body
having jurisdiction over the Company or any of its properties.
(c) Leven and Aronson, severally and not jointly, each
represents and warrants to the other parties as follows:
(i) He has the full right, capacity and authority
to enter into this Agreement. This Agreement has been duly authorized,
executed and delivered by such Person and constitutes the legal, valid
and binding obligation of such Person enforceable against him in
accordance with
<PAGE> 238
24
its terms, except that such enforcement may be limited by bankruptcy,
fraudulent conveyance, fraudulent transfer, insolvency, reorganization,
liquidation, conservatorship, moratorium and other similar laws relating
to or affecting creditors' rights or the collection of debtors'
obligations generally and any general equitable principles (regardless of
whether enforcement is considered in a proceeding in equity or at law)
and the discretion of any court before which any proceedings therefor may
be brought.
(ii) The execution, delivery and performance by
such Persons do not and will not conflict with or result in a breach or
violation of any agreement to which such Person is bound or subject and
do not and will not result in any violation of any statute, order, rule
or regulation of any court or governmental agency or body having
jurisdiction over such Person.
Section 10. Miscellaneous.
(a) Recapitalizations, Exchanges, etc. The provisions of this
Agreement shall apply, to the full extent set forth herein, with respect to (i)
the shares of Common Stock and (ii) any and all equity securities of the Company
or any successor or assign of the Company (whether by merger, consolidation,
sale of assets or otherwise), which may be issued in respect of, in conversion
of, in exchange for or in substitution of, the shares of Common Stock, and shall
be appropriately adjusted for any stock dividends, splits, reverse splits,
combinations, recapitalizations and the like occurring after the date hereof.
(b) No Inconsistent Agreements. The Company shall not enter
into any agreement with respect to its securities that is inconsistent with the
registration rights granted in this Agreement.
(c) Successors and Assigns; Third Party Beneficiaries. This
Agreement shall inure to the benefit of and be binding upon the successors and
permitted assigns of each of the parties hereto. Except as specifically provided
herein, this Agreement is not assignable by any of the parties.
(d) Specific Performance. Each of the parties hereto
acknowledges that the other parties would not have an adequate remedy at law for
money damages if any of the covenants or agreements of the parties in this
Agreement were not performed in accordance with its terms and therefore agrees
that the other party(ies) shall be entitled to specific enforcement of such
covenants or agreements and to injunctive and other equitable relief in addition
to any other remedy to which it may be entitled, at law or in equity.
(e) Survival of Representations and Warranties. The
representations, warranties, covenants and agreements contained in this
Agreement
<PAGE> 239
25
shall survive the execution of this Agreement and any investigation at any time
by the Securityholders, the Company, or on behalf of either thereof.
(f) Entire Agreement. This Agreement, together with the
Merger Agreement and the Contribution Agreement, contains the entire
understandings of the parties with respect to the subject matter of such
agreements. This Agreement may not be amended except by a writing signed by all
of the Company, Leven, Aronson and record holders of a majority of the Shares.
(g) Severability. If any terms, provision, covenant or
restriction of this Agreement is held by a court of competent jurisdiction to be
invalid, void or unenforceable, the remainder of the terms, provisions,
covenants and restriction of this Agreement shall remain in full force and
effect, unless such action would substantially impair the benefits to either
party of the remaining provisions of this Agreement.
(h) Notices. Any notices and other communications
required to be given pursuant to this Agreement shall be delivered by hand, by
registered or certified mail, postage prepaid, return receipt requested, by
private courier, by facsimile or by telex, as follows:
If to the Company, Leven or Aronson:
U.S. Franchise Systems, Inc.
13 Corporate Square, Suite 250
Atlanta, Georgia 30329
Attention: Neal K. Aronson
Telecopier: (404) 235-7448
With copies to:
Paul, Weiss, Rifkind, Wharton & Garrison
1285 Avenue of the Americas
New York, New York 10019-6064
Attention: Paul D. Ginsberg, Esq.
Telecopier: (212) 757-3990
<PAGE> 240
26
If to the Securityholders:
c/o HSA Properties, Inc.
200 West Madison Street
Suite 3800
Chicago, Illinois 60606
Attention: Harold S. Handelsman, Esq.
Telecopier: (312) 750-8545
with copies to:
Neal, Gerber & Eisenberg
Two North LaSalle Street
Suite 2200
Chicago, Illinois 60602
Attention: Michael A. Pucker, Esq.
Telecopier: (312) 269-1747
(i) Governing Law. This Agreement shall be
governed by and construed in accordance with the laws of the State of Delaware.
(j) Counterparts. This Agreement may be
executed in one or more counterparts, which together will constitute a single
agreement.
<PAGE> 241
27
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed and delivered as of the date first above written.
HAWTHORN SUITES ASSOCIATES
By: Meridian Associates, L.P., its
managing venturer
By: Meridian Investments, Inc., its
general partner
By:
-------------------------------------
Name:
Title:
HSA PROPERTIES, INC.
By:
-------------------------------------
Name:
Title:
U.S. FRANCHISE SYSTEMS, INC.
By:
-------------------------------------
Name:
Title:
----------------------------------------
Michael A. Leven
----------------------------------------
Neal K. Aronson
<PAGE> 242
Appendix C
[Form of Short Form Tax Opinion of Paul, Weiss, Rifkind, Wharton & Garrison]
(212) 373-3000
U.S. Franchise Systems, Inc.
13 Corporate Square
Suite 250
Atlanta, GA 30329
Re: U.S. Franchise Systems, Inc.
Dear Sir or Madam:
We have acted as United States federal income tax counsel for
U.S. Franchise Systems, Inc. ("USFS") in connection with the merger of USFS with
and into USFS Hawthorn, Inc. ("USH") in which USH will be the surviving
corporation (the "Merger").
We are giving this opinion in connection with the Proxy
Statement, as amended (the "Proxy Statement"), relating to the Merger filed
pursuant to the Securities Act of 1933, as amended, and the rules and
regulations of the Securities Exchange Commission promulgated thereunder.
Capitalized terms used but not defined herein have the respective meanings
ascribed to them in the Proxy Statement.
In rendering our opinion, we have examined originals or
copies, certified or otherwise identified to our satisfaction, of such
agreements and other documents as we have deemed relevant and necessary and we
have made such investigations of law as we have deemed appropriate as a basis
for the opinion expressed below. In our examination, we have assumed the
authenticity of original
<PAGE> 243
U.S. Franchise Systems, Inc.
2
documents, the accuracy of copies and the genuineness of signatures. We
understand and assume that (i) each such agreement represents the valid and
binding obligation of the respective parties thereto, enforceable in accordance
with its respective terms and the entire agreement between the parties with
respect to the subject matter thereof, (ii) the parties to each agreement have
complied, and will comply, with all of their respective covenants, agreements
and undertakings contained therein, (iii) the transactions provided for by each
agreement were and will be carried out in accordance with their terms and (iv)
certain representations regarding factual matters and certain covenants as to
future actions made by USFS, USH and major holders of USFS Common Stock will be
complied with.
Our opinion is based upon existing United States federal
income tax laws, regulations, administrative pronouncements and judicial
decisions. All such authorities are subject to change, either prospectively or
retroactively, and any such change could affect our opinion.
The opinion set forth herein has no binding effect on the
United States Internal Revenue Service or the courts of the United States. No
assurance can be given that, if the matter were contested, a court would agree
with the opinion set forth herein.
We hereby confirm the opinion set forth under the caption
"Certain Federal Income Tax Consequences" in the Proxy Statement. While such
description discusses the material anticipated United States federal income tax
consequences applicable to holders of USFS Common Stock who are citizens or
residents of the United States, it does not purport to discuss all United States
federal income tax consequences and our opinion is limited to those United
States federal income tax consequences specifically discussed therein.
In giving the foregoing opinion, we express no opinion other
than as to the federal income tax laws of the United States of America.
We are furnishing this letter in our capacity as United States
federal income tax counsel to USFS. This letter is not to be used, circulated,
quoted or otherwise referred to for any other purpose, except as set forth
below.
We hereby consent to the filing of this opinion as an Exhibit
to the Proxy Statement and we further consent to the use of our name under the
captions "Certain Federal Income Tax Consequences in the Proxy Statement." The
issuance of
<PAGE> 244
U.S. Franchise Systems, Inc.
3
such a consent does not concede that we are an "expert" for purposes of the
Securities Act.
Very truly yours,
PAUL, WEISS, RIFKIND, WHARTON & GARRISON
<PAGE> 245
PROXY
U.S. FRANCHISE SYSTEMS, INC.
13 CORPORATE SQUARE, SUITE 250
ATLANTA, GEORGIA 30329
THIS PROXY IS SOLICITED ON BEHALF OF THE
BOARD OF DIRECTORS
SPECIAL MEETING OF STOCKHOLDERS,
MARCH 11, 1998
The undersigned hereby appoints Michael A. Leven and Neal K. Aronson, and each
of them, with full power of substitution, the true and lawful attorneys in fact,
agents and proxies of the undersigned to vote on behalf of the undersigned all
of the shares of Class A common stock, par value $.01 per share, of U.S.
Franchise Systems, Inc. ("USFS") and Class B common stock, par value $.01 per
share of USFS, which the undersigned is entitled to vote at the special meeting
(the "Special Meeting") of Stockholders of USFS, to be held on March 11, 1998,
commencing at 4:00 p.m., local time, at the offices of USFS, 13 Corporate
Square, Suite 250, Atlanta, Georgia 30329, and any and all adjournments or
postponements thereof, the following proposals more fully described in the
Notice of Special Meeting of Stockholders and the Proxy Statement/Prospectus
(the "Proxy Statement/Prospectus") of USFS and USFS Hawthorn, Inc. ("USH").
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSAL 1 LISTED BELOW.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN
BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS GIVEN HEREIN, THIS PROXY WILL
BE VOTED "FOR" PROPOSAL 1 BELOW, AND IN THE DISCRETION OF THE PROXIES IN ALL
OTHER MATTERS AS MAY PROPERLY COME BEFORE THE SPECIAL MEETING AND ANY ALL
ADJOURNMENTS OR POSTPONEMENTS THEREOF.
1. To approve a proposal to adopt the Agreement and Plan of Merger dated
December 9, 1997, as amended, among USFS and USH, which provides for
the merger of USFS with and into USH (the "Merger"), with USH as the
surviving corporation, and to authorize the Merger and certain related
transactions, as more fully set forth in the Proxy
Statement/Prospectus.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
2. To transact such other business as may properly come before the Special
Meeting and any and all adjournments or postponements thereof.
<PAGE> 246
Your signature on this proxy card is your acknowledgment of receipt of the
Notice of Special Meeting of Stockholders and the Proxy Statement/Prospectus.
The undersigned stockholder hereby revokes all proxies heretofore given by the
undersigned stockholder to vote at the Special Meeting or any adjournments or
postponements thereof.
Dated: , 1998
----------------------------
--------------------------------
Signature
--------------------------------
Signature if held jointly
Please sign exactly as name(s) appear on
this Proxy Card. When shares are held by
joint tenants, both should sign. When
signing as attorney-in-fact, executor,
administrator, personal representative,
trustee, or guardian, please give full
title as such. If a corporation, please
sign in full corporate name by
authorized officer. If a partnership,
please sign in partnership name by
authorized person. If you attend the
Special Meeting and decide to vote by
ballot, such vote will supersede this
proxy.
To help us in our planning, please check
here if you expect to attend the Special
Meeting [ ]
PLEASE MARK, DATE, SIGN AND RETURN THIS PROXY CARD PROMPTLY USING THE ENCLOSED
ENVELOPE.
PLEASE DO NOT SEND ANY STOCK CERTIFICATES WITH THIS PROXY CARD.
<PAGE> 247
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145(a) of the General Corporation Law of the State of Delaware
provides that a Delaware corporation may indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation) by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation or is or was serving at the request of the corporation as a
director, officer, employees or agent of another corporation or enterprise,
against expenses, judgments, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with such action, suit or proceeding if
he acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation, and, with respect to any
criminal action or proceeding, had no cause to believe his conduct was unlawful.
Section 145(b) provides that a Delaware corporation may indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that such
person acted in any of the capacities set forth above, against expenses actually
and reasonably incurred by him in connection with the defense or settlement of
such action or suit if he acted under similar standards, except that no
indemnification may be made in respect of any claim, issue or matter as to which
such person shall have been adjudged to be liable to the corporation unless and
only to the extent that the court in which such action or suit was brought shall
determine that despite the adjudication of liability, such person is fairly and
reasonably entitled to be indemnified for such expenses which the court shall
deem proper.
Section 145 further provides that to the extent a director or officer of a
corporation has been successful in the defense of any action, suit or proceeding
referred to in subsections (a) and (b) or in the defense of any claim, issue or
matter therein, he shall be indemnified against expenses actually and reasonably
incurred by him in connection therewith; that indemnification provided for by
Section 145 shall not be deemed exclusive of any other rights to which the
indemnified party may be entitled; and that the corporation may purchase and
maintain insurance on behalf of a director or officer of the corporation against
any liability asserted against him or incurred by him in any such capacity or
arising out of his status as such whether or not the corporation would have the
power to indemnify him against such liabilities under such Section 145.
Section 102(b)(7) of the General Corporation Law provides that a
corporation in its original certificate of incorporation or an amendment thereto
validly approved by stockholders may eliminate or limit personal liability of
members of its board of directors or governing body for breach of a director's
fiduciary duty. However, no such provision may eliminate or limit the liability
of a director for breaching his duty of loyalty, failing to act in good faith,
engaging in intentional misconduct or knowingly violating a law, paying a
dividend or approving a stock repurchase which was illegal, or obtaining an
improper personal benefit. A provision of this type has no effect on the
availability of equitable remedies, such as injunction or rescission, for breach
of fiduciary duty. The Company's Charter contains such a provision.
The Company's Charter further provides that the Company shall indemnify its
officers and directors and, to the extent authorized by the Board of Directors,
employees and agents of the Company, to the fullest extent permitted by and in
the manner permissible under the laws of the State of Delaware.
In addition, the Company has entered into agreements (the "Indemnification
Agreements") with each of the directors of the Company, and intends to enter
into similar agreements with each of the future directors of the Company,
pursuant to which the Company has agreed to indemnify each director against
claims, liabilities, damages, expenses, losses, costs, penalties or amounts paid
in settlement (collectively, "Losses") incurred by such director and arising out
of his capacity as a director, officer, employee and/or agent of the Company to
the maximum extent authorized or permitted by applicable law. In addition, each
director shall be entitled to an advance of expenses to the maximum extent
authorized or permitted by law to meet the
II-1
<PAGE> 248
obligations indemnified against. The Indemnification Agreements also obligate
the Company to purchase and maintain insurance for the benefit and on behalf of
each of its directors insuring such director in or arising out of his capacity
as a director, officer, employee and/or agent of the Company.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S> <C>
2.1 -- Agreement and Plan of Merger, dated December 9, 1997,
between U.S.Franchise Systems, Inc. and USFS Hawthorn, Inc.
(included as Appendix A to the Proxy Statement/Prospectus
filed as part of this Registration Statement).
2.2 -- Contribution Agreement, dated December 9, 1997, among
Hawthorn Suites Associates, HSA Properties, Inc., USFS
Hawthorn, Inc. and U.S. Franchise Systems Inc. (included as
Appendix B-1 to the Proxy Statement/Prospectus filed as part
of this Registration Statement).
3.1 -- Certificate of Incorporation of USFS Hawthorn, Inc., as in
effect.*
3.2 -- By-laws of USFS Hawthorn, Inc., as in effect.*
4.1 -- Reference is made to Exhibit 3.1.
4.2 -- Form of 10% Subordinated Debenture due September 29, 2007
(incorporated by reference to Exhibit A to Exhibit A to
Exhibit 3.1 of the Company's Registration Statement on Form
S-1 (Registration No. 333-11427)).
4.3 -- Specimen Class A Common Stock Certificate of USFS Hawthorn,
Inc.*
4.4 -- Specimen Class B Common Stock Certificate of USFS Hawthorn,
Inc.*
5.1 -- Opinion of Paul, Weiss, Rifkind, Wharton & Garrison as to
the legality of the USFS Hawthorn Common Stock being
registered hereby.*
8.1 -- Tax Opinion of Paul, Weiss, Rifkind, Wharton & Garrison.*
10.1 -- Form of License Agreement for Microtel brand hotels
(incorporated by reference from Exhibit 10.1 to 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 Exhibit 10.2 to the
Company's Registration Statement on Form S-1 (Registration
No. 333-11427)).
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 Exhibit 10.3 to 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 Exhibit 10.4 to 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 Exhibit 10.5 to 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 Exhibit
10.6 to the Company's Registration Statement on Form S-1
(Registration No. 333-11427)).
</TABLE>
II-2
<PAGE> 249
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S> <C>
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 Exhibit
10.7 to 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 Exhibit 10.8 to 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 Exhibit 10.9 to the
Company's Registration Statement on Form S-1 (Registration
No. 333-11427)).
10.10 -- Voting Agreement between Michael A. Leven and Andrea Leven
entered into October 30, 1996 (incorporated by reference
from Exhibit 10.10 to the Company's Registration Statement
on Form S-1 (Registration No. 333-11427)).
10.11 -- Voting Agreement between Michael A. Leven and Andrea Leven
to be entered into simultaneously with the closing of the
Merger.*
10.12 -- Voting Agreement between Michael A. Leven and Neal K.
Aronson entered into October 30, 1996 (incorporated by
reference from Exhibit 10.11 to the Company's Registration
Statement on Form S-1 (Registration No. 333-11427)).
10.13 -- Voting Agreement between Michael A. Leven and Neal K.
Aronson to be entered into simultaneously with the closing
of the Merger.*
10.14 -- Office Lease Agreement between Hallwood Real Estate
Investors Fund XV and U.S. Franchise Systems, Inc., dated
September 25, 1995 (incorporated by reference from Exhibit
10.12 to the Company's Registration Statement on Form S-1
(Registration No. 333-11427)).
10.15 -- First Amendment to Office Lease between Hallwood 95, L.P.
and U.S. Franchise Systems, Inc., dated May 20, 1996
(incorporated by reference from Exhibit 10.13 to the
Company's Registration Statement on Form S-1 (Registration
No. 333-11427)).
10.16 -- Sublease Agreement by and among Unocal Corporation, DBA
Union Oil Co. of California, U.S. Franchise Systems, Inc.
and Hallwood 95, L.P., dated July 25, 1997.*
10.17 -- Addendum to Sublease by and among Union Oil Company of
California d/b/a Unocal, U.S. Franchise Systems, Inc. and
Hallwood Real Estate Investors Fund XV, dated July 25,
1997.*
10.18 -- U.S. Franchise Systems, Inc. Amended and Restated 1996 Stock
Option Plan (incorporated by reference from Exhibit 10.14 to
the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1996 (File No. 0-28908)).
10.19 -- U.S. Franchise Systems, Inc. 1996 Stock Option Plan for
Non-Employee Directors (incorporated by reference from
Exhibit 10.15 to the Company's Registration Statement on
Form S-1 (Registration No. 333-11427)).
10.20 -- Term Sheet, dated May 14, 1996, between the Company and NACC
regarding the Franchise Financing Facility (incorporated by
reference from Exhibit 10.16 to the Company's Registration
Statement on Form S-1 (Registration No. 333-11427)).
10.21 -- Agreement of Purchase and Sale between America's Best Inns,
Inc. and The Other Selling Entities Listed on Schedule I
thereto and Best Acquisition, Inc., dated December 15, 1997.
The Registrant agrees to furnish copies of the schedules
hereto supplementally to the Commission on request.*
21.1 -- Subsidiaries of the Registrant.*
</TABLE>
II-3
<PAGE> 250
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- --------- -----------------------------------------------------------------------------------------------------
<C> <S> <C>
23.1 -- Consent of Paul, Weiss, Rifkind, Wharton & Garrison, with respect to the legality of securities being
registered (contained in Exhibit 5.1).
23.2 -- Consent of Paul, Weiss, Rifkind, Wharton & Garrison, with respect to certain tax matters (contained
in Exhibit 8.1).
23.3 -- Consent of Deloitte & Touche LLP.*
23.4 -- Consent of Deloitte & Touche LLP.*
23.5 -- Consent of Doug Geoga.*
27.1 -- Financial Data Schedule (for SEC use only).*
</TABLE>
- ---------------
* Filed herewith
(B) FINANCIAL STATEMENT SCHEDULES
None
ITEM 22. UNDERTAKINGS.
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement: (i) to
include any prospectus required by Section 10(a)(3) of the Securities Act
of 1933; (ii) to reflect in the prospectus any facts or events arising
after the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
Registration Statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than 20% change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee" table in the
effective Registration Statement; and (iii) to include any material
information with respect to the plan of distribution not previously
disclosed in the Registration Statement or any material change to such
information in the Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) The undersigned Registrant hereby undertakes as follows: that prior to
any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this Registration Statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other Items of the applicable form.
(c) The undersigned Registrant undertakes that every prospectus (i) that is
filed pursuant to paragraph (b) immediately preceding, or (ii) that purports to
meet the requirements of section 10(a)(3) of the Securities Act and is used in
connection with an offering of securities subject to Rule 415 under the
Securities Act, will be filed as a part of an amendment to the Registration
Statement and will not be used until such amendment is effective, and that, for
purposes of determining any liability under the Securities Act, each such
II-4
<PAGE> 251
post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(d) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(e) The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the Proxy
Statement/Prospectus pursuant to Items 4, 10(b), 11 or 13 of this Form, within
one business day of receipt of such request, and to send the incorporated
documents by first class mail or other equally prompt means. This includes
information contained in documents filed subsequent to the effective date of the
Registration Statement through the date of responding to the request.
(f) The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the Registration Statement when it became effective.
II-5
<PAGE> 252
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-4 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Atlanta, State of Georgia, on February 12, 1998.
USFS Hawthorn, Inc.
(Registrant)
By: /s/ Neal K. Aronson
------------------------------------
Neal K. Aronson
President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below on February 12, 1998 by the
following persons in the capacities indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLES
--------- ------
<C> <S>
/s/ Neal K. Aronson President, Principal Executive Officer,
- ----------------------------------------------------- Principal Financial Officer, Principal
Neal K. Aronson Accounting Officer and sole Director
</TABLE>
II-6
<PAGE> 1
EXHIBIT 3.1
CERTIFICATE OF INCORPORATION
of
USFS HAWTHORN, INC.
The undersigned incorporator, in order to form a corporation under the
General Corporation Law of the State of Delaware (the "General Corporation Law")
certifies as follows:
1. Name. The name of the corporation USFS Hawthorn, Inc. (the
"Corporation").
2. Address; Registered Office and Agent. The address of the
Corporation's registered office is 1209 Orange Street, Wilmington, New Castle
County, State of Delaware; and its registered agent at such address is The
Corporation Trust Company.
3. Purposes. The purpose of the Corporation is to engage in any
lawful act or activity for which corporations may be organized under the General
Corporation Law.
4. Number and Designation of Shares of Capital Stock. The total
number of shares of all classes of stock that the Corporation shall have
authority to issue is Thirty-Six Million (36,000,000), of which (a) Thirty-Five
Million (35,000,000) shall be shares of Common Stock, par value $.01 per share,
and (b) One Million (1,000,000) shall be shares of preferred stock, par value
$.01 per share (the "Preferred Stock").
<PAGE> 2
2
4.1 Common Stock. The common stock, par value $.01 per
share, shall be divided into Class A Common Stock and Class B Common Stock.
There shall be Thirty Million (30,000,000) shares of Class A Common Stock and
Five Million (5,000,000) shares of Class B Common Stock (the Class A Common
Stock and Class B Common Stock are sometimes collectively referred to herein as
the "Common Stock"). All shares of Common Stock will be identical and will
entitle the holders thereof to the same rights and privileges, except as
otherwise provided herein.
(a) Voting Rights. Except as otherwise set forth herein or
as otherwise required by law, in all matters, every holder of Class A Common
Stock shall be entitled to one (1) vote in person or by proxy for each share of
Class A Common Stock standing in such holder's name on the transfer books of the
Corporation and every holder of Class B Common Stock shall be entitled to ten
(10) votes in person or by proxy for each share of Class B Common Stock standing
in such holder's name on the transfer books of the Corporation. Holders of
Common Stock shall not have cumulative voting rights. Except as otherwise
provided herein or required by law, the holders of Class A Common Stock and
Class B Common Stock shall vote together as a single class on all matters. The
number of authorized shares of any class or classes of stock may be increased or
decreased (but not below the number of shares thereof then outstanding) by the
affirmative vote of holders of a majority of the voting power of the Common
Stock of the Corporation irrespective of the provisions of Section 242(b)(2) of
Delaware Law.
<PAGE> 3
3
(b) Dividends. Subject to the rights of holders of
Preferred Stock, and subject to any other provisions of this Certificate of
Incorporation, as amended from time to time, holders of Class A Common Stock and
Class B Common Stock shall be entitled to receive such dividends and other
distributions in cash, property or shares of stock of the Corporation as may be
declared thereon by the Board of Directors of the Corporation (the "Board of
Directors") from time to time out of assets or funds of the Corporation legally
available therefor. Shares of Class A Common Stock and Class B Common Stock will
rank on a par with each other as to dividends. No dividend in cash, property or
shares of stock of the Corporation may be declared and paid on any shares of
Common Stock unless a dividend of the same character (i.e., cash, property or
shares of stock of the Corporation) is simultaneously declared and paid on all
Common Stock, except as set forth in the sentence immediately following. If
stock dividends are paid on shares of Common Stock, then the dividends paid with
respect to (i) the Class A Common Stock shall be paid with shares of Class A
Common Stock and (ii) the Class B Common Stock shall be paid with shares of
Class B Common Stock. In the case of dividends or other distributions consisting
of other voting securities of the Corporation, the Corporation shall declare and
pay such dividends in two separate classes of such voting securities, identical
in all respects, except that the voting rights of each such security paid to the
holders of Class A Common Stock shall be one-tenth of the voting rights of each
such security paid to the holders of Class B Common Stock, and such security
paid to the holders of Class B Common Stock shall convert into the security paid
to the holders of Class A Common Stock upon the same terms
<PAGE> 4
4
and conditions applicable to the Class B Common Stock. In the case of dividends
or other distributions consisting of securities convertible into, or
exchangeable for, voting securities of the Corporation, the Corporation shall
provide that such convertible or exchangeable securities and the underlying
securities be identical in all respects (including, without limitation, the
conversion or exchange rate), except that the voting rights for the underlying
securities of the convertible or exchangeable security paid to the holders of
Class A Common Stock shall be one-tenth of the voting rights of each underlying
security of the convertible or exchangeable security paid to the holders of the
Class B Common Stock, and such underlying securities paid to the holders of the
Class B Common Stock shall convert into the underlying securities paid to the
holders of Class A Common Stock upon the same terms and conditions applicable to
the Class B Common Stock. The rate per share of each share dividend declared and
paid on the Class A Common Stock shall be identical to the simultaneous dividend
per share declared and paid on the Class B Common Stock. No offering of rights
to subscribe for shares of capital stock may be made to holders of Class A
Common Stock or Class B Common Stock unless an identical offering is made
simultaneously to the holders of the other class, except that if the offering is
of rights to subscribe for shares of Common Stock, the holders of the Class A
Common Stock shall be offered the right to subscribe for shares of Class A
Common Stock and the holders of Class B Common Stock shall be offered the right
to subscribe for shares of Class B Common Stock. All such rights offerings shall
offer the respective holders of Class A Common Stock and Class B Common Stock
the right to subscribe at the same rate per share.
<PAGE> 5
5
(c) Liquidation Rights, Merger, Etc. In the event of any
dissolution, liquidation or winding up of the affairs of the Corporation,
whether voluntary or involuntary, after payment or provision for payment of the
debts and other liabilities of the Corporation and after making provision for
the holders of each series of Preferred Stock, if any, the remaining assets and
funds of the Corporation, if any, shall be divided among and paid ratably to the
holders of the Class A Common Stock and the Class B Common Stock treated as a
single class. For purposes of this Section 4.1(c), a merger or consolidation of
the Corporation with or into any other corporation shall not constitute a
dissolution, liquidation or winding up of the affairs of the Corporation. In the
event of any merger or consolidation of the Corporation with or into any other
corporation pursuant to which shares of Class A Common Stock and Class B Common
Stock are converted into other securities, cash or other property, the shares of
Class A Common Stock and Class B Common Stock shall be converted into the
identical consideration at the same rate per share, except that any voting
securities into which Class B Common Stock shall be converted shall have ten
(10) times the voting power of any otherwise identical securities into which
Class A Common Stock is converted, unless the holders of a majority of the
shares of each such class shall have approved such merger or consolidation.
(d) Conversion Rights of Class B Common Stock.
(i) Optional Conversion. Subject to and upon
compliance with the provisions of this Section 4.1(d), each holder of shares of
Class B Common Stock shall be entitled to convert, at any time and from time to
time, any and all of the shares of such holder's Class B Common Stock, on a
one-for-
<PAGE> 6
6
one basis, into shares of Class A Common Stock. Each conversion of shares of
Class B Common Stock into shares of Class A Common Stock pursuant to this
Section 4.1(d) shall be effected by the surrender of the certificate or
certificates representing the shares to be converted (the "Converting Shares")
at the principal office of the Corporation (or such other office or agency of
the Corporation as the Corporation may designate by written notice to the
holders of Class B Common Stock) at any time during its usual business hours,
together with written notice by the holder of such Converting Shares, stating
that such holder desires to convert the Converting Shares, or a stated number of
the shares represented by such certificate or certificates, into an equal number
of shares of Class A Common Stock (the "Converted Shares"). Such notice shall
also state the name or names (with addresses) and denominations in which the
certificate or certificates for Converted Shares are to be issued and shall
include instructions for the delivery thereof. Promptly after such surrender and
the receipt of such written notice, the Corporation will issue and deliver in
accordance with the surrendering holder's instructions the certificate or
certificates evidencing the Converted Shares issuable upon such conversion, and
the Corporation will deliver to the converting holder a certificate or
certificates (which shall contain such legends, if any, as were set forth on the
surrendered certificate or certificates) representing any shares that are
represented by the certificate or certificates that were delivered to the
Corporation in connection with such conversion, but which were not converted.
Such conversion, to the extent permitted by law, shall be deemed to have been
effected as of the close of business on the date on which (A) such certificate
or certificates shall have been surrendered, (B) such notice shall have been
received by
<PAGE> 7
7
the Corporation and (C) any payment required pursuant to Section 4.1(f) shall
have been made, and at such time the rights of the holder of the Converting
Shares as such holder shall cease and the person or persons in whose name or
names the certificate or certificates for the Converted Shares are to be issued
upon such conversion shall be deemed to have become the holder or holders of
record of the Converted Shares. Upon issuance of shares in accordance with this
Section 4.1(d), such Converted Shares shall be deemed to be duly authorized,
validly issued, fully paid and non-assessable. All Converting Shares shall be
retired and canceled.
(ii) Automatic Conversion. Except as otherwise provided
in the following paragraph, each share of Class B Common Stock shall
automatically convert into one (1) share of Class A Common Stock upon the
transfer (including any transfer by operation of law, including to any estate of
a holder thereof) of such share, effective on the date on which a certificate
representing such share is presented for transfer on the books of the
Corporation. As promptly as practicable following the surrender for transfer of
a certificate representing shares of Class B Common Stock and the payment in
cash of any amount required by the provisions of Section 4.1(f), the Corporation
will deliver or cause to be delivered a certificate or certificates representing
the number of full shares of Class A Common Stock issuable upon such transfer
and automatic conversion, issued in such name or names as such holder may
direct. Such automatic conversion shall be deemed to have been effected
immediately prior to the close of business on the date of transfer. Upon the
date any automatic conversion under this Section 4.1(d)(ii), all rights of the
holder of the transferred shares of Class B Common Stock shall cease, and the
new owner or
<PAGE> 8
8
owners of such shares shall be treated for all purposes as having become the
record holder or holders of an equivalent number of shares of Class A Common
Stock.
The foregoing provision for automatic conversion shall not apply to any
transfer by a holder of Class B Common Stock (other than by will or through
intestate succession) to any immediate family member (which shall mean, with
respect to any person, such person's spouse, parents, children and grandchildren
and the spouse of such person's children and grandchildren) of such holder or to
any trust or partnership of which all the beneficiaries or partners, as the case
may be, are such holder and/or an immediate family member of such holder,
provided that the transferee of such shares grants the exclusive power to vote
such shares to the person who had such right prior to such transfer.
Shares of Class B Common Stock shall be registered in the names of the
beneficial owners thereof and not in "street" or "nominee" name. For this
purpose, a "beneficial owner" of any shares of Class B Common Stock shall mean a
person who, or an entity which, possesses the power, either singly or jointly,
to direct the voting of such shares.
(iii) Reservation of Shares. The Corporation shall at
all times reserve and keep available out of its authorized but unissued shares
of Class A Common Stock, solely for the purpose of issuance upon the conversion
of shares of Class B Common Stock, such number of shares of such class as are
then issuable upon the conversion of all outstanding shares of Class B Common
Stock; provided, that, nothing contained herein shall be construed to preclude
the Corporation from satisfying its obligations in respect of the conversion of
the
<PAGE> 9
9
outstanding shares of Class B Common Stock by delivery of shares of Class A
Common Stock held in the treasury of the Corporation. The Corporation covenants
that if any shares of Class A Common Stock required registration with or
approval of any governmental authority under any federal or state law before
such shares of Class A Common Stock may be issued upon conversion, the
Corporation will use reasonable efforts to cause such shares to be duly
registered or approved, as the case may be. The Corporation will use its
reasonable efforts to list the shares of Class A Common Stock required to be
delivered upon conversion prior to such delivery upon each national securities
exchange (including, if applicable, The NASDAQ Stock Market) upon which the
outstanding Class A Common Stock is listed or quoted at the time of such
delivery. The Corporation covenants that all shares of Class A Common Stock that
shall be issued upon conversion of the shares of fully paid and nonassessable
Class B Common Stock will, upon issue, be fully paid and nonassessable.
(e) Stock Splits, Adjustments. If the Corporation shall in
any manner subdivide (by stock split, stock dividend or otherwise) or combine
(by reverse stock split or otherwise) the outstanding shares of the Class A
Common Stock or the Class B Common Stock, then the outstanding shares of such
other classes of Common Stock will be subdivided or combined, as the case may
be, to the same extent, share and share alike, and effective provision shall be
made for the protection of the conversion rights hereunder. In case of any
reorganization, reclassification or change of shares of the Common Stock
subsequent to the date hereof (other than a change in par value or from par to
no par value as a result of a subdivision or
<PAGE> 10
10
combination), or in case of any consolidation of the Corporation with one or
more corporations or a merger of the Corporation with another corporation (other
than a consolidation or merger in which the Corporation is the resulting or
surviving corporation and which does not result in any reclassification or
change of outstanding shares of Common Stock), each holder of a share of Class B
Common Stock shall have the right at any time thereafter, so long as the
conversion right hereunder with respect to such share would exist had such event
not occurred, to convert such share into the kind and amount of shares of stock
and other securities and properties (including cash) receivable upon such
reorganization, reclassification, change, consolidation or merger by a holder of
the number of shares of Class A Common Stock, into which such shares of Class B
Common Stock might have been converted immediately prior to such reorganization,
reclassification, change, consolidation or merger. In the event of such a
reorganization, reclassification, change, consolidation or merger, effective
provision shall be made in the certificate of incorporation of the resulting or
surviving corporation or otherwise for the protection of the conversion rights
of the shares of Class B Common Stock.
(f) No Charge. The issuance of certificates for any shares
of Class A Common Stock upon conversion of shares of Class B Common Stock shall
be made without charge to the holders of such shares for any issuance or
transfer tax in respect thereof or other cost incurred by the Corporation in
connection with such conversion and the related issuance of shares of Class A
Common Stock; provided, however, that the Corporation shall not be required to
pay any tax that may be payable in respect of any transfer involved in the
issuance and delivery of any
<PAGE> 11
11
certificate in a name other than that of the holder of the Class B Common Stock
that is converted.
4.2 Preferred Stock.
(a) The shares of Preferred Stock may be issued from time to
time in one or more series of any number of shares, provided that the aggregate
number of shares issued and not canceled of any and all such series shall not
exceed the total number of shares of Preferred Stock hereinabove authorized, and
with distinctive serial designations, all as shall hereafter be stated and
expressed in the resolution or resolutions providing for the issue of such
shares of Preferred Stock from time to time adopted by the Board of Directors
pursuant to authority so to do which is hereby vested in the Board of Directors
or as is stated and expressed in this Certificate of Incorporation. Each series
of shares of Preferred Stock (i) may have such voting powers, full or limited,
or may be without voting powers; provided, however, that, unless holders of at
least seventy-five percent (75%) of the outstanding shares of Class B Common
Stock have approved the issuance of such shares of Preferred Stock, the Board of
Directors may not issue any shares of Preferred Stock that have the right (A) to
vote for the election of directors under ordinary circumstances or (B) under any
circumstances to elect fifty percent (50%) or more of the directors of the
Corporation; (ii) may be subject to redemption at such time or times and at such
prices; (iii) may be entitled to receive dividends (which may be cumulative or
non-cumulative) at such rate or rates, on such conditions and at such times, and
payable in preference to, or in such relation to, the dividends payable on any
other class or classes or series of stock; (iv) may have such rights upon the
<PAGE> 12
12
dissolution of, or upon any distribution of the assets of, the Corporation; (v)
may be made convertible into or exchangeable for shares of any other class or
classes or of any other series of the same or any other class or classes of
shares of the Corporation or any securities of the Corporation at such price or
prices or at such rates of exchange and with such adjustments; (vi) may be
entitled to the benefit of a sinking fund to be applied to the purchase or
redemption of shares of such series in such amount or amounts; (vii) may be
entitled to the benefit of conditions and restrictions upon the creation of
indebtedness of the Corporation or any subsidiary, upon the issue of any
additional shares (including additional shares of such series or of any other
series) and upon the payment of dividends or the making of other distributions
on, and the purchase, redemption or other acquisition by the Corporation or any
subsidiary of, any outstanding shares of the Corporation and (viii) may have
such other relative, participating, optional or other special rights,
qualifications, limitations or restrictions thereof, all as shall be stated in
said resolution or resolutions providing for the issue of such shares of
Preferred Stock. Any of the voting powers, designations, preferences, rights and
qualifications, limitations or restrictions of any such series of Preferred
Stock may be made dependent upon facts ascertainable outside of the resolution
or resolutions providing for the issue of such Preferred Stock adopted by the
Board pursuant to the authority vested in it by this Section 4.2, provided that
the manner in which such facts shall operate upon the voting powers,
designations, preferences, rights and qualifications, limitations or
restrictions of such series of Preferred Stock is clearly and expressly set
forth in the resolution or resolutions providing for the issue of such Preferred
Stock. The term "facts" as used
<PAGE> 13
13
in the next preceding sentence shall have the meaning given to it in Section
151(a) of the General Corporation Law. Shares of Preferred Stock of any series
that have been redeemed (whether through the operation of a sinking fund or
otherwise) or that if convertible or exchangeable, have been converted into or
exchanged for shares of any other class or classes or for securities of the
Corporation shall have the status of authorized and unissued shares of Preferred
Stock of the same series and may be reissued as a part of the series of which
they were originally a part or may be reclassified and reissued as part of a new
series of shares of Preferred Stock to be created by resolution or resolutions
of the Board or as part of any other series of shares of Preferred Stock, all
subject to the conditions or restrictions on issuance set forth in the
resolution or resolutions adopted by the Board of Directors providing for the
issue of any series of shares of Preferred Stock.
(b) Subject to the provisions of any applicable law or of
the By-laws of the Corporation, as from time to time amended, with respect to
the closing of the transfer books or the fixing of a record date for the
determination of stockholders entitled to vote and except as otherwise provided
by law or by the resolution or resolutions, or by the provisions of this
Certificate of Incorporation, providing for the issue of any series of shares of
Preferred Stock, the holders of out standing shares of Common Stock shall
exclusively possess voting power for the election of directors and for all other
purposes, each holder of record of shares of Common Stock being entitled to the
number of votes established herein for each share of Common Stock standing in
his or her name on the books of the Corporation. Except as otherwise provided by
the resolution or resolutions, or by the provisions of
<PAGE> 14
14
this Certificate of Incorporation, providing for the issue of any series of
shares of Preferred Stock, the holders of shares of Common Stock shall be
entitled, to the exclusion of the holders of shares of Preferred Stock of any
and all series, to receive such dividends as from time to time may be declared
by the Board. In the event of any liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary, after payment shall have been
made to the holders of shares of Preferred Stock of the full amount to which
they shall be entitled pursuant to the resolution or resolutions, or by the
provisions of this Certificate of Incorporation, providing for the issue of any
series of shares of Preferred Stock, the holders of shares of Common Stock shall
be entitled, to the exclusion of the holders of shares of Preferred Stock of any
and all series, to share, ratably according to the number of shares of Common
Stock held by them, in all remaining assets of the Corporation available for
distribution to its stockholders.
4.3 Issuance and Consideration. Subject to the provisions of this
Certificate of Incorporation and except as otherwise provided by law, the stock
of the Corporation, regardless of class, may be issued for such consideration
and for such corporate purposes as the Board may from time to time determine.
5. Name and Mailing Address of Incorporator. The name and mailing
address of the incorporator are: Dalia Litay, Paul, Weiss, Rifkind, Wharton and
Garrison, 1285 Avenue of the Americas, New York, New York 10019-6064.
6. Election of Directors. Members of the Board of Directors may be
elected either by written ballot or by voice vote.
<PAGE> 15
15
7. Limitation of Liability. No director of the Corporation shall be
personally liable to the Corporation or its stockholders for monetary damages
for breach of fiduciary duty as a director, provided that this provision shall
not eliminate or limit the liability of a director (a) for any breach of the
director's duty of loyalty to the Corporation or its stockholders, (b) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (c) under Section 174 of the General Corporation Law
or (d) for any transaction from which the director derived any improper personal
benefits. Any repeal or modification of the foregoing provision shall not
adversely affect any right or protection of a director of the Corporation
existing at the time of such repeal or modification.
8. Indemnification.
8.1 To the extent not prohibited by law, the Corporation
shall indemnify any person who is or was made, or threatened to be made, a party
to any threatened, pending or completed action, suit or proceeding (a
"Proceeding"), whether civil, criminal, administrative or investigative,
including, without limitation, an action by or in the right of the Corporation
to procure a judgment in its favor, by reason of the fact that such person, or a
person of whom such person is the legal representative, is or was a director or
officer of the Corporation, or, at the request of the Corporation, is or was
serving as a director or officer of any other corporation or in a capacity with
comparable authority or responsibilities for any partnership, joint venture,
trust, employee benefit plan or other enterprise (an "Other Entity"), against
judgments, fines, penalties, excise taxes, amounts paid in settlement and costs,
charges and expenses (including attorneys' fees, disbursements and other
charges).
<PAGE> 16
16
Persons who are not directors or officers of the Corporation (or otherwise
entitled to indemnification pursuant to the preceding sentence) may be similarly
indemnified in respect of service to the Corporation or to an Other Entity at
the request of the Corporation to the extent the Board at any time specifies
that such persons are entitled to the benefits of this Article 8.
8.2 The Corporation shall, from time to time, reimburse or advance
to any director or officer or other person entitled to indemnification hereunder
the funds necessary for payment of expenses, including attorneys' fees and
disbursements, incurred in connection with any Proceeding, in advance of the
final disposition of such Proceeding; provided, however, that, if required by
the General Corporation Law, such expenses incurred by or on behalf of any
director or officer or other person may be paid in advance of the final
disposition of a Proceeding only upon receipt by the Corporation of an
undertaking, by or on behalf of such director or officer (or other person
indemnified hereunder), to repay any such amount so advanced if it shall
ultimately be determined by final judicial decision from which there is no
further right of appeal that such director, officer or other person is not
entitled to be indemnified for such expenses.
8.3 The rights to indemnification and reimbursement or advancement
of expenses provided by, or granted pursuant to, this Article 8 shall not be
deemed exclusive of any other rights to which a person seeking indemnification
or reimbursement or advancement of expenses may have or hereafter be entitled
under any statute, this Certificate of Incorporation, the By-laws, any
agreement, any vote of
<PAGE> 17
17
stockholders or disinterested directors or otherwise, both as to action in his
or her official capacity and as to action in another capacity while holding such
office.
8.4 The rights to indemnification and reimbursement or advancement
of expenses provided by, or granted pursuant to, this Article 8 shall continue
as to a person who has ceased to be a director or officer (or other person
indemnified hereunder) and shall inure to the benefit of the executors,
administrators, legatees and distributees of such person.
8.5 The Corporation shall have power to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of the Corporation, or is or was serving at the request of the Corporation
as a director, officer, employee or agent of an Other Entity, against any
liability asserted against such person and incurred by such person in any such
capacity, or arising out of such person's status as such, whether or not the
Corporation would have the power to indemnify such person against such liability
under the provisions of this Article 8, the By-laws or under Section 145 of the
General Corporation Law or any other provision of law.
8.6 The provisions of this Article 8 shall be a contract between
the Corporation, on the one hand, and each director and officer who serves in
such capacity at any time while this Article 8 is in effect and any other person
entitled to indemnification hereunder, on the other hand, pursuant to which the
Corporation and each such director, officer, or other person intend to be, and
shall be, legally bound. No repeal or modification of this Article 8 shall
affect any rights or obligations with respect to any state of facts then or
theretofore existing or there-
<PAGE> 18
18
after arising or any proceeding theretofore or thereafter brought or threatened
based in whole or in part upon any such state of facts.
8.7 The rights to indemnification and reimbursement or advancement
of expenses provided by, or granted pursuant to, this Article 8 shall be
enforceable by any person entitled to such indemnification or reimbursement or
advancement of expenses in any court of competent jurisdiction. The burden of
proving that such indemnification or reimbursement or advancement of expenses is
not appropriate shall be on the Corporation. Neither the failure of the
Corporation (including its Board, its independent legal counsel and its
stockholders) to have made a determination prior to the commencement of such
action that such indemnification or reimbursement or advancement of expenses is
proper in the circumstances nor an actual determination by the Corporation
(including its Board, its independent legal counsel and its stockholders) that
such person is not entitled to such indemnification or reimbursement or
advancement of expenses shall constitute a defense to the action or create a
presumption that such person is not so entitled. Such a person shall also be
indemnified for any expenses incurred in connection with successfully
establishing his or her right to such indemnification or reimbursement or
advancement of expenses, in whole or in part, in any such proceeding.
8.8 Any director or officer of the Corporation serving in any
capacity (a) another corporation of which a majority of the shares entitled to
vote in the election of its directors is held, directly or indirectly, by the
Corporation or (b) any employee benefit plan of the Corporation or any
corporation referred to in clause (a) shall be deemed to be doing so at the
request of the Corporation.
<PAGE> 19
19
8.9 Any person entitled to be indemnified or to reimbursement or
advancement of expenses as a matter of right pursuant to this Article 8 may
elect to have the right to indemnification or reimbursement or advancement of
expenses interpreted on the basis of the applicable law in effect at the time of
the occurrence of the event or events giving rise to the applicable Proceeding,
to the extent permitted by law, or on the basis of the applicable law in effect
at the time such indemnification or reimbursement or advancement of expenses is
sought. Such election shall be made, by a notice in writing to the Corporation,
at the time indemnification or reimbursement or advancement of expenses is
sought; provided, however, that if no such notice is given, the right to
indemnification or reimbursement or advancement of expenses shall be determined
by the law in effect at the time indemnification or reimbursement or advancement
of expenses is sought.
9. Action by Stockholders.
9.1 No Action by Written Consent. The stockholders of the
Corporation entitled to take action on any matter may not consent in writing to
the taking of any such action without a meeting of stockholders duly called and
held in accordance with law and this Certificate of Incorporation and the
By-laws.
9.2 Meetings of Stockholders. The annual meeting of
stockholders for the election of directors and the transaction of such other
business as may be brought before such meeting in accordance with this
Certificate of Incorporation shall be held at such hour and on such business day
in each year as may be determined by resolution adopted by the affirmative vote
of a majority of the entire Board of Directors (the "entire Board"). Except as
otherwise required by law, special meetings of stockholders may be called only
at the direction of the
<PAGE> 20
20
Directors by resolution adopted by the affirmative vote of a majority of the
entire Board or by the Chairman or by the Chief Executive Officer. Upon a
written request by the Board of Directors to call a special meeting of
stockholders, the Chairman, the President or the Chief Executive Officer shall
call such meeting. Except as otherwise required by law, stockholders of the
Corporation shall not have the right to request or call a special meeting of the
stockholders. Annual and special meetings of stockholders shall not be called or
held otherwise than as herein provided.
10. Adoption, Amendment and/or Repeal of By-Laws. The Board of
Directors may from time to time adopt, amend or repeal the By-laws; provided,
however, that any By-laws adopted or amended by the Board of Directors may be
amended or repealed, and any By-laws may be adopted, by the stockholders of the
Corporation by vote of a majority of the holders of shares of stock of the
Corporation entitled to vote in the election of directors of the Corporation.
11. Amendment of Certain Articles.
11.1 The provisions set forth in Article Eleven, Article Nine
and Section 4.2 (a)(i) may not be amended, altered, changed or repealed in any
respect unless such amendment, alteration, change or repeal is approved by the
affirmative vote of holders of not less than seventy-five percent (75%) of the
voting power of the outstanding shares of the Corporation entitled to vote
thereon, voting together as a single class. In addition, any proposed amendment,
alteration or change to this Certificate of Incorporation, or repeal of any
provision of this Certificate of Incorporation, which would amend, alter, change
or repeal the powers, preferences or
<PAGE> 21
21
special rights of the shares of Class B Common Stock so as to affect them
adversely, the affirmative vote of not less than seventy-five percent (75%) of
the outstanding shares of Class B Common Stock voting as a separate class, shall
be required in addition to the vote otherwise required pursuant to this Article
Eleven.
11.2 Subject to the provisions of Section 11.1 of this Article
Eleven, the Corporation reserves the right to amend, alter, change or repeal any
provision contained in this Certificate of Incorporation, in the manner now or
hereafter prescribed by statute, and all rights conferred on stockholders herein
are granted subject to this reservation.
<PAGE> 22
22
WITNESS the signature of this Certificate this 26th of November, 1997.
By: /s/ Dalia Litay
-------------------------------------
Dalia Litay
<PAGE> 1
EXHIBIT 3.2
BY-LAWS
of
USFS HAWTHORN, INC.
(A Delaware Corporation)
------------------------
ARTICLE 1
DEFINITIONS
As used in these By-laws, unless the context otherwise requires, the
term:
1.1 "Assistant Secretary" means an Assistant Secretary of the
Corporation.
1.2 "Assistant Treasurer" means an Assistant Treasurer of the
Corporation.
1.3 "Board" means the Board of Directors of the Corporation.
1.4 "By-laws" means the initial by-laws of the Corporation, as
amended from time to time.
1.5 "Certificate of Incorporation" means the initial certificate of
incorporation of the Corporation, as amended, supplemented or restated from time
to time.
1.6 "CFO" means the Chief Financial Officer of the Corporation.
1.7 "Chairman" means the Chairman of the Board of Directors of the
Corporation.
<PAGE> 2
2
1.8 "Chief Executive Officer" means the Chief Executive Officer of
the Corporation.
1.9 "Corporation" means USFS Hawthorn, Inc.
1.10 "Directors" means directors of the Corporation.
1.11 "Entire Board" means all directors of the Corporation in office,
whether or not present at a meeting of the Board, but disregarding vacancies.
1.12 "General Corporation Law" means the General Corporation Law of
the State of Delaware, as amended from time to time.
1.13 "Office of the Corporation" means the executive office of the
Corporation, anything in Article 131 of the General Corporation Law to the
contrary notwithstanding.
1.14 "Officer" means the Chairman, the President, the Chief Executive
Officer, the Chief Financial Officer, any Vice President, any Secretary or
Assistant Secretary, any Treasurer or Assistant Treasurer and any other officer
of the Corporation.
1.15 "President" means the President of the Corporation.
1.16 "Secretary" means the Secretary of the Corporation.
1.17 "Stockholders" means Stockholders of the Corporation.
1.18 "Treasurer" means the Treasurer of the Corporation.
1.19 "Vice President" means a Vice President of the Corporation.
<PAGE> 3
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ARTICLE 2
STOCKHOLDERS
2.1 Place of Meetings. Every meeting of Stockholders shall be held
at the office of the Corporation or at such other place within or without the
State of Delaware as shall be specified or fixed in the notice of such meeting
or in the waiver of notice thereof.
2.2 Annual Meeting. A meeting of Stockholders shall be held annually
for the election of Directors and the transaction of other business at such hour
and on such business day in April or May or as may be determined by the Board
and designated in the notice of meeting.
2.3 Deferred Meeting for Election of Directors, Etc. If the annual
meeting of Stockholders for the election of Directors and the transaction of
other business is not held within the months specified in Article 2.2 hereof,
the Board shall call a meeting of Stockholders for the election of Directors and
the transaction of other business as soon thereafter as convenient.
2.4 Other Special Meetings. A special meeting of Stockholders (other
than a special meeting for the election of Directors), unless otherwise
prescribed by statute, may be called at any time by the Board or by the Chairman
or the Chief Executive Officer. At any special meeting of Stockholders, only
such business may be transacted as is related to the purpose or purposes of such
meeting set forth in the notice thereof given pursuant to Article 2.6 hereof or
in any waiver of notice thereof given pursuant to Article 2.7 hereof.
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2.5 Fixing Record Date. For the purpose of (a) determining the
Stockholders entitled (i) to notice of or to vote at any meeting of Stockholders
or any adjournment thereof or (ii) to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock; or (b) any other lawful
action, the Board may fix a record date, which record date shall not precede the
date upon which the resolution fixing the record date was adopted by the Board
and which record date shall not be (x) in the case of clause (a)(i) above, more
than 60 nor less than 10 days before the date of such meeting and (y) in the
case of clause (a)(iii) or (b) above, more than 60 days prior to such action. If
no such record date is fixed:
2.5.1 the record date for determining Stockholders entitled to
notice of or to vote at a meeting of Stockholders shall be at the close
of business on the day next preceding the day on which notice is given,
or, if notice is waived, at the close of business on the day next
preceding the day on which the meeting is held; and
2.5.2 the record date for determining Stockholders for any
purpose other than those specified in Article 2.5.1 shall be at the
close of business on the day on which the Board adopts the resolution
relating thereto.
When a determination of Stockholders entitled to notice of or to vote at any
meeting of Stockholders has been made as provided in this Article 2.5, such
determination shall apply to any adjournment thereof unless the Board fixes a
new record date for the adjourned meeting. Delivery made to the Corporation's
registered office in
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accordance with Article 2.5.2 shall be by hand or by certified or registered
mail, return receipt requested.
2.6 Notice of Meetings of Stockholders. Except as otherwise provided
in Articles 2.5 and 2.7 hereof, whenever under the provisions of any statute,
the Certificate of Incorporation or these By-laws, Stockholders are required or
permitted to take any action at a meeting, written notice shall be given stating
the place, date and hour of the meeting and, in the case of a special meeting,
the purpose or purposes for which the meeting is called. Unless otherwise
provided by any statute, the Certificate of Incorporation or these By-laws, a
copy of the notice of any meeting shall be given, personally or by mail, not
less than ten nor more than sixty days before the date of the meeting, to each
Stockholder entitled to notice of or to vote at such meeting. If mailed, such
notice shall be deemed to be given when deposited in the United States mail,
with postage prepaid, directed to the Stockholder at his or her address as it
appears on the records of the Corporation. An affidavit of the Secretary or an
Assistant Secretary or of the transfer agent of the Corporation that the notice
required by this Article 2.6 has been given shall, in the absence of fraud, be
prima facie evidence of the facts stated therein. When a meeting is adjourned to
another time or place, notice need not be given of the adjourned meeting if the
time and place thereof are announced at the meeting at which the adjournment is
taken, and at the adjourned meeting any business may be transacted that might
have been transacted at the meeting as originally called. If, however, the
adjournment is for more than thirty days, or if after the adjournment a new
record date is fixed for the
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adjourned meeting, a notice of the adjourned meeting shall be given to each
Stockholder of record entitled to vote at the meeting.
2.7 Waivers of Notice. Whenever the giving of any notice is required
by statute, the Certificate of Incorporation or these By-laws, a waiver thereof,
in writing, signed by the Stockholder or Stockholders entitled to said notice,
whether before or after the event as to which such notice is required, shall be
deemed equivalent to notice. Attendance by a Stockholder at a meeting shall
constitute a waiver of notice of such meeting except when the Stockholder
attends a meeting for the express purpose of objecting, at the beginning of the
meeting, to the transaction of any business on the ground that the meeting has
not been lawfully called or convened. Neither the business to be transacted at,
nor the purpose of, any regular or special meeting of the Stockholders need be
specified in any written waiver of notice unless so required by statute, the
Certificate of Incorporation or these By-laws.
2.8 List of Stockholders. The Secretary shall prepare and make, or
cause to be prepared and made, at least ten days before every meeting of
Stockholders, a complete list of the Stockholders entitled to vote at the
meeting, arranged in alphabetical order, and showing the address of each
Stockholder and the number of shares registered in the name of each Stockholder.
Such list shall be open to the examination of any Stockholder, the Stockholder's
agent, or attorney, at the Stockholder's expense, for any purpose germane to the
meeting, during ordinary business hours, for a period of at least ten days prior
to the meeting, either at a place within the city where the meeting is to be
held, which place shall be specified in the
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notice of the meeting, or, if not so specified, at the place where the meeting
is to be held. The list shall also be produced and kept at the time and place of
the meeting during the whole time thereof, and may be inspected by any
Stockholder who is present. The Corporation shall maintain the Stockholder list
in written form or in another form capable of conversion into written form
within a reasonable time. Upon the willful neglect or refusal of the Directors
to produce such a list at any meeting for the election of Directors, they shall
be ineligible for election to any office at such meeting. The stock ledger shall
be the only evidence as to who are the Stockholders entitled to examine the
stock ledger, the list of Stockholders or the books of the Corporation, or to
vote in person or by proxy at any meeting of Stockholders.
2.9 Notice of Stockholder Business and Nominations.
2.9.1 Annual Meetings of Stockholders.
(a) Nominations of persons for election to the Board of
Directors of the Corporation and proposals of business to be considered by the
stockholders at an annual meeting of stockholders may be made (i) pursuant to
the Corporation's notice of meeting delivered pursuant to Section 2.6 of these
By-laws, (ii) by or at the direction of the Chairman of the Board of Directors
or (iii) by any stockholder of the Corporation who is entitled to vote at the
meeting, who complied with the notice procedures set forth in clauses (b) and
(c) of this Section 2.9.1(a) and who was a stockholder of record at the time
such notice is delivered to the Secretary of the Corporation.
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(b) For nominations or other business to be properly
brought before an annual meeting by a stockholder pursuant to clause (iii) of
Section 2.9.1(a), the stockholder must have given timely notice thereof in
writing to the Secretary of the Corporation. To be timely, a stockholder's
notice shall be delivered to the Secretary at the principal executive offices of
the Corporation not less than seventy days nor more than ninety days prior to
the first anniversary of the preceding year's annual meeting; provided, however,
that in the event that the date of the annual meeting is advanced by more than
twenty days, or delayed by more than seventy days, from such anniversary date,
notice by the stockholder to be timely must be so delivered not earlier than the
ninetieth day prior to such annual meeting and not later than the close of
business on the later of the seventieth day prior to such annual meeting or the
tenth day following the day on which public announcement of the date of such
meeting is first made. Such stockholder's notice shall set forth (i) as to each
person whom the stockholder proposes to nominate for election or re-election as
a director, all information relating to such person that is required to be
disclosed in solicitations of proxies for election of directors, or is otherwise
required, in each case pursuant to Regulation 14A under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), including such person's written
consent to being named in the proxy statement as a nominee and to serve as a
director if elected; (ii) as to any other business desired to be brought before
the meeting, the reasons for conducting such business at the meeting and any
material interest in such business of such stockholder and the beneficial owner,
if any, on whose behalf the proposal is made; and (iii) as to
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the stockholder giving the notice and the beneficial owner, if any, on whose
behalf the nomination or proposal is made (1) the name and address of such
stockholder, as they appear on the Corporation's books, and of such beneficial
owner and (2) the class and number of shares of the Corporation which are owned
beneficially and of record by such stockholder and such beneficial owner.
(c) Notwithstanding anything in the second sentence of
Section 2.9.1(b) to the contrary, in the event that the number of directors to
be elected to the Board of Directors of the Corporation is increased and there
is no public announcement naming all of the nominees for director or specifying
the size of the increased Board of Directors made by the Corporation at least
eighty days prior to the first anniversary of the preceding year's annual
meeting, a stockholder's notice required by the By-law shall also be considered
timely, but only with respect to nominees for any new positions created by such
increase, if it shall be delivered to the Secretary at the principal executive
offices of the Corporation not later than the close of business on the tenth day
following the day on which such public announcement is first made by the
Corporation.
2.9.2 Special Meetings of Stockholders. Only such business
shall be conducted at a special meeting of stockholders as shall have
been brought before the meeting pursuant to the Corporation's notice of
meeting pursuant to 2.6 of these By-laws. Nominations of persons for
election to the Board of Directors may be made at a special meeting of
stockholders at which directors are to be elected pursuant to the
Corporation's notice of meeting (a) by or at the direction of the Board
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of Directors or (b) by any stockholder of the Corporation who is
entitled to vote at the meeting, who complies with the notice
procedures set forth in this By-law and who is a stockholder of record
at the time such notice is delivered to the Secretary of the
Corporation. Nominations by stockholders of persons for election to the
Board of Directors may be made at such special meeting of stockholders
if the stockholder's notice as required by paragraph 2.9.1(b) of this
By-law shall be delivered to the Secretary at the principal executive
offices of the Corporation not earlier than the ninetieth day prior to
such special meeting and not later than the close of business on the
later of the seventieth day prior to such special meeting or the tenth
day following the day on which public announcement is first made of the
date of the special meeting and of the nominees proposed by the Board
of Directors to be elected at such meeting. In no event shall the
public announcement of an adjournment of a special meeting commence a
new time period for the giving of a stockholder's notice as described
above.
2.9.3 General.
(a) Only persons who are nominated in accordance with
the procedure set forth in this By-law shall be eligible to serve as a director,
and only such business shall be conducted at a meeting of stockholders as shall
have been brought before the meeting in accordance with the procedures set forth
in this By-law. Except as otherwise provided by law, the Certificate of
Incorporation or these Bylaws, the chairman of the meeting shall have the power
and duty to determine whether a nomination or any business proposed to be
brought before the meeting was made in
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accordance with the procedures set forth in this By-law and, if any proposed
nomination or business is not in compliance with this By-law, to declare that
such defective proposal or nomination shall be disregarded.
(b) For purposes of this By-law, "public announcement"
shall mean disclosure in a press release reported by the Dow Jones New Service,
Associated Press or comparable national news service or in a document publicly
filed by the Corporation with the Securities and Exchange Commission pursuant to
Section 13, 14 or 15(d) of the Exchange Act.
(c) Notwithstanding the foregoing provisions of this
By-law, a stockholder shall also comply with all applicable requirements of the
Exchange Act and the rules and regulations thereunder with respect to the
matters set forth in this By-law. Nothing in this By-law shall be deemed to
affect any rights of stockholders to request inclusion of proposals in the
Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act.
2.10 Quorum of Stockholders; Adjournment. Except as otherwise
provided by any statute, the Certificate of Incorporation or these By-laws, the
holders of one-third of all outstanding shares of stock entitled to vote at any
meeting of Stockholders, present in person or represented by proxy, shall
constitute a quorum for the transaction of any business at such meeting. When a
quorum is once present to organize a meeting of Stockholders, it is not broken
by the subsequent withdrawal of any Stockholders. The holders of a majority of
the shares of stock present in person or represented by proxy at any meeting of
Stockholders, including an adjourned
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meeting, whether or not a quorum is present, may adjourn such meeting to another
time and place. Shares of its own stock belonging to the Corporation or to
another corporation, if a majority of the shares entitled to vote in the
election of directors of such other corporation is held, directly or indirectly,
by the Corporation, shall neither be entitled to vote nor be counted for quorum
purposes; provided, however, that the foregoing shall not limit the right of the
Corporation to vote stock, including but not limited to its own stock, held by
it in a fiduciary capacity.
2.11 Voting; Proxies. Unless otherwise provided in the Certificate of
Incorporation, every Stockholder of record shall be entitled at every meeting of
Stockholders to one vote for each share of capital stock standing in his or her
name on the record of Stockholders determined in accordance with Article 2.5
hereof. If the Certificate of Incorporation provides for more or less than one
vote for any share on any matter, each reference in the By-laws or the General
Corporation Law to a majority or other proportion of stock shall refer to such
majority or other proportion of the votes of such stock. The provisions of
Articles 212 and 217 of the General Corporation Law shall apply in determining
whether any shares of capital stock may be voted and the persons, if any,
entitled to vote such shares; but the Corporation shall be protected in assuming
that the persons in whose names shares of capital stock stand on the stock
ledger of the Corporation are entitled to vote such shares. Holders of
redeemable shares of stock are not entitled to vote after the notice of
redemption is mailed to such holders and a sum sufficient to redeem the stocks
has been deposited with a bank, trust company, or other financial institution
under an irrevocable
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obligation to pay the holders the redemption price on surrender of the shares of
stock. At any meeting of Stockholders (at which a quorum was present to organize
the meeting), all matters, except as otherwise provided by statute or by the
Certificate of Incorporation or by these By-laws, shall be decided by a majority
of the votes cast at such meeting by the holders of shares present in person or
represented by proxy and entitled to vote thereon, whether or not a quorum is
present when the vote is taken. All elections of Directors shall be by written
ballot unless otherwise provided in the Certificate of Incorporation. In voting
on any other question on which a vote by ballot is required by law or is
demanded by any Stockholder entitled to vote, the voting shall be by ballot.
Each ballot shall be signed by the Stockholder voting or the Stockholder's proxy
and shall state the number of shares voted. On all other questions, the voting
may be viva voce. Each Stockholder entitled to vote at a meeting of Stockholders
or to express consent or dissent to corporate action in writing without a
meeting may authorize another person or persons to act for such Stockholder by
proxy. The validity and enforceability of any proxy shall be determined in
accordance with Article 212 of the General Corporation Law. A Stockholder may
revoke any proxy that is not irrevocable by attending the meeting and voting in
person or by filing an instrument in writing revoking the proxy or by delivering
a proxy in accordance with applicable law bearing a later date to the Secretary.
2.12 Voting Procedures and Inspectors of Election at Meetings of
Stockholders. The Board, in advance of any meeting of Stockholders, may appoint
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one or more inspectors to act at the meeting and make a written report thereof.
The Board may designate one or more persons as alternate inspectors to replace
any inspector who fails to act. If no inspector or alternate is able to act at a
meeting, the person presiding at the meeting may appoint, and on the request of
any Stockholder entitled to vote thereat shall appoint, one or more inspectors
to act at the meeting. Each inspector, before entering upon the discharge of his
or her duties, shall take and sign an oath faithfully to execute the duties of
inspector with strict impartiality and according to the best of his or her
ability. The inspectors shall (a) ascertain the number of shares outstanding and
the voting power of each, (b) determine the shares represented at the meeting
and the validity of proxies and ballots, (c) count all votes and ballots, (d)
determine and retain for a reasonable period a record of the disposition of any
challenges made to any determination by the inspectors, and (e) certify their
determination of the number of shares represented at the meeting and their count
of all votes and ballots. The inspectors may appoint or retain other persons or
entities to assist the inspectors in the performance of their duties. Unless
otherwise provided by the Board, the date and time of the opening and the
closing of the polls for each matter upon which the Stockholders will vote at a
meeting shall be determined by the person presiding at the meeting and shall be
announced at the meeting. No ballot, proxies or votes, or any revocation thereof
or change thereto, shall be accepted by the inspectors after the closing of the
polls unless the Court of Chancery of the State of Delaware upon application by
a Stockholder shall determine otherwise.
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2.13 Organization. At each meeting of Stockholders, the President, or
in the absence of the President, the Chairman, or if there is no Chairman or if
there be one and the Chairman is absent, a Vice President, and in case more than
one Vice President shall be present, that Vice President designated by the Board
(or in the absence of any such designation, the most senior Vice President,
based on age, present), shall act as chairman of the meeting. The Secretary, or
in his or her absence one of the Assistant Secretaries, shall act as secretary
of the meeting. In case none of the officers above designated to act as chairman
or secretary of the meeting, respectively, shall be present, a chairman or a
secretary of the meeting, as the case may be, shall be chosen by a majority of
the votes cast at such meeting by the holders of shares of capital stock present
in person or represented by proxy and entitled to vote at the meeting.
2.14 Order of Business. The order of business at all meetings of
Stockholders shall be as determined by the chairman of the meeting, but the
order of business to be followed at any meeting at which a quorum is present may
be changed by a majority of the votes cast at such meeting by the holders of
shares of capital stock present in person or represented by proxy and entitled
to vote at the meeting.
ARTICLE 3
Directors
3.1 General Powers. Except as otherwise provided in the Certificate
of Incorporation, the business and affairs of the Corporation shall be managed
by or under the direction of the Board. The Board may adopt such rules
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and regulations, not inconsistent with the Certificate of Incorporation or these
By-laws or applicable laws, as it may deem proper for the conduct of its
meetings and the management of the Corporation. In addition to the powers
expressly conferred by these By-laws, the Board may exercise all powers and
perform all acts that are not required, by these By-laws or the Certificate of
Incorporation or by statute, to be exercised and performed by the Stockholders.
3.2 Number; Qualification; Term of Office. The Board shall consist
of seven (7) members or such other number as may be fixed from time to time by
action of the Board. Directors need not be Stockholders. Each Director shall
hold office until a successor is elected and qualified or until the Director's
death, resignation or removal.
3.3 Election. Directors shall, except as otherwise required by
statute or by the Certificate of Incorporation, be elected by a plurality of the
votes cast at a meeting of Stockholders by the holders of shares entitled to
vote in the election.
3.4 Newly Created Directorships and Vacancies. Unless otherwise
provided in the Certificate of Incorporation, newly created Directorships
resulting from an increase in the number of Directors and vacancies occurring in
the Board for any other reason, including the removal of Directors without
cause, may be filled by the affirmative votes of a majority of the entire Board,
although less than a quorum, or by a sole remaining Director, or may be elected
by a plurality of the votes cast by the holders of shares of capital stock
entitled to vote in the election at a special
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meeting of Stockholders called for that purpose. A Director elected to fill a
vacancy shall be elected to hold office until a successor is elected and
qualified, or until the Director's earlier death, resignation or removal.
3.5 Resignation. Any Director may resign at any time by written
notice to the Corporation. Such resignation shall take effect at the time
therein specified, and, unless otherwise specified in such resignation, the
acceptance of such resignation shall not be necessary to make it effective.
3.6 Removal. Subject to the provisions of Article 141(k) of the
General Corporation Law, any or all of the Directors may be removed with or
without cause by vote of the holders of a majority of the shares then entitled
to vote at an election of Directors.
3.7 Compensation. Each Director, in consideration of his or her
service as such, shall be entitled to receive from the Corporation such amount
per annum or such fees for attendance at Directors' meetings, or both, as the
Board may from time to time determine, together with reimbursement for the
reasonable out-of-pocket expenses, if any, incurred by such Director in
connection with the performance of his or her duties. Each Director who shall
serve as a member of any committee of Directors in consideration of serving as
such shall be entitled to such additional amount per annum or such fees for
attendance at committee meetings, or both, as the Board may from time to time
determine, together with reimbursement for the reasonable out-of-pocket
expenses, if any, incurred by such Director in the performance of his or her
duties. Nothing contained in this Article 3.7 shall preclude
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any Director from serving the Corporation or its subsidiaries in any other
capacity and receiving proper compensation therefor.
3.8 Times and Places of Meetings. The Board may hold meetings, both
regular and special, either within or without the State of Delaware. The times
and places for holding meetings of the Board may be fixed from time to time by
resolution of the Board or (unless contrary to a resolution of the Board) in the
notice of the meeting.
3.9 Annual Meetings. On the day when and at the place where the
annual meeting of Stockholders for the election of Directors is held, and as
soon as practicable thereafter, the Board may hold its annual meeting, without
notice of such meeting, for the purposes of organization, the election of
officers and the transaction of other business. The annual meeting of the Board
may be held at any other time and place specified in a notice given as provided
in Article 3.11 hereof for special meetings of the Board or in a waiver of
notice thereof.
3.10 Regular Meetings. Regular meetings of the Board may be held
without notice at such times and at such places as shall from time to time be
determined by the Board.
3.11 Special Meetings. Special meetings of the Board may be called by
the Chairman, the President or the Secretary or by any two or more Directors
then serving on at least one day's notice to each Director given by one of the
means specified in Article 3.14 hereof other than by mail, or on at least three
days' notice if given by mail. Special meetings shall be called by the Chairman,
President or
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Secretary in like manner and on like notice on the written request of any two or
more of the Directors then serving.
3.12 Telephone Meetings. Directors or members of any committee
designated by the Board may participate in a meeting of the Board or of such
committee by means of conference telephone or similar communications equipment
by means of which all persons participating in the meeting can hear each other,
and participation in a meeting pursuant to this Article 3.12 shall constitute
presence in person at such meeting.
3.13 Adjourned Meetings. A majority of the Directors present at any
meeting of the Board, including an adjourned meeting, whether or not a quorum is
present, may adjourn such meeting to another time and place. At least one day's
notice of any adjourned meeting of the Board shall be given to each Director
whether or not present at the time of the adjournment, if such notice shall be
given by one of the means specified in Article 3.14 hereof other than by mail,
or at least three days' notice if by mail. Any business may be transacted at an
adjourned meeting that might have been transacted at the meeting as originally
called.
3.14 Notice Procedure. Subject to Articles 3.11 and 3.17 hereof,
whenever, under the provisions of any statute, the Certificate of Incorporation
or these By-laws, notice is required to be given to any Director, such notice
shall be deemed given effectively if given in person or by telephone, by mail
addressed to such Director at such Director's address as it appears on the
records of the
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Corporation, with postage thereon prepaid, or by telegram, telex, telecopy or
similar means addressed as aforesaid.
3.15 Waiver of Notice. Whenever the giving of any notice is required
by statute, the Certificate of Incorporation or these By-laws, a waiver thereof,
in writing, signed by the person or persons entitled to said notice, whether
before or after the event as to which such notice is required, shall be deemed
equivalent to notice. Attendance by a person at a meeting shall constitute a
waiver of notice of such meeting except when the person attends a meeting for
the express purpose of objecting, at the beginning of the meeting, to the
transaction of any business on the ground that the meeting has not been lawfully
called or convened. Neither the business to be transacted at, nor the purpose
of, any regular or special meeting of the Directors or a committee of Directors
need be specified in any written waiver of notice unless so required by statute,
the Certificate of Incorporation or these By-laws.
3.16 Organization. At each meeting of the Board, the Chairman, or,
in the absence of the Chairman, the President, or, in the absence of the
President, a chairman chosen by a majority of the Directors present, shall
preside. The Secretary shall act as secretary at each meeting of the Board. In
case the Secretary shall be absent from any meeting of the Board, an Assistant
Secretary shall perform the duties of secretary at such meeting; and in the
absence from any such meeting of the Secretary and all Assistant Secretaries,
the person presiding at the meeting may appoint any person to act as secretary
of the meeting.
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3.17 Quorum of Directors. The presence in person of a majority of the
entire Board shall be necessary and sufficient to constitute a quorum for the
transaction of business at any meeting of the Board, but a majority of a smaller
number may adjourn any such meeting to a later date.
3.18 Action by Majority Vote. Except as otherwise expressly required
by statute, the Certificate of Incorporation or these By-laws, the act of a
majority of the Directors present at a meeting at which a quorum is present
shall be the act of the Board.
3.19 Action Without Meeting. Unless otherwise restricted by the
Certificate of Incorporation or these By-laws, any action required or permitted
to be taken at any meeting of the Board or of any committee thereof may be taken
without a meeting if all Directors or members of such committee, as the case may
be, consent thereto in writing, and the writing or writings are filed with the
minutes of proceedings of the Board or committee.
ARTICLE 4
COMMITTEES OF THE BOARD
4.1 Generally. The Board may, by resolution passed by a vote of the
entire Board, designate one or more committees, each committee to consist of one
or more of the Directors of the Corporation. The Board may designate one or more
Directors as alternate members of any committee, who may replace any absent or
disqualified members at any meeting of such committee. If a member of a
committee shall be absent from any meeting, or disqualified from voting thereat,
the remaining
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member or members present and not disqualified from voting, whether or not such
member or members constitute a quorum, may, by a unanimous vote, appoint another
member of the Board to act at the meeting in the place of any such absent or dis
qualified member. Any such committee, to the extent provided in a resolution of
the Board passed as aforesaid, shall have and may exercise all the powers and
authority of the Board in the management of the business and affairs of the
Corporation, and may authorize the seal of the Corporation to be impressed on
all papers that may require it, but no such committee shall have the power or
authority of the Board in reference to amending the Certificate of
Incorporation, adopting an agreement of merger or consolidation under Article
251 or Article 252 of the General Corporation Law, recommending to the
Stockholders (a) the sale, lease or exchange of all or substantially all of the
Corporation's property and assets, or (b) a dissolution of the Corporation or a
revocation of a dissolution, or amending the By-laws of the Corporation; and,
unless the resolution designating it expressly so provides, no such committee
shall have the power and authority to declare a dividend, to authorize the
issuance of stock or to adopt a certificate of ownership and merger pursuant to
Article 253 of the General Corporation Law. Unless otherwise specified in the
resolution of the Board designating a committee, at all meetings of such
committee a majority of the total number of members of the committee shall
constitute a quorum for the transaction of business, and the vote of a majority
of the members of the committee present at any meeting at which there is a
quorum shall be the act of the committee. Each committee shall keep regular
minutes of its meetings. Unless the
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Board otherwise provides, each committee designated by the Board may make, alter
and repeal rules for the conduct of its business. In the absence of such rules
each committee shall conduct its business in the same manner as the Board
conducts its business pursuant to Article 3 of these By-laws.
4.2 Stock Reallocation Committee. To the extent required under any
agreement to which the Corporation is a party, the Board of Directors shall
appoint a Stock Reallocation Committee, with full authority to undertake the
trans actions set forth in any agreement to which the Corporation is a party, or
any other transactions as may be added by the Board of Directors. The Stock
Reallocation Committee shall have full authority to monitor, oversee and
authorize transactions with respect to stock held by Officers or held by the
Corporation for the benefit of Officers. The Stock Reallocation Committee shall
have such other authority and duties as may be delegated by the Board of
Directors from time to time.
ARTICLE 5
OFFICERS
5.1 Positions. The officers of the Corporation shall be a Chief
Executive Officer, a President, a Chief Financial Officer, a Secretary, a
Treasurer and such other officers as the Board may appoint, including a
Chairman, one or more Vice Presidents and one or more Assistant Secretaries and
Assistant Treasurers, who shall exercise such powers and perform such duties as
shall be determined from time to time by the Board. The Board may designate one
or more Vice Presidents as Executive Vice Presidents and may use descriptive
words or phrases to designate the
<PAGE> 24
24
standing, seniority or areas of special competence of the Vice Presidents
elected or appointed by it. Any number of offices may be held by the same person
unless the Certificate of Incorporation or these By-laws otherwise provide.
5.2 Appointment. The officers of the Corporation shall be chosen by
the Board at its annual meeting or at such other time or times as the Board
shall determine.
5.3 Compensation. The compensation of all officers of the
Corporation shall be fixed by the Board. No officer shall be prevented from
receiving a salary or other compensation by reason of the fact that the officer
is also a Director.
5.4 Term of Office. Each officer of the Corporation shall hold
office for the term for which he or she is elected and until such officer's
successor is chosen and qualifies or until such officer's earlier death,
resignation or removal. Any officer may resign at any time upon written notice
to the Corporation. Such resignation shall take effect at the date of receipt of
such notice or at such later time as is therein specified, and, unless otherwise
specified, the acceptance of such resignation shall not be necessary to make it
effective. The resignation of an officer shall be without prejudice to the
contract rights of the Corporation, if any. Any officer elected or appointed by
the Board may be removed at any time, with or without cause, by vote of a
majority of the entire Board; provided, however, that no employment agreement
that may be entered into with Michael A. Leven and Neal K. Aronson may be
terminated without the approval of 75% of the full Board of
<PAGE> 25
25
Directors, it being understood that the officer whose continued employment is at
issue (if such officer is also a director) may not vote on the termination of
his own employment agreement. Any vacancy occurring in any office of the
Corporation shall be filled by the Board. The removal of an officer without
cause shall be without prejudice to the officer's contract rights, if any. The
election or appointment of an officer shall not of itself create contract
rights.
5.5 Fidelity Bonds. The Corporation may secure the fidelity of any
or all of its officers or agents by bond or otherwise.
5.6 Chairman. The Chairman, if one shall have been appointed, shall
preside at all meetings of the Board and shall exercise such powers and perform
such other duties as shall be determined from time to time by the Board.
5.7 Chief Executive Officer. The Chief Executive Officer shall be
the chief executive officer of the Corporation and shall have general
supervision over the business of the Corporation, subject, however, to the
control of the Board and of any duly authorized committee of Directors. The
Chief Executive Officer shall preside at all meetings of the Stockholders and at
all meetings of the Board at which the Chairman (if there be one) is not
present. The Chief Executive Officer may sign and execute in the name of the
Corporation deeds, mortgages, bonds, contracts and other instruments except in
cases in which the signing and execution thereof shall be expressly delegated by
the Board or by these By-laws to some other officer or agent of the Corporation
or shall be required by statute otherwise to be signed or executed and, in
general, the Chief Executive Officer shall perform all duties incident to the
<PAGE> 26
26
office of Chief Executive Officer of a corporation and such other duties as may
from time to time be assigned to the Chief Executive Officer by the Board.
5.8 President. The President shall be the chief operational officer
of the Corporation and shall have general supervision over the day-to-day
affairs of the Corporation, subject, however, to the control of the Chief
Executive Officer, the Board and of any duly authorized committee of Directors.
In the absence of the Chief Executive Officer, the President shall preside at
all meetings of the Stockholders and at all meetings of the Board at which the
Chairman (if there be one) is not present. The President may sign and execute in
the name of the Corporation deeds, mortgages, bonds, contracts and other
instruments except in cases in which the signing and execution thereof shall be
expressly delegated by the Board or by these By-laws to some other officer or
agent of the Corporation or shall be required by statute otherwise to be signed
or executed and, in general, the President shall perform all duties incident to
the office of President of a corporation and such other duties as may from time
to time be assigned to the President by the Board.
5.9 Chief Financial Officer. The Chief Financial Officer shall be
the chief financial officer of the Corporation and shall have general
supervision over the finances of the Corporation, subject, however, to the
control of the Chief Executive Officer, the President, the Board and of any duly
authorized committee of Directors. The Chief Financial Officer may sign and
execute in the name of the Corporation deeds, mortgages, bonds, contracts and
other instruments except in cases in which the signing and execution thereof
shall be expressly delegated by the Board
<PAGE> 27
27
or by these By-laws to some other officer or agent of the Corporation or shall
be required by statute otherwise to be signed or executed and, in general, the
Chief Financial Officer shall perform all duties incident to the office of Chief
Financial Officer of a corporation and such other duties as may from time to
time be assigned to the Chief Financial Officer by the Board.
5.10 Vice Presidents. At the request of the Chief Executive Officer
or President, or, in the Chief Executive Officer's or the President's absence,
at the request of the Board, the Vice Presidents shall (in such order as may be
designated by the Board or, in the absence of any such designation, in order of
seniority based on age) perform all of the duties of the Chief Executive Officer
and President and, in so performing, shall have all the powers of, and be
subject to all restrictions upon, the Chief Executive Officer and President. Any
Vice President may sign and execute in the name of the Corporation deeds,
mortgages, bonds, contracts or other instruments, except in cases in which the
signing and execution thereof shall be expressly delegated by the Board or by
these By-laws to some other officer or agent of the Corporation, or shall be
required by statute otherwise to be signed or executed, and each Vice President
shall perform such other duties as from time to time may be assigned to such
Vice President by the Board or by the Chief Executive Officer or the President.
5.11 Secretary. The Secretary shall attend all meetings of the Board
and of the Stockholders and shall record all the proceedings of the meetings of
the Board and of the Stockholders in a book to be kept for that purpose, and
shall perform like duties for committees of the Board, when required. The
Secretary shall
<PAGE> 28
28
give, or cause to be given, notice of all special meetings of the Board and of
the Stockholders and shall perform such other duties as may be prescribed by the
Board or by the Chief Executive Officer or the President, under whose
supervision the Secretary shall be. The Secretary shall have custody of the
corporate seal of the Corporation, and the Secretary, or an Assistant Secretary,
shall have authority to impress the same on any instrument requiring it, and
when so impressed the seal may be attested by the signature of the Secretary or
by the signature of such Assistant Secretary. The Board may give general
authority to any other officer to impress the seal of the Corporation and to
attest the same by such officer's signature. The Secretary or an Assistant
Secretary may also attest all instruments signed by the Chief Executive Officer,
the President, the Chief Financial Officer or any Vice President. The Secretary
shall have charge of all the books, records and papers of the Corporation
relating to its organization and management, shall see that the reports,
statements and other documents required by statute are properly kept and filed
and, in general, shall perform all duties incident to the office of Secretary of
a corporation and such other duties as may from time to time be assigned to the
Secretary by the Board or by the Chief Executive Officer or the President.
5.12 Treasurer. Subject to the discretion of the Chief Financial
Officer, the Treasurer shall have charge and custody of, and be responsible for,
all funds, securities and notes of the Corporation; receive and give receipts
for moneys due and payable to the Corporation from any sources whatsoever;
deposit all such moneys and valuable effects in the name and to the credit of
the Corporation in such
<PAGE> 29
29
depositaries as may be designated by the Board; against proper vouchers, cause
such funds to be disbursed by checks or drafts on the authorized depositaries of
the Corporation signed in such manner as shall be determined by the Board and be
responsible for the accuracy of the amounts of all moneys so disbursed;
regularly enter or cause to be entered in books or other records maintained for
the purpose full and adequate account of all moneys received or paid for the
account of the Corporation; have the right to require from time to time reports
or statements giving such information as the Treasurer may desire with respect
to any and all financial transactions of the Corporation from the officers or
agents transacting the same; render to the Chief Executive Officer, President,
Chief Financial Officer or the Board, whenever such Officer(s) or the Board
shall require the Treasurer so to do, an account of the financial condition of
the Corporation and of all financial transactions of the Corporation; exhibit at
all reasonable times the records and books of account to any of the Directors
upon application at the office of the Corporation where such records and books
are kept; disburse the funds of the Corporation as ordered by the Board; and, in
general, perform all duties incident to the office of Treasurer of a corporation
and such other duties as may from time to time be assigned to the Treasurer by
the Board or the President.
5.13 Assistant Secretaries and Assistant Treasurers. Assistant
Secretaries and Assistant Treasurers shall perform such duties as shall be
assigned to them by the Secretary or by the Treasurer, respectively, or by the
Board or by the Chief Executive Officer or the President.
<PAGE> 30
30
ARTICLE 6
CONTRACTS, CHECKS, DRAFTS, BANK ACCOUNTS, ETC.
6.1 Execution of Contracts. The Board, except as otherwise provided
in these By-laws, may prospectively or retroactively authorize any officer or
officers, employee or employees or agent or agents, in the name and on behalf of
the Corporation, to enter into any contract or execute and deliver any
instrument, and any such authority may be general or confined to specific
instances, or otherwise limited.
6.2 Loans. The Board may prospectively or retroactively authorize
the Chief Executive Officer or the President or any other officer, employee or
agent of the Corporation to effect loans and advances at any time for the
Corporation from any bank, trust company or other institution, or from any firm,
corporation or individual, and for such loans and advances the person so
authorized may make, execute and deliver promissory notes, bonds or other
certificates or evidences of indebtedness of the Corporation, and, when
authorized by the Board so to do, may pledge and hypothecate or transfer any
securities or other property of the Corporation as security for any such loans
or advances. Such authority conferred by the Board may be general or confined to
specific instances, or otherwise limited.
6.3 Checks, Drafts, Etc. All checks, drafts and other orders for the
payment of money out of the funds of the Corporation and all evidences of
indebtedness of the Corporation shall be signed on behalf of the Corporation in
such manner as shall from time to time be determined by resolution of the Board.
<PAGE> 31
31
6.4 Deposits. The funds of the Corporation not otherwise employed
shall be deposited from time to time to the order of the Corporation with such
banks, trust companies, investment banking firms, financial institutions or
other depositaries as the Board may select or as may be selected by an officer,
employee or agent of the Corporation to whom such power to select may from time
to time be delegated by the Board.
ARTICLE 7
STOCK AND DIVIDENDS
7.1 Certificates Representing Shares. The shares of capital stock of
the Corporation shall be represented by certificates in such form (consistent
with the provisions of Article 158 of the General Corporation Law) as shall be
approved by the Board. Such certificates shall be signed by the Chairman, the
Chief Executive Officer, the President, the Chief Financial Officer or a Vice
President and by the Secretary or an Assistant Secretary or the Treasurer or an
Assistant Treasurer, and may be impressed with the seal of the Corporation or a
facsimile thereof. The signatures of the officers upon a certificate may be
facsimiles, if the certificate is countersigned by a transfer agent or registrar
other than the Corporation itself or its employee. In case any officer, transfer
agent or registrar who has signed or whose facsimile signature has been placed
upon any certificate shall have ceased to be such officer, transfer agent or
registrar before such certificate is issued, such certificate may, unless
otherwise ordered by the Board, be issued by the Corporation with the
<PAGE> 32
32
same effect as if such person were such officer, transfer agent or registrar at
the date of issue.
7.2 Transfer of Shares. Transfers of shares of capital stock of the
Corporation shall be made only on the books of the Corporation by the holder
thereof or by the holder's duly authorized attorney appointed by a power of
attorney duly executed and filed with the Secretary or a transfer agent of the
Corporation, and on surrender of the certificate or certificates representing
such shares of capital stock properly endorsed for transfer and upon payment of
all necessary transfer taxes. Every certificate exchanged, returned or
surrendered to the Corporation shall be marked "Cancelled," with the date of
cancellation, by the Secretary or an Assistant Secretary or the transfer agent
of the Corporation. A person in whose name shares of capital stock shall stand
on the books of the Corporation shall be deemed the owner thereof to receive
dividends, to vote as such owner and for all other purposes as respects the
Corporation. No transfer of shares of capital stock shall be valid as against
the Corporation, its Stockholders and creditors for any purpose, except to
render the transferee liable for the debts of the Corporation to the extent
provided by law, until such transfer shall have been entered on the books of the
Corporation by an entry showing from and to whom transferred.
7.3 Transfer and Registry Agents. The Corporation may from time to
time maintain one or more transfer offices or agents and registry offices or
agents at such place or places as may be determined from time to time by the
Board.
<PAGE> 33
33
7.4 Lost, Destroyed, Stolen and Mutilated Certificates. The holder
of any shares of capital stock of the Corporation shall immediately notify the
Corporation of any loss, destruction, theft or mutilation of the certificate
representing such shares, and the Corporation may issue a new certificate to
replace the certificate alleged to have been lost, destroyed, stolen or
mutilated. The Board may, in its discretion, as a condition to the issue of any
such new certificate, require the owner of the lost, destroyed, stolen or
mutilated certificate, or his or her legal representatives, to make proof
satisfactory to the Board of such loss, destruction, theft or mutilation and to
advertise such fact in such manner as the Board may require, and to give the
Corporation and its transfer agents and registrars, or such of them as the Board
may require, a bond in such form, in such sums and with such surety or sureties
as the Board may direct, to indemnify the Corporation and its transfer agents
and registrars against any claim that may be made against any of them on account
of the continued existence of any such certificate so alleged to have been lost,
destroyed, stolen or mutilated and against any expense in connection with such
claim.
7.5 Rules and Regulations. The Board may make such rules and
regulations as it may deem expedient, not inconsistent with these By-laws or
with the Certificate of Incorporation, concerning the issue, transfer and
registration of certif icates representing shares of its capital stock.
7.6 Restriction on Transfer of Stock. A written restriction on the
transfer or registration of transfer of capital stock of the Corporation, if
permitted by Article 202 of the General Corporation Law and noted conspicuously
on the
<PAGE> 34
34
certificate representing such capital stock, may be enforced against the holder
of the restricted capital stock or any successor or transferee of the holder,
including an executor, administrator, trustee, guardian or other fiduciary
entrusted with like responsibility for the person or estate of the holder.
Unless noted conspicuously on the certificate representing such capital stock, a
restriction, even though permitted by Article 202 of the General Corporation
Law, shall be ineffective except against a person with actual knowledge of the
restriction. A restriction on the transfer or registration of transfer of
capital stock of the Corporation may be imposed either by the Certificate of
Incorporation or by an agreement among any number of Stockholders or among such
Stockholders and the Corporation. No restriction so imposed shall be binding
with respect to capital stock issued prior to the adoption of the restriction
unless the holders of such capital stock are parties to an agreement or voted in
favor of the restriction.
7.7 Dividends, Surplus, Etc. Subject to the provisions of the
Certificate of Incorporation and of law, the Board:
7.7.1 may declare and pay dividends or make other distributions
on the outstanding shares of capital stock in such amounts and at such
time or times as it, in its discretion, shall deem advisable giving due
consideration to the condition of the affairs of the Corporation;
7.7.2 may use and apply, in its discretion, any of the surplus
of the Corporation in purchasing or acquiring any shares of capital
stock of the Corporation, or purchase warrants therefor, in accordance
with law, or any of
<PAGE> 35
35
its bonds, debentures, notes, scrip or other securities or evidences of
indebtedness; and
7.7.3 may set aside from time to time out of such surplus or net
profits such sum or sums as, in its discretion, it may think proper, as
a reserve fund to meet contingencies, or for equalizing dividends or
for the purpose of maintaining or increasing the property or business
of the Corporation, or for any purpose it may think conducive to the
best interests of the Corporation.
ARTICLE 8
INDEMNIFICATION
8.1 Indemnity Undertaking. To the extent not prohibited by law, the
Corporation shall indemnify any person who is or was made, or threatened to be
made, a party to any threatened, pending or completed action, suit or proceeding
(a "Proceeding"), whether civil, criminal, administrative or investigative,
including, without limitation, an action by or in the right of the Corporation
to procure a judgment in its favor, by reason of the fact that such person, or a
person of whom such person is the legal representative, is or was a Director or
officer of the Corporation, or, at the request of the Corporation, is or was
serving as a director or officer of any other corporation or in a capacity with
comparable authority or responsibilities for any partnership, limited liability
company, joint venture, trust, employee benefit plan or other enterprise (an
"Other Entity"), against judgments, fines, penalties, excise taxes, amounts paid
in settlement and costs, charges and
<PAGE> 36
36
expenses (including attorneys' fees, disbursements and other charges). Persons
who are not Directors or officers of the Corporation (or otherwise entitled to
indemnification pursuant to the preceding sentence) may be similarly indemnified
in respect of service to the Corporation or to an Other Entity at the request of
the Corporation to the extent the Board at any time specifies that such persons
are entitled to the benefits of this Article 8.
8.2 Advancement of Expenses. The Corporation shall, from time to
time, reimburse or advance to any Director or officer or other person entitled
to indemnification hereunder the funds necessary for payment of expenses,
including attorneys' fees and disbursements, incurred in connection with any
Proceeding, in advance of the final disposition of such Proceeding; provided,
however, that, if required by the General Corporation Law, such expenses
incurred by or on behalf of any Director or officer or other person may be paid
in advance of the final disposition of a Proceeding only upon receipt by the
Corporation of an undertaking, by or on behalf of such Director or officer (or
other person indemnified hereunder), to repay any such amount so advanced if it
shall ultimately be determined by final judicial decision from which there is no
further right of appeal that such Director, officer or other person is not
entitled to be indemnified for such expenses.
8.3 Rights Not Exclusive. The rights to indemnification and
reimbursement or advancement of expenses provided by, or granted pursuant to,
this Article 8 shall not be deemed exclusive of any other rights to which a
person seeking indemnification or reimbursement or advancement of expenses may
have or hereafter
<PAGE> 37
37
be entitled under any statute, the Certificate of Incorporation, these By-laws,
any agreement, any vote of Stockholders or disinterested Directors or otherwise,
both as to action in his or her official capacity and as to action in another
capacity while holding such office.
8.4 Continuation of Benefits. The rights to indemnification and
reimbursement or advancement of expenses provided by, or granted pursuant to,
this Article 8 shall continue as to a person who has ceased to be a Director or
officer (or other person indemnified hereunder) and shall inure to the benefit
of the executors, administrators, legatees and distributees of such person.
8.5 Insurance. The Corporation shall have power to purchase and
maintain insurance on behalf of any person who is or was a director, officer,
employee or agent of the Corporation, or is or was serving at the request of the
Corporation as a director, officer, employee or agent of an Other Entity,
against any liability asserted against such person and incurred by such person
in any such capacity, or arising out of such person's status as such, whether or
not the Corporation would have the power to indemnify such person against such
liability under the provisions of this Article 8, the Certificate of
Incorporation or under Article 145 of the General Corporation Law or any other
provision of law.
8.6 Binding Effect. The provisions of this Article 8 shall be a
contract between the Corporation, on the one hand, and each Director and officer
who serves in such capacity at any time while this Article 8 is in effect and
any other person entitled to indemnification hereunder, on the other hand,
pursuant to which the
<PAGE> 38
38
Corporation and each such Director, officer or other person intend to be, and
shall be, legally bound. No repeal or modification of this Article 8 shall
affect any rights or obligations with respect to any state of facts then or
theretofore existing or there after arising or any proceeding theretofore or
thereafter brought or threatened based in whole or in part upon any such state
of facts.
8.7 Procedural Rights. The rights to indemnification and
reimbursement or advancement of expenses provided by, or granted pursuant to,
this Article 8 shall be enforceable by any person entitled to such
indemnification or reimbursement or advancement of expenses in any court of
competent jurisdiction. The burden of proving that such indemnification or
reimbursement or advancement of expenses is not appropriate shall be on the
Corporation. Neither the failure of the Corporation (including its Board of
Directors, its independent legal counsel and its Stockholders) to have made a
determination prior to the commencement of such action that such indemnification
or reimbursement or advancement of expenses is proper in the circumstances nor
an actual determination by the Corporation (including its Board of Directors,
its independent legal counsel and its Stockholders) that such person is not
entitled to such indemnification or reimbursement or advancement of expenses
shall constitute a defense to the action or create a presumption that such
person is not so entitled. Such a person shall also be indemnified for any
expenses incurred in connection with successfully establishing his or her right
to such indemnification or reimbursement or advancement of expenses, in whole or
in part, in any such proceeding.
<PAGE> 39
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8.8 Service Deemed at Corporation's Request. Any Director or officer
of the Corporation serving in any capacity (a) another corporation of which a
majority of the shares entitled to vote in the election of its directors is
held, directly or indirectly, by the Corporation or (b) any employee benefit
plan of the Corporation or any corporation referred to in clause (a) shall be
deemed to be doing so at the request of the Corporation.
8.9 Election of Applicable Law. Any person entitled to be indemnified
or to reimbursement or advancement of expenses as a matter of right pursuant to
this Article 8 may elect to have the right to indemnification or reimbursement
or advancement of expenses interpreted on the basis of the applicable law in
effect at the time of the occurrence of the event or events giving rise to the
applicable Proceeding, to the extent permitted by law, or on the basis of the
applicable law in effect at the time such indemnification or reimbursement or
advancement of expenses is sought. Such election shall be made, by a notice in
writing to the Corporation, at the time indemnification or reimbursement or
advancement of expenses is sought; provided, however, that if no such notice is
given, the right to indemnification or reimbursement or advancement of expenses
shall be determined by the law in effect at the time indemnification or
reimbursement or advancement of expenses is sought.
<PAGE> 40
40
ARTICLE 9
BOOKS AND RECORDS
9.1 Books and Records. There shall be kept at the principal office
of the Corporation correct and complete records and books of account recording
the financial transactions of the Corporation and minutes of the proceedings of
the Stockholders, the Board and any committee of the Board. The Corporation
shall keep at its principal office, or at the office of the transfer agent or
registrar of the Corporation, a record containing the names and addresses of all
Stockholders, the number and class of shares held by each and the dates when
they respectively became the owners of record thereof.
9.2 Form of Records. Any records maintained by the Corporation in
the regular course of its business, including its stock ledger, books of
account, and minute books, may be kept on, or be in the form of, punch cards,
magnetic tape, photographs, microphotographs, or any other information storage
device, provided that the records so kept can be converted into clearly legible
written form within a reasonable time. The Corporation shall so convert any
records so kept upon the request of any person entitled to inspect the same.
9.3 Inspection of Books and Records. Except as otherwise provided by
law, the Board shall determine from time to time whether, and, if allowed, when
and under what conditions and regulations, the accounts, books, minutes and
other records of the Corporation, or any of them, shall be open to the
Stockholders for inspection.
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ARTICLE 10
SEAL
The corporate seal shall have inscribed thereon the name of the
Corporation, the year of its organization and the words "Corporate Seal,
Delaware." The seal may be used by causing it or a facsimile thereof to be
impressed or affixed or otherwise reproduced.
ARTICLE 11
FISCAL YEAR
The fiscal year of the Corporation shall be fixed, and may be changed,
by resolution of the Board.
ARTICLE 12
PROXIES AND CONSENTS
Unless otherwise directed by the Board, the Chairman, the Chief
Executive Officer, the President, the Chief Financial Officer, any Vice
President, the Secretary or the Treasurer, or any one of them, may execute and
deliver on behalf of the Corporation proxies respecting any and all shares or
other ownership interests of any Other Entity owned by the Corporation
appointing such person or persons as the officer executing the same shall deem
proper to represent and vote the shares or other ownership interests so owned at
any and all meetings of holders of shares or other ownership interests, whether
general or special, and/or to execute and deliver consents respecting such
shares or other ownership interests; or any of the aforesaid
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officers may attend any meeting of the holders of shares or other ownership
interests of such Other Entity and thereat vote or exercise any or all other
powers of the Corporation as the holder of such shares or other ownership
interests.
ARTICLE 13
EMERGENCY BY-LAWS
Unless the Certificate of Incorporation provides otherwise, the
following provisions of this Article 13 shall be effective during an emergency,
which is defined as when a quorum of the Corporation's Directors cannot be
readily assembled because of some catastrophic event. During such emergency:
13.1 Notice to Board Members. Any one member of the Board or any one
of the following officers: Chairman, the Chief Executive Officer, President, the
Chief Financial Officer, any Vice President, Secretary, or Treasurer, may call a
meeting of the Board. Notice of such meeting need be given only to those
Directors whom it is practicable to reach, and may be given in any practical
manner, including by publication and radio. Such notice shall be given at least
six hours prior to commencement of the meeting.
13.2 Temporary Directors and Quorum. One or more officers of the
Corporation present at the emergency Board meeting, as is necessary to achieve a
quorum, shall be considered to be Directors for the meeting, and shall so serve
in order of rank, and within the same rank, in order of seniority. In the event
that less than a quorum of the Directors are present (including any officers who
are to serve as
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Directors for the meeting), those Directors present (including the officers
serving as Directors) shall constitute a quorum.
13.3 Actions Permitted To Be Taken. The Board as constituted in
Article 13.2, and after notice as set forth in Article 13.1 may:
13.3.1 prescribe emergency powers to any officer of the
Corporation;
13.3.2 delegate to any officer or Director, any of the powers of
the Board;
13.3.3 designate lines of succession of officers and agents, in
the event that any of them are unable to discharge their duties;
13.3.4 relocate the principal place of business, or designate
successive or simultaneous principal places of business; and
13.3.5 take any other convenient, helpful or necessary action to
carry on the business of the Corporation.
ARTICLE 14
AMENDMENTS
These By-laws may be amended or repealed and new By-laws may be adopted
by a vote of the holders of shares entitled to vote in the election of Directors
or by the Board. Any By-laws adopted or amended by the Board may be amended or
repealed by the Stockholders entitled to vote thereon. Notwithstanding anything
to the contrary herein, Section 2.9 of these By-laws may not be amended or
repealed by the Stockholders without the affirmative vote of holders of not less
than 75% of the
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voting power of the outstanding shares of the Corporation entitled to vote
thereon, voting together as a single class.
<PAGE> 1
EXHIBIT 4.3
COMMON STOCK COMMON STOCK
NUMBER SHARES
USFS
U.S. FRANCHISE SYSTEMS, INC.
INCORPORATED UNDER THE LAWS SEE REVERSE FOR
OF THE STATE OF DELAWARE CERTAIN DEFINITIONS
THIS IS TO CERTIFY THAT CUSIP 902956 30 9
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF CLASS A COMMON STOCK
OF THE PAR VALUE OF $0.01 PER SHARE OF
U.S. FRANCHISE SYSTEMS, INC.
transferable upon the books of the Corporation by the holder hereof in person or
by duly authorized attorney upon surrender of this Certificate properly
endorsed. This Certificate is not valid unless countersigned and registered by
the Transfer Agent and Registrar.
Witness the facsimile seal of the Corporation and the facsimile signatures of
its duly authorized officers.
Dated:
[Signature of Neal Aronson] [Signature of Michael A. Leven]
EXECUTIVE VICE PRESIDENT AND SECRETARY PRESIDENT AND CHIEF EXECUTIVE OFFICER
U.S. FRANCHISE SYSTEMS, INC.
CORPORATE
SEAL
1997
DELAWARE
*
COUNTERSIGNED AND REGISTERED:
WACHOVIA BANK OF NORTH CAROLINA, N.A.
(WINSTON-SALEM, NC) TRANSFER AGENT AND REGISTRAR
BY:
AUTHORIZED SIGNATURE
<PAGE> 2
The Corporation will furnish without charge to each stockholder who so
requests a statement of the powers, designations, preferences and relative,
participating, optional or other special rights of each lcass of stock or series
thereof and the qualifications, limitations or restrictions of such preferences
and/or rights. Such request may be addressed to the Secretary of the Corporation
or to the Transfer Agent and Registrar named on the face of this Certificate.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM -- as tenants in common
TEN ENT -- as tenants by the entireties
JT TEN -- as joint tenants with right of
survivorship and not as tenants
in common
UNIF GIFT MIN ACT--________ Custodian ________
(Cust) (Minor)
under Uniform Gifts to Minors
Act _______________________
(State)
Additional abbreviations may also be used though not in the above list.
For Value Received, _________________________________________ hereby sell,
assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------
- --------------------------------------
- -------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------Shares
of the capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint_____________________________________________
______________________________________________________________________ Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated
------------------------------
Signature(s) Guaranteed: ------------------------------------
Signature
- ----------------------------------------- ------------------------------------
THE SIGNATURE(S) SHOULD BE GUARANTEED BY NOTICE: THE SIGNATURE(S) TO THIS AN
ELIGIBLE GUARANTOR INSTITUTION, AS ASSIGNMENT MUST CORRESPOND WITH THE
DEFINED IN RULE 17Ad-15 UNDER THE AS NAME(S) AS WRITTEN UPON THE FACE
SECURITIES AND EXCHANGE ACT OF 1934, AS OF THE CERTIFICATE IN EVERY
AMENDED. PARTICULAR, WITHOUT ALTERATION OR
ENLARGEMENT OR ANY CHANGE WHATEVER.
<PAGE> 1
EXHIBIT 4.4
NUMBER SHARES
INCORPORATED UNDER THE LAWS
OF THE STATE OF DELAWARE
U.S. FRANCHISE SYSTEMS, INC.
Total Authorized Issue
5,000,000 Shares -- Par Value $.01 each
Class B Common Stock
SEE REVERSE FOR
CERTAIN DEFINITIONS
THIS IS TO CERTIFY THAT
is the owner of
Fully Paid and Non-Assessable Shares of the above Corporation transferable upon
the books of the Corporation by the holder hereof in person or by duly
authorized Attorney upon surrender of this Certificate properly endorsed.
Witness the seal of the Corporation and the signatures of its duly
authorized officers.
Dated:
SECRETARY/TREASURER PRESIDENT
U.S. FRANCHISE SYSTEMS, INC.
CORPORATE
SEAL
1997
DELAWARE
*
<PAGE> 2
The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM--as tenants in common
TEN ENT--as tenants by the entireties
JT TEN --as joint tenants with right of
survivorship and not as tenants
in common
UNIF GIFT MIN ACT--________ Custodian ________
(Cust) (Minor)
under Uniform Gifts to Minors
Act _______________________
(State)
For Value Received, _________________________________________ hereby sell,
assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------
- --------------------------------------
- -------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Shares
- --------------------------------------------------------------------------
represented by the within Certificate, and do hereby irrevocably constitute and
appoint_____________________________________________
______________________________________________________________________ Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated
-------------------------------
In presence of:
----------------------------------------
Signature
NOTE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS
WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER.
<PAGE> 1
EXHIBIT 5.1
[LETTERHEAD OF PAUL, WEISS, RIFKIND, WHARTON & GARRISON]
(212) 373-3000
February 12, 1998
USFS Hawthorn, Inc.
13 Corporate Square, Suite 250
Atlanta, Georgia 30329
Ladies and Gentlemen:
In connection with Registration Statement on Form S-4 (the
"Registration Statement") of USFS Hawthorn, Inc., a Delaware corporation (the
"Company"), filed with the Securities and Exchange Commission (the "Commission")
pursuant to the Securities Act of 1933, as amended (the "Act"), and the rules
and regulations promulgated thereunder, we have been requested by the Company to
render this opinion as to the validity of 9,844,972 shares of Class A Common
Stock, par value $.01 per share, and 2,707,919 shares of Class B Common Stock,
par value $.01 per share (collectively, the "Merger Shares"), of the Company to
be issued as merger consideration in exchange for 9,844,972 outstanding shares
of Class A Common Stock, par value $.01 per share, and
<PAGE> 2
2
2,707,919 outstanding shares of Class B Common Stock, par value $.01 per share,
respectively, of U.S. Franchise Systems, Inc., a Delaware corporation ("USFS"),
pursuant to the terms and conditions of the Agreement and Plan of Merger, dated
December 9, 1997 (the "Merger Agreement"), by and between the Company and USFS.
In connection with furnishing this opinion, we have examined
originals, or copies certified or otherwise identified to our satisfaction, of
(i) the Certificate of Incorporation of the Company, as amended on or prior to
the date hereof, (ii) the Bylaws of the Company, as amended on or prior to the
date hereof, (iii) the Merger Agreement, (iv) the Registration Statement and (v)
all such corporate records, agreements and other instruments of the Company, and
all such other certificates, agreements and documents as we deemed relevant and
necessary as a basis for the opinion hereinafter expressed.
In our examination of the aforesaid documents, we have assumed,
without independent investigation, that the Merger Shares will be issued in
accordance with the terms of the Merger Agreement and the resolutions
authorizing their issuance. In such examination, we have also assumed, without
independent investigation, the genuineness of all signatures, the legal capacity
of all individuals who have executed any of the documents reviewed by us, the
authenticity of all documents submitted to us as originals, the conformity to
original documents of all documents submitted to us as certified, photostatic,
reproduced or conformed copies of valid existing agreements or other documents,
and the authenticity of all of such latter documents. In expressing our opinion
<PAGE> 3
3
herein, we have relied, as to certain matters of fact, on representations,
statements or certificates of officers of the Company and public officials.
Based upon the foregoing, and subject to the assumptions,
exceptions and qualifications stated herein, we are of the opinion that, at the
time the Merger (as defined in the Merger Agreement) becomes effective, the
Merger Shares will have been duly authorized, validly issued, fully paid and
non-assessable.
Our opinion expressed above is limited to the corporate law of
the State of Delaware. Our opinion is rendered only with respect to the laws and
the rules, regulations and orders thereunder, which are currently in effect.
We hereby consent to the filing of this opinion as an exhibit to
the Registration Statement and to the reference to this firm under the heading
"Legal Matters" in the Prospectus included in the Registration Statement. In
giving our consent, we do not thereby admit that we are in the category of
persons whose
<PAGE> 4
4
consent is required by the Act or the rules and regulations of the Commission
thereunder.
Very truly yours,
/s/PAUL, WEISS, RIFKIND, WHARTON & GARRISON
PAUL, WEISS, RIFKIND, WHARTON & GARRISON
<PAGE> 1
Exhibit 8.1
[Letterhead of Paul, Weiss, Rifkind, Wharton & Garrision]
(212) 373-3000
U.S. Franchise Systems, Inc.
13 Corporate Square
Suite 250
Atlanta, GA 30329
Re: U.S. Franchise Systems, Inc.
Dear Sir or Madam:
We have acted as United States federal income tax counsel for
U.S. Franchise Systems, Inc. ("USFS") in connection with the merger of USFS with
and into USFS Hawthorn, Inc. ("USH") in which USH will be the surviving
corporation (the "Merger").
We are giving this opinion in connection with the Proxy
Statement, as amended (the "Proxy Statement"), relating to the Merger filed
pursuant to the Securities Act of 1933, as amended, and the rules and
regulations of the Securities Exchange Commission promulgated thereunder.
Capitalized terms used but not defined herein have the respective meanings
ascribed to them in the Proxy Statement.
In rendering our opinion, we have examined originals or
copies, certified or otherwise identified to our satisfaction, of such
agreements and other documents as we have deemed relevant and necessary and we
have made such investigations of law as we have deemed appropriate as a basis
for the opinion expressed below. In our
<PAGE> 2
U.S. Franchise Systems, Inc.
2
examination, we have assumed the authenticity of original documents, the
accuracy of copies and the genuineness of signatures. We understand and assume
that (i) each such agreement represents the valid and binding obligation of the
respective parties thereto, enforceable in accordance with its respective terms
and the entire agreement between the parties with respect to the subject matter
thereof, (ii) the parties to each agreement have complied, and will comply, with
all of their respective covenants, agreements and undertakings contained
therein, (iii) the transactions provided for by each agreement were and will be
carried out in accordance with their terms and (iv) certain representations
regarding factual matters and certain covenants as to future actions made by
USFS, USH and major holders of USFS Common Stock will be complied with.
Our opinion is based upon existing United States federal
income tax laws, regulations, administrative pronouncements and judicial
decisions. All such authorities are subject to change, either prospectively or
retroactively, and any such change could affect our opinion.
The opinion set forth herein has no binding effect on the
United States Internal Revenue Service or the courts of the United States. No
assurance can be given that, if the matter were contested, a court would agree
with the opinion set forth herein.
We hereby confirm the opinion set forth under the caption
"Certain Federal Income Tax Consequences" in the Proxy Statement. While such
description discusses the material anticipated United States federal income tax
consequences applicable to holders of USFS Common Stock who are citizens or
residents of the United States, it does not purport to discuss all United States
federal income tax consequences and our opinion is limited to those United
States federal income tax consequences specifically discussed therein.
In giving the foregoing opinion, we express no opinion other
than as to the federal income tax laws of the United States of America.
We are furnishing this letter in our capacity as United States
federal income tax counsel to USFS. This letter is not to be used, circulated,
quoted or otherwise referred to for any other purpose, except as set forth
below.
We hereby consent to the filing of this opinion as an Exhibit
to the Proxy Statement and we further consent to the use of our name under the
captions "Certain
<PAGE> 3
U.S. Franchise Systems, Inc.
3
Federal Income Tax Consequences in the Proxy Statement." The issuance of such a
consent does not concede that we are an "expert" for purposes of the Securities
Act.
Very truly yours,
/s/PAUL, WEISS, RIFKIND, WHARTON & GARRISON
PAUL, WEISS, RIFKIND, WHARTON & GARRISON
<PAGE> 1
EXHIBIT 10.11
VOTING AGREEMENT
VOTING AGREEMENT, dated as of ____________1998 (this "Agreement"),
between MICHAEL A. LEVEN ("M. Leven") and ANDREA E. LEVEN ("A. Leven").
WHEREAS, as of the date hereof, A. Leven owns 233,032 shares of
Class A Common Stock, par value $0.01 per share (the "Class A Common Stock"),
and 770,801 shares of Class B Common Stock, par value $0.01 per share (the
"Class B Common Stock") of USFS Hawthorn, Inc. (the "Company"). The term
"Company" includes any entity which survives a merger or consolidation involving
USFS Hawthorn, Inc.
WHEREAS, in connection with the initial public offering of U.S.
Franchise Systems, Inc., a Delaware corporation which has merged with and into
the Company (the "Merger"), and at the request of the Underwriters of such
offering, A. Leven and M. Leven entered into a similar Voting Agreement which
subsequent to the Merger is no longer effective.
WHEREAS, A. Leven has agreed to enter into this Agreement with
respect to 232,032 shares of Class A Common Stock and 770,801 shares of Class B
Common Stock now owned by A. Leven (the "Shares") The term "Shares" includes any
securities into which such shares of Class A Common Stock or Class B Common
Stock are converted into pursuant to a merger or consolidation of the Company
with or into any other entity.
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants and agreements contained herein, and intending to be legally bound
hereby, the parties hereto hereby agree as follows:
ARTICLE I
VOTING AND PROXY
Section 1.1 Voting Agreement. A. Leven hereby agrees that during
the time this Agreement is in effect, at any meeting of the stockholders of the
Company, however called, and in any action by consent of the stockholders of the
Company, A. Leven shall vote the Shares as directed by M. Leven, and, to
effectuate such agreement, to grant to M. Leven a proxy to vote the Shares
("Proxy").
Section 1.2 Proxy. Attached hereto as Exhibit A is a proxy granted
by A.Leven to M. Leven to carry out Section 1.1.
<PAGE> 2
2
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF A. LEVEN AND M. LEVEN
A. Leven hereby represents and warrants to M. Leven as follows:
Section 2.1 Authority Relative to This Agreement. A. Leven has all
necessary power and authority to execute and deliver this Agreement and to
perform her obligations hereunder. This Agreement has been duly executed and
delivered by A. Leven and, assuming the due authorization, execution and
delivery by M. Leven, constitutes a legal, valid and binding obligation of A.
Leven, enforceable against A. Leven in accordance with its terms except to the
extent enforceability may be limited by bankruptcy, insolvency, moratorium or
other similar laws affecting creditors' rights generally or by general
principles governing the availability of equitable remedies.
Section 2.2 No Conflict. (a) The execution and delivery of this
Agreement by A. Leven does not, and the performance of this Agreement by A.
Leven shall not, (i) conflict with or violate any law, rule, regulation, order,
judgment or decree applicable to A. Leven or by which the Shares are bound or
affected or (ii) result in any breach of or constitute a default (or an event
that with notice or lapse or time or both would become a default) under, or give
to others any rights of termination, amendment, acceleration or cancellation of,
or result in the creation of a lien or encumbrance on any of the Shares pursuant
to, any note, bond, mortgage, indenture, contract, agreement, lease, license,
permit, franchise or other instrument or obligation to which A. Leven is a party
or by which A. Leven or the Shares are bound or affected.
(b) The execution and delivery of this Agreement by A.
Leven does not, and the performance of this Agreement by A. Leven shall not,
require any consent, approval, authorization or permit of, or filing with or
notification to, any governmental entity except for applicable requirements, if
any, under the federal securities laws.
Section 2.3 Title to the Shares. As of the date hereof, A. Leven is
the record and beneficial owner of the Shares. The Shares are owned free and
clear of all security interests, liens, claims, pledges, options, rights of
first refusal, agreement, limitations on A. Leven's voting rights, charges and
other encumbrances of any nature whatsoever, except as contemplated by that
certain Amended and Restated Employee Stock Purchase Agreement, originally dated
as of September 29, 1995 and amended and restated as of October 30, 1996,
between A. Leven and the Company. Except with respect to the Proxy, the
Stockholder has not appointed or granted any proxy, which appointment or grant
is still effective, with respect to the Shares.
<PAGE> 3
3
ARTICLE III
COVENANTS OF A. Leven
Section 3.1 No Inconsistent Agreement. A. Leven hereby agrees that,
except as contemplated by this Agreement, A. Leven shall not enter into any
voting agreement or grant a proxy or power of attorney with respect to the
Shares that is inconsistent with this Agreement.
ARTICLE IV
MISCELLANEOUS
Section 4.1 Termination. This Agreement shall terminate on the
earlier of (a) October 30, 2001 or (b) the transfer of the Shares to a person
that is not an "affiliate" of A. Leven (as determined under the Securities
Exchange Act of 1934 and the rules promulgated thereunder), unless earlier
terminated in writing by the parties hereto.
Section 4.2 Specific Performance. The parties hereto agree that
irreparable damage would occur in the event any provision of this Agreement was
not performed in accordance with the terms hereof and that the parties shall be
entitled to specific performance of the terms hereof, in addition to any other
remedy at law or in equity.
Section 4.3 Entire Agreement. This Agreement and the Proxy
constitute the entire agreement between A. Leven and M. Leven with respect to
the subject matter hereof and thereof and supersedes all prior agreements and
understandings, both written and oral, between A. Leven and M. Leven with
respect to the subject matter hereof and thereof.
Section 4.4 Amendment. This Agreement may not be amended except by
an instrument in writing signed by the parties hereto.
Section 4.5 Governing Law. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of Delaware regardless of
the laws that might otherwise govern under applicable principles of conflicts of
law.
Section 4.6 Assignability. This Agreement may not be assigned by
either party without the prior written consent of the other party.
<PAGE> 4
4
IN WITNESS WHEREOF, Leven and A. Leven have executed this Agreement
on the date hereof.
----------------------------------------
Michael A. Leven
----------------------------------------
Andrea E. Leven
<PAGE> 5
EXHIBIT A
PROXY
The undersigned hereby appoints MICHAEL A. LEVEN or any nominee of
MR. LEVEN, with full power of substitution (the "Proxy Holder"), as proxy for
the undersigned, to vote 233,032 shares of Class A Common Stock, par value $0.01
per share, and 770,801 shares of Class B Common Stock, par value $0.01 per
share, of USFS Hawthorn, Inc., a Delaware corporation (the "Corporation") of the
undersigned or any securities into which such shares of Class A Common Stock or
Class B Common Stock are converted into pursuant to a merger or consolidation of
the Company with or into any other entity (such number of shares to be
automatically reduced by the number of any such shares sold by the undersigned
after the date hereof) (the "Shares"), for and in the name, place and stead of
the undersigned at any annual or special meeting of stockholders of the
Corporation or of any entity which survives a merger or consolidation involving
the Company, and any adjournment(s) thereof in any manner as such Proxy Holder
sees fit, and to execute written consents in lieu of any such meeting, until the
earlier of (a) October 30, 2001, (b) the transfer of the Shares to a person who
is not an "Affiliate" of the undersigned (within the meaning of the Securities
Exchange Act of 1934, as amended) (but only with respect to the number of Shares
so transferred) (c) the death of Mr. Leven; (d) the adjudicataed incompetency of
Mr. Leven; (e) the death of the undersigned; and (f) the earlier termination
hereof by A. Leven.
This proxy is being granted in connection with the execution of a
Voting Agreement, dated the date hereof, between the undersigned and Mr. Leven.
Dated: , 1998.
-----------------
----------------------------------------
A. Leven
<PAGE> 1
EXHIBIT 10.13
1
VOTING AGREEMENT
VOTING AGREEMENT, dated as of ___________1998 (this "Agreement"),
between MICHAEL A. LEVEN ("Leven") and NEAL K. ARONSON ("Aronson").
WHEREAS, as of the date hereof, Aronson owns 589,865 shares of
Class A Common Stock, par value $0.01 per share (the "Class A Common Stock"),
and 1,509,453 shares of Class B Common Stock, par value $0.01 per share (the
"Class B Common Stock") of USFS Hawthorn, Inc. (the "Company"). The term
"Company" includes any entity which survives a merger or consolidation involving
USFS Hawthorn, Inc.
WHEREAS, in connection with the initial public offering of U.S.
Franchise Systems, Inc., a Delaware corporation which has merged with and into
the Company (the "Merger"), and at the request of the Underwriters of such
offering, Leven and Aronson entered into a similar Voting Agreement which
subsequent to the Merger is no longer effective.
WHEREAS, Aronson has agreed to enter into this Agreement with
respect to 111,347 shares of Class A Common Stock and 311,007 shares of Class B
Common Stock now owned by Aronson (the "Shares"). The term "Shares" includes any
securities into which such shares of Class A Common Stock or Class B Common
Stock are converted into pursuant to a merger or consolidation of the Company
with or into any other entity.
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants and agreements contained herein, and intending to be legally bound
hereby, the parties hereto hereby agree as follows:
ARTICLE I
VOTING AND PROXY
Section 1.1 Voting Agreement. Aronson hereby agrees that during the
time this Agreement is in effect, at any meeting of the stockholders of the
Company, however called, and in any action by consent of the stockholders of the
Company, Aronson shall vote the Shares as directed by Leven, and, to effectuate
such agreement, to grant to Leven a proxy to vote the Shares ("Proxy").
Section 1.2 Proxy. Attached hereto as Exhibit A is a proxy granted
by Aronson to Leven to carry out Section 1.1.
<PAGE> 2
2
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF ARONSON AND LEVEN
Aronson hereby represents and warrants to Leven as follows:
Section 2.1 Authority Relative to This Agreement. Aronson has all
necessary power and authority to execute and deliver this Agreement and to
perform his obligations hereunder. This Agreement has been duly executed and
delivered by Aronson and, assuming the due authorization, execution and delivery
by Leven, constitutes a legal, valid and binding obligation of Aronson,
enforceable against Aronson in accordance with its terms except to the extent
enforceability may be limited by bankruptcy, insolvency, moratorium or other
similar laws affecting creditors' rights generally or by general principles
governing the availability of equitable remedies.
Section 2.2 No Conflict. (a) The execution and delivery of this
Agreement by Aronson does not, and the performance of this Agreement by Aronson
shall not, (i) conflict with or violate any law, rule, regulation, order,
judgment or decree applicable to Aronson or by which the Shares are bound or
affected or (ii) result in any breach of or constitute a default (or an event
that with notice or lapse or time or both would become a default) under, or give
to others any rights of termination, amendment, acceleration or cancellation of,
or result in the creation of a lien or encumbrance on any of the Shares pursuant
to, any note, bond, mortgage, indenture, contract, agreement, lease, license,
permit, franchise or other instrument or obligation to which Aronson is a party
or by which Aronson or the Shares are bound or affected.
(b) The execution and delivery of this Agreement by
Aronson does not, and the performance of this Agreement by Aronson shall not,
require any consent, approval, authorization or permit of, or filing with or
notification to, any governmental entity except for applicable requirements, if
any, under the federal securities laws.
Section 2.3 Title to the Shares. As of the date hereof, Aronson is
the record and beneficial owner of the Shares. The Shares are owned free and
clear of all security interests, liens, claims, pledges, options, rights of
first refusal, agreement, limitations on Aronson's voting rights, charges and
other encumbrances of any nature whatsoever, except as contemplated by that
certain Amended and Restated Employee Stock Purchase Agreement, originally dated
as of September 29, 1995, and amended and restated as of October 30, 1996,
between Aronson and the Company. Except with respect to the Proxy, the
Stockholder has not appointed or granted any proxy, which appointment or grant
is still effective, with respect to the Shares.
<PAGE> 3
3
ARTICLE III
COVENANTS OF ARONSON
Section 3.1 No Inconsistent Agreement. Aronson hereby agrees that,
except as contemplated by this Agreement, Aronson shall not enter into any
voting agreement or grant a proxy or power of attorney with respect to the
Shares that is inconsistent with this Agreement.
ARTICLE IV
MISCELLANEOUS
Section 4.1 Termination. This Agreement shall terminate on the
earlier of (a) October 30, 2001, (b) the transfer of the Shares to a person
that is not an "affiliate" of Aronson (as determined under the Securities
Exchange Act of 1934 and the rules promulgated thereunder), (c) the death of
Mr. Leven or (d) the adjudicated incompetency of Mr. Leven, unless earlier
terminated in writing by the parties hereto.
Section 4.2 Specific Performance. The parties hereto agree that
irreparable damage would occur in the event any provision of this Agreement was
not performed in accordance with the terms hereof and that the parties shall be
entitled to specific performance of the terms hereof, in addition to any other
remedy at law or in equity.
Section 4.3 Entire Agreement. This Agreement and the Proxy
constitute the entire agreement between Aronson and Leven with respect to the
subject matter hereof and thereof and supersedes all prior agreements and
understandings, both written and oral, between Aronson and Leven with respect to
the subject matter hereof and thereof.
Section 4.4 Amendment. This Agreement may not be amended except by
an instrument in writing signed by the parties hereto.
Section 4.5 Governing Law. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of Delaware regardless of
the laws that might otherwise govern under applicable principles of conflicts of
law.
Section 4.6 Assignability. This Agreement may not be assigned by
either party without the prior written consent of the other party.
<PAGE> 4
4
IN WITNESS WHEREOF, Leven and Aronson have executed this Agreement
on the date hereof.
----------------------------------------
Michael A. Leven
----------------------------------------
Neal K. Aronson
<PAGE> 5
EXHIBIT A
PROXY
The undersigned hereby appoints MICHAEL A. LEVEN or any nominee of
MR. LEVEN, with full power of substitution (the "Proxy Holder"), as proxy for
the undersigned, to vote 111,347 shares of Class A Common Stock, par value $0.01
per share, and 311,007 shares of Class B Common Stock, par value $0.01 per
share, of USFS Hawthorn, Inc., a Delaware corporation (the "Corporation") of the
undersigned or any securities into which such shares of Class A Common Stock or
Class B Common Stock are converted into pursuant to a merger or consolidation of
the Company with or into any other entity (such number of shares to be
automatically reduced by the number of any such shares sold by the undersigned
after the date hereof) (the "Shares"), for and in the name, place and stead of
the undersigned at any annual or special meeting of stockholders of the
Corporation or of any entity which survives a merger or consolidation involving
the Company, and any adjournment(s) thereof in any manner as such Proxy Holder
sees fit, and to execute written consents in lieu of any such meeting, until the
earlier of (a) October 30, 2001, (b) the transfer of the Shares to a person who
is not an "Affiliate" of the undersigned (within the meaning of the Securities
Exchange Act of 1934, as amended) (but only with respect to the number of Shares
so transferred), (c) the death or Mr. Leven, (d) the adjudicated incompetency
of Mr. Leven and (e) the earlier termination hereof by Aronson.
This proxy is being granted in connection with the execution of a
Voting Agreement, dated the date hereof, between the undersigned and Mr. Leven.
Dated: , 1998.
------------------
----------------------------------------
Neal K. Aronson
<PAGE> 1
EXHIBIT 10.16
SUBLEASE AGREEMENT
THIS SUBLEASE AGREEMENT (this "Sublease") is made and entered
into on this 25th day of July 1997, by and between Unocal Corporation, DBA Union
Oil Co. of California ("Sublessor"), U.S. Franchise Systems, Inc. ("Sublessee"),
and Hallwood 95, L.P., a Delaware Limited Partnership ("Master Lessor").
1. Premises.
Sublessor subleases to Sublessee, and Sublessee subleases from
Sublessor, that certain premises or portion thereof known by unit number 13.200,
consisting of approximately 2,584 square feet (the "Premises"). The Premises are
outlined and depicted on the floor plan attached to this Sublease as Exhibit
"A." The Premises are located in a building being situated on the real property
described on Exhibit "B" attached hereto.
2. Term.
2.1 The term of this Sublease shall be for 2 Years commencing on
July 1, 1997 (the "Commencement Date") and ending on June 30, 1999 (the
"Termination Date") unless sooner terminated pursuant to any provision thereof.
2.2 Notwithstanding the Commencement Date, if for any reason
Sublessor cannot deliver possession of the Premises to Sublessee on the
Commencement Date, Sublessor shall not be subject to any liability therefor, nor
shall such failure affect the validity of this Sublease or the obligations of
Sublessee hereunder or extend the term hereof, but in such case Sublessee shall
not be obligated to pay rent until possession of the Premises is tendered to
Sublessee; provided, however, that if Sublessor shall not have delivered
possession of the Premises within sixty (60) days from the Commencement Date,
Sublessee may, at Sublessee's option, by notice in writing to Sublessor within
ten (10) days after such 60-day period, cancel this Sublease, in which event the
parties shall be discharged from all obligations hereunder. If Sublessee
occupies the Premises prior to the Commencement Date, such occupancy shall be
subject to all of the provisions hereof, such occupancy shall be subject to all
of the provisions hereof, such occupancy shall not advance the Termination Date
and Sublessee shall pay rent for such period at the monthly rate set forth
below.
3. Rent.
Sublessee shall pay to Sublessor as rent for the Premises
equal monthly payments of $2,549.55, in advance, on the first day of each month
of the term hereof. Sublessee shall pay Sublessor upon the execution hereof
$2,549.55 as rent for
July 1, 1997 through June 30, 1998, $2,549.55 per month
July 1, 1998 through June 30, 1999, $2,721.81 per month
Rent for any period during the term hereof which is for less than one month
shall be a pro rata portion of the monthly payment. Rent shall be payable in
lawful money of the United States of America to Sublessor at 13 Corporate
Square, Suite 200, Atlanta, GA 30329 or to such other persons or at such other
places as Sublessor may designate in writing.
4. Security Deposit.
Sublessee shall deposit with Sublessor upon execution hereof
$2,549.55 (the "Security Deposit") as security for Sublessee's faithful
performance of Sublessee's obligations hereunder. If Sublessee fails to pay rent
or other charges due hereunder, or otherwise defaults with respect to any
provision of this Sublease, Sublessor may use, apply or retain all or any
portion of the Security Deposit for the payment of any rent or other charge in
default or for the payment of any other sum to which Sublessor may become
obligated by reason of Sublessee's default, or to
<PAGE> 2
compensate Sublessor for any loss or damage which Sublessor may suffer thereby.
If Sublessor so uses or applies all or any portion of the Security Deposit,
Sublessee shall within ten (10) days after written demand therefore deposit cash
with Sublessor in an amount sufficient to restore the Security Deposit to the
full amount hereinabove stated and Sublessee's failure to do so shall be a
material breach of this Sublease. Sublessor shall not be required to keep the
Security Deposit separate from its general accounts. If Sublessee performs all
of Sublessee's obligations hereunder, the Security Deposit, or so much thereof
as has not theretofore been applied by Sublessor, shall be returned, without
payment of interest or other increment for its use, to Sublessee at the
expiration of the term hereof, and after Sublessee has vacated the Premises. No
trust relationship is created herein between Sublessor and Sublessee with
respect to the Security Deposit.
5. Use.
5.1 The premises shall be used and occupied only for General
Office Use and for no other purpose.
5.2 (a) Sublessor warrants to Sublessee that the Premises, in its
existing state, but without regard to the use which Sublessee will use the
Premises, does not violate any applicable building code, regulation or ordinance
at the time that this Sublease is executed. In the event that it is determined
that this warranty has been violated, then it shall be the obligation of
Sublessor, after written notice from Sublessee, to promptly, at Sublessor's sole
cost and expense, rectify any such violation. In the event that Sublessee does
not give to Sublessor written notice of a violation of this warranty within one
(1) year from the Commencement Date, it shall be conclusively deemed that such
violation did not exist and the correction of the same shall be the obligation
of Sublessee.
(b) Except as provided in paragraph 5.2(a) above, Sublessee
shall, at Sublessee's expense, comply promptly with all applicable statutes,
ordinances, rules, regulations, orders, restrictions of record, and requirements
in effect during the term or any part of the term hereof regulating the use by
Sublessee of the Premises. Sublessee shall not use or permit the use of the
Premises in any manner that will tend to create waste or a nuisance or, if there
shall be more than one tenant of the building containing the Premises, which
shall tend to disturb such other tenants.
5.3 Except as provided in paragraph 5.2(a) above, Sublessee hereby
accepts the Premises in its condition existing as of the date hereof, subject to
all applicable zoning, municipal, county and state laws, ordinances, regulations
and all matters of record governing and regulating the use of the Premises, and
accepts this Sublease subject thereto and to all matters disclosed thereby.
Sublessee acknowledges that neither Sublessor nor Sublessor's agents have made
any representation or warranty as to the suitability of the Premises for the
conduct of Sublessee's business.
6. Master Lease.
6.1 Sublessor is the tenant or lessee of the Premises by virtue of
that certain lease made and entered into by and between Master Lessor, as
landlord or lessor, and Sublessor, as tenant or lessee, dated March 14, 1991
(the "Master Lease"), a copy of which is attached hereto as Exhibit "C." This
Sublease is and shall be at all times subject, subordinate and inferior to the
Master Lease.
6.2 The terms, conditions and respective obligations of Sublessor
and Sublessee to each other under this Sublease shall be governed by and the
same as the terms, conditions and obligations of the Master Lease, except for
those provisions of the Master Lease which are directly contradicted by this
Sublease in which event the terms of this Sublease shall control over the Master
Lease. Therefore, for purposes of this Sublease, as between Sublessor and
Sublessee, wherever in the Master Lease the word "Landlord" or "Lessor" is used
it shall be deemed to mean Sublessor, and
2
<PAGE> 3
wherever in the Master Lease the word "Tenant" or "Lessee" is used it shall be
deemed to mean Sublessee.
6.3 During the term of this Sublease and for all periods
subsequent to the term of this Sublease for obligations which arise prior to the
termination of this Sublease, Sublessee expressly assumes and agrees to pay,
perform, discharge and comply with, for the benefit of Sublessor and Master
Lessor, each and every debt, duty and obligation of Sublessor under the Master
Lease with respect to the Premises. The debts, duties and obligations that
Sublessee has assumed and agreed to pay, perform, discharge and comply with
under this paragraph are hereinafter referred to as the "Sublessee's Assumed
Obligations." The obligations that Sublessee has not assumed under this
paragraph are hereinafter referred to as the "Sublessor's Remaining
Obligations."
6.4 Sublessee shall hold Sublessor harmless of and from all
liability, judgments, costs, damages, claims or demands, including reasonable
attorneys' fees, arising out of Sublessee's failure to pay, perform, discharge
and comply with Sublessee's Assumed Obligations. Sublessor agrees to maintain
the Master Lease during the entire term of this Sublease, subject, however, to
any earlier termination of the Master Lease without the fault of Sublessor, and
to pay, perform, discharge and comply with Sublessor's Remaining Obligations.
7. Assignment of Sublease.
7.1 Sublessor hereby assigns and transfers to Master Lessor the
Sublessor's interest in this Sublease and all rentals and income arising
therefrom, subject however to the terms of paragraph 7.2 below.
7.2 Master Lessor, by executing this Sublease, agrees that until a
default shall occur in the performance of Sublessor's obligations under the
Master Lease, that Sublessor may receive, collect and enjoy the rents accruing
under this Sublease. However, if Sublessor shall default in the performance of
its obligations to Master Lessor, then Master Lessor, may, at its option,
receive and collect, directly from Sublessee, all rent owing and to be owed
under this Sublease. Master Lessor shall not, by reason of this assignment of
this Sublease nor by any reason of the collection of the rents from Sublessee,
be deemed liable to Sublessee for any failure of Sublessor to perform and comply
with Sublessor's Remaining Obligations or otherwise.
7.3 Sublessor hereby irrevocably authorizes and directs Sublessee,
upon receipt of any written notice from Master Lessor stating that a default
exists in the performance of Sublessor's obligations under the Master Lease, to
pay to Master Lessor the rents due and to become due under this Sublease.
Sublessor agrees that Sublessee shall have the right to rely upon any such
statement and request from Master Lessor, and that Sublessee shall pay such
rents to Master Lessor without any obligation or right to inquire as to whether
such default exists and notwithstanding any notice from or claim from Sublessor
to the contrary, and Sublessor shall have no right or claim against Sublessee
for any such rents so paid by Sublessee.
7.4 No changes or modifications shall be made to this Sublease
without the prior written consent of Master Lessor.
8. Consent of Master Lessor.
8.1 In the event that the Master Lease requires that Sublessor
obtain the consent of Master Lessor to any subletting by Sublessor, then this
Sublease shall not be effective unless, within 10 days of the date hereof,
Master Lessor signs this Sublease thereby giving its consent to this Sublease.
3
<PAGE> 4
8.2 In the event that the obligations of Sublessor under the
Master Lease have been guaranteed by third parties, then neither this Sublease
nor the Master Lessor's consent, shall be effective unless, within 10 days of
the date hereof, the guarantors sign this Sublease thereby giving their consent
to this Sublease.
8.3 In the event that Master Lessor does give such consent, then:
(a) Such consent will not release Sublessor of its debts,
duties or obligations, or alter the primary liability of Sublessor to pay the
rent and pay, perform, discharge and comply with all of the debts, duties and
obligations of Sublessor to be performed, under the Master Lease.
(b) The acceptance of rent by Master Lessor from Sublessee or
anyone else liable under the Master Lease shall not be deemed a waiver by Master
Lessor of any provisions of the Master Lease.
(c) The consent of this Sublease shall not constitute a
consent to any subsequent subletting or assignment.
(d) In the event of any default of Sublessor under the Master
Lease, Master Lessor may proceed directly against Sublessor, any guarantors or
anyone else liable under the Master Lease or this Sublease without first
exhausting Master Lessor's remedies against any other person or entity liable
thereon to Master Lessor.
(e) Master Lessor may consent to subsequent sublettings or
assignments of the Master Lease or this Sublease or any amendments or
modifications thereto or hereto without notifying Sublessor nor anyone else
liable under the Master Lease and without obtaining their consent, and such
action shall not relieve such persons from liability.
(f) In the event that Sublessor shall default in its
obligations under the Master Lease, then Master Lessor, at its option and
without being obligation to do so, may require Sublessee to attorn to Master
Lessor by written notice to Sublessee from Master Lessor, in which event Master
Lessor shall undertake the obligations of Sublessor under this Sublease from the
time of the exercise of such option to the termination of this Sublease, but
Master Lessor shall not be liable for any prepaid rents nor any security
deposits paid by Sublessee, nor shall Master Lessor be liable for any defaults
of Sublessor under this Sublease.
SUBLESSOR: SUBLESSEE:
UNOCAL U.S. FRANCHISE SYSTEMS INC.
By: /s/ Richard Oehlerts By: /s/ Michael A. Leven
--------------------------------- ---------------------------------
Name: Richard Oehlerts Name: Michael A. Leven
Title: Asset Manager Title: Pres./CEO
MASTER LESSOR: GUARANTOR(S):
Hollwood Commercial Real Estate,
- ------------------------------------ ------------------------------------
for Agent
- ------------------------------------
------------------------------------
By: [Illegible]
---------------------------------
Name: Richard D. [Illegible]
Title: Regional Director
------------------------------------
4
<PAGE> 5
EXHIBIT A
[Floor Plan]
5
<PAGE> 6
EXHIBIT 10.16
Exhibit C
LEASE AGREEMENT
BUILDING: Corporate Square
--------------------------------------------------------------
LANDLORD: Equitec Real Estate Investors Fund XV
--------------------------------------------------------------
TENANT: Union Oil Company of California
-----------------------------------------------------
DBA: Unocal
-----------------------------------------------------
<PAGE> 7
OFFICE LEASE AGREEMENT
TABLE OF CONTENTS
<TABLE>
<CAPTION>
SECTION ITEM PAGE
- --------------------------------------------------------------------------------
<S> <C> <C>
1. CERTAIN LEASE PROVISIONS................................................ 1
1.1 Premises................................................ 1
1.2 Rentable Area of Premises............................... 1
1.3 Use Clause.............................................. 1
1.4 Lease Term.............................................. 1
1.5 Lease Commencement Date................................. 1
1.6 Lease Expiration Date................................... 1
1.7 Security Deposit........................................ 1
1.8 Tenant's Addresses...................................... 1
1.9 Landlord's Addresses.................................... 1
1.10 Base Rent Commencement Date............................. 1
1.11 Base Rent Monthly Installments.......................... 1
1.12 Additional Rent......................................... 2
1.13 Brokers................................................. 2
1.14 This Lease consists of 27 articles on 18 pages.......... 2
2. PREMISES................................................................ 2
2.1 Premises................................................ 2
2.3 Use Clause.............................................. 2
2.4 Common Area............................................. 2
3. LEASE TERM.............................................................. 3
3.1 Term.................................................... 3
3.2 Change in Lease Commencement Date....................... 3
5. RENTS................................................................... 3
5.1 Payment................................................. 3
5.2 Late Fees............................................... 3
5.2 Base Rent............................................... 3
5.5 Additional Taxes........................................ 4
6.0 SERVICES................................................................ 5
8.0 ACCEPTANCE.............................................................. 7
9.0 ASSIGNMENT OF SUBLETTING................................................ 7
10. CONDUCT OF BUSINESS..................................................... 8
10.1 Operation............................................... 8
11. RULES AND REGULATIONS................................................... 8
12. DEFAULTS AND REMEDIES.................................................. 14
12.1 Defaults...................................................... 14
12.2 Remedies...................................................... 14
13. INSURANCE.............................................................. 15
13.1 Tenant's Insurance............................................ 15
13.2 Landlord's Insurance.......................................... 16
13.3 Insurance Policies............................................ 16
13.4 Waiver of Subrogation......................................... 16
14. NO PERSONAL LIABILITY OF LANDLORD...................................... 16
</TABLE>
Tenant's Initials __________
Landlord's Initials __________
i
<PAGE> 8
<TABLE>
<S> <C> <C>
15. HOLD HARMLESS.......................................................... 17
16. ACCESS TO PREMISES..................................................... 17
17. ALTERATIONS............................................................ 17
17.1 Alterations By Landlord....................................... 17
17.2 Alterations By Tenant......................................... 19
18. REPAIRS AND MAINTENANCE................................................ 19
18.1 Landlord's Obligations........................................ 19
18.3 Surrender..................................................... 19
19. LIENS.................................................................. 19
20. DAMAGE OR DESTRUCTION.................................................. 20
20.1 Lease Termination............................................. 20
20.2 Repairs or Restoration........................................ 20
21. CONDEMNATION........................................................... 20
22. FORCE MAJEURE.......................................................... 22
24. SUCCESSION TO LANDLORD'S INTEREST...................................... 22
24.1 Attornment.................................................... 22
24.2 Subordination................................................. 22
24.4 Estoppel Certificate.......................................... 22
25. SURRENDER OF PREMISES.................................................. 22
26. PARKING................................................................ 23
27. MISCELLANEOUS.......................................................... 23
27.1 Partial Invalidity............................................ 23
27.2 Successors and Assigns........................................ 24
27.3 Waiver........................................................ 24
27.4 Accord and Satisfaction....................................... 24
27.5 Attorneys' Fees............................................... 24
27.6 Time Is Of the Essence........................................ 24
27.7 Broker's Commission........................................... 24
27.8 No Light, Air or View Easement................................ 24
27.9 Entire Agreement.............................................. 24
27.10 Applicable Law................................................ 24
27.11 Notices....................................................... 24
27.12 Quiet Enjoyment............................................... 25
27.13 Compliance with Law........................................... 25
27.14 Superior Law.................................................. 25
27.15 Guarantor..................................................... 25
27.16 Exhibit....................................................... 25
27.17 Execution of Lease............................................ 25
</TABLE>
Tenant's Initials __________
Landlord's Initials __________
ii
<PAGE> 9
OFFICE LEASE AGREEMENT
THIS LEASE, dated for reference purposes March 14, 1991, is
made by and between Equitec Real Estate Investors Fund XV, as Landlord, and
Union Oil Company of California dba Unocal, as Tenant.
1. CERTAIN LEASE PROVISIONS:
The description and amounts set forth below are qualified by their
usage elsewhere in this Lease, including those Articles referred to in
parentheses:
1.1 Premises (Article 2.1): Unit #200
Building: Thirteen
Street: 13 Corporate Square, Suite 200
Address: 13 Corporate Square, Suite 200
City: Atlanta County: Dekalb
State: Georgia Zip: 30329
1.2 Rentable Area of Premises (Article 2.1):
approximately 14,049 square feet (the "Area")
Total Rentable Area of Building (Article 2.2):
approximately 32,694 square feet
1.3 Use Clause (Article 2.3): All legal uses accepted.
1.4 Lease Term (Article 3.1): 3 years, 0 months.
1.5 Lease Commencement Date (Article 3.1): July 1, 1991.
1.6 Lease Expiration Date (Article 3.1): June 30, 1994.
1.7 Security Deposit (Article 4.): $N/A.
1.8 Tenant's Addresses (Articles 5.1, 27.10):
(A) Notice
Address: 13 Corporate Square, Suite 200
Atlanta, Georgia 30329
(B) Billing
Address: 13 Corporate Square, Suite 200
Atlanta, Georgia 30329
1.9 Landlord's Addresses (Articles 5.1, 27.10):
Building, C/O Equitec Properties Company
(A) Notice
Address: 3 Corporate Square, Suite 315, Atlanta, Georgia 30329
(B) Payment
Address: Equitec Real Estate Investors Fund XV
3 Corporate Square, Suite 315, Atlanta, Georgia 30329
1.10 Base Rent Commencement Date (Articles 5.1, 5.4): July 1, 1991.
1.11 Base Rent Monthly Installments (Articles 5.1, 5.3)
From 7/91 - 6/92 Monthly $13,580.70
From 7/92 - 6/93 Monthly $13,580.70
From 7/93 - 6/94 Monthly $13,580.70
Tenant's Initials __________
Landlord's Initials __________
<PAGE> 10
1.12 Additional Rent (Article 5.4)
Base Expenses $N/A per square foot
Initial Payment $N/A per month
1.13 Brokers (Article 27.7): Not Applicable
1.14 This Lease consists of 27 articles on 18 pages, plus Exhibits
A, B, C, D, E and ten (10) additional pages of Addenda.
2. PREMISES:
2.1 Premises. Landlord hereby leases to Tenant and Tenant leases
from Landlord, for the term, at the rental and upon all of the conditions set
forth herein, that certain real property known by unit number and address
specified in Article 1.1 hereof, consisting of the approximate Area specified in
Article 1.2 hereof, and which is referred to herein as the "Premises." The
Premises are depicted in Exhibit A attached hereto. The Premises are located in
a building (the "Building"), which building, the real property on which it is
situated, and any parking facilities or structures appurtenant thereto, are
hereinafter collectively referred to as the "Property," and described in Exhibit
B attached hereto.
2.3 Use Clause. Tenant is permitted to use the Premises for the
purposes specified in Article 1.3 hereof, and for no other purpose whatsoever.
Tenant shall obtain, at its own expense, all necessary governmental licenses and
permits, inclusive of any impact or use fees imposed by said governmental
bodies, for such use. Tenant shall not conduct any secondhand, auction,
distress, fire, bankruptcy or going-out-of-business sales.
2.4 Common Area. As long as the Lease remains in effect and Tenant
is not in default hereunder, Tenant shall have the nonexclusive right, in common
with the Landlord, other tenants, subtenants, employees and invitees, to use the
common areas of the Property, which include, but are not limited to: walkways,
patios, landscaped areas and parks, sidewalks, service corridors, recreational
facilities, restrooms, stairways, elevators, plazas, malls, throughways, parking
areas and roadways, provided that Landlord shall have the right at any time to
exclude therefrom such areas as Landlord may determine so long as access to the
Premises is not unreasonably denied.
Tenant's Initials __________
Landlord's Initials __________
2
<PAGE> 11
3. LEASE TERM:
3.1 Term. The Term of this Lease shall be as defined in Article
1.4 hereof, commencing on the Lease Commencement Date specified in Article 1.5
hereof, and ending on the Lease Expiration Date specified in Article 1.6 hereof,
unless sooner terminated pursuant to any provision of this Lease.
3.2 Change in Lease Commencement Date. (SEE ADDENDUM TO LEASE)
Landlord cannot deliver possession of the Premises to Tenant on said Lease
Commencement Date, Landlord shall not be subject to any liability therefor, nor
shall such failure affect the validity of this lease or the obligations of the
Tenant hereunder. However (SEE ADDENDUM TO LEASE) in such case Tenant shall not
be obligated under any provisions of this Lease. In the event that Landlord
shall permit Tenant to occupy Premises prior to said Lease Commencement Date,
such occupancy shall be subject to all of the provisions of this Lease. Said
early possession shall not advance the Lease Expiration Date.
Upon Landlord's request, the parties agree to execute in
writing an Addendum to certify the commencement date and expiration date hereof,
but this Lease shall not be affected in any manner if either party fails or
refuses to execute such Addendum.
5. RENTS:
5.1 Payment. All rents shall be payable in advance, without prior
demand or any right of offset or deduction, in monthly installments on the first
day of each calendar month of the Term hereof. Tenant shall pay all rents to
Landlord in lawful money of the United States of America at the address stated
in Article 1.9(B) or to such other persons or at such other places as Landlord
may designate in writing.
If the Lease Commencement Date occurs on a day other than the
first day of a calendar month, than all rents except Base Rent shall be prorated
for the balance of that month based upon the actual number of days the Lease is
in effect during said calendar month. The term "Lease Year," as hereinafter
used, refers to each successive twelve-month period beginning with the Lease
Commencement Date, as it may be adjusted pursuant to Article 3.2 hereof.
Notwithstanding anything to the contrary contained herein, after Lease
expiration Landlord (SEE ADDENDUM TO LEASE) shall have the right to reconcile
all rents billed, paid and/or owed by Tenant during the Term hereof and
thereafter submit a (SEE ADDENDUM TO LEASE). Upon receipt thereof, Tenant (SEE
ADDENDUM TO LEASE) shall submit payment in full to Landlord (SEE ADDENDUM TO
LEASE) within thirty (30) days.
5.2 Late Fees. Should Tenant fail to pay when due any installment
of rent or any other sum payable to Landlord under the terms of this Lease,
Landlord may assess interest at (SEE ADDENDUM TO LEASE) from and after the date
on which any such sum shall be due and payable, and such interest, and/or a Late
Fee of $50.00, which shall be paid by Tenant to Landlord at the time of payment
of the delinquent sum; provided, however, nothing charged hereby shall ever
exceed the amount that may properly be charged or recovered under the laws of
the state in which the Premises are located.
5.2 Base Rent. Payment of Base Rent shall begin on the Base Rent
Commencement Date specified in Article 1.10. If the Base Rent Commencement Date
occurs on a day other than the first day of a calendar month, then Base Rent
shall be prorated for the balance of that month based upon the actual number of
days from the Base Rent Commencement Date through the last day of said calendar
month. The amount of each monthly installment of Base Rent for the Premises for
the entire term of this Lease shall be as specified in Article 1.11, subject to
adjustment pursuant to the following paragraph.
Tenant's Initials __________
Landlord's Initials __________
3
<PAGE> 12
5.5 Additional Taxes. If Landlord is assessed additional taxes or
if its present taxes are increased as a result of any value placed on Tenant's
leasehold, fixtures or furnishings, or goods and services, then immediately upon
demand Tenant shall pay to Landlord the amount of said additional tax, or the
amount of the increase.
Tenant's Initials __________
Landlord's Initials __________
4
<PAGE> 13
6.0 SERVICES:
Landlord shall maintain the public and common areas of the Building,
such as lobbies, stairs, elevators, corridors and restrooms in reasonably good
order and condition except for damage occasioned by the (SEE ADDENDUM TO LEASE)
act of Tenant, which damage shall be repaired by Landlord at Tenant's (SEE
ADDENDUM TO LEASE) expense.
Landlord shall furnish the Premises with (i) electricity sufficient to
provide power for typewriters and other office machines of similar low
electrical consumption, but not including electricity required for electronic
data processing equipment, special lighting in excess of building standard
improvements, and any other item of electrical equipment which (singly) consumes
more than .5 kilowatts per hour at rated capacity or requires a voltage other
than one hundred twenty (120) volts
Tenant's Initials __________
Landlord's Initials __________
5
<PAGE> 14
single phase; per hour at rated capacity or require a voltage other than one
hundred twenty (120) volts single phase; and provided, however, that if the
installation of such electrical equipment requires additional air conditioning
capacity above that provided by the building standard improvements, the
additional air conditioning installation and operating costs shall be paid by
Tenant, (ii) heat and air conditioning to the extent reasonably required for the
comfortable occupation of the premises during reasonable and usual business
hours, 8:00 a.m. to 5:00 p.m. weekdays and 8:00 a.m. to 1:00 p.m. on Saturdays
(exclusive of Sundays and State and National Holidays) such shorter period
specified or prescribed by any applicable policies or regulations adopted by any
utility or government agency, (iii) elevator service, (iv) lighting replacement
(for building standard lights), (v) restroom supplies, (vi) janitorial service
on five (5) day/week basis, excluding holidays; provided, however, that if
tenant improvements are not consistent in quality and quantity with building
standard improvements, Tenant shall pay any cleaning and janitorial costs
attributable thereto, (vii) security for the building; provided, however, that
Landlord shall not be liable to Tenant for any losses, including personal injury
and property damage that may result to tenant from theft, burglary or
intentional conduct on the part of any person or entity, or for damages directly
or indirectly resulting from, nor shall the rental herein reserved be abated by
reason of (1) the installation, use or interruption of any services, (2) failure
to furnish or delay in furnishing any such services when such failure or delay
is caused by accident or any condition beyond the reasonable control of Landlord
or by the making of necessary repairs or improvements to the Premises or the
Building. Landlord shall use reasonable efforts to remedy any interruption in
the furnishing of such services.
It is understood that Landlord does not warrant that any of the
services referred to above, or any other services which Landlord may supply,
will be free from interruption. Tenant acknowledges that any one or more such
services may be suspended or reduced by reason of accident or repairs,
alterations or improvements necessary to be made, by strikes or by any cause
beyond the reasonable control of Landlord, or by orders or regulations of any
federal, state, county or municipal authority. Any such interruption or
suspension of services (SEE ADDENDUM TO LEASE) shall never be deemed an eviction
or disturbance to Tenant's use and possession of the Premises or any part
thereof, or render Landlord liable to Tenant for damages by abatement of rent or
relieve Tenant of performance of Tenant's obligation under this Lease. Landlord
will use its reasonable efforts in the event of a strike to secure parties not
involved in the labor dispute to provide minimum services for cleaning
restrooms, waste removal, and janitorial services. (SEE ADDENDUM TO LEASE)
Whenever heat generating machines or equipment or lighting other than
building standard lights are used in the Premises by Tenant which (SEE ADDENDUM
TO LEASE) affect the temperature otherwise maintained by the air conditioning
system, Landlord shall have the right to install supplementary air conditioning
units in the Premises and the cost (SEE ADDENDUM TO LEASE) thereof, including
the cost of installation and the (SEE ADDENDUM TO LEASE) cost of operating and
maintenance thereof, shall be paid by Tenant to Landlord upon billing by
Landlord. If Tenant installs lighting requiring power in excess of that required
for normal desk-top office equipment or normal copying equipment as determined
by Landlord, Tenant shall pay to Landlord upon billing for the cost of such
excess power as additional rent, together with the cost of installing any
additional risers or other facilities that may be necessary to furnish such
excess power to the Premises.
Tenant's Initials __________
Landlord's Initials __________
6
<PAGE> 15
8.0 ACCEPTANCE:
Tenant acknowledges that it has fully inspected the Premises, and
hereby accepts such "As Is." Tenant also acknowledges that the Premises are
suitable for the purposes for which the same are leased, in their present
condition. Tenant further acknowledges that Landlord has made no warranties or
representations as to either the condition or the suitability of the Premises in
terms of the Use as specified in Article 1.3. This Lease is, and shall be
considered to be, the only agreement between the parties hereto and their
representatives and agents. All negotiations and oral agreements acceptable to
both parties have been merged into and are included herein. There are no other
representations or warranties between the parties and all reliance with respect
to representations is solely upon the representations and agreements contained
in this document. (SEE ADDENDUM TO LEASE)
9.0 ASSIGNMENT OF SUBLETTING:
Tenant shall not voluntarily or by action of law transfer, assign,
sublet, mortgage or otherwise transfer or encumber all or any part of Tenant's
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interest in this Lease or in the Premises without Landlord's prior written
consent (which consent shall not be unreasonably withheld), nor shall Tenant
suffer or permit the Premises or any part thereof to be used or occupied by
others without Landlord's prior written consent. Any attempted assignment,
transfer, mortgage, encumbrance or subletting without such consent shall be void
and shall constitute a breach of the Lease. Regardless of Landlord's consent, no
subletting or assignment or other transfer shall release Tenant of Tenant's
obligation or alter the primary liability of Tenant to pay the rent and to
perform all other obligations to be performed by Tenant hereunder. (SEE ADDENDUM
TO LEASE)
As a condition of obtaining Landlord's consent, Tenant shall submit to
Landlord with its request the effective date of the transfer (it must be at
least (SEE ADDENDUM TO LEASE) days after submission date), the name of the
proposed assignee or subtenant, the terms and provisions of the proposed
transaction, the proposed use, which must be consistent with the provisions of
Article 1.3 hereof, a financial statement, a business history and such other
information as is necessary to demonstrate to Landlord that the proposed
assignee or subtenant has business experience and (SEE ADDENDUM TO LEASE)
financial strength and stability.
In addition, Tenant shall (SEE ADDENDUM TO LEASE), one hundred percent
(100%) of all moneys or other consideration received by Tenant from its
transferee. In the event Landlord (SEE ADDENDUM TO LEASE) to a sublease,
assignment or transfer, Tenant shall pay Landlord $200.00 for administrative
fees incurred in connection with such consent. (SEE ADDENDUM TO LEASE)
10. CONDUCT OF BUSINESS:
10.1 Operation. Tenant covenants and agrees that, it will operate and
conduct within the Premises the business it is permitted to operate and conduct
under the provisions of this lease. Tenant agrees to conduct its business at all
times in a first class manner consistent with reputable business standards and
practices.
11. RULES AND REGULATIONS:
(SEE ADDENDUM TO LEASE) [and] Tenant agree to comply with and observe
the following rules and regulations, (SEE ADDENDUM TO LEASE) and Tenant's
failure to keep and observe them shall constitute a default of this Lease.
Landlord reserves the right from time to time to (SEE ADDENDUM TO LEASE) or (SEE
ADDENDUM TO LEASE) rules and regulations, and to adopt and promulgate additional
rules and regulations applicable to the Premises and the Property. Notice of
such amended or additional rules and regulations shall be given to Tenant, and
Tenant agrees thereupon to comply with and observe all (SEE ADDENDUM TO LEASE)
rules and regulations and amendments and additions thereto.
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Landlord may waive any one or more of these Rules and Regulations for
the benefit of any particular Tenant or Tenants, but no such waiver by Landlord
shall be construed as a waiver of such Rules and Regulations in favor of any
other Tenant or Tenants, nor prevent Landlord from thereafter enforcing any such
Rules and Regulations against any or all of the Tenants of the Building. (SEE
ADDENDUM TO LEASE)
These Rules and Regulations are in addition to, and shall not be
construed to in any way modify or amend, in whole or in part, the terms,
covenants, agreements and conditions of any lease of premises in the Building.
11.1 No Tenant shall allow the Premises to be used for lodging, nor
shall cooking be done or permitted by any Tenant on the Premises; except, use by
the Tenant of Underwriters' Laboratory approved equipment for brewing coffee,
tea, hot chocolate and similar beverages or microwave ovens or similar
appliances installed for occasional use by Tenant's employees or invitees shall
be permitted, provided that such use is in accordance with all applicable
federal, state and city laws, codes, ordinances, rules and regulations.
11.2 Neither Tenant, its agents nor its employees shall solicit
business in the parking area or other common areas, nor shall Tenant, its agents
or its employees, distribute or display any handbills or other advertising
matter in or on automobiles or other vehicles parked in the parking area, or in
other common areas. If any such materials are distributed, Tenant shall pay
Landlord for the cost of cleanup.
11.3 No aerial, antenna, satellite dish or similar device shall be
erected on the roof or exterior walls of the Building or on the grounds, without
the prior written consent of Landlord. (SEE ADDENDUM TO LEASE) Any such device
so installed without such consent shall be subject to removal without notice at
any time, without liability to the Landlord therefor; costs incurred by Landlord
for such removal shall be paid by Tenant.
11.4 No loudspeakers, televisions, phonographs, radios or other
devices shall be used in a manner so as to be heard or seen outside of the
Premises without the prior written consent of Landlord. (SEE ADDENDUM TO LEASE)
11.5 No Tenant shall use or keep or permit to be used or kept any
foul or obnoxious gas or substance in the Premises, or permit or suffer the
Premises to be occupied or used in a manner offensive or objectionable to
Landlord or to other occupants of the Building by reason of noise, odors or
vibrations, or interfere in any way with other Tenants or those having business
herein.
11.6 The plumbing facilities, including fixtures and appliances,
shall not be used for any purpose other than that for which they are
constructed. The expense of any breakage, stoppage, or damage resulting from a
violation of this provision shall be borne by the Tenant whose employees, agents
or invitees shall have caused same.
11.7 Tenant's access to the roof is limited to maintenance of
equipment installed with Landlord's approval and inspections for damage to that
equipment. Neither Tenant nor its agents or employees shall enter upon the roof
at any time without the express prior approval of Landlord. (SEE ADDENDUM TO
LEASE)
11.8 Tenant and its employees shall park their motor vehicles only
in those parking areas designated for that purpose by Landlord, and Tenant shall
provide Landlord with a list of its employees' motor vehicle license tag
numbers. If Tenant and/or its employees are in violation of this rule Landlord
shall have the right to tow said vehicle at Tenant's expense. (SEE ADDENDUM TO
LEASE)
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11.9 No Tenant shall use or keep in the Premises or the building
any kerosene, gasoline or inflammable or combustible fluid or material other
than limited quantities thereof reasonably necessary for the operation or
maintenance of office equipment, or, without Landlord's prior written approval.
11.10 Landlord shall have the right, exercisable without notice and
without liability to any Tenant, to change the name and street address of the
Building. (SEE ADDENDUM TO LEASE)
11.11 No curtains, draperies, blinds, shutters, shades, screens or
other coverings, hangings or decorations shall be attached to, hung or placed
in, or used in connection with any window of the Building without the prior
written consent of Landlord (SEE ADDENDUM TO LEASE) and such items shall be
installed as instructed by Landlord.
11.12 Should a Tenant require telegraphic, telephonic, annunciator
or any other communication service, the Landlord will direct the electricians
and installers where and how the wires are to be introduced and placed, and none
shall be introduced or placed except as the Landlord shall direct.
11.13 The Landlord has the right to evacuate the Building in event
of emergency or catastrophe.
11.14 Tenant agrees not to allow or keep any animals or pets of any
kind on the Premises, except those guide dogs which are for the direct purpose
of aiding and assisting the (SEE ADDENDUM TO LEASE) impaired.
11.15 The requirements of the Tenants will be attended to only upon
application by telephone or in person at the office of Landlord. Employees of
Landlord shall not perform any work or do anything outside of their regular
duties unless under special instructions from Landlord.
11.16 The sidewalks, halls, passages, exits, entrances, elevators
and stairways of the Building shall not be obstructed by any of the Tenants or
used by them for any purpose other than for ingress to and egress from their
respective Premises. The halls, passages, exits, entrances, elevators and
stairways are not for the general public, and Landlord shall in all cases retain
the right to control and prevent access thereto of all persons whose presence in
the judgement of Landlord would be prejudicial to the safety, character,
reputation and interest of the Building and its Tenants, provided that nothing
herein contained shall be construed to prevent such access to persons with whom
any Tenant normally deals in the ordinary course of its business, unless such
persons are engaged in illegal activities.
11.17 No sign, placard, picture, name, advertisement or notice,
visible from the exterior of any Tenant's business shall be inscribed, painted,
affixed or otherwise displayed by any Tenant on any part of the Building without
the prior written consent of Landlord. Landlord will adopt and furnish to Tenant
general guidelines relating to signs inside the Building on the office floors.
Tenant agrees to conform to such guidelines, but may request approval of
Landlord for modifications, which approval will not be unreasonably withheld.
Material visible from outside the Building will not be permitted.
11.18 Tenant shall not allow a fire or bankruptcy sale or any
auction to be held on the Premises or allow the Premises to be used for the
storage of merchandise held for sale to the general public.
11.19 No Tenant shall employ any person or persons other than the
janitor of Landlord for the purpose of cleaning the Premises, unless otherwise
agreed to by Landlord in writing. (SEE ADDENDUM TO LEASE) Except with the
written consent of Landlord no person or persons other than those approved by
Landlord shall be permitted
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to enter the Building for the purpose of cleaning the same. No Tenant shall
cause any unnecessary labor by reason of such Tenant's carelessness or
indifference in the preservation of good order and cleanliness. Janitor services
will not be furnished on nights when rooms are occupied after 9:30 p.m. unless,
by agreement in writing, service is extended to a later hour for specifically
designated rooms.
11.20 Landlord will furnish each Tenant free of charge with two keys
to each door lock in the Premises. Landlord may make a reasonable charge for any
additional keys. No Tenant shall have any keys made. No Tenant shall alter any
lock or install a new or additional lock or any bolt on any door of its Premises
without the prior written consent of Landlord. Tenant shall in each case furnish
Landlord with a key for any such lock. Each Tenant, upon the termination of its
tenancy, shall deliver to Landlord all keys to door in the Building which shall
have been furnished to Tenant.
11.21 No Tenant shall use any method of heating or air conditioning
other than that supplied by Landlord.
11.22 Landlord reserves the right to exclude from the Building,
between the hours of 6:00 p.m. and 7:00 a.m. and at all hours on Sundays, legal
holidays and on Saturdays any person who, in Landlord's (SEE ADDENDUM TO LEASE)
opinion, has no legitimate business in the Building, Landlord shall in no case
be liable for damages for any error with regard to the admission to or exclusion
from the Building of any person. In the case of invasion, mob, riot, public
excitement or other circumstances rendering such action advisable in Landlord's
opinion, Landlord reserves the right to prevent access to the Building during
the continuance of the same by such action as Landlord may deem appropriate,
including closing doors.
11.23 The directory of the Building will be provided for the display
of the name an location of Tenants (SEE ADDENDUM TO LEASE). Any additional name
which Tenant shall desire to place upon said directory must first be approved by
Landlord in writing, and, if so approved, a charge will be made therefore.
11.24 Each Tenant shall see that the doors of its Premises are
closed and locked and that all water faucets, water apparatus and utilities are
shut off before Tenant or Tenant's employees leave the Premises, so as to
prevent waste or damage, and for any default or carelessness in this regard
Tenant shall make good all injuries sustained by other tenants or occupants of
the Building or Landlord. All Tenants shall keep the doors to the Building
corridors closed at all times except for ingress and egress.
11.25 Except with the prior written consent of Landlord, no Tenant
will sell, or permit the sale at retail, of newspapers, magazines, periodicals,
theatre tickets or any other goods or merchandise to the general public in or on
the Premises, nor shall any Tenant carry on, or permit or allow any employee or
other person to carry on, the business of stenography, typewriting or any
similar business in or from the Premises for the service or accommodation of
occupants of any other portion of the Building, nor shall the Premises of any
Tenant be used for manufacturing of any kind, or any business or activity other
than that specifically provided for in such Tenant's lease.
11.26 Landlord shall designate how all office equipment, furniture,
appliances and other large objects or property ("Equipment") shall be moved in
and/or out of the Building. The persons employed to move such Equipment in or
out of the Building must be acceptable (SEE ADDENDUM TO LEASE) to Landlord.
Landlord shall have the right to prescribe the weight, size and position of all
Equipment brought into the Building. Heavy objects shall, if considered
necessary by Landlord, stand on wood strips of such thickness as is necessary to
properly distribute the weight. Landlord will not be responsible for loss of or
damage to any such Equipment from any cause, and all damage done to the Building
by moving or maintaining such Equipment shall be repaired at the expense of
Tenant.
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Tenant agrees to coordinate all moving activities of office equipment
and furniture in and out of the Building with Landlord or Landlord' agent, and
to use the services of an insured (SEE ADDENDUM TO LEASE) professional moving
company.
11.27 Hand trucks shall not be used in any space or public halls of
the Building, either by any Tenant or others, except those equipped with rubber
tires an side guards or such other material-handling equipment as Landlord may
approve. No other vehicles of any kind shall be brought by any Tenant into the
Building or kept in or about the Premises.
11.28 Each Tenant shall store all its trash and garbage within its
Premises. No material shall be placed in the trash boxes, receptacles or common
areas if such material is of such nature that it may not be disposed of in the
ordinary and customary manner of removing and disposing of trash ordinance
governing such disposal. All garbage and refuse disposal shall be made only
through entry ways and elevators provided for such purposes and at such times as
Landlord shall designate.
12. DEFAULTS AND REMEDIES:
12.1 Defaults. The occurrence of any one or more of the following
events shall constitute a (SEE ADDENDUM TO LEASE) default and breach of this
Lease by Tenant:
(A) The failure by Tenant to make any payment of Base Rent, or
any other payment required to be made by Tenant hereunder, as and when due (SEE
ADDENDUM TO LEASE); or
(B) More than two defaults by Tenant within any one Lease Year
for the nonpayment of rent hereunder, necessitating that Landlord, because of
such defaults, shall have served upon Tenant within said Lease Year more than
two written notices; or
(C) The failure by Tenant to observe or perform any of the
covenants, conditions or provisions of this Lease to be observed or performed by
Tenant, where such failure shall continue for a period of twenty (20) business
days after written notice thereof from Landlord to Tenant (SEE ADDENDUM TO
LEASE); or
(D) The insolvency of the Tenant or the execution by Tenant of
an assignment for the benefit of creditors; or
(E) The filing by or for reorganization or arrangement under
any law relating to bankruptcy or insolvency; or
(F) The appointment of a receiver or trustee to take
possession of substantially all of Tenant's assets located at the Premises or of
Tenant's interest in this Lease; or
12.2 Remedies. Upon the occurrence of any event of default,
Landlord shall have the right at any time thereafter to pursue any one or more
of the following remedies with or without notice or demand. Pursuit of any of
the following remedies shall not preclude pursuit of any of the other remedies
herein provided or any other remedies provided by law, nor shall pursuit of any
remedy herein provided constitute a forfeiture or waiver of any rents due to
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Landlord hereunder or of any damages accruing to Landlord by reason of the
Tenant's violation of any of the terms, conditions or covenants herein
contained.
(A) Terminate this Lease, in which event Tenant shall
immediately surrender the Premises to Landlord, and if Tenant fails to do so,
Landlord may, without prejudice to any other remedy which it may have for
possession or arrearages in rents, without being liable for prosecution or any
claim or damages therefor. Tenant agrees to pay to Landlord on demand the amount
of all loss and damage which Landlord may suffer by reason of such termination,
whether through inability to relet the Premises on satisfactory terms or
otherwise.
Any rents which may be due Landlord, whether by acceleration
or otherwise, as provided herein, shall include Base Rent, and any Additional
Rent provided for herein.
(B) Demand payment for any rents be made by certified check,
cashier's check or money order.
13. INSURANCE:
13.1 Tenant's Insurance. Tenant, at its sole expense, shall obtain
and keep in force during the Term of this Lease the following policies of
insurance, naming Landlord as a (SEE ADDENDUM TO LEASE):
(A) Comprehensive general liability insurance and personal
injury liability insurance, insuring Tenant against liability for injury to
persons or damage to property occurring in or about the Premises or arising out
of the ownership, maintenance, use or occupancy thereof. Said insurance shall
specify a single occurrence policy limit of at least $1,000,000;
(B) All Risk property insurance (SEE ADDENDUM TO LEASE),
including coverage against damage caused by fire, windstorm, explosion,
aircraft, vehicles, smoke, riot or vandalism on all of Tenant's personal
property, trade fixtures, leasehold improvements and furnishings in the minimum
amount of 80% of their replacement cost;
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(C) Glass Insurance (SEE ADDENDUM TO LEASE) covering 100% of
the replacement cost of all glass at the Premises; and
(D) Worker's Compensation insurance (SEE ADDENDUM TO LEASE)
insuring Tenant from all claims for personal injury, disease and/or death under
the worker's compensation law of the state where the Building is located, in the
amounts required by law.
13.2 Landlord's Insurance. Landlord shall obtain and keep in force
during the Term of this Lease fire and extended coverage on the Building. Tenant
agrees that it will not store, keep, use, or sell in or upon the Premises,
gasoline and related products, firearms, explosives or any other article which
may be prohibited by the standard form of fire insurance policy, or which will
increase Landlord's insurance cost.
13.3 Insurance Policies. Insurance required to be obtained by
Tenant hereunder shall be in companies rated (SEE ADDENDUM TO LEASE) or better
in "Best's Insurance Guide," and licensed to do business in the state where the
policy is written. Tenant shall furnish Landlord proof of insurance policies
within ten (10) days after the execution of this Lease but not later than ten
(10) days prior to possession of Premises. Such policies shall provide that
coverage may not be canceled or reduced without at least ten (10) days written
notice first being given to Landlord. If Tenant shall fail to procure and
maintain the insurance required hereunder, Landlord may but shall not be
required to procure and maintain the same, and any amounts paid by Landlord for
such insurance shall be Additional Rent, which shall be due and payable by
Tenant on the next succeeding date on which a Base Rent installment is due.
13.4 Waiver of Subrogation. As long as their respective insurers so
permit without additional premium, Tenant and Landlord (SEE ADDENDUM TO LEASE)
each waives any and all rights of recovery against the other, or against the
officers, employees, agents and representatives of the other for loss or damage
to such waiving party or its property or the property of others under its
control, where such loss or damage is insured under any insurance policy in
force at the time of such loss or damage.
14. NO PERSONAL LIABILITY OF LANDLORD:
"Landlord," as used in this Lease insofar as covenants or obligations
on the part of Landlord are concerned, shall be limited to mean and include only
the owner or owners at the time in question of the Premises. In the event of any
transfer of title, the Landlord named herein shall automatically be freed and
relieved from and after the date of such transfer or conveyance of all personal
liability as respects the performance of any covenants or obligations on the
part of Landlord contained in this Lease thereafter to be performed, provided
that (SEE ADDENDUM TO LEASE) any funds in the hands of such Landlord at the time
of such transfer shall be turned over to the grantee. Tenant shall look solely
to the estate and property of Landlord in the Property of which the Premises are
a part for the satisfaction of Tenant's remedies for collection of a judgement
or other judicial process requiring the payment of money by Landlord in the
event of any default or breach by Landlord of any of the terms, covenants and
conditions of Lease to be observed and/or performed by Landlord, and no other
property or assets of Landlord, its partners or agents shall be subject to levy,
execution or other enforcement procedure for the satisfaction of Tenant's
remedies.
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15. HOLD HARMLESS:
Tenant shall indemnify, defend and hold Landlord harmless from any and
all claims, liabilities, damages and costs, including attorneys fees, incurred
by Landlord which may arise from Tenant's (SEE ADDENDUM TO LEASE) use of the
Premises or from the conduct of its business or from any (SEE ADDENDUM TO LEASE)
activity, work or things which may be (SEE ADDENDUM TO LEASE) permitted or
suffered by Tenant in, on or about the Premises, and shall further indemnify,
defend and hold Landlord harmless from and against any and all claims,
liabilities, damages and costs, including attorneys' fees, incurred by Landlord
which may arise from any breach or default in the performance of any obligation
on Tenant's part under this Lease or which may arise from any negligence of
Tenant or any of its agents, representatives, customers, employees or invitees.
Tenant shall indemnify, defend and hold Landlord harmless from and against any
and all liabilities, damages and costs, including attorneys' fees, which may
arise from any injury or loss incurred as a result of Landlord, its agents,
representatives or designees entering the Premises under an emergency
circumstance, such as fire or similar event (SEE ADDENDUM TO LEASE). Landlord
and Tenant to give reciprocal indemnifications regarding Paragraph 15.
16. ACCESS TO PREMISES:
Landlord, its agents, representative and designees shall have the right
to enter the Premises at any time to examine and inspect the same, or to make
such repairs, additions or alterations as Landlord may (SEE ADDENDUM TO LEASE)
deem necessary or proper for the safety, improvement or preservation thereof.
Landlord shall also have the right to enter the Premises during Tenant's regular
business hours, to exhibit same to prospective purchasers, mortgagees, lessees
and tenants. During the ninety (90) days prior to the Lease Expiration Date,
Landlord may place upon the Premises "For Lease" or other similar signs which
Tenant shall permit to remain thereon displayed.
17. ALTERATIONS:
17.1 Alterations By Landlord. The Building and common areas are at all
times subject to the exclusive control and management of Landlord. Without
limiting the generality of the foregoing (SEE ADDENDUM TO LEASE). Landlord has
the right in its management and operation of the Building to do and perform such
acts in and to the Buildings in the use of good business judgment the Landlord
determines to be advisable for the more efficient and proper operation of the
Building including:
(A) Obstruct or close off all or any part of the Property for
the purpose of maintenance, repair or construction;
(B) Use any part of the Common Area for merchandising, display
decorations, entertainment, and structures designed for retail selling or
special features or promotional activities;
(C) Change area, level, location, arrangement or use of
Property or any part thereof;
(D) Construct other buildings, structures or improvements in
the Property and make alterations thereof, additions thereto, subtractions
therefrom, or rearrangements thereof, build additional stories on any building
and construct additional buildings or facilities adjoining or proximate to the
Property;
(E) Construct multiple deck, elevated or underground parking
facilities, and expand, reduce or alter same in any manner whatsoever (SEE
ADDENDUM TO LEASE).
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17.2 Alterations By Tenant. Tenant shall not make any structural or
mechanical alterations in any portion of the Premises. Tenant shall not make any
interior alterations at a cost in excess of (SEE ADDENDUM TO LEASE), without
first obtaining the written consent of Landlord (SEE ADDENDUM TO LEASE). All
alterations, additions and improvements provided for herein shall become, upon
completion, the property of Landlord subject to the terms of this Lease.
18. REPAIRS AND MAINTENANCE:
18.1 Landlord's Obligations. Landlord shall keep in good order,
condition and repair the structural portions of the Building and those portions
of the Property not occupied or leased by any tenant.
18.3 Surrender. On the last day of the Term hereof, or on any
sooner termination or date on which Tenant ceases to possess the Premises,
Tenant shall surrender the Premises, and the keys thereto, to Landlord in good
and clean condition, ordinary wear and tear excepted. Prior to such surrender,
Tenant shall repair any damage to the Premises occasioned by its removal of
trade fixtures, furnishings and equipment, which repair shall include the
patching and filling of holes and repair of structural damage.
19. LIENS:
Tenant shall suffer no liens of any kind to be placed upon the Premises
or the Property. In any lien is placed upon the Premises or the Property as a
result of any work done on behalf of Tenant, or as a result of any goods or
services sold or rendered to Tenant, then Tenant shall, within ten (10) days of
the imposition of the lien, cause said lien to be removed (SEE ADDENDUM TO
LEASE) at Tenant's sole expense. At any time Tenant either desires to or is
required to make repairs or alterations in accordance with this Lease, Landlord
may require Tenant, at Tenant's sole cost and expense, to obtain and provide to
Landlord a lien and completion bond (or such other applicable bond as (SEE
ADDENDUM TO LEASE) determined by Landlord) in an amount equal to one and
one-half times the estimated cost of such improvements to insure Landlord
against liability including but not limited to liability for mechanics' and
materialmen's liens and to insure completion of the work.
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20. DAMAGE OR DESTRUCTION:
If the Premises or the Building shall be damaged or destroyed by fire
or other casualty, Landlord shall have the following options:
20.1 Lease Termination.
(A) If the Building or the Premises is damaged or destroyed to
the extent of fifty percent (50%) or more of its reasonable market value prior
to the time of said damage or destruction, Landlord may (SEE ADDENDUM TO LEASE)
terminate this Lease as of the date of the occurrence.
(B) (SEE ADDENDUM TO LEASE) If the Building or the Premises is
damaged or destroyed to the extent of the less than fifty (50%) of its
reasonable market value prior to the time of said damage or destruction but the
Building cannot, in the (SEE ADDENDUM TO LEASE) judgment of Landlord, be
operated economically as an integral unit, then Landlord may terminate this
Lease as of the date of the occurrence.
(C) (SEE ADDENDUM TO LEASE) If the Premises are damaged or
destroyed within the last thirty-six (36) months of the Term of this Lease or
any extension thereof, to the extent that Tenant cannot carry on Tenant's
business, then Landlord, at its sole discretion, may terminate this Lease as of
the date of the occurrence.
20.2 Repairs or Restoration. If Landlord elects to repair or
restore the Premises to the same condition as existed before such damage or
destruction, it shall proceed with reasonable dispatch to perform the necessary
work. However, notwithstanding anything in this Lease to the contrary, if the
cost of repair or restoration exceeds any insurance proceeds available for such
work, Landlord may terminate this Lease unless Tenant shall (SEE ADDENDUM TO
LEASE) after notice of the amount of deficiency, pay to Landlord that
deficiency. Upon Landlord's election to repair or restore the Premises, the Base
Rent shall be abated until such work is completed but Landlord shall not be
liable to Tenant for any delay which arises by reason of labor strikes,
adjustments of insurance or any other cause beyond Landlord's control, and in no
event shall Landlord be liable for any loss of profits or income. If fire or
other casualty causing damage to the Premises or other parts of the Building
shall have been caused by the (SEE ADDENDUM TO LEASE) negligence or (SEE
ADDENDUM TO LEASE) misconduct of the Tenant, its agents, representative,
employees, such damage shall be repaired by Landlord at the expense of Tenant
despite contrary provisions appearing this Lease and in such event there shall
be no abatement of rent.
21. CONDEMNATION:
If the Premises shall be taken by right of eminent domain, in whole or
in part, for public purposes or should be sold by Landlord under the threat of
the exercise of such power, then this Lease, at the option of Landlord (SEE
ADDENDUM TO LEASE) shall terminate and the Rent shall be properly apportioned to
the date of such taking, and the Landlord shall receive (SEE ADDENDUM TO LEASE)
the entire award for the lands and improvements so taken, or the entire amount
of any payment made under the threat of the exercise of power of eminent domain,
and Tenant shall have (SEE ADDENDUM TO LEASE) claim for the value of any portion
of its leasehold estate so terminated (SEE ADDENDUM TO LEASE). If less than a
substantial part of the Premises shall be taken, this Lease shall not terminate
[and] Landlord shall promptly restore and reconstruct the Premises, provided
such restoration and reconstruction shall make the same reasonably suitable for
the uses for which the Premises are leased, but in no event shall Landlord be
required to expend any amount greater than the amount received by Landlord as
compensation for the portion of the
Tenant's Initials __________
Landlord's Initials __________
17
<PAGE> 26
Premises taken by the condemnor. (SEE ADDENDUM TO LEASE). Tenant's rental
obligations during the unexpired portion of this Lease shall be adjusted
proportionately to reflect the gross leasable area remaining in the Premises, as
of the date on which the condemning authority takes title or possession.
22. FORCE MAJEURE:
In the event that either party hereto shall be delayed or hindered in
or prevented from the performance of any act required hereunder by reason of
strikes, lockouts, inability to procure materials, loss of utility services,
restrictive governmental laws or regulations, riots, insurrection, war, acts of
God, or other reason of a like nature not the fault of the party delayed in
performing work or doing acts required under the terms of this Lease, then
performance of such act shall be excused for the period of delay and the period
for the performance of any such act shall be extended for a period equivalent to
the period of such delay. The provisions of this Section shall not operate to
excuse Tenant from the prompt payment of Rent or any other charges under this
Lease.
24. SUCCESSION TO LANDLORD'S INTEREST:
24.1 Attornment. Tenant shall attorn and be bound to any of
Landlord's successors under all the terms, covenants and conditions of this
Lease for the balance of the remaining Term.
24.2 Subordination. This Lease shall be subordinate to (SEE
ADDENDUM TO LEASE) of any mortgage or security deed or the lien resulting from
any other method of financing or refinancing now or hereafter in force against
the Property, any portion thereof, or upon any buildings hereafter placed upon
the land of which the Premises are a part, and to any and all advances to be
made under such mortgages, and all renewals, modifications, extensions,
consolidations and replacements thereof (SEE ADDENDUM TO LEASE). Tenant
covenants and agrees to execute and deliver upon demand such further instrument
or instruments subordinating this Lease on the foregoing basis to the lien of
any such mortgage or mortgages as shall be desired by Landlord and any
mortgagees or proposed mortgagees, within ten (10) days after written notice to
do so.
24.4 Estoppel Certificate. Within (SEE ADDENDUM TO LEASE) days
after request therefor by Landlord, or in the event that upon any sale,
assignment or hypothecation of the Premises and/or the land thereunder by
Landlord an estoppel certificate (SEE ADDENDUM TO LEASE) in recordable form to
any proposed mortgagee or purchaser, or to Landlord, certifying that this Lease
is unmodified and in full force and effect (or if modified that the same is in
full force and effect as modified, and stating the modifications), that there
are no defenses or offsets thereto (or stating those claimed by Tenant) and the
dates to which Base Rent and Additional Rent have been paid.
25. SURRENDER OF PREMISES:
25.1 At the expiration (SEE ADDENDUM TO LEASE) or earlier
termination of this Lease, Tenant shall surrender the Premises to Landlord broom
clean and in the same condition as when tendered by Landlord, reasonable wear
and tear and insured casualty excepted. Tenant shall promptly repair any damage
to the Premises caused the removal of any furniture, trade fixtures or other
personal property placed in the Premises.
Tenant's Initials __________
Landlord's Initials __________
18
<PAGE> 27
25.2 Should Tenant, with Landlord's written consent, hold over at
the end of the term hereof, Tenant shall become a Tenant at will and any such
holding over shall not constitute an extension of this Lease (SEE ADDENDUM TO
LEASE).
26. PARKING:
The parking areas, or (SEE ADDENDUM TO LEASE) designated portions
thereof, shall be available for the use of tenants of the building and, to the
extent designated by Landlord, the employees, agents, customers and invitees of
said tenants shall (SEE ADDENDUM TO LEASE) be subject to the Rules, Regulations,
Charges, and Rates as set forth by the Landlord from time to time. However,
Landlord may restrict to certain portions of the parking areas parking for the
tenant and other tenants of the Building and their employees and agents, and may
designate other areas to be used at large only by customers and invitees of the
Building (SEE ADDENDUM TO LEASE).
Notwithstanding anything elsewhere herein contained, Landlord reserves
the right from time to time to make reasonable changes in, additions to and
deletions from the parking areas and the purposes to which the same may be
devoted, and the use of parking areas shall at all times be subject to such
reasonable rules and regulations as may be promulgated by landlord provided that
Landlord shall not reduce Tenant's parking rights as described in subparagraph
above (although it may change the locations thereof).
Covered reserved parking for Tenant and its employees or agents will be
provided, subject to availability, at a charge based upon the then fair market
value of such parking as determined solely by Landlord.
Landlord, or its agents (if Landlord has delegated such privileges),
shall have the right to cause to be removed any cars of Tenant, its employees or
agents that are parked in violation hereof or in violation of (SEE ADDENDUM TO
LEASE) Regulations of the Building, without liability of any kind to Landlord,
its agents or employees, and Tenant agrees to hold Landlord harmless from and
defend it against any and all claims, losses, or damages asserted or arising in
respect to or in connection with the removal of any such automobiles as
aforesaid. Tenant shall from time to time upon request of Landlord supply
Landlord with a list of license plate numbers of all automobiles operated by its
employees and agents who are to have parking privileges hereunder. Tenant may,
as a part of the regulations promulgated by Landlord, if for use of the Parking
Areas, require that Tenant cause an identification sticker issued by Landlord to
be affixed to all automobiles of Tenant and its employees or agents who are
authorized to park in the Parking Areas.
27. MISCELLANEOUS:
27.1 Partial Invalidity. If any term, covenant or condition of this
Lease or the application thereof to any person or circumstance shall, to any
extent, be invalid or unenforceable, the remainder of this Lease, or the
application of such term, covenant or condition to persons or circumstances
other than those as to which it is held invalid or unenforceable, shall not be
affected thereby, and each term, covenant or condition of this Lease shall be
valid and be enforced to the fullest extent permitted by law.
Tenant's Initials __________
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19
<PAGE> 28
27.2 Successors and Assigns. Except as otherwise provided herein,
this Lease shall be binding upon and inure to the benefit of the parties hereto
and their respective heirs, personal representatives, executors, successors and
assigns.
27.3 Waiver. The waiver by (SEE ADDENDUM TO LEASE) of any breach of
any term, covenant or condition herein contained shall not be deemed to be a
waiver of such term, covenant or condition or any subsequent breach of the same
or any other term, covenant or condition herein contained. The subsequent
acceptance of rent hereunder by Landlord shall not be deemed to be a waiver of
any preceding breach by Tenant of any term, covenant or condition of this Lease,
other than the failure of Tenant to pay the particular rental so accepted,
regardless of Landlord's knowledge of such preceding breach at the time of
acceptance of such rent. No covenant, term or condition of this Lease shall be
deemed to have been waived by (SEE ADDENDUM TO LEASE), unless such waiver be in
writing by (SEE ADDENDUM TO LEASE).
27.4 Accord and Satisfaction. No payment by Tenant or receipt by
Landlord of a lesser amount than the monthly rent herein stipulated shall be
deemed to be other than on account of the earliest stipulated rent, nor shall
any endorsement or statement on any check or any letter accompanying any check
or payment as rent be deemed an accord and satisfaction, and Landlord may accept
such check or payment without prejudice to Landlord's right to recover the
balance of such rent or pursue any other remedy in this Lease provided.
27.5 Attorneys' Fees. In the event any action is commenced for any
breach of any covenant, condition or agreement herein contained, the prevailing
party in such action shall be entitled to receive all costs incurred in such
action, including without limitation, all reasonable attorneys' fees.
27.6 Time Is Of the Essence. Time is of the essence of this
Agreement.
27.7 Broker's Commission. Tenant warrants that it has had no
dealings with any broker or agent in connection with this Lease except as
designated in Article 1.13, and covenants to pay, hold harmless and indemnify
Landlord from and against any and all cost, expense or liability for any
compensation, commissions and charges claimed by any broker or agent with
respect to this Lease or the negotiation thereof (SEE ADDENDUM TO LEASE).
27.8 No Light, Air or View Easement. Any diminution or shutting off
of light, air or view by any structure which may be erected on lands adjacent to
the Building shall in no way affect this Lease or impose any liability on
Landlord.
27.9 Entire Agreement. This Lease and the Exhibits and Addends, if
any, attached hereto and forming a part hereof, set forth all the covenants,
promises, agreements, conditions and understandings between Landlord and Tenant
concerning the Premises and there are no covenants, promises, agreements,
conditions or understandings, either oral or written, between them other than as
are herein set forth. Except as herein otherwise provided, no subsequent
alteration, amendment, change or addition to this Lease shall be binding upon
Landlord or Tenant unless reduced to writing and signed by them.
27.10 Applicable Law. The validity, performance and enforcement of
this Lease shall be governed by the laws of the state in which the Building is
located.
27.11 Notices. Whenever under this Lease provision is made for any
demand, notice or declaration of any kind, or where it is deemed desirable or
necessary by either party to give or serve any such notice,
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20
<PAGE> 29
demand or declaration to the other party, it shall be in writing and sent by
certified mail, return receipt requested, postage prepaid, to the address set
forth in Articles 1.8(A) and 1.9(A) hereof, or to such other address as may be
given by a party to the other by proper notice hereunder. The date on which the
certified mail is deposited with the United States Postal Service shall be the
date on which any proper notice hereunder shall be deemed given.
27.12 Quiet Enjoyment. Landlord warrants that it has full right and
power to execute and perform this Lease and that Tenant, on payment of the sums
due hereunder and performance of all of the covenants, conditions and provisions
on Tenant's part to be observed and performed hereunder, shall peacefully and
quietly have, hold and enjoy the Premises during the Term of this Lease and any
extension or renewal hereof.
27.13 Compliance with Law. Tenant shall comply with all present and
future laws, ordinances and regulations applicable to the use of Premises, and
shall promptly comply with all governmental orders and directives for the
correction, prevention and abatement of nuisance in, upon or connected with the
Premises, all at Tenant's sole expense (SEE ADDENDUM TO LEASE).
27.14 Superior Law. If any provision of this Lease is ever in
conflict with any applicable law or regulation, either now in effect or
hereafter adopted, said law or regulation shall control.
27.15 Guarantor. In the event that there is a guarantor of this
Lease, said guarantor shall have the same obligations as Tenant under this
Lease.
27.16 Exhibit. The Exhibits listed in Article 1.14 are attached
hereto and by this Article made a part hereof.
27.17 Execution of Lease. The submission of this Lease for
examination does not constitute a reservation of or option for the Premises and
this Lease becomes effective as a lease only upon execution and delivery thereof
by Landlord and Tenant. If Tenant is a corporation, Tenant shall furnish
Landlord with such evidence as Landlord reasonably requires to evidence the
binding effect on Tenant of the execution and delivery of this Lease.
IN WITNESS WHEREOF, the parties have subscribed their respective
signatures in execution hereof, on the day and year written.
TENANT: Union Oil Company of LANDLORD: REI Fund XV
California D/B/A Unocal ----------------------------
-----------------------
By By [Illegible]
----------------------------------- -----------------------------------
Name J.L. Prince Name [Illegible]
--------------------------------- ---------------------------------
Title Vice President Title [Illegible]
-------------------------------- --------------------------------
Date June 28, 1991 Date 7/12/91
--------------------------------- ---------------------------------
by Hallwood Management Co. as agent
Signed in the presence of:
Witness /s/Paul Granch Witness /s/Robin Nilsson
------------------------------ ------------------------------
Name Paul Granch Name Robin Nilsson
--------------------------------- ---------------------------------
Title Real Estate Contract Specialist Title Administrative Assistant
-------------------------------- --------------------------------
Tenant's Initials __________
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21
<PAGE> 30
LEASE AGREEMENT
EXHIBIT A
FLOOR PLAN
(Attached hereto)
Tenant: __________________________
DBA:_______________________________ The Premises and the Building a
shown above are approximations.
Premises: approximately 14,049 square feet (rentable)
Tenant's Initials __________
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22
<PAGE> 31
LEASE AGREEMENT
EXHIBIT B
LEGAL DESCRIPTION
ALL THAT TRACT or parcel of land lying and being in Land Lot 156 of the 18th
District of Dekalb County, Georgia, and being more particularly described as
follows:
TO FIND THE POINT OF BEGINNING, commence at the corner common to Land Lots 156,
157, 197 and 198; run thence south 70 degrees 41 minutes 46 seconds west 818.01
feet to a point; said point being the POINT OF BEGINNING; run thence south 27
degrees 15 minutes 51 seconds east 822.37 feet to a point on the northwestern
right of way of Interstate 85 Access Road; run thence along the northwestern
right of Interstate 85 Access Road south 61 degrees 15 minutes 28 seconds west
274.3 feet to a point; leaving the northwestern right of way, run north 55
degrees 57 minutes 00 seconds west 384.31 feet to a point; run thence south 34
degrees 03 minutes 00 seconds east 299.83 feet to a point; run thence south 05
degrees 11 minutes 00 seconds east 221.00 feet to a point on the northwestern
right of way Interstate 85 Access Road; run thence along the northwestern right
of way Interstate 85 Access Road the following courses and distances, south 62
degrees 10 minutes 29 seconds west 113.18 feet; south 83 degrees 26 minutes 13
seconds west 68.80 feet; south 65 degrees 17 minutes 47 seconds west 218.50 feet
to a point; leaving the northeastern right of way of Interstate 85 Access Road,
run thence north 77 degrees 54 minutes 53 seconds west 25.65 feet to a point;
run thence along the northwestern right of way of Corporate Boulevard north 27
degrees 06 minutes 30 seconds west 247.78 feet to a point; run thence along the
northwestern right of way of Corporate Boulevard an arc distance of 358.05 feet
to a point (said arc being subtended by a chord bearing north 40 degrees 42
minutes 09 seconds west and having a length of 365.60 feet); run thence north 35
degrees 22 minutes 30 seconds east 71.0 feet to a point, run thence north 82
degrees 37 minutes 30 seconds east 159.0 feet to a point, run thence south 27
degrees 22 minutes 30 seconds east 63.0 feet to a point, run thence north 62
degrees 37 minutes 30 seconds east 72.0 feet to a point, run thence south 27
degrees 22 minutes 30 seconds east 65 feet to a point, run thence north 62
degrees 37 minutes 30 seconds east 75.0 feet to a point, run thence north 27
degrees 22 minutes 30 seconds west 351.00 feet to a point; run thence along an
arc to the right 7.85 feet (said arc being subtended by a chord bearing north 17
degrees 37 minutes 30 seconds east and having a chord distance of 7.07 feet) to
a point; run thence north 62 degrees 37 minutes 30 seconds east 16.0 feet to a
point; run thence along an arc to the right 7.85 feet (said arc being subtended
by a chord bearing south 72 degrees 22 minutes 30 seconds east and having a
distance of 7.07 feet) to a point; run thence south 27 degrees 22 minutes 30
seconds east 14.0 feet to a point; run thence north 62 degrees 37 minutes 30
seconds east 36.0 feet to a point; run thence north 27 degrees 22 minutes 30
seconds west 209.0 feet to a point; run thence north 33 degrees 37 minutes 30
seconds east 5.0 feet to a point; run thence north 56 degrees 22 minutes 30
seconds west 45.63 feet to a point; run thence south 33 degrees 45 minutes 44
seconds west 808.25 feet to a point on the northeastern right of way of
Corporate Boulevard; run thence along the northeastern right of way of Corporate
Boulevard north 56 degrees 06 minutes 30 seconds west a distance of 108 feet
more or less to the centerline of Peachtree Creek; run thence northeast along
the centerline of Peachtree Creek 889 feet more or less to the intersection with
the northern land lot line of Land Lot 156; run thence easterly along the
northern land lot line of Land Lot 156 south 89 degrees 32 minutes 09 seconds
east 280 feet more or less to a point on the northern land lot line; run thence
north 89 degrees 38 minutes 48 seconds east 64.01 feet to a point; run thence
south 27 degrees 22 minutes 30 seconds east 136.0 feet to a point; run thence
north 62 degrees 37 minutes 30 seconds east 77.00 feet to a point; run thence
south 27 degrees 19 minutes 09 seconds east 310.41 feet to a point; run thence
north 82 degrees 39 minutes __ seconds east 323.07 feet to the POINT OF
BEGINNING, all according to a survey for Equitec Real Estate Investors, Fund XV
and Ticor Title Insurance Company by Watts & Browning, Engineers, dated July 1,
1985, last revised July 19th, 1985.
Tenant's Initials __________
Landlord's Initials __________
23
<PAGE> 32
LEASE AGREEMENT
EXHIBIT C
TENANT SUITE IMPROVEMENT WORKLETTER
Tenant's Initials __________
Landlord's Initials __________
24
<PAGE> 33
UNION OIL COMPANY OF CALIFORNIA
LEASE AGREEMENT
EXHIBIT E
RIDER TO LEASE
I. FIRST RIGHT OF REFUSAL
Landlord hereby extends to Tenant a right of first refusal for all
rental space immediately adjacent to the premises leased to Tenant under the
Lease Agreement. The rental rate applicable to any such additional space shall
be the same per square foot rental rate then applicable under the Lease
Agreement. Upon Landlord's receipt of a bona fide offer to Lease with regard to
such adjacent leasehold space, Landlord shall extend to Tenant, by written
notice, a right of first refusal. Such notice shall constitute an offer to lease
such space to Tenant which shall remain open for a period of at least five (5)
business days. Tenant may exercise its right of first refusal by written notice
delivered to Landlord within that time. If such right of first refusal is
exercised, Tenant shall be granted $5.00 per rentable square foot to improve the
space. The improvement allowance shall be prorated accordingly depending on the
time during the three year lease term in which this right is exercised, using a
monthly proration figure of $.1389 per month. Any improvement dollars expended
for such a first right of refusal shall also correlate back and be considered a
part of the cancellation option penalty.
II. IMPROVEMENT ALLOWANCE
Tenant shall be granted $5.00 per rentable square foot allowance which
Tenant has elected to take as an improvement allowance credit against the
monthly rental over the entire term of the lease. The improvement allowance
credit shall break down as follows:
From 07/91 - 06/92 = Monthly Improvement Credit $1,951.25
From 07/92 - 06/93 = Monthly Improvement Credit $1,951.25
From 07/93 - 06/94 = Monthly Improvement Credit $1,951.25
Said improvement allowance shall offset gross rentals on a monthly
basis with the credit taken as noted above, as negotiated between the parties to
lease.
III. RENEWAL OPTION
Landlord hereby grants Tenant the right to renew and extend the term of
this lease for one (1) additional period of four (4) years upon the following
terms and conditions: A. Tenant shall give Landlord written notice of its intent
to exercise of such renewal option at least 90 days prior to the expiration of
the then current term of this lease. B. Such option will be exercised only if,
at the time of the exercise of such option, and at the date of commencement of
the renewal term, this lease is in full force and effect, and no event of
default shall exist pursuant to Section 12 of the Lease. C. Such a renewal
option is subject to market economics and at terms and conditions subject to
negotiations at the time of such exercise. Market comparable
<PAGE> 34
EXHIBIT E
RIDER TO LEASE
PAGE 2 OF 4
properties shall include Koger Center, Century Center and Executive Park. D.
Improvement allowance subject to such renewal shall be defined as not to exceed
$7.00 per rentable square foot.
IV. CANCELLATION OPTION
Landlord hereby grants Tenant the right to cancel this Lease at any
full year interval anniversary date providing Landlord ninety (90) days prior
written notice of its desire to cancel. Full year interval anniversary date
shall be defined as July 1, 1992 or July 1, 1993.
V. BUILDING SYSTEMS
Landlord agrees to maintain building temperatures at a reasonable
range. Landlord agrees to survey the heating/air conditioning system for the
purpose of estimating cost of work necessary to rebalance the system. Landlord
shall absorb any costs associated with the survey work only. Rebalancing the
system, if necessary, will be at Tenant's option and sole expense.
VI. SUBLEASE AND ASSIGNMENT RIGHT
Tenant shall have the continuing right to assign the lease or sublet
all or any portion of the premises at any time during the primary lease term,
with Landlord's consent which shall not be unreasonably withheld or delayed and
to retain 100% of any rentals resulting from the sublease(s) or assignments.
Subleases or assignments to any subsidiaries or affiliates of Tenant shall not
require Landlord's consent.
VII. SURRENDER OF PREMISES/HOLDING OVER
Tenant shall have the right to hold over beyond the expiration of the
lease for a period of up to six (6) months at the same terms and conditions as
the primary lease including base rental rate but excluding any improvement
allowance credit. Tenant may vacate the premises by giving Landlord thirty (30)
days prior written notice during the holdover term. Occupancy after the initial
six (6) month holdover period shall be considered a month-to-month tenancy and
rental paid by Tenant shall be at a rate equal to 110% of the then current base
rental rate at the end of the holdover period. Base rental rate is defined in
Lease Provision 1.11.
VIII. INTENTIONALLY DELETED
<PAGE> 35
EXHIBIT E
RIDER TO LEASE
PAGE 3 OF 4
IX. NON-DISTURBANCE AGREEMENT
Landlord shall make every best effort to secure for Tenant a
non-disturbance agreement. No guarantees can be made as to a timeframe for
receipt, however Landlord will make every best effort to secure such an
agreement in a timely fashion after execution of this lease agreement. If not
received within ninety (90) days after full execution of the Lease agreement by
both parties, Tenant has the right for a period of seven (7) days, to cancel
upon thirty (30) days written notice to Landlord at no cost to Tenant.
X. FIXTURES
All affixed appurtenances including, but not limited to fixtures, wall
mounted cabinets, computer, and/or electronic equipment which are owned or
installed by Tenant, may be removed by Tenant upon vacating the premises
provided that any damage caused to premises by said removal be repaired to its
original condition with reasonable wear and tear excepted.
XI. PARKING
Tenant shall be granted the use of four (4) parking spaces per 1,000
rentable square feet as required by Dekalb County Code. Such use of the parking
spaces defined herein shall be at no cost to the Tenant, and shall not be
specifically designated or marked for Tenant's sole use.
XII. ACCESS INTO PREMISES
Tenant shall have 24 hour per day/7 days per week access into the
premises.
XIII. REQUEST FOR ADDITIONAL SERVICES
Tenant shall have the ability to request additional heating/air
conditioning service hours at an hourly charge of $35.00 per hour. Landlord
shall have the option to adjust the hourly charge to accommodate for rate
fluctuations incurred from the local utility company. Tenant shall be notified
in writing from Landlord of rate changes regarding additional services.
XIV. HAZARDOUS OR REGULATED MATERIALS
Landlord shall indemnify Tenant for any and all claims, liabilities,
damages, and costs, including attorneys' fees incurred by Tenant as a result of
all hazardous or
<PAGE> 36
EXHIBIT E
RIDER TO LEASE
PAGE 4 OF 4
regulated materials contained on or within the Property and/or materials brought
in or onto the Property by individuals other than Tenant's employees and/or
visitors.
XV. HOLD HARMLESS:
Landlord shall indemnify, defend and hold Tenant harmless from any and
all claims, liabilities, damages and costs, including attorneys fees, incurred
by Tenant which may arise from Landlord's negligent use of the Property or from
the conduct of its business or from any negligent activity, work or things which
be negligently permitted or suffered by Landlord in, on or about the Property,
and shall further indemnify, defend and hold Tenant harmless from and against
any and all claims, liabilities, damages and costs, including attorneys fees,
incurred by Tenant which may arise from any breach or default in the performance
of any obligation on Landlord's part under this Lease or which may arise from
any negligence of Landlord or any of its agents, representatives, customers,
employees or invitees. Landlord shall indemnify, defend and hold Tenant harmless
from and against any and all liabilities, damages and costs, including attorneys
fees, which may arise from any injury or loss incurred as a result of Landlord,
its agents, representatives or designees entering the Premises under an
emergency circumstance, such as fire or similar event which Landlord has
negligently caused.
XVI. GENERAL REASONABILITY PROVISION
Whenever this Lease grants Landlord or Tenant the right to take action,
exercise discretion, establish rules and regulations or make allocations or
other determinations, Landlord or Tenant shall act reasonably and in good faith
and take no action which result in the frustration of the reasonable
expectations of a sophisticated prudent Landlord and sophisticated prudent
Tenant concerning the benefits to be enjoyed under this Lease.
XVII. COMPLIANCE WITH LAW
Landlord shall comply with all present and future laws, ordinances and
regulations applicable to the use of Property, and shall promptly comply with
all governmental orders and directives for the correction, prevention and
abatement of nuisance in, upon or connected with the Property, all at Landlord's
sole expense.
XVIII. POTENTIAL CONFLICTS
In the event of a conflict between the provisions of the Lease, the
Addendum to Lease and the Rider to Lease, the Addendum and Rider shall govern
the Agreement.
<PAGE> 37
Union Oil Company of California
Lease Dated March 14, 1991
Addendum to Lease
Page 1 of 10
Section 2.1
Paragraph 2 - Delete paragraph.
Section 2.2 - Delete section.
Section 2.3
Paragraph 2 - Delete paragraph.
Section 3.2
Line 1 - Replace: If for any reason With: Subject to the immediately
succeeding sentence,
Line 6 - Delete: until possession of the Premises is tendered to
Tenant, which date shall be the new Lease Commencement Date, and the Lease
Expiration Date shall remain unchanged. Add: if Landlord fails to deliver
possession of the premises to Tenant prior to July 1, 1991 in accordance with
the terms hereof.
Section 4. - Delete section.
Section 5.1
Paragraph 2, Line 8 - Directly after "Landlord", Add: and Tenant
Paragraph 2, Line 10 - Replace: billing to Tenant With: reconciliation
statement
Paragraph 2, Line 10 - Directly after "Tenant", Add: or Landlord, as
applicable
Paragraph 2, Line 11 - Replace: Landlord With: the other Section 5.2
Line 3 - Replace: the highest legal rate With: ten percent (10%)
Section 5.3
Paragraph 2 - Delete paragraph
Section 5.4 - Delete section.
<PAGE> 38
Union Oil Company of California
Lease Dated March 14, 1991
Addendum to Lease
Page 2 of 10
Section 6.0
Paragraph 1, Line 3 - Directly after "by the" Add: negligent
Paragraph 1, Line 4 - Directly after "Tenant's" Add: reasonable
Paragraph 3, Line 8 - Directly after "services" Add: beyond Landlord's
reasonable control
Paragraph 3, End of Paragraph - Add: Notwithstanding anything to the
contrary contained in this Section 6.0 or this Lease, in the event that Landlord
provided services are interrupted or suspended in such a manner to adversely
affect Tenant's use of the Premises for a period in excess of five (5) business
days, Tenant may undertake to cause to have such services reinstated and shall
have the right to off-set such costs incurred against any amounts owing Landlord
under this Lease, not to exceed a maximum dollars of $2,500.00.
Paragraph 4 - Delete paragraph.
Paragraph 5, Line 2 - Directly after "which" Add: materially
Paragraph 5, Line 5 - In between "and the" and "cost" in both places
that line Add: reasonable
Section 7.0 - Delete section.
Section 8.0
End of Paragraph - Add: See Rider to Lease, Paragraph V. entitled
Building Systems, which further defines Landlord's obligations.
Section 9.0
Paragraph 1, End of Paragraph - Add: Landlord will allow Tenant the
unilateral right to assign or sublet to any entity which is controlled by or is
under common control with Tenant ("Affiliate") without consent of the Landlord.
Additionally, upon time of Assignment to an Affiliate or a third party having
equal creditworthiness, Tenant is to be released from lease obligations upon
assumption by Assignee.
Paragraph 2 - Delete paragraph.
Paragraph 3, Line 3 - Replace: sixty With: thirty (30)
<PAGE> 39
Union Oil Company of California
Lease Dated March 14, 1991
Addendum to Lease
Page 3 of 10
Paragraph 3, Line 8 - Directly after "experience and" Add: viable
Paragraph 3, Line 8 & 9 - Delete: equal to or greater than that of
Tenant
Paragraph 4, Line 1 & 2 - Delete: execute an agreement with Landlord
agreeing to pay to Landlord, as Additional Rent, Add: be entitled to retain
Paragraph 4, Line 3 - 5 - Delete: in excess of the amounts owed by
Tenant to Landlord under this Lease, which Additional Rent shall be paid to
Landlord as and when received by Tenant.
Paragraph 4, Line 6 - Replace: shall consent With: that Landlord's
consent is necessary hereunder and Landlord consents
Paragraph 4, End of Paragraph - Add: Notwithstanding the foregoing
should Tenant be released from all of its obligations hereunder upon such
assignment or transfer with Landlord's written consent, Landlord shall retain
100% of all monies or other consideration to be paid by said Transferee or
Assignee.
Section 10.1
Paragraph 1, Line 1 & 2 - Delete: , continuously and uninterruptedly
from and after the initial opening for business,
Paragraph 1, Line 4 & 5 - Delete: , except while the Premises are
untenantable by reason of fire or other casualty
Section 11
Paragraph 1, Line 1 - Prior to "Tenant agree" Add: Landlord and
Paragraph 1, Line 2 - Directly after "regulations, and" Add: Landlord's
or
Paragraph 1, Line 3 - Delete: amend Add: make such reasonable
amendments
Paragraph 1, Line 4 - Delete: supplement said Add: supplemental
Paragraph 1, Line 7 - Directly after "observe all" Add: reasonable
Paragraph 2, End of Paragraph - Add: All such waivers must be
consistently applied.
<PAGE> 40
Union Oil Company of California
Lease Dated March 14, 1991
Addendum to Lease
Page 4 of 10
Section 11.3
Line 3 - Directly after "consent of Landlord" Add: which consent shall
not be unreasonably withheld or delayed
Section 11.4
Line 3, End of Paragraph - Add: which consent shall not be unreasonably
withheld or delayed
Section 11.6
Line 2 & 3 - Delete: , and no foreign substance of any kind shall be
deposited therein
Line 6 - 8 - Delete: Tenant shall be responsible for all sanitary sewer
lines up to the limit of Tenant's private sewer line, whether or not such lines
are located within the premises.
Section 11.7
End of Paragraph - Add: which shall not be unreasonably withheld or
delayed
Section 11.8
End of Paragraph - Add: Parking areas designated for Tenant parking
shall be defined as the north, east, south or west parking lots immediately
surrounding Building 13.
Section 11.10
End of Paragraph - Add: Any such name change is limited as to not be
named by or after any direct competition relating to Tenant's business.
Section 11.11
Line 4 - Directly after "consent of Landlord" Add: which shall not be
unreasonably withheld or delayed
Section 11.14
Line 3 - Replace: visually With: physically
<PAGE> 41
Union Oil Company of California
Lease Dated March 14, 1991
Addendum to Lease
Page 5 of 10
Section 11.19
Line 3 - Directly after "Landlord in writing" Add: which shall not be
unreasonably withheld or delayed
Section 11.22
Line 3 - Replace: sole With: reasonable
Section 11.23
Line 2 - Directly after "location of Tenants" Add: and Tenant's
employees located in the Premises
Section 11.26
Paragraph 1, Line 4 - Directly after "Building must be" Add: reasonably
Paragraphs 2, Line 3 - Directly after "services of an insured" Add: /or
bonded
Paragraph 2, Line 3 - 6 - Delete language as noted in body of Lease.
Section 12.1
Line 2 - Directly after "constitute" Add: an event of
Subsection A, Line 2 - Delete: Additional Rent
Subsection A, Line 3 - Directly after "when due" Add: Notice Cure
period after notice shall be defined as twenty (20) business days for
"non-rental" default and five (5) business day cure period for "rental" default.
Subsection B, Line 4 - Delete: . This default shall be deemed a
non-curable default
Subsection C, Line 3 - Delete: other than Paragraph (A) above,
Subsection C, Line 5 - Directly after "Tenant" Add: Provided, however
if incapable of being cured within twenty (20) business days, Tenant shall not
be in default if commences to cure and diligently proceeds to cure
Subsection G - Delete section.
<PAGE> 42
Union Oil Company of California
Lease Dated March 14, 1991
Addendum to Lease
Page 6 of 10
Section 12.2
Subsection A - Delete language as noted in body of Lease.
Subsection B - Delete section.
Subsection C - Delete section.
Subsection D - Delete section.
Section 13.1
Line 3 - Directly after "insurance" Add: or self-insurance
Line 3 - Replace: co-insured With: an additional insured
Subsection B, Line 1 - Directly after "insurance" Add: or
self-insurance
Subsection C, Line 1 - Directly after "Glass Insurance" Add: or
self-insurance
Subsection D, Line 1 - Directly after "Compensation insurance" Add: or
self-insurance
Section 13.3
Line 2 - Delete: A+, AAA Add: A
Section 13.4
Line 2 - Directly after "and Landlord" Add: hereby release one another
from any and all claims covered by their respective insurers and
Section 14
Line 8 - Directly after "provided that" Add: the Successor assumes
Landlord's obligations and
Section 15
Line 3 - Directly after "from Tenant's" Add: negligent
Line 4 - Directly after "or from any" Add: negligent
<PAGE> 43
Union Oil Company of California
Lease Dated March 14, 1991
Addendum to Lease
Page 7 of 10
Line 4 - Directly after "which may be" Add: negligently
Line 15 - Directly after "similar event" Add: which Tenant has
negligently caused
End of Paragraph - Add: Landlord and Tenant to give reciprocal
indemnifications. See Rider to Lease, Paragraph XV.
Section 16
Line 1 - Directly after "have the right" Add: upon giving Tenant two
(2) day notice
Line 3 - Directly after "Landlord may" Add: reasonably
Section 17.1
Line 3 - Directly after "of the foregoing," Add: and so long as
Tenant's access to the Premises and the operation of its business is not
limited,
Subsection E, Line 2 - Replace: ; and With: .
Section 17.2
Line 3 - Directly after "any" Add: individual
Line 3 - Replace: $2,500 With: $10,000
Line 4 - Directly after "Landlord" Add: which shall not be unreasonably
withheld or delayed.
Line 6 - 9 - Delete language as noted in body of Lease.
Section 18.1
Line 3 - 7 - Delete language as noted in body of Lease.
Section 18.2 - Delete section.
Section 19
Line 5 - Directly after "to be removed" Add: or shall cause to be
procured a Statutory Release Bond
<PAGE> 44
Union Oil Company of California
Lease Dated March 14, 1991
Addendum to Lease
Page 8 of 10
Line 9 - directly after "applicable bond as" Add: reasonably
Section 20.1
Subsection A, Line 3 - Directly after "Landlord" Add: or Tenant
Subsection B, Line 1 - Prior to "If the Building" Add: Subject to
Subsection C below,
Subsection B, Line 4 - Delete: sole Add: reasonable
Subsection C - Redefine subsection letter as Subsection (D)
Subsection C - Replace previous Subsection (C) with the following: If
the Premises are damaged or incur destruction less than 50% of the total Tenant
area and the Landlord does not or cannot complete necessary repairs within sixty
(60) days of occurrence, Tenant may terminate the Lease with thirty (30) days
written notice to Landlord.
Section 20.2
Line 6 - Directly after "Tenant shall" Add: without any duty to do so
Line 14 - Prior to "negligence or" Add: gross
Line 14 - Directly after "negligence or" Add: willful
Line 15 & 16 - Delete: or of any other person entering the premises
under express or implied invitation of Tenant,
Section 21
Line 3 - Directly after "option of Landlord" Add: or Tenant
Line 5 - Delete: the entire Add: its proportionate share of the
Line 7 - Delete: no Add: a
Line 8 - 9 - Delete: except any claim to which Tenant is solely
entitled not affecting Landlord's claim. Add: and consequent moving expenses
Line 10 - Delete: less than a substantial part of the Premises shall be
taken, this
<PAGE> 45
Union Oil Company of California
Lease Dated March 14, 1991
Addendum to Lease
Page 9 of 10
Line 11 - Delete: but Delete: at its sole expense,
End of Paragraph - Add: Provided, however, that in no event shall
repairs or restoration take longer than (60) days completion date
Section 23 - Delete section.
Section 24.2
Line 1 - Delete: the lien Add: any existing liens
Line 7 - Directly after "thereof." Add: Such subordination shall be
self-operative only upon the receipt of a non-disturbance agreement by Tenant in
form reasonably acceptable to Tenant.
Line 7 - 8 - Delete language as noted in body of Lease.
Line 12 - 14 - Delete language as noted in body of Lease.
End of Paragraph - Add: See Rider to Lease Paragraph IX attached and
made a part hereto.
Section 24.3 - Delete section.
Section 24.4
Line 1 - Delete: ten (10) Add: thirty (30)
Line 4 - Delete: shall be required from Tenant, Tenant agrees to
deliver Add: which Tenant reasonably approves shall be delivered by Tenant
Line 4 - 5 - Delete: a certificate
Section 25.1
Line 1 - Directly after "At the expiration" Add: as defined in the
attached Rider to Lease, Paragraph VII
Section 25.2
Line 3 - 10 - Delete language as noted in body of Lease.
<PAGE> 46
Union Oil Company of California
Lease Dated March 14, 1991
Addendum to Lease
Page 10 of 10
Line 3 - Directly after "of this Lease" Add: with exception as defined
in the Rider to Lease, Paragraph VII
Section 26
Paragraph 1, Line 1 - Directly after "The parking areas, or" Add:
reasonably
Paragraph 1, Line 3 - Directly after "said tenants shall" Add: upon
Tenant receiving notice thereof and providing approval thereof
Paragraph 1, Line 8 - Directly after "of the Building" Add: not to
exceed four (4) spaces per 1,000 square feet of office space
Paragraph 4, Line 3 - Directly after "in violation of" Add:
above-referenced
Section 27.3
Line 1 - Delete: Landlord Add: either party
Line 10 - Delete: Landlord Add: either party
Line 11 - Delete: Landlord Add: such party
Section 27.7
End of Paragraph - Add: Landlord warrants that it has had no dealings
with any broker or agent in connection with this Lease except as designated in
Article 1.13, and covenants to pay, hold harmless and indemnify Tenant from and
against any and all cost, expense or liability for any compensation, commissions
and charges claimed by any broker or agent with respect to this Lease or the
negotiation thereof.
Section 27.13
End of Paragraph - Add: Landlord shall provide Tenant with reciprocal
compliance. See Rider to Lease, Paragraph XVII.
<PAGE> 47
FIRST AMENDMENT
TO LEASE
STATE OF GEORGIA
COUNTY OF DEKALB
Amendment, made this 6th day of June, 1994, by and between
HALLWOOD REAL ESTATE INVESTORS FUND XV, a Delaware General Partnership, having
an office at 3 Corporate Square, Suite 315, Atlanta, Georgia, party of the first
part, hereinafter referred to as "Landlord", and UNION OIL OF CALIFORNIA aka
UNOCAL, having an office at 13 Corporate Square, Suite 200, Atlanta, Georgia,
party of the second part, hereinafter referred to as "Tenant".
WITNESSETH
WHEREAS, Equitee Real Estate Investors Fund XV and Tenant, as
of March 14, 1991, entered into a Lease covering Suite 200 on the second floor
of the building known as 13 Corporate Square, and at the rental and upon the
terms and conditions therein more particularly set forth, and Equitee REI Fund
XV subsequently assigned its interest therein to Landlord, and
WHEREAS, Landlord and Tenant are desirous of further amending
said Lease in the manner set forth below:
PREMISES
Effective July 1, 1994, the square footage under lease to
Tenant shall decrease from approximately 14,049 rentable square feet to
approximately 5,610 rentable square feet.
TERM
The termination date of the Lease shall be and is hereby
extended from the 30th day of June, 1994 to the 30th day of June, 1999, the
"Extension Period".
RATE
The total base monthly rental amounts during the above stated
Extension Period shall be billed and are payable as follows:
<PAGE> 48
<TABLE>
<CAPTION>
TERM RENTAL RATE
---- -----------
<S> <C>
7-1-94 to 6-30-95 $4,815.25 per month
7-1-95 to 6-30-96 $5,058.35 per month
7-1-96 to 6-30-97 $5,310.80 per month
7-1-97 to 6-30-98 %5,572.60 per month
7-1-98 to 6-30-99 $5,853.10 per month
</TABLE>
LEASEHOLD IMPROVEMENTS
Landlord shall grant Tenant a build-out allowance in the
amount of $540,672.50 ($7.25 per square foot, based on 5,610 square feet) for
the purpose of down-sizing the premises described above, in accordance with
current building and fire codes, the floor plan attached hereto as Exhibit 1-A
(which shall suffice as representative of the tenant improvements mutually
agreed upon by the parties hereto, until such time as sealed construction
drawings can be created and presented to Tenant for Tenant's acceptance and
signed approval prior to commencement of construction), the Work Letter attached
hereto as Exhibit 1-B, and the General Contractor's line-item bid attached
hereto as Exhibit 1-C, all of which are made a part hereof by this reference.
Tenant shall have the sole responsibility for payment of any tenant improvement
costs required hereunder which exceed Landlord's build-out allowance, and Tenant
shall promptly pay to Landlord any overage due, upon receipt of invoice from
Landlord. (Example: As of the date of this First Amendment, the total
construction cost is estimated at $61,167.57, and given that level of cost,
Tenant's portion payable to Landlord would be $20,495.07). Notwithstanding
anything contained herein to the contrary, Tenant's portion of such construction
costs shall not exceed $20,495.07 without Tenant's written consent except in the
event of a change order approved in advance by Tenant, or required changes
imposed by the fire marshall or building inspector as a result of Tenant's floor
plan attached hereto.
RIDER TO LEASE
The following list of paragraphs, as more particularly set
forth in Lease Exhibit E, "Rider to Lease", shall be considered expired and
therefore null and void in their entirety as of the effective date of the
Extension Period, that is July 1, 1994:
Paragraph I. First Right of Refusal;
Paragraph II. Improvement Allowance;
Paragraph III. Renewal Option;
Paragraph IV. Cancellation Option.
<PAGE> 49
BROKER
Tenant represents that Tenant has dealt with no broker or
agent in connection with this First Amendment to Lease, and that no other
party(ies) is (are) entitled to any commission in connection herewith other than
Hallwood Management Company, managing agent for Landlord, and the
Miller-Richmond Company, agent for Tenant. Landlord shall pay a commission to
the managing agent named herein, according to their agreement, and Tenant shall
owe no commission whatsoever to managing agent named herein; however, Tenant
shall indemnify and hold Landlord harmless from any and all claims for services
rendered to Tenant by any other agent(s) with whom Tenant has dealt in
connection herewith, whether named or not named herein. Hallwood Management
Company has not acted as agent for the Tenant in this transaction, and shall
have no obligation whatsoever for payment of any fees or commissions to the
Miller-Richmond Company, agent for Tenant, which may be due for services
rendered to Tenant by Tenant's agent. Landlord represents that Landlord has
dealt with no broker or agent in connection with this First Amendment to Lease,
and that no other party(ies) is (are) entitled to any commission in connection
herewith other than Hallwood Management Company, managing agent for Landlord,
and Miller-Richmond Company, agent for Tenant. Landlord shall indemnify and hold
Tenant harmless for any and all claims for services rendered to Landlord by any
other agent(s) with whom Landlord has dealt in connection herewith, whether
named or not named herein.
THIS FIRST AMENDMENT to Lease shall be in full force as of the
date above first written, and shall take effect as of July 1, 1994 and shall
continue in effect for the duration of said Lease, as amended, that is through
June 30, 1999. The Lease, as amended, is hereby ratified and confirmed, and all
conditions contained therein remain in full force and effect.
<PAGE> 50
IN WITNESS WHEREOF, each party has caused this Amendment to
Lease to be executed by its duly authorized officer(s).
LANDLORD: HALLWOOD REAL ESTATE INVESTORS FUND XV, a Delaware General
Partnership
BY: Hallwood Management Company, as Agent for Hallwood Real Estate
Investors Fund XV
NAME: _____________________________________________________________
TITLE: _____________________________________________________________
DATE: _____________________________________________________________
TENANT: UNION OIL COMPANY OF CALIFORNIA
BY: _____________________________________________________________
NAME: _____________________________________________________________
TITLE: _____________________________________________________________
DATE: _____________________________________________________________
<PAGE> 51
SECOND AMENDMENT
TO LEASE
STATE OF GEORGIA
COUNTY OF DEKALB
Amendment, made this 18th day of August, 1994, by and between
HALLWOOD REAL ESTATE INVESTORS FUND XV, a Delaware General Partnership, having
an office at 3 Corporate Square, Suite 315, Atlanta, Georgia, party of the first
part, hereinafter referred to as "Landlord", and UNION OIL OF CALIFORNIA aka
UNOCAL, having an office at 13 Corporate Square, Suite 200, Atlanta, Georgia,
party of the second part, hereinafter referred to as "Tenant".
WITNESSETH
WHEREAS, Equitee Real Estate Investors Fund XV and Tenant, as
of March 14, 1991, entered into a Lease covering Suite 200 on the second floor
of the building known as 13 Corporate Square, and at the rental and upon the
terms and conditions therein more particularly set forth, and as amended, and
Equitec REI Fund XV subsequently assigned its interest therein to Landlord, and
WHEREAS, the Lease was amended pursuant to that certain First
Amendment to Lease dated June 6, 1994, and
WHEREAS, Landlord and Tenant are desirous of further amending
said Lease in the manner set forth below:
PREMISES
Effective September 1, 1994, and for the remaining term of the
Lease, that is until June 30, 1999, the square footage under lease to Tenant
shall be increased from approximately 5,610 rentable square feet to
approximately 5,769 rentable square feet, according to the following adjustments
and as set forth on the floor plan marked as Exhibit 2-A, attached hereto and
made a part hereof by this reference: 1.) Tenant shall take under lease the
floor area marked by cross-hatched lines on Exhibit 2-A containing approximately
399 rentable square feet; 2.) Tenant shall give up to Landlord, from under
Lease, the floor area marked by diagonal lines on Exhibit 2-A, containing
approximately 240 rentable square feet; the net difference of which is equal to
approximately 159 rentable square feet, which accounts for the increase in
square footage under lease to Tenant, as set forth above.
RATE
The total base monthly rental amounts during the Periods set
forth below shall be billed and are payable as follows:
<PAGE> 52
<TABLE>
<CAPTION>
TERM RENTAL RATE
---- -----------
<S> <C>
9-1-94 to 6-30-95 $4,919.11 per month
7-1-95 to 6-30-96 $5,167.45 per month
7-1-96 to 6-30-97 $5,425.35 per month
7-1-97 to 6-30-98 $5,692.79 per month
7-1-98 to 6-30-99 $5,979.34 per month
</TABLE>
LEASEHOLD IMPROVEMENTS
Landlord shall grant Tenant a build-out allowance in the
amount of $877.25, which is granted in addition to the $40,762.50 allowance as
set forth in the First Amendment document, for the purpose of alterations to the
First Amendment square footage and the additional space added herein, as
indicated on the floor plan attached hereto as Exhibit 2-A, in accordance with
current building and fire codes and in accordance with the sealed construction
drawings prepared by Brent Davis Associates Architects, Inc., dated August 17,
1994, and which were mutually agreed upon, signed, and accepted by the parties
hereto on August 30, 1994, and with the finishes consistent with those set forth
in the Work Letter found in the First Amendment to Lease as Exhibit 1-B. Tenant
shall have the sole responsibility for payment of any tenant improvement costs
required hereunder which exceed Landlord's build-out allowance, and Tenant shall
promptly pay to Landlord any overage due, upon receipt of invoice from Landlord.
As of the date of this Second Amendment to Lease, the total combined build-out
cost of the First and Second Amendments is estimated at $65,417.57, less
Landlord's combined allowance of $412,549.75, equals Tenant's portion, payable
to Landlord, of $23,867.82. Notwithstanding anything contained herein to the
contrary, Tenant's portion of such construction costs shall not exceed
$23,867.82 without Tenant's written consent, except in the event of a change
order approved in advance by Tenant, or required changes imposed by the Fire
Marshall or Building Inspector as a result of Tenant's floor plan attached
hereto.
BROKER
Tenant represents that Tenant has dealt with no broker or
agent in connection with this Second Amendment to Lease, and that no other
party(ies) is(are) entitled to any commission in connection herewith other than
Hallwood Management Company, managing agent for Landlord, and the
Miller-Richmond Company, agent for Tenant. Landlord shall pay a commission to
the managing agent named herein, according to their agreement, and Tenant shall
owe no commission whatsoever to managing agent named herein; however, Tenant
shall indemnify and hold Landlord harmless from any and all claims for services
rendered to Tenant by any other agent(s) with whom Tenant has dealt in
connection therewith, whether named or not named herein. Hallwood Management
Company has not acted as agent for the Tenant
<PAGE> 53
in this transaction, and shall have no obligation whatsoever for payment of any
fees or commissions to the Miller-Richmond Company, agent for Tenant, which may
be due for services rendered to Tenant by Tenant's agent. Landlord represents
that Landlord has dealt with no broker or agent in connection with this First
Amendment to Lease, and that other party(ies) is(are) entitled to any commission
in connection herewith other than Hallwood Management Company, managing agent
for Landlord, and Miller-Richmond Company, agent for Tenant. Landlord shall
indemnify and hold Tenant harmless for any and all claims for services rendered
to Landlord by any other agent(s) with whom Landlord has dealt in connection
herewith, whether named or not named herein.
THIS SECOND AMENDMENT to Lease shall be in full force as of
the date above first written, and shall take effect as of September 1, 1994 and
shall continue in effect for the duration of said Lease, as amended, that is
through June 30, 1999. The Lease, as amended, is hereby ratified and confirmed,
and all conditions contained therein remain in full force and effect.
IN WITNESS WHEREOF, each party has caused this Amendment to
Lease to be executed by its duly authorized officer(s).
LANDLORD: HALLWOOD REAL ESTATE INVESTORS FUND XV, a Delaware General
Partnership
BY: Hallwood Management Company, as Agent for Hallwood Real Estate
Investors Fund XV
NAME: _____________________________________________________________
TITLE: _____________________________________________________________
DATE: _____________________________________________________________
TENANT: UNION OIL COMPANY OF CALIFORNIA
BY: _____________________________________________________________
NAME: _____________________________________________________________
TITLE: _____________________________________________________________
DATE: _____________________________________________________________
<PAGE> 54
EXHIBIT 1-B
CONSTRUCTION WORK LETTER
In addition to those wall changes and construction items set forth in the First
Amendment to Lease under the title "Tenant Improvements," Exhibit 1-A, and
Exhibit 1-C, Landlord shall include in the scope of work for the benefit of
Tenant, the following items, as clarification of the labor and materials
involved in performing the scope of work:
Contractor: S&E Contractors ("Contractor") has been selected by
Landlord to perform the proposed scope of work to the
reduced the size of the office space to be occupied
by Tenant, based on a competitive bid process of
selection. Contractor is experienced in the
alterations of occupied office space, and is insured,
and is licensed to do construction in Dekalb County,
Georgia.
Time Table: Work shall be performed during business hours, and
shall commence upon approval by the Dekalb County
Building Inspector's office of the Construction
Drawings (CD's). Construction is estimated to require
thirty (30) days to complete. Therefore, it is
estimated that construction, including plans
approval, should take no more than forty-five (45)
days from the time this First Amendment to Lease is
fully executed.
Scope of Work: Labor and materials shall be applied to the premises
in accordance with Exhibit 1-A, and Contractor's
line-item bid form, to be supplied to Tenant by
Landlord, and by mutually approved, written change
order, as may be required after work has commenced.
<PAGE> 55
Finishes: Finishes shall be supplied to and installed at the
construction site in accordance with Exhibit 1-A,
and Exhibit 1-C. Finishes shall be of building
standard quality and shall consist of the following
general specifications, which may be supplied or
secured from a choice of reputable companies
available to Landlord and Contractors:
- Wall Paint: Flat latex paint, two (2)
coats, in Tenant's choice of color.
- Carpet: Remove old carpet and provide and
install, throughout, new 30 oz. nylon, cut
pile carpet, in Tenant's choice of color.
- Door Frame Paint: Semi-gloss, two (2)
coats, in Tenant's choice of Color.
All construction shall be managed by Hallwood Management Company's Construction
Coordinator, agent for Landlord, and Tenant agrees that Hallwood shall be paid a
fee for all such construction management, in the amount of ten (10) percent of
all construction costs, which shall include the cost of all labor, materials,
overhead, and profit of all contractors and sub-contractors utilized to
accomplish the scope of work. That is, Tenant acknowledges and agrees that
Hallwood is entitled to said 10% construction management fee on all portions of
construction costs, paid for by Landlord's allowance, and due from Tenant for
its required payment of mutually agreed upon overages in construction costs, and
for mutually agreed upon change orders to the scope of work as Tenant may
require of Landlord subsequent to the start of construction.
<PAGE> 56
EXHIBIT 1-C
General Contractor's
Line-Item Bid
S & E CONTRACTORS, INC. HALLWOOD MANAGEMENT
5840 ROCK SPRINGS CIRCLE RECORPORATE SQUARE, BLD 13-200, UNOCAL
BUFORD, GA 30518 PROPOSAL #6263
PHONE # (404) 536-4546 MAY 19, 1994
<TABLE>
<CAPTION>
DESCRIPTION OF WORK UNIT QUANTITY UNIT COST ITEM TOTAL SUB TOTAL
======================================= ==== ======== ========= ========== =========
<S> <C> <C> <C> <C> <C>
THIS BID PREPARED BY TONY GUNTER
DEMOLITION
REMOVE CEILING HEIGHT WALLS LF 178 $4.60 $801.00
REVOVE SHEETROCK ONE SIDE LF 61 $2.00 $102.00
REMOVE CEILING TILE 8F 1500 $0.15 $225.00
REMOVE WALLCOVERING SF 878 $0.20 $76.60
REMOVE STOREFRONT GLASS DOOR LS 1 $150.00 $150.00
SUB TOTAL $1,353.60
DRYWALL
9' HIGH WALL TO GRID LF 186 $16.00 $2,976.00
TOP EXISTING WALL TO LF 181 $16.00 $2,896.00
STRUCTURE, 12' HIGH
FIRE CAULKING LS 1 $550.00 $550.00
LAMINATE WITH SHEETROCK ONE
SIDE LF 51 $8.00 $405.00
CUT OPENING EA 10 $65.00 $650.00
CLOSE OPENING EA 10 $76.00 $750.00
BUTT/CORNER PACHES EA 15 $15.00 $225.00
HOT PATCHES EA 7 $15.00 $105.00
WINDOW MULL TIE IN EA 3 $20.00 $60.00
SKIM WALLS WHERE W/C REMOVED SF 720 $0.50 $380.00
MISC. PATCHING LS 1 $150.00 $150.00
SUB TOTAL $9,130.00
CEILING
INSTALL 2X4 TILE SF 1600 $0.55 $825.00
INSTALL 2X4 GRID LS 11 $250.00 $250.00
REPAIR GRID AT DEMISING WALL LF 540 $1.50 $810.00
PAINT GRID SF 1500 $0.18 $270.00
REPLACE DAMAGED TILE DUE TO LS 1 $400.00 $400.00
CONSTRUCTION
SUB TOTAL $2,555.00
</TABLE>
<PAGE> 57
(EXHIBIT 1-C Continued)
General Contractor's
Line-Item Bid
S & E CONTRACTORS, INC. HALLWOOD MANAGEMENT
5840 ROCK SPRINGS CIRCLE RECORPORATE SQUARE, BLD 13-200, UNOCAL
BUFORD, GA 30518 PROPOSAL #6263
PHONE # (404) 536-4546 MAY 19, 1994
<TABLE>
<CAPTION>
DESCRIPTION OF WORK UNIT QUANTITY UNIT COST ITEM TOTAL SUB TOTAL
======================================= ==== ======== ========= ========== =========
<S> <C> <C> <C> <C> <C>
DOORS
RELOCATE INTERIOR DOOR EA 12 $45.00 $540.00
INSTALL 3'x6'8" S/C BIRCH DOOR,
FRAME PASSAGE, STOP EA 2 $250.00 $500.00
INSTALL HANDICAP PASSAGE SET EA 15 $65.00 $975.00
INSTALL HANDICAP, LOCKSET EA 2 $150.00 $300.00
INSTALL DOOR CLOSER EA 2 $95.00 $190.00
INSTALL EXISTING GLASS DOOR &
WINDOW EA 1 $350.00 $350.00
SUB TOTAL $2,855.00
MILLWORK
REMOVE BASE CABINETS &
REINSTALL LS 1 $2,000.00 $2,000.00
SUB TOTAL $2,000.00
PAINT/WALLCOVERING
FLAT LATEX (2 COATS OVER
CARPET) SF 12457 $0.30 $3,737.10
DOOR AND FRAME EA 23 $35.00 $805.00
SUB TOTAL $4,542.10
</TABLE>
<PAGE> 58
(EXHIBIT 1-C Continued)
General Contractor's
Line-Item Bid
S & E CONTRACTORS, INC. HALLWOOD MANAGEMENT
5840 ROCK SPRINGS CIRCLE RECORPORATE SQUARE, BLD 13-200, UNOCAL
BUFORD, GA 30518 PROPOSAL #6263
PHONE # (404) 536-4546 MAY 19, 1994
<TABLE>
<CAPTION>
DESCRIPTION OF WORK UNIT QUANTITY UNIT COST ITEM TOTAL SUB TOTAL
======================================= ==== ======== ========= ========== =========
<S> <C> <C> <C> <C> <C>
ELECTRICAL
DEMO LS 1 $250.00 $250.00
DUPLEX OUTLET EA 36 $35.00 $1,260.00
DEDICATED OUTLET EA 4 $145.00 $580.00
S.P. SWITCH EA 9 $35.00 $315.00
3-WAY SWITCH EA 4 $60.00 $240.00
PHONE/DATA BOX AND STRING EA 21 $15.00 $315.00
RELOCATE AND REWIRE 2X4 LIGHT EA 18 $35.00 $560.00
INSTALL 2X4 LIGHT EA 10 $95.00 $950.00
EMERGENCY LIGHT EA 2 $150.00 $300.00
EXIT LIGHT EA 5 $150.00 $750.00
BRING ELECTRICAL CEILING TO SF 3500 $0.08 $280.00
CODE
REPLACE LIGHT LENS EA 7 $15.00 $105.00
SUB TOTAL $5,905.00
HVAC
2X2 SUPPLIES (2) LS 1 $5,965.00 $5,965.00
RETURN FIRE DAMPERS (6)
FIRE DAMPERS IN DUCT WORK (10)
RELOCATE SUPPLY (2)
RELOCATE T-STAT (1)
BALANCE SYSTEM BASED ON
SUFFICIENT-BLD AIR
SUBTOTAL $5,965.00
</TABLE>
<PAGE> 59
(EXHIBIT 1-C Continued)
General Contractor's
Line-Item Bid
S & E CONTRACTORS, INC. HALLWOOD MANAGEMENT
5840 ROCK SPRINGS CIRCLE RECORPORATE SQUARE, BLD 13-200, UNOCAL
BUFORD, GA 30518 PROPOSAL #6263
PHONE # (404) 536-4546 MAY 19, 1994
<TABLE>
<CAPTION>
DESCRIPTION OF WORK UNIT QUANTITY UNIT COST ITEM TOTAL SUB TOTAL
======================================= ==== ======== ========= ========== ==========
<S> <C> <C> <C> <C> <C>
FLOORINGS
CARPET & BASE (BY HALLWOOD MANAGEMENT)
SUBTOTAL $0.00
PLUMBING
RELOCATE PLUMBING IN BREAK RM LS 1 $1,000.00 $1,000.00
SUBTOTAL $1,000.00
SPECIALTY ITEM
FIRE EXTINGUISHERS EA 2 $75.00 $150.00
GENERAL CONDITIONS LS 1 $650.00 $650.00
FINAL CLEAN SF 3500 $0.10 $350.00
PERMITS EA 1 $250.00 $250.00
SUBTOTAL $1,400.00
SUBTOTAL $38,706.70
OVERHEAD $4,404.68
TOTAL $41,110.38
</TABLE>
PLEASE NOTE:
BID DOES NOT INCLUDE ANY WALLCOVERING.
BID DOES NOT INCLUDE NEW CARPET, BASE, MINIBLINDS, REKEYING OF SPACE.
<PAGE> 1
EXHIBIT 10.17
ADDENDUM TO SUBLEASE
AGREEMENT, made and entered into this 25th day of July, 1997,
by and between Union Oil Company of California d/b/a Unocal (hereinafter
referred to as "Unocal"), U. S. Franchises Systems, Inc. (hereinafter referred
to as "USF") and Hallwood Real Estate Investors Fund XV, further amended to
read Hallwood 95 L.P., a Delaware Limited Partnership (hereinafter referred to
as "Hallwood").
W I T N E S S E T H
WHEREAS, Unocal and USF have concurrently herewith entered
into that certain "SUBLEASE AGREEMENT" dated July 25, 1997 (hereinafter
referred to as the "Sublease"); and
WHEREAS, Unocal and Hallwood have previously entered into
that certain "OFFICE LEASE AGREEMENT" dated March 14, 1991 together with all
addenda, riders and amendments thereto (hereinafter collectively referred to as
the "Master Lease"), specifically including but not limited to that certain
"LEASE AGREEMENT EXHIBIT E RIDER TO LEASE" (hereinafter separately referred to
as the "Master Lease Rider"), and that certain "Addendum to Lease" dated March
14, 1991 (hereinafter separately referred to as the "Master Lease Addendum"),
that certain "FIRST AMENDMENT TO LEASE" dated June 6, 1994 (hereinafter
separately referred to as the "lst Amendment"), and that certain "SECOND
AMENDMENT TO LEASE" dated August 18, 1994 (hereinafter separately referred to
as the "2nd Amendment"); and
WHEREAS, Unocal, USF and Hallwood wish to add, delete or
amend certain terms and conditions of the Sublease as hereinafter provided;
NOW THEREFORE, in consideration of the mutual covenants and
promises herein contained and other good and valuable consideration, each to
the other in hand paid, Unocal, USF and Hallwood agree as follows:
1. Prior to taking possession of the Premises, USF shall
furnish Unocal with Certificates of Insurance showing both Unocal and Hallwood
as Additional Insureds, in Companies reasonably satisfactory to Unocal and with
coverages of types and amounts as set forth in Exhibit "A" attached hereto and
incorporated herein by reference.
2. USF acknowledges that neither Unocal nor Hallwood has
agreed to provide any "Build Out Allowance" or to perform any "Build Out" or
other improvements, modifications or repair of the Premises and that USF has
inspected the Premises and accepts same in "As Is" condition.
<PAGE> 2
3. As between Unocal and USF, the language contained in the
parenthetical near the end of Section 4 of the Sublease is hereby deleted. No
further Subletting of the Premises by USF shall be allowed.
4. As between Unocal and USF, Section 5.2(a) of the Sublease
and the references thereto contained in Sections 5.2(b) and 5.3 are hereby
deleted. Unocal makes no representations or warranties whatsoever regarding the
condition of the Premises or their compliance with any applicable codes,
regulations or ordinances.
5. As between Unocal and USF, Sections VI, VII, IX, XIV, XV
and XVII of the Master Lease Rider are hereby deleted.
6. As between Unocal and USF, the "Leasehold Improvements"
Section of the 2nd Amendment is hereby deleted.
7. As between Unocal and USF, Section 9.0 "ASSIGNMENT OR
SUBLETTING" of the Master Lease is hereby deleted. No further assignment or
subletting by USF shall be allowed.
8. As between Unocal and USF, the first sentence of Section
13.2 "Landlord's Insurance" of the Master Lease is hereby deleted.
9. As between Unocal and USF, all instances of the word
"Negligence" added to Section 15 "HOLD HARMLESS" of the Master Lease by the
Master Lease Addendum, are hereby deleted.
10. As between Unocal and USF, Section 18.1 "Landlord's
Obligations" of the Master Lease, is hereby deleted.
11. In the event Unocal shall elect, in its sole discretion,
to sublet any additional portion of its leased space at 13 Corporate Square,
Atlanta, Georgia, USF shall have a thirty (30) day right of first refusal to
lease such space on the terms and conditions then proposed by Unocal, subject
to any necessary approvals by Hallwood. If USF fails to exercise said right of
first refusal by written notification to Unocal within thirty (30) days
following written notice of Unocal's determination to sublease additional
space, said right of first refusal shall be deemed waived.
12. Anything herein contained to the contrary
notwithstanding, the parties agree that all of the terms, conditions and
obligations of the Master Lease which run from Hallwood to Unocal (Landlord and
Tenant respectively under the Master Lease) shall also be deemed to run from
Hallwood to USF and USF shall be entitled to rely upon and enjoy the benefits
of all of such terms, conditions and obligations, to the same extent as Unocal.
Except as specifically set forth hereinabove, the Sublease remains in full
force and effect.
<PAGE> 3
In witness whereof the parties have set their mutual hands and seals the day
and date first above written.
UNOCAL: USF:
By: [Signature Illegible] By: Michael Leven
------------------------------- ---------------------------------
Assistant Manager President/Chief Executive Officer
------------------------------- ---------------------------------
Title Title
Attest: [Signature Illegible] Attest: David E. Shaw
--------------------------- -------------------------------
Assistant Executive Vice President
HALLWOOD:
By: [Signature Illegible]
-------------------------------
[Illegible]
-------------------------------
Title
Attest: [Signature Illegible]
---------------------------
Administrative Assistant
---------------------------
Title
<PAGE> 4
EXHIBIT
A
INSURANCE. During the sub-lease period, sub-lessee, at its own expense, shall
procure and maintain during the performance of its obligation under this
Sub-Lease Agreement policies of liability insurance, issued by insurance
companies duly qualified or licensed to issue policies of insurance in the
State of Georgia reasonably acceptable to UNOCAL, which are primary as to any
other existing, valid and collectible insurance insuring Sub-Lessor against
loss or liability caused by or in connection with the performance of this
Sub-Lease Agreement by Sub-Lessee, its agents, servants, employees, invitees,
guests, contractors or subcontractors, in amounts not less than:
(a) Commercial General Liability Insurance Occurrence Form, or the
equivalent, including Blanket Contractual Liability, with a combined single
limit of ONE MILLION DOLLARS ($1,000,000) each occurrence, for Bodily Injury
and Property Damage, including Personal Injury.
(b) Comprehensive Automobile Liability Insurance or Business Auto Policy
covering all owned, hired, or otherwise operated non-owned vehicles, with a
minimum combined single limit of ONE MILLION DOLLARS ($1,000,000) each
occurrence for Bodily Injury and Property Damage.
(c) Workers' Compensation Insurance as required by law, and Employers'
Liability Insurance with a minimum limit of ONE MILLION DOLLARS ($1,000,000)
each occurrence.
The policies of liability insurance shall name UNOCAL and Hallwood, as defined
in the SubLease Agreement, as an additional insured: with a Cross Liability
Clause (Severability of Interest), and shall not exclude or restrict coverage
based upon alleged or actual negligence of an additional insured. Sub-Lessee
shall deliver to UNOCAL a certificate evidencing the policies, that UNOCAL and
Hallwood are named as an additional insured under the policies and that coverage
will not be canceled or materially changed prior to thirty (30) days' advance
written notice to UNOCAL. Subrogation against UNOCAL and Hallwood shall be
waived as respects all of the insurance policies set forth above (including
without limitation policies of any subcontractor). The insurance required
hereunder in no way limits or restricts the indemnification under section 6.4 of
the Sub-Lease Agreement, nor is the insurance to be carried limited by any
limitation placed on the indemnity as a matter of law. Any deductible amount is
the responsibility of the Sublessee.
<PAGE> 1
EXHIBIT 10.21
AGREEMENT OF PURCHASE AND SALE
between
AMERICA'S BEST INNS, INC. and THE OTHER
SELLING ENTITIES LISTED ON SCHEDULE 1
TO THIS AGREEMENT
(collectively, "Sellers")
and
BEST ACQUISITION, INC.
("Purchaser")
Dated: December 15, 1997
<PAGE> 2
Table of Contents
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Article 1 Purchase and Sale......................................................................1
1.1. Purchase and Sale......................................................................1
1.2. Certain Definitions....................................................................3
1.3. No Assumption..........................................................................7
Article 2 Purchase Price.........................................................................7
2.1. Purchase Price.........................................................................7
2.2. Allocation of Purchase Price...........................................................7
Article 3 Review Period..........................................................................7
3.1. Review Period..........................................................................7
Article 4 Representations and Warranties.........................................................8
4.1. Representations and Warranties of Sellers..............................................8
4.2. Representations and Warranties of Purchaser...........................................24
Article 5 Conditions Precedent..................................................................25
5.1. Conditions Precedent to Purchaser's Obligations.......................................25
5.2. Conditions Precedent to Sellers' Obligations..........................................31
Article 6 Covenants.............................................................................31
6.1. Covenants of Sellers..................................................................31
6.2. Covenants of Purchaser................................................................39
Article 7 Right of First Refusal................................................................40
Article 8 Closing and Closing Documents.........................................................41
8.1. Closing and Closing Documents.........................................................41
8.2. Deeds and Other Instruments of Conveyance.............................................41
8.3. Notices to Vendors....................................................................42
8.4. Security Deposits.....................................................................43
8.5. FIRPTA................................................................................43
8.6. Title Affidavits, etc.................................................................43
8.7. Escrow Closing........................................................................43
8.8. Additional Deliveries at Closing......................................................43
8.9. Apportionments........................................................................44
8.10. Tax Reduction Proceedings.............................................................45
8.11. Purchaser's Closing Documents.........................................................45
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Article 9 Termination Prior to Closing..........................................................46
9.1. Termination of Agreement..............................................................46
9.2. Termination of Obligations............................................................47
Article 10 Brokerage.............................................................................47
Article 11 Closing Costs.........................................................................47
Article 12 Condemnation..........................................................................47
Article 13 Insurance; Destruction or Damage......................................................48
Article 14 Miscellaneous.........................................................................49
14.1. Governing Law.........................................................................49
14.2. Entire Agreement......................................................................49
14.3. Waiver................................................................................49
14.4. Severability..........................................................................49
14.5. Exhibits and Schedules................................................................49
14.6. Further Assurances....................................................................49
14.7. Headings..............................................................................49
14.8. No Third-Party Beneficiaries..........................................................50
14.9. Assignment............................................................................50
14.10. Notices...............................................................................50
14.11. Successors and Assigns................................................................52
14.12. Attorneys' and Other Professionals' Fees..............................................52
14.13. Liability Joint and Several...........................................................52
14.14. Plural and Singular...................................................................52
</TABLE>
<PAGE> 4
AGREEMENT OF PURCHASE AND SALE
AGREEMENT OF PURCHASE AND SALE ("Agreement"), dated as of
December 15, 1997, made by and between AMERICA'S BEST INNS, INC., a Delaware
corporation, having an address at 1205 Skyline Drive, Marion, Illinois 62959
and EACH OF THE OTHER SELLING ENTITIES LISTED ON SCHEDULE 1 TO THIS AGREEMENT
(collectively, "Sellers"), and BEST ACQUISITION, INC., a Georgia corporation,
having an address at 13 Corporate Square, Suite 250, Atlanta, Georgia 30329
("Purchaser").
Preliminary Statement
Sellers are the owners of the "Assets" described in Article 1
below. Sellers desire to sell the Assets, and Purchaser desires to purchase the
Assets all upon and subject to, the terms, covenants and conditions set forth
in this Agreement.
Accordingly, the parties hereto hereby agree as follows:
Agreement of the Parties
Article 1
Purchase and Sale
1.1. Purchase and Sale. Sellers shall sell, convey and
assign and Purchaser shall purchase, subject to the terms and conditions of
this Agreement:
(a) A fee simple interest in the parcels of land
described on Schedule 1.1(a) annexed hereto (collectively, the "Land");
(b) Leasehold estates in the parcel of land and
office space described on Schedule 1.1(b)(1) annexed hereto ("Sellers' Leased
Land") held by the applicable Seller pursuant to the leases described on
Schedule 1.1(b)(2) annexed hereto (the "Sellers' Leases");
(c) A fee simple interest in all of the buildings and
improvements (collectively, the "Sellers' Improvements") situated on the Land or
Sellers' Leased Land, as applicable;
(d) All right, title and interest of each Seller
(whether as owner in fee simple of the Land or as tenant under any of Sellers'
Leases) in and to any land lying in the bed of any highway, street, road, or
avenue, open or proposed, including vaults, if any, and any strips and gores in
front of or abutting or adjoining the Land or Sellers' Leased Land, and any
award made or to be made in lieu thereof and in and to any unpaid award for
damages to any Land, Sellers' Leased Land or any of Sellers' Improvements by
reason of a change of grade of any highway, street, road or avenue adjoining
any of the Land or Sellers' Leased Land;
<PAGE> 5
2
(e) All right, title and interest of each Seller in
and to all easements, tenements, hereditaments, privileges and appurtenances in
any way belonging to the Land, Sellers' Leased Land, Sellers' Leases or
Sellers' Improvements;
(f) All Bookings, Books and Records, Consumables,
FF&E, Miscellaneous Assets, Small Operating Equipment (each, as hereinafter
defined) and all other articles of personal property, whether tangible or
intangible, which are attached, appurtenant to, installed or placed in or upon
or used for or adapted in any way to the complete and comfortable use,
enjoyment, occupancy and operation of the Hospitality Assets (as hereinafter
defined) and the Related Assets (as hereinafter defined), and all contractual
rights of every kind relating to the Hospitality Assets and the Related Assets
(all of the above being hereinafter collectively referred to as "Sellers'
Personal Property"). Notwithstanding the foregoing, Sellers' Personal Property
shall not include any items (x) which are owned by Tenants under the Leases
(defined in paragraph (h) below), other than those items which are not
removable by such Tenants pursuant to the terms of their respective Leases, (y)
which are owned by guests at Sellers' Improvements or (z)constituting Excluded
Assets. Each parcel of Land and the Sellers' Improvements located thereon and
the property interests described in paragraphs (d), (e) and (f) appurtenant
thereto, and each Sellers' Lease, Sellers' Leased Land leased pursuant thereto
and Sellers' Improvements located on such Sellers' Leased Land and the property
interests described in paragraphs (d), (e) and (f) appurtenant thereto is
hereinafter individually referred to as a "Hospitality Unit", and collectively
as the "Hospitality Units";
(g) To the extent assignable or transferable to
Purchaser, all "Permits" (as defined in subsection 4.1.12) relating to
Hospitality Units, all "Service Agreements" relating to Hospitality Units; and
all of Sellers' rights under any unexpired warranties or guarantees relating to
Sellers' Personal Property or Sellers' Improvements;
(h) All of Sellers' right, title and interest in and
to the leases, license agreements, concessionaire agreements, franchises not
constituting a part of the Franchise Business or other agreements and all
modifications, renewals and amendments thereto and third party guarantees
thereof any person or entity (each, a "Tenant") to use or occupy space at
Hospitality Units (collectively, "Leases"), and all rental, security deposits,
receivables, and other monetary items payable by Tenants and all rentals paid
by Tenants prior to the date hereof, but relating to the period on or after the
Closing Date;
(i) (i) All of Sellers' right, title and interest in
and to all trademarks, service marks, trade dress, logos, trade names, and
corporate names, together with all translations, adaptations, derivations, and
combinations thereof and including all goodwill associated therewith, and all
trademarks or business or corporate names confusingly similar thereto in
relation to any goods or services, and
<PAGE> 6
3
all applications, registrations, and renewals in connection therewith, (ii) all
copyrightable works, all copyrights, and applications, registrations, and
renewals in connection therewith, (iii) all trade secrets and confidential
business information (including ideas, research and development, know-how,
formulas, compositions, marketing processes and techniques, technical data,
designs, drawings, customer and supplier lists, pricing and cost information,
and business and marketing plans and proposals), (iv) all Software (as
hereinafter defined) (including data, source code and related documentation),
(v) all other proprietary rights, and (vi) all copies and tangible embodiments
thereof (in whatever form or medium) and including, without limitation, the
items listed on Schedule 1.1(i) attached hereto (collectively, the
"Intellectual Property").
(j) All right, title and interest of ABI (as
hereinafter defined) in, to and under the Franchise Business (as hereinafter
defined);
(k) All right, title and interest of BMC (as
hereinafter defined) in, to and under the Management Business (as hereinafter
defined); and
(l) All right, title and interest of ABI in, to and
under the Reservations Business (as hereinafter defined).
Each of the items referred to in paragraphs (a) - (h) above
are collectively referred to as the "Hospitality Assets"; each of the items
referred to in paragraphs(i) - (l) above are collectively referred to as the
"Related Assets"; the Hospitality Assets and Related Assets are hereinafter
collectively referred to as the "Assets".
Notwithstanding the foregoing, the Assets shall not include
the Excluded Assets.
1.2. Certain Definitions. For purposes of this Agreement,
the following terms shall have the following meanings. Such definitions shall
be equally applicable to the singular and plural forms of the terms defined.
(a) "ABI" means America's Best Inns, Inc., a Delaware
corporation.
(b) "Affiliate" means with respect to any Person, any
Person that directly, or indirectly through one or more intermediaries,
controls or is controlled by, or is under common control with such Person.
(c) "BMC" means Brewer Management Company, Inc., a
Delaware corporation.
<PAGE> 7
4
(d) "Bookings" means the contracts or reservations
for the use of guest rooms, banquet facilities, restaurants or meeting rooms in
any Hospitality Unit.
(e) "Books and Records" means all books, records,
ledgers, files, information, data and other written materials to the extent
relating to the operation of any Hospitality Unit or Related Business,
including, without limitation, books and records (i)relating to taxes which are
payable in connection with the operation of any Hospitality Unit or Related
Business, including, without limitation, accounting and tax records and
information pertaining to events occurring in connection with the operation of
any Hospitality Unit or Related Business prior to the Closing Date, and
(ii)required to be retained by the Purchaser after the Closing Date pursuant to
obligations imposed by applicable law.
(f) "BRC" means Best Reservations Corporation, an
Illinois not-for-profit corporation.
(g) "Consumables" means all of Seller's unused food
and beverages, all unused engineering, maintenance and housekeeping supplies,
including soap, cleaning materials, fuel and other materials, all unused
stationery, brochures, advertising materials and other printed items, and all
of Sellers' other unused supplies of all kinds which are held in storage and
available for use in connection with the maintenance and operation of any
Hospitality Unit.
(h) "Employee" means each employee of any of the
Sellers who regularly works for such Seller in connection with the operation of
the Hospitality Units, the Franchise Business, the Management Business or the
Reservation Business.
(i) "Environmental Laws" means, without limitation,
the Comprehensive Environmental Response, Compensation and Liability Act, 42
U.S.C. ss.ss.9601 et seq., the Emergency Planning and Community Right-to-Know
Act of 1986, 42 U.S.C. ss.ss.11001 et seq., the Resource Conservation and
Recovery Act, 42 U.S.C. ss.ss.6901 et seq., the Toxic Substances Control Act,
15 U.S.C. ss.ss.2601 et seq., the Federal Insecticide, Fungicide, and
Rodenticide Act, 7 U.S.C. ss.ss.136 et seq., the Clean Air Act, 42 U.S.C.
ss.ss.7401 et. seq., the Clean Water Act, 33 U.S.C. ss.ss.1251 et seq., the
Safe Drinking Water Act, 42 U.S.C. ss.ss.300f et seq., the Occupational Safety
and Health Act, 29 U.S.C. ss.ss.641, et seq., the Hazardous Materials
Transportation Act, 49 U.S.C. ss.ss.1801, et seq., as any of the above statutes
have been amended from time to time prior to the date hereof, all rules and
regulations promulgated prior to the date hereof pursuant to any of the above
statutes, and any other federal, state or local law, statute, ordinance, rule
or regulation governing environmental, health or safety matters, as the same
have been amended from time to time prior to the date of this Agreement,
including any common law cause of action, all indemnity agreements and other
contractual obligations relating to environmental, health and safety matters.
<PAGE> 8
5
(j) "ERISA Affiliate" means each business or entity
which is a member of a "controlled group of corporations", under "common
control" or an "affiliated service group" with any Seller within the meaning of
Sections 414(b), (c) or (m) of the Code (as hereinafter defined), or required
to be aggregated with any Seller under Section 414(o) of the Code, or is under
"common control" with any Seller within the meaning of Section 4001(a)(14) of
ERISA (as hereinafter defined).
(k) "Excluded Assets" means each of the assets listed
on Schedule 1.1(k).
(l) "FF&E" shall mean all fixtures, furniture,
furnishings, fittings, equipment, machinery, apparatus, appliances and other
articles of personal property owned by any Seller and located on the Land or
Sellers' Leased Land, as applicable, or in any Hospitality Unit as of the date
of this Agreement and used or usable in connection with the operation of any
Hospitality Unit or any Related Business. FF&E does not include (i)Consumables,
(ii)Small Operating Equipment, (iii)equipment leased by any Seller or provided
to any Seller pursuant to a Service Agreement and not owned or leased by any
Seller, (iv)the Sellers' Improvements and (v)property owned or leased by
guests, employees or other persons furnishing goods or services to any
Hospitality Unit.
(m) "Franchise Business" means ABI's Best Inns and
Best Suites franchise program, including, without limitation, all operational
concepts and manuals, advertising programs, training programs, franchise fees
receivable accruing from and after the Closing Date (as hereinafter defined),
and all of ABI's rights under any franchise agreement.
(n) "Hazardous Materials" means any pollutants,
contaminants, substances, materials, wastes, constituents, compounds,
chemicals, natural or man-made elements or forces (including, without
limitation, petroleum or any by-products or fractions thereof, any form of
natural gas, lead, asbestos or asbestos-containing materials, polychlorinated
biphenyls ("PCBs") or PCB-containing equipment, radon and other radioactive
elements, pesticides, defoliants, and urea formaldehyde foam insulation) that
are regulated by, or may form the basis of liability under, any Environmental
Laws.
(o) "Management Business" means BMC's motel property
management services business, including, without limitation, sales and
marketing support, financial planning and reporting, maintenance services,
human resources services, contracting for outside services and all of BMC's
rights under any motel property management agreement.
(p) "Miscellaneous Assets" shall mean all contract
rights, Books and Records, technology and technological information,
warranties, guarantees, plans, drawings, specifications, surveys, building or
engineering records and reports,
<PAGE> 9
6
schedules and the like in any Seller's possession relating to the original
construction or any renovations of any of the Hospitality Units.
(q) "Pension Plan" means each Employee Plan (other
than a multi-employer plan) which is an "employee pension benefit plan" within
the meaning of Section 3(2) of ERISA.
(r) "Person" means any individual, partnership,
limited partnership, corporation (including a business trust), not-for-profit
corporation, limited liability company, joint stock company, estate, trust,
business trust, unincorporated association, joint venture or other entity or a
government or an agency or political subdivision thereof.
(s) "Related Business" means, collectively, the
Franchise Business, the Management Business and the Reservations Business.
(t) "Reservations Business" means BRC's central
reservation system pursuant to which BRC books guest reservations, additions
and cancellations with respect to each participating Hospitality Unit under the
"Best Inn" or "Best Suite" names.
(u) "Sellers' knowledge" The terms "Sellers'
knowledge", "Sellers' best knowledge", "to the knowledge of Seller", or "to the
best knowledge of Seller" mean the knowledge of any director or executive
officer of a Seller that is a corporation; the managing general partner of any
Seller that is a limited partnership or a general partnership; the manager of
any Seller that is a limited liability company; ABI's knowledge (as defined
above) for any Seller that is a contractual joint venture, and in each case,
the knowledge of any employee of any of the foregoing entities who is involved
in the management of such entities.
(v) "Small Operating Equipment" means all china,
glassware, stemware, bath mats, bath rugs, shower curtains, tools, linens,
towels, uniforms, bedding, silverware, telephones, televisions, cable
equipment, computer equipment and peripherals and any other equipment, goods,
utensils, supplies or reserve stock owned by any Seller, located in any
Hospitality Unit and used or held in reserve or storage for future use in
connection with the maintenance and operation of any Hospitality Unit. The term
"Small Operating Equipment" does not include Consumables and the FF&E.
(w) "Transaction Documents" means, collectively, this
Agreement and each other agreement, deed, instrument, certificate or other
document executed or otherwise delivered in connection with the transactions
contemplated by this Agreement.
<PAGE> 10
7
(x) "Welfare Plan" means each Employee Plan which is
an "employee welfare benefit plan" within the meaning of Section 3(1) of ERISA.
1.3. No Assumption. Except as expressly provided in this
Agreement, Purchasers will not assume any of the liabilities of Sellers
relating to or incurred or in connection with the ownership or operation of the
Assets, it being understood that any liabilities under any of the Service
Agreements, Intercompany Contracts, Third Party Contracts, transferable
Insurance Policies or Permits transferred to Purchaser at the Closing (a) which
arose prior to the Closing, shall not be assumed by Purchaser and shall remain
Sellers' responsibility and (b) which arise after the Closing, shall be assumed
by Purchaser and shall become Purchaser's responsibility.
Article 2
Purchase Price
2.1. Purchase Price. Subject to the terms of this Agreement
and to the adjustments, credits and additional payments hereinafter
specifically provided for, the Purchaser shall pay to Seller Eighty-Four
Million Dollars ($84,000,000) (the "Purchase Price") on the Closing Date by
wire transfer of immediately available funds to such account as Sellers shall
specify to Purchaser, in writing, prior to the Closing Date.
2.2. Allocation of Purchase Price. Purchaser and Sellers
confirm that Schedule 2.2 accurately sets forth the portions of the total
consideration to be paid by Purchaser allocable (i) to each of Hospitality
Units and (ii) to each of the other Assets to be conveyed to Purchaser in
connection with the transactions contemplated by the Agreement and the other
Transaction Documents.
Article 3
Review Period
3.1. Review Period. (a) During the period (the "Review
Period") between the date hereof and January 29, 1998, Purchaser shall have the
right to review the financial and physical condition and methods of operation
of the Hospitality Units and the Related Businesses, any of the documents,
instruments or agreements heretofore or hereafter delivered to Purchaser
pursuant to this Agreement or otherwise, or any of the matters referred to
therein, and to determine whether the same are satisfactory to Purchaser, in
its sole discretion. On or before the end of the Review Period, Purchaser shall
notify Seller, in writing, of whether it has elected to terminate this
Agreement. If Purchaser elects to terminate this Agreement, it shall provide
Seller with its reason for such termination in its notice, it being understood
that no such reason shall affect the validity or effectiveness of such
termination notice.
(b) In the event that Purchaser's environmental
consultant shall recommend that Purchaser have a Phase II environmental
assessment performed in any
<PAGE> 11
8
Hospitality Unit, Purchaser shall notify Sellers and Purchaser shall provide
Sellers with a copy of Purchaser's Phase I environmental assessment relating to
such Hospitality Unit. Sellers shall within five (5) days of such notice advise
Purchaser, in writing, whether or not it has agreed to allow Purchaser to
perform a Phase II environmental assessment in such Hospitality Unit. If
Sellers do not allow a Phase II environmental assessment be performed in such
Hospitality Unit, Purchaser shall have the right to elect to terminate this
Agreement upon written notice to Sellers, whereupon this Agreement shall
terminate and be of no further force or effect, except for those provisions
which by their terms are intended to survive. Purchaser's rights under this
Section 3.1(b) are not intended to limit any of Purchaser's other rights
otherwise set forth in this Agreement.
Article 4
Representations and Warranties
4.1. Representations and Warranties of Sellers. Sellers
represent and warrant as follows:
4.1.1. Organization of Sellers; Authority of Sellers;
Validity. (a) ABI is a corporation, duly formed under the laws of the state of
Delaware and in good standing under the laws of such state and is authorized to
do business in each state in which the conduct of its business or the ownership
of any of the Assets requires it to be so qualified. ABI has full power and
authority to execute and deliver to Purchaser this Agreement and all other
Transaction Documents to which it is a party and to own and operate those
Assets owned by it and perform the obligations and carry out the duties imposed
on ABI by this Agreement and by all the other Transaction Documents. This
Agreement has been duly authorized, approved and executed by ABI and
constitutes the valid and binding obligation of ABI, enforceable against ABI in
accordance with its terms. The Transaction Documents to which ABI is a party
have been duly authorized and approved, and upon due execution and delivery of
such Transaction Documents, will constitute the valid and binding obligations
of ABI, enforceable against ABI in accordance with their respective terms.
(b) BMC is a corporation, duly formed under the laws
of the state of Delaware and in good standing under the laws of such state and
is authorized to do business in each state in which the conduct of its business
or the ownership of any of the Assets requires it to be so qualified. BMC has
full power and authority to execute and deliver to Purchaser this Agreement and
all other Transaction Documents to which it is a party and to own and operate
those Assets owned by it and perform the obligations and carry out the duties
imposed on BMC by this Agreement and by all the other Transaction Documents.
This Agreement has been duly authorized, approved and executed by BMC and
constitutes the valid and binding obligation of BMC, enforceable against BMC in
accordance with its terms. The Transaction Documents to which BMC is a party
have been duly authorized and approved, and upon due execution and delivery of
such Transaction Documents, will constitute the
<PAGE> 12
9
valid and binding obligations of BMC, enforceable against BMC in accordance
with their respective terms.
(c) BRC is a not-for-profit corporation, duly formed
under the laws of the state of Illinois and in good standing under the laws of
such state and is authorized to do business in each state in which the conduct
of its business or the ownership of any of the Assets requires it to be so
qualified. BRC has full power and authority to own and operate those Assets
owned by it. The Transaction Documents to which BRC is a party will have been
duly authorized and approved on or prior to the Closing Date, and upon due
execution and delivery of such Transaction Documents, will constitute the valid
and binding obligations of BRC, enforceable against BRC in accordance with
their respective terms.
(d) Carbondale Hospitality Partners, an Illinois
limited partnership ("Carbondale"), is a limited partnership, duly formed under
the laws of the state of Illinois and in good standing under the laws of such
state and is authorized to do business in each state in which the conduct of
its business or the ownership of any of the Assets requires it to be so
qualified. Carbondale has full power and authority to execute and deliver to
Purchaser this Agreement and all other Transaction Documents to which it is a
party and to own and operate those Assets owned by it and perform the
obligations and carry out the duties imposed on Carbondale by this Agreement
and by all the other Transaction Documents. This Agreement has been duly
authorized, approved and executed by Carbondale and constitutes the valid and
binding obligation of Carbondale, enforceable against Carbondale in accordance
with its terms. The Transaction Documents to which Carbondale is a party have
been duly authorized and approved, and upon due execution and delivery of such
Transaction Documents, will constitute the valid and binding obligations of
Carbondale, enforceable against Carbondale in accordance with their respective
terms.
(e) Paducah Joint Venture, an Illinois general
partnership ("Paducah"), is a general partnership, duly formed under the laws
of the state of Illinois and in good standing under the laws of such state and
is authorized to do business in each state in which the conduct of its business
or the ownership of any of the Assets requires it to be so qualified. Paducah
has full power and authority to execute and deliver to Purchaser this Agreement
and all other Transaction Documents to which it is a party and to own and
operate those Assets owned by it and perform the obligations and carry out the
duties imposed on Paducah by this Agreement and by all the other Transaction
Documents. This Agreement has been duly authorized, approved and executed by
Paducah and constitutes the valid and binding obligation of Paducah,
enforceable against Paducah in accordance with its terms. The Transaction
Documents to which Paducah is a party have been duly authorized and approved,
and upon due execution and delivery of such Transaction Documents, will
constitute the valid and binding obligations of Paducah, enforceable against
Paducah in accordance with their respective terms.
<PAGE> 13
10
(f) Fort Wayne Joint Venture, an Illinois general
partnership ("Fort Wayne"), is a general partnership, duly formed under the
laws of the state of Illinois and in good standing under the laws of such state
and is authorized to do business in each state in which the conduct of its
business or the ownership of any of the Assets requires it to be so qualified.
Fort Wayne has full power and authority to execute and deliver to Purchaser
this Agreement and all other Transaction Documents to which it is a party and
to own and operate those Assets owned by it and perform the obligations and
carry out the duties imposed on Fort Wayne by this Agreement and by all the
other Transaction Documents. This Agreement has been duly authorized, approved
and executed by Fort Wayne and constitutes the valid and binding obligation of
Fort Wayne, enforceable against Fort Wayne in accordance with its terms. The
Transaction Documents to which Fort Wayne is a party have been duly authorized
and approved, and upon due execution and delivery of such Transaction
Documents, will constitute the valid and binding obligations of Fort Wayne,
enforceable against Fort Wayne in accordance with their respective terms.
(g) Johnston, Iowa Joint Venture, an Illinois general
partnership ("Johnston"), is a general partnership, duly formed under the laws
of the state of Illinois and in good standing under the laws of such state and
is authorized to do business in each state in which the conduct of its business
or the ownership of any of the Assets requires it to be so qualified. Johnston
has full power and authority to execute and deliver to Purchaser this Agreement
and all other Transaction Documents to which it is a party and to own and
operate those Assets owned by it and perform the obligations and carry out the
duties imposed on Johnston by this Agreement and by all the other Transaction
Documents. This Agreement has been duly authorized, approved and executed by
Johnston and constitutes the valid and binding obligation of Johnston,
enforceable against Johnston in accordance with its terms. The Transaction
Documents to which Johnston is a party have been duly authorized and approved,
and upon due execution and delivery of such Transaction Documents, will
constitute the valid and binding obligations of Johnston, enforceable against
Johnston in accordance with their respective terms.
(h) Springfield Joint Venture, an Illinois general
partnership ("Springfield"), is a general partnership, duly formed under the
laws of the state of Illinois and in good standing under the laws of such state
and is authorized to do business in each state in which the conduct of its
business or the ownership of any of the Assets requires it to be so qualified.
Springfield has full power and authority to execute and deliver to Purchaser
this Agreement and all other Transaction Documents to which it is a party and
to own and operate those Assets owned by it and perform the obligations and
carry out the duties imposed on Springfield by this Agreement and by all the
other Transaction Documents. This Agreement has been duly authorized, approved
and executed by Springfield and constitutes the valid and binding obligation of
Springfield, enforceable against Springfield in accordance with its terms. The
Transaction Documents to which Springfield is a party have been duly authorized
and approved, and upon due execution and delivery of such Transaction
Documents, will
<PAGE> 14
11
constitute the valid and binding obligations of Springfield, enforceable
against Springfield in accordance with their respective terms.
(i) Anderson Joint Venture, an Illinois general
partnership ("Anderson"), is a general partnership, duly formed under the laws
of the state of Illinois and in good standing under the laws of such state and
is authorized to do business in each state in which the conduct of its business
or the ownership of any of the Assets requires it to be so qualified. Anderson
has full power and authority to execute and deliver to Purchaser this Agreement
and all other Transaction Documents to which it is a party and to own and
operate those Assets owned by it and perform the obligations and carry out the
duties imposed on Anderson by this Agreement and by all the other Transaction
Documents. This Agreement has been duly authorized, approved and executed by
Anderson and constitutes the valid and binding obligation of Anderson,
enforceable against Anderson in accordance with its terms. The Transaction
Documents to which Anderson is a party have been duly authorized and approved,
and upon due execution and delivery of such Transaction Documents, will
constitute the valid and binding obligations of Anderson, enforceable against
Anderson in accordance with their respective terms.
(j) Libertyville Joint Venture, an Illinois general
partnership ("Libertyville"), is a general partnership, duly formed under the
laws of the state of Illinois and in good standing under the laws of such state
and is authorized to do business in each state in which the conduct of its
business or the ownership of any of the Assets requires it to be so qualified.
Libertyville has full power and authority to execute and deliver to Purchaser
this Agreement and all other Transaction Documents to which it is a party and
to own and operate those Assets owned by it and perform the obligations and
carry out the duties imposed on Libertyville by this Agreement and by all the
other Transaction Documents. This Agreement has been duly authorized, approved
and executed by Libertyville and constitutes the valid and binding obligation
of Libertyville, enforceable against Libertyville in accordance with its terms.
The Transaction Documents to which Libertyville is a party have been duly
authorized and approved, and upon due execution and delivery of such
Transaction Documents, will constitute the valid and binding obligations of
Libertyville, enforceable against Libertyville in accordance with their
respective terms.
(k) Nashville Joint Venture, an Illinois general
partnership ("Nashville"), is a general partnership, duly formed under the laws
of the state of Illinois and in good standing under the laws of such state and
is authorized to do business in each state in which the conduct of its business
or the ownership of any of the Assets requires it to be so qualified. Nashville
has full power and authority to execute and deliver to Purchaser this Agreement
and all other Transaction Documents to which it is a party and to own and
operate those Assets owned by it and perform the obligations and carry out the
duties imposed on Nashville by this Agreement and by all the other Transaction
Documents. This Agreement has been duly authorized, approved and executed by
Nashville and constitutes the valid and binding obligation of
<PAGE> 15
12
Nashville, enforceable against Nashville in accordance with its terms. The
Transaction Documents to which Nashville is a party have been duly authorized
and approved, and upon due execution and delivery of such Transaction
Documents, will constitute the valid and binding obligations of Nashville,
enforceable against Nashville in accordance with their respective terms.
(l) Jackson Best Suites, L.L.C., an Illinois
limited liability company ("Jackson"), is a limited liability company, duly
formed under the laws of the state of Illinois and in good standing under the
laws of such state and is authorized to do business in each state in which the
conduct of its business or the ownership of any of the Assets requires it to be
so qualified. Jackson has full power and authority to execute and deliver to
Purchaser this Agreement and all other Transaction Documents to which it is a
party and to own and operate those Assets owned by it and perform the
obligations and carry out the duties imposed on Jackson by this Agreement and
by all the other Transaction Documents. This Agreement has been duly
authorized, approved and executed by Jackson and constitutes the valid and
binding obligation of Jackson, enforceable against Jackson in accordance with
its terms. The Transaction Documents to which Jackson is a party have been duly
authorized and approved, and upon due execution and delivery of such
Transaction Documents, will constitute the valid and binding obligations of
Jackson, enforceable against Jackson in accordance with their respective terms.
4.1.2. Governmental Approvals. As of the date hereof,
no approval, consent, order or authorization of, or designation, registration
or declaration with, any governmental authority is required in connection with
the valid execution and delivery of, and compliance with, this Agreement or any
of the other Transaction Documents by Sellers. To the extent that either
Purchaser or Sellers determine that any such approval, consent, order,
authorization, designation, registration or declaration is required in respect
of Sellers by any such governmental authority, then Sellers shall obtain such
approval, consent, order authorization, or designation, or effect such
registration or declaration in accordance with subsection 5.1.12.
4.1.3. Compliance with Other Instruments. Neither the
execution, delivery or performance by Sellers of this Agreement, nor any of the
transactions contemplated hereby or by the other Transaction Documents will (a)
conflict with, or will result in a breach of, violate, or will constitute a
default under, (i) the organizational documents of any Seller, (ii) any
judgment, statute, rule, order, decree, writ, injunction or regulation of any
court or governmental authority to which any Seller is subject, or (iii) any
material agreement or instrument to which any Seller may be bound or which may
affect the Assets (other than the agreements or instruments for which Sellers
are obligated to obtain consents pursuant to subsection 5.1.3), or (b) result
in the creation or imposition of any lien, charge, or encumbrance upon any of
the Assets or any other property of any Seller. Without limiting the foregoing
provisions of this subsection 4.1.3, all franchise agreements relating to the
Franchise Business and Service Agreements, including, without limitation,
Hospitality
<PAGE> 16
13
Unit management agreements are transferable by Seller to Purchaser or to any
designee or assignee of Purchaser.
4.1.4. Bankruptcy; Insolvency; Litigation. (a) There
is not pending against any Seller, or any of their respective Affiliates (i) a
petition in bankruptcy, whether voluntary or otherwise, (ii)an assignment for
the benefit of creditors, (iii) any petition seeking reorganization or
arrangement under the bankruptcy or insolvency laws of the United States or any
state, or (iv)any other similar action brought under such bankruptcy or
insolvency laws; (b)no trustee or receiver has been appointed to take control
over any Seller, or any part of the property of any Seller and (c)except as set
forth on Schedule 4.1.4, to Sellers' knowledge, there are no other material
claims, litigation or proceedings against any Seller or any of the Assets.
4.1.5. Financial Statements. (a) Prior to the date
hereof, Sellers have furnished Purchaser with copies of (i) audited
consolidated financial statements of Sellers as of December 31, 1996 and 1995,
and (ii)unaudited statements of income and expense for each of the Hospitality
Units for the period ending on October 31, 1997 (the "Interim Operation
Statements"). Such financial statements (collectively, the "Operation
Statements") are true, accurate, complete and correct copies and the statements
of income and expense contained therein present fairly the results of
operations for the periods then ended in conformity with generally accepted
accounting principles applied on a consistent basis ("GAAP") (or in the case of
the Interim Operation Statements, GAAP for interim financial statements). Since
October 31, 1997, there has been no material adverse change in the results of
operations for any of the Hospitality Units or any Related Business.
(b) As of the date of such Operation Statements,
there were no liabilities of Sellers, whether accrued, contingent, absolute,
determined, determinable or otherwise, required to be reflected on the balance
sheets included in such Operation Statements or disclosed in the notes thereto
which were not so reflected or disclosed which would have a material adverse
effect on the Sellers. Since October 31, 1997, no liabilities have been
incurred by Sellers other than liabilities incurred in the ordinary course of
Sellers' respective businesses, which would be required to be reflected in a
balance sheet of Sellers prepared in accordance with GAAP, other than as
disclosed in the Operation Statements.
(c) Prior to the date hereof, Sellers have
furnished Purchaser with copies of unaudited statements of income and expense
for Robert N. Brewer for the annual periods ended December 31, 1995 and
December 31, 1996. Such financial statements are accurate, complete and correct
copies and present fairly the results of operations of Robert N. Brewer for the
periods then ended, prepared in conformity with GAAP.
4.1.6. Sellers' Leases. The copies of the Sellers'
Leases heretofore delivered to Purchaser by Sellers are true, complete and
correct copies
<PAGE> 17
14
thereof and have not been otherwise amended, modified or supplemented. No
Seller has heretofore waived any obligations of the landlords under the
Sellers' Leases, except as set forth in the Sellers' Leases heretofore
delivered to Purchaser, and no Seller shall waive any landlord's obligations
prior to the Closing Date without the prior written approval of Purchaser. The
Sellers' Leases are valid and subsisting and in full force and effect, no
Seller (nor to the best knowledge of Sellers any other party) is in default
thereunder, and to the best knowledge of Sellers, no event or omission has
occurred which but for the passing of time or giving of notice or both could
give rise to any such default. There are no percentage rents payable pursuant
to any of the Sellers' Leases. The landlord under each Seller's Lease is not an
Affiliate of any Seller. Each Seller's Lease was entered into an arms-length
terms.
4.1.7. Leases. There are no Leases of any space at
any Hospitality Unit by any Seller, as landlord to any other Person, as tenant,
and no Person has the right to occupy any portion of any Hospitality Unit
pursuant to any written or oral agreement, other than transient guests staying
at any Hospitality Unit.
4.1.8. Service or Other Agreements. There are no
equipment leases, building service agreements, management agreements,
agreements for advertising billboards or similar matters or other agreements
relating to the operation of the Hospitality Units, except as set forth in
Schedule 4.1.8. annexed hereto (collectively, the "Service Agreements"). To the
Sellers' best knowledge, none of the Service Agreements has been amended or
otherwise modified, each of the Service Agreements is valid and subsisting and
in full force and effect, none of the parties thereto is in default thereunder,
and no event or omission has occurred which but for the passing of time or
giving of notice or both could give rise to such default. Sellers have
heretofore delivered to Purchaser true, correct and complete copies of each
Service Agreement in their possession. Sellers shall deliver to Purchaser true,
correct and complete copies of each Service Agreement not heretofore delivered
to Purchaser within fifteen (15) days after the date hereof. No Affiliate of
any Seller is a counterparty to any Service Agreement.
4.1.9. Insurance. Schedule 4.1.9 is a complete and
accurate list of all insurance policies maintained by Sellers with respect to
the Hospitality Units and the Related Businesses (collectively, the "Insurance
Policies"). Each of said Insurance Policies is now in full force and effect,
and all premiums due thereunder have been paid. No Seller has received any
written notice from the insurance company which issued any of said Insurance
Policies stating in effect that such Insurance Policy will not be renewed or
will be renewed at a higher premium than is presently payable therefor. No
Seller has received any written notice from any insurance company which has
issued an Insurance Policy requesting performance of any structural or other
repairs or alterations to any Hospitality Unit, which has not been complied
with.
4.1.10. Facilities; Related Businesses. The
facilities of the Hospitality Units do not materially vary from the
descriptions thereof in Schedule
<PAGE> 18
15
4.1.10(a). The operation of each Related Business does not materially vary from
the descriptions thereof in Schedule4.1.10(b). As used herein, the term
"Operation" means the use and operation of the facilities described in
Schedule4.1.10(a), and the businesses described in Schedule4.1.10(b) for the
respective purposes and in the respective manner they were used and operated
immediately before the execution of this Agreement, as described more
particularly in such Schedule4.1.10(a) and Schedule4.1.10(b).
4.1.11. Legal Requirements. To the Sellers'
knowledge, the Hospitality Units, and each of the Related Businesses are in
compliance with all laws, rules, regulations, codes and other requirements of
any governmental authority having jurisdiction over any of the Hospitality
Units or any of such Related Businesses, as applicable, and with the
requirements of any local board of insurance underwriters and of the insurance
company which is presently insuring any of the Hospitality Units or any of such
Related Businesses, as applicable ("Legal Requirements"). The Land and the
Leased Land has been lawfully subdivided from all adjacent properties. To the
Sellers' knowledge, there are no Legal Requirements which would materially
inhibit or materially adversely affect (a)the operation or occupancy of the
Hospitality Units as presently operated or occupied or (b)the operation of any
of the Related Businesses, as presently operated.
4.1.12. Permits. To the knowledge of Sellers, all
governmental or private easements, permits, licenses (including, without
limitation, liquor licenses), consents, and approvals, (collectively,
"Permits") which are necessary in order to own or operate the Hospitality Units
or the Related Businesses, as applicable, in accordance with Legal Requirements
for the Operation and for the purposes provided for by the Sellers' Leases have
been issued and paid for and are in full force and effect. The Permits are
listed on Schedule 4.1.12 hereto. To the best of Sellers' knowledge, there is
no pending threat of modification or cancellation of any of the Permits. To the
best of Sellers' knowledge, none of the Improvements depend on any variance,
special exception or other special municipal approval for their continuing
legality. None of the Permits depend upon any real property or rights
appurtenant thereto other than the Land or the Leased Land.
4.1.13. Public Access. Each of the Hospitality Units
has public vehicular and pedestrian access adequate for its intended purpose,
by roadways duly dedicated and accepted by all relevant governmental
authorities. Other than as set forth on Schedule 4.1.13, Sellers have no
knowledge of any Federal, State or local plan to substantially change that
portion of the highway or road system abutting any of the Hospitality Units or
to restrict or change access from any such highway or road to the Hospitality
Units.
4.1.14. Utilities. All drainage facilities and water,
sewer, gas, electric, telephone and other utilities required for the normal
operation of the Hospitality Units (collectively, "Utilities") enter the Land
or the Leased Land, as
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16
applicable, through adjoining public property or, if they pass through
adjoining private property, do so in accordance with written and duly recorded
private or governmental easements. All Utilities are connected and in service,
are adequate to service the Hospitality Units and are supplied directly by
facilities of public utilities. All costs of installing Utilities required to
be paid by the owner of the Hospitality Units or any of them, if any, have been
fully paid.
4.1.15. Parking. Schedule 4.1.15 accurately sets
forth the number of indoor and outdoor parking spaces at each of the
Hospitality Units and the same fully comply with all applicable provisions of
law and with all Leases, Sellers' Leases, and to Sellers' best knowledge, title
conditions and other agreements with respect thereto.
4.1.16. Condition of the Hospitality Units. The
electrical, plumbing, heating, drainage, air conditioning, mechanical, roofs
and other systems in the Hospitality Units are in good working order and repair
(ordinary wear and tear excepted) and are adequate in quality and quantity for
the proper operation of the Hospitality Units. The Hospitality Units are in
good condition (ordinary wear and tear excepted) and there are no structural or
other material defects therein.
4.1.17. Condemnation. No Seller has received notice
of any condemnation proceeding with respect to all or part of any of the
Hospitality Units and to the knowledge of Sellers, no such proceeding is
contemplated by any governmental authority.
4.1.18. Restrictions. Sellers have not received
notice of any violation of any restriction, condition or agreement contained in
any instrument affecting any of the Hospitality Units or any of the Related
Businesses.
4.1.19. No Options, etc. No party has any contract
right, option, right of first refusal, right of first offer or other right to
acquire all or any part of the Assets.
4.1.20. Sellers' Personal Property. (a) Schedule
4.1.20(a)(1) is a complete and accurate inventory of the Sellers' Personal
Property located at each of the Hospitality Units and each location in which
the Related Businesses are located. Such inventory contains at least "two par"
(as such term is used in the motel business) for each of the Hospitality Units.
Sellers have good and marketable title to the Personal Property free and clear
of all liens, encumbrances, equipment leases, chattel, mortgages and claims of
others, except as set forth on Schedule4.1.20(a)(2). All of the Personal
Property has been paid for in full.
(b) (i) All Consumables, FF&E and Small Operating
Equipment consist of a quality and quantity usable or saleable in the ordinary
and usual course of business, except for items of obsolete materials and
materials of below standard value;
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(ii)the quantities of each type of Consumables, FF&E and Small Operating
Equipment are reasonable and appropriate in the present circumstances of each
of the Hospitality Units and the Related Businesses; (iii)all Consumables, FF&E
and Small Operating Equipment is located at the Hospitality Units or at 1205
Skyline Drive, Marion, Illinois; (iv)no Consumables, FF&E or Small Operating
Equipment is stored with a bailee, warehouseman or similar party; and (v)no
Consumables, FF&E or Small Operating Equipment is under consignment to any
person.
4.1.21. Assessments. No assessments for public
improvements have been made against any of the Hospitality Units which remain
unpaid, and to the best of Sellers' knowledge none have been proposed.
4.1.22. Flood Hazard. None of the Hospitality Units
lie in any area designated as a flood hazard area under the document entitled
"Department of Housing and Urban Development, Federal Insurance Administration
- -- Special Flood Hazard Area Maps".
4.1.23. Mechanics and Materialmen. No services,
materials or work have been supplied by contractors, subcontractors or
materialmen with respect to any of the Hospitality Units for which an invoice
has been rendered and for which payment is not delinquent.
4.1.24. Employment Matters. (a) Employees. There
are no written agreements or understandings (including, without limitation,
employment or collective bargaining agreements) between Sellers and the
Employees at any of the Hospitality Units, or the Employees of any of the
Related Businesses, as applicable (including, without limitation, severance
agreements). No Employee of any Seller is a member of any labor union, trade
union, or similar organization. Each employee of each Seller is an employee at
will. Schedule 4.1.24(a) is a complete and correct list of all persons who are
employed by Sellers, in connection with the management, operation or
maintenance of the Hospitality Units and the Related Businesses, setting forth,
with respect to each of them, his or her name, employer name, date employment
commenced, and regular wages or salary.
(b) Documents. Neither Seller, nor any Affiliate
of any Seller contributes to or sponsors any "pension plan" (within the meaning
of Section3(2) of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA") (each such plan individually herein referred to as an
"Employee Pension Benefit Plan") on behalf of Employees at any Hospitality Unit
or any Related Business. Schedule 4.1.24(b) sets forth a true, correct and
complete list of each other agreement, arrangement, plan or policy to provide
deferred compensation, bonuses, fringe benefits or other compensation or
benefits to any employee at any Hospitality Unit or any Related Business
(herein referred to as the "Other Employee Benefit Plans") (all Employee
Pension Benefit Plans and Other Employee Benefit Plans herein collectively
referred to as the "Employee Plans"). Neither of the Sellers nor any
<PAGE> 21
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ERISA Affiliate has any plan or commitment, whether legally binding or not, to
establish any new Employee Plan or to enter into any agreement related to terms
of employment, nor has any intention of Sellers to do the foregoing been
communicated to the Employees by Sellers or by any of their respective
Affiliates. To the extent in existence, the Sellers have provided, or will
cause to be provided, to Purchaser (i)current, accurate and complete copies of
all documents embodying or relating to each Employee Pension Benefit Plan,
including all amendments thereto and trust or funding agreements with respect
thereto; (ii)the two (2) most recent annual reports (Series 5500 and all
schedules thereto), if any, required under ERISA; (iii)the most recent summary
plan description; and (iv)all material communications to any Employee or
Employees relating to each Employee Pension Benefit Plan.
(c) Neither the Sellers, nor any ERISA Affiliate,
to the knowledge of Sellers, presently sponsors, maintains, contributes to, nor
is required to contribute to, nor has the Sellers or any ERISA Affiliate ever
sponsored, maintained, contributed to, or been required to contribute to with
respect to any Employees (i) a Pension Plan which is subject to Title IV of
ERISA; (ii) a multi-employer plan (within the meaning of Sections 3(37) or
4001(a)(3) of ERISA); or (iii) any Employee Plan which provides, or has any
liability to provide, life insurance, medical, severance or other employee
welfare benefits to any Employee upon his retirement or termination of
employment, except as may be required by Section 4980B of the Code.
(d) Compliance. All contributions, payments or
premiums due under any Employee Plan have been made. To the knowledge of
Sellers, each Employee Plan has been administered in material compliance with
its terms, and applicable provisions of the Code (as hereinafter defined),
ERISA and other laws, and neither Sellers nor, to the knowledge of Sellers, any
fiduciary of any Employee Plan has engaged in any transaction prohibited by
Section 406 of ERISA or described in Section 4975(d) of the Code and for which
there is no exemption.
(e) Employment Matters. Except as set forth on
Schedule 4.1.24(e) and, to the knowledge of Sellers, the Sellers (i)are in
compliance with all applicable federal, state and local laws, rules and
regulations (domestic and foreign) respecting employment, employment practices,
labor, terms and conditions of employment and wages and hours, in each case,
with respect to Employees; (ii)have withheld all amounts required by law or by
agreement to be withheld from the wages, salaries and other payments to
Employees; (iii)are not liable for any arrears of wages or any taxes or any
penalty for failure to comply with any of the foregoing; and (iv)are not liable
for any payment to any trust or other fund or to any governmental or
administrative authority, with respect to unemployment compensation benefits,
social security or other benefits for Employees.
4.1.25. Labor Matters. (a) Except as set forth on
Schedule 4.1.25, no Seller has received notice of any:
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(i) pending grievances or arbitration
proceedings or unsatisfied arbitration awards, or judicial proceedings or
orders respecting awards, relating to Sellers, or any of the Hospitality Units
or any of the Related Businesses or any employees of Sellers;
(ii) pending unfair labor practice charges
or complaints, unsatisfied unfair labor practice orders or judicial proceedings
or orders with respect thereto relating to Sellers, or any of the Hospitality
Units or any of the Related Businesses or any employees of Sellers;
(iii) pending charges or complaints with or
by city, state or federal civil or human rights agencies, unremedied orders by
such agencies or judicial proceedings or orders with respect to obligations
under city, state or federal civil or human rights or antidiscrimination laws
or executive orders relating to Sellers or any of the Hospitality Units or any
of the Related Businesses or any employees of Sellers; or
(iv) other pending or actual claims,
actions, proceedings, charges, investigations, complaints, petitions or
unsatisfied orders, or to the best of Sellers' knowledge, any threat thereof by
or before any administrative agency or court respecting alleged obligations of
Sellers, their respective employees, or the employees' representatives.
(b) There are no strikes, picketing, job actions,
slowdowns or other curtailment of work by any employees or their
representatives or attempts to interfere with the normal operation of any of
the Hospitality Units or any of the Related Businesses by any person, group of
persons or organization.
4.1.26. Advance Reservations. Schedule 4.1.26 sets
forth, with respect to each Hospitality Unit, the "rack rate" applicable to the
rooms in each Sellers' Motel, as well as the group and other promotional rates
offered with respect to each Sellers' Motel, setting forth the size of the
group entitled to group rates and the persons entitled to any such promotional
rates.
4.1.27. Taxpayer Identification. The United States
taxpayer identification number of ABI is 37-1132930, of BMC is 37-0890020, of
BRC is 37-1222729, of Carbondale is 37-1133417, of Paducah is 37-1163974, of
Fort Wayne is 37-1197547, of Johnston is 42-1340709, of Springfield is
37-1215503, of Anderson is 36-3592732, of Libertyville is 37-1221220, of
Nashville is 37-1355075 and of Jackson is 37-1362977. No Seller is a foreign
person (as defined in the Internal Revenue Code of 1986, as amended and the
regulations promulgated thereunder (the "Code")), and Purchaser is not required
to deduct and withhold any tax under Section 1445(a) of the Code in connection
with the disposition of the Assets pursuant to this Agreement.
<PAGE> 23
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4.1.28. Taxes. Sellers have previously provided to
Purchasers true, correct and complete copies of all federal, state and local
tax returns filed by Sellers for the tax years 1995 and 1996 relating to
income, motel occupancy, franchise or sales taxes. Each Seller has duly filed,
or has obtained a filing extension from the appropriate federal, state and
local governments or governmental agencies with respect to, all tax returns
required to be filed by Sellers for all such taxes. Payment in full of all
taxes shown to be due on such tax returns or otherwise due and payable by
Sellers has been made. All amounts required to be withheld by Sellers from
employees for income taxes, social security and other payroll taxes have been
collected and withheld and, together with all sales or hotel occupancy taxes,
accrued through the date hereof, have either been paid to the respective
governmental agencies, set aside in accounts for such purpose or accrued,
reserved against and entered upon the applicable Seller's books and records.
4.1.29. Environmental Matters. Except as disclosed on
Schedule 4.1.29:
(a) to the Sellers' knowledge, Sellers, the
Related Businesses and the Hospitality Assets have been operated at all times,
and are, in compliance with applicable Environmental Laws, including all
limitations, restrictions, conditions, standards, prohibitions, requirements,
obligations, schedules and timetables contained therein;
(b) to the Sellers' knowledge, Sellers and the
Related Businesses have obtained, are in compliance with, and have made all
appropriate filings for issuance or renewal of, all permits, licenses,
authorizations, registrations and other governmental consents required by any
applicable Environmental Laws ("Environmental Permits"), and all such
Environmental Permits are in full force and effect;
(c) Sellers have not received notice of any
claims, notices, civil, criminal or administrative actions, suits, hearings,
investigations, inquiries or proceedings pending or to the Sellers' knowledge,
threatened against Sellers or the Related Businesses, or any of their
respective predecessors, and no requests from any governmental authority or
other third party to perform any investigatory or remedial activity have been
made to Sellers, the Related Businesses or any of their respective
predecessors, that are based on or related to any actual or alleged release of
Hazardous Materials or any other environmental, health or safety matters or the
failure to have any required Environmental Permits;
(d) to the Sellers' knowledge, there are no past
or present conditions, events, circumstances, facts, activities, practices,
incidents, actions or omissions that (x)would give rise to any liability or
other obligation of Sellers or the Related Businesses under any Environmental
Laws, or (y)would interfere with or
<PAGE> 24
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prevent continued compliance by Seller or the Related Businesses with
Environmental Laws and/or Environmental Permits;
(e) to the Sellers' knowledge, there are no, and
have never been any, underground or aboveground storage tanks, incinerators or
surface impoundments at, on, under, or within any of the Hospitality Units;
(f) to the Sellers' knowledge, there have been no
releases (i.e., any past or present releasing, spilling, leaking, pumping,
pouring, emitting, emptying, discharging, injecting, escaping, leaching,
disposing or dumping) of Hazardous Materials by Sellers, the Related Businesses
or any of their respective predecessors on, at, under, affecting or migrating
from any of the Hospitality Units, and to the Sellers' knowledge, each is free
of contamination arising from, relating to, or resulting from any release
discharge or emission of Hazardous Materials, other than such releases and
contamination that are permitted by, and would not result in liability under,
Environmental Laws.
4.1.30. Software. Schedule 4.1.30 identifies all of
the software used in connection with the ownership and operation of each of the
Hospitality Units and the Related Businesses (collectively, "Software").
Sellers are the owners or licensees of the Software and, except as listed on
Schedule 4.1.30, and for Software licensed to the Sellers under "shrinkwrap"
software licenses, the Software and all rights thereunder are transferable to
Purchaser without restriction. No Seller has granted any person a license to
use any proprietary Software owned by any Seller.
4.1.31. The Americans with Disabilities Act. To the
knowledge of Sellers, the Land, the Improvements and the Leased Property, when
used for the purposes and in the manner presently used, complies with the
provisions of the Americans with Disabilities Act of 1990, 42 U.S.C.
ss.ss.12101 et seq. as presently enacted and interpreted by applicable
governmental entities (the "ADA"), and all other Legal Requirements governing
the use of any portion of the Land, the Improvements and the Leased Property by
persons with disabilities.
4.1.32. Third Party Consents. Except as set forth on
Schedule 4.1.32, no approval, consent or authorization of any third party,
including, without limitation, any general or limited partners, shareholders or
members of or joint venturers with any Seller (or with respect to BRC, from any
other person in connection with the maintenance of BRC's not-for-profit status)
is required in connection with the valid execution and delivery of and
compliance with this Agreement or any of the other Transaction Documents by
Sellers.
4.1.33. Intellectual Property. (a) Sellers own or
have the right to use all Intellectual Property necessary for the operation of
the Hospitality Units and the Related Businesses as presently conducted. Except
as otherwise set forth in subsection 4.1.30, each item of Intellectual Property
owned or used by Sellers
<PAGE> 25
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immediately prior to the Closing hereunder will be owned or available for use
by the Purchaser on identical terms and conditions immediately subsequent to
the Closing hereunder.
(b) To Sellers' knowledge, Sellers have not
interfered with, infringed upon, misappropriated, or otherwise come into
conflict with any Intellectual Property rights of third parties, and Sellers
have not received any charge, complaint, claim, demand, or notice alleging any
such interference, infringement, misappropriation, or violation (including any
claim that Sellers must license or refrain from using any Intellectual Property
rights of any third party).
(c) To the knowledge of Sellers, no third party is
presently interfering with, infringing upon, misappropriating, or otherwise
coming into conflict with any Intellectual Property rights of Sellers.
(d) Schedule 1.1(i) hereto identifies each
trademark, service mark, item of trade dress, logo, trade name, corporate name,
or copyright owned by Sellers, and identifies each license, agreement, or other
permission which Sellers have granted to any third party with respect to any of
their respective Intellectual Property. Sellers have delivered to the Purchaser
correct and complete copies of all such licenses, agreements, and permissions
(as amended to date) and has made available to the Purchaser correct and
complete copies of all other written documentation evidencing ownership and
prosecution (if applicable) of each such item. With respect to each item of
Intellectual Property required to be identified on Schedule 1.1(i):
(i) Sellers possess all right, title, and
interest in and to the item, free and clear of any security interest, lien,
license, or other restriction;
(ii) the item is not subject to any
outstanding injunction, judgment, order, decree, ruling, or charge;
(iii) no action, suit, proceeding, hearing,
investigation, charge, complaint, claim, or demand is pending or, to the
knowledge of Sellers is threatened which challenges the legality, validity,
enforceability, use, or ownership of the item; and
(iv) Sellers have never agreed to indemnify
any entity or person for or against any interference, infringement,
misappropriation, or other conflict with respect to the item.
(e) There exists no item of Intellectual Property
which is necessary for the operation of the Hospitality Units or the Related
Business as presently conducted, which is owned by a third party and for which
Sellers do not have a valid, transferable license or other right to use such
Intellectual Property.
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4.1.34. Title to Real Property. Sellers hold good and
marketable title in fee simple to that portion of the Land underlying the
Hospitality Units, free and clear of all mortgages, options, liens, charges,
easements, agreements, claims, restrictions or other encumbrances of any kind
or nature, except as disclosed on Schedule 4.1.34 and as would otherwise be
shown on an accurate title report in respect of any such Hospitality Unit.
4.1.35. Agreements in Respect of Related Businesses.
Schedule 4.1.35(a) sets forth a list of all contracts and other agreements
between any Seller and any unaffiliated third party, together with any
amendments, which relate to any of the Related Businesses (collectively, the
"Third Party Contracts"). Schedule 4.1.35(b) sets forth a list of all material
contracts and other agreements between any Seller and any of its Affiliates,
together with any amendments, which relate to any of the Related Businesses
(collectively, the "Intercompany Contracts"). Each of the Third Party Contracts
and each of the Intercompany Contracts are unmodified, in full force and effect
and are each enforceable in accordance with their respective terms. Each of the
Intercompany Contracts have been and continue to be performed in accordance
with their respective terms. Sellers have no knowledge of any defaults under
any of the Third Party Contracts or the Intercompany Contracts which remain
uncured, or of any event or omission which has occurred and which but for the
passing of time, or the giving of notice, or both would constitute such a
default.
4.1.36. Additional Representations Regarding BRC. (a)
All of the membership interests in BRC are held by the Persons listed on
Schedule 4.1.36. ABI has good title to its membership in BRC, free and clear of
all liens, charges, claims, agreements, restrictions or other encumbrances of
every kind or nature. ABI's membership in BRC has been duly authorized, validly
issued, and is non-assessable. BRC is in compliance in all material respects,
with all laws applicable to not-for-profit entities under the Code (as
hereinafter defined) and in the State of Illinois and in each other state in
which BRC is doing business.
(b) There are no warrants, options, rights
(including stock or membership interest appreciation, phantom stock, profit
participation or similar rights and rights to demand registration of, or to
sell in connection with a registration by BRC of, any securities of BRC under
the federal securities laws), calls or other commitments of any nature relating
to the membership interests of BRC and there are no outstanding securities of
BRC other than the membership interests listed on Schedule 4.1.36. Other than
with respect to the right of each franchisee of the Franchise Business to be
issued membership in BRC, BRC is not obligated to issue any of its memberships
for any purpose.
(c) There are no corporations, partnerships,
associations, trusts, joint ventures or other entities in which BRC owns,
directly or indirectly, any capital stocks or other equity, ownership or
proprietary interest.
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(d) Without duplicating any of the representations
set forth in this Article 4, BRC (i)does not own any material assets other than
as set forth on Schedule 4.1.36(d)(i), and (ii)does not have any liabilities or
obligations of any kind whatsoever (whether accrued, absolute, contingent or
otherwise) except for the liabilities set forth on Schedule 4.1.36(d)(ii).
(e) Prior to the date hereof, BRC has furnished
Purchaser with copies of unconsolidated, audited financial statements of BRC
for the periods ended December 31, 1995 and December 31, 1996, each prepared in
accordance with GAAP.
4.1.37. Safe Deposit Boxes and Baggage. No
Hospitality Unit contains any (a) safe deposit boxes or similar storage systems
or (b) baggage storage facilities, in each case, available for the use of
guests at any Hospitality Unit.
4.1.38. Materiality. No representation or warranty of
any Seller contained in this Agreement or in any Exhibit or Schedule hereto
contains an untrue statement of a material fact or omits to state a material
fact necessary to render the statements therein contained not misleading in any
material respect.
4.2. Representations and Warranties of Purchaser.
4.2.1. Organization of Purchaser. Purchaser is a
corporation duly formed under the laws of the state of Georgia and in good
standing under the laws of such state and is authorized to do business in each
state in which the conduct of its business or the ownership of any of its
assets requires it to be so qualified. Purchaser has full power and authority
to execute and deliver to Sellers this Agreement and all other Transaction
Documents to which it is a party and perform the obligations and carry out the
duties imposed on Purchaser by this Agreement and by all the other Transaction
Documents. This Agreement has been duly authorized, approved and executed by
Purchaser and constitutes the valid and binding obligation of Purchaser,
enforceable against Purchaser in accordance with its terms. The Transaction
Documents to which Purchaser is a party have been duly authorized and approved,
and upon due execution and delivery of such Transaction Documents, will
constitute the valid and binding obligations of Purchaser, enforceable against
Purchaser in accordance with their respective terms.
4.2.2. Compliance with Other Instruments. Neither
the entry into nor the performance of, or compliance with, this Agreement and
the other Transaction Documents to which Purchaser is a party will result in
any violation of, be in conflict with or constitute a default under any
articles of organization, operating agreement, corporate charter, certificate
of incorporation, bylaw, mortgage, indenture, contract, permit, judgment,
decree, order, statute, rule or regulation applicable to Purchaser.
<PAGE> 28
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4.2.3. Governmental Approvals. No approval, consent,
order or authorization of, or designation, registration or declaration with,
any governmental authority is required in connection with the valid execution
and delivery of, and compliance with, this Agreement or any of the other
Transaction Documents by Purchaser.
Article 5
Conditions Precedent
5.1. Conditions Precedent to Purchaser's Obligations. The
fulfillment by Sellers of each of the following conditions ("Sellers' Closing
Conditions") on or before the Closing Date (any or all of which may be waived
in whole or in part by Purchaser) is a condition precedent to the obligations
of Purchaser under this Agreement.
5.1.1. State of Title; Title Policies; Title
Commitments; Surveys. (a) Sellers shall have, and shall convey to Purchaser in
accordance with Article 8, good, marketable and insurable title to the
Hospitality Units, subject only to the exceptions to title as shown in the
commitments from the Title Insurer (as hereinafter defined) to issue the title
insurance policies described in clause (b) (the "Commitments"), and either
consented to, or not objected to by Purchaser, acting as a reasonably prudent
purchaser of improved real property (the "Permitted Exceptions"), relating to
the Hospitality Units.
(b) Stewart Title Guaranty Company, or such other
nationally-recognized title insurance company acceptable to Purchaser ("Title
Insurer") shall have issued to Purchaser an ALTA owner's title insurance policy
with respect to each of Hospitality Units in amounts and in form reasonably
acceptable to Purchaser. Each such policy shall insure fee title to the
Improvements and the Land, except that the policies issued with respect to
Hospitality Units which are subject to Sellers' Leases, shall insure (x) that
the applicable Sellers' Lease is a valid and subsisting lease of Leased Land
for the unexpired portion of the term of such Sellers' Lease, subject to the
terms, covenants and conditions of such Sellers' Lease, (y) fee title to the
Improvements located on the applicable parcel of Leased Land and (z) the
validity of Purchaser's rights with respect to any option conveyed to
Purchaser, by Sellers at Closing to purchase all or any portion of Sellers'
Leased Land and the Improvements located thereon. No such policy shall contain
any standard or other exceptions other than the Permitted Exceptions, and each
such policy shall contain the following, whether by endorsement or otherwise,
all in form and substance satisfactory to Purchaser and to the extent available
in the applicable jurisdiction:
(i) Affirmative insurance against
mechanics' liens, including inchoate mechanics' liens;
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(ii) With respect to any Land or Sellers'
Leased Land consisting of more than one parcel, affirmative insurance that such
parcels are contiguous;
(iii) Affirmative insurance that no
restrictive covenants of record have been breached and that no such breach
shall result in any forfeiture or reversion; and
(iv) Such other affirmative insurance as
Purchaser shall reasonably request.
(c) In order to evidence Sellers' title to the
Hospitality Units, as promptly as possible, Purchaser shall have received
current as-built surveys of each of the Hospitality Units prepared by a
licensed surveyor satisfactory to Purchaser, prepared to the standard of the
"Minimum Standard Detail Requirements for Land Title Surveys" jointly
established and adopted by ALTA and ACSM, as currently in effect (collectively,
the "Surveys"), and otherwise satisfactory to Purchaser, Title Insurer and any
lender designated by Purchaser.
(d) Within five (5) business days after receipt of
the Commitments and the Surveys, Purchaser shall advise Sellers of any
objections it may have to the state of title to the Hospitality Units indicated
in the Commitments or the Surveys. Sellers shall cause such objections to title
(other than Permitted Exceptions) to be removed of record at or prior to the
Closing. Subject to clause (e), if Sellers fail to cause any such objections to
be discharged of record, the provisions of Article 9 shall apply.
(e) In the event that there shall be a defect in
the state of title which cannot readily be removed by the expenditure of money
or other commercially reasonable methods, Sellers shall be entitled to a
reasonable adjournment of the Closing Date of at least thirty (30) days in
order to attempt to cure such defect. If such defect has not been so cured
within such 30-day period, or such longer period as may be granted to Sellers
by Purchaser, at the election of Purchaser, this Agreement may be terminated by
Purchaser upon two (2) business days prior written notice to Sellers, whereupon
this Agreement shall terminate and be of no further force or effect, except for
those provisions which by their terms are intended to survive. If Sellers cure
such defect, to the satisfaction of Purchaser, prior to the expiration of such
adjournment period, then Purchaser and Sellers shall proceed to consummate the
Closing upon the terms and conditions set forth in this Agreement, within ten
(10) business days after Purchaser has received notice of Sellers' cure of such
defect.
(f) The parties hereto acknowledge that Purchaser
shall order the Commitments and the Surveys promptly after execution and
delivery of this Agreement. Notwithstanding the foregoing, Purchaser's receipt
and approval of such
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Commitments and Surveys in accordance with this subsection 5.1.1 shall continue
to be a Seller's Closing Condition.
5.1.7. Estoppels. There shall have been delivered
to Purchaser estoppel certificates dated not more than fifteen (15) days prior
to the Closing Date, in form and substance reasonably satisfactory to Purchaser
from (a) the landlords under each of the Sellers' Leases and (b) the
counterparties to each of the management agreements in respect of the
Management Business and each of the franchise agreements in respect of the
Franchise Business.
5.1.3. Consents. There shall have been delivered
to Purchaser agreements, in form and substance reasonably satisfactory to
Purchaser, consenting to the transfer of the Hospitality Units, the Related
Businesses and the other Assets, as applicable, from each of the persons listed
on Schedule 4.1.32. None of such consents shall require any modifications of
any of the terms of the Sellers' Leases, Service Agreements, Third Party
Contracts, or Intercompany Contracts, and any fees or costs incurred in
obtaining such consents shall be borne solely by Sellers. Sellers shall have
delivered each such consent to Purchaser on or prior to the date fifteen (15)
days after the date hereof (the "Consent Date"). The expiration of the Review
Period shall be extended by one (1) day for each day beyond the Consent Date
that any consents have not been delivered to Purchaser.
5.1.4. Cancellations. If Purchaser by written
notice given at or prior to the Closing shall have elected not to take an
assignment of one or more of the Intercompany Contracts or transferable
Insurance Policies, Sellers shall have canceled the same (or caused the same to
be canceled), shall have paid all cancellation fees due in connection
therewith, and shall have provided evidence of the foregoing satisfactory to
Purchaser.
5.1.5. Opinion of Counsel. There shall have been
delivered to Purchaser a customary opinion of Sellers' counsel covering matters
which include, without limitation, the formation, existence and good standing
of the Sellers, due authorization, due execution and delivery of this Agreement
and the other Transaction Documents, no conflicts and validity and
enforceability of this Agreement and the other Transaction Documents, in each
case, in a form reasonably acceptable to Purchaser.
5.1.6. Updated Financial Statements. Sellers
shall have delivered to Purchaser (a) updates of the Operation Statements
delivered pursuant to subsection 4.1.5, as soon as such updates are available,
but in no event later than twenty (20) days after the end of each month, and
such updates shall indicate no material adverse changes in the financial
condition of the Hospitality Units, the Related Businesses or any of the other
Assets, as applicable and (b) letters from Robert N. Brewer's auditors within
fifteen (15) days of the end of each month, indicating no material adverse
changes in the financial condition of Robert N. Brewer.
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5.1.7. Updated Schedules. Sellers shall update, as
of the Closing Date, the information set forth on each Schedule to this
Agreement, as of the Closing Date.
5.1.8. Representations and Warranties True; No
Default. All of the representations and warranties of the Sellers set forth in
Article 4 shall be true and correct in all material respects as if made on the
Closing Date, and Sellers shall have complied in all material respects with the
covenants and agreements set forth herein to be performed or complied with by
them on or before the Closing Date.
5.1.9. Delivery of Documents; etc. All of the
documents, instruments and other items required to be executed and exchanged
between Sellers and Purchaser at Closing or delivered to Purchaser at or prior
to Closing shall have been executed and exchanged or delivered as appropriate.
5.1.10. No Pending Adverse Litigation. On the
Closing Date, there shall not then be pending or, to the knowledge of any
Seller, threatened, any litigation, administrative proceeding, investigation or
other form of governmental enforcement, or executive or legislative proceeding
relating to the Assets, not covered by insurance and which, if determined
adversely, would either individually, require the payment by Sellers of more
than $5,000, or in the aggregate, require the payment by Sellers of more than
$50,000.
5.1.11. Taxes. Sellers shall have paid any state,
federal or local gains tax or transfer tax, if any, payable in connection with
the transfer of the Land or the Sellers' Leases in accordance with Article 11.
5.1.12. Governmental Approvals. Any and all
governmental regulatory compliance and any approvals necessary to consummate
the transactions contemplated by this Agreement or any other Transaction
Document have been performed and/or obtained, as the case may be, including,
without limitation, any approvals, consents, orders, authorizations,
designations, registrations or declarations determined, after the date hereof,
in accordance with subsection 4.1.2, to be required.
5.1.13. Bulk Sales. The parties hereto waive
compliance by the Sellers with the provisions of any so-called bulk sales or
bulk transfer laws or similar laws in connection with the transactions
contemplated by this Agreement.
5.1.14. No Bankruptcy, etc. Between the date of
this Agreement and the Closing Date, (a)no Seller shall have applied for or
consented to the appointment of a receiver, trustee or liquidator for itself or
any of its assets unless the same shall have been discharged prior to the
Closing Date, and no such receiver, liquidator or trustee shall have otherwise
been appointed, unless same shall have been discharged prior to the Closing
Date, (b)no Seller shall have admitted in writing an inability to pay its debts
as they mature, (c)no Seller shall have made a general
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assignment for the benefit of creditors, (d)no Seller shall have been
adjudicated a bankrupt or insolvent, or had a petition for reorganization
granted with respect to such Seller, and (e)no Seller shall have filed a
voluntary petition seeking reorganization or an arrangement with creditors or
taken advantage of any bankruptcy, reorganization, insolvency, readjustment or
debt, dissolution or liquidation law or statute, or filed an answer admitting
the material allegations of a petition filed against it in any proceedings
under any such law, or had any petition filed against it in any proceeding
under any of the foregoing laws unless the same shall have been dismissed,
canceled or terminated prior to the Closing Date.
5.1.15. Sellers' Certification. Sellers shall have
certified in writing to Purchaser that all of the Closing Conditions have been
complied with in full.
5.1.16. Membership in BRC. Sellers shall have taken
all necessary and proper actions, including, without limitation, amending BRC's
by-laws, to cause the substitution of Purchaser for ABI as a member in BRC.
Seller shall, on or prior to the Closing Date, have delivered evidence
reasonably satisfactory to Purchaser that such substitution has taken place and
that at Closing, Purchaser shall have succeeded to all of ABI's right, title
and interest in and to BRC.
5.1.17. Advance Reservations. (a) Sellers shall
have delivered to Purchaser on or before the date five (5) days prior to the
Closing Date a certificate setting forth all of the advance reservations
accepted by Sellers for the period after such date, setting forth the name of
the guest, the date of such reservation, the type, and if applicable, the grade
of room, the daily rate and the amount and date of any deposit received or to
be received.
(b) Sellers shall have delivered to Purchaser on
the Closing Date, a certificate updating the certificate described in clause
(a) to show such advance reservations accepted by Sellers for the period after
the Closing Date.
5.1.18. Existing Mortgages. Unless Purchaser has
requested, in writing, that Sellers cause any mortgagee to assign any mortgage,
at Purchaser's expense (together with the applicable promissory note)
encumbering any Hospitality Unit to Purchaser's lender or other designee (to
the extent such assignment is permissible in the applicable jurisdiction and to
the extent such mortgages and related promissory notes are, by their terms,
freely assignable), Sellers shall have caused, at Sellers' expense (a)the
repayment, in full, of such indebtedness, together with any interest accruing
thereon and prepayment premiums, upon receipt of customary payoff letters and
(b)the satisfaction of each such mortgage and any other security document
(including, without limitation, UCC-1 financing statements) sufficient to
remove such matter from the public record, in each case, in a manner acceptable
to Purchaser.
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5.1.19. Personal Property Search. There shall have
been delivered to Purchaser (a) a search by Title Insurer (or another person
satisfactory to Purchaser) of the relevant public records indicating that
except as may be approved by Purchaser in its sole discretion, there are no
financing statements, conditional sales contracts, chattel mortgages or other
liens and encumbrances of record affecting the Personal Property and there are
no bankruptcies, federal or state or local tax liens or judgments affecting
Sellers or any of the Assets and (b) by Sellers, to the extent such search
discloses any such matters, satisfactions or terminations of each such matter
to Purchaser's satisfaction (including, without limitation, UCC-3 terminations)
sufficient to remove such matters from the public record.
5.1.20. Management and Franchise Agreements. (a) BMC
and the applicable Sellers shall have entered into management agreements on
substantially the same terms and conditions as BMC would have entered into on
the date hereof, in its capacity as a hotel or motel manager, with a third
party hotel or motel owner, containing a management fee of five percent (5%) of
total hotel or motel revenues for such property and otherwise on arm's-length
terms which are mutually acceptable to the parties hereto, in each case, in
respect of the hotel properties under development by Sellers listed on Schedule
6.1.2(b).
(b) To the extent legally permissible in the
states where the applicable Hospitality Units are now or will be located, ABI
and the applicable Sellers shall have entered into franchise agreements on
ABI's standard form of franchise agreement with third party franchisees and
otherwise having a fifteen (15) year term, a franchise royalty fee of 5% of
room revenues, a reservation fee of 1% of room revenues, a national marketing
fee of 1% of room revenues, no up-front franchise application fee and otherwise
on arm's length terms which are mutually acceptable to the parties hereto, in
each case, in respect of the hotel properties under development by Sellers
listed on Schedule 6.1.2(b). If it is not legally permissible for ABI and such
Sellers to enter into one or more of such franchise agreements with respect to
one or more of such hotel properties listed on Schedule 6.1.2(b) on or prior to
the Closing Date, then, as soon after the Closing Date as it is legally
permissible for U.S. Franchise Systems, Inc. or an Affiliate thereof ("USFS")
and such Sellers to enter into franchise agreements in respect of such hotel
properties, the applicable Sellers and USFS shall enter into franchise
agreements on USFS's standard form of franchise agreement for the America's
Best Inns or America's Best Suites brands, and otherwise containing the terms
described in the immediately preceding sentence, with respect to such hotel
properties (it being understood that such standard form of franchise agreement
shall not materially differ from the standard form of franchise agreement
heretofore provided to Sellers by USFS, other than with respect to such terms
described in the immediately preceding sentence). The provisions of this clause
(b) shall survive the Closing.
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5.2. Conditions Precedent to Sellers' Obligations. The
fulfillment by Purchaser of each of the following conditions ("Purchaser's
Closing Conditions") on or before the Closing Date (any or all of which may be
waived in whole or in part by Sellers) is a condition precedent to the
obligations of Sellers under this Agreement.
5.2.1. Payment of Purchase Price. Purchaser shall
have paid the Purchase Price, subject to adjustment in accordance with the
terms of this Agreement.
5.2.2. Representations and Warranties True; No
Default. All of the representations and warranties of the Purchaser set forth
in Article 4 shall be true and correct in all material respects as if made on
the Closing Date, and Purchaser shall have complied, in all material respects,
with the covenants and agreements set forth herein to be performed or complied
with by Purchaser on or before the Closing Date.
5.2.3. Purchaser's Due Authorization. Purchaser
shall have delivered to Sellers, on or prior to the Closing Date (a) a
certificate of existence or good standing, or similar certificate, issued by
the secretary of state of the state in which Purchaser is organized, (b) a
certificate of an officer, managing member or other authorized Person, on
behalf of Purchaser, attaching true and correct copies of (i) the portions of
Purchaser's operating agreement, by-laws, or similar organizational document
forming the basis for the authority of the Person executing and delivering this
Agreement and the other Transaction Documents on behalf of Purchaser (the
"Signatory") to take such actions on behalf of Purchaser and (ii) to the extent
required by the terms of such operating agreement, by-laws or similar
organizational document, an instrument of consent, executed by the Persons
required to authorize the Signatory to take such actions on behalf of Purchaser
and (c) a true, correct and complete copy of Purchaser's articles of
organization, certificate of incorporation or similar original document,
certified by the secretary of state of the state in which Purchaser is
organized.
Article 6
Covenants
6.1. Covenants of Sellers. In addition to the other
covenants, agreements and obligations of Sellers under this Agreement, Sellers
covenant as follows:
6.1.1. Inspection and Access. (a) Purchaser shall
be entitled to have representatives of Purchaser at each Hospitality Unit and
the offices of the Related Businesses, at reasonable times, during normal
business hours, and otherwise under reasonable circumstances, to observe and
become familiar with the operations of the Hospitality Units and the Related
Businesses (which shall include reasonable access to the Books and Records),
provided (i) Purchaser shall give Sellers at least two (2) days prior written
or oral notice in each instance Purchaser desires to send such
<PAGE> 35
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representative(s) to any Hospitality Unit or office of any Related Business,
(ii) such representative(s) do not unreasonably or materially interfere with
Hospitality Unit management or employees or any of the operations of the
Hospitality Units and (iii) Sellers shall have the right to accompany such
representative(s) at all times at any such Hospitality Unit or office of any
Related Business. Sellers will instruct senior management of the Hospitality
Units and the Related Businesses to reasonably cooperate with such
representative(s). Without limiting the foregoing provisions of this subsection
6.1.1, Sellers shall, upon request of Purchaser, make available to Purchaser,
and Purchaser's authorized representatives and employees, all records, tax
returns, accounts, employee information, surveys, plans, engineering studies
and other files relating to the Assets which are in the possession of Sellers
and shall on the Closing Date deliver the same, as may be directed by
Purchaser.
(b) Sellers will allow an independent appraiser
and/or engineer(s) and/or environmental consultant(s) and/or land surveyor(s),
selected and paid for by Purchaser and by Purchaser's lender which is providing
financing to Purchaser for the purchases contemplated hereby, access to the
Hospitality Units at reasonable times, during normal business hours and
otherwise under reasonable circumstances, in order to conduct a review of the
Assets (which review shall be physically non-intrusive), provided (i)Purchaser
shall give Sellers at least two (2) days prior written notice in each instance
Purchaser desires or is required to send such appraiser(s) and/or engineer(s)
and/or environmental consultant(s) and/or land surveyor(s) to the Hospitality
Units, (ii)such appraiser and/or engineer(s) and/or environmental consultant(s)
and/or land surveyor(s) do not interfere with Hospitality Unit management or
employees or any of the operations of the Hospitality Unit and (iii)Sellers
shall have the right to accompany such appraiser and/or engineer(s) and/or
environmental consultant(s) at all times at the Hospitality Unit.
(c) Without limiting the terms of this subsection
6.1.1, Purchaser shall have the right to (i)inspect records, reports, permits,
applications, monitoring results, studies, correspondence, data and any other
information or documents relevant to environmental, health and safety matters
affecting Sellers, the Related Businesses, and/or the Hospitality Units,
(ii)inspect the Hospitality Units and the Related Businesses, including,
without limitation (A)perform Phase I environmental site assessments, and
(B)conduct tests of the soil and groundwater at, in, on, beneath or about the
Hospitality Units as may be recommended by an environmental consultant engaged
by Purchaser; provided that in the case of clause(B), such tests and
inspections shall be conducted in the manner set forth in clauses (i) - (iii)
of paragraph (b) above.
6.1.2. Noncompetition. Sellers agree that in order
for Purchaser to protect the value of the Assets being acquired pursuant to
this Agreement neither Sellers nor any entity owned or controlled by Sellers
shall for a period of 10 years from the date hereof (or such shorter period as
may be requested by Purchaser from time to time with respect to one or more
Hospitality Units) (x) induce or attempt to induce any employees of Purchaser
to leave its employ, (y) own, operate, manage,
<PAGE> 36
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lease or otherwise acquire any interest in any motel, hotel, motor inn or
similar establishment located within the areas described on Schedule 6.1.2(a)
or (z) own, operate, manage or otherwise acquire any interest in any
hospitality franchise or reservation business similar to any of the Related
Business, it being understood that nothing set forth in this subsection 6.1.2
shall prevent Sellers or Robert N. Brewer, as applicable, from (a) owning or
managing the America's Best Inns Motels described in Schedule 6.1.2(b) or (b)
participating in the development and management of any Hawthorne Suites or
Microtel hotels. The provisions of this subsection shall survive the Closing.
6.1.3. Closing Conditions. Sellers will use their
respective reasonable, good faith efforts, and will cooperate with Purchaser,
to secure all necessary consents, approvals, authorizations and exemptions from
governmental agencies and other third parties, including, without limitation,
all consents required by subsections 4.1.2 and 4.1.32. Sellers will use their
respective reasonable, good faith efforts to obtain the satisfaction of the
conditions specified in Section 5.1.
6.1.4. Operation of the Assets. (a) Between the
date hereof and the Closing Date, Sellers shall continue the Operation of the
Hospitality Units and the Related Businesses in the ordinary course of Sellers'
respective businesses and shall timely make all repairs, maintenance and
replacements to keep the Hospitality Units and all fixtures and equipment
thereon and therein in good and operable condition, and shall keep supplies
adequately stocked, as if the sale of the Assets hereunder were not to occur.
(b) Between the date hereof and the Closing Date
Sellers shall continue to accept reservations with respect to the Hospitality
Units in accordance with Sellers' ordinary practices as if the sale of the
Assets hereunder was not to occur.
(c) Between the date hereof and the Closing Date
Sellers shall maintain in effect all advertising and promotional campaigns
(including any radio, television, billboard, pamphlet, auto club or other
campaigns) at the level usual for the Hospitality Units and the Related
Businesses as if the sale of the Hospitality Units and the Related Businesses
were not occurring. Without limiting Sellers' obligations elsewhere in this
Agreement, Seller shall provide all information reasonably requested by
Purchaser regarding its current and planned advertising and promotional
campaigns.
(d) Between the date hereof and the Closing Date
Sellers shall, with respect to Hospitality Units and the Related Businesses,
timely pay and perform all of the obligations to be performed by Sellers and
the Partnerships under the Leases, Permits, Ground Leases, Service Agreements,
Third Party Contracts and Intercompany Contracts. Between the date hereof and
the Closing Date, Sellers shall not amend, modify, or terminate any of the
foregoing or waive any of the material obligations of any other party thereto,
without obtaining in each instance, the prior
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written consent of Purchaser. Between the date hereof and the Closing Date
Sellers shall keep all of the Insurance Policies in full force and effect.
6.1.5. Disclosure; Press Releases. Except with the
prior written consent of Purchaser or as otherwise required by applicable law
or regulations, Sellers shall not disclose to any third party the terms of this
transaction. Purchaser agrees to consult with Sellers prior to issuing any
press release relating to this Agreement or the transactions contemplated
hereby, it being understood that Sellers' consent shall not be required with
respect to any such press release.
6.1.6. Other Transactions. From and after the date
hereof until the earlier to occur of (a) the Closing Date or (b) the expiration
or termination of this Agreement, Sellers shall not (i) provide any
information, financial or otherwise, relating to any of the Assets, to, or (ii)
conduct negotiations concerning the sale, assignment, transfer or other
disposition of any of the Assets with any prospective acquirer of any of the
Assets, other than Purchaser.
6.1.7. Discharge of Liens. Without limiting Sellers'
obligations to discharge liens and encumbrances to the extent provided
elsewhere in this Agreement, Sellers shall, at or prior to Closing, discharge
of record any liens or title conditions created or suffered to be created by
Sellers on or after the date hereof to the extent that at Closing, Sellers
shall be able to convey such property, free and clear of any such leases or any
other liens, encumbrances or claims of third parties. If Sellers are unable to
discharge of record any such liens or title conditions, Sellers may cause such
liens or title conditions to be discharged of record in accordance with
subsection 5.1.1(e).
6.1.8. Mechanics' Liens. If, subsequent to the
Closing Date, any mechanic's or other similar lien, charge or order for the
payment of money shall be filed against any of the Hospitality Units or against
Purchaser, based upon any act or omission, or alleged act or omission of
Sellers, their agents, servants or employees, or any contractor, subcontractor
or materialman in connection with the construction, completion and installation
by Sellers of improvements at any of the Hospitality Units (including, without
limitation, Tenant improvements) or repairs made to any of the Hospitality
Units then, within twenty (20) days after notice to Sellers of the filing
thereof, and regardless of whether such lien, charge or order shall be valid or
enforceable as such, Sellers shall take such action, by bonding, deposit,
payment or otherwise, as will remove or satisfy such lien, charge or order, of
record. The provisions of this subsection shall survive the Closing.
6.1.9. Indemnity. (a) Remedies. Except as
otherwise limited by this subsection 6.1.9, Sellers and Robert N. Brewer shall,
jointly and severally, defend, indemnify, and hold harmless and reimburse
Purchaser and each of Purchaser's assignees and designees and each of their
respective Affiliates, officers, directors, agents and consultants
(collectively, the "Purchaser Indemnitees") for any
<PAGE> 38
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and all claims, losses, liabilities, damages, costs (including court costs) and
expenses (including reasonable attorneys' and accountants' fees) exclusive of
Environmental Costs (as hereinafter defined) incurred by any Purchaser
Indemnitee (hereinafter "Loss" or "Losses") suffered or incurred by any
Purchaser Indemnitee as a result of, or with respect to, (i) any breach or
inaccuracy of any representation or warranty of the Seller set forth in this
Agreement (other than as set forth in subsection 4.1.29) or in any certificate
or other document delivered by Sellers pursuant hereto or in connection
herewith, whether such breach or inaccuracy exists or is made on the date of
this Agreement or as of the Closing Date; (ii) any breach of or noncompliance
by Sellers or Robert N. Brewer, as applicable, with any covenant or agreement
of Sellers or Robert N. Brewer, as applicable, contained in this Agreement;
(iii) the acquisition, development, construction, ownership or operation of the
Assets prior to the Closing Date; provided, however, and without limiting the
indemnity set forth in subsection 6.1.9(b), the indemnity set forth in this
subsection 6.1.9(a)(iii) shall not provide any right of recovery with respect
to (w) any violation of Environmental Laws by Sellers or otherwise, (x) any
Loss related to Hazardous Materials, (y) the costs of any investigative,
enforcement, cleanup, removal, containment, remedial or other similar action,
regardless of by whom instituted, and (z) any claim for recovery of any amounts
which would otherwise have been recoverable pursuant to a violation of
subsection 4.1.29, if such representation were read without any qualifications
regarding Sellers' knowledge, (iv) any claims asserted against any Purchaser
Indemnitees under the bulk sales or bulk transfer laws of any state where the
Assets are located or any similar laws now or hereafter in effect, including,
without limitation, claims arising out of Sellers' failure to comply with such
laws, or (v) any claim by an employee at any Hospitality Unit or any Related
Business that arose under federal, state or local statute (including, without
limitation, Title VII of the Civil Rights Act of 1964, the Civil Rights Act of
1991, the Age Discrimination in Employment Act of 1990, the Equal Pay Act, the
Americans with Disabilities Act of 1990, ERISA and all other statutes
regulating the terms and conditions of employment arising from transactions
contemplated by this Agreement), regulation or ordinance, under the common law
or in equity (including any claims for wrongful discharge or otherwise), or
under any policy, agreement, understanding or promise, written or oral, formal
or informal, between Seller and any employee at any Hospitality Unit or any
Related Business arising out of actions, events or omissions that occurred (or,
in the case of omissions, failed to occur) on or prior to the Closing Date.
(b) Notwithstanding any other provision of this
Agreement, from and after the Closing Date, Sellers and Robert N. Brewer will
jointly and severally indemnify, defend and hold harmless each Purchaser
Indemnitee, from and against all Environmental Costs incurred by Purchaser
resulting from the breach by Sellers of their respective representations and
warranties set forth in subsection 4.1.29.
(c) For purposes of this Agreement, the term
"Environmental Costs" shall mean the costs of any investigative, enforcement,
cleanup, removal, containment, remedial or other private or governmental or
regulatory action instituted
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or completed by any federal or state governmental authority or third party
(which shall not include any Purchaser Indemnitee or any Affiliate of any
Purchaser Indemnitee, unless such Purchaser Indemnitee or Affiliate of such
Purchaser Indemnitee would have a direct cause of action against any other
Purchaser Indemnitee, absent such affiliation) against any Purchaser Indemnitee
relating to the environment or natural resources.
(d) Indemnity Claims.
(i) Survival. The representations,
warranties and indemnities of Sellers and Robert N. Brewer contained herein or
in any certificate or other document delivered pursuant hereto or in connection
herewith shall not be extinguished by the Closing but shall survive the
Closing, subject to the limitations set forth in subsection 6.1.9(d)(ii) hereof
with respect to the time periods within which claims for indemnity must be
asserted, and the covenants and agreements of the Sellers contained herein
shall survive without limitation as to time except as may be otherwise
specified herein.
(ii) Time to Assert Claims. All claims for
indemnification hereunder shall be asserted no later eighteen (18) months after
the Closing Date, except as follows:
(A) claims with respect to Losses arising
out of or related in any way to the matters described in subsections
6.1.9(a)(ii), (iii), (iv) and (v) may be made without limitation, except as
limited by law;
(B) claims with respect to Losses arising
out of or related in any way to (x) any breach of or inaccuracy in the
representations and warranties contained in subsection 4.1.3(a)(ii) hereof
insofar as such representations and warranties relate to any federal, state or
local antitrust law or regulation, (y) any breach of or inaccuracy in the
representations and warranties contained in subsection 4.1.28 hereof shall be
made no later than thirty (30) days after the expiration of the applicable
statute of limitations relative to the liability relating to such
representation or warranty; and
(C) Indemnification claims made pursuant
to subsection 6.1.9(b) shall be made no later than three (3) years from the
Closing Date.
(e) Deductible; Limitation on Recovery.
(i) Purchaser shall make no claim against
Sellers or Robert N. Brewer for indemnification under subsection 6.1.9 unless
and until the aggregate amount of such claims exceeds $50,000 (the
"Deductible"), in which event Purchaser may claim indemnification for the
amount of such claims.
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(ii) The aggregate liability of all Sellers
and Robert N. Brewer under this Agreement shall be as follows: (x) for all
claims under this Agreement other than those described in clauses (y) and (z)
hereof, an amount not to exceed five percent (5%) of the Purchase Price, (y)
for all claims under subsection 6.1.9(b) an amount not to exceed five percent
(5%) of the Purchase Price, it being understood that the limitations on
recovery in clause (x) and this clause (y) shall be exclusive of each other and
shall not be aggregated, and (z) there shall be no limitation on the amount
recoverable for claims based upon (A)fraud, (B)defects in the state of title to
the Assets purported to be conveyed to the Purchaser at the Closing, (C) any
violation of or failure to comply with any bulk sales or bulk transfer laws
applicable to the Assets or to Sellers, (D)any breach by Sellers of their
respective representations and warranties set forth in subsection 4.1.31 or (E)
any breach of or noncompliance by any Seller of the provisions set forth in the
last two sentences of subsection 5.1.20(b).
(f) Notice of Claim. Purchaser shall notify the
applicable Seller and Robert N. Brewer, in writing, of any claim for
indemnification, specifying in reasonable detail the nature of the Loss or
Environmental Cost, and, if known, the amount, or an estimate of the amount, of
the liability arising therefrom. Purchaser shall provide to Seller and Robert
N. Brewer as promptly as practicable thereafter such information and
documentation as may be reasonably requested by Seller and Robert N. Brewer to
support and verify the claim asserted, so long as such disclosure would not
violate the attorney-client privilege of Purchaser.
(g) Defense. If the facts pertaining to a Loss, or
Environmental Cost arise out of the claim of any third party, or if there is
any claim against a third party (other than Purchaser or a Purchaser
Indemnitee) available by virtue of the circumstances of the Loss or
Environmental Cost, Sellers and Robert N. Brewer may assume the defense or the
prosecution thereof by prompt written notice to Purchaser and the affected
Purchaser Indemnitee, including the employment of counsel or accountants, at
Sellers' cost and expense; provided, however, the damages assessed against
Purchaser in any action the defense of which has been assumed by Sellers and
Robert N. Brewer, shall not be subject to the monetary limitations set forth in
clause (e). Purchaser and the affected Purchaser Indemnitee shall have the
right to employ counsel separate from counsel employed by Sellers and Robert N.
Brewer in any such action and to participate therein, but the fees and expenses
of such counsel employed by Purchaser and the affected Purchaser Indemnitee
shall be at their expense. Sellers and Robert N. Brewer shall not be liable for
any settlement of any such claim effected without their prior written consent,
which shall not be unreasonably withheld; provided that if Sellers and Robert
N. Brewer do not assume the defense or prosecution of a claim as provided above
within thirty (30) days after notice thereof from any Purchaser Indemnitee,
Purchaser and the affected Purchaser Indemnitee may settle such claim without
Sellers' and Robert N. Brewer's consent. Seller and Robert N. Brewer shall not
agree to a settlement of any claim which provides for any relief other than the
payment of monetary damages or which could have a material precedential
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impact or effect on the business or financial condition of any Purchaser
Indemnitee without Purchaser's and the affected Purchaser Indemnitee's prior
written consent. Whether or not Sellers and Robert N. Brewer choose to so
defend or prosecute such claim, all the parties hereto shall cooperate in the
defense or prosecution thereof and shall furnish such records, information and
testimony, and attend such conferences, discovery proceedings, hearings, trials
and appeals, as may be reasonably requested in connection therewith.
(h) Subrogation. To the extent that (x)Purchaser
may pursue an action against any Person other than the Sellers, the Sellers'
Affiliates or Robert N. Brewer in respect of any claim arising out of this
Agreement or the transactions contemplated hereby and (y) Purchaser has
indefeasibly recovered, in full, the amount of any Losses or Environmental
Costs arising out of the indemnification obligations set forth in this
subsection 6.1.9, then Sellers and Robert N. Brewer shall be subrogated to any
right Purchaser may have had against any such Person, with respect to such
claim.
(i) Exclusive Remedy. Except for claims based
upon fraud, intentional misconduct, defects in the state of title to the Assets
purported to be conveyed to Purchaser at the Closing, or for equitable or
injunctive relief, the remedies pursuant to this subsection 6.1.9 are the sole
and exclusive remedies of all Purchaser Indemnitees in connection with this
Agreement and the transactions to be consummated pursuant hereto with respect
to any subject matter addressed by this Agreement. For the purpose of the
foregoing sentence, a subject matter shall be deemed to have been addressed by
this Agreement without regard to the fact that a remedy may be limited in any
fashion or may no longer exist due to the specific limitations on recovery
contained in this Agreement. Purchaser expressly acknowledges that this
subsection 6.1.9(f) is intended to limit all forms of remedies, whether in
contract, tort, or any other form of action with respect to the subject matter
addressed by this Agreement. In addition, the parties hereto agree that they
have carefully negotiated all of the representations, warranties, indemnities
and other remedies in this Agreement and except as otherwise expressly set
forth herein, neither party makes or grants to the other any additional
representations, warranties, indemnities or other remedies, whether express or
implied.
6.1.10. Books and Records. Sellers acknowledge that
the Books and Records which identify the list of the Hospitality Units' and the
Related Business' respective customers are valuable trade secrets and are part
of the Intellectual Property purchased by Purchaser pursuant to this Agreement.
Neither Sellers nor any Affiliate of Sellers shall use such customer lists, nor
Sellers' knowledge of the contents of the customer lists, directly to solicit
the Hospitality Units' or the Related Businesses respective customers through
direct mailing, telemarketing, or otherwise. The provisions of this subsection
shall survive the Closing.
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6.1.11. Title to and the Integrity of Certain
Intellectual Property. Sellers acknowledge that hereafter, as between Sellers
and Purchaser, Purchaser is the owner of all right, title and interest in and
to all Intellectual Property listed on Schedule 1.1. (i), including, without
limitation, all other trademarks, service marks, trade dress, logos, trade
names, corporate names and copyrights owned by any Seller and relating to the
Assets. Sellers shall not do or suffer to be done any act or thing which will
in any way adversely affect any rights of Purchaser in and to the Intellectual
Property or any registrations thereof or which, directly or indirectly, will
reduce the value of the Intellectual Property or detract from its reputation or
goodwill. Sellers shall never challenge Purchaser's ownership of or the
validity of the Intellectual Property or any application by Purchaser for
registration thereof or any rights of Purchaser therein. The provisions of this
subsection shall survive the Closing.
6.1.12. Commissions, etc. Seller shall pay, on or
prior to the date due, all outstanding commissions and referral fees relating
to any of the Hospitality Units, attributable matters arising prior to the
Closing Date. The provisions of this subsection shall survive the Closing.
6.1.13. Change of ABI Corporate Name. ABI shall after
the Closing, upon Sellers' request, cause its corporate name to be changed to a
name which is dissimilar in all respects from the name "America's Best Inns" or
any name similar thereto and, in any event, to a name which will not be likely
to result in any confusion with or infringement upon (x)any corporate or trade
name hereafter adopted by Purchaser or in respect of the Assets or (y)any of
the Intellectual Property. The provisions of this subsection shall survive the
Closing.
6.2. Covenants of Purchaser. Purchaser covenants as
follows:
6.2.1. Closing Conditions. Purchaser shall use its
reasonable, good faith efforts to obtain satisfaction of Sellers' Closing
Conditions.
6.2.2. Disclosure. Except with the prior written
consent of Sellers, Purchaser shall not disclose to any third party the terms
of this transaction.
6.2.3. Transferred Employees. Purchaser agrees to
hire all of the Seller's Employees who regularly work in the Hospitality Units,
the Franchise Business, the Management Business and the Reservations Business
(the "Transferred Employees"), effective as of the date of Closing, on the same
terms upon which such Sellers' Employees are currently employed by Sellers;
provided that nothing herein shall be deemed to require Purchaser to continue
to employ such Seller's Employee's for a period in excess of ninety (90) days
or such shorter period if such Seller's Employee is dismissed for cause. The
provisions of this subsection shall survive the Closing.
<PAGE> 43
40
6.2.4. Insurance Coverages for Transferred Employees.
Purchaser agrees to provide immediate coverage for the Transferred Employees,
effective as of 12:00 a.m. on the date of Closing, under a group health
insurance plan sponsored by the Purchaser. The group health insurance coverage
will provide coverages similar to those provided by the Seller's plans. The
Purchaser agrees to waive all waiting or elimination periods and preexisting
condition limitations of such plan for the Transferred Employees and to
equalize deductibles for the year for the Transferred Employees. The provisions
of this subsection shall survive the Closing.
6.2.5. Sellers' Access to Books and Records. To the
extent Sellers or Robert N. Brewer have not retained copies thereof, upon
reasonable prior notice and at reasonable times after the Closing, Purchaser
shall permit Robert N. Brewer or ABI to review the Books and Records conveyed
to Purchaser at the Closing, at Robert N. Brewer's or ABI's sole cost and
expense, it being further understood that Purchaser shall have no liability to
Robert N. Brewer or ABI in the event that all or any portion of such Books and
Records shall have been lost or otherwise destroyed, it being understood that
Purchaser shall use reasonable efforts to preserve such Books and Records until
the third anniversary of the Closing. Robert N. Brewer or ABI shall not have
access to any of Purchaser's books and records relating to any time period
after the Closing. Robert N. Brewer and ABI agree to keep all such Books and
Records in strict confidence unless it is necessary to disclose or use such
Books and Records in connection with claims made by third parties against
Robert N. Brewer or ABI, or as required by law. The provisions of this
subsection shall survive the Closing.
Article 7
Right of First Refusal
If Robert N. Brewer, or any entity directly or indirectly
majority owned or directly or indirectly controlled by Robert N. Brewer
("Offeror") constructs or acquires a hotel or motel property (including,
without limitation, the Hospitality Units described on Schedule 6.1.2(b))
(each, a "First Refusal Property") and if a third party (each, an "Offeree")
offers to purchase such First Refusal Property, then Offeror shall promptly
provide a written notice to Purchaser (each, an "Offer Notice"), attaching a
true, correct and complete copy of any so-called "term sheet" or "letter of
intent" signed by Offeror and such Offeree, setting forth all of the material
economic terms and conditions of the proposed sale of such First Refusal
Property to such Offeree. If Purchaser then desires to purchase such First
Refusal Property, upon substantially the same terms as set forth in the Offer
Notice, then Purchaser shall deliver a written notice (each, a "Negotiation
Notice") to Offeror within fifteen (15) days after Purchaser's receipt of such
Offer Notice and Purchaser and Offeror shall then have an additional period of
time equal to the greater of (a)the amount of time specified in the letter of
intent or term sheet attached to such Offer Notice and (b)forty five (45) days,
in each case, to enter into a mutually acceptable definitive contract of sale
with respect to such First Refusal Property, substantially upon such terms and
to close the
<PAGE> 44
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transactions contemplated thereby, it being understood that the parties shall
negotiate and proceed in good faith in order to agree upon such definitive
contract of sale and to close the transactions contemplated thereby. If Offeror
and Purchaser, negotiating in good faith, are unable to reach agreement on such
definitive contract of sale or to close the transactions contemplated thereby
within such 45-day period, then the parties' obligations to each other under
this Article 7, with respect to the applicable First Refusal Property, shall
terminate and be of no further force or effect and Offeror may sell such First
Refusal Property to Offeree on the terms set forth in the Offer Notice. The
provisions of this Article 7 shall survive the Closing.
Article 8
Closing and Closing Documents
8.1. Closing and Closing Documents. The closing of the
transactions contemplated by this Agreement (the "Closing") shall take place at
the offices of Fried, Frank, Harris, Shriver & Jacobson, One New York Plaza,
New York, New York, on January 29, 1998, or upon such later date, as the date
of such Closing may be extended in accordance with the terms of this Agreement.
The actual date of the Closing is herein referred to as the "Closing Date".
8.2. Deeds and Other Instruments of Conveyance. At the
Closing, Sellers shall execute, acknowledge and deliver the following:
(a) a separate limited warranty deed for each of the
Hospitality Units, containing a covenant against grantor's acts, in form
reasonably acceptable to Purchaser, and in any event, in proper form for
recording in the jurisdiction where such Hospitality Unit is located, except
that with respect to Hospitality Units which are subject to Sellers' Leases,
each such deed shall convey only the Improvements;
(b) a bill of sale with respect to Sellers' Personal
Property, which shall be in a form reasonably acceptable to Purchaser;
(c) separate assignments of each of Sellers' Leases,
which assignments shall contain a surviving limited warranty of title and an
express assignment of Sellers' right, title and interest in, to and under any
option to purchase the Leased Land and any Improvements thereon under any
Sellers' Lease, and containing a covenant against assignor's acts, shall be in
proper form for recording in the jurisdiction where such Hospitality Unit is
located, shall otherwise comply with any applicable requirements of Sellers'
Leases and shall be in a form reasonably acceptable to Purchaser;
(d) an instrument, in form and substance reasonably
satisfactory to Purchaser assigning to Purchaser all unexpired assignable
warranties
<PAGE> 45
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and guarantees with respect to Hospitality Units (the "Warranties"), which
instrument shall also irrevocably appoint Purchaser as attorney-in-fact for the
purpose of exercising the rights of Sellers under such warranties;
(e) an instrument assigning to Purchaser all of the
Intellectual Property, which instrument shall contain a surviving general
warranty of title and shall be in a form reasonably acceptable to Purchaser;
(f) an instrument, in form and substance reasonably
satisfactory to Purchaser assigning to Purchaser all of the following relating
to Hospitality Units and the Related Businesses: (i) all Service Agreements,
transferable Insurance Policies, Third Party Contracts and Intercompany
Contracts, other than those transferable Insurance Policies and Intercompany
Contracts, if any, which Purchaser at or prior to Closing elects not to accept
an assignment of, (ii) all Leases, (iii) all Permits, to the extent
transferable, and (iv) all Bookings;
(g) Form 1099-S, as required by the Internal Revenue
Service;
(h) Form 8594, as required by the Internal Revenue
Service;
(i) all federal and state and local transfer tax
returns in respect of the Assets;
(j) to the extent permissible in the applicable
jurisdiction, separate instruments, in form and substance reasonably
satisfactory to Purchaser and in proper form for recording in the appropriate
jurisdiction, assigning to Purchaser or Purchaser's designee and at Purchaser's
expense, the mortgages and promissory notes relating to such mortgages as
Purchaser shall have requested in accordance with this Agreement; and
(k) such other instruments as Purchaser or the Title
Insurer shall reasonably request in order to vest title to the Assets in
Purchaser.
8.3. Notices to Vendors. Sellers and Purchaser shall, at
the Closing send to each vendor supplying goods and/or services to the
Hospitality Units or the Related Businesses pursuant to a Service Agreement
which is actually assumed by Purchaser a written notice stating:
(a) that the applicable Service Agreement has been
assigned to and assumed by Purchaser; and
(b) requesting that all services previously performed
by such vendor for the applicable Seller be performed by such vendor for
Purchaser, in accordance with such Service Contract.
<PAGE> 46
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8.4. Security Deposits. At the Closing, Sellers shall
deliver to Purchaser all of the security deposits and advance rentals together
with interest thereon theretofore deposited or paid by Tenants, against written
receipt by Purchaser. Sellers and Purchaser shall take all steps and execute
such documents, if any, as are necessary to comply with the laws of the States
in which the Hospitality Units are located and the terms of the applicable
Leases as then in effect relating to the holding, and transfer of the security
deposits under the Leases.
8.5. FIRPTA. At Closing, Sellers shall deliver to Purchaser
affidavits with respect to the matters represented in subsection 4.1.27 in form
and substance satisfactory to Purchaser and such other affidavits or materials
as may be required under the Code to permit Purchaser to file such affidavits.
8.6. Title Affidavits, etc. At Closing, Sellers shall
execute or cause to be executed and delivered such affidavits and other
documents and instruments, and shall make such deposits with Title Insurer as
shall be requested by Title Insurer (x) to remove the exception in the title
policies relating to Hospitality Units for "rights of parties in possession"
and (y) to evidence Sellers' authority to convey the Hospitality Assets, or (z)
to remove any exceptions to title which Sellers are obligated to remove
pursuant to this Agreement.
8.7. Escrow Closing. Unless the Title Insurer is willing at
the Closing to delete all exceptions (printed or otherwise) in its title
policies relating to matters affecting title arising between the Closing Date
and the actual recordation of the deeds, assignments of Sellers' Leases, deeds
of trust, mortgages, financing statements and other instruments to be recorded,
there shall be an escrow closing pursuant to which all payments, checks and
other documents shall be held in escrow by the Title Company under an escrow
agreement satisfactory to Purchaser and Sellers, pending (i) prompt recordation
of such deeds, assignments, deeds of trust, mortgages, financing statements and
other instruments and (ii) written certification by the Title Insurer that
there has been no change in the state of title between the Closing Date and
said recordation
8.8. Additional Deliveries at Closing. At the Closing,
Sellers shall deliver to Purchaser all of the following relating to Hospitality
Units or the Related Businesses, (i) executed counterparts of the Service
Agreements; (ii) executed counterparts of the Leases; (iii) the original
Permits; (iv) all Books and Records and all other correspondence, files and
records relating to the construction, operation, leasing, repair and
maintenance of such Hospitality Units (including all of the same in the
possession of any managing agent of such Hospitality Units) and with respect to
the operation of the Related Businesses; (v) copies of all structural,
mechanical or engineering reports relating to such Hospitality Units that are
in the possession of Sellers and which have not previously been delivered to
Purchaser; (vi) keys, codes, passcards and combinations to the Improvements;
(vii) copies of all Warranties; (viii)
<PAGE> 47
44
existing as-built plans and specifications for the Improvements, in Sellers'
possession, (ix)executed counterparts of all Third Party Contracts and all
Intercompany Contracts.
8.9. Apportionments. (a) The following shall be
apportioned between Sellers and Purchaser and shall be prorated as of midnight
of the day preceding the Closing:
(i) real estate and personal property
taxes, sewer rents and charges and other state, county and municipal taxes,
charges and assessments affecting Hospitality Units or any portion thereof or
any Related Business or any portion thereof, on the basis of the fiscal year
for which the same are levied, imposed or assessed. If the rate or amount of
any such taxes, rents, charges, or assessments shall not be fixed prior to the
Closing, the adjustments thereof at the Closing shall be upon the basis of the
rate for the preceding fiscal year applied to the latest assessed valuation (or
other applicable basis of valuation), except for real estate and personal
property taxes which will be calculated on the same basis and then increased by
two percent (2%);
(ii) charges for water, electricity, gas,
oil, steam, telephone and other utilities at Hospitality Units. If the
consumption of any of the foregoing is measured by meters, Purchaser shall
furnish a current reading of each meter, or, if the bills for any of the
foregoing have not been issued prior to the Closing, the charges therefor shall
be adjusted at the Closing on the basis of the charges for the prior period for
which bills were issued and shall be further adjusted when the bills for the
current period are issued. Sellers shall cooperate with Purchaser to effect the
transfer of utility accounts from Sellers to Purchaser without any interruption
in service;
(iii) charges under Service Agreements, Third
Party Contracts and Intercompany Contracts which Purchaser has assumed pursuant
to this Agreement;
(iv) wages, salaries, vacation pay, sick
leave, bonus and other employee benefits for those of Sellers' employees hired
by Purchaser in connection with the operation and maintenance of Hospitality
Units or the operation of the Related Businesses; and
(v) if Purchaser shall elect to accept any
transferable Insurance Policies maintained by Sellers with respect to
Hospitality Units or the Related Businesses, the premiums payable thereon.
(b) The gross revenue, including all taxes,
produced by any of Hospitality Units or the Related Businesses prior to
midnight of the day preceding the Closing shall be and remain the property of
Sellers; all other gross revenue shall become the property of Purchaser.
Purchaser will honor, for Purchaser's account, all
<PAGE> 48
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reservations confirmed by Sellers prior to the Closing for dates subsequent
thereto, at Sellers' advertised rates. All deposits and down payments received
by Sellers prior to the Closing on confirmed reservations for the day of
Closing or days subsequent thereto will be paid over to Purchaser, at Closing.
Any deposits or down payments, received by Sellers on or after the Closing on
confirmed reservations for dates subsequent to the date of Closing, will be
paid over to Purchaser immediately upon receipt.
If, as a result of the above apportionments, a net amount is
due to Purchaser, such net amount shall be paid to Purchaser at Closing, or at
Purchaser's election, credited against the portion of the purchase price
payable at the Closing. If the net apportionments are in favor of Seller, the
purchase price shall be increased by the net amount thereof. The provisions of
this Section 8.9 shall survive the Closing.
8.10. Tax Reduction Proceedings. If tax reduction proceedings
have been commenced with respect to any of Hospitality Units, Sellers shall so
advise the Purchasers in writing prior to the Closing Date, and any refunds or
savings in the payment of taxes resulting from such tax reduction proceedings
applicable to the period prior to the Closing Date shall belong to and be the
property of Seller and any refunds or savings in the payment of taxes
applicable to the period from and after the Closing Date shall belong to and be
the property of Purchaser. All attorney's fees and other expenses incurred in
obtaining such refunds or savings shall be apportioned between Purchaser and
Seller in proportion to the gross amount of such refunds or savings payable to
Purchaser and Seller, respectively. All such tax reduction proceedings shall be
prosecuted with due diligence, and Purchaser shall be allowed to participate
with counsel of Purchaser's choice in any such proceedings which relate to a
tax year occurring in whole or in part after the Closing Date. Any such tax
reduction proceedings for the tax year in which the Closing Date occurs shall
not be settled without the prior written consent of Purchaser. The provisions
of this Section 8.10 shall survive the Closing.
8.11. Purchaser's Closing Documents. At the Closing,
Purchaser shall execute, acknowledge and deliver the following:
(a) together with Sellers, the Form 1099-S described
in Section 8.2(g);
(b) Form 8594, as required by the Internal Revenue
Service; and
(c) such instruments of assumption, in form and
substance reasonably satisfactory to Purchaser, in respect of all items being
assigned to Purchaser at Closing, pursuant to this Agreement or the other
Transaction Documents, for which such assumption by Purchaser is required by
the terms of any of the documents, agreements or instruments being so assigned
to Purchaser.
<PAGE> 49
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Article 9
Termination Prior to Closing
9.1. Termination of Agreement. Except as otherwise
specifically provided herein, this Agreement may be terminated at any time
prior to the Closing:
(a) By mutual written consent of Purchaser and
Sellers (which right shall be exercised on behalf of Sellers by ABI);
(b) By the Sellers in writing, without liability
(which right shall be exercised on behalf of Sellers by ABI), if Purchaser
shall (i) fail to perform in any material respect its agreements contained
herein required to be performed by it on the Closing Date, or (ii) materially
breach any of its representations, warranties or covenants contained herein,
which failure or breach is not cured within ten (10) days after the Sellers
have notified Purchaser of their intent to terminate this Agreement pursuant to
this clause (b);
(c) By Purchaser in writing, without liability, if
Sellers shall (i)fail to perform in any material respect their agreements
contained herein required to be performed by them on or prior to the Closing
Date, or (ii) materially breach any of their representations, warranties or
covenants contained herein, which failure or breach is not cured within ten
(10) days after Purchaser has notified the Sellers of its intent to terminate
this Agreement pursuant to this clause (c);
(d) By either the Sellers or Purchaser in writing,
without liability (which right shall be exercised on behalf of Seller by ABI),
if there shall be any order, writ, injunction or decree of any court or
governmental or regulatory agency binding on Purchaser or Sellers, which
prohibits or restrains Purchaser or Sellers from consummating the transactions
contemplated hereby, provided that Purchaser and Sellers shall have used their
reasonable, good faith efforts to have any such order, writ, injunction or
decree lifted and the same shall not have been lifted within 30 days after
entry, by any such court or governmental or regulatory agency; or
(e) By either Sellers or Purchaser, in writing (which
right shall be exercised on behalf of Sellers by ABI) and without liability, if
for any reason (other than the breach of this Agreement by the party attempting
to terminate the Agreement pursuant to this subsection 9.1(e)) the Closing has
not occurred by (x) January 29, 1998, or (y) such later date as is provided for
pursuant to any other express provision of this Agreement, or (z) such later
date as is otherwise agreed to by the parties in writing. A purported
termination of this Agreement by a party whose breach has resulted in the
Closing not occurring by the date provided for above shall not be a valid
termination pursuant to this subsection 9.1(e), and shall not relieve such
party of any liability for such invalid termination.
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47
9.2. Termination of Obligations. Termination of this
Agreement pursuant to this Article 9 shall terminate all obligations of the
parties hereunder, except for the obligations expressly intended to survive
such termination; provided, however, that termination pursuant to clauses (b),
(c) or (e) of subsection 9.1 hereof shall not relieve a defaulting or breaching
party from any liability to the other party hereto.
Article 10
Brokerage
Seller agrees to pay any brokerage commission or other fees
or compensation due to the Broker (as hereinafter defined) in connection with
this Agreement and the transactions contemplated hereby. Purchaser and Sellers
represent to each other that they dealt with no broker or finder in connection
with this Agreement and the transactions contemplated thereby other than
Merrill Lynch & Co. (the "Broker"), and had no contact or dealings regarding
this Agreement and the transactions contemplated hereby with any other broker
or person who can claim a right to a commission or finder's fee. The parties
hereto agree to indemnify and hold the other harmless from any loss, liability,
cost and expense, including reasonable attorneys' fees, arising by reason of
the incorrectness of its representation hereinabove set forth. The provisions
of this Article 10 shall survive the Closing or sooner termination of this
Agreement.
Article 11
Closing Costs
Purchaser shall pay the costs of its legal counsel, its
auditors, its engineers, title insurance premiums and survey costs, any deed
recording taxes not constituting transfer taxes and any mortgage recording
taxes in respect of mortgages filed in respect of the Hospitality Units on the
Closing Date. Except as otherwise set forth in the immediately preceding
sentence, Sellers shall pay at or prior to the Closing all other closing costs
not payable by Purchaser, including cost of its legal counsel; any transfer,
stamp, sales and other taxes and charges imposed upon or relating to the sale
of the Assets or any of the instruments to be delivered at the Closing.
Article 12
Condemnation
(a) If, at any time prior to or on the Closing Date, any
part of any Hospitality Unit shall be taken, or by written notice to Sellers,
threatened to be taken, or there shall be a taking or by written notice to
Sellers, threatened taking of any property which adversely affects the ingress
or egress to Hospitality Units, in the exercise of the power of eminent domain
by any sovereign, municipality or other public or private authority, Sellers
shall give Purchaser notice of such taking or
<PAGE> 51
48
threatened taking within five (5) business days after it become aware thereof.
In such event, Purchaser may, within ten (10) days after Purchaser has received
Sellers' notice, or within such shorter time necessary for Purchaser to deliver
such notice to Sellers prior to the expiration of the Review Period, terminate
this Agreement by written notice to Sellers, whereupon all further rights,
obligations and liabilities under this Agreement between Sellers and Purchaser
shall end, other than with respect to the rights and obligations hereunder
expressly intended to survive.
(b) If a taking or threatened taking described in paragraph
(a) has occurred, but this Agreement shall not have been terminated in
accordance with paragraph (a), then this Agreement shall remain in full force
and effect, and if such taking affects any of Hospitality Units, at the Closing
Sellers shall pay to Purchaser any award in connection with such taking
received by Sellers and shall assign to Purchaser, without recourse, any right
Sellers may have to receive such an award. Sellers shall reasonably cooperate
with Purchaser in connection with the collection by Purchaser of any such award
after the Closing Date. The provisions of this clause (b) shall survive the
Closing.
(c) For purposes of this Article, the term "taking" shall
include temporary as well as permanent takings.
(d) The provisions of this Article 12 are expressly intended
to supersede any laws to the contrary governing the terms of such Article 12.
Article 13
Insurance; Destruction or Damage
(a) If any Hospitality Unit shall be in any way damaged or
destroyed by fire or any other casualty prior to the Closing, then, Purchaser
may, at Purchaser's option, within ten (10) days after Purchaser has received
notice of such fire or other casualty, or within such shorter time necessary
for Purchaser to deliver such notice to Sellers prior to the expiration of the
Review Period, terminate this Agreement by written notice to Sellers, whereupon
all further rights, obligations and liabilities under this Agreement between
Purchasers and Sellers shall end, except for those obligations and liabilities
expressly intended to survive.
(b) If pursuant to the provisions of clause(a) above, this
Agreement shall not have terminated by reason of any such fire or casualty,
then, at the Closing, (i) Sellers shall assign to Purchaser, all of Sellers'
right to receive the proceeds of any Insurance Policies covering such damage or
destruction, together with all of Sellers' rights to adjust and/or settle any
claims under such Insurance Policies with respect to such damage or destruction
and (ii) the Purchase Price shall be reduced by any deductible payable under
such Insurance Policies. Sellers shall reasonably cooperate with Purchaser in
connection with the collection of the proceeds by Purchaser under
<PAGE> 52
49
such Insurance Policies or the adjustment and/or settlement of any claims
thereunder, after the Closing.
(c) The provisions of clause (b) shall survive the Closing.
(d) The provisions of this Article 13 are expressly
intended to supersede any laws to the contrary governing the terms of such
Article 13.
Article 14
Miscellaneous
14.1. Governing Law. This Agreement and the rights and
obligations of the parties hereunder shall be interpreted, construed and
enforced in accordance with the laws of the State of Illinois.
14.2. Entire Agreement. This Agreement and the Exhibits and
Schedules hereto constitute the entire agreement between the parties hereto
with respect to the subject matter hereof. No variations, modifications, or
changes herein or hereof shall be binding upon any party hereto unless set
forth in a document duly executed by or on behalf of such party.
14.3. Waiver. No failure by either party to insist upon the
strict performance of any covenant, duty, agreement or term condition of this
Agreement or to exercise any right or remedy consequent upon a breach thereof
shall constitute a waiver of any such breach or of such or any other covenant,
duty, agreement, term or condition.
14.4. Severability. If any provision of this Agreement or the
application thereof to any person or circumstances shall be invalid or
unenforceable to any extent, the remainder of this Agreement and the
application of such provisions to other persons or circumstances shall not be
affected thereby and shall be enforced to the greatest extent permitted by law.
14.5. Exhibits and Schedules. All Exhibits and Schedules
referred to in this Agreement are hereby incorporated in this Agreement by
reference.
14.6. Further Assurances. In addition to the obligations
required to be performed hereunder by Sellers at the Closing, Sellers agree
from time to time, to perform such other acts, and to execute, acknowledge and
deliver subsequent to the Closing such other instruments, documents and other
materials, as Purchaser may reasonably request in order to effectuate the
consummation of the transactions contemplated herein and to vest title to the
Related Assets in Purchaser.
14.7. Headings. Article and Section headings are inserted
only for the purpose of convenient reference and in no way define, limit or
prescribe the scope or
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50
intent of this Agreement or any part thereof and shall not be considered in
interpreting or construing this Agreement.
14.8. No Third-Party Beneficiaries. Other than as expressly
set forth in this Agreement, the provisions of this Agreement are for the sole
benefit of the parties to this Agreement and shall not give rise to any rights
by or on behalf of anyone other than such parties.
14.9. Assignment. (a) Purchaser shall upon written notice to
Sellers and upon Sellers' prior written consent (which consent, if granted by
Sellers, shall be granted by ABI on the Sellers' behalf), have the right to
assign, in whole or in part, any of its right, title or interest in this
Agreement or any of the other Transaction Documents to any Person or entity;
provided, however, that Sellers' consent shall not be required in connection
with Purchaser's assignment, in whole or in part, of any of its right, title or
interest in this Agreement or any of the other Transaction Documents to USFS,
or to any Person or entity which is an Affiliate of USFS. Sellers and Purchaser
hereby agree that an assignment by Purchaser in compliance with this Section
14.9 shall release the then Purchaser from all of its obligations and
liabilities hereunder and from and after such an assignment, all references to
Purchaser herein shall be deemed to mean such permitted assignee. Sellers agree
to execute a confirmation of such release, in form and substance reasonably
satisfactory to Sellers and Purchaser, provided that failure of Sellers to
execute same shall not impair the validity of the release.
(b) Sellers and Purchaser agree that upon delivery of
prior written notice to Sellers by Purchaser, Sellers shall convey, at the
Closing, all or such portion of the Assets as Purchaser shall designate in such
notice to the assignee or designee of Purchaser described in such notice, in
Purchaser's sole discretion.
14.10. Notices. Any notice or other communication that is
required or permitted to be given under the terms of this Agreement (each a
"Notice") shall be in writing and shall be deemed to have been duly given (a)
upon being deposited in the mail, postage prepaid for registered or certified
mail, return receipt requested, or (b) when personally delivered against
written receipt, or when delivered by overnight courier, in each case, to the
parties hereto at the following addresses or at such other address as any party
hereto shall hereafter specify by 10 days prior Notice given and received in
the manner provided in this Section 14.10 to the other parties described in
this Section.
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If to Sellers:
c/o America's Best Inns, Inc.
1205 Skyline Drive
P.O. Box 1719
Marion, Illinois 62959
Attention: Robert N. Brewer
with a copy to:
Long, Aldridge and Norman LLP
One Peachtree Center
303 Peachtree Street, N.E.
Suite 5300
Atlanta, Georgia 30308
Attention: Jeffrey K. Haidet, Esq.
and
Ronald E. Osman & Associates, Ltd.
1602 West Kimmel
Marion, Illinois 62959
Attention: Ronald E. Osman, Esq.
If to Purchaser:
Best Acquisition, Inc.
13 Corporate Square, Suite 250
Atlanta, Georgia 30329
Attention: Neal K. Aronson
with a copy to:
Paul, Weiss, Rifkind, Wharton & Garrison
1285 Avenue of the Americas
New York, New York 10019
Attention: Judith R. Thoyer, Esq.
A Notice shall be deemed to have been duly received (a) if
mailed, on the date set forth on the return receipt or (b) if personally
delivered or sent by overnight courier on the date of such delivery. The
inability to make delivery because
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52
of change of address of which no Notice was given, or rejection or refusal to
accept any Notice offered for delivery shall be deemed to be receipt of the
Notice as of the date of such inability to deliver or rejection or refusal to
accept. Any Notice may be given by counsel for the party giving same. Any
Notice to be given to Sellers or by Sellers shall be given by or to ABI, as
applicable, on behalf of Sellers.
14.11. Successors and Assigns. This Agreement and each of the
rights, obligations, representations, warranties, indemnities and covenants
contained herein and in the other Transaction Documents shall be binding on,
and the benefits thereof shall inure to, the successors and assigns of the
parties hereto, including such parties' successors in title. The parties hereto
acknowledge and agree that Purchaser will be transferring its interests in some
or all of the Assets to an entity or entities which constitute Purchaser's
successor hereunder; such successors are hereby deemed third party
beneficiaries of Purchaser and all representations, warranties, covenants and
indemnities set forth in this Agreement and the other Transaction Documents
shall be binding upon and shall insure to such successors' benefit.
14.12. Attorneys' and Other Professionals' Fees. If either
party to this Agreement shall institute any action or proceeding against the
other party to enforce its rights and remedies hereunder, the prevailing party
shall be entitled to recover from the other party reasonable attorneys' fees
and expenses. As used herein, "prevailing party" shall mean, in the case of
claimant, one who is successful in obtaining substantially all of the relief
sought, and in the case of a defendant or respondent, one who is successful in
denying substantially all of the relief sought. Otherwise each party hereto
shall pay the fees and disbursements of its own attorneys, accountants,
investment advisers and other professionals.
14.13. Liability Joint and Several. The liability of Sellers
and Robert Brewer (with respect to his indemnification obligations hereunder)
under this Agreement shall be joint and several.
14.14. Plural and Singular. As used in the Agreement, unless
the context otherwise requires, the plural shall be construed to include the
singular and the singular shall be construed to include the plural. Without
limiting the foregoing, unless the context otherwise requires, the term
"Sellers" shall be construed to mean each and all of Sellers.
<PAGE> 56
53
IN WITNESS WHEREOF, this Agreement has been executed by the
parties hereto on the date set forth above.
SELLERS:
AMERICA'S BEST INNS, INC.
By:
-----------------------------------
Robert N. Brewer
President
BREWER MANAGEMENT
COMPANY, INC.
By:
-----------------------------------
Robert N. Brewer
President
CARBONDALE HOSPITALITY
PARTNERS
By: America's Best Inns, Inc., its
general partner
By:
-----------------------------
Robert N. Brewer
President
PADUCAH JOINT VENTURE
By: America's Best Inns, Inc.,
a general partner
By:
-----------------------------
Robert N. Brewer
President
FORT WAYNE JOINT VENTURE
<PAGE> 57
54
By: America's Best Inns, Inc., a
general partner
By:
--------------------------
Robert N. Brewer
President
JOHNSTON, IOWA JOINT VENTURE
By: America's Best Inns, Inc., a
general partner
By:
--------------------------
Robert N. Brewer
President
SPRINGFIELD JOINT VENTURE
By: America's Best Inns, Inc., a
general partner
By:
--------------------------
Robert N. Brewer
President
ANDERSON JOINT VENTURE
By: America's Best Inns, Inc., a
general partner
By:
--------------------------
Robert N. Brewer
President
LIBERTYVILLE JOINT VENTURE
By: America's Best Inns, Inc., a
general partner
By:
--------------------------
Robert N. Brewer
President
<PAGE> 58
55
NASHVILLE JOINT VENTURE
By: America's Best Inns, Inc., a
general partner
By:
----------------------------
Robert N. Brewer
President
JACKSON BEST SUITES, L.L.C.
By: America's Best Inns, Inc., its
managing member
By:
----------------------------
Robert N. Brewer
President
-------------------------------------
Robert N. Brewer
PURCHASER:
BEST ACQUISITION, INC.
By:
----------------------------------
Michael Leven
President
<PAGE> 1
EXHIBIT 21.1
U.S. FRANCHISE SYSTEMS, INC.1/
***
List of Subsidiaries and Indirect Subsidiaries
<TABLE>
<S> <C>
Subsidiary State of Incorporation
Microtel Inns and Suites Franchising,
Inc. ("Microtel") Georgia
Hawthorn Suites Franchising, Inc. Georgia
Microtel Inns Realty Corp. ("MIRC")
(sub of Microtel) Georgia
Microtel International, Inc. (sub of
Microtel) Georgia
US Funding Corp. (sub of USFS) Georgia
U.S. Franchise Capital, Inc. (sub of
USFS) Georgia
Tempe Inns Realty Corp. (sub of MIRC) Georgia
Chandler Inns Realty Corp. (sub of
MIRC) Georgia
Tempe Holdings, LLC (sub of MIRC) Arizona LLC
Chandler Holdings, LLC (sub of MIRC) Arizona LLC
Best Acquisition, Inc.
</TABLE>
- --------------
1/ USFS Hawthorn, Inc. currently does not have any subsidiaries. After the
Merger, though, the subsidiaries of U.S. Franchise Systems, Inc. will
become the subsidiaries of USFS Hawthorn, Inc.
<PAGE> 1
EXHIBIT 23.3
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of U.S. Franchise Systems
on Form S-4 of our report dated February 28, 1997 related to U.S. Franchise
systems, Inc., appearing in the Proxy Statement, which is part of this
Registration Statement.
We also consent to the reference to us under the headings "Selected Financial
Data" and "Experts" in such Proxy Statement.
Deloitte & Touche LLP
Atlanta, Georgia
February 9, 1998
<PAGE> 1
EXHIBIT 23.4
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of USFS Hawthorn, Inc.
on Form S-4 of our report dated December 12, 1997 related to USFS Hawthorn,
Inc., appearing in the Proxy Statement, which is part of this Registration
Statement.
We also consent to the reference to us under the headings "Experts" in such
Prospectus.
Deloitte & Touche LLP
Atlanta, Georgia
February 9, 1998
<PAGE> 1
EXHIBIT 23.5
Consent of Director
USFS Hawthorn, Inc.
I hereby consent to be named in the Registration Statement on Form
S-4 of USFS Hawthorn, Inc. relating to the proposed offering of shares of its
Class A Common Stock and Class B Common Stock in connection with the merger of
U.S. Franchise Systems, Inc. with and into USFS Hawthorn, Inc., including in any
supplement to any prospectus included in such Registration Statement, any
amendment to such Registration Statement or any subsequent Registration
Statement filed under the Securities Act of 1933, as amended.
By: /s/ Doug Geoga
-------------------------------------
Doug Geoga
Chicago, Illinois
February 11, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET OF USFS HAWTHORN, INC. AS OF DECEMBER 12, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH BALANCE SHEET.
</LEGEND>
<CIK> 0001054636
<NAME> USFS HAWTHORN, INC.
<S> <C>
<PERIOD-TYPE> 1-MO
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> NOV-26-1997
<PERIOD-END> DEC-12-1997
<CASH> 10
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 0
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 10
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 0
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
