<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of
1934
(Amendment No.___)
Filed by the Registrant [x]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-b(e)(2))
[x] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
U.S. FRANCHISE SYSTEMS, INC.
-------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
NOT APPLICABLE
-------------------------------------------------
(Name of Person(s) Filing Proxy Statement if other than Registrant)
Payment of Filing Fee (Check the appropriate box):
[x] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
2) Aggregate number of securities to which transaction applies:
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11:1
4) Proposed maximum aggregate value of transaction:
5) Total fee paid:
[ ] Fee paid previously with preliminary materials.
[] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
2) Form, Schedule or Registration Statement No.:
3) Filing Party:
4) Date Filed:
- ------------------------
(1) Set forth the amount on which the filing fee is calculated and state how it
was determined.
<PAGE>
U.S. FRANCHISE SYSTEMS, INC.
May 26, 1998
Dear Stockholder:
This year's Annual Meeting of Stockholders ("Annual Meeting") of U.S.
Franchise Systems, Inc. (the "Company") will be held on Friday, June 26, 1998
at 4:00 p.m., local time, at the Company's offices, 13 Corporate Square,
Suite 250, Atlanta, Georgia 30329. You are cordially invited to attend.
The Notice of Annual Meeting and a Proxy Statement, which describe the
formal business to be conducted at the Annual Meeting, follow this letter.
After reading the Proxy Statement, please promptly mark, sign and return
the enclosed proxy in the prepaid envelope to assure that your shares will be
represented. Your shares cannot be voted unless you date, sign and return the
enclosed proxy or attend the Annual Meeting in person. Regardless of the
number of shares you own, your careful consideration of, and vote on, the
matters before our stockholders are important.
A copy of the Company's 1997 Annual Report is also enclosed for your
information.
We look forward to seeing you at the Annual Meeting.
VERY TRULY YOURS,
/s/ Michael A. Leven
Michael A. Leven
CHAIRMAN OF THE BOARD
<PAGE>
U.S. FRANCHISE SYSTEMS, INC.
13 Corporate Square, Suite 250
Atlanta, Georgia 30329
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD JUNE 26, 1998
The annual meeting of shareholders of U.S. Franchise Systems, Inc. (the
"Company") will be held on Friday, June 26, 1998 at 4:00 p.m., at the
Company's offices, 13 Corporate Square, Suite 250, Atlanta, Georgia 30329,
for the following purposes:
(1) To elect ten (10) directors to constitute the Board of Directors, to
serve for a term of one year and until their successors are elected and
qualified;
(2) To approve an amendment to the Company's Amended and Restated 1996
Stock Option Plan to increase the number of shares of Class A Common Stock
available for grant thereunder from 325,000 shares to 725,000 shares;
(3) To approve the award of performance-based options to purchase an
aggregate of 26,886 shares of Class A Common Stock to Steven Romaniello, the
Company's Executive Vice President -Franchise Sales and Development and a
Director; and
(4) To transact such other business as may properly come before the
meeting or any adjournments or postponements thereof.
Only shareholders of record at the close of business on May 15, 1998
will be entitled to notice of and to vote at the meeting or any adjournments
or postponements thereof.
A Proxy Statement and a proxy solicited by the Board of Directors are
enclosed herewith. Please sign, date and return the proxy promptly. If you
attend the meeting, you may, if you wish, withdraw your proxy and vote in
person.
BY ORDER OF THE BOARD OF DIRECTORS,
/s/ Michael A. Leven
Michael A. Leven, Chairman of the Board
ATLANTA, GEORGIA
May 26, 1998
PLEASE COMPLETE AND RETURN THE ENCLOSED PROXY PROMPTLY SO THAT YOUR VOTE MAY
BE RECORDED AT THE MEETING IF YOU DO NOT ATTEND PERSONALLY.
<PAGE>
U.S. FRANCHISE SYSTEMS, INC.
13 Corporate Square, Suite 250
Atlanta, Georgia 30329
ANNUAL MEETING OF SHAREHOLDERS
JUNE 26, 1998
PROXY STATEMENT
This Proxy Statement is furnished in connection with the solicitation of
proxies by the Board of Directors of U.S. Franchise Systems, Inc. (the
"Company") for the Annual Meeting of Shareholders to be held on Friday, June
26, 1998, and any adjournments or postponements thereof, at the time and
place and for the purposes set forth in the accompanying notice of the
meeting. The expense of this solicitation, including the cost of preparing
and mailing this Proxy Statement, will be paid by the Company. In addition to
solicitations by mail, officers and regular employees of the Company, at no
additional compensation, may assist in soliciting proxies by telephone. This
Proxy Statement and the accompanying proxy are first being mailed to
shareholders on or about May 26, 1998. The address of the principal executive
offices of the Company is 13 Corporate Square, Suite 250, Atlanta, Georgia
30329.
Any proxy given pursuant to this solicitation may be revoked by any
shareholder who attends the meeting and gives oral notice of his election to
vote in person, without compliance with any other formalities. In addition,
any proxy given pursuant to this solicitation may be revoked prior to the
meeting by delivering to the Secretary of the Company an instrument revoking
it or a duly executed proxy for the same shares bearing a later date. Proxies
which are returned properly executed and not revoked will be voted and will
be voted in accordance with the shareholder's directions specified thereon.
Where no direction is specified, proxies will be voted for the election of
the nominees named below to constitute the entire Board of Directors, for
approval of the amendment to the Amended and Restated 1996 Stock Option Plan
and for the approval of the award of performance-based options to Steven
Romaniello. Abstentions and broker non-votes will not be counted as votes
either in favor of or against the matter with respect to which the abstention
or broker non-vote relates.
The record of shareholders entitled to vote at the annual meeting was
taken on May 15, 1998. On that date the Company had outstanding and entitled
to vote 12,917,194 shares of Class A Common Stock, $.01 par value per share
(the "Class A Common Stock"), and 2,707,919 shares of Class B Common Stock
$.01 par value per share (the "Class B Common Stock," collectively the Class
A Common Stock and the Class B Common Stock are hereinafter referred to as
the "Common Stock"). Each share of Class A Common Stock is entitled to one
vote and each share of Class B Common Stock is entitled to ten votes.
On March 12, 1998, the Company completed a series of transactions which
enabled it to acquire the entire interest in the Hawthorn Suites brand of
hotels. The transaction (the "HSA Acquisition") was structured as a reverse
acquisition, whereby U.S. Franchise Systems, Inc. ("USFS") was merged into
USFS Hawthorn, Inc., a Delaware corporation incorporated on November 26, 1997
("USH"), pursuant to an Agreement and Plan of Merger dated as of December 9,
1997 by and between USFS and USH. Immediately following consummation of the
HSA Acquisition, USH changed its name to U.S. Franchise Systems, Inc. The
term "the Company" when used herein, refers to USFS before the HSA
Acquisition, and, following completion of the HSA Acquisition, to USH as the
surviving corporation in the HSA Acquisition and as the successor to the
business of USFS.
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of the Company's Class A Common Stock and Class B Common
Stock as of May 1, 1998 by (i) each person known by the Company to be the
beneficial owner of more than five percent (5%) of the outstanding Common
Stock; (ii) each director of the Company; (iii) each Named Executive Officer
(as defined herein); and (iv) all directors and executive officers of the
Company as a group. Each share of Class B Common Stock is entitled to ten
votes per share.
<TABLE>
<CAPTION>
SHARES OF SHARES OF PERCENT
NAME OF CLASS A PERCENT OF CLASS B PERCENT OF OF TOTAL
BENEFICIAL OWNER COMMON STOCK(1) CLASS COMMON STOCK(1) CLASS VOTING POWER
- --------------------------------------- ---------------- ------------- ---------------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
Michael A. Leven....................... 910,617(2) 7.0% 1,509,473(3) 55.7% 40.0%
Neal K. Aronson........................ 916,811(4) 7.1 1,509,473(5) 55.7 40.0
Dean Adler............................. 71,500(6) * 0 0 *
Irwin Chafetz.......................... 292,100(7) 2.3 0 0 *
James Darby............................ 6,250(8) * 0 0 *
Douglas G. Geoga....................... 0 0 0 0 0
Richard D. Goldstein................... 511,555(9) 4.0 0 0 *
David T. Hamamoto...................... 437,500(10) 3.4 0 0 *
Andrea Leven........................... 233,032(11) 1.8 770,801(12) 28.5
Jeffrey A. Sonnenfeld.................. 7,000(7) * 0 0 *
Barry S. Sternlicht.................... 301,770(13) 2.3 0 0 *
Steven Romaniello...................... 194,716(14) 1.5 0 0 *
David E. Shaw, Sr...................... 109,499(15) * 0 0 *
H Suites Associates, Inc............... 2,222,222(16) 17.2 0 0 5.6
All officers and directors as a group
(12 persons)**....................... 3,351,776 25.9 2,707,919 100.0 76.1
</TABLE>
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* 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 May 1, 1998. 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
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voted by Mr. Leven. Mr. Leven's business 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
business address is 13 Corporate Square, Suite 250, Atlanta, Georgia 30329.
(5) Consists of 1,509,473 shares designated as Unrestricted Shares, of which Mr.
Aronson has sole voting power as to 1,198,466 shares and has transferred
voting power to Mr. Leven as to 311,007 shares.
(6) Includes (i) stock options for 2,000 shares of Class A Common Stock at
$13.50 per share which are fully vested and (ii) 62,500 shares of Class A
Common Stock owned collectively by Lubert-Adler Real Estate Opportunity Fund
L.P., Lubert-Adler Real Estate Opportunity Fund II, L.P. and Lubert-Adler
Capital Real Estate Opportunity Fund, L.P., entities controlled by Mr.
Adler.
(7) Includes stock options for 2,000 shares of Class A Common Stock at $13.50
per share which are fully vested.
(8) 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.
(9) Such shares consist of (i) 159,555 shares owned by G2 Investment Partners
("G2"), an investment partnership of which Mr. Goldstein is a general
partner, (ii) stock options for 2,000 shares of Class A Common Stock at
$13.50 per share which are fully vested and (iii) 350,000 shares owned by
Alpine Hospitality Equities LLC ("Alpine Equities"). Mr. Goldstein shares
voting and investment power with respect to shares owned by both G2 and
Alpine Equities.
(10)Represents shares owned by Sextant Trading LLC, an entity owned
beneficially by NorthStar Capital Investment Corp. (together with its
affiliates, "NorthStar"), of which Mr. Hamamoto is a director. Mr. Hamamoto
disclaims beneficial ownership of these shares.
(11)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 business
address is 13 Corporate Square, Suite 250, Atlanta, Georgia 30329, c/o U.S.
Franchise Systems, Inc.
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(12)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.
(13)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)
stock options for 2,000 shares of Class A Common Stock at $13.50 per share
which are fully vested.
(14)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)
stock options for 1,500 shares Class A Common Stock at $13.50 per share
which are fully vested.
(15)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)
stock options for 750 shares of Class A Common Stock at $13.50 per share
which are fully vested.
(16)Includes (i) 2,199,775 shares owned by H Suites Associates, Inc. (formerly
known as Hawthorn Suites Associates, Inc.) ("HSA") and (ii) 22,447 shares
owned by HSA Properties, Inc. ("HPI"), an affiliate of HSA. HSA's business
address is 200 West Madison Street, Suite 3800, Chicago, Illinois 60606.
MANAGEMENT'S SHARES OF COMMON STOCK
BACKGROUND. 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 Common Stock of the Company (some of
which shares have since been repurchased by the Company and reissued to
members of management).
On October 5, 1995, Messrs. Leven and Aronson purchased 5,485,259 shares
or 51% of the Class A Common Stock then outstanding for an aggregate purchase
price of $567,245 or $0.1034 per share (the "Original Issue Price").
Twenty-five percent (25%) of such Class A Common Stock was acquired by
Messrs. Leven and Aronson outright (i.e., without restriction on their
ability to vote or receive dividends with respect to such shares and free of
any risk of forfeiture), although a limited number of such shares could be
repurchased from Messrs. Leven and Aronson and reissued to other employees
under certain circumstances described below (the "Unrestricted Shares").
Immediately following such acquisition, Mr. Leven owned 15% and Mr. Aronson
owned 10% of the then outstanding Class A Common Stock in the form of
Unrestricted Shares. The remaining shares of Class A Common Stock acquired by
Messrs. Leven and Aronson, representing 26% of such Class A Common Stock at
the time of such acquisition, were subject to significant restrictions with
respect to voting and dividend rights and substantial risks of forfeiture
(the "Restricted Shares"), as described below. Mr. Leven and Mr. Aronson each
acquired 13% of the then
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<PAGE>
outstanding Class A Common Stock in the form of Restricted Shares. On August
23, 1996, the Board of Directors voted to amend the respective Employee Stock
Purchase Agreements pursuant to which Messrs. Leven and Aronson purchased the
Class A Common Stock (the "Old Stock Purchase Agreements") to eliminate the
restrictions with respect to one-half of the Restricted Shares (the "1996
Amendment"). See " -- 1996 Amendment" below for a description of the
amendment.
RESALE OF SHARES TO OTHER MANAGEMENT. The Old Stock Purchase Agreements
provide that Unrestricted Shares representing 5% of the Class A Common Stock
then outstanding and Restricted Shares representing 6% of the Class A Common
Stock then outstanding could be repurchased by the Company from Messrs. Leven
and Aronson at the Original Issue Price and then reissued to other members of
the Company's management at fair market value. As of April 1, 1998, a total
of approximately 826,833 shares of outstanding Class A Common Stock have been
repurchased from Messrs. Leven and Aronson and reissued to other members of
management. By virtue of the 1996 Amendment, members of management who
acquired these shares are required to vote those shares that are Restricted
Shares, on a one vote per share basis, one-half in the same manner as Mr.
Leven votes his shares and one-half as Mr. Aronson votes his shares. With
respect to those shares that are Unrestricted Shares, the management holders
continue to be required to vote 60% of such shares in the manner that Mr.
Leven votes his shares and 40% in the manner that Mr. Aronson votes his
shares. The Company's right to cause the redemption and reissuance of the
remaining shares was eliminated by the 1996 Amendment. All shares which have
been repurchased from Messrs. Leven and Aronson and reissued to other members
of management pursuant to the Old Stock Purchase Agreements are subject to a
vesting schedule, which provides that Unrestricted Shares vest over a five
year period and Restricted Shares vest over a ten year period, in each case
provided that the management employee remains employed by the Company (and
with Restricted Shares subject to further vesting requirements based on the
Company's performance). Any unvested shares that are forfeited upon the
termination of such employment are to be repurchased by the Company and
resold to Mr. Leven or Mr. Aronson, as the case may be (depending on who
owned the shares originally), at the Original Issue Price. In the event any
of such shares are forfeited and reissued to Messrs. Leven or Aronson at the
Original Issue Price, the Company will recognize compensation expense for the
difference between the Original Issue Price and the market value of the stock
on the date such shares are repurchased by Messrs. Leven and Aronson. Upon
such resale, the shares will continue as Unrestricted Shares or Restricted
Shares in the same manner as had they not been so forfeited. As of April 1,
1998, 57,807 unvested shares have been repurchased by the Company but Messrs.
Leven and Aronson have waived their rights to such shares.
UNRESTRICTED SHARES. Following the 1996 Amendment, there are no
restrictions on the Unrestricted Shares held by Messrs. Leven and Aronson and
their permitted transferees, 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 "-- 1996 Amendment."
Under both the Old Stock Purchase Agreements and the Amended Stock
Purchase Agreements, Restricted Shares become "Earned Shares" upon the
Company's attaining certain performance criteria. However, notwithstanding
that they have been "earned," Earned Shares (other than the Class A Common
Stock that was deemed to have been earned by virtue of the 1996 Amendment)
will be forfeited if the
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<PAGE>
management holder of such shares (including either of Messrs. Leven or
Aronson) resigns from his or her employment with the Company without "good
reason" or is terminated for "cause" prior to the tenth anniversary of the
date such shares were acquired by the holder thereof from the Company
("Termination Forfeiture"). See " -- 1996 Amendment."
Pursuant to the 1996 Amendment, one-half of the Restricted Shares were
deemed to be Unrestricted Shares.
Under both the Old Stock Purchase Agreements and the Amended Stock
Purchase Agreements, Earned Shares will be permanently vested (i.e., they
will no longer be subject to Termination Forfeiture) on September 29, 2005.
Any Restricted Shares that have not become Earned Shares by September 29,
2005 must be redeemed by the Company at the Original Issue Price and offered
to the original investors (the "Original Investors") of the Company (other
than Messrs. Leven and Aronson) pro rata at the Original Issue Price based on
their original holdings of Old Common Stock. In addition, upon the occurrence
of a Termination Forfeiture with respect to Mr. Leven or Mr. Aronson, such
person's Restricted Shares must be redeemed by the Company and so offered to
the Original Investors.
Under both the Old Stock Purchase Agreements and the Amended Stock
Purchase Agreements, if substantially all of the Company's stock or assets
are transferred or sold, or upon a business combination, any remaining
Restricted Shares will automatically become Unrestricted Shares to the extent
that value for the entire Company indicated by the gross sale price in such
transaction results in an internal rate of return to the Original Investors
of at least 40% on a compounded annual basis (after taking into account the
amount and timing of all distributions and payments received by such Original
Investors from the Company, after considering Unrestricted and Earned Shares
then held by Messrs. Leven and Aronson, and after giving effect to Restricted
Shares that become Unrestricted Shares as a result of such transaction).
1996 AMENDMENT. On October 30, 1996, the Company and Messrs. Leven and
Aronson amended their respective Old Stock Purchase Agreements. The 1996
Amendment provided that (i) one-half of their Restricted Shares will be
deemed to be Unrestricted Shares, notwithstanding the fact that certain
performance criteria had not been met, (ii) their remaining Restricted Shares
will become Earned Shares at the rate of 1/13 of all of the remaining number
of Restricted Shares (including the Restricted Shares held by other members
of management) for every $1,000,000 of annual Adjusted EBITDA of the Company
(defined as earnings before interest, taxes, depreciation, amortization and
other non-cash charges, adjusted to exclude one-time or non-recurring
expenses or credits), but only after Adjusted EBITDA for a fiscal year equals
or exceeds $14,000,000, (iii) the Unrestricted Shares held by Messrs. Leven
and Aronson and by Mr. Leven's wife, including the Unrestricted Shares
referred to in clause (i) above, will be shares of Class B Common Stock (with
ten votes per share), (iv) the remaining Restricted Shares held by Messrs.
Leven and Aronson will be Class A Common Stock (with one vote per share),
including if and when such shares become Earned Shares, and will continue to
be subject to Termination Forfeiture, (v) Messrs. Leven and Aronson will have
the right to vote their Restricted Shares and to receive dividends, if any,
declared thereon before they become Earned Shares, (vi) no additional shares
will be repurchased from Messrs. Leven and Aronson and reissued to other
members of management and (vii) in calculating Adjusted EBITDA for any given
year, there generally shall be subtracted 10% of the consideration paid by
the Company in connection with any future acquisitions by the Company and/or
its subsidiaries of another corporation or other entity. As part of the 1996
Amendment, one-half of the Restricted Shares previously allocated to other
members of management were also be deemed to be Unrestricted Shares. Such
shares, representing approximately 1.6% of the Class A Common Stock
outstanding as of April 1, 1998, 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
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<PAGE>
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.
CERTAIN OTHER AGREEMENTS RELATING TO COMMON STOCK. In connection with
the HSA Acquisition, HSA, HPI, Michael A. Leven, Neal K. Aronson and the
Company entered into a shareholders agreement (the "HSA Shareholders
Agreement"). Pursuant to the HSA Shareholders Agreement, the Pritzker family
related entities parties thereto have agreed, 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 Class
A Common Stock received by them in the HSA Acquisition until March 12, 2000.
In addition, pursuant to the HSA Shareholders Agreement such entities have
agreed to certain standstill provisions on customary terms with respect to
the acquisition of additional shares of Common Stock, and have been granted
certain tag-along rights on customary terms in connection with sales of
Common Stock by Mr. Leven or Mr. Aronson and certain other holders of Common
Stock and have been granted certain demand registration rights and piggy-back
registration rights on customary terms.
In connection with the establishment of Constellation Development Fund
LLC (the "Development Fund"), the Company issued shares of Class A Common
Stock to Lubert-Adler Real Estate Opportunity Funds, L.P. (together with its
affiliates, "Lubert-Alder") and NorthStar, and entered into a Registration
and Tag-Along Rights Agreement with Lubert-Adler, NorthStar, Mr. Leven and
Mr. Aronson. Pursuant to this agreement, Lubert-Adler and NorthStar have been
granted certain tag-along rights on customary terms in connection with sales
of Common Stock by Mr. Leven or Mr. Aronson and have been granted certain
demand registration rights and piggy-back registration rights on customary
terms.
In connection with the acquisition of Best Inns on April 28, 1998, the
Company entered into a Registration Rights Agreement with Alpine Equities,
Mr. Leven and Mr. Aronson. Pursuant to this agreement, Alpine Equities has
been granted certain tag-along rights in connection with sales of Common
Stock by Mr. Leven or Mr. Aronson and has been granted certain demand
registration rights and piggy-back registration rights on customary terms.
In connection with a letter agreement with an unaffiliated hotel
developer, the Company agreed to issue up to $900,000 in shares of Class A
Common Stock in the future, at a price per share based upon the closing price
of the Class A Common Stock on the date of issuance upon such developer's
achieving certain milestones for opening USFS branded hotels.
AGENDA ITEM ONE
ELECTION OF DIRECTORS
The Board of Directors of the Company consists of ten directors. The
Company's By-Laws provide that the Board of Directors shall consist of seven
members, or such other number as may be fixed from time to time by the Board
of Directors. The number of directors has been set at ten by the Board. The
Board of Directors recommends the election of the ten nominees listed below.
Each of the nominees has consented to being named in this Proxy
Statement and to serve as a director of the Company if elected. In the event
that any nominee withdraws or for any reason is not able to serve as a
director, the proxy will be voted for such other person as may be designated
by the Board of Directors, but in no event will the proxy be voted for more
than ten nominees. The affirmative vote of a plurality of all votes cast at
the meeting by the holders of the Common Stock is required for the election
of the ten
7
<PAGE>
nominees standing for election. Management of the Company has no reason to
believe that any nominee will not serve if elected.
Each of the following persons has been nominated by management for
election to the Board of Directors to succeed themselves for a term of one
year and until their successors are elected and qualified:
Michael A. Leven. Mr. Leven, age 60, has been Chairman, President and
Chief Executive Officer of the Company since October 1995. From October 1990
to September 1995, Mr. Leven was President and Chief Operating Officer for
Holiday Inn Worldwide in Atlanta, Georgia. From April 1985 to May 1990, he
was President and Chief Operating Officer of Days Inn of America, Inc. in
Atlanta, Georgia. Mr. Leven is a Director of Starwood Lodging Trust, one of
the nation's largest hotel REITs, 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, a Director
and Vice Chair 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 the Company since October 1995. Mr. Aronson
was founding partner of Growth Capital Partners in New York, New York, and
was with the partnership from September 1994 to October 1995. From December
1993 to September 1994, he was Managing Director of Rosecliff, Inc., a
private equity investment group in New York, New York. From January 1992 to
December 1993, he was principal of Odyssey Partners, L.P. in New York, New
York. From June 1989 to December 1991, Mr. Aronson was a principal of Acadia
Partners, L.P. in New York, New York. Mr. Aronson is a nephew of Michael A.
Leven. Mr. Aronson has served as a director of the Company since September
1995.
STEVEN ROMANIELLO. Mr. Romaniello, age 31, has been Executive Vice
President, Franchise Sales and Development of the Company since October 1996.
From October 1995 through September 1996, he served as Senior Vice President,
Franchise Sales and Development of the Company. From March 1991 through
September 1995, Mr. Romaniello was Vice President, Franchise Sales and
Services for Holiday Inn Worldwide in Atlanta, Georgia. From December 1988 to
March 1991 he was Regional Vice President, Franchise Sales for Days Inn of
America, Inc. in Atlanta, Georgia and in Boston, Massachusetts. Mr.
Romaniello has served as a director of the Company since March 1998.
DEAN S. ADLER. Mr. Adler, age 41, 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 REIT, RMS Technologies, a leading provider of information
technology services to federal and other governmental institutions, and
Transworld Entertainment, a New York Stock Exchange, Inc. listed company
which owns music retail stores. Mr. Adler has served as a director of the
Company since October 1996.
IRWIN CHAFETZ. Since 1990, Mr. Chafetz, age 62, has been the President
and a Director of Interface Group-Massachusetts, Inc., a privately held
company that owns and operates GWV International, New England's largest tour
operator. From 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 trade show that is
8
<PAGE>
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 Lockheed L-1011 aircraft. Mr.
Chafetz is a director of Back Bay Restaurant Group, a publicly held Nasdaq
listed company. Mr. Chafetz has served as a director of the Company since
September 1995.
DOUGLAS G. 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. Mr. Geoga has served
as a director of the Company since March 1998.
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. Mr. Goldstein has served as a director of the Company
since September 1995.
DAVID T. HAMAMOTO. Mr. Hamamoto, age 38, has served as co-Chief
Executive Officer, co-President and co-Chairman of NorthStar Capital
Investment Corp. since 1997. Prior to then, Mr. Hamamoto was a partner and
co-head of the Real Estate Principal Investment Area at Goldman, Sachs & Co.
In 1988, Mr. Hamamoto initiated the effort to build a real estate principal
investment business at Goldman, Sachs under the auspices of the Whitehall
Funds. Today, the Whitehall Funds have $3.9 billion under management. Mr.
Hamamoto was formerly a director of the Westin Hotel Company, a global hotel
management and ownership company; the George Soros/Whitehall private REIT, a
$1 billion partnership between Whitehall and investor George Soros; Millenium
Partners, an urban mixed-use development company; and the Archon Group,
Goldman, Sachs' asset management company. Mr. Hamamoto is a director of
Emeritus Corporation, a publicly traded company in the assisted living
business. Mr. Hamamoto has served as a director of the Company since March
1998.
JEFFREY A. SONNENFELD. Mr. Sonnenfeld, age 44, has served as the
Chairman and President of The Chief Executive Institute, a non-profit
leadership school. From 1989 to 1997, Dr. Sonnenfeld 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. Mr. Sonnenfeld has
served as a director of the Company since October 1996.
9
<PAGE>
BARRY S. STERNLICHT. Since 1993, Mr. Sternlicht, age 37, has been the
President and Chief Executive Officer of Starwood Capital Group, L.P., a real
estate investment firm that he founded in 1991. Mr. Sternlicht is the
Chairman of the Board and Chief Executive Officer of Starwood Hotels and
Resorts, one of the nation's largest hotel REITs, and is the Chairman of
Starwood Mortgage Trust. Mr. Sternlicht is also a trustee of Equity
Residential Properties Trust, a multi-family REIT. Mr. Sternlicht has served
as a director of the Company since September 1995.
Except as disclosed above, there are no family relationships between any
director or executive officer and any other director or executive officer of
the Company.
AGREEMENTS REGARDING BOARD POSITIONS
Pursuant to the terms of the HSA Shareholders Agreement, subject to HSA
and HPI and/or their affiliates together owning more than 1,100,000 million
shares of Common Stock of the Company (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 HSA Shareholders Agreement, HPI and HSA
nominated, and the Board of Directors of the Company elected, Mr. 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.
Pursuant to a Management Services Agreement between the Company and
Constellation Development Fund, LLC, the Company agreed to use its best
efforts to elect Mr. Hamamoto to the Board of the Company. Mr. Hamamoto was
elected to the Board on March 16, 1998.
Section 16(a) Beneficial Ownership Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors, executive officers and persons who own more than 10% of
the outstanding Common Stock of the Company to file with the Securities and
Exchange Commission reports of changes in ownership of the Common Stock of
the Company held by such persons. Officers, directors and greater than 10%
shareholders are also required to furnish the Company with copies of all
forms they file under this regulation. To the Company's knowledge, based
solely on a review of the copies of such reports furnished to the Company and
representations that no other reports were required, during the year ended
December 31, 1997, all Section 16(a) filing requirements applicable to its
officers, directors and greater than 10% shareholders were complied with.
Although it is not the Company's obligation to make filings pursuant to
Section 16 of the Securities Exchange Act of 1934 (the "Exchange Act"), the
Company has adopted a policy requiring all Section 16 reporting persons to
report monthly to the Associate General Counsel of the Company as to whether
any transactions in the Company's securities occurred during the previous
month.
MEETINGS OF THE BOARD OF DIRECTORS AND COMMITTEES OF THE BOARD
The Board of Directors held five meetings during the year ended December
31, 1997. Each director attended at least 75% or more of the aggregate number
of meetings held by the Board of Directors. The Company's Board of Directors
has three standing committees--the Audit Committee, the Compensation
Committee and the Stock Option Committee. The Board of Directors does not
have a standing nominating committee, such function being reserved to the
full Board of Directors.
10
<PAGE>
The Audit Committee presently consists of Richard D. Goldstein and Dean
S. Adler, outside directors of the Company. The functions of the Audit
Committee include (i) the review of the professional services and
independence of the Company's independent auditors and the scope of the
annual external audit as recommended by the independent auditors; (ii) the
review, in consultation with the independent auditors and the Company's chief
internal auditor, of the plan and results of the annual audit and the
adequacy of the Company's internal accounting controls; (iii) the review, in
consultation with management and the independent auditors, of the Company's
annual financial statements and the results of each external audit; and (iv)
the review, in consultation with the Company's independent auditors and the
Company's principal financial officer and principal accounting officer, of
the auditing and accounting principles and practices to be used in the
preparation of the Company's financial statements. The Audit Committee has
the authority to consider the qualification of the Company's independent
auditors and make recommendations to the Board of Directors as to their
selection, and review and resolve any differences of opinion between such
independent auditors and management relating to the preparation of the annual
financial statements. The Audit Committee held two meetings during 1997.
The Compensation Committee presently consists of Michael A. Leven, Irwin
Chafetz and Jeffrey A. Sonnenfeld. The Compensation Committee has been
assigned the functions of approving and monitoring the remuneration
arrangements for senior management and establishing the targets that
determine performance bonuses payable to the Company's officers. The
Compensation Committee held one meeting during 1997.
The Stock Option Committee presently consists of Barry S. Sternlicht,
Irwin Chafetz and Jeffrey A. Sonnenfeld, outside directors of the Company.
The Stock Option Committee has been assigned the functions of administering
the Company's 1996 Stock Option Plan and granting options thereunder. The
Stock Option Committee held two meetings during 1997.
EXECUTIVE OFFICERS
The executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION HELD
- ---- --- -------------
<S> <C> <C>
Michael A. Leven 60 Chairman of the Board and Chief Executive Officer
Neal K. Aronson 33 Executive Vice President, Chief Financial Officer and
Director
David E. Shaw, Sr. 55 Executive Vice President--Administration
Steven Romaniello 31 Executive Vice President--Franchise Sales and
Development and Director
James Darby 41 Executive Vice President--Franchise Operations
</TABLE>
Executive officers are chosen by and serve at the discretion of the
Board of Directors of the Company. Executive officers will devote their full
time to the affairs of the Company. See "Election of Directors" for
information with respect to Michael A. Leven, Neal K. Aronson and Steven
Romaniello.
11
<PAGE>
DAVID E. SHAW, SR. Mr. Shaw has been Executive Vice President,
Administration of the Company since October 1995. From January 1991 to
September 1995 he was Vice President of Operations Administration for Holiday
Inn Worldwide in Atlanta, Georgia. From July 1990 to January 1991, Mr. Shaw
was Executive Vice President, Administration for Hospitality Franchise
Systems, Inc. (now known as Cendant Corporation) in Wayne, New Jersey.
JAMES DARBY. Mr. Darby has been Executive Vice President-Franchise
Operations of the Company since January 1997. From March 1991 to January
1997, Mr. Darby served in various capacities with Holiday Inn Worldwide,
including most recently as Vice President of Franchise Services and
Administration.
EXECUTIVE COMPENSATION
The following table provides certain summary information for the fiscal
years ended December 31, 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").
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
-----------------------------------------------------------------
ANNUAL COMPENSATION LONG TERM
--------------------------------------------------- COMPENSATION
OTHER NUMBER OF
NAME AND ANNUAL OPTIONS
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 Executive 1995(2) 93,750 153,000(3)(4) 3,000 --
Officer
Neal K. Aronson 1997 $ 207,500 $ 92,363 $ 11,588 --
Executive Vice President and 1996 200,000 70,298 11,517 --
Chief Financial Officer 1995(2) 50,000 151,500(3)(4) 2,250 --
David E. Shaw, Sr. 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.
12
<PAGE>
(2) Includes the period from August 28, 1995, the date of the 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 the Company and successfully negotiating and
completing the acquisition of the Microtel brand hotels on behalf of the
Company.
(4) Mr. Leven and Mr. Aronson, pursuant to the terms of their respective
employment agreements with the Company, are each entitled to receive bonuses
based upon the number of franchises sold each year. See "-Employment
Agreements." During 1995, neither Mr. Leven nor Mr. Aronson received a bonus
for the three franchises sold during 1995, although the Company accrued
$3,000 and $1,500 for bonuses owed to Mr. Leven and Mr. Aronson,
respectively, with respect to such franchise agreements.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with Messrs. Leven
and Aronson, the material terms of which are described below.
MICHAEL A. LEVEN. Mr. Leven's employment agreement with the Company
provides for his employment as Chairman of the Board of Directors, President
and Chief Executive Officer of the Company for a ten year term expiring on
September 30, 2005. Mr. Leven is entitled to a base salary of at least
$375,000 per year, subject to annual cost of living increases and other
annual increases determined by the Company based on the performance of Mr.
Leven and the Company and on prevailing economic circumstances.
Certain insurance benefits, if available on commercially reasonable
terms, are to be provided to Mr. Leven under his Employment Agreement,
including term life insurance in the amount of $1,500,000, executive health,
dental and medical insurance, long term disability and long term home care.
The Company has obtained all of the foregoing benefits for Mr. Leven. In
addition, Mr. Leven is entitled to a monthly automobile allowance in the
amount of $1,000.
Mr. Leven's employment agreement provides for a performance bonus of (i)
$1,000 for each franchise agreement executed in a given Year (defined as each
12 month period commencing October 1st and ending on September 30th of each
year during the term of such agreement) up to 150 franchise agreements and
(ii) $2,000 for each franchise agreement above the first 150 franchise
agreements entered into in a given Year.
Mr. Leven's employment agreement also contains confidentiality
provisions that prohibit him from disclosing Company trade secrets at any
time in the future and from disclosing any confidential information relating
to the Company for a period extending five years after the termination of his
employment agreement. In addition, the agreement contains non-competition
provisions that prohibit Mr. Leven from competing in the franchising business
generally and in the business of franchising, operating or managing of hotels
and motels for a period of five years following the termination of his
employment for "cause" or his resignation without "good reason." The
enforceability of these non-disclosure and non-competition provisions under
Georgia law, which governs Mr. Leven's agreement, is uncertain.
In addition to allowing Mr. Leven to resign at any time for "good
reason," his employment agreement provides that, after the first five years
of such agreement and provided the redeemable preferred stock sold to Mr.
Leven has been redeemed, Mr. Leven may resign at any time upon six months
notice. If his resignation is without "good reason," the Company is required
to pay Mr. Leven only his base salary, unused vacation time, and performance
bonus actually earned through the effective date of resignation. The
employment
13
<PAGE>
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, (ii) the term life insurance benefit is $500,000, (iii) his automobile
allowance is $750 per month, (iv) the bonus is $500 for each franchise
agreement executed within a Year (as defined above) up to 150 franchise
agreements, and $1,000 for each agreement executed in any Year in excess of
150 and (v) Mr. Aronson is not entitled to receive long-term disability or
long-term home care insurance coverage from the Company. Pursuant to the
Company's By-Laws, Mr. Aronson's employment agreement may not be terminated
without the approval of 75% of the Board of Directors (excluding Mr.
Aronson). Mr. Aronson's employment agreement does not contain any change of
control provisions.
See "Security Ownership Of Certain Beneficial Owners and Management
- --Management's Shares of Common Stock" as to the effect of termination of
employment on the Class A Common Stock held by Messrs. Leven and Aronson.
ADDITIONAL COMPENSATION ARRANGEMENTS
At a meeting of the Board of Directors on April 24, 1998, the Board
voted, subject to shareholder approval of the increase of the number of
shares of Class A Common Stock reserved for issuance under the Amended and
Restated 1996 Stock Option Plan, to grant to Steven Romaniello options to
purchase 18,824 and 12,097 shares of Class A Common Stock at an exercise
price of $0.1034 and $0.11375 per share, respectively. These options will be
subject to Mr. Romaniello's continued employment with the Company and vest
over a period of four years.
Subject to shareholder approval at the annual meeting, Mr. Romaniello will
be granted performance-based options to purchase 20,166 and 6,720 shares of
Class A Common Stock at an exercise price of $0.1034 and $0.11375 per share,
respectively. These options are also subject to Mr. Romaniello's continued
employment with the Company and will vest as the Company meets certain
financial targets.
14
<PAGE>
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.
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 1997. There were no material transactions
between the Company and any of the members of the Compensation Committee
during fiscal 1997.
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
USFS adopted, subject to the approval of its stockholders, the U.S. Franchise
Systems, Inc. 1996 Stock Option Plan (the "Option Plan"). USFS's stockholders
approved the Option Plan on October 11, 1996. By virtue of the HSA
Acquisition, the Option Plan was assumed by the Company. The purpose of the
Option Plan is to promote the interests of the Company and its stockholders
by (i) attracting and retaining exceptional officers and other key employees
of the Company and its subsidiaries, and consultants, advisors and others
whose skills would be an asset to the Company or any of its subsidiaries;
(ii) motivating such individuals by means of performance-related incentives
to achieve long-range performance goals; and (iii) enabling such individuals
to participate in the long-term growth and financial success of the Company.
Any officer or other key employee of the Company or any of its subsidiaries
who is not a member of the committee that administers the Option Plan (the
"Option Committee") shall be eligible to participate under the Option Plan.
The Option Plan authorizes the grant of awards to participants of a maximum
of 325,000 shares of the Company's Class A Common Stock (725,000 shares if
the amendment to the Option Plan is approved by the shareholders of the
Company at the annual meeting), which maximum number is subject to adjustment
in certain circumstances to prevent dilution or enlargement.
DIRECTORS PLAN. On September 27, 1996, the Board of Directors of USFS
adopted, subject to the approval of the its 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. By virtue of the HSA Acquisition, the Directors Plan was
assumed by the Company. The purpose of the Directors Plan is to secure for
the Company the benefits of the additional incentive inherent in the
ownership of Shares by non-employee directors of the Company and to help the
Company secure and retain the services of such non-employee directors. The
Directors Plan is intended to be a self-governing formula
15
<PAGE>
plan. To this end, the Directors Plan requires minimal discretionary action
by any administrative body with regard to any transaction under the Directors
Plan. To the extent, if any, that questions of administration arise, such
issues will be resolved by the Board of Directors. Eligible persons under the
Directors Plan are directors of the Company who are not employees of the
Company or any affiliate of the Company ("Outside Directors"). A maximum of
125,000 shares of Class A Common Stock has been reserved by the Company for
issuance pursuant to options under the Directors Plan, which number is
subject to adjustment in certain circumstances in order to prevent dilution
or enlargement. On October 24, 1996, each Outside Director was granted an
option to purchase 2,000 shares of Class A Common Stock. Thereafter, each
person who is an Outside Director as of January 1st of each calendar year
beginning January 1, 1998 and each person who becomes an Outside Director
during the term of the Directors Plan shall receive an option to purchase
2,000 shares of Class A Common Stock as of such date. All options granted
under the Directors Plan shall be "nonqualified" stock options subject to the
provisions of Section 83 of the Code.
The following table provides certain information concerning individual
grants of stock options under the Company's Option Plan made during the year
ended December 31, 1997 to the Named Executive Officers:
<TABLE>
<CAPTION>
OPTION GRANTS IN LAST FISCAL YEAR
---------------------------------------------------------------------------
INDIVIDUAL GRANTS
---------------------------
POTENTIAL REALIZABLE
% OF TOTAL VALUE AT ASSUMED
OPTIONS EXERCISE ANNUAL RATES OF STOCK
GRANTED TO OR BASE PRICE APPRECIATION FOR
OPTIONS EMPLOYEES PRICE OPTION TERM(1)
GRANTED IN FISCAL ($PER EXPIRATION ---------------------
NAME (#) YEAR SHARE) DATE 5% 10%
- ----------------------------------------------------- ---------- ------------- ----------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Michael A. Leven..................................... -- -- -- -- -- --
Neal K. Aronson...................................... -- -- -- -- -- --
David E. Shaw, Sr.................................... 1,000(2) 1.2 $ 8.13 12/01/04 $ 3,310 $ 7,713
Steven Romaniello.................................... 2,000(2) 2.4 $ 8.13 12/01/04 $ 6,619 $ 15,426
James Darby.......................................... 25,000(3) 30.1 $ 9.63 01/20/04 $ 98,000 $ 228,400
2,000(2) 2.4 $ 8.13 12/01/04 $ 6,619 $ 15,426
</TABLE>
- ------------------------
(1) The dollar amounts under these columns represent the potential realizable
value of each grant of option assuming that the market price of the
Company's Class A Common Stock appreciates in value from the date of grant
at the 5% and 10% annual rates prescribed by the SEC and therefore are not
intended to forecast possible future appreciation, if any, of the price of
the Company's Class A Common Stock.
(2) Options vest in increments of 25% per year commencing on December 1, 1998.
(3) Options vest in increments of 25% per year commencing on January 20, 1998.
16
<PAGE>
The following table provides certain information concerning the value of
unexercised options held by the Named Executive Officers under the Company'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 OPTIONS AT FISCAL YEAR-END
AT FISCAL YEAR END (A)
---------------------------- --------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------------------------------------- ------------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Michael A. Leven.......................................... -- -- -- --
Neal K. Aronson........................................... -- -- -- --
David E. Shaw, Sr......................................... 750 3,250 $ 0 $ 1,870
Steven Romaniello......................................... 1,500 6,500 $ 0 $ 3,740
James Darby............................................... 6,250 20,750 $ 2,312 $ 10,677
</TABLE>
- ------------------------
(a) Dollar values were calculated by determining the difference between the
closing price of the Class A Common Stock on December 31, 1997 as reported
on the Nasdaq National Market ($10.00 per share) and the exercise price of
the options.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TRANSACTIONS ENTERED INTO IN CONNECTION WITH THE DEVELOPMENT FUND
Dean S. Adler, a director of the Company, is a principal of the entity
that controls Lubert-Adler. Irwin Chafetz, a director of the Company, is an
investor in Lubert-Adler. In connection with the formation of the Development
Fund, the Company sold 62,500 shares of Class A Common Stock to Lubert-Adler
for $703,000 at a price per share of $11.25 per share on March 17, 1998. The
closing price of the Class A Common Stock on March 17, 1998, as reported on
the Nasdaq National Market, was $13.00 per share, resulting in a discount of
$109,375 to Lubert-Adler. In addition, Lubert-Adler was issued to the right
to acquire an additional 62,500 shares of Class A Common Stock, exercisable
on a pro rata basis within 18 months of the commitment of the Development
Funds's capital, at an exercise price of $11.25 per share. The purchase price
for the shares of Class A Common Stock issued to Lubert-Adler and the
exercise price for the additional shares were negotiated on an arm's-length
basis between the Company and NorthStar, a participant in the Development
Fund. Lubert-Adler was provided the opportunity to acquire shares of Class A
Common Stock and the right to acquire the additional shares on a pro rata
basis with NorthStar in connection with the respective commitments of each to
the formation of the Development Fund. The Company will also be paid
approximately $3.5 million over the next five years to manage the Development
Fund.
TRANSACTIONS ENTERED INTO IN CONNECTION WITH THE BEST INNS ACQUISITION
Richard D. Goldstein, a director of the Company, is an Executive Vice
President and a Senior Managing Director of the general partner of Alpine
Equity Partners L.P., the entity that indirectly owns and controls a majority
of Alpine Hospitality Ventures LLC ("Ventures") and Alpine Equities, an
affiliate of Ventures. As part of the acquisition of Best Inns on April 28,
1998, the Company entered into, directly and indirectly, a number of
transactions with Ventures and Alpine Equities. Ventures purchased 17 Best
Inns Hotels (the "Acquired Hotels") for a total purchase price of $84
million. In connection with Ventures' acquisition of these hotels, the
Company made a $15 million unsecured subordinated loan to Ventures at
interest rate of 12% per annum, interest on which will be paid in cash to the
extent of available cash and otherwise will be paid-in-kind. In addition, the
Company committed to make up to $7.5 million of additional
17
<PAGE>
loans to Ventures under certain circumstances at an interest rate and upon
other terms that substantially similar to Ventures' or its subsidiaries'
third-party indebtedness at such time. In connection with Ventures'
acquisition of these hotels, the Company entered into the following
additional transactions with Ventures and Alpine Equities: (i) the Company
issued 350,000 shares (the "Alpine Shares") of Class A Common Stock to Alpine
Equities for a cash purchase price of $1.6 million and granted to Alpine
Equities certain demand and piggy-back registration rights on customary terms
as well as certain tag-along rights, (ii) the Company entered into a
management contract and franchise agreements with Ventures relating to the 17
Acquired Hotels, and (iii) the Company agreed to pay to Alpine Equities
$1,000 per year for each Best Inns hotel that is added to the USFS system of
hotels after the closing date of the transaction (the "New Hotel Fee").
The terms of the sale of the Alpine Shares were substantially similar to
the terms the Company had contemplated in negotiations with Highend
Hospitality Partners, LLC ("Highend"), a third party buyer with whom the
Company had previously been negotiating to acquire the 17 Acquired Hotels.
The purchase price for the 350,000 shares of Class A Common Stock had been
negotiated with Highend and was based upon a purchase price of $8.00 per
share for 200,000 shares of Class A Common Stock (the closing price on the
Nasdaq National Market on December 15, 1997) and the issuance for no
additional consideration of 150,000 shares of Class A Common Stock (in lieu
of issuing a warrant to acquire a substantially greater number of shares of
Class A Common Stock, as originally requested by Highend). To the Company's
knowledge, no officer, director or 5% or greater shareholder of the Company
has any ownership interest in Highend. The New Hotel Fee to be paid to Alpine
Equities is substantially similar to a fee that the Company had negotiated on
an arm's-length basis with, and had planned to pay to, Highend. Finally the
terms of the management contract and franchise agreements entered into with
Ventures are substantially similar to the agreements that the Company
expected to enter into with Highend.
MISCELLANEOUS
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 the Company, owns
a profits interest in CMS Entrepreneurial Associates, L.P., one of the
limited partners of Equity Partners, L.P.
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.
Mr. Leven's sons, Jonathan Leven and Robert Leven, were employed by the
Company during 1997 and received total compensation of $170,000 and $90,000,
respectively, and option grants to acquire 1,000 and 2,000 shares,
respectively, a Class A Common Stock under the Company's 1996 Stock Option
Plan.
18
<PAGE>
STOCKHOLDER RETURN PERFORMANCE GRAPH
Set forth below is a line graph comparing the percentage change in the
cumulative total stockholder return on the Company's Class A Common Stock
against the cumulative total return of the Nasdaq Stock Market Index and the
S&P Lodging -Hotels Index for the period commencing on October 25, 1996 (the
date of the Company's initial public offering of Class A Common Stock) and
ending December 31, 1997 (the "Measuring Period"). The graph assumes that the
value of the investment in the Company's Class A Common Stock and each index
was $100 on October 25, 1996. The change in cumulative total return is
measured by dividing (1) the sum of (i) the cumulative amount of dividends
for the Measuring Period, assuming dividend reinvestment, and (ii) the change
in share price between the beginning and end of the Measuring Period, by (2)
the share price at the beginning of the Measuring Period. The Company has not
paid any cash dividends.
COMPARISON OF CUMULATIVE TOTAL RETURN AMONG
U.S. FRANCHISE SYSTEMS, INC., NASDAQ STOCK MARKET INDEX AND
S&P LODGING--HOTELS INDEX
<TABLE>
<CAPTION>
MEASUREMENT PERIOD U.S. FRANCHISE NASDAQ STOCK S & P LODGING-
(FISCAL YEAR COVERED) SYSTEMS, INC. MARKET INDEX HOTELS INDEX
- ------------------------------------------------------------------- --------------- --------------- -----------------
<S> <C> <C> <C>
October 25, 1996................................................... $ 100 $ 100 $ 100
December 31, 1996.................................................. 75 106 90
December 31, 1997.................................................. 74 130 126
</TABLE>
ASSUMES $100 INVESTED ON OCTOBER 25, 1996 IN U.S. FRANCHISE SYSTEMS, INC.
CLASS A COMMON STOCK, NASDAQ STOCK MARKET INDEX AND
S&P LODGING--HOTELS INDEX
19
<PAGE>
REPORT OF COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION
During the year ended December 31, 1997, the Compensation Committee of
the Board of Directors was responsible for: (i) setting the Company's
compensation philosophy and policies; (ii) setting the terms and the
administration of compensation plans for officers of the Company; (iii)
review and approval of pay recommendations for the executive officers of the
Company; and (iv) initiation of all compensation actions for the Chief
Executive Officer of the Company.
The Company's compensation policies have been designed to align the
financial interests of the Company's management with those of its
stockholders, and reflect the nature of the Company by taking into account
the Company's operating environment and the expectations for growth and
future profitability. Compensation for each of the Company's executive
officers consists of a base salary, discretionary performance bonus and, in
some cases, stock options. The Company does not currently provide executive
officers with other long term incentive compensation other than the ability
to contribute their earnings to the Company's 401(k) Plan.
The Compensation Committee's philosophy is that a significant portion of
an executive's compensation should be based directly upon performance
bonuses. The Compensation Committee believes that providing executives with
cash bonuses based on the performance of the Company as well as with the
opportunities to acquire significant stakes in the growth and prosperity of
the Company, while maintaining other elements of the Company's compensation
program at conservative levels, will enable the Company to attract and retain
executives with the outstanding management abilities and entrepreneurial
spirit which are essential to the Company's ongoing success. Furthermore, the
Compensation Committee believes that this approach to compensation motivates
executives to perform to their full potential.
At least annually, the members of the Compensation Committee review
salary recommendations for the Company's executives and then approve such
recommendations, with any modifications they deem appropriate. The annual
salary recommendations are made based on evaluations of the individual
executive's past and expected future performance. Although the base
compensation of the Chief Executive Officer and of the Chief Financial
Officer are set by the terms of employment agreements entered into with such
executive officers, the Board may adjust the base salary of the Chief
Executive Officer and the Chief Financial Officer based on a review of such
officers overall compensation packages and the Compensation Committee's
assessment of their past performance and its expectation as to future
performance on behalf of the Company.
The members of the Compensation Committee also determine, based upon
discussions with management, the annual bonus, if any, to be paid to
executive officers (other than the Chief Executive Officer and the Chief
Financial Officer). The amount of each individual bonus is determined based
upon an evaluation of such factors as individual performance, increases in
the Company's revenue and market penetration, as well as improvements in
operating efficiencies. The assessment of performance achievement is
considered in relation to the maximum normal bonus opportunity, which is paid
for achieving outstanding levels of performance. The annual performance bonus
to be paid to the Chief Executive Officer and the Chief Financial Officer is
set by the terms of their respective employment agreements. See "Executive
Compensation -Employment Agreements."
The Compensation Committee continually evaluates the Company's
compensation policies and procedures with respect to executives. Although the
Compensation Committee believes that current compensation policies have been
successful in aligning the financial interests of executive officers with
those
20
<PAGE>
of the Company's stockholders and with Company performance, it continues to
examine what modifications, if any, should be implemented to further link
executive compensation with both individual and Company performance.
MICHAEL A. LEVEN
IRWIN CHAFETZ
JEFFREY A. SONNENFELD
Notwithstanding anything to the contrary set forth in any of the
Company's previous filings under the Securities Act of 1933, as amended, or
the Exchange Act, that might incorporate future filings, including this Proxy
Statement, in whole or in part, the foregoing Report of Compensation
Committee on Executive Compensation and the Stockholder Return Performance
Graph shall not be incorporated by reference into any such filings.
AGENDA ITEM TWO
PROPOSAL TO AMEND AMENDED AND RESTATED 1996 STOCK OPTION PLAN
GENERAL
On September 27, 1996, the Board of Directors of USFS adopted, subject
to the approval of its stockholders, the U.S. Franchise Systems, Inc. 1996
Stock Option Plan (the "Option Plan"). USFS's stockholders approved the
Option Plan on October 11, 1996. By virtue of the HSA Acquisition, the Option
Plan was assumed by the Company. 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 "Committee") shall be
eligible to participate under the Option Plan. The Option Plan authorizes the
grant of awards to participants of a maximum of 325,000 shares of the
Company's Class A Common Stock (725,000 shares if the amendment to the Option
Plan is approved by the shareholders of the Company at the annual meeting),
which maximum number is subject to adjustment in certain circumstances to
prevent dilution or enlargement.
The Option Plan is not subject to the Employee Retirement Income
Security Act of 1974, as amended ("ERISA") or Section 401(a) of the Internal
Revenue Code of 1986, as amended (the "Code").
As of April 24, 1998, the Company had granted options to purchase shares
of Class A Common Stock pursuant to the Option Plan as follows: (i) each
Named Executive Officer (Michael A. Leven and Neal K. Aronson: no shares;
David E. Shaw, Sr.: 4,000 shares; Steven Romaniello: 8,000 shares; and James
Darby: 27,000 shares); (ii) all current executive officers as a group: 39,000
shares; (iii) all current directors who are not executive officers as a
group: no shares; (iv) each nominee for election as a director: no shares,
other than Steven Romaniello (8,000 shares); and (v) all current employees,
including all current officers who are not executive officers, as a group:
270,200 shares.
DESCRIPTION OF PROPOSED AMENDMENT
On April 24, 1998, the Board of Directors of the Company adopted an
amendment to the Option Plan which would increase the number of shares of
Class A Common Stock of the Company available for grant thereunder to 725,000
shares from 325,000 shares. As of April 24, 1998, 15,800 shares of Class A
Common
21
<PAGE>
Stock remained available for grant under the Option Plan. The proposed
increase in the number of authorized shares would ensure the uninterrupted
continuation of the Option Plan. The Board of Directors recommends that
shareholders vote FOR the proposed amendment. The affirmative vote of a
majority of the shares of Common Stock represented in person or by proxy at
the Annual Meeting is necessary for the approval of the amendment to the
Option Plan.
DESCRIPTION OF OPTION PLAN
OPTION PLAN ADMINISTRATION. The Option Plan is administered by the
Committee, which is a committee of the Board of Directors of the Company
designated by the Board and composed of not less than two Board members, each
of whom is intended to be a "Non-Employee Director" (within the meaning of
Rule 16b-3 under the Securities Exchange Act of 1934 (the "Exchange Act"))
and an "outside director" (within the meaning of Section 162(m) of the Code),
to the extent such provisions are applicable to the Company; provided that
during any period in which such a committee of the Board has not been so
designated, the Committee will be the Board or any authorized committee
thereof.
DURATION OF AN OPTION PLAN/AMENDMENT. The Option Plan became effective
upon approval of the stockholders of the Company on October 11, 1996 and will
remain in effect until October 24, 2003, unless sooner terminated by the
Board. The Board may amend, alter, suspend, discontinue, or terminate the
Option Plan or any portion thereof at any time; provided that no such action
may be taken without shareholder approval if such approval is necessary to
comply with any tax or regulatory requirement. In addition, the Committee is
authorized to waive any conditions or rights under, amend any terms of, or
alter, suspend, discontinue, cancel or terminate, any option granted under
the Option Plan; provided that no such action which would impair the rights
of any participant or any holder or beneficiary of any option may be taken
without the consent of the affected participant, holder or beneficiary.
SHARE AUTHORIZATION/ADJUSTMENTS. 325,000 shares of Class A Common Stock
("Shares") are available for awards under the Option Plan; provided that the
maximum number of Shares with respect to which options may be granted to any
participant in any fiscal year shall be 250,000.
As described more fully in the Option Plan, any shares covered by
options which are forfeited, expire or which are terminated or canceled for
any reason (other than as a result of the exercise or vesting of the option)
and with respect to which a participant has received no benefits of ownership
with respect to the forfeited Shares or the Shares to which such expired,
terminated or canceled option relates (other than voting rights and dividends
that were forfeited in connection with such forfeiture, expiration,
termination or cancellation), will again be available for grant under the
Option Plan.
In addition, the Option Plan provides the Committee with broad
discretion to adjust any or all of (i) the number of Shares or other
securities of the Company (or number and kind of other securities or
property) with respect to which options may be granted, (ii) the number of
Shares or other securities of the Company (or number and kind of other
securities or property) subject to outstanding options, and (iii) the grant
or exercise price with respect to any option, or, if deemed appropriate, make
provision for a cash payment to the holder of an outstanding option in
consideration for the cancellation of such option, if the Committee
determines that certain corporate transactions or events affect the Shares
such that an adjustment is determined by the Committee in its discretion to
be appropriate in order to prevent dilution or enlargement of the benefits or
potential benefits intended to be made available under the Option Plan.
Any Shares delivered under the Option Plan may consist, in whole or in
part, of authorized and unissued Shares or of treasury Shares. In the case of
any purchase of shares that is not made on the open market, no fee,
commission or other charge will be paid.
22
<PAGE>
AWARDS--GENERAL. Under the Option Plan, the Committee may grant awards
in the following forms: Non-qualified stock options or incentive stock
options.
A stock option granted under the Option Plan provides a participant the
right to purchase, within a specified period of time, a stated number of
Shares at the price specified in the option. Non-qualified and incentive
stock options granted under the Option Plan will be subject to such terms,
including exercise price and the conditions and timing of exercise, as may be
determined by the Committee and specified in the applicable award agreement
or thereafter; provided that stock options that are intended to qualify as
incentive stock options will be subject to terms and conditions that comply
with such rules as may be prescribed by Section 422 of the Code.
Payment in respect of the exercise of an option granted under the Option
Plan may be made in cash, or its equivalent, or, if and to the extent
permitted by the Committee, (i) by exchanging Shares owned by the optionee
(which are not the subject of any pledge or other security interest and which
have been owned by such optionee for at least six months) or (ii) if
permitted by and subject to such rules as may be established by the
Committee, through delivery of irrevocable instructions to a broker to sell
Shares with respect to which the option is then being exercised and to
deliver promptly to the Company an amount equal to the exercise price, or by
a combination of the foregoing, provided that the combined value of all cash
and cash equivalents and the fair market value of such Shares so tendered to
the Company as of the date of such tender is at least equal to the aggregate
exercise price of the option.
Each option granted under the Option Plan may be exercised, during the
participant's lifetime, only by the participant or, if permissible under
applicable law, by the participant's guardian or legal representative and no
option may be assigned, alienated, pledged, attached, sold or otherwise
transferred or encumbered by a participant other than by will or by the laws
of descent and distribution; provided that the designation of a beneficiary
will not constitute an assignment, alienation, pledge, attachment, sale,
transfer or encumbrance for purposes of the Option Plan.
CHANGE OF CONTROL. In the event of a "Change of Control" (as defined in
the Option Plan), any outstanding options then held by a participant which
are unexercisable or otherwise unvested will automatically be deemed
exercisable or otherwise vested, as the case may be, immediately prior to
such Change of Control.
RESALE RESTRICTIONS. There is no restriction under the federal
securities laws on the resale of any shares acquired pursuant to the Option
Plan, except that (i) persons who at the time of the resale are considered
"affiliates" of the Company (by reason of being in a "control" relationship
with the Company) may resell such shares only pursuant to Rule 144 under the
Securities Act of 1933 or pursuant to a "reoffer prospectus" which may
hereinafter be filed by the Company as part of a registration statement
relating to the Option Plan and (ii) purchases and sales by corporate
officers and directors of any securities of the Company are subject to
Section 16(b) of the Exchange Act and the rules promulgated thereunder
relating to insider short-swing profits.
FEDERAL INCOME TAX CONSEQUENCES
The following summary of the federal income tax consequences of the
grant and exercise of nonqualified and incentive stock options awarded under
the Option Plan, the disposition of Shares purchased pursuant to the exercise
of such stock options and the cash settlement of other awards granted under
the Option Plan, is intended to reflect the current provisions of the Code
and the regulations thereunder. This summary is not intended to be a complete
statement of applicable law, nor does it address state and local tax
considerations. Moreover, the federal income tax consequences to any
particular participant may differ from
23
<PAGE>
those described herein by reason of, among other things, the particular
circumstances of such participant. For these reasons, Participants are urged
to consult their own tax advisors with respect to the consequences of their
participation in the Option Plan.
No income will be realized by an optionee upon grant of a nonqualified
stock option. Upon exercise of a nonqualified stock option, the optionee will
recognize ordinary compensation income in an amount equal to the excess, if
any, of the fair market value of the underlying stock over the option
exercise price (the "Spread") at the time of exercise. The Spread will be
deductible by the Company for federal income tax purposes subject to the
possible limitations on deductibility under Sections 28OG and 162(m) of the
Code of compensation paid to executives designated in those Sections. The
optionee's tax basis in the underlying shares acquired by exercise of a
nonqualified stock option will equal the exercise price plus the amount
taxable as compensation to the optionee. Upon sale of the shares received by
the optionee upon exercise of the nonqualified stock option, any gain or loss
is generally long-term or short-term capital gain or loss, depending on the
holding period. The optionee's holding period for shares acquired pursuant to
the exercise of a nonqualified stock option will begin on the date of
exercise of such option.
Pursuant to currently applicable rules under Section 16(b) of the
Exchange Act, the grant of an option (and not its exercise) to a person who
is subject to the reporting and short-swing profit provisions under Section
16 of the Exchange Act (a "Section 16 Person") begins the six-month period of
potential short-swing liability. The taxable event for the exercise of an
option that has been outstanding at within six months ordinarily will be the
date of exercise. If an option is exercised by a Section 16 Person within six
months after the date of grant, however, taxation ordinarily will be deferred
until the date which is six months after the date of grant, unless the person
has filed a timely election pursuant to Section 83(b) of the Code to be taxed
on the date of exercise. Pursuant to a recent amendment to the rules under
Section 16(b) of the Exchange Act, with respect to option grants that are
effected on or after August 15, 1996 (or at the election of the Company, on
or after November 1, 1996) (the "New Rule Date"), the six month period of
potential short-swing liability may be eliminated if the option grant (i) is
approved in advance by the Company's board of directors (or a committee
composed solely of two or more non-employee directors) or (ii) approved in
advance, or subsequently ratified by the Company's shareholders no later than
the next annual meeting of shareholders. Consequently, the taxable event for
the exercise of an option granted after the New Rule Date that satisfies
either of the conditions described in clauses (i) or (ii) above will be the
date of exercise.
The payment by an optionee of the exercise price, in full or in part,
with previously acquired Shares will not affect the tax treatment of the
exercise described above. No gain or loss generally will be recognized by the
optionee upon the surrender of the previously acquired Shares to the Company,
and Shares received by the optionee, equal in number to the previously
surrendered Shares, will have the same tax basis as the Shares surrendered to
the Company and will have a holding period that includes the holding period
of the Shares surrendered. The value of Shares received by the optionee in
excess of the number of Shares surrendered to the Company will be taxable to
the optionee. Such additional Shares will have a tax basis equal to the fair
market value of such additional Shares as of the date ordinary income is
recognized, and will have a holding period that begins on the date ordinary
income is recognized.
The Code requires that, for incentive stock option treatment, Shares
acquired through exercise of an incentive stock option cannot be disposed of
before two years from the date of grant of the option and one year from the
date of exercise. Incentive stock option holders will generally incur no
federal income tax liability at the time of grant or upon exercise of such
options. However, the Spread will be an "item of tax preference" which may
give rise to "alternative minimum tax" liability at the time of exercise. If
the optionee does not dispose of the Shares before two years from the date of
grant and one year from the date of exercise, the difference between the
exercise price and the amount realized upon disposition of the Shares will
constitute long-term capital gain or loss, as the case may be. Assuming both
holding periods are satisfied,
24
<PAGE>
no deduction will be allowed to the Company for federal income tax purposes
in connection with the grant or exercise of the option. If, within two years
of the date of grant or one year from the date of exercise, the holder of
shares acquired through the exercise of an incentive stock option disposes of
such Shares, the optionee will generally realize ordinary compensation at the
time of such disposition equal to the difference between the exercise price
and the lesser of the fair market value of the stock on the date of initial
exercise or the amount realized on the subsequent disposition, and such
amount will generally be deductible by the Company for federal income tax
purposes, subject to the possible limitations on deductibility under Sections
28OG and 162(m) of the Code for compensation paid to executives designated in
those Sections.
If the optionee pays the exercise price of an incentive stock option, in
full or in part, with previously acquired Shares, proposed Internal Revenue
Service regulations will impose the following rates: if the Shares
surrendered in payment of the exercise price of an incentive stock option are
"statutory option stock" (including Shares acquired pursuant to the exercise
of an incentive stock option) and if, at the time of surrender, the
applicable holding period for such Shares had not been met, any gain realized
on such transfer will be taxable to the optionee, as discussed above.
Otherwise, when previously acquired Shares are surrendered upon exercise of
an incentive stock option, in general (i) no gain or loss generally will be
recognized upon surrender, (ii) the number of Shares received that is equal
to the number of Shares surrendered will have a tax basis equal to the tax
basis of the shares surrendered and will have a holding period that includes
the holding period of the Shares surrendered, and (iii) any additional Shares
received will have a zero tax basis and will have a holding period that
begins on the date of surrender. If any of the Shares received are disposed
of within two years from the date of grant of the incentive stock option or
within one year from the date of exercise, the Shares with the lowest tax
basis will be deemed to be disposed of first, and such disposition will be a
disqualifying disposition giving rise to ordinary income as discussed above,
and the Company will generally be entitled to a corresponding deduction at
such time, subject to the possible limitations on deductibility under
Sections 28OG and 162(m) of the Code of compensation paid to the executives
designated in those Sections.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE COMPANY'S SHAREHOLDERS APPROVE
THE PROPOSED AMENDMENT TO THE OPTION PLAN.
25
<PAGE>
AGENDA ITEM THREE
APPROVAL OF PERFORMANCE STOCK OPTION AWARDS
PERFORMANCE OPTIONS
The Board of Directors of the Company has voted to grant to Steven
Romaniello, subject to shareholder approval, and is proposing for shareholder
approval, options to acquire an aggregate of 26,886 shares of Class A Common
Stock of the Company, $.01 par value (the "Shares") pursuant to the Option
Plan (the "Performance Options). Mr. Romaniello serves as the Executive Vice
President -Franchise Sales and Development of the Company and as a Director.
The Performance Options are being submitted to shareholders for approval in
response to Section 162(m) of the Code, which imposes limits on the Company's
ability to deduct for federal income tax purposes compensation in excess of
$1,000,000 paid to certain officers of the Company. The deduction limitation
imposed by Section 162(m) does not apply to performance-based compensation
that meets certain requirements set forth in Section 162(m) and the payment
of which is subject to receipt of shareholder approval. The grant of the
Performance Options is also subject to shareholder approval of the increase
in the number of shares of Class A Common Stock available for grant under the
Option Plan. See "Agenda Item Two--Proposal to Amend Amended and Restated
1996 Stock Option Plan." The Board of Directors unanimously recommends a vote
for the proposal to approve the Performance Options.
The Board of Directors voted to approve the grant of the Performance
Options on April 24, 1998, subject to shareholder approval, pursuant to two
separate award agreements (each an "Award"). One Award represents an option
to acquire 20,166 Shares for a per Share exercise price of $0.1034. The other
Award represents an option to acquire 6,720 Shares for a per Share exercise
price of $0.11375. In all other respects the Awards are identical.
The Performance Options will vest and become exercisable only if, when
and to the extent the Company attains certain pre-established EBITDA goals
(i.e., earnings before consolidated interest, taxes, depreciation,
amortization and other non-cash charges, adjusted to exclude one-time
non-recurring expenses or credits and certain other specified items)
established by the Option Committee ("Performance Goals"), subject to
accelerated vesting in full in the event of a change of control of the
Company.
The Performance Options have a term of seven years; provided that in the
event of a termination of Mr. Romaniello's employment for any reason (other
than a termination by the Company without cause) (i) the unvested portion of
the Performance Options will be immediately forfeited and (ii) the vested
portion of the Performance Option will remain exercisable until the earliest
to occur of (x) the seventh anniversary of the date of grant, (y) one year
following the date of Mr. Romaniello's termination of employment due to death
or disability, and (z) 30 days following the date of Mr. Romaniello's
termination of employment by the Company for cause or by Mr. Romaniello for
any reason.
Payment of the exercise price with respect to the Performance Options
may be made in cash or its equivalent or (i) by exchanging Shares owned by
Mr. Romaniello (which are not subject to any pledge or other security
interest and have been held for at least six months), or (ii) through
delivery to the Company of irrevocable instructions to a broker to sell the
securities issued upon exercise of the Option and to deliver promptly to the
Company an amount equal to the aggregate exercise price upon the sale of such
securities.
The Awards evidencing the Performance Options may be amended by the
Committee; provided that any amendment that would impair the rights of Mr.
Romaniello shall not to that extent be effective without Mr. Romaniello's
consent.
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The Performance Options may not be exercised, and will be forfeited,
unless the grant of the Performance Options is approved by the Company's
shareholders.
TIME OPTIONS
In addition to the Performance Options, on April 24, 1998 the Board of
Directors voted to grant to Mr. Romaniello, on an unconditional basis,
options to acquire an aggregate of 30,921 Shares pursuant to the Option Plan
(the "Time Options"). The Company is not soliciting shareholder approval for
the grant of the Time Options since these awards may not qualify as
performance-based compensation under Section 162(m). The grant of the Time
Options, however, is subject to shareholder approval of the increase in the
number of shares of Class A Common Stock available for grant under the Option
Plan. See "Agenda Item Two--Proposal to Amend Amended and Restated 1996 Stock
Option Plan."
The Time Options will be granted pursuant to two separate award agreements
(each a "Time Award"). One Time Award represents an option to acquire 18,824
Shares for a per Share exercise price of $0.1034. The other Time Award
represents an option to acquire 12,097 Shares for a per Share exercise price
of $0.11375. In all other respects the Time Awards are identical.
The Time Options will vest and become exercisable with respect to
approximately (i) 5% of the number Shares subject thereto on the second
anniversary of the grant date, (ii) 45% of the number Shares subject thereto
on the third anniversary of the grant date, and (iii) 50% of the number
Shares subject thereto on the fourth anniversary of the grant date, subject
to accelerated vesting in full in the event of a change of control of the
Company or a termination of Mr. Romaniello's employment by the Company
without cause.
The Time Options have a term of seven years; provided that in the event
of a termination of Mr. Romaniello's employment for any reason (other than a
termination by the Company without cause) (i) the unvested portion of the Time
Options, if any, will be immediately forfeited and (ii) the vested portion of
the Time Options will remain exercisable until the earliest to occur of (x) the
seventh anniversary of the grant date, (y) one year following the date of
Mr. Romaniello's termination of employment due to death or disability, and
(z) 30 days following the date of Mr. Romaniello's termination of employment by
the Company or by Mr. Romaniello for any reason.
The Time Options may be exercised by paying the exercise price in the
same manner as the Performance Options described above.
FEDERAL INCOME TAX CONSEQUENCES
The following summary of the federal income tax consequences of the
grant and exercise of the Performance Options and Time Options (collectively,
the "Options") and the disposition of Shares purchased pursuant to the
exercise of such Options, is intended to reflect the current provisions of
the Code and the regulations thereunder. This summary is not intended to be a
complete statement of applicable law, nor does it address state and local tax
considerations.
No income will be realized by Mr. Romaniello upon grant of the Options.
Upon exercise of the Options (or upon vesting of the Options in the event the
Options are treated as Shares for federal income tax purposes as a result of
the discount from fair market value reflected in the exercise price of the
Options), Mr. Romaniello will recognize ordinary compensation income in an
amount equal to the excess, if any, of the fair market value of the
underlying stock over the Option exercise price (the "Spread"). The Spread
will be deductible by the Company for federal income tax purposes subject to
the possible limitations on deductibility under Sections 280G and 162(m) of
the Code of compensation paid to executives designated in those sections. Mr.
Romaniello's tax basis in the underlying Shares acquired by exercise of the
Options
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will equal the exercise price plus the amount taxable as compensation
to Mr. Romaniello. Upon sale of the Shares received by Mr. Romaniello upon
exercise of the Option, any gain or loss is generally long-term or short-term
capital gain or loss, depending on the holding period. Mr. Romaniello's
holding period for shares acquired pursuant to the exercise of the Options
will begin on the date of exercise of such Option (or any earlier date on
which he incurs federal income tax in respect of the Option).
Pursuant to currently applicable rules under section 16(b) of the
Exchange Act, the grant of an option (and not its exercise) to a person who
is subject to the reporting and short-swing profit provisions under Section
16 of the Exchange Act (a "Section 16 Person") begins the six-month period of
potential short-swing liability. The taxable event for the exercise of an
option that has been outstanding at least six months ordinarily will be the
date of exercise. If an option is exercised by a Section 16 Person within six
months after the date of grant, however, taxation ordinarily will be deferred
until the date which is six months after the date of grant, unless the person
has filed a timely election pursuant to Section 83(b) of the Code to be taxed
on the date of exercise. The six month period of potential short-swing
liability may be eliminated if the option grant (i) is approved in advance by
the Company's board of directors (or a committee composed solely of two or
more non-employee directors) or (ii) approved in advance, or subsequently
ratified by the Company's shareholders no later than the next annual meeting
of shareholders. Consequently, the taxable event for the exercise of an
option that satisfies either of the conditions described in clauses (i) or
(ii) above will be the date of exercise.
The payment by Mr. Romaniello of the exercise price, in full or in
part, with previously acquired Shares will not affect the tax treatment of
the exercise described above. No gain or loss generally will be recognized by
Mr. Romaniello upon the surrender of the previously acquired Shares of the
Company, and Shares received by Mr. Romaniello, equal in number to the
previously surrendered Shares, will have the same tax basis as the Shares
surrendered to the Company and will have a holding period that includes the
holding period of the Shares surrendered. The value of Shares received by Mr.
Romaniello in excess of the number of Shares surrendered to the Company will
be taxable to Mr. Romaniello. Such additional Shares will have a tax basis
equal to the fair market value of such additional Shares as of the date
ordinary income is recognized, and will have a holding period that begins on
the date ordinary income is recognized.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE COMPANY'S SHAREHOLDERS
APPROVE THE PERFORMANCE OPTIONS.
INDEPENDENT PUBLIC ACCOUNTANTS
Deloitte & Touche LLP has served as independent auditors of the Company
for the fiscal year ended December 31, 1997 and have been selected by the
Board of Directors to serve as independent auditors of the Company for the
year ending December 31, 1998. Representatives of Deloitte & Touche LLP are
expected to be present at the shareholders' meeting and will have the
opportunity to make a statement if they desire to do so and to respond to
appropriate questions.
ANNUAL REPORT ON FORM 10-K
The Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997, as filed with the Securities and Exchange Commission, is
available to shareholders who make written request therefor to the Company's
Public Relations Department, 13 Corporate Square, Suite 250, Atlanta, Georgia
30329. Copies of exhibits and basic documents filed with that report or
referenced therein will be furnished to shareholders of record upon request.
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SHAREHOLDER PROPOSALS
Proposals of shareholders intended to be presented at the Company's 1999
annual meeting must be received at the Company's principal executive offices
by January 31, 1999 in order to be eligible for inclusion in the Company's
proxy statement and form of proxy for that meeting.
OTHER MATTERS
The Board of Directors knows of no other matters to be brought before
the annual meeting. However, if other matters should come before the annual
meeting it is the intention of the persons named in the enclosed form of
Proxy to vote the Proxy in accordance with their judgment of what is in the
best interest of the Company.
BY ORDER OF THE BOARD OF DIRECTORS,
/s/ Michael A. Leven
Michael A. Leven, Chairman of the Board
ATLANTA, GEORGIA
May 26, 1998
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Appendix
U.S. FRANCHISE SYSTEMS, INC.
13 Corporate Square, Suite 250
Atlanta, Georgia 30329
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS FOR THE 1998
ANNUAL MEETING OF SHAREHOLDERS.
The annual meeting of shareholders of U.S. Franchise Systems, Inc. (the
"Company") will be held on Friday, June 26, 1998 at 4:00 p.m., at the
Company's offices, 13 Corporate Square, Suite 250, Atlanta, Georgia 30329,
for the following purposes:
1. To elect ten (10) directors to constitute the Board of Directors, to
serve for a term of one year and until their successors are elected and
qualified;
// For all nominees listed below // WITHHOLD AUTHORITY to
(except as marked to the contrary vote for all nominees listed
below) below
MICHAEL A. LEVEN, NEAL K. ARONSON, STEVEN ROMANIELLO, DEAN S. ADLER, IRWIN
CHAFETZ, DOUGLAS G. GEOGA, RICHARD D. GOLDSTEIN, DAVID T. HAMAMOTO,
JEFFREY A. SONNENFELD and BARRY S. STERNLICHT
INSTRUCTION: To withhold authority to vote for any individual nominee write
that nominee's name in the space provided below.
---------------------------------
2. To approve an amendment to the Company's Amended and Restated 1996
Stock Option Plan to increase the number of shares of Class A Common Stock
available for grant thereunder from 325,000 shares to 725,000 shares;
// FOR // AGAINST // ABSTAIN
3. To approve the award of performance-based options to purchase an
aggregate of 26,886 shares of Class A Common Stock to Steven Romaniello, the
Company's Executive Vice President -Franchise Sales and Development and a
Director; and
// FOR // AGAINST // ABSTAIN
4. To vote in accordance with their best judgment with respect to any
other matters that may properly come before the meeting and any adjournments
or postponements thereof.
<PAGE>
THE BOARD OF DIRECTORS FAVORS A VOTE "FOR" THE ABOVE PROPOSALS AND
UNLESS INSTRUCTIONS TO THE CONTRARY ARE INDICATED IN THE SPACE PROVIDED, THIS
PROXY WILL BE SO VOTED.
Please date and sign this Proxy exactly as name(s) appears on
the mailing label.
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Print Name(s):
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NOTE: When signing as an attorney, trustee, executor,
administrator or guardian, please give your title as such. If
a corporation or partnership, give full name by authorized
officer. In the case of joint tenants, each joint owner must
sign.
Dated:
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