<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-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section240.14a-11(c) or
Section240.14a-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 the 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)(1)
and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
-----------------------------------------------------------------------
(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:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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<PAGE>
[LOGO]
April 20, 1999
Dear Stockholder:
This year's Annual Meeting of Stockholders ("Annual Meeting") of U.S.
Franchise Systems, Inc. (the "Company") will be held on Thursday, May 27, 1999
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 1998 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>
de1229a
U.S. FRANCHISE SYSTEMS, INC.
13 CORPORATE SQUARE, SUITE 250
ATLANTA, GEORGIA 30329
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD MAY 27, 1999
The annual meeting of shareholders of U.S. Franchise Systems, Inc. (the
"Company") will be held on Thursday, May 27, 1999 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 transact such other business as may properly come before the
meeting or any adjournments or postponements thereof.
Only shareholders of record at the close of business on April 9, 1999 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
April 20, 1999
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
MAY 27, 1999
----------------------
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. ("USFS" or the
"Company") for the Annual Meeting of Shareholders to be held on Thursday, May
27, 1999 and any adjournments or postponements thereof, at the time and place
and for the purposes set forth in the accompanying notice of the meeting. The
expense of this solicitation, including the cost of preparing and mailing this
Proxy Statement, will be paid by the Company. In addition to solicitations by
mail, officers and regular employees of the Company, at no additional
compensation, may assist in soliciting proxies by telephone. This Proxy
Statement and the accompanying proxy are first being mailed to shareholders on
or about April 20, 1999. The address of the principal executive offices of the
Company is 13 Corporate Square, Suite 250, Atlanta, Georgia 30329.
Any proxy given pursuant to this solicitation may be revoked by any
shareholder who attends the meeting and gives oral notice of his election to
vote in person, without compliance with any other formalities. In addition, any
proxy given pursuant to this solicitation may be revoked prior to the meeting by
delivering to the Secretary of the Company an instrument revoking it or a duly
executed proxy for the same shares bearing a later date. Proxies which are
returned properly executed and not revoked will be voted and will be voted in
accordance with the shareholder's directions specified thereon. Where no
direction is specified, proxies will be voted for the election of the nominees
named below to constitute the entire Board of Directors. Abstentions and broker
non-votes will not be counted as votes either in favor of or against the matter
with respect to which the abstention or broker non-vote relates.
The record of shareholders entitled to vote at the annual meeting was taken
on April 9, 1999. On that date the Company had outstanding and entitled to vote
17,167,194 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.
The Company was incorporated in November 1997 for the purposes of acquiring
the Hawthorn Suites brand. The Company's predecessor, also known as USFS, was
incorporated in Delaware in August 1995. The term "the Company" refers to USFS
before the Hawthorn merger, and as the surviving corporation in the merger.
<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
April 9, 1999 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) 5.3% 1,509,473(3) 55.7% 36.2%
Neal K. Aronson........................................ 916,811(4) 5.3 1,509,473(5) 55.7 36.2
Dean Adler............................................. 98,500(6) * 0 0 *
Irwin Chafetz.......................................... 354,100(7) 2.1 0 0 *
James Darby............................................ 9,625(8) * 0 0 *
Douglas G. Geoga....................................... 2,000(9) * 0 0 *
Richard D. Goldstein................................... 513,555(10) 3.0 0 0 *
David T. Hamamoto...................................... 614,500(11) 3.5 0 0 *
Andrea Leven........................................... 233,032(12) 1.4 770,801(13) 28.5
Jeffrey A. Sonnenfeld.................................. 9,000(14) * 0 0 *
Barry S. Sternlicht.................................... 303,770(15) 1.8 0 0 *
Steven Romaniello...................................... 196,716(16) 1.2 0 0 *
David E. Shaw, Sr...................................... 118,499(17) * 0 0 *
Meridian Associates, L.P............................... 2,122,222(18) 12.4 0 0 4.8
All officers and directors as a group (12 persons)**... 3,640,581 21.2 2,707,919 100.0 69.4
</TABLE>
- ------------------------
* Represents less than 1% of the outstanding shares, both in number and in
terms of voting power.
** Duplications eliminated.
(1) "Beneficial Ownership" includes shares for which an individual, directly or
indirectly, has or shares voting or investment power or both and also
includes options which are exercisable within sixty days of April 9, 1999.
All of the listed persons have sole voting and investment power over the
shares listed opposite their names unless otherwise indicated in the notes
below.
(2) Consists of (i) 123,805 Restricted Shares (as defined herein) held directly
by Mr. Leven and as to which Mr. Leven has sole voting power, (ii) 233,032
Restricted Shares held by Mr. Leven's wife, which are voted by Mr. Leven,
(iii) 346,461 Unrestricted Shares (as defined herein), which have been
reallocated to other members of management and are voted in the same manner
that Mr. Leven votes his shares, (iv) 95,972 shares that were designated as
Restricted Shares pursuant to Mr. Leven's Old Stock Purchase Agreement (as
defined herein), which have been reallocated to other members of management
and by virtue of the 1996 Amendment (as defined herein) are voted in the
same manner that Mr. Leven votes his Unrestricted Shares, and (v) 111,347
Restricted Shares owned by Mr. Aronson, which are voted by Mr. Leven. Mr.
Leven's 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.
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<PAGE>
(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) Consists of (i) 7,000 shares as to which Mr. Adler has sole voting and
investment power, (ii) stock options for 2,000 shares of Class A Common
Stock at $13.50 per share which are fully vested, (iii) stock options for
2,000 shares of Class A Common Stock at $10.00 per share which are fully
vested, (iv) 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. (collectively, "Lubert-Adler"), entities controlled by Mr. Adler,
and (v) Lubert-Adler's right to purchase up to 25,000 shares of Class A
Common Stock at $11.25 per share, which right is fully vested.
(7) Consists of (i) 350,100 shares as to which Mr. Chafetz has sole voting and
investment power, (ii) stock options for 2,000 shares of Class A Common
Stock at $13.50 per share which are fully vested, and (iii) stock options
for 2,000 shares of Class A Common Stock at $10.00 per share which are fully
vested.
(8) Mr. Darby resigned from the Company effective December 1, 1998. Consists of
(i) stock options for 9,375 shares of Class A Common Stock exercisable at a
price of $9.63 per share which are fully vested and (ii) stock options for
250 shares of Class A Common Stock at $8.13 per share which are fully
vested.
(9) Consists of stock options for 2,000 shares of Class A Common Stock at $13.00
per share which are fully vested.
(10) Consists 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, (iii) stock options for 2,000 shares of Class A
Common Stock at $10.00 per share which are fully vested, and (iv) 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.
(11) Consists of (i) stock options for 2,000 shares of Class A Common Stock at
$13.00 per share which are fully vested; (ii) 437,500 shares of Class A
Common Stock owned by Sextant Trading LLC ("Sextant"), 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 the shares owned by Sextant; and (iii)
Sextant's right to purchase 175,000 shares of Class A Common Stock at $11.25
per share, which right is fully vested.
(12) 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.
3
<PAGE>
(13) 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 all voted by Mr. Leven.
(14) Consists of (i) 5,000 shares as to which Dr. Sonnenfeld has sole voting and
investment power, (ii) stock options for 2,000 shares of Class A Common
Stock at $13.50 per share which are fully vested, and (iii) stock options
for 2,000 shares of Class A Common Stock at $10.00 per share which are fully
vested.
(15) Consists 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, (ii) stock options for
2,000 shares of Class A Common Stock at $13.50 per share which are fully
vested, and (iii) stock options for 2,000 shares of Class A Common Stock at
$10.00 per share which are fully vested.
(16) 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, (iv) stock
options for 3,000 shares of Class A Common Stock at $13.50 per share which
are fully vested and (v) stock options for 500 shares of Class A Common
Stock at $8.13 per share which are fully vested.
(17) Consists of (i) 9,200 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, (iv) stock
options for 1,500 shares of Class A Common Stock at $13.50 per share which
are fully vested, and (v) stock options for 250 shares of Class A Common
Stock at $8.13 per share which are fully vested.
(18) Consists of (i) 2,099,775 shares owned by Meridian Associates, L.P.
("Meridian") and (ii) 22,447 shares owned by HSA Properties, Inc. ("HPI"),
an affiliate of Meridian. Meridian'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
4
<PAGE>
acquisition, were subject to significant restrictions with respect to voting and
dividend rights and substantial risks of forfeiture (the "Restricted Shares"),
as described below. Mr. Leven and Mr. Aronson each acquired 13% of the then
outstanding Class A Common Stock in the form of Restricted Shares. On August 23,
1996, the Board of Directors voted to amend the respective Employee Stock
Purchase Agreements pursuant to which Messrs. Leven and Aronson purchased the
Class A Common Stock (the "Old Stock Purchase Agreements") to eliminate the
restrictions with respect to one-half of the Restricted Shares (the "1996
Amendment"). See "--1996 Amendment" below for a description of the amendment.
RESALE OF SHARES TO OTHER MANAGEMENT. The Old Stock Purchase Agreements
provide that Unrestricted Shares representing 5% of the Class A Common Stock
then outstanding and Restricted Shares representing 6% of the Class A Common
Stock then outstanding could be repurchased by the Company from Messrs. Leven
and Aronson at the Original Issue Price and then reissued to other members of
the Company's management at fair market value. As of April 1, 1999, 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, 1999, 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 management holder of such shares (including either of Messrs. Leven or
Aronson) resigns from his or her
5
<PAGE>
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 1.2% of the Class A Common Stock outstanding
as of April 1, 1999, will be voted by the management holders thereof 60% in the
same manner that Mr. Leven votes his shares, and 40% in the same manner that Mr.
Aronson votes his shares. As to any Restricted Shares still held by such
management holders, 50% of such shares will be voted by the management holders
thereof in the same manner that Mr. Leven votes his shares and 50% will be voted
in the same manner Mr. Aronson votes his shares.
6
<PAGE>
CERTAIN OTHER AGREEMENTS RELATING TO COMMON STOCK. In connection with the
Hawthorn merger, Hawthorn Suites Associates, 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 all but 100,000
of the shares of Class A Common Stock received by them in the Hawthorn merger
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-Adler") 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. NorthStar and
Lubert-Adler also have the right to purchase up to an additional 500,000 shares
of Class A Common Stock, exercisable on a pro-rata basis within 18 months of the
commitment of the Development Fund's capital at a price of $11.25 per share. As
of April 9, 1999, based on the amount of capital committed to date, NorthStar
and Lubert-Adler have vested rights to purchase 175,000 and 25,000 shares of
Class A Common Stock, respectively.
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 nominees
standing for election. Management of the Company has no reason to believe that
any nominee will not serve if elected.
7
<PAGE>
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 61, 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 Lodgian, 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 Chairman of the
Biomedical Services Board of the American Red Cross, a Trustee of National
Realty Trust, the largest franchisee of Coldwell Banker Corporation and a member
of The Board of Directors of both The Fourth Network, a private company which
provides Internet services to the hotel industry, and The Chief Executive
Leadership Institute, a non-profit leadership school. Mr. Leven is an uncle of
Mr. Aronson.
NEAL K. ARONSON. Mr. Aronson, age 34, 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 a Managing Director of Rosecliff, Inc., a private equity
investment group in New York, New York. From January 1992 to December 1993, he
was a principal of Odyssey Partners, L.P. in New York, New York. From June 1989
to December 1991, Mr. Aronson was a principal of Acadia Partners, L.P. in New
York, New York. Mr. Aronson is a nephew of Michael A. Leven. Mr. Aronson has
served as a director of the Company since September 1995.
STEVEN ROMANIELLO. Mr. Romaniello, age 32, has been Executive Vice
President, Franchise Sales and Administration of the Company since January 1999.
From October 1996 through December 1998, Mr. Romaniello served as Executive Vice
President, Franchise Sales and Development of the Company. 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 42, 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 63, 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 charter vacation 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 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
8
<PAGE>
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 43, 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"),
immediate past 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 47, 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 a
director of On Command Corporation, a NASDAQ company, and various portfolio
companies of Alpine. Mr. Goldstein is also a trustee and member of the Executive
Committee of the Queens College Foundation, Trustee of the North Shore Long
Island Jewish Health System and 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 39, is a co-Chief Executive Officer of
NorthStar, having co-founded the firm in July 1997. At NorthStar, Mr. Hamamoto
has overseen the investment of more than $1 billion of equity in real estate
assets and operating companies with an aggregate cost exceeding $2 billion.
Prior to founding NorthStar, Mr. Hamamoto initiated the effort in 1998 to build
a real estate principal investment business at Goldman, Sachs & Co. under the
auspices of the Whitehall Funds, and was a co-head of the Whitehall Funds and a
partner at Goldman, Sachs & Co. from 1994 to 1997. Mr. Hamamoto is a director of
Emeritus Corporation, one of the largest publicly traded owners and operators of
assisted living facilities. Mr. Hamamoto received a B.S. from Stanford
University and an M.B.A. from the Wharton School of the University of
Pennsylvania. Mr. Hamamoto has served as a director of the Company since March
1998.
JEFFREY A. SONNENFELD. Dr. Sonnenfeld, age 45, currently serves as the
Chairman and President of The Chief Executive Leadership Institute, a non-profit
educational organization. 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 CEO leadership, top management, executive development and corporate
governance. 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. Dr. Sonnenfeld has
served as a director of the Company since October 1996.
BARRY S. STERNLICHT. Since 1993, Mr. Sternlicht, age 38, has been the
President and Chief Executive Officer of Starwood Capital Group, LLC, 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 also serves on the Board of Directors of Channel 13, a
public television station. Mr. Sternlicht has served as a director of the
Company since September 1995.
9
<PAGE>
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 as amended, entered
into in connection with the March 1998 Hawthorn merger transaction, subject to
Meridian 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), Meridian 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 Meridian
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, Meridian 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, 1998, all
Section 16(a) filing requirements applicable to its officers, directors and
greater than 10% shareholders were complied with, except that a Form 4 filing
relating to two transactions made by David E. Shaw Sr., the Company's Executive
Vice President- Administration, was filed six days late.
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 to the Associate General Counsel of the Company if 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 four meetings during the year ended December 31,
1998. 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 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
10
<PAGE>
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 1998.
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 two
meetings during 1998.
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 Amended and Restated Stock Option Plan and granting options thereunder. The
Stock Option Committee held four meetings during 1998.
The Board of Directors does not have a standing nominating committee, such
function being reserved to the full Board of Directors. Any shareholder entitled
to vote for the election of directors may nominate a person or persons for
election as a director by complying in all respects with the requirements for
director nominations set forth in the Company's By-Laws.
EXECUTIVE OFFICERS
The executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION HELD
- --------------------------- --- -------------------------------------------------------------------------------
<S> <C> <C>
Michael A. Leven 61 Chairman of the Board and Chief Executive Officer
Neal K. Aronson 34 Executive Vice President, Chief Financial Officer and Director
Steven Romaniello 32 Executive Vice President--Franchise Sales and Administration and Director
David E. Shaw, Sr. 56 Executive Vice President--Administration
</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.
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.
EXECUTIVE COMPENSATION
The following table provides certain summary information for the fiscal
years ended December 31, 1998, 1997 and 1996 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, 1998 (the "Named
Executive Officers").
11
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION 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.................................................. 1998 $400,735 $263,284 $38,044 --
Chairman of the Board, 1997 389,063 184,725 37,971 --
President and Chief Executive 1996 375,000 140,497 33,327 --
Officer
Neal K. Aronson................................................... 1998 $213,725 $145,000 $11,619 --
Executive Vice President and 1997 207,500 92,363 11,588 --
Chief Financial Officer 1996 200,000 70,298 11,517 --
David E. Shaw, Sr................................................. 1998 $158,145 $ -- $ 2,430 --
Executive Vice President-- 1997 155,625 25,000 2,384 1,000
Administration 1996 150,000 25,000 2,316 3,000
Steven Romaniello................................................. 1998 $ 82,500 $634,393 $ 2,430 57,807
Executive Vice President-- 1997 110,000 265,200 2,384 2,000
Franchise Sales and 1996 101,667 213,600 2,316 6,000
Administration
James Darby....................................................... 1998(2) $154,500 $ 34,051 $ 2,430 --
Former Executive Vice 1997 142,708 22,000 2,384 27,000
President--Franchise Operations
</TABLE>
- ------------------------
(1) Includes life insurance, health insurance, long-term disability insurance,
automobile allowance and/or long-term home care.
(2) Mr. Darby resigned from the Company, effective December 1, 1998.
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.
12
<PAGE>
Mr. Leven's employment agreement also contains confidentiality provisions
that prohibit him from disclosing Company trade secrets at any time in the
future and from disclosing any confidential information relating to the Company
for a period extending five years after the termination of his employment
agreement. In addition, the agreement contains non-competition provisions that
prohibit Mr. Leven from competing in the franchising business generally and in
the business of franchising, operating or managing of hotels and motels for a
period of five years following the termination of his employment for "cause" or
his resignation without "good reason." The enforceability of these
non-disclosure and non-competition provisions under Georgia law, which governs
Mr. Leven's agreement, is uncertain.
In addition to allowing Mr. Leven to resign at any time for "good reason,"
his employment agreement provides that, after the first five years of such
agreement and provided the redeemable preferred stock sold to Mr. Leven has been
redeemed, Mr. Leven may resign at any time upon six months notice. If his
resignation is without "good reason," the Company is required to pay Mr. Leven
only his base salary, unused vacation time, and performance bonus actually
earned through the effective date of resignation. The employment agreement
further provides that if Mr. Leven resigns without good reason during the first
five years, he will not be liable for any consequential damages or damages for
loss of economic opportunity or profits to the Company. If Mr. Leven resigns for
"good reason," or if his employment is terminated "without cause," he is
entitled to severance pay in accordance with the terms of his employment
agreement. For the purpose of Mr. Leven's employment agreement, "good reason"
includes, but is not limited to, the failure to elect and continue Mr. Leven's
membership on the Board of Directors of the Company or his involuntary
relocation outside of Atlanta, Georgia. In addition, pursuant to the Company's
By-Laws, Mr. Leven's employment agreement may not be terminated without the
approval of 75% of the Board of Directors (excluding Mr. Leven). Except as noted
above concerning Mr. Leven's right to resign for "good reason" if he is not
re-elected to the Board, Mr. Leven's employment agreement does not contain any
change of control provisions.
NEAL K. ARONSON. Mr. Aronson's employment agreement, pursuant to which he
serves as Chief Financial Officer of the Company, is substantially similar to
Mr. Leven's agreement, except that (i) his base salary is $200,000 per year,
(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.
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
13
<PAGE>
Committee served as an officer or employee of the Company or any of its
subsidiaries during fiscal 1998. There were no material transactions between the
Company and any of the members of the Compensation Committee during fiscal 1998.
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.
Mr. Leven serves as a director of The Chief Executive Leadership Institute,
a non-profit leadership school. Jeffrey A Sonnenfeld, a director of the Company,
serves as Chairman and President of The Chief Executive Leadership Institute.
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 Hawthorn merger,
the Option Plan was assumed by the Company. The Option Plan was amended to
increase the number of shares available for grant thereunder from 325,000 to
725,000 by the Board of Directors on April 24, 1998 and approved by the
Company's shareholders on June 26, 1998. 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 725,000 shares of the Company's
Class A Common Stock, which maximum number is subject to adjustment in certain
circumstances to prevent dilution or enlargement.
DIRECTORS PLAN. On September 27, 1996, the Board of Directors 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 Hawthorn merger, 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 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.
14
<PAGE>
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, 1998 to the Named Executive Officers:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------------------------
% OF POTENTIAL REALIZABLE VALUE
TOTAL AT
OPTIONS ASSUMED ANNUAL RATES OF
GRANTED STOCK
TO BASE PRICE PRICE APPRECIATION FOR
OPTIONS EMPLOYEES EXERCISE OR OPTION TERM(1)
GRANTED IN FISCAL ($ PER EXPIRATION ----------------------------
NAME (#) YEAR SHARE) DATE 0% 5% 10%
- ----------------------------------------------------- -------- --------- ----------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Michael A. Leven..................................... -- -- -- -- -- -- --
Neal K. Aronson...................................... -- -- -- -- -- -- --
David E. Shaw, Sr.................................... -- -- -- -- -- -- --
Steven Romaniello.................................... 20,166(2) 6.2 $ 0.1034 6/29/05 $159,243 $224,920 $312,297
6,720(2) 2.1 $ 0.11375 6/29/05 $ 52,996 $ 74,881 $103,999
18,824(3) 5.8 $ 0.1034 6/29/05 $148,646 $209,952 $291,515
12,097(4) 3.7 $ 0.11375 6/29/05 $ 95,400 $134,798 $187,213
James Darby.......................................... -- -- -- -- -- -- --
</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) Represents performance stock options which 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, subject to accelerated vesting
in full in the event of a change of control of the Company. The closing
price of the Company's common stock on the date these options were granted
was $8.00 per share.
(3) Options vest as follows: (i) 5% (941 shares) on June 29, 2000; (ii) 45%
(8,471 shares) on June 29, 2001; and (iii) 50% (9,412 shares) on June 29,
2002.
(4) Options vest as follows: (i) 5% (605 shares) on June 29, 2000; (ii) 45%
(5,444 shares) on June 29, 2001; and (iii) 50% (6,048 shares) on June 29,
2002.
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, 1998. No stock options were exercised by the
Named Executive Officers and there were no SARs outstanding during fiscal 1998.
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY
OPTIONS OPTIONS AT FISCAL
AT FISCAL YEAR END YEAR-END (A)
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------------------------------------------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Michael A. Leven........................................................ -- -- -- --
Neal K. Aronson......................................................... -- -- -- --
David E. Shaw, Sr....................................................... 1,750 2,250 $ 438 $ 1,313
Steven Romaniello....................................................... 3,500 83,307 $ 875 $567,586
James Darby............................................................. 6,500 6,500 $2,000 $ 2,000
</TABLE>
- ------------------------
(a) Dollar values were calculated by determining the difference between the
closing price of the Class A Common Stock on December 31, 1998 as reported
on the Nasdaq National Market ($9.88 per share) and the exercise price of
the options.
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<PAGE>
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 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 first
five years to manage the Development Fund.
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., an entity that is a member of Alpine Rockport LLC ("Rockport").
Rockport is a member of three entities which have entered into certain financing
arrangements with an affiliate of the Development Fund for the construction of
three Microtel projects. Rockport or its affiliates have also entered into
franchise and management agreements with the Company relating to the three
aforementioned Microtel projects. The Company considers the terms of the
franchise, management and financing arrangements with Rockport and its
affiliates to be commercially reasonable and reflective of standard agreements
that the Company generally executes with third parties.
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 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,
the management contract and the franchise agreements and the New Hotel Fee were
all substantially similar to the terms the Company had contemplated in
negotiations with Highend Hospitality Partners, LLC ("Highend"), a third party
buyer
16
<PAGE>
with whom the Company had previously been negotiating to acquire the 17 Acquired
Hotels. To the Company's knowledge, no officer, director or 5% or greater
shareholder of the Company has any ownership interest in 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
entities which own Microtel and Hawthorn Suites hotels. 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 certain limited liability companies to acquire and
operate Microtel and Best Inn hotels. To date, the limited liability companies
have entered into four franchise agreements and one management agreement with
the Company, and have opened one Microtel and one Best Inn.
Mr. Leven's sons, Jonathan Leven and Robert Leven, were employed by the
Company during 1998 and received total compensation of $135,712.74 and
$118,375.96, respectively. Mr. Aronson's brother, Stephen Aronson, was employed
by the Company during 1998 and received total compensation of $95,011.36.
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, 1998 (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.
17
<PAGE>
COMPARISON OF CUMULATIVE TOTAL RETURN AMONG
U.S. FRANCHISE SYSTEMS, INC., NASDAQ STOCK MARKET INDEX AND
S&P LODGING--HOTELS INDEX
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
U.S. FRANCHISE SYSTEMS NASDAQ STOCK MARKET INDEX S&P LODGING-HOTELS INDEX
<S> <C> <C> <C>
October 25, 1996 $100 $100 $100
December 31, 1996 $75 $106 $90
December 31, 1997 $74 $130 $126
December 31, 1998 $73 $183 $103
</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
REPORT OF COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION
During the year ended December 31, 1998, 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
18
<PAGE>
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 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.
INDEPENDENT PUBLIC ACCOUNTANTS
Deloitte & Touche LLP has served as independent auditors of the Company for
the fiscal year ended December 31, 1998 and have been selected by the Board of
Directors to serve as independent auditors of the Company for the year ending
December 31, 1999. 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, 1998, as filed with the Securities and Exchange Commission, is available to
shareholders who make written request
19
<PAGE>
therefor to the Company's Public Relations Department, 13 Corporate Square,
Suite 250, Atlanta, Georgia 30329. Copies of exhibits and basic documents filed
with that report or referenced therein will be furnished to shareholders of
record upon request.
SHAREHOLDER PROPOSALS
Any proposal of stockholders to be presented at next year's Annual Meeting
must be received at the principal executive offices of the Company not later
than December 21, 1999 directed to the attention of the Corporate Secretary, in
order to be eligible for inclusion in the Company's proxy statement and form of
proxy relating to that meeting. Proxies solicited by the Company for the 2000
Annual Meeting may confer discretionary authority to vote on any proposals
received after April 17, 2000 without a description of them in the proxy
materials for that meeting. Any stockholder proposals must comply in all
respects with the rules and regulations of the Securities and Exchange
Commission and the Company's bylaws. A copy of the Company's bylaws may be
obtained by writing to the Corporate Secretary.
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
April 20, 1999
20
<PAGE>
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 1999
ANNUAL MEETING OF SHAREHOLDERS.
The annual meeting of shareholders of U.S. Franchise Systems, Inc. (the
"Company") will be held on Thursday, May 27, 1999 at 4:00 p.m., at the Company's
offices, 13 Corporate Square, Suite 250, Atlanta, Georgia 30329, for the
following purposes:
<TABLE>
<S> <C> <C> <C>
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
(EXCEPT AS MARKED TO THE CONTRARY TO VOTE FOR ALL NOMINEES LISTED
BELOW) BELOW
</TABLE>
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 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.
__________________________________
__________________________________
Print Name(s): ___________________
NOTE: When signing as an attorney,
trustee, executor, administrator
or guardian, please give your
title as such. If a corporation or
partnership, give full name by
authorized officer. In the case of
joint tenants, each joint owner
must sign.
Dated: ___________________________
