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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
(Amendment No.)
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Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/X/ Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted
by Rule 14a-6(e)(2))
/ / Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Under Rule 14a-12
U.S. FRANCHISE SYSTEMS, INC.
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(Name of Registrant as Specified In Its Charter)
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(Name of Person(s) Filing Proxy Statement, if Other Than the
Registrant)
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Payment of filing fee (Check the appropriate box):
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/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):
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4) Proposed maximum aggregate value of transaction:
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5) Total fee paid:
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/ / 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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[LOGO]
U.S. FRANCHISE SYSTEMS, INC.
ANNUAL MEETING OF STOCKHOLDERS
, 2000
------------------
NOTICE AND PROXY STATEMENT
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[LOGO]
U.S. FRANCHISE SYSTEMS, INC.
, 2000
Dear Stockholder:
On behalf of the Board of Directors, I cordially invite you to attend the
2000 Annual Meeting of Stockholders of U.S. Franchise Systems, Inc. (the
"Company") to be held at , Atlanta, Georgia, on , 2000
at a.m., local time. The formal notice of the Annual Meeting appears on the
following page.
The Company has agreed to enter into a recapitalization transaction in which
the Company will (1) offer to purchase from its stockholders up to an aggregate
of 8,666,666, but not less than 3,000,000, shares of its outstanding Class A
Common Stock and Class B Common Stock for $7.50 per share (the "Offer") and
(2) in exchange for a $75,000,000 investment in the Company, issue an aggregate
of 75,000 shares of two new series of Preferred Stock (Series A Preferred Stock
and Series B Preferred Stock) to entities controlled by Pritzker family business
interests (the "Investment"). Pritzker family business interests include, among
other ventures, Hyatt Corporation and Hyatt International Corporation and have
significant experience in the hospitality industry. This recapitalization will
allow the Company to provide stockholders that are considering a sale of their
shares of Common Stock the opportunity to sell all or a portion of those shares
(depending on how many shares of Common Stock are tendered in the Offer) at a
price greater than the prevailing market price as of the date of this letter
without the usual transaction costs associated with open market sales. THE
COMPANY CANNOT COMPLETE THE OFFER OR THE INVESTMENT UNLESS ITS STOCKHOLDERS
APPROVE (1) THE COMPANY'S ISSUANCE AND SALE OF THE PREFERRED STOCK AND THE
COMPANY'S ISSUANCE OF THE CLASS A COMMON STOCK UPON THE POTENTIAL
CONVERSION/EXCHANGE OF THE SERIES B PREFERRED STOCK AND (2) SEVERAL AMENDMENTS
TO THE COMPANY'S CERTIFICATE OF INCORPORATION.
At the Annual Meeting, you will also be asked to consider and act upon:
(1) the election of nine directors; (2) the amendment of the Company's Amended
and Restated 1996 Stock Option Plan to increase the authorized shares of
Class A Common Stock reserved for issuance under the Plan from 725,000 to
1,975,000 shares; and (3) the ratification of Deloitte & Touche LLP as the
Company's independent auditors.
The attached Notice of Annual Meeting and Proxy Statement describe each of
these matters to be acted upon at the Annual Meeting.
YOUR VOTE IS VERY IMPORTANT. Whether or not you plan to attend the Annual
Meeting, it is important that your shares be represented. Regardless of the
number of shares you own, please complete and return the enclosed proxy card. If
you sign and return your proxy card without indicating how you want to vote,
your shares will be voted in accordance with the recommendations of the Board of
Directors contained in the Proxy Statement.
We look forward to seeing you on , 2000 and urge you to return
your proxy card as soon as possible.
Sincerely,
MICHAEL A. LEVEN
CHAIRMAN OF THE BOARD
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[LOGO]
U.S. FRANCHISE SYSTEMS, INC.
13 CORPORATE SQUARE, SUITE 250
ATLANTA, GEORGIA 30329
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NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON , 2000
------------------------
To the Stockholders of
U.S. Franchise Systems, Inc.:
The Annual Meeting of Stockholders (the "Annual Meeting") of U.S. Franchise
Systems, Inc. (the "Company") will be held at a.m., local time, on
, 2000, at , Atlanta, Georgia to consider and vote on:
(1) Approval of (a) the issuance and sale by the Company of its Series A 8.5%
Cumulative Redeemable Preferred Stock, par value $.01 per share (the "A
Preferred Stock"), and its Series B 6.0% Cumulative Redeemable
Convertible/Exchangeable Preferred Stock, par value $.01 per share (the "B
Preferred Stock" and together with the A Preferred Stock, the "Preferred
Stock"), to SDI, Inc. ("SDI") and/or its affiliated designees, and (b) the
issuance by the Company of its Class A Common Stock, par value $.01 per
share, upon the potential conversion/exchange of the B Preferred Stock, all
in accordance with the provisions of the Recapitalization Agreement, dated
as of June 2, 2000, among the Company, SDI, Meridian Associates, L.P., and
HSA Properties, Inc. (the "Recapitalization Agreement");
(2) Approval and adoption of amendments to the Company's Certificate of
Incorporation to:
(a) establish requirements for the Board of Directors to include at least
three persons who meet specified standards of independence; and
(b) establish requirements for the Company entering into transactions that
(1) may cause the Class A Common Stock to be held of record or
beneficially by less than 300 persons or to be neither listed on a
national securities exchange nor authorized to be quoted on an
interdealer quotation system of any registered national securities
association, (2) involve the Company purchasing shares of its Common
Stock or (3) are with certain persons or entities directly or indirectly
affiliated with the Company;
(3) Approval and adoption of amendments to the Company's Certificate of
Incorporation to:
(a) eliminate the supermajority requirements for stockholder voting in
Section 11 of the Certificate of Incorporation and add requirements for
stockholder approval for changes to sections of the Certificate of
Incorporation that are subject to Proposal 2; and
(b) eliminate the prohibitions on stockholder action by written consent in
Section 9 of the Certificate of Incorporation;
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(4) Approval and adoption of an amendment to the Company's Amended and Restated
1996 Stock Option Plan to increase the authorized shares of Class A Common
Stock reserved for issuance under the Plan from 725,000 to 1,975,000;
(5) Election of nine directors to the Board of Directors;
(6) Ratification of the appointment by the Board of Directors of Deloitte &
Touche LLP as the independent auditors of the Company's financial statements
for the year ending December 31, 2000; and
(7) Any other business as may properly come before the Annual Meeting or any
adjournments or postponements thereof.
The Board of Directors has carefully reviewed and considered the terms and
conditions of the transactions under the Recapitalization Agreement, including
the Company's issuance and sale of the Preferred Stock and issuance of the
Class A Common Stock upon the potential conversion/exchange of the B Preferred
Stock (the "Investment") and the offer to purchase from its stockholders up to
an aggregate of 8,666,666, but not less than 3,000,000, shares of its
outstanding Class A Common Stock and Class B Common Stock for $7.50 per share
(the "Offer"), and has received the favorable opinion of Banc of America
Securities LLC as to the fairness, from a financial point of view, of the
Investment and the Offer, taken as a whole, as of the date of such opinion, to
the stockholders of the Company (other than SDI, Meridian Associates, L.P., HSA
Properties, Inc., Michael Leven (the Chairman of the Board of Directors and
Chief Executive Officer of the Company), Neal Aronson (the Chief Financial
Officer and Executive Vice President of the Company), Steven Romaniello (the
President and Chief Operating Officer of the Company) and certain other
stockholders of the Company). A copy of the opinion of Banc of America
Securities LLC is attached to the accompanying Proxy Statement as Appendix A.
Details of the transactions under the Recapitalization Agreement are described
in the accompanying Proxy Statement and attached appendices. Stockholders are
urged to read the accompanying Proxy Statement and attached appendices
carefully.
The Board of Directors has fixed the close of business on , 2000 as
the record date for determining stockholders entitled to notice of, and to vote
at, the Annual Meeting and any adjournments or postponements thereof.
By order of the Board of Directors,
STEPHEN D. ARONSON
VICE PRESIDENT, GENERAL COUNSEL
AND SECRETARY
Atlanta, Georgia
, 2000
ALL STOCKHOLDERS ARE URGED TO ATTEND THE MEETING IN PERSON OR BY PROXY. WHETHER
OR NOT YOU EXPECT TO BE PRESENT AT THE MEETING, PLEASE COMPLETE, SIGN AND DATE
THE ENCLOSED PROXY CARD AND RETURN IT PROMPTLY IN THE ENCLOSED POSTAGE PAID
ENVELOPE FURNISHED FOR THAT PURPOSE.
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TABLE OF CONTENTS
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PROXY STATEMENT SUMMARY..................................... 3
PROPOSAL 1--PROPOSAL TO APPROVE THE ISSUANCE AND SALE OF THE
PREFERRED STOCK AND THE CLASS A COMMON STOCK ISSUABLE UPON
THE POTENTIAL CONVERSION/EXCHANGE THEREOF PURSUANT TO THE
RECAPITALIZATION AGREEMENT................................ 9
PROPOSAL 2--PROPOSAL TO APPROVE THE AMENDMENTS TO THE
COMPANY'S CERTIFICATE OF INCORPORATION TO ESTABLISH
REQUIREMENTS FOR THE FUTURE BOARD COMPOSITION AND THE
COMPANY ENTERING INTO TRANSACTIONS THAT (1) MAY CAUSE THE
CLASS A COMMON STOCK TO BE HELD BY RECORD OR BENEFICIALLY
BY LESS THAN 300 PERSONS OR TO BE NEITHER LISTED ON A
NATIONAL SECURITIES EXCHANGE NOR AUTHORIZED TO BE QUOTED
ON AN INTERDEALER QUOTATION SYSTEM OF ANY REGISTERED
NATIONAL SECURITIES ASSOCIATION, (2) INVOLVE THE COMPANY
PURCHASING SHARES OF ITS COMMON STOCK OR (3) ARE WITH
CERTAIN PERSONS OR ENTITIES DIRECTLY OR INDIRECTLY
AFFILIATED WITH THE COMPANY............................... 43
PROPOSAL 3--PROPOSAL TO APPROVE THE AMENDMENTS TO THE
COMPANY'S CERTIFICATE OF INCORPORATION TO (1) ELIMINATE
SUPERMAJORITY REQUIREMENTS FOR STOCKHOLDER VOTING AND ADD
REQUIREMENTS FOR STOCKHOLDER APPROVAL FOR CHANGES TO
SECTIONS OF THE CERTIFICATE OF INCORPORATION WHICH ARE THE
SUBJECT OF PROPOSAL 2 AND (2) ELIMINATE PROHIBITIONS ON
STOCKHOLDER ACTION BY WRITTEN CONSENT..................... 45
PROPOSAL 4--PROPOSAL TO APPROVE THE AMENDMENT TO THE
COMPANY'S AMENDED AND RESTATED 1996 STOCK OPTION PLAN..... 46
PROPOSAL 5--ELECTION OF DIRECTORS........................... 52
EXECUTIVE COMPENSATION...................................... 58
SECURITY OWNERSHIP OF MANAGEMENT AND PRINCIPAL
STOCKHOLDERS.............................................. 66
PROPOSAL 6--RATIFICATION OF APPOINTMENT OF AUDITORS......... 75
MISCELLANEOUS AND OTHER MATTERS............................. 76
APPENDIX A--OPINION OF BANC OF AMERICA SECURITIES LLC
APPENDIX B--RECAPITALIZATION AGREEMENT
APPENDIX C--FORM OF CERTIFICATE OF DESIGNATION OF THE SERIES
A 8.5% CUMULATIVE REDEEMABLE PREFERRED STOCK
APPENDIX D--FORM OF CERTIFICATE OF DESIGNATION OF THE SERIES
B 6.0% CUMULATIVE REDEEMABLE CONVERTIBLE/EXCHANGEABLE
PREFERRED STOCK
APPENDIX E--ARONSON AGREEMENT
APPENDIX F--LEVEN AGREEMENT
APPENDIX G--FORM OF STOCKHOLDERS AGREEMENT
APPENDIX H--REGISTRATION RIGHTS AGREEMENT
APPENDIX I--FORM OF CERTIFICATE OF AMENDMENT TO THE
CERTIFICATE OF INCORPORATION OF U.S. FRANCHISE
SYSTEMS, INC.
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U.S. FRANCHISE SYSTEMS, INC.
13 CORPORATE SQUARE, SUITE 250
ATLANTA, GEORGIA 30329
------------------------
ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON , 2000
------------------------
PROXY STATEMENT
The accompanying proxy is solicited by the Board of Directors of U.S.
Franchise Systems, Inc., a Delaware corporation ("USFS" or the "Company"), for
use at the Company's annual meeting of stockholders (the "Annual Meeting") to be
held at a.m., Atlanta time, , , 2000, at ,
Atlanta, Georgia, and any adjournments or postponements thereof. This Proxy
Statement and accompanying form of proxy are first being mailed to stockholders
on or about , 2000.
At the Annual Meeting, you will be asked to consider and vote upon the
following matters:
(1) Approval of (a) the issuance and sale and issuance by the Company of its
Series A 8.5% Cumulative Redeemable Preferred Stock, par value $.01 per
share (the "A Preferred Stock"), and its Series B 6.0% Cumulative Redeemable
Convertible/Exchangeable Preferred Stock, par value $.01 per share (the "B
Preferred Stock" and together with the A Preferred Stock, the "Preferred
Stock"), to SDI, Inc. ("SDI") and/or its affiliated designees (collectively,
the "Investors"), and (b) the issuance by the Company of its Class A Common
Stock, par value $.01 per share (the "Class A Common Stock"), upon the
potential conversion/exchange of the B Preferred Stock, all in accordance
with the provisions of the Recapitalization Agreement, dated as of June 2,
2000 (the "Recapitalization Agreement"), among the Company, SDI, Meridian
Associates, L.P. ("Meridian") and HSA Properties, Inc. ("HSA");
(2) Approval and adoption of amendments to the Company's Certificate of
Incorporation to:
(a) establish requirements for the Board of Directors to include at least
three persons who meet specified standards of independence; and
(b) establish requirements for the Company entering into transactions that
(1) may cause the Class A Common Stock to be held of record or
beneficially by less than 300 persons or to be neither listed on a
national securities exchange nor authorized to be quoted on an
interdealer quotation system of any registered national securities
association, (2) involve the Company purchasing shares of its Common
Stock or (3) are with certain persons or entities directly or indirectly
affiliated with the Company;
(3) Approval and adoption of amendments to the Company's Certificate of
Incorporation to:
(a) eliminate the supermajority requirements for stockholder voting in
Section 11 of the Certificate of Incorporation and add requirements for
stockholder approval for changes to sections of the Certificate of
Incorporation that are the subject of Proposal 2; and
(b) eliminate the prohibitions on stockholder action by written consent in
Section 9 of the Certificate of Incorporation;
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(4) Approval and adoption of an amendment to the Company's Amended and Restated
1996 Stock Option Plan (the "Option Plan") to increase the authorized shares
of Class A Common Stock reserved for issuance under the Option Plan from
725,000 to 1,975,000;
(5) Election of nine directors to the Board of Directors;
(6) Ratification of the appointment by the Board of Directors of Deloitte &
Touche LLP as the independent auditors of the Company's financial statements
for the year ending December 31, 2000; and
(7) Any other business as may properly come before the Annual Meeting or any
adjournments or postponements thereof.
This Proxy Statement contains forward-looking statements under the Private
Securities Litigation Reform Act of 1995 that involve risks and uncertainties.
Some, but not necessarily all, of these forward-looking statements can be
identified by the use of forward-looking terminology such as "believes,"
"expects," "may," "will," "should," or "anticipates" or the negative thereof or
other variations thereof or comparable terminology, or by discussions of
strategy that involve risks and uncertainties. These forward-looking statements
involve known and unknown risks, uncertainties and other factors which may cause
the actual results, performance or achievements of USFS and its subsidiaries to
be materially different from any future results, performance or achievements
expressed or implied by these forward-looking statements. These factors include,
but are not limited to, the following: general economic and business conditions;
aggressive competition in the lodging and franchising industry; success of
acquisitions and operating initiatives; management of growth; risks relating to
the Company's loans to, and other investments in, franchisees; dependence on
senior management; brand awareness; general risks of the lodging and franchising
industries; development risk in construction; risk relating to the availability
of financing for franchisees; the existence or absence of adverse publicity;
changes in business strategy or development plans; availability, terms and
deployment of capital; business abilities and judgment of personnel;
availability of qualified personnel; labor and employee benefit costs; changes
in, or failure to comply with, government regulations; construction schedules;
and the costs and other effects of legal and administrative proceedings. In
addition, if the transactions under the Recapitalization Agreement are
consummated, there can be no assurance that the Company will experience the
benefits that it expects from its relationship with, and the participation of
directors designated by, Pritzker family business interests. There can also be
no assurance that the transactions will take place. Except as otherwise required
by federal securities laws, the Company will not undertake and specifically
declines any obligation to publicly release the results of any revisions which
may be made to any forward-looking statement to reflect events or circumstances
after the date of such statement or to reflect the occurrence of anticipated or
unanticipated events.
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SUMMARY
The following summary highlights some significant matters discussed
elsewhere in this Proxy Statement. Because it is a summary, it is not complete
and should be read along with the more detailed information appearing or
incorporated by reference in the Proxy Statement and the attached appendices.
Stockholders are urged to carefully read this Proxy Statement, including the
documents incorporated by reference, and the attached appendices in their
entirety.
THE COMPANY
The Company was formed in August 1995 to acquire, market and service
well-positioned brands with potential for rapid unit growth through franchising.
The Company's brands, which are in the lodging industry, are Microtel Inn &
Suites ("Microtel"), Hawthorn Suites ("Hawthorn") and Best Inns & Suites ("Best
Inns"). The Company acquired the rights to these brands because of their
potential for significant growth, which reflects, among other things, the
potential profitability for franchisees at the property level and their
positions in attractive segments of the lodging industry. Microtel primarily
competes in the budget and economy segment, Hawthorn primarily in the upscale
and mid-market segments, and Best Inns primarily in the mid-market and economy
segments of the lodging industry. USFS's principal executive offices are located
at 13 Corporate Square, Suite 250, Atlanta, Georgia 30329, (404) 321-4045.
RECENT DEVELOPMENTS
In the second quarter of 2000, the Company determined to cease providing
management services to hotel properties. On June 2, 2000, the Company entered
into an agreement terminating the management agreement and the Company's related
obligations (but not the franchise agreements) relating to the 17 Best Inn
properties owned by a subsidiary of Alpine Hospitality Ventures LLC. In
connection with this termination agreement, the Company agreed to make a $2.5
million payment, one half of which was paid in cash and the other half of which
was paid through the issuance of a promissory note. See "Proposal 5--Certain
Other Relationships and Related Transactions--Transactions Entered into in
Connection with the Best Inns Acquisition."
The Company recently has incurred and expects to further incur significant
costs and expenses in connection with (1) the Company's consideration of
strategic alternatives, (2) the completion of the proposed recapitalization
transactions, (3) defense of a pending class action lawsuit, (4) the termination
of the Company's management contracts and related obligations in respect of the
17 Best Inns properties owned by a subsidiary of Alpine Hospitality Ventures
LLC, and (5) the Company's determination to exit the management business.
Management of the Company believes that if the Company is unsuccessful in
completing the recapitalization transactions under the Recapitalization
Agreement in a timely manner, the Company may be required to seek other sources
of capital to fund its operations. Although management believes that the Company
should be able to attract other sources of capital, there can be no assurance
that the Company would be successful in finding sources of additional funding on
terms acceptable to the Company, or at all, if the recapitalization transactions
are not completed.
As the Company reported in its Current Report on Form 8-K filed with the
Securities and Exchange Commission (the "Commission") on June 1, 2000, a
purported class action lawsuit, FORREST P. GUNTHER V. U.S. FRANCHISE
SYSTEMS, INC., MICHAEL A. LEVEN, NEAL K. ARONSON AND RICHARD D. GOLDSTEIN, Case
No. 00-CV-1244 (the "Class Action Lawsuit"), has been brought in the United
States District Court for the Northern District of Georgia, Atlanta Division.
The named plaintiff in this lawsuit claims to represent all purchasers of the
Class A Common Stock during the period from May 6, 1999 through October 29, 1999
and seeks unspecified damages on their behalf. The named plaintiff alleges,
among other things, that the Company and the individual defendants violated
federal securities laws by concealing adverse material information about the
business, business practices, performance, operations and future prospects of
the
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Company. The Company believes that the allegations are without merit and intends
to defend this action vigorously.
RECAPITALIZATION
USFS has agreed to issue and sell to the Investors (1) 65,000 shares of its
A Preferred Stock and (2) 10,000 shares of its B Preferred Stock for an
aggregate purchase price of $75,000,000 (the "Investment"). The Preferred Stock
will be issued under the terms of the Recapitalization Agreement. The Investors,
Meridian and HSA, all of which are parties to the Recapitalization Agreement,
are controlled by Pritzker family business interests and are sometimes referred
to in this Proxy Statement collectively as the "Investor Group." Pritzker family
business interests include, among other ventures, Hyatt Corporation and Hyatt
International Corporation and have significant experience in the hospitality
industry. However, there can be no assurance that the personnel or assets of
these or other Pritzker family business interests will be available to the
Company.
Under the terms of the Recapitalization Agreement, USFS will use up to
$65,000,000 of the gross proceeds from the issuance and sale of the Preferred
Stock to complete an offer to purchase up to an aggregate of 8,666,666, but not
less than 3,000,000, shares of its Class A Common Stock and Class B Common
Stock, $.01 par value per share (the "Class B Common Stock" and collectively
with the Class A Common Stock, the "Common Stock"), at a purchase price of $7.50
per share (the "Offer"). Of the remaining $10,000,000 of gross proceeds, the
Company estimates that approximately $6,248,236 will be used to pay various
expenses relating to the Offer, the Investment and related matters.
The completion of the Investment is subject to a number of conditions,
including without limitation, (1) approval by the Company's stockholders of the
Company's issuance and sale of the Preferred Stock and the Company's issuance of
the Class A Common Stock upon the potential conversion/exchange of the
B Preferred Stock and the amendments to the Certificate of Incorporation
described in Proposals 2 and 3 and (2) the consummation of the Offer. If the
stockholders do not approve these matters, the Company will be unable to
consumate the Offer or the Investment. In that event, the Company will attempt
to seek other alternatives to maximize stockholder value. However, such
alternatives have not been identified and may not be available. The Company
would also be obligated to reimburse the Investor Group for its reasonable legal
and other fees, not to exceed $1,000,000. If the Company also were to enter into
an agreement for a Superior Proposal (as defined below), it would also be
obligated to pay the Investors $3,000,000.
Approval by the holders of the Class B Common Stock of the Company's
issuance and sale of the B Preferred Stock is required by the Company's
Certificate of Incorporation, and approval by the holders of the Common Stock is
required for the amendments to the Certificate of Incorporation. Additionally,
because the Class A Common Stock is listed on the Nasdaq National Market,
approval by the holders of the Common Stock of the Company's issuance and sale
of the Preferred Stock and the issuance of the Class A Common Stock upon the
potential conversion/exchange of the B Preferred Stock is required under the
rules of the Nasdaq Stock Market, Inc. Nasdaq Rule 4460(i)(1)(B) (the "Nasdaq
Control Rule") requires stockholder approval of the issuance of securities by
the Company that will result in a change of control of the Company. For the
reasons described below, the transactions contemplated by the Recapitalization
Agreement fall within the Nasdaq Control Rule.
The Company intends to maintain the listing of the Class A Common Stock on
the Nasdaq Stock Market (which includes both the Nasdaq National Market and The
Nasdaq SmallCap Market), and in the Recapitalization Agreement the Investor
Group has agreed to use its reasonable efforts to cause the Class A Common Stock
to be listed on The Nasdaq Stock Market. There can be no assurance, however,
that the Company will continue to meet all of the listing requirements of The
Nasdaq National Market and, accordingly, it is possible that the listing of the
Class A Common Stock on the Nasdaq National Market could be terminated. In the
event of such termination, the Company would seek to list the Class A
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Common Stock on The Nasdaq SmallCap Market. Although the Company believes, based
on the current market price of the Class A Common Stock, that it would meet The
Nasdaq SmallCap listing requirements, there can be no assurance that it will, in
which case the Class A Common Stock would not be listed for trading on the
Nasdaq Stock Market.
Immediately following completion of the transactions contemplated by the
Recapitalization Agreement, and assuming 8,666,666 shares of Common Stock are
purchased in the Offer, the Investor Group would own approximately 42.9% of the
voting power of the Company's capital stock. The Recapitalization Agreement
contemplates that Michael Leven, the Company's Chairman and Chief Executive
Officer, and his family, and Steven Romaniello, the Company's President and
Chief Operating Officer, will enter into a Stockholders Agreement with the
Investor Group. Under the Stockholders Agreement, the Investor Group will be
entitled to designate a majority of the Company's Board of Directors. This
ability to control the Board of Directors and the Investor Group's voting power
will give the Investor Group the ability to control the business, corporate
actions and management of the Company. This could (1) result in the Investor
Group taking actions with respect to the Company with which other stockholders
disagree, and/or (2) delay, defer or prevent tender offers or takeover attempts
that other stockholders of the Company consider to be in their best interest and
adversely affect the price that investors might be willing to pay in the future
for shares of Class A Common Stock.
CHARTER AMENDMENTS
Pursuant to the terms of the Recapitalization Agreement, the Company is
seeking stockholder approval for several amendments to the Company's Certificate
of Incorporation. These amendments address (1) the requirements for the future
composition of the Board of Directors, (2) procedural requirements for the
Company to enter into certain transactions with related parties, (3) the
elimination of some supermajority voting requirements and (4) the elimination of
prohibitions on stockholder action by written consent.
The Company proposes to add a new Section 12.1 to the Certificate of
Incorporation which would require that the Board of Directors include at least
three Independent Directors (as defined below), three of whom will initially be
selected in accordance with the provisions of the Recapitalization Agreement and
whose nominations in subsequent elections must be approved by resolution of the
Board of Directors acting with the affirmative vote of a majority of the
Independent Directors then in office.
The Company is also seeking to add new Sections 12.2, 12.3 and 13 to the
Certificate of Incorporation which would establish procedural requirements for
the Company to enter into certain transactions with related parties. The
proposed Section 12.2 would provide that, for a period of five years, the
Company cannot enter into certain "going private" transactions unless the
stockholders have approved the terms thereof and the Company receives an opinion
as to the fairness of the transaction from a nationally recognized investment
bank. The proposed Section 12.3 would provide that, for a period of five years,
the Company cannot enter into any transaction with a Restricted Party (as
defined below) unless the terms of such transaction have been approved by,
depending on the size of the transaction, the Board of Directors acting with the
affirmative vote of a majority of the Independent Directors and, in the case of
a large transaction, are supported by a fairness opinion from an investment
banking, valuation or accounting firm. The proposed Section 13 would provide
that, for a period of four years, the Company may not, except upon a resolution
of the Board acting with the affirmative vote of a majority of the Independent
Directors, purchase shares of Common Stock (other than as provided in proposed
Section 12.2) at a per share price that is less than $7.50 if such purchase
occurs within the first two years after the closing of the Offer and the
Investment, or thereafter at a price lower than the highest bid price per share
for the preceding 52-week period.
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BOARD OF DIRECTORS
The Company is nominating the following nine persons for election to the
Board of Directors: Michael A. Leven, Steven Romaniello, Neal. K. Aronson, Dean
S. Adler, Irwin Chafetz, Douglas G. Geoga, Richard D. Goldstein, David T.
Hamamoto and Jeffrey A. Sonnenfeld. However, pursuant to the terms of the
Recapitalization Agreement, upon consummation of the Offer and the Investment,
the Board of Directors will (1) increase its size to eleven members, (2) accept
the resignations of each director other than Messrs. Leven, Romaniello, Geoga,
Chafetz and Sonnenfeld, and (3) appoint one person to serve with
Messrs. Chafetz and Sonnenfeld as Independent Directors and five other directors
to be designated by the Investor Group (some of whom may also qualify as
Independent Directors). These appointees are expected to be Ronald M. Brill,
Laurence S. Geller, Robert C. Glustrom, Philip M. Kayman, Scott D. Miller and
David A. Shapiro.
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ANNUAL MEETING
RECORD DATE AND OUTSTANDING SHARES
The Board of Directors has fixed the close of business on , 2000
as the record date (the "Record Date") for the determination of stockholders
entitled to notice of, and to vote at, the Annual Meeting or any adjournments or
postponements thereof. As of the Record Date, USFS had outstanding 17,245,834
shares of Class A Common Stock and 2,707,919 shares of Class B 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 all matters to come before the
Annual Meeting. The holders of Class A Common Stock and Class B Common Stock
vote together as a single class on all matters to come before the Annual
Meeting, and the holders of Class B Common Stock vote as a separate class on
certain matters described under the caption "Required Vote" below.
VOTING OF PROXIES
Stephen D. Aronson, the person named as proxy on the proxy card accompanying
this Proxy Statement, was selected by the Board of Directors to serve in that
capacity. Mr. Aronson is an executive officer of USFS. The shares represented by
executed and returned proxies received before the Annual Meeting, and not
revoked before they are exercised, will be voted in accordance with the
directions indicated thereon. If a stockholder does not indicate how its proxy
is to be voted, its shares will be voted in accordance with the recommendations
of the Board of Directors contained in this Proxy Statement. Stockholders may
use the accompanying proxy card if they (1) are unable or do not wish to attend
the Annual Meeting in person or (2) wish to have their shares voted by proxy
even if they do attend the Annual Meeting. Each stockholder can revoke a proxy
at any time before the shares it represents are voted by (1) delivering to the
Secretary of USFS a written notice revoking the proxy or a later-dated, executed
proxy card relating to the same shares or (2) attending the Annual Meeting and
voting in person (however, if a stockholder attends the Annual Meeting and does
not vote, its proxy will still be voted).
REQUIRED VOTE
The affirmative vote of (1) a majority of the voting power of the
outstanding shares of Common Stock is required to approve the Company's issuance
and sale of the Preferred Stock and the Company's issuance of Class A Common
Stock upon the potential conversion/exchange of the B Preferred Stock and
(2) 75% of the voting power of the outstanding shares of Class B Common Stock,
voting as a separate class, is required to approve the Company's issuance and
sale of the B Preferred Stock described in Proposal 1.
The affirmative vote of a majority of the voting power of the outstanding
shares of Common Stock is required to approve and adopt the amendments to the
Company's Certificate of Incorporation described in Proposal 2. The affirmative
vote of a majority of the outstanding shares of Common Stock represented (in
person or by proxy) at the Annual Meeting is required to: (1) approve and adopt
the amendment to the Option Plan described in Proposal 4; and (2) ratify the
appointment by the Board of Directors of Deloitte & Touche LLP as the
independent auditors of USFS's financial statements for the year ending
December 31, 2000 described in Proposal 6.
The affirmative vote of 75% of the voting power of the outstanding shares of
(1) Common Stock and (2) Class B Common Stock, voting as a separate class, is
required to approve and adopt the amendments to the Company's Certificate of
Incorporation described in Proposal 3.
The affirmative vote of a plurality of the outstanding shares of Common
Stock represented (in person or by proxy) at the Annual Meeting is required to
elect the nine nominees for directorships described in Proposal 5. Stockholders
will not be allowed to cumulate their votes in the election of directors.
Pursuant to the terms of the Aronson Agreement (as defined and discussed in
"Proposal 1--Agreements Executed and To Be Executed in Connection with the
Recapitalization Agreement--Aronson Agreement") and the Leven Agreement (as
defined and discussed in "Proposal 1--Agreements Executed and To Be Executed in
Connection with the Recapitalization Agreement--Leven Agreement"), Neal
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Aronson, the Company's Executive Vice President and Chief Financial Officer, and
Mr. and Mrs. Michael Leven are obligated to vote all the shares of Common Stock
over which they have the power to vote in favor of (1) the Company's issuance
and sale of the Preferred Stock and the Company's issuance of the Class A Common
Stock upon the potential conversion/exchange of the B Preferred Stock described
in Proposal 1 and (2) the amendments to the Certificate of Incorporation
described in Proposals 2 and 3.
As of the Record Date, Mr. Aronson and Mr. and Mrs. Michael Leven had voting
control over an aggregate of approximately 1,655,981 shares of Class A Common
Stock and all 2,707,919 shares of Class B Common Stock outstanding, which
represented 64.8% of the total voting power of the Common Stock outstanding as
of the Record Date. As of the Record Date, Meridian and HSA, both of which are
parties to the Recapitalization Agreement, owned 2,122,222 shares of Class A
Common Stock, which represented 4.8% of the voting power of the Common Stock
outstanding as of the Record Date. The Company expects that Meridian and HSA
will vote all their 2,122,222 shares of Class A Common Stock in favor of
(1) the Company's issuance and sale of the Preferred Stock and the Company's
issuance of Class A Common Stock upon the potential conversion/exchange of the B
Preferred Stock described in Proposal 1 and (2) the amendments to the
Certificate of Incorporation described in Proposals 2 and 3.
Excluding Mr. Leven and Neal Aronson, as of the Record Date, the executive
officers and directors of the Company beneficially owned an aggregate of
approximately 1,295,294 shares of Class A Common Stock, which represented 2.9%
of the voting power of the Common Stock outstanding as of the Record Date. The
Company expects these executive officers and directors to vote in favor of each
of the Proposals being considered at the Annual Meeting.
Giving effect to the agreements of various persons to vote their shares and
the Company's expectation that directors and executive officers of the Company
and Meridian and HSA will vote in favor of the proposals described in this Proxy
Statement, the Company believes that stockholder approval is assured for
Proposals 1, 2, 4 and 6 and for the election of directors described in
Proposal 5.
QUORUM; ABSTENTIONS AND BROKER NON-VOTES
The required quorum for transaction of business at the Annual Meeting will
be one-third of the shares of Common Stock issued and outstanding as of the
Record Date. With respect to the separate vote as a class by the Class B Common
Stock on Proposals 1 and 3, a quorum consisting of one-third of the shares of
Class B Common Stock issued and outstanding as of the Record Date will also be
required to vote on such matters. Votes cast by proxy or in person at the Annual
Meeting will be tabulated by the election inspectors appointed for the meeting
and will determine whether or not a quorum is present. The election inspectors
will treat abstentions and broker non-votes as shares that are present and
entitled to vote for purposes of determining the presence of a quorum. Broker
non-votes are the shares held by brokers as to which customer instructions have
not been received and the broker indicates it does not have discretionary
authority to vote on a particular matter. Abstentions and broker non-votes will
have no effect on the election of directors. Abstentions will be considered
present and entitled to vote with respect to the proposals to approve the
Company's issuance and sale of the Preferred Stock and the Company's issuance of
Class A Common Stock upon the potential conversion/exchange of the B Preferred
Stock, the amendments to the Certificate of Incorporation, the amendment to the
Option Plan and the appointment of the independent auditors, and they will have
the same effect as votes "against" such proposals. Broker non-votes will not be
considered as present and entitled to vote with respect to such proposals.
Therefore, broker non-votes will have (1) the same effect as votes "against" the
proposals to approve the Company's issuance and sale of the Preferred Stock and
the Company's issuance of Class A Common Stock upon the conversion/exchange of
the B Preferred Stock and the amendments to the Certificate of Incorporation
described in Proposals 2 and 3 and (2) no effect on the voting on the proposals
to approve the amendment to the Option Plan and the appointment of the auditors.
ANNUAL REPORT TO STOCKHOLDERS
USFS's Annual Report to Stockholders for the year ended December 31, 1999,
containing financial and other information pertaining to USFS, is being
furnished to stockholders with this Proxy Statement.
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PROPOSAL 1
TO APPROVE THE COMPANY'S ISSUANCE AND SALE OF THE PREFERRED STOCK AND THE
COMPANY'S ISSUANCE OF CLASS A COMMON STOCK UPON THE POTENTIAL CONVERSION/
EXCHANGE OF THE B PREFERRED STOCK, ALL PURSUANT TO THE TERMS OF THE
RECAPITALIZATION AGREEMENT.
GENERAL
The Company's stockholders are being asked to approve (1) the Company's
issuance and sale to the Investors of (a) an aggregate of 65,000 shares of its
A Preferred Stock and up to 12,000 shares of A Preferred Stock that may be
issued as dividends on the A Preferred Stock and (b) an aggregate of 10,000
shares of its B Preferred Stock and up to 8,200 shares of B Preferred Stock that
may be issued as dividends on the B Preferred Stock, and (2) the Company's
issuance of shares of Class A Common Stock to the Investors upon the potential
conversion/exchange of the B Preferred Stock, all pursuant to the terms and
conditions of the Recapitalization Agreement between the Company and the
Investor Group, which are entities controlled by Pritzker family business
interests. Pritzker family business interests include, among other ventures,
Hyatt Corporation and Hyatt International Corporation and have significant
experience in the hospitality industry. Pursuant to the Recapitalization
Agreement, the Investors have agreed to purchase the Preferred Stock for
aggregate consideration of $75,000,000 ($65,000,000 for the A Preferred Stock
and $10,000,000 for the B Preferred Stock).
The consummation of the Investment is subject to a number of conditions,
including, among others, (1) approval by the Company's stockholders of the
Company's issuance and sale of the Preferred Stock and the Company's issuance of
Class A Common Stock upon the potential conversion/exchange of the B Preferred
Stock described in this Proposal 1 and the amendments to the Certificate of
Incorporation described in Proposals 2 and 3 and (2) consummation of the
Company's offer to purchase from its stockholders up to an aggregate of
8,666,666, but not less than 3,000,000, shares of its Common Stock at a purchase
price of $7.50 per share. The Company has agreed to use up to $65,000,000 of the
proceeds from the Investment to purchase the shares tendered in the Offer. IF
THE STOCKHOLDERS DO NOT APPROVE (1) THE COMPANY'S ISSUANCE AND SALE OF THE
PREFERRED STOCK AND THE COMPANY'S ISSUANCE OF CLASS A COMMON STOCK UPON THE
POTENTIAL CONVERSION/EXCHANGE OF THE B PREFERRED STOCK DESCRIBED IN THIS
PROPOSAL 1 AND (2) THE AMENDMENTS TO THE CERTIFICATE OF INCORPORATION DESCRIBED
IN PROPOSALS 2 AND 3 BELOW, THE COMPANY WILL NOT CONSUMMATE THE OFFER OR THE
INVESTMENT. If the Offer and the Investment are not consummated, the Company
will attempt to pursue other alternatives to maximize stockholder value.
However, such alternatives have not been identified and may not be available.
The Company would also be obligated to reimburse the Investor Group for its
reasonable legal and other fees, not to exceed $1,000,000. If the Company were
to also enter into an agreement for a Superior Proposal (as defined below), it
would also be obligated to pay the Investors $3,000,000. See "--Miscellaneous
Provisions of the Recapitalization Agreement--No Solicitation" and
"--Termination."
Approval by the holders of the Class B Common Stock of the Company's
issuance and sale of the B Preferred Stock is required by the Company's
Certificate of Incorporation. Approval by the holders of the Common Stock of the
Company's issuance and sale of the Preferred Stock and the Company's issuance of
Class A Common Stock upon the potential conversion/exchange of the B Preferred
Stock is also required by the Nasdaq Control Rule.
The following summarizes the material provisions of the Preferred Stock, the
Recapitalization Agreement, other agreements executed or to be executed in
connection therewith and the transactions contemplated thereby. This summary is
qualified in its entirety by reference to the complete text of the
Recapitalization Agreement and the related agreements entered into or to be
entered into in connection with the recapitalization transactions, the form of
Certificate of Designation for the A Preferred Stock and the form of Certificate
of Designation for the B Preferred Stock, which are attached hereto as
Appendices B through H.
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TERMS OF THE A PREFERRED STOCK
DIVIDENDS
The A Preferred Stock will accrue dividends of 8.5% per annum, compounded
quarterly, which will accrue whether or not there are profits, surplus or other
funds of the Company legally available for payment of dividends. The A Preferred
Stock dividends will be cumulative. All accrued and unpaid dividends must be
fully paid or declared with funds irrevocably set apart for payment before any
dividend, distribution or payment may be made with respect to any Junior
Securities (as defined below). At the option of the Company, upon resolution of
the Board of Directors acting with the affirmative vote of a majority of the
Independent Directors, dividends accruing through the first eight quarterly
dividend periods may be paid in the form of additional shares of A Preferred
Stock having an initial Liquidation Value (as defined below) equal to the amount
of the dividend so paid. With regard only to the A Preferred Stock, any equity
security of the Company other than shares of A Preferred Stock is considered a
"Junior Security."
LIQUIDATION PREFERENCE
Upon any liquidation, dissolution or winding up of the Company, whether
voluntary or involuntary, the holders of A Preferred Stock will be entitled to
receive, after payment or provision for payment of the Company's debt and other
obligations, but before any payment is made with respect to any Junior
Securities, an amount in cash equal to the aggregate Liquidation Value of all
shares of A Preferred Stock held by such holders. The "Liquidation Value" of any
share of A Preferred Stock, as of any particular date, is equal to the issue
price of $1,000 per share plus all accrued and unpaid dividends through such
date.
RESTRICTIONS ON PAYMENT
So long as the A Preferred Stock remains outstanding, the Company may not
redeem, purchase or otherwise acquire, directly or indirectly, any Junior
Securities, nor may the Company directly or indirectly pay or declare any
dividend or make any distribution upon any Junior Securities (other than in the
form of stock dividends, consisting solely of Junior Securities), if at the time
the Company has failed to pay the full amount of any accrued and unpaid
dividends to the holders of A Preferred Stock.
MANDATORY AND OPTIONAL REDEMPTION
On the quarterly dividend date following the seventh anniversary of the date
of issuance of the A Preferred Stock, the Company must redeem for cash all
outstanding shares of A Preferred Stock at a price per share equal to the
Liquidation Value as of the date of redemption. If the funds for redemption are
not legally available or are insufficient, the Company must redeem the maximum
possible number of shares of A Preferred Stock, ratably among the holders of
such shares, from available cash and redeem the rest when cash becomes legally
available. In addition, the Company has the option to redeem, at a price per
share equal to the Liquidation Value as of the date of redemption, all or any
portion of the A Preferred Stock, at any time and from time to time, upon
resolution of the Board of Directors acting with the affirmative vote of a
majority of the Independent Directors.
VOTING RIGHTS
The prior approval of the holders of a majority of the A Preferred Stock,
voting together as a single class, is required for: (1) any vote to merge or
consolidate the Company with another entity, sell all or substantially all of
the Company's assets or dissolve or liquidate the Company, (2) any action which
would affect the superior position of the A Preferred Stock in relation to any
other class of stock with regard to payments of dividends, distributions of
assets upon liquidation, dissolution or winding-up, voting, redemption or
otherwise, or (3) any action that results in any amendment, alteration or repeal
of any provision of the Certificate of Incorporation or any other certificate
amendatory thereof, that would materially
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adversely affect the preferences, rights, powers or privileges of the
A Preferred Stock. Except as required by law, the holders of A Preferred Stock
will have no other voting rights.
TERMS OF THE B PREFERRED STOCK
DIVIDENDS
The B Preferred Stock will accrue dividends of 6.0% per annum, compounded
quarterly, which will accrue whether or not there are profits, surplus or other
funds of the Company legally available for payment of dividends. The B Preferred
Stock dividends will be cumulative. All accrued and unpaid dividends must be
fully paid or declared with funds irrevocably set apart for payment before any
dividend, distribution or payment may be made with respect to any Junior
Securities (as defined below). At the option of the Company, upon resolution of
the Board of Directors acting with the affirmative vote of a majority of the
Independent Directors, dividends accruing may be paid in the form of additional
shares of B Preferred Stock having an initial Liquidation Value (as defined
below) equal to the amount of the dividend so paid. The holders of B Preferred
Stock will also be entitled to participate, on an as-converted basis (as
described below), in any dividend paid to the holders of the Class A Common
Stock. With regard only to the B Preferred Stock, any security of the Company
other than shares of A Preferred Stock and other shares of B Preferred Stock is
considered a "Junior Security."
LIQUIDATING DIVIDENDS; LIQUIDATION PREFERENCE
If the Company pays a dividend or makes any other distribution (whether
pursuant to a merger, consolidation or other event) to the holders of the
Class A Common Stock (other than stock dividends), the holders of the
B Preferred Stock will also be entitled to participate, on an as-converted
basis, in any such dividend or other distribution.
Upon any liquidation, dissolution or winding up of the Company, whether
voluntary or involuntary, the holders of B Preferred Stock will be entitled to
be paid, after payment or provision for payment to the A Preferred Stock and the
Company's debt and other obligations, but before any payment is made to any
Junior Securities, an amount in cash equal to the aggregate Liquidation Value of
all shares of B Preferred Stock held by such holders. The "Liquidation Value" of
any share of B Preferred Stock, as of any particular date, is equal to the issue
price of $1,000 per share plus all accrued and unpaid dividends through such
date.
RESTRICTIONS ON PAYMENT
So long as the B Preferred Stock remains outstanding, the Company may not
redeem, purchase or otherwise acquire directly or indirectly any Junior
Securities, nor may the Company directly or indirectly pay or declare any
dividend or make any distribution upon any Junior Securities (other than in the
form of stock dividends, consisting solely of Junior Securities), if at the time
the Company has failed to pay the full amount of any accrued but unpaid
dividends to the B Preferred Stock.
MANDATORY AND OPTIONAL REDEMPTION
On the quarterly dividend date following the tenth anniversary of the date
of issuance of the B Preferred Stock, the Company must redeem for cash all
outstanding shares of B Preferred Stock at a price per share equal to the
Liquidation Value as of the date of redemption. If the funds for redemption are
not legally available or are insufficient, the Company must redeem the maximum
possible number of shares of B Preferred Stock, ratably among the holders of
such shares, from available cash and redeem the rest when such cash becomes
legally available. In addition, the Company has the option to redeem, at a price
per share equal to the Liquidation Value as of the date of redemption, all or
any portion of the B Preferred Stock, at any time and from time to time on and
after the quarterly dividend date following the
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seventh anniversary of the date of issuance of the B Preferred Stock, upon
resolution of the Board of Directors acting with the affirmative vote of a
majority of the Independent Directors.
VOTING RIGHTS
The holders of B Preferred Stock will be entitled to vote on all matters
submitted to the stockholders for a vote, together with the holders of the
Common Stock, with each share of B Preferred Stock entitled to vote on an
as-converted basis in accordance with the conversion ratio described below under
"--Conversion/Exchange." In addition, the prior approval of a majority of the
holders of B Preferred Stock, voting together as a single class, will be
required for: (1) any vote to merge or consolidate the Company with another
entity, sell all or substantially all of the Company's assets, or dissolve or
liquidate the Company, (2) any action that would affect the superior position of
the B Preferred Stock in relation to any other class of stock with regards to
payment of dividends, distributions of assets upon liquidation, dissolution or
winding-up, voting, redemption or otherwise, or (3) any action that results in
any amendment, alteration or repeal of any provision of the Certificate of
Incorporation or any certificate amendatory thereof that would materially
adversely affect the preferences, rights, powers or privileges of the
B Preferred Stock.
CONVERSION/EXCHANGE
The holders of B Preferred Stock may, at any time prior to redemption and at
their option, convert/ exchange their shares of B Preferred Stock into shares of
Class A Common Stock. Initially, 10,000,000 shares of Class A Common Stock will
be issuable upon conversion/exchange of the B Preferred Stock. The B Preferred
Stock has an initial conversion/exchange price of $7.50 per share. On the 90(th)
day after the first date of issuance of the B Preferred Stock, the initial
conversion/exchange price will be adjusted and become the lesser of (1) $7.50
and (2) 130% of the market price of the Class A Common Stock (based on the
average of representative bid and asked prices quoted on the Nasdaq Stock Market
at 4:00 p.m. on each of the 21 trading days ending on the 90th day), provided
that the initial conversion/exchange price as adjusted on that date may not be
less than $6.50 per share (the "Initial Conversion/Exchange Price"). The
conversion/exchange price for the B Preferred Stock will be subject to downward
adjustment upon the occurrence of certain events, including a stock split, stock
dividend, recapitalization and reclassification, and will be subject to upward
adjustment upon the occurrence of certain events, including a reverse stock
split or reclassification. The conversion/exchange price as it may be adjusted
from time to time is referred to as the "Conversion/Exchange Price." Except for
the reset provision setting the Initial Conversion/ Exchange Price as described
above, and except as provided below, each adjustment resulting in a decrease in
the Conversion/Exchange Price will result in a corresponding increase in the
number of shares of Class A Common Stock issuable upon conversion/exchange of
B Preferred Stock.
The Conversion/Exchange Price will also be reduced as a result of specified
losses that the Company may incur after June 2, 2000 and before the dividend
payment date following the fifth anniversary of the date of issuance of the
B Preferred Stock in connection with payments made to Alpine Hospitality
Ventures LLC ("Ventures") or others, by reason of the obligation of the Company
to make up to $7.5 million of additional loans to Ventures under certain
circumstances or the release of any such obligation by Ventures or any claim by
any person in connection therewith and all other associated out-of-pocket costs,
losses, damages and expenses, excluding, however, $2,500,000 paid to Ventures or
any of its affiliates in connection with the termination of certain of the
Company's obligations under its agreements with Ventures or its affiliates. See
"Proposal 5--Certain Relationships and Related Transactions--Transactions
entered into in connection with the Best Inns Transaction." The reduction of the
Conversion/Exchange Price resulting from such losses will not increase the
number of shares of Class A Common Stock issuable upon conversion/exchange of
the B Preferred Stock, but will result in a reduction in the number of shares of
B Preferred Stock and other consideration required to convert/exchange to the
same number of shares of Class A Common Stock, initially 10,000,000 shares.
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The Conversion/Exchange Price will also be reduced as a result of any losses
(including non-reimbursed out-of-pocket costs) resulting from any settlement of
claims or satisfaction of judgments in connection with any stockholder or
derivative litigation after June 2, 2000 and before the dividend payment date
following the fifth anniversary of the date of issuance of the B Preferred Stock
asserting a cause of action arising out of certain events existing prior to
June 2, 2000, such as the Class Action Lawsuit. The reduction of the
Conversion/Exchange Price resulting from such losses will not increase the
number of shares of Class A Common Stock issuable upon conversion/exchange of
the B Preferred Stock, but will result in a reduction in the number of shares of
B Preferred Stock and other consideration required to convert/exchange to the
same number of shares of Class A Common Stock, initially 10,000,000 shares.
In order to convert/exchange shares of B Preferred Stock, the holder must
surrender the shares of B Preferred Stock to be converted/exchanged and
additional consideration (either in the form of cash or shares of A Preferred
Stock) having an aggregate value (with the A Preferred Stock and B Preferred
Stock surrendered for conversion/exchange being valued at their respective
Liquidation Value) equal to the number of shares of Class A Common Stock
issuable upon conversion/exchange of the B Preferred Stock surrendered for
conversion/exchange multiplied by the Conversion/Exchange Price then in effect.
PURCHASE RIGHTS
If the Company grants, issues or sells any options, convertible securities
or other rights to purchase stock, warrants, securities or other property pro
rata to the holders of the Class A Common Stock, then in addition to the other
rights of the holders of the B Preferred Stock, the holders of the B Preferred
Stock will also be entitled to participate, on an as-converted basis, in the
acquisition of such purchase rights.
BACKGROUND OF THE TRANSACTION
Although the Company recorded net income of approximately $5.1 million for
the nine months ended September 30, 1999 (compared to a net loss of
approximately $3.0 million during the comparable prior year period), for the
year ended December 31, 1999, USFS recorded a net loss of $13.8 million,
including a charge of $17.1 million related to reserves taken against the
Company's loan portfolio (as compared to a net loss of $2.9 million for the
prior year). In addition, the trading price of the Class A Common Stock on the
Nasdaq National Market declined from $23.187 on June 30, 1999 to $4.50 during
the fourth quarter of 1999.
Beginning in the fourth quarter 1999, USFS received several inquiries
concerning the possible acquisition of the Company. On January 18, 2000, USFS
engaged Banc of America Securities LLC ("Banc of America Securities") to act as
its financial advisor in connection with assisting the Company in evaluating
possible strategic business alternatives, including a potential sale of the
Company. In December 1999 and January 2000, USFS entered into confidentiality
agreements with a number of potential acquirors and began providing them with
information regarding the Company.
During early February 2000, USFS received written or oral preliminary
proposals from four of these parties. After evaluating those proposals in
consultation with Banc of America Securities, the Board of Directors of USFS
authorized the Company to pursue discussions regarding a potential transaction
with two of the potential acquirors ("Party A" and "Party B") whose expressions
of interest were deemed the most favorable to the Company. During the remainder
of February and early March 2000, Party A and Party B conducted further legal,
business and financial due diligence. On February 28, 2000, the Company provided
a draft definitive merger agreement to Party A and Party B and requested that
final proposals, accompanied by a markup of the definitive agreement, be
submitted to the Company.
On March 6, 2000, Party A submitted a proposal to acquire all of the capital
stock of USFS in a merger transaction at a cash purchase price in the range of
$6.50 to $8.00 per share. The proposal was subject to numerous conditions,
including the satisfactory completion of additional business, legal and
financial due diligence, the approval of Party A's board of directors, the
negotiation of definitive documentation, the negotiation of employment
agreements with certain members of the Company's
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management and the public release of USFS's earnings for 1999 and the filing of
its annual report on Form 10-K for the fiscal year ended December 31, 1999. The
proposal also contemplated USFS granting Party A the exclusive right to
negotiate a transaction until April 9, 2000.
On March 7, 2000, Party B submitted a proposal to effect a transaction in
which Party B, a non-public company, would merge into USFS in a transaction that
would result in the current stockholders of USFS owning 25% of the outstanding
Common Stock of the surviving entity. The proposal did not state the implied per
share value of the transaction to the holders of the Common Stock. The proposal
was subject to numerous conditions, including the approval of Party B's board of
directors, the negotiation of definitive documentation, completion of further
due diligence and the entering into of employment agreements with key managers
of USFS.
On March 13, 2000, Party A submitted a revised proposal to acquire all of
the capital stock of USFS in a merger transaction at a cash purchase price in
the range of $7.25 to $7.50 per share. The proposal remained subject to the same
conditions as the prior proposal, except for the requirement concerning the 1999
earnings release and the filing of the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1999. Additionally, representatives from
Party A communicated to Banc of America Securities that the price range likely
could be increased to $7.75 to $8.00 per share.
At a meeting on March 16, 2000, the Board of Directors, in consultation with
its financial and legal advisors, considered the proposals submitted by Party A
and Party B and authorized the Company to continue discussions with Party A with
the objective of obtaining a price per share of $8.00 in a "two step"
transaction--a tender offer followed by a merger--and entering into definitive
documentation by March 29, 2000. On March 17, 2000, the Company entered into an
agreement providing Party A with the exclusive right to negotiate a transaction
until March 29, 2000.
During the next two weeks, Party A continued its due diligence review of the
Company and submitted to the Company an extensive markup of the draft definitive
documentation. On March 27, 2000, Party A reported to USFS that it had not yet
completed its due diligence review, that the purchase price per share would be
no greater than $7.50, that certain key members of the Company's management,
including Mr. Leven and Neal Aronson, would be required to forego receiving cash
for a portion of their shares and instead would retain shares of common stock in
the surviving corporation that would be subject to performance vesting criteria
to be determined, that the transaction would not be structured in the "two step"
manner that USFS desired and that Party A now had concerns about the potential
effect of the transaction on its credit rating.
At a meeting on March 28, 2000, the Board of Directors reviewed the status
of Party A's proposal. After consultation with its financial and legal advisors,
the Board of Directors concluded that there was substantial uncertainty about
Party A's ability to complete a transaction on terms acceptable to the Company
and Mr. Leven and Mr. Aronson, whose support, as holders of a majority of the
Company's voting power, would be required to complete any transaction.
Accordingly, the Board determined to discontinue discussions with Party A at
that time. At that same meeting, Mr. Leven, the Company's Chairman and Chief
Executive Officer, recommended that representatives of Pritzker family business
interests be contacted to determine their interest in pursuing an acquisition
transaction with the Company. Representatives of Pritzker family business
interests had previously indicated to Mr. Leven the desire to explore a
potential transaction with the Company if the Company was unsuccessful in
reaching agreement with other potential acquirors. Subsequent to this meeting of
the Board, after Pritzker family business interests expressed an interest in
pursuing an acquisition transaction with the Company, Mr. Geoga, a director of
the Company and the President of Hospitality Investment Fund, L.L.C., did not
participate in Board deliberations in connection with the proposals from the
Investor Group or any other party with respect to the Company.
On March 30, 2000, the Company issued a press release in which it stated
that (1) in recent months it had received a number of unsolicited inquiries
regarding the possible sale of the Company, including from several competitors,
(2) in response, the Company had retained Banc of America Securities as an
advisor,
14
<PAGE>
(3) the Company had discussions with several of those parties but none resulted
in offers that were satisfactory to the Company and (4) the Company had
requested Banc of America Securities to assist the Company more generally in
evaluating strategic alternatives and opportunities that may be or may become
available to the Company.
On March 31, 2000, the Company entered into a confidentiality agreement with
Hospitality Investment Fund, L.L.C., an advisor to, and an affiliate of, the
Investors. During the week of April 3, 2000, representatives of the Investor
Group began conducting legal and financial due diligence on the Company. At this
time, Banc of America Securities also contacted approximately 25 additional
parties to explore whether they had an interest in a possible acquisition
transaction with the Company. USFS entered into confidentiality agreements with
six of these additional parties. None of these parties submitted an offer to the
Company.
On May 2, 2000, the Company received a written proposal from the Investor
Group describing a recapitalization transaction similar to the transactions
contemplated by the Recapitalization Agreement. Several days later, another
party that had originally expressed an interest in acquiring the Company
("Party C"), reinitiated contact concerning a potential transaction. In
addition, representatives of the Company contacted Party A to inquire about
whether it continued to have an interest in acquiring the Company. During the
next several weeks, the Company began negotiating the terms of the Investor
Group's proposal. On May 12, 2000, the Company received a written preliminary
proposal from Party C. Party C's proposal contemplated an acquisition of all of
the capital stock of the Company at a purchase price of $7.50 per share. The
proposal was subject to numerous conditions, including satisfactory completion
by Party C of its due diligence review, and negotiation of definitive
documentation. The Company and its representatives commenced further discussions
with Party C concerning its proposal. Representatives of the Company also
continued to contact Party A in order to obtain from it a revised proposal.
Party A did not submit one.
On May 18, 2000, while the Company was in continuing discussions with the
Investor Group and Party C, the Company was notified that the Class Action
Lawsuit, captioned FORREST P. GUNTHER V. U.S. FRANCHISE SYSTEMS, INC.,
MICHAEL A. LEVEN, NEAL K. ARONSON AND RICHARD D. GOLDSTEIN, Case
No. 00-CV-1244, had been brought against the Company and certain of its officers
and directors in the United States District Court for the Northern District of
Georgia, Atlanta Division.
During the week of May 22, 2000, representatives of the Company continued
discussions with representatives of the Investor Group concerning its proposal
and, separately, with Party C concerning its proposal. On May 26, 2000, however,
Party C advised the Company of its decision not to pursue a transaction at this
time, in part due to the uncertainty resulting from the class action lawsuit.
Also, on May 25, 2000, Party A advised the Company of its decision not to pursue
an acquisition of the Company.
Negotiations with the Investor Group continued until June 2, 2000, at which
time the Investor Group submitted for consideration a final, definitive proposal
(including the final form of definitive agreements (prior drafts of which had
been considered by the Board's legal advisors and Banc of America Securities for
several weeks)) to the Company's Board of Directors. The Investor Group's final
proposal provided that it would be withdrawn if not accepted by the Company
prior to 5:00 p.m. on June 2, 2000. The Board of Directors held a special
meeting to evaluate the terms of the Investor Group's proposal on June 2, 2000.
At that meeting, with the Company's legal and financial advisors in attendance,
the Board of Directors reviewed the proposed recapitalization transaction. The
Board received a report from its financial and legal advisors on the status of
the Company's efforts with other potential acquirors and the final terms of the
recapitalization transaction as proposed by the Investor Group. The Board, in
executive session with Messrs. Geoga, Leven, Aronson and Romaniello recused in
order to give the other directors an opportunity to discuss the Investor Group's
proposal in private, had a full discussion of the terms of the transaction and
reviewed the various benefits of the transaction. The Board received a
presentation from Banc of America Securities regarding the financial terms of
the transaction and Banc of America Securities delivered its oral opinion,
subsequently confirmed in writing as of the same date, to the executive session
of
15
<PAGE>
the Board that, on such date, the transactions contemplated by the Offer and
Investment, taken as a whole, were fair from a financial point of view, to the
holders of the Company's Common Stock (other than the Investor Group, Michael
Leven, Andrea Leven, Neal Aronson, Steven Romaniello, and any affiliate of the
foregoing or any natural person otherwise related to the foregoing by virtue of
being a spouse, a descendant, or an ancestor of such natural person, or a trust
solely for the benefit of such natural person and/or such natural person's
spouse, descendant or ancestor (the "Excluded Stockholders")). Following these
presentations, and the receipt of the oral fairness opinion, subsequently
confirmed in writing, of Banc of America Securities, the executive session of
the Board resolved to recommend approval of the transaction to the full Board.
The full Board reconvened and received a similar presentation about the
transaction from Banc of America Securities, including the delivery of its oral
fairness opinion. Following this presentation, the Board of Directors
unanimously authorized and approved the Investment, the Offer and the related
transactions.
RECOMMENDATION OF THE BOARD OF DIRECTORS OF USFS; REASONS FOR THE
RECAPITALIZATION AND THE OFFER
The Board of Directors of USFS, by unanimous vote of all directors in
attendance, has approved the Recapitalization Agreement and the transactions
contemplated thereby and recommends stockholder approval of the Company's
issuance and sale of the Preferred Stock and the Company's issuance of Class A
Common Stock upon the potential conversion/exchange of the B Preferred Stock.
In considering the recommendation of the Board of Directors, USFS
stockholders should also consider that some of the members of the Board of
Directors have interests in the transactions contemplated by the
Recapitalization Agreement that may be different from, or in addition to, the
interests of the stockholders of USFS generally. See "--Agreements Executed and
To Be Executed in Connection with the Recapitalization Agreement." The
transactions contemplated by the Recapitalization Agreement were unanimously
approved, however, by the four disinterested directors in attendance.
In reaching its determination, the Board of Directors consulted with USFS's
management, as well as its financial advisor and legal counsel, and considered
the short-term and long-term interests of USFS and other alternative
transactions available to USFS. In particular, the Board of Directors considered
the following material factors, among others, all of which it deemed favorable,
in reaching its decision to approve the Recapitalization Agreement and the
transactions contemplated thereby:
- The Offer will provide current stockholders of USFS (other than Meridian
and HSA) with the opportunity to realize a significant premium to the
market price of the Class A Common Stock as of June 2, 2000, the date of
the signing of the Recapitalization Agreement ($5.875 per share), for at
least a portion of their shares. Furthermore, the Company's stockholders
will be able to enjoy any potential appreciation in the market price of
the Class A Common Stock subsequent to the closing of the transactions due
to their remaining stock interests (assuming the Offer is oversubscribed
and there is a proration of their tendered shares).
- The reputation and resources of the Investor Group as sophisticated
strategic partners of the Company may enhance the perception of USFS among
investors, employees and franchisees. Furthermore, although they have made
no commitment to do so, the Investor Group may provide the Company with
additional avenues to capital and exposure to strategic corporate
opportunities.
- The Company had investigated a number of alternative transactions during
the previous five months, including executing confidentiality agreements
with a number of parties, permitting other parties to conduct due
diligence and in at least two other instances engaging in negotiations.
The Board was advised by Banc of America Securities that the most likely
potential acquirors for the Company had all been contacted.
- Management had expressed concerns at meetings of the Board about the
Company's ability to continue to successfully implement its business plan
in light of the disruptions caused by the Company's evaluation of
strategic alternatives, the pending Class Action Lawsuit, the effects of
the recent decline in the trading price of the Class A Common Stock on
employee and franchisee
16
<PAGE>
confidence in the Company and the competitive environment in which the
Company operates. Management advised the Board that it believed the
perception of the Company in the investment and franchise communities
would benefit from a strong strategic partner's commitment to the Company.
- Banc of America Securities had delivered its oral opinion to the Board of
Directors, which it reconfirmed in writing, that, as of June 2, 2000, the
Offer and the Investment, taken as a whole, are fair from a financial
point of view to the holders of shares of Common Stock (other than the
Excluded Stockholders). The Board of Directors also reviewed the
methodologies used by Banc of America Securities in rendering its opinion.
A copy of Banc of America Securities's written opinion is attached to this
Proxy Statement as Appendix A, and the stockholders of USFS are encouraged
to, and should, read this opinion in its entirety. See "--Fairness Opinion
of Financial Advisor."
- The Recapitalization Agreement provides the Company with the right, under
certain circumstances, to terminate the Recapitalization Agreement and not
commence the Offer in order to approve an unsolicited offer to acquire not
less than 75% of the shares of Common Stock if the Board determines that
such a transaction would be more favorable to the stockholders from a
financial point of view than the Offer and the Company pays a fee to the
Investors in the amount of $3,000,000 and reimburses the Investor Group
for its legal and other expenses (not to exceed $1,000,000).
- The obligation of the Investors to purchase the Preferred Stock is not
subject to any financing condition.
- The Recapitalization Agreement and the proposed amendments to the
Company's Certificate of Incorporation contain protections for
stockholders of the Company that restrict for a period of time the
Investor Group's ability to complete a second-step transaction that would
in certain circumstances freeze out the remaining public stockholders
after completion of the Offer.
The USFS Board of Directors also considered the following potentially
negative factors, which it believed were outweighed by the factors described
above, in its decision to approve the Recapitalization Agreement and the
transactions contemplated thereby:
- The issuance of the B Preferred Stock and the Class A Common Stock
issuable upon the potential conversion/exchange of the B Preferred Stock
and the rights of the holders of the Preferred Stock upon liquidation of
USFS and on certain other events will have a dilutive effect on the
economic interest of existing holders of Common Stock. Following the
closing of the Investment and the Offer and assuming 8,666,666 shares of
Common Stock are tendered and purchased pursuant to the Offer and that Mr.
and Mrs. Michael Leven and Mr. Neal Aronson tender and convert their
shares of Common Stock as described below, existing stockholders (other
than the Investor Group) will hold approximately 40.9% of the outstanding
Class A Common Stock (including Class A Common Stock issuable upon the
potential conversion/exchange of the B Preferred Stock).
- The issuance of the B Preferred Stock will also have a dilutive effect on
the voting rights of existing holders of Common Stock. Following the
closing, the Investor Group will be able to control the vote on most
matters submitted to the stockholders of USFS and, as a result of the
Stockholders Agreement, will be entitled to designate and elect a majority
of the Board of Directors. In addition, holders of the B Preferred Stock
will have special voting rights, in certain events. While the charter
amendments described under Proposal 2 below are designed to mitigate some
of these risks, there can be no assurance that the Investor Group (or
Mr. and Mrs. Leven, who are also parties to the Stockholders Agreement)
will not take actions as stockholders that adversely affect the interests
of other stockholders. In addition, conflicts of interest may arise as a
consequence of the Investor Group and its affiliates having interests in
companies in the hospitality industry, which is the same industry in which
the Company operates.
17
<PAGE>
- The significant ownership interests of the Investor Group could
effectively deter a third party from making an offer to acquire USFS,
which might involve a premium stock price or other benefits for
stockholders, or otherwise prevent changes in control or management of
USFS.
- The holders of the Preferred Stock will have preferential rights, and the
holders of the B Preferred Stock may also participate with the Common
Stock on an as-converted basis, with respect to distributions upon
liquidation of USFS. No distributions upon liquidation may be made to the
holders of Common Stock until the holders of the Preferred Stock have been
paid their liquidation preference. As a result, it is possible, on
liquidation, that all amounts available for the holders of equity of USFS
would be paid to the holders of the Preferred Stock and that the holders
of Common Stock would not receive a payment at all.
- The holders of the Preferred Stock will also have preferential rights with
respect to the payment of dividends. The A Preferred Stock will accrue
dividends at 8.5% per year and the B Preferred Stock will accrue dividends
at 6.0% per year; no dividends may be paid to the holders of Common Stock
prior to payment of all accrued dividends to the holders of the Preferred
Stock. In addition, the B Preferred Stock will participate in the payment
of dividends with the Common Stock on an as-converted basis.
- The A Preferred Stock will be subject to mandatory redemption by USFS
approximately seven years after the date of issuance and the B Preferred
Stock will be subject to mandatory redemption by USFS approximately ten
years after the date of issuance. Any requirement for redemption could
impose significant financial obligations on USFS unless the Preferred
Stock is converted/exchanged for Class A Common Stock before the
redemption date.
- The provisions of the B Preferred Stock provide for adjustments to the
Conversion/Exercise Price under specified circumstances. These adjustments
may result in significant further economic dilution to the holders of
Common Stock.
- The reduced number of shares available in the marketplace subsequent to
the consummation of the Offer may decrease investor interest in, and
analyst coverage of, the Class A Common Stock and depress the market price
thereof.
- If the Board did not engage in any transaction and the Company were able
to successfully implement its business plan, the existing stockholders of
the Company would be able to retain all of the resulting long-term
benefits, including potential market price increases.
While all of the above-mentioned factors were considered by the Board of
Directors, the Board of Directors did not make determinations with respect to
each of the factors. Rather, the Board of Directors made its judgment based on
the total mix of information available to it, and the judgments of individual
directors may have been influenced to a greater or lesser degree by their
individual views with respect to different factors.
FAIRNESS OPINION OF FINANCIAL ADVISOR
Pursuant to an engagement letter dated January 18, 2000 (the "Engagement
Letter"), the Board retained Banc of America Securities to act as its financial
advisor in connection with assisting the Company in evaluating possible
strategic business alternatives, including a potential sale of the Company. Banc
of America Securities is a nationally recognized investment banking firm and, as
part of its activities, is regularly engaged in the valuation of businesses and
their securities in connection with mergers and acquisitions, negotiated
underwritings, competitive biddings, secondary distributions of listed and
unlisted securities, private placements and valuations for corporate and other
purposes. The Board selected Banc of America Securities as its financial advisor
on the basis of Banc of America Securities' experience and expertise in
transactions similar to the Offer and the Investment (the "Proposed
Transactions") and its historical investment banking relationship with the
Company.
18
<PAGE>
On June 2, 2000, Banc of America Securities delivered to the Board its oral
opinion, which was subsequently confirmed by a written opinion as of the same
date, that as of such date and based upon the procedures and subject to the
assumptions and qualifications described to the Board, the Proposed
Transactions, taken as a whole, are fair from a financial point of view to the
holders of shares of Company Common Stock (other than the Excluded
Stockholders).
THE FULL TEXT OF BANC OF AMERICA SECURITIES' WRITTEN OPINION DATED AS OF
JUNE 2, 2000, WHICH SETS FORTH, AMONG OTHER THINGS, THE ASSUMPTIONS MADE,
PROCEDURES FOLLOWED, MATTERS CONSIDERED AND LIMITATIONS ON THE REVIEW UNDERTAKEN
IN CONNECTION WITH THE OPINION, IS ATTACHED HERETO AS APPENDIX A AND IS
INCORPORATED HEREIN BY REFERENCE. HOLDERS OF SHARES OF COMMON STOCK SHOULD READ
CAREFULLY SUCH OPINION IN ITS ENTIRETY IN CONNECTION WITH THIS PROXY STATEMENT.
THE FOLLOWING SUMMARY OF BANC OF AMERICA SECURITIES' OPINION IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE FULL TEXT OF THE OPINION.
Banc of America Securities' opinion is directed to the Board and does not
constitute a recommendation to any stockholder as to how such stockholder should
vote with respect to any matter being considered by the stockholders at the
Annual Meeting. Banc of America Securities' opinion addresses only the fairness
of the Proposed Transactions, taken as a whole, to the holders of shares of the
Common Stock (other than the Excluded Stockholders), as of the date of the
opinion, from a financial point of view and does not address the relative merits
of the Proposed Transactions or any alternatives to the Proposed Transactions,
the underlying decision of the Board to proceed with or effect the Proposed
Transactions or any other aspect of the Proposed Transactions. In furnishing its
opinion, Banc of America Securities did not admit that it is an expert within
the meaning of the term "expert" as used in the Securities Act, nor did it admit
that its opinion constitutes a report or valuation within the meaning of the
Securities Act, and statements to such effect are included in Banc of America
Securities' opinion.
In connection with its opinion, Banc of America Securities, among other
things: (1) reviewed certain publicly available financial statements and other
business and financial information of the Company; (2) reviewed certain internal
financial statements and other financial and operating data concerning the
Company prepared by the management of the Company; (3) analyzed certain
financial forecasts of the Company prepared by the management of the Company;
(4) reviewed and discussed certain information concerning the strategic,
financial and operating prospects of the Company with senior executives of the
Company; (5) reviewed and discussed with senior executives of the Company
certain published financial forecasts prepared by equity analysts with respect
to the Company; (6) discussed certain strategic, financial and operational
benefits anticipated from the Proposed Transactions with the management of the
Company; (7) reviewed and discussed information relating to certain strategic,
financial and operational alternatives with the management of the Company;
(8) discussed the past and current operations, financial condition and prospects
of the Company with senior executives of the Company; (9) reviewed the pro forma
impact of the Proposed Transactions on the Company's earnings per share on a
cash basis, cash flow, consolidated capitalization and financial ratios; (10)
reviewed the reported prices and trading activity of the Class A Common Stock;
(11) compared the financial performance of the Company and the prices and
trading activity of the Class A Common Stock with the financial performance and
stock prices and trading activity of certain other publicly traded companies
that Banc of America Securities deemed relevant; (12) compared certain financial
terms of the Proposed Transaction to corresponding financial terms, to the
extent publicly available, of certain other business transactions that Banc of
America Securities deemed relevant; (13) discussed the contingent liabilities of
the Company with the management and senior executives of the Company; (14)
participated in discussions and negotiations among representatives of the
Company and the Investor Group and their legal advisors; (15) reviewed the draft
of the Recapitalization Agreement dated May 31, 2000 and certain related
documents; and (16) performed such other analyses and considered such other
factors as it deemed appropriate.
In rendering its opinion, Banc of America Securities assumed and relied
upon, without independent verification, the accuracy and completeness of the
financial and other information reviewed by Banc of America Securities for the
purpose of its opinion. In arriving at its opinion, Banc of America Securities
relied upon, without independent verification, the assessments of the management
of the Company of the
19
<PAGE>
strategic, financial and operational benefits anticipated from the Proposed
Transactions. With respect to the financial forecasts, including information
relating to certain strategic, financial and operational benefits anticipated
from the Proposed Transactions, Banc of America Securities assumed that such
forecasts had been reasonably prepared on bases reflecting the best currently
available estimates and the good faith judgments of the future financial
performance of the Company. Banc of America Securities did not make an
independent evaluation or appraisal of the assets or liabilities of the Company,
nor was Banc of America Securities furnished with any such appraisals. Banc of
America Securities also assumed that the final form of the Recapitalization
Agreement would be substantially similar to the last draft reviewed by it.
Banc of America Securities' opinion is necessarily based on economic, market
and other conditions as in effect on, and the information made available to Banc
of America Securities as of, the date of its opinion. Accordingly, although
subsequent developments may affect its opinion, Banc of America Securities has
not assumed any obligation to update, revise or reaffirm its written opinion,
dated as of June 2, 2000. Banc of America Securities expressed no opinion as to
the prices at which the Common Stock will trade following consummation of the
Proposed Transactions.
In accordance with customary investment banking practice, Banc of America
Securities employed generally accepted valuation methods in reaching its
opinion. The following is a brief summary of certain of the analyses performed
by Banc of America Securities and reviewed with the Board in connection with the
rendering of its oral opinion of June 2, 2000, and its written opinion dated as
of June 2, 2000. Some of the summaries below include information in tabular
format. The tables are not a complete description of the financial analyses and
should be read together with the text of each summary.
DISCOUNTED CASH FLOW ANALYSIS
Banc of America Securities performed a discounted cash flow analysis for the
Company for the fiscal years ended 2000 through 2004. Such analysis was based
upon certain financial projections prepared by the management of the Company.
Such projections were developed by USFS to reflect USFS management's best
estimates of certain potential outcomes and the impact of those outcomes on
USFS' expected future performance. USFS management provided financial
projections (the "USFS financial projections") for two potential outcomes:
(1) the Case 1 projections are based on the assumption that the business and
industry fundamentals with respect to the Company remain consistent with the
current trends ("Case 1") and (2) the Case 2 projections are based on the
assumption that, as a result of numerous factors, including a general economic
downturn, there is a deterioration in general market conditions ("Case 2").
Subsequent to the preparation of the USFS financial projections, the Company's
management expressed its concern to Banc of America Securities regarding the
Company's ability to achieve the Case 1 financial projections in the current
environment. Utilizing such financial projections, Banc of America Securities
calculated the discounted cash flow values for the Company as the sum of the net
present values of (1) the estimated unlevered future cash flows that USFS was
projected to generate for the periods set forth below, plus (2) the terminal
value of USFS at the end of the five year period. These projections showed
estimated unlevered free cash flow (unlevered net income plus depreciation and
amortization less increases in working capital, capital expenditures and
development subsidies) as follows:
<TABLE>
<CAPTION>
2000 2001 2002 2003 2004
-------- -------- -------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Case 1.................................... $7.5 $18.6 $21.5 $28.8 $37.7
Case 2.................................... $4.4 $12.4 $18.0 $19.9 $26.2
</TABLE>
The terminal value of USFS, in both Case 1 and Case 2, was calculated based
upon projected earnings before interest, taxes, depreciation and amortization
("EBITDA") for 2004 and a range of multiples of 6.0x to 8.0x. Banc of America
Securities used discount rates in each case ranging from 14.0% to 20.0%. Banc of
America Securities used such discount rates based on its judgment of the
estimated weighted average cost of capital of comparable companies and the risks
inherent in USFS' achieving either Case 1 or Case 2
20
<PAGE>
management projections, among other factors, and used such multiples based on
its review of the trading characteristics of the common stock of comparable
companies. This analysis indicated the following:
<TABLE>
<CAPTION>
IMPLIED VALUE IMPLIED EQUITY
PER SHARE OF VALUE
COMMON STOCK (IN MILLIONS)
-------------- -----------------
<S> <C> <C>
Case 1...................................... $9.31 - $14.78 $183.2 - $294.3
Case 2...................................... $6.66 - $10.53 $129.4 - $208.1
</TABLE>
The preparation of the USFS financial projections involved judgments with
respect to USFS' operations that, though considered reasonable at the time by
management of the Company, may not be realized. The USFS financial projections
were based on estimates and assumptions that are inherently subject to
significant economic and competitive uncertainties and contingencies, all of
which are difficult to predict and many of which are beyond the Company's
control. Accordingly, there can be no assurance that actual results will not
vary materially from the USFS financial projections.
The Company does not, as a matter of course, publicly disclose forecasts or
projections as to future revenues, earnings or other financial information. USFS
does not intend to update or otherwise publicly revise the USFS financial
projections included in this Proxy Statement to reflect the occurrence of
unanticipated events. This information does not reflect revised prospects of the
Company's business, changes in general business and economic conditions, or any
other transaction or event that has occurred since, or that may occur after, the
time that the USFS financial projections were prepared. The inclusion of such
financial projections in this Proxy Statement is not a representation by any
person that the results reflected therein will be achieved. Therefore,
stockholders should not rely on them. The USFS financial projections were not
prepared with a view toward public disclosure or compliance with either the
published guidelines of the Commission regarding projections or forecasts or the
American Institute of Certified Public Accountants' Guide for Prospective
Financial Statements. The USFS financial projections were not prepared in
accordance with generally accepted accounting principles and were not audited or
reviewed by independent auditors nor did any independent auditor perform any
other service with respect to such financial projections.
COMPARABLE COMPANY ANALYSIS
Banc of America Securities reviewed and compared selected historical and
projected financial, operating and stock market performance of USFS to certain
corresponding data of certain publicly traded companies that Banc of America
Securities deemed comparable to the Company. The selected comparable companies
(the "Comparable Companies") included three publicly traded hotel franchisor
and/or management companies: Marriott International, Inc., Choice Hotels
International, Inc. and Cendant Corporation.
For each of the Comparable Companies, Banc of America Securities calculated
equity market values as multiples of estimates of net income for fiscal years
2000 and 2001. This analysis indicated multiple medians for the Comparable
Companies of 12.9x 2000 estimated net income and 11.0x 2001 estimated net
income. Banc of America Securities calculated the implied USFS value per common
share obtained by multiplying USFS' estimated 2000 and 2001 earnings per share
("EPS") by the relevant multiple range of 10.0x to 14.0x and 9.0x to 12.0x for
2000 and 2001, respectively, based upon the Comparable Companies. The implied
USFS value per common share for Case 1 is $4.00 to $5.60 and $8.28 to $11.04 for
2000 and
21
<PAGE>
2001, respectively, while the implied USFS value per common share for Case 2 is
$2.40 to $3.36 and $5.58 to $7.44 for 2000 and 2001, respectively.
<TABLE>
<CAPTION>
PRICE/
CALENDAR EPS EARNINGS
SHARES PRICE MARKET ------------------- -------------------
COMPANY O/S 5/31/00 CAP. 2000E 2001E 2000E 2001E
------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Choice Hotels International, Inc.............. 53.4 $12.13 $ 647.0 $1.11 $1.24 10.9x 9.8x
Cendant Corporation (1)....................... 721.0 13.25 9,553.8 1.03 1.20 12.9x 11.0x
Marriott International Inc.................... 239.6 36.25 8,686.2 1.87 2.16 19.4x 16.8x
AVERAGE..................................... 14.4X 12.5X
MEDIAN...................................... 12.9X 11.0X
----- -----
U.S. Franchise Systems, Inc................... 20.3 5.44 110.4 0.40 0.92 13.6x 5.9x
----- -----
</TABLE>
------------------------
(1) Cendant Corporation financials are pro forma to exclude all one time
expenses associated with its merger with CUC Incorporated and settlement of
a class action lawsuit.
To calculate the trading multiples of USFS and the Comparable Companies,
Banc of America Securities used publicly available information concerning
historical and projected financial performance, including published historical
financial information and consensus analysts' earnings estimates. The estimates
for Marriott International, Inc. were provided by Banc of America Securities
research. The estimates for Choice Hotels International, Inc. and Cendant
Corporation were provided by IBES and First Call. The estimates for USFS were
provided by the management of USFS.
None of the companies utilized in the selected Comparable Company analysis
is identical to the Company. Accordingly, Banc of America Securities believes
the analysis of the Comparable Companies is not simply mathematical. The
numerical results are not in themselves meaningful in analyzing the Comparable
Companies. Rather, it involves complex considerations and qualitative judgments
concerning differences in financial and operating characteristics of the Company
and the Comparable Companies, as well as other factors that could affect the
publicly-traded and/or transaction value.
COMPARABLE TRANSACTION ANALYSIS
Banc of America Securities considered certain recently announced
acquisitions in the franchising and management segments of the lodging industry
involving target companies that Banc of America Securities deemed comparable to
the Company. The selected comparable transactions (the "Comparable
Transactions") included three transactions where the target company was a
publicly-traded hotel franchisor and/or management company:
- The acquisition of Promus Hotel Corp.;
- The acquisition of Super 8 Hotels by Hospitality Franchise Systems; and
- The acquisition of Days Inn of America, Inc. by Hospitality Franchise
Systems.
In considering the Comparable Transactions, Banc of America Securities
calculated the implied USFS value per common share (obtained by multiplying
USFS' estimated 2000 EBITDA by the multiple range of 7.0x to 9.0x based on the
Comparable Transactions). The implied USFS value per common share for Case1 is
$4.09 to $5.18 while the implied USFS value per common share for Case 2 is $2.90
to $3.65. Earnings estimates for the Company were provided to Banc of America
Securities by the management of the Company.
No company utilized in the selected comparable transaction analysis is
identical to USFS nor is any transaction identical to the Proposed Transaction.
An analysis of the results therefore requires complex considerations and
judgements regarding the financial and operating characteristics of USFS and the
companies involved in the Comparable Transactions, as well as other facts that
could affect their publicly-
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traded and/or transaction value. The numerical results are not in themselves
meaningful in analyzing the Proposed Transaction as compared to Comparable
Transactions.
PREMIUMS PAID ANALYSIS
Banc of America Securities reviewed the consideration paid in 138 comparable
U.S. acquisitions involving an aggregate value of between $100 and $300 million
which were announced between January 1, 1998 and May 17, 2000. Banc of America
Securities calculated the premiums paid in these transactions over the
applicable stock price of the target company one day, one week and four weeks
prior to the announcement of the acquisition offer. Such analysis indicated
median premiums of 27.3%, 32.3% and 39.0%, respectively. Banc of America
Securities noted that the premiums implied by the $7.50 tender offer were 25.0%,
57.9% and 62.2% for the period one day, one week and four weeks prior to the
date of Banc of America Securities's opinion.
COMPARABLE PUBLIC AND PRIVATE CONVERTIBLE SECURITY TRANSACTIONS
Banc of America Securities reviewed the following three separate types of
convertible security transactions in order to determine whether the terms of the
A Preferred Stock and the B Preferred Stock reflected current market conditions:
(1) publicly and privately issued convertible preferred securities in the real
estate and lodging industries since March 1996; (2) publicly issued convertible
securities issued since January 2000; and (3) privately issued convertible
preferred securities issued since March 2000.
Banc of America Securities analyzed 20 (9 publicly issued and 11 privately
issued) transactions involving issuances of convertible preferred securities in
the real estate sector focusing on the coupon and conversion premium in such
transactions. The conversion premiums on the publicly issued securities ranged
from 2.37% to 27.12%, with an average premium of 14.63%. The conversion premium
on the privately issued securities ranged from 0.0% to 102.1%, with an average
premium of 21.09%. The coupon on the publicly issued securities ranged from
5.25% to 8.25%, with an average coupon of 7.38%. The coupon on the privately
issued securities ranged from 7.0% to 12.0%, with an average of 8.27%. Banc of
America Securities analyzed 12 transactions involving issuances of convertible
securities in public transactions in the lodging sector focusing on the coupon
and conversion premium in such transactions. The conversion premiums in such
transactions ranged from 11.2% to 28.8%, with a premium average of 20.5%. The
coupon on the convertible securities in such transactions ranged from 4.25% to
8.625%, with an average coupon of 6.77%.
Banc of America Securities analyzed 82 transactions that have been announced
since January 2000 involving non-industry specific publicly issued convertible
securities. All such securities were issued in 2000 and the transactions ranged
in size from $75 million to $2 billion. The average size was $350.4 million. Of
these transactions, no transactions were completed for companies with an equity
market cap of less than $400 million. The conversion premiums in such
transactions ranged from 5% to 43.1%, with an average premium of 21.2%. The
coupon in such transactions ranged from 2.75% to 8.50%, with an average coupon
of 5.5%.
Banc of America Securities analyzed 37 transactions involving privately
issued convertible preferred securities focusing on the coupon and the
conversion premium. The conversion premiums in such
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transactions ranged from (140.6)% to 100.6%, with an average premium of (5.7)%.
The coupon ranged from 0.0% to 10.0%, with an average coupon of 6.0%.
<TABLE>
<CAPTION>
CONVERSION
PREMIUM RANGE AVERAGE COUPON RANGE
-------------------------- CONVERSION ------------------- AVERAGE
LOW HIGH PREMIUM LOW HIGH COUPON
--------------- -------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Real Estate Convertible Transactions
Public............................... 2.4% 27.1% 14.6% 5.3% 8.3% 7.4%
Private.............................. 0.0% 102.1% 21.1% 7.0% 12.0% 8.3%
Lodging Convertible Transactions....... 11.2% 28.8% 20.5% 4.3% 8.6% 6.8%
Public Convertible Transactions........ 5.0% 43.1% 21.2% 2.8% 8.5% 5.5%
Private Convertible Transactions....... -140.6% 100.6% -5.7% 0.0% 10.0% 6.0%
</TABLE>
In the Proposed Transaction, the A Preferred Stock has a coupon of 8.5%, and
the B Preferred Stock has a coupon of 6.0% and a conversion premium of a range
from 19.5% (based on a Conversion/Exchange Price of $6.50) to 37.9% (based on a
Conversion/Exchange Price of $7.50). The Conversion/Exchange Price for the
B Preferred Stock is equal to 130% of the market price of the Class A Common
Stock (based on the average representative bid and asked prices quoted on the
Nasdaq Stock Market at 4:00 p.m. on each of the 21 business days ending on the
90th day after the first issuance of the B Preferred Stock). For the purposes of
this analysis, Banc of America Securities assumed that there would be no
downward adjustment in the Conversion/Exchange Price. Pursuant to the terms of
the B Preferred Stock, the Conversion/Exchange Price can in no event be lower
$6.50 and no higher than $7.50. However, the Conversion/Exchange Price may be
subject to downward adjustments in certain circumstances. See
"Proposal 1--Terms of the B Preferred Stock--Conversion/Exchange."
The summary set forth above does not purport to be a complete description of
the analysis presented by Banc of America Securities. The preparation of a
fairness opinion is a complex process and is not necessarily susceptible to
partial analysis or summary description. Banc of America Securities believes
that selecting any portion of its analysis or of the summary set forth above,
without considering the analyses as a whole, would create an incomplete view of
the process underlying Banc of America Securities' opinion. In arriving at its
opinion, Banc of America Securities considered the results of all such analyses.
The analyses performed by Banc of America Securities are not necessarily
indicative of actual values or actual future results, which may be significantly
more or less favorable than those suggested by such analyses. The analyses do
not purport to be appraisals or to reflect the prices at which the Company might
actually be sold or the prices at which the Class A Common Stock may trade at
any time in the future. Such analyses were prepared solely for the purposes of
Banc of America Securities providing its opinion to the Board as to the
fairness, from a financial point of view, of the Proposed Transactions, taken as
a whole, to the holders of shares of Common Stock (other than the Excluded
Stockholders). Analyses based upon forecasts or future results are not
necessarily indicative of actual values or future results, which may be
significantly more or less favorable than suggested by such analyses. Because
such analyses are inherently subject to uncertainty, being based upon numerous
factors and events, including, without limitation, factors related to general
economic and competitive conditions beyond the control of the parties or their
respective advisors, Banc of America Securities has assumed no liability for
such forecasts. As described above, Banc of America Securities' opinion and
presentation to the Board were among the many factors taken into consideration
by the Board in making its determination to approve, and to recommend that the
Company's stockholders approve, the matters being considered by the stockholders
at the Annual Meeting. The foregoing summary does not purport to be a complete
description of the analysis performed by Banc of America Securities and is
qualified by reference to the written opinion dated as of June 2, 2000 of Banc
of America Securities set forth in Appendix A hereto. The stockholders of USFS
are encouraged to read this opinion in its entirety.
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Banc of America Securities provides a full range of financial, advisory and
security services and in the ordinary course of its normal trading, brokerage,
investment banking, principal investing, investment management and financing
activities may at any time hold long or short positions or other investments and
may trade or otherwise effect transactions, for its own account, those of its
affiliates, or the accounts of its customers, in the equity securities of the
Company. Banc of America Securities and its affiliates also have certain lending
relationships with certain entities ("Pritzker Controlled Entities") controlled
by Pritzker family business interests (that control the Investor Group), have in
the past acted as the agent for a Pritzker Controlled Entity and are currently
under discussions regarding a potential partnership with a Pritzker Controlled
Entity in a real estate oriented debt fund. In addition, Pritzker family
business interests were a significant shareholder in Montgomery Securities, a
predecessor of Banc of America Securities. In the past, Banc of America
Securities or its affiliates have provided financial advisory and financing
services for the Company and have received fees for the rendering of these
services.
Pursuant to the terms of the Engagement Letter, the Company has agreed to
pay Banc of America Securities a transaction fee based on the Proposed
Transactions. The Engagement Letter also calls for the Company to reimburse Banc
of America Securities for its reasonable out-of-pocket expenses. Pursuant to a
separate letter agreement, the Company has agreed to indemnify Banc of America
Securities, its affiliates, and their respective partners, directors, officers,
agents, consultants, employees and controlling persons against certain
liabilities, including liabilities under the federal securities laws.
EFFECT OF ISSUANCE OF PREFERRED STOCK AND CLASS A COMMON STOCK
The issuance of the Preferred Stock and consummation of the Offer are
conditioned upon each other and will result in the Investor Group beneficially
owning approximately 42.9% of the voting power of the Company (assuming the
maximum of 8,666,666 shares of Common Stock are accepted for purchase in the
Offer and the conversion of Neal Aronson's shares of Class B Common Stock into
shares of Class A Common Stock, as contemplated by the Aronson Agreement). The
issuance of the Preferred Stock will, therefore, dilute the voting power of the
stockholders of the Company and, in combination with the consummation of the
Offer and the execution of the agreements contemplated by the Recapitalization
Agreement, give the Investor Group the ability to control the business and
corporate actions of the Company requiring stockholder approval, including the
election of directors, a sale of substantially all of the Company's assets and a
merger of the Company with another entity.
In addition, upon consummation of the Offer and the Investment, Mr. and
Mrs. Michael Leven will beneficially own approximately 27.5% of the voting power
of the Company (assuming the maximum of 8,666,666 shares of Common Stock are
accepted for purchase in the Offer, Neal Aronson converts his shares of Class B
Common Stock into shares of Class A Common Stock, and Mr. and Mrs. Leven retain
half of the shares of Common Stock currently owned by them and that all of such
shares are Class B Common Stock).
Delaware general corporate law empowers the Company's Board of Directors to
direct the management of the Company's business and to make numerous major
decisions without the approval of the Company's stockholders. Matters and
decisions subject to Board control include, among other things, the purchase and
sale of assets of the Company within the ordinary course of business, the
issuance of debt securities and additional equity securities (subject to
limitations imposed by the Company's Certificate of Incorporation), the
declaration of dividends, the election and removal of officers of the Company,
capital expenditure decisions, strategic planning, by-law amendments, executive
compensation matters and the recommendation for stockholder approval of certain
major corporate transactions. Upon consummation of the Offer and the Investment,
a majority of the Board of Directors (6 out of 11) will be designated by the
Investor Group. If these six directors vote together, they will have the ability
to control the outcome of matters and decisions voted on by the Board. This
ability to control the Board of Directors and the concentration of ownership
could (1) result in the Investor Group taking actions with respect to the
Company with which the other stockholders do not agree and/or (2) delay, defer
or prevent tender offers or takeover attempts that other stockholders of the
Company consider to be in their best interests and
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<PAGE>
adversely affect the price that investors might be willing to pay in the future
for shares of Common Stock. Also, in the event of a sale of the Company's
business, the Investor Group could attempt to receive a control premium to the
exclusion of other stockholders. In addition, Pritzker family business
interests, which control the Investor Group, have interests in companies in the
hospitality industry, which is the same industry in which the Company operates.
Therefore, the Investor Group may have conflicts between the Company's interests
and Pritzker family business interests' in competing companies.
There can be no assurance that the Investor Group or Mr. and Mrs. Leven will
not take actions that adversely affect the interests of other stockholders.
Although the Company expects to benefit from the participation of the Investor
Group's director designees and its stronger relationships with the Investor
Group as significant investors in the Company, there can be no assurance that
the Investor Group's influence on, and participation in, the Company's
management will not have a material adverse affect on the Company's financial
condition and performance. In addition, Pritzker family business interests are
not committed to make additional resources available to the Company.
The B Preferred Stock participates in dividends and liquidating
distributions from the Company on an "as-converted" basis, which assumes the
conversion/exchange of all B Preferred Stock into Class A Common Stock. As a
result, the issuance of B Preferred Stock to the Investors may decrease the
rights of the holders of Common Stock to participate in dividends and
liquidating distributions from the Company. In addition, the Preferred Stock has
dividend and liquidation preferences over the Common Stock. As a result, holders
of Common Stock will not be entitled to receive dividends or distributions upon
liquidation of the Company until the holders of Preferred Stock receive the
preferential dividends and distributions to which they are entitled. Because the
aggregate Liquidation Value of the Preferred Stock increases with the accrual of
dividends and the possible issuance of additional shares of Preferred Stock in
lieu of cash dividends, the preferences of the Preferred Stock over the Common
Stock and the rights of the B Preferred Stock to participate in dividends and
distributions on liquidation of the Company may increase over time relative to
the rights of the Common Stock. The A Preferred Stock has a preferential
dividend that accrues at the annual rate of 8.5% on the Liquidation Value
(initially an aggregate of $65,000,000) of the A Preferred Stock, and the B
Preferred Stock has a preferential dividend that accrues at the annual rate of
6.0% on the Liquidation Value (initially an aggregate of $10,000,000) of the B
Preferred Stock. The funds used by the Company to pay these dividends will not
be available for other purposes.
The A Preferred Stock will be subject to mandatory redemption by USFS
aproximately seven years after the date of issuance and the B Preferred Stock
will be subject to mandatory redemption by USFS approximately ten years after
the date of issuance. Any requirement for redemption could impose significant
financial obligations on USFS unless the Preferred Stock is converted/exchanged
for Class A Common Stock before the redemption date.
The issuance of the Class A Common Stock upon the potential
conversion/exchange of the B Preferred Stock will dilute the economic interests
of the other then existing stockholders. The provisions of the B Preferred Stock
provide for adjustments to the Conversion/Exercise Price under specified
circumstances. These adjustments may result in significant further economic
dilution to the holders of Common Stock. However, the conversion/exchange of the
B Preferred Stock will eliminate the preferential dividend accrual and
preferences on liquidation of the B Preferred Stock and any A Preferred Stock
surrendered for conversion/exchange.
The Class A Common Stock is currently listed on the Nasdaq National Market.
In the Recapitalization Agreement, the Investor Group has agreed to use its
reasonable efforts to cause the Class A Common Stock to be listed on the Nasdaq
Stock Market, which includes both the Nasdaq National Market and The Nasdaq
SmallCap Market ("Nasdaq"). In order for the Company to maintain the Nasdaq
National Market designation with respect to its Class A Common Stock, the
Company is required to meet certain criteria, including having net tangible
assets of at least $4,000,000 or a minimum bid price of $5.00 per share for its
Class A Common Stock. The Company desires to maintain the listing of the
Class A Common Stock on the Nasdaq National Market. However, after the
consummation of the Offer and the Investment, there can be
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<PAGE>
no assurance that the Company will do so. In the event the listing of the
Class A Common Stock on the Nasdaq National Market is terminated, the Company
would seek to transfer the listing of the Class A Common Stock to The Nasdaq
SmallCap Market, which would require the Company to have, among other things,
(1) net tangible assets of at least $2,000,000 or a market capitalization of at
least $35,000,000 and (2) a minimum bid price of $1.00 for its Class A Common
Stock. Although the Company believes, based on the current market price of the
Class A Common Stock, that it would meet The Nasdaq SmallCap Market listing
requirements, there can be no assurance that the Company will do so, in which
case the Class A Common Stock would not be listed for trading on Nasdaq. This
would adversely affect the ability of investors to obtain pricing information
about the Class A Common Stock and sell or purchase the Class A Common Stock.
The Company believes that its Class A Common Stock is currently "held of
record" by less than 300 persons, as such term is defined pursuant to
Rule 12g5-1 of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). Therefore, the Class A Common Stock is currently eligible for
deregistration under the Exchange Act. In the Recapitalization Agreement, the
Investor Group has agreed to use reasonable efforts to cause the Class A Common
Stock to continue to be listed on Nasdaq. Nasdaq listing of a security requires
registration of that security under the Exchange Act. Consequently, as long as
the Class A Common Stock is listed on Nasdaq, the Company cannot deregister the
Class A Common Stock from the Exchange Act. Registration under the Exchange Act
requires, among other things, the Company to furnish annual and quarterly
information to its stockholders and the Commission and to comply with the
Commission's proxy rules in connection with the solicitation of proxies.
For a discussion regarding proposed amendments to the Company's Certificate
of Incorporation which may have the effect of delaying, deferring or preventing
a change of control of the Company, see "Proposal 2."
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<PAGE>
MATERIAL CONDITIONS TO THE CLOSING OF THE INVESTMENT AND THE OFFER
Each party's respective obligations under the Recapitalization Agreement are
conditioned upon the satisfaction or waiver of the following conditions:
a. The Company's issuance and sale of the Preferred Stock and the Company's
issuance of Class A Common Stock upon the potential conversion/exchange
of the B Preferred Stock must be approved by the stockholders of the
Company in accordance with applicable law and the Company's Certificate
of Incorporation and By-Laws;
b. The amendments to the Certificate of Incorporation described in
Proposals 2 and 3 must be duly approved by the stockholders of the
Company in accordance with applicable law and the Company's Certificate
of Incorporation and By-Laws;
c. Consummation of the Investment and the Offer may not result in a
violation of any applicable law, including a violation of the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, and all applicable
waiting periods thereunder shall have expired or been terminated;
d. No preliminary or permanent injunction or other order issued by any
United States federal or state court of competent jurisdiction in the
United States prohibiting the consummation of the Offer or the Investment
shall be in effect or threatened;
e. All conditions to the Offer must be satisfied or waived. The material
conditions to the Offer are expected to include: (1) a minimum of
3,000,000 shares of Common Stock must be tendered; (2) the Company's
stockholders must approve the Company's issuance and sale of the
Preferred Stock and the Company's issuance of the Class A Common Stock
upon the potential conversion/ exchange of the B Preferred Stock
described in this Proposal 1 and the amendments to the Company's
Certificate of Incorporation described in Proposals 2 and 3;
(3) customary regulatory clearances shall have been obtained; (4) the
Investor Group shall not have materially breached any of their
representations, warranties, covenants or agreements in the
Recapitalization Agreement; and (5) all of the conditions to the
Investors' obligation to purchase the Preferred Stock shall have been
fulfilled or waived;
f. The members of the Board of Directors of the Company, other than
Messrs. Leven, Romaniello, Geoga, Chafetz and Sonnenfeld, must resign;
the remaining members of the Board of Directors must take all necessary
steps to cause the Board of Directors to consist of eleven members
immediately following the effective time of the resignations; and the
remaining members of the Board of Directors must appoint one person to
serve with Messrs. Chafetz and Sonnenfeld as Independent Directors and
five other directors as will be designated by the Investor Group (some of
whom may also qualify as Independent Directors); and
g. The Class A Common Stock issuable upon the potential conversion/exchange
of the B Preferred Stock must be approved for listing on Nasdaq, pending
official notice of issuance.
The Investor Group's obligations under the Recapitalization Agreement are
also conditioned upon the satisfaction or waiver of the following additional
conditions:
a. In general, the representations and warranties of the Company contained
in the Recapitalization Agreement must be true and correct as of the
closing of the Offer and the Investment;
b. In general, since the execution of the Recapitalization Agreement, there
can be no change in the Company's assets, financial condition or results
of operations, nor can there be any other development, event or condition
relating to or affecting the Company that could reasonably be expected to
have a material adverse affect on the Company;
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<PAGE>
c. The Company must adopt, execute, and file with the Secretary of State of
Delaware the Certificates of Designation setting forth the rights and
preferences of the A Preferred Stock and the B Preferred Stock; and
d. The Company must deliver to the Investor Group an opinion of the
Company's legal counsel with respect to the matters required by the
Recapitalization Agreement.
The Company's obligations under the Recapitalization Agreement are also
conditioned upon the satisfaction or waiver of the following additional
conditions:
a. In general, representations and warranties of the Investor Group
contained in the Recapitalization Agreement must be true and correct as
of the closing of the Offer and the Investment; and
b. The Investors shall have paid to the Company $75,000,000 against
delivery of the Preferred Stock.
MISCELLANEOUS PROVISIONS OF THE RECAPITALIZATION AGREEMENT
RESTRICTIONS ON STOCK ACQUISITIONS
In the Recapitalization Agreement, the Investor Group has agreed to refrain,
for a period of four years from the closing of the Investment and the Offer,
from purchasing shares of Common Stock, either on the open market or, except
under certain circumstances, in connection with any other transaction, at a
price less than (1) $7.50, if such transaction is effected within 24 months
after the closing date of the Recapitalization Agreement, or (2) if such
transaction is effected after a 24-month period, at a price that is less than
the highest bid price per share of Class A Common Stock for the preceding
52-week period. Such prices are subject to adjustment for any stock split, stock
dividend, reclassification, or any other action with respect to the outstanding
shares of Common Stock. Any adjustment will be made pursuant to a resolution of
the Board of Directors acting with the affirmative vote of a majority of the
Independent Directors.
This requirement of the Recapitalization Agreement may be modified or waived
on behalf of the Company by resolution of the Board of Directors acting with the
affirmative vote of a majority of the Independent Directors.
AFFILIATE TRANSACTIONS
In the Recapitalization Agreement, the Investor Group has agreed to refrain,
for a period of five years after the closing of the Investment and the Offer,
from entering into any transaction, including a purchase or sale of property or
the performance of a service, with the Company or any of the Company's
subsidiaries unless (1) the transaction terms are fair and no less favorable to
the Company than those that could be obtained from a party that is not a member
of the Investor Group, (2) if the transaction involves an amount in excess of
$2,000,000, the agreement is set forth in writing and approved by a resolution
of the Board of Directors acting with the affirmative vote of a majority of the
Independent Directors, and (3) if the transaction involves an amount in excess
of $5,000,000, the terms have been determined by a nationally recognized
investment banking, valuation or accounting firm to be fair, from a financial
point of view, to the Company.
This requirement of the Recapitalization Agreement may be modified or waived
on behalf of the Company by resolution of the Board of Directors acting with the
affirmative vote of a majority of the Independent Directors.
NO SOLICITATION
The Company has agreed that, other than the Offer or the Investment, it will
not, and will use its reasonable efforts to cause its directors, officers,
employees, agents, representatives, and investment bankers not to, directly or
indirectly solicit, initiate, knowingly encourage, engage in any discussions
regarding, provide any person confidential information with respect to, or agree
to or endorse any proposal
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<PAGE>
relating to a possible (1) merger, consolidation, tender or exchange offer or
similar transaction, (2) sale, lease or other disposition of 10% or more of
proprietary rights or other material assets of the Company, (3) acquisition or
issuance of securities representing 15% or more of the votes attached to the
outstanding securities of the Company, (4) liquidation or dissolution,
(5) recapitalization, or (6) transaction similar to any of the foregoing (an
"Acquisition Proposal").
However, the Company or its Board of Directors, directly or indirectly, may
furnish non-public information to, or enter into negotiations with, any person
in connection with an unsolicited Acquisition Proposal that would (1) result in
the opportunity for all stockholders to receive cash or other property for at
least 75% of all issued and outstanding shares of Common Stock, and (2) in the
reasonable good faith judgement of the Board of Directors, result in a
transaction more favorable to the stockholders from a financial point of view
than the Offer (a "Superior Proposal"). In the event that the Company does not
consummate the Offer and the Investment and enters into an agreement for such a
Superior Proposal, the Company must pay the Investors $3,000,000 and reimburse
the Investor Group for its reasonable legal and other expenses incurred in
preparation of the Recapitalization Agreement and related documents, not to
exceed $1,000,000, and legal fees reasonably incurred to enforce any such
payment (with interest).
TERMINATION
The Recapitalization Agreement may be terminated and the Offer may be
terminated and abandoned at any time prior to the closing of the Offer and the
Investment, before or after stockholder approval of the issuance of the
Preferred Stock and the Class A Common Stock and of the amendments to the
Certificate of Incorporation described in Proposals 2 and 3, by (1) mutual
consent of the Company and the Investors, (2) either the Company or the
Investors if the other party fails to comply in any material respect with any
covenant or agreement in the Recapitalization Agreement, (3) either the
Investors or the Company if the purchase of Common Stock pursuant to the Offer
does not become effective by November 30, 2000, if such stockholder approval is
not obtained by October 15, 2000, subject to extension under certain
circumstances, or if the Offer terminates or expires without the Company's
acceptance for purchase of any shares of Common Stock or (4) the Company if its
Board of Directors approves and enters into definitive documents for a Superior
Proposal. If the Investors terminate the Recapitalization Agreement because the
Company breaches a representation or covenant or breaches its obligations under
the Recapitalization Agreement with respect to an Acquisition Proposal, the
Company is required to reimburse the Investor Group for its reasonable legal and
other expenses incurred in preparation of the Recapitalization Agreement and
related documents, not to exceed $1,000,000, and legal fees reasonably incurred
to enforce any such payment (with interest).
ACCELERATED VESTING OF OPTIONS AND RESTRICTED SHARES
Immediately prior to completion of the Offer, all 1,371,317 shares of Common
Stock that are Restricted Shares (as defined below) will become unrestricted and
may be tendered for sale to the Company pursuant to the Offer. See "Proposal
5--Management Shares of Common Stock." In addition, all outstanding options to
purchase 823,957 shares of Class A Common Stock granted under the Option Plan
will become vested and exercisable. Under the terms of the Recapitalization
Agreement, the Company is required to afford each holder of options under the
Option Plan an opportunity to receive cash for their vested and exercisable
options (and receive the net value thereof) at or following the expiration of
the Offer. The Company expects to provide holders of vested options with an
exercise price below $7.50 the opportunity to surrender all or any portion of
those vested options to the Company at such time after the Offer as the Company
is permitted to do so under applicable law in exchange for a cash payment equal
to the difference between the exercise price and $7.50. If all outstanding
"in-the-money" options are surrendered for cash pursuant to this arrangement,
the aggregate cash payment by the Company will be $2,592,061. The vesting of
options and Restricted Shares will not be accelerated if the Offer and the
Investment are not consummated. The acceleration of vesting of options and
Restricted
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<PAGE>
Shares will also result in non-cash charges of $785,750 upon completion of the
Offer and the Investment. See "--Pro Forma Consolidated Statement of Financial
Position" and "--Pro Forma Consoldated Statement of Operations."
AGREEMENTS EXECUTED AND TO BE EXECUTED IN CONNECTION WITH THE RECAPITALIZATION
AGREEMENT
The Company will enter into new employment agreements with Mr. Leven, the
Company's Chief Executive Officer, and Mr. Romaniello, the Company's President
and Chief Operating Officer, to become effective upon the consummation of the
Offer and the Investment. In addition, the Company has set the base salary of
Stephen Aronson, the Company's Vice President and General Counsel, at $150,000,
effective July 1, 2000, with a guaranteed bonus of $50,000 to be paid at the end
of 2000 and up to an additional $50,000 in bonus in 2001. Upon consummation of
the Offer and the Investment, Mr. Aronson will receive a lump sum payment of
$150,000 from the Company.
NEW LEVEN EMPLOYMENT AGREEMENT
The Company will enter into a new employment agreement with Mr. Leven which
will become effective upon consummation of the Offer and the Investment on
substantially the terms described herein. Mr. Leven's new employment agreement
with the Company will provide for his employment as Chief Executive Officer and
Chairman of the Board of the Company for a five-year term commencing on the
effective date of the agreement. Mr. Leven will be entitled to a base salary of
at least $500,000 per year, subject to annual cost of living increases. In
addition, Mr. Leven will be paid a performance bonus no later than 120 days
after the end of each fiscal year and the performance bonus target will be in an
amount no less than $250,000. Mr. Leven will also be granted options to purchase
200,000 shares of Class A Common Stock with an exercise price equal to the
Initial Conversion/Exercise Price of the B Preferred Stock. The options will
become vested and exercisable with respect to 20% of the options on each
anniversary of the grant date and will be exercisable until the tenth
anniversary of the grant date. Upon termination of Mr. Leven's employment, by
the Company for reasons other than for "cause" or by Mr. Leven for "good reason"
(each as defined below), all of his granted but unvested options will
immediately vest. The Company will agree to maintain certain insurance benefits
for Mr. Leven under his new employment agreement, including term life insurance
in the amount of $3,000,000, executive health, dental and medical insurance,
long term disability and long term home care. Mr. Leven will also be eligible
for participation in all of the Company's employee welfare and benefit plans
under his new employment agreement which may be in effect from time to time,
including a retirement plan, annual and long-term incentive compensation plans,
group life insurance, accident and death insurance, medical and dental
insurance, pension plans and disability plans.
Mr. Leven's new employment agreement also will contain confidentiality
provisions that will 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 three years after the termination of his
employment agreement. The agreement will also contain non-competition provisions
that will 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 three years following the termination of his
employment for "cause" or his resignation without "good reason." In addition,
for a period extending for three years after the termination of his employment
with the Company regardless of the reason, Mr. Leven will agree to refrain from
(1) soliciting any employee of the Company and (2) inducing any franchisee or
supplier of the Company to terminate its relationship with the Company.
Furthermore, for a period extending for three years after termination of his
employment for reasons other than by the Company without "cause" or by
Mr. Leven for "good reason" Mr. Leven will refrain from soliciting the Business
(as defined in such employment agreement) or entering into any contractual
relationship with any franchisee or licencee regarding the Business, subject to
several qualifications. The enforceability of these
31
<PAGE>
non-disclosure and non-competition provisions under Georgia law, which will
govern Mr. Leven's agreement, is uncertain.
In addition to allowing Mr. Leven to resign at any time for "good reason,"
his employment agreement will provide that Mr. Leven may resign at any time upon
six months notice. If his resignation is without "good reason," the Company will
be required to pay Mr. Leven only his base salary, unused vacation time, and
performance bonus actually earned or accrued through the effective date of
resignation. If Mr. Leven resigns for "good reason," or if his employment is
terminated without "cause," he will be entitled to a single lump sum severance
payment equal to his base salary and he will be entitled to receive his
performance bonus and continuation of other benefits for one year following such
termination of employment. If Mr. Leven's employment is terminated by the
Company without "cause" or by Mr. Leven for "good reason", in either case during
the first year, his lump sum payments and benefits will be provided for a
two-year period. For the purpose of Mr. Leven's employment agreement, "good
reason" will mean the occurrence of any one of the following events: (1) any
material breach (which is not corrected within 30 days following written notice
from Mr. Leven to the Company specifying such breach) by the Company of its
obligations under this agreement or (2) resignation by Mr. Leven at the written
request of the Company which has been authorized by the Company's Board of
Directors. For the purpose of Mr. Leven's employment agreement, "cause" will
mean (1) the conviction or no contest plea for any felony other than a
traffic-related offense, (2) fraud, theft, embezzlement or intentional
misappropriation of funds of the Company, and (3) repeated negligence of duties
(other than for bad judgement), and (4) material breach of obligations under the
employment agreement. In addition, pursuant to the Company's By-Laws,
Mr. Leven's employment agreement will not be subject to termination without the
approval of 75% of the Board of Directors (excluding Mr. Leven).
ROMANIELLO EMPLOYMENT AGREEMENT
The Company will enter into an employment agreement with Mr. Romaniello,
currently the Company's President and Chief Operating Officer, which will become
effective upon the consummation of the Offer and the Investment.
Mr. Romaniello's new employment agreement with the Company will provide for his
employment as President and Chief Operating Officer of the Company for a
seven-year term commencing on the effective date of the agreement.
Mr. Romaniello will be entitled to a base compensation equal to the sum of
(1) $3,000 times the number of newly executed Microtel franchise agreements in a
given calendar year, up to a maximum of 110, plus (2) $2,000 times the number of
newly executed Microtel franchise agreements in excess of 110, plus (3) $2,000
times the number of newly executed franchise agreements (excluding Microtel
agreements) for all of the Company's other hotel brands currently existing or
hereafter acquired or licensed. Mr. Romaniello will be entitled to a yearly draw
of $110,000 against such base compensation payable in bi-monthly installments.
Mr. Romaniello will be granted options to purchase 250,000 shares of Class A
Common Stock with an exercise price equal to the Initial Conversion/Exchange
Price of the B Preferred Stock. The options will become vested and exercisable
with respect to 1/7(th) of the options on each anniversary of the grant date.
Upon termination of his employment by the Company for reasons other than for
"cause" or by Romaniello for "good reason" (each of which is substantially
similar to those expected to be in Mr. Leven's new employment agreement), all of
his granted but unvested options will immediately vest. Mr. Romaniello will be
eligible for participation in all of the Company's employee welfare and benefit
plans under his new employment agreement which may be in effect from time to
time, including a retirement plan, annual and long-term incentive compensation
plans, group life insurance, medical and dental insurance and pension plans. The
Company will continue the split dollar life insurance and disability insurance
benefits currently provided to Mr. Romaniello.
Mr. Romaniello also will be offered a one-time opportunity to purchase up to
250,000 newly issued shares of Class A Common Stock within 270 days after
completion of the Offer and the Investment at a price equal to the market price
at the close of business on the date Mr. Romaniello gives notice of his
intention to purchase those shares. Pritzker family business interests have
advised the Company that they
32
<PAGE>
have agreed to lend Mr. Romaniello the funds to enable him to purchase these
shares. The loan will be secured by the shares purchased.
Mr. Romaniello's new employment agreement also will contain confidentiality
provisions that will 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 three years after the termination of his
employment agreement. The agreement will also contain non-competition provisions
that will prohibit Mr. Romaniello from competing in the hotel franchising
business for a period of three years following the termination of his employment
for "cause" or his resignation without "good reason." In addition,
Mr. Romaniello will agree to refrain for a period extending for three years
after termination of his employment with the Company regardless of the reason
from (1) soliciting any employee of the Company; and (2) inducing any franchisee
or supplier of the Company to terminate its relationship with the Company.
Furthermore, for a period extending for three years after termination of his
employment for reasons other than by the Company without "cause" or by
Mr. Romaniello for "good reason" or by Mr. Romaniello within 90 days of a change
of control of the Company Mr. Romaniello will agree to refrain from soliciting
the Business (as defined in such employment agreement) or entering into any
contractual relationship with any franchisee or licensee regarding the Business,
subject to several qualifications. The enforceability of these non-disclosure
and non-competition provisions under Georgia law, which will govern
Mr. Romaniello's agreement, is uncertain.
In addition to allowing Mr. Romaniello to resign at any time for "good
reason," his employment agreement will provide that he may resign at any time
upon three months notice. If his resignation is without "good reason," the
Company is required to pay Mr. Romaniello his base compensation through the date
of termination. If Mr. Romaniello resigns for "good reason," or if his
employment is terminated without "cause," he will be entitled to a single lump
sum severance payment equal to the sum of his base compensation for one full
year and he will continue to receive full benefits for a period of one full year
following termination. Furthermore, Mr. Romaniello may resign upon a change of
control of the Company. In such case, the Company is required to pay
Mr. Romaniello all fringe benefits and his base compensation through the date of
termination. Unless and until Mr. Romaniello is offered and accepts employment
with an affiliate of the Investor Group, he will be entitled to receive for one
year a monthly amount equal to one-twelfth of his base compensation and
continuation of other benefits (other than perquisites).
SEPARATION AGREEMENT
In connection with the execution of the Recapitalization Agreement, the
Company entered into an agreement with Neal Aronson (the "Separation
Agreement"), which provides that Mr. Aronson will resign from his employment
with the Company 60 days after consummation of the Offer and the Investment and
provides him with severance benefits in connection therewith. Mr. Aronson's
severance benefits will include: (1) a cash payment of $350,000 payable on his
ending date, (2) an office and office support for 30 days after his ending date,
(3) reimbursement of up to $15,000 expenses for the pursuit of other employment
opportunities, (4) reimbursement of up to $10,000 of legal fees in connection
with the agreement and reimbursement of up to $15,000 of relocation expenses,
and (5) certain other benefits including split dollar life insurance and medical
coverage for his family paid for by the Company for 16 months after his ending
date with the Company (to the extent that Mr. Aronson is not eligible for
similar coverage provided by another employer). The Separation Agreement
provides that all of its provisions cease to be effective if the Offer is not
consummated or is materially amended, the Restricted Shares are not fully vested
by the closing of the Investment and the Offer or the Recapitalization Agreement
is terminated pursuant to its terms.
33
<PAGE>
ARONSON AGREEMENT
In connection with the execution of the Recapitalization Agreement, Meridian
entered into an agreement with Neal Aronson (the "Aronson Agreement") which
obligates Mr. Aronson to, among other things, (1) tender all the shares of
Common Stock over which he has dispositive control in the Offer, (2) vote his
shares of Common Stock, and any shares he has the power to vote, in favor of the
Company's issuance and sale of the Preferred Stock and the Company's issuance of
Class A Common Stock upon the potential conversion/exchange of the B Preferred
Stock described in this Proposal 1 and the amendments to the Certificate of
Incorporation described in Proposals 2 and 3, and (3) convert any of his
remaining shares of Class B Common Stock that are not accepted by the Company
for purchase in the Offer into Class A Common Stock by the first business day
after the closing of the Investment and the Offer. The Aronson Agreement
provides that all of its provisions cease to be effective if the Offer is not
consummated or is materially amended, the Restricted Shares are not fully vested
by the closing of the Offer and the Investment or the Recapitalization Agreement
is terminated pursuant to its terms. The complete text of the Aronson Agreement
is attached hereto as Appendix E.
LEVEN AGREEMENT
In connection with the execution of the Recapitalization Agreement, Meridian
entered into an agreement (the "Leven Agreement") with Mr. Leven and his wife
that obligates Mr. and Mrs. Leven, among other things, (1) in their capacities
as stockholders, to refrain for 90 days from June 2, 2000 from selling or
exchanging their shares of Common Stock or taking any action, except pursuant to
a Superior Proposal, that would adversely affect the transactions contemplated
by the Recapitalization Agreement, (2) at a meeting of stockholders called for
such purpose, to vote all their shares of Common Stock they have the power to
vote in favor of the Company's issuance and sale of the Preferred Stock and the
Company's issuance of Class A Common Stock upon the potential
conversion/exchange of the B Preferred Stock described in this Proposal 1 and
the amendments to the Certificate of Incorporation described in Proposals 2 and
3, and (3) to not tender for purchase shares of Common Stock pursuant to the
Offer that will result in more than 50% of the Common Stock held by Mr. and
Mrs. Leven being acquired by the Company pursuant to the Offer, and if required
to have their shares prorated in the Offer, to request to have the Company
purchase their shares of Class A Common Stock before purchasing any shares of
Class B Common Stock. Mr. and Mrs. Leven are not required to perform their
obligations under clauses (1) and (2) above if the Offer is terminated or
withdrawn pursuant to the Recapitalization Agreement or the Recapitalization
Agreement is earlier terminated in accordance with its terms. The complete text
of the Leven Agreement is attached hereto as Appendix F.
STOCKHOLDERS AGREEMENT
As contemplated by the Recapitalization Agreement, the Company expects that
the Investor Group, Mr. Romaniello, Mr. and Mrs. Leven, and certain members of
the Leven family will agree to enter into a Stockholders Agreement (the
"Stockholders Agreement"). The Stockholders Agreement provides for various
rights and restrictions, including: (1) restrictions on the ability of the
parties to transfer their stock, (2) rights of first offer granting the Investor
Group and any non-transferring party the ability to purchase its pro rata share
of any shares offered for sale by any other party to third parties,
(3) tag-along rights which permits the other parties to transfer an amount of
their shares on a pro rata basis in the event that the Investor Group proposes
to transfer more than 20% of their shares held on the effective date of the
agreement, (4) co-sale rights which obligate the other parties to transfer an
amount of their shares on a pro rata basis on the same terms and conditions in
the event that the Investor Group proposes to transfer more than 50% of their
total shares, (5) an agreement among the parties not to pledge any of their
shares of Common Stock without the consent of the Investor Group and (6) an
agreement among the parties to vote all of their shares of Common Stock in favor
of the election to the Board of Directors of the Company of (a) each of Messrs.
Leven and Romaniello (subject to their continued employment by the Company and,
34
<PAGE>
for Mr. Leven, for such additional time as he meets certain shareholding
requirements), (b) six persons designated by the Investor Group (two of whom may
not be directors, officers, employees, agents or other representatives of the
Investor Group or an affiliate of the Investor Group), and (c) at least three
persons designated in accordance with proposed Section 12.1 of the Certificate
of Incorporation described in Proposal 2. The complete text of the form of
Stockholders Agreement is attached hereto as Appendix G.
REGISTRATION RIGHTS AGREEMENT
In connection with the execution of the Recapitalization Agreement, the
Company has entered into a Registration Rights Agreement with the Investor Group
and Neal Aronson (the "Registration Rights Agreement"). The Registration Rights
Agreement grants the Investor Group the right to demand three times that the
Company, at its expense, register the Investor Group's unregistered shares of
Class A Common Stock for public resale under the Securities Act. Mr. Aronson
will be able to request the inclusion of his shares of Class A Common Stock in
any such demand registration. The Investor Group and Mr. Aronson will also be
able to include their shares of Class A Common Stock in any registered public
offering initiated by the Company. In each case, the shares requested to be
registered will be subject to limitations or reductions depending upon the
circumstances of the offering. The complete text of the Registration Rights
Agreement is attached hereto as Appendix H.
USE OF PROCEEDS
The gross proceeds of $75,000,000 to be received by the Company from the
Investor Group in the Investment in exchange for the Preferred Stock is expected
to be used as follows: $65,000,000 to purchase shares of Common Stock in the
Offer (assuming the maximum of 8,666,666 shares of Common Stock are tendered and
accepted for purchase), approximately $6,248,236 to pay the estimated remaining
aggregate expenses relating to the Recapitalization Agreement, the Offer and
related matters, including the expenses attributable to the cash payments the
Company expects to make for surrender of options (assuming all 810,951 "in the
money" options are surrendered), the fee payable to Banc of America Securities
for its services as financial advisor to the Company and legal expenses, and the
remaining approximately $3,751,764 (or such greater amount if less than the
maximum number of (1) shares of Common Stock are tendered and accepted for
purchase in the Offer and/or (2) options are surrendered for payment) for
working capital and general corporate purposes. No assurances can be given that
such funds will be available to fund activities related to future growth of the
Company.
35
<PAGE>
PRO FORMA CONSOLIDATED STATEMENT OF FINANCIAL POSITION
U.S. FRANCHISE SYSTEMS, INC. AND SUBSIDIARIES
MARCH 31, 2000 (UNAUDITED)
The following unaudited Pro Forma Consolidated Statement of Financial
Position is presented as if the issuance of the Preferred Stock and the
completion of the Offer (assuming the acceptance of 8,666,666 shares of Common
Stock tendered) had occurred on March 31, 2000. Such pro forma information is
based in part upon, and should be read in conjunction with, the historical
consolidated statement of financial position of the Company and its subsidiaries
and the notes thereto, which are contained in the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 2000 and which are incorporated by
reference in this Proxy Statement. See "Miscellaneous--Incorporation of Certain
Information by Reference."
The following unaudited Pro Forma Consolidated Statement of Financial
Position is not necessarily indicative of what the actual financial position
would have been assuming such transactions had been completed as of March 31,
2000, nor does it purport to represent the future financial position of the
Company.
ASSETS
<TABLE>
<CAPTION>
COMPANY PRO FORMA COMPANY
HISTORICAL ADJUSTMENTS PRO FORMA
------------ ------------ ------------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and temporary cash investments............. $ 5,776,000 $ 75,000,000 (A) $ 8,640,944
(64,999,995)(B)
(2,592,061)(C)
(4,543,000)(D)
Accounts receivable............................. 3,360,000 -- 3,360,000
Deposits and prepaid expenses................... 182,000 -- 182,000
Promissory notes receivable..................... 2,359,000 -- 2,359,000
Deferred commissions............................ 4,249,000 -- 4,249,000
------------ ------------ ------------
Total current assets.......................... 15,926,000 2,864,944 18,790,944
PROMISSORY NOTES RECEIVABLE....................... 11,116,000 -- 11,116,000
PROPERTY AND EQUIPMENT--Net....................... 2,053,000 -- 2,053,000
FRANCHISE RIGHTS--Net............................. 24,463,000 -- 24,463,000
DEFERRED COMMISSIONS.............................. 5,254,000 -- 5,254,000
DEVELOPMENT SUBSIDIES............................. 11,593,000 -- 11,593,000
OTHER ASSETS--Net................................. 493,000 -- 493,000
------------ ------------ ------------
Total assets.................................. $ 70,898,000 $ 2,864,944 $ 73,762,944
============ ============ ============
</TABLE>
36
<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMPANY PRO FORMA COMPANY
HISTORICAL ADJUSTMENTS PRO FORMA
------------ ------------ ------------
<S> <C> <C> <C>
CURRENT LIABILITIES:
Accounts payable................................ $ 582,000 $ -- $ 582,000
Commissions payable............................. 758,000 -- 758,000
Deferred application fees....................... 5,052,000 -- 5,052,000
Accrued expenses................................ 2,534,000 (250,000)(D) 2,284,000
------------ ------------ ------------
Total current liabilities..................... 8,926,000 (250,000) 8,676,000
DEFERRED APPLICATION FEES......................... 5,095,000 -- 5,095,000
------------ ------------ ------------
Total liabilities............................. 14,021,000 (250,000) 13,771,000
REDEEMABLE STOCK:
Preferred shares, par value $0.01 per share;
authorized 1,000,000 shares; pro forma issued
and outstanding 65,000 Series A shares, 8.5%
dividend accrual rate, cumulative, (entitled
in liquidation to $65,000,000 at March 31,
2000)......................................... 64,549,333 (E) 64,549,333
Preferred shares, par value $0.01 per share;
authorized 1,000,000 shares; pro forma issued
and outstanding 10,000 Series B shares, 6.0%
dividend accrual rate, cumulative,
exchangeable, convertible (entitled in
liquidation to $10,000,000 at March 31,
2000)......................................... 9,930,667 (F) 9,930,667
Common shares, par value $0.01 per share; issued
and outstanding 3,128,473 (net of 58,807 share
in Treasury at March 31, 2000) entitled to
redemption under certain circumstances at
$324,000 (net of $6,000 in Treasury) at
March 31, 2000................................ 324,000 (324,000)(G) --
STOCKHOLDERS' EQUITY:
Common shares, par value $0.01 per share;
authorized 30,000,000 shares of Class A Common
Stock and 5,000,000 shares of Class B Common
Stock, issued and outstanding 14,117,361
Class A shares and 2,707,919 Class B shares
at March 31, 2000 pro forma issued and
outstanding 17,245,834 Class A shares and
2,707,919 Class B shares at March 31, 2000.... 167,000 31,285 (G) 198,285
Capital in excess of par........................ 90,687,000 1,078,465 (G) 91,765,465
Accumulated deficit............................. (34,301,000) (5,772,811)(H) (40,073,811)
------------ ------------ ------------
56,553,000 (4,663,061) 51,889,939
Less treasury stock, 8,666,666 shares, at
cost.......................................... -- (66,377,995)(I) (66,377,995)
------------ ------------ ------------
Total stockholders' equity...................... 56,553,000 (71,041,056) (14,448,056)
------------ ------------ ------------
$ 70,898,000 $ 3,491,153 $ 73,762,944
============ ============ ============
Net tangible book value per share............... $ 1.63 $ 1.67 (J)
============ ============
</TABLE>
37
<PAGE>
------------------------
(A) Reflects the issuance of 65,000 shares of A Preferred Stock and 10,000
shares of B Preferred Stock at $1,000 per share.
(B) Reflects the reacquisition by the Company in the Offer of 8,666,666 shares
of outstanding Common Stock at $7.50 per share.
(C) Reflects the acquisition of 810,957 outstanding options to purchase Common
Stock granted under the Option Plan.
(D) Reflects additional estimated costs and expenses incurred in connection with
the Offer and the Investment, including fees and expenses of professionals
and advisors of approximately $3,545,000, severance costs of $440,000,
bonuses totaling $230,000, and other costs totaling $328,000, with a
corresponding reduction of $250,000 in professional fees previously accrued.
(E) Reflects the issuance of 65,000 shares of A Preferred Stock, net of issuance
costs of $450,667, which will be accreted over a 7 year period.
(F) Reflects the issuance of 10,000 shares of B Preferred Stock, net of issuance
costs of $69,333, which will be accreted over a 10 year period.
(G) Reflects the reclassification of the Restricted Shares to Common Stock, due
to the elimination of the vesting criteria and $785,750 in compensation
expense arising as a result of the vesting of the unvested portion of all
823,957 outstanding options to purchase Common Stock granted under the
Option Plan.
(H) Represents severance costs of $440,000, bonuses totalling $230,000, advisor
fees of $1,975,000, and compensation expense of $785,750 arising as a result
of the vesting of the unvested portion of all 823,957 outstanding options to
purchase Common Stock granted under the Option Plan and the cash settlement
of 810,957 of such outstanding options of $2,292,061.
(I) Reflects the reacquisition by the Company in the Offer of 8,666,666 shares
of outstanding Common Stock at $7.50 per share, plus estimated costs and
expenses incurred in connection with the Offer and the Investment, including
fees and expenses of professionals and advisors of approximately $1,570,000
and other costs of $328,000, less amounts attributable to the issuance of
the Preferred Stock of $520,000.
(J) Represents net tangible book value per share (total assets less franchise
rights, less total liabilities) divided by pro forma weighted average shares
of Common Stock outstanding of 11,267,906 plus the as converted B Preferred
Stock (with an Initial Conversion/Exchange price of $7.50) of 10,000,000
shares of Common Stock.
38
<PAGE>
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
U.S. FRANCHISE SYSTEMS, INC. AND SUBSIDIARIES
FOR THE THREE MONTHS ENDED MARCH 31, 2000 (UNAUDITED)
The following unaudited Pro Forma Consolidated Statement of Operations is
presented as if the issuance of the Preferred Stock and the completion of the
Offer (assuming the acceptance of 8,666,666 shares of common stock tendered) had
occurred on January 1, 2000. Such pro forma information is based in part upon,
and should be read in conjunction with, the historical consolidated statement of
operations of the Company and its subsidiaries, and the notes thereto, which are
contained in the Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 2000 and which are incorporated by reference in this Proxy Statement.
See "Miscellaneous--Incorporation of Certain Information by Reference."
The following unaudited Pro Forma Consolidated Statement of Operations is
not necessarily indicative of what the actual financial position would have been
assuming such transaction had been completed as of January 1, 2000, nor does it
purport to represent the future financial position of the Company.
<TABLE>
<CAPTION>
COMPANY PRO FORMA COMPANY
HISTORICAL ADJUSTMENTS PRO FORMA
--------------- ----------- ------------
<S> <C> <C> <C>
REVENUES:
Royalty and other fee income................. $ 3,873,000 $ -- $ 3,873,000
Franchise application fees................... 918,000 -- 918,000
----------- ----------- ------------
4,791,000 -- 4,791,000
EXPENSES:
General and administrative................... 4,112,000 2,395,000 (K) 6,574,750
3,377,811 (L)
67,750 (M)
Franchise sales commissions.................. 804,000 -- 804,000
Depreciation and amortization................ 439,000 -- 439,000
Interest income.............................. (209,000) -- (209,000)
----------- ----------- ------------
--
Net loss before taxes.......................... (355,000) (5,840,561) (6,195,561)
--
Income taxes................................. -- -- --
----------- ----------- ------------
Net loss after taxes........................... $ (355,000) $(5,840,561) $ (6,195,561)
=========== =========== ============
Net loss attributable to common shareholders... $ (7,744,640)(N)
============
Weighted average number of common shares
outstanding.................................. 19,934,572
Pro forma weighted average number of common
shares outstanding........................... 11,267,906 (O)
Loss per share (Basic)......................... $ (0.02)
===========
Pro forma loss per share (Basic) applicable to
common shareholders.......................... $ (0.69)
============
Pro forma deficiency in fixed charge
coverage..................................... $ 7,726,811 (P)
============
</TABLE>
39
<PAGE>
------------------------
(K) Reflects severance costs of $440,000, bonuses totaling $230,000 and advisor
fees of $1,975,000 net of $250,000 in professional fees previously accrued.
(L) Reflects compensation expense of $785,750 arising as a result of the vesting
of the unvested portion of all 823,957 outstanding options to purchase
Common Stock granted under the Option Plan and the cash settlement of
810,957 of such outstanding options of $2,592,061.
(M) Reflects the compensation expense associated with granting options to
purchase 450,000 shares of Class A Common Stock with an exercise price equal
to the Initial Conversion/Exercise Price of the B Preferred Stock.
(N) Reflects the dividends and amortization of issuance cost associated with the
Preferred Stock.
(O) Reflects reacquisition by the Company in the Offer of 8,666,666 shares of
outstanding Common Stock, at $7.50 per share.
(P) Represents the deficiency in earnings to fixed charges, including dividends
on the Preferred Stock.
40
<PAGE>
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
U.S. FRANCHISE SYSTEMS, INC. AND SUBSIDIARIES
FOR THE YEAR ENDED DECEMBER 31, 1999 (UNAUDITED)
The following unaudited Pro Forma Consolidated Statement of Operations is
presented as if the issuance of the Preferred Stock and the completion of the
Offer (assuming the acceptance of 8.666,666 million shares of Common Stock
tendered) had occurred on January 1, 1999. Such pro forma information is based
in part upon, and should be read in conjunction with, the historical
consolidated statement of operations of the Company and its subsidiaries and the
notes thereto, which are in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1999 and which are incorporated by reference in
this Proxy Statement. See "Miscellaneous--Incorporation of Certain Information
by Reference."
The following unaudited Pro Forma Consolidated Statement of Operations is
not necessarily indicative of what the actual financial position would have been
assuming such transaction had been completed as of January 1, 1999, nor does it
purport to represent the future financial position of the Company.
<TABLE>
<CAPTION>
COMPANY PRO FORMA COMPANY
HISTORICAL ADJUSTMENTS PRO FORMA
-------------- ----------- ------------
<S> <C> <C> <C>
REVENUES:
Royalty and other fee income.................. $ 14,607,000 $ -- $ 14,607,000
Franchise application fees.................... 5,089,000 -- 5,089,000
------------ ----------- ------------
19,696,000 -- 19,696,000
EXPENSES:
General and administrative.................... 12,175,000 2,645,000 (K) 15,091,000
3,377,811 (L)
271,000 (M)
Franchise sales commissions................... 4,878,000 -- 4,878,000
Depreciation and amortization................. 1,677,000 -- 1,677,000
Interest income............................... (2,469,000)
Bad debt reserves............................. 17,121,000 -- 17,121,000
------------ ----------- ------------
--
Net loss before taxes........................... (13,686,000) (6,293,811) (19,929,811)
--
Income taxes.................................. 62,000 -- 62,000
------------ ----------- ------------
Net loss after taxes............................ $(13,624,000) $(6,293,811) $(19,917,811)
============ =========== ============
Net loss attributable to common shareholders.... $(26,306,378)(N)
============
Weighted average number of common shares
outstanding................................... 19,886,030
Pro forma weighted average number of common
shares outstanding............................ 11,219,364 (O)
Loss per share (Basic).......................... $ (0.02)
============
Pro forma loss per share (Basic) applicable to
common shareholders........................... $ (0.43)
============
Pro forma deficiency in fixed charge coverage... $ 26,235,064
============
</TABLE>
------------------------
(K) Reflects severance costs of $440,000, bonuses totaling $230,000 and advisor
fees of $1,975,000.
(L) Reflects compensation expense of $785,750 arising as a result of the vesting
of the unvested portion of all 823,957 outstanding options to purchase
Common Stock granted under the Option Plan and the cash settlement of
810,957 of such outstanding options of $2,592,061.
(M) Reflects the compensation expense associated with granting options to
purchase 450,000 shares of Class A Common Stock with an exercise price equal
to the Initial Conversion/Exercise Price of the B Preferred Stock.
(N) Reflects the dividends and amortization of issuance cost associated with the
Preferred Stock.
(O) Reflects reacquisition by the Company in the Offer of 8,666,666 shares of
outstanding Common Stock, at $7.50 per share.
(P) Represents the deficiency in earnings to fixed charges, including dividends
on the Preferred Stock.
41
<PAGE>
NO APPRAISAL RIGHTS
Under Delaware law, stockholders are not entitled to appraisal rights with
respect to the Offer or the Investment.
REQUIRED VOTE
The affirmative vote of (1) a majority of the voting power of the
outstanding shares of Common Stock is required to approve the Company's issuance
and sale of the Preferred Stock and the Company's issuance of Class A Common
Stock upon the potential conversion/exchange of the B Preferred Stock and
(2) 75% of the voting power of the outstanding shares of Class B Common Stock,
voting as a separate class, is required to approve the Company's issuance and
sale of the B Preferred Stock. As a result of the Leven Agreement and the
Aronson Agreement and the expectation that Meridian, HSA and directors and
officers of the Company will vote in favor of this proposal, the Company
believes that stockholder approval is assured for Proposal 1.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE FOR THE COMPANY'S
ISSUANCE AND SALE OF THE PREFERRED STOCK AND THE COMPANY'S ISSUANCE OF THE
CLASS A COMMON STOCK UPON THE POTENTIAL CONVERSION/ EXCHANGE OF THE B PREFERRED
STOCK.
42
<PAGE>
PROPOSAL 2
TO APPROVE THE AMENDMENTS TO THE COMPANY'S CERTIFICATE OF INCORPORATION TO
ESTABLISH REQUIREMENTS (1) FOR THE FUTURE COMPOSITION OF THE BOARD OF DIRECTORS
AND (2) FOR THE COMPANY ENTERING INTO TRANSACTIONS THAT (A) MAY CAUSE THE CLASS
A COMMON STOCK TO BE HELD BY RECORD OR BENEFICIALLY BY LESS THAN 300 PERSONS OR
TO BE NEITHER LISTED ON A NATIONAL SECURITIES EXCHANGE NOR AUTHORIZED TO BE
QUOTED ON AN INTERDEALER QUOTATION SYSTEM OF ANY REGISTERED NATIONAL SECURITIES
ASSOCIATION, (B) INVOLVE THE COMPANY PURCHASING SHARES OF ITS COMMON STOCK OR
(C) ARE WITH CERTAIN PERSONS OR ENTITIES DIRECTLY OR INDIRECTLY AFFILIATED WITH
THE COMPANY.
Pursuant to the Recapitalization Agreement, the consummation of the Offer
and the Investment is conditioned upon the approval by the stockholders of the
Company of the proposed amendments to the Company's Certificate of Incorporation
described in both this Proposal 2 and in Proposal 3.
The following summary description of two of the Company's proposed
amendments to its Certificate of Incorporation does not purport to be complete
and is qualified in its entirety by reference to the form of Amendment of the
Certificate of Incorporation of USFS attached hereto as Appendix I.
REQUIREMENTS FOR FUTURE COMPOSITION OF BOARD OF DIRECTORS
The Company is seeking stockholder approval to add new Section 12.1 to the
Certificate of Incorporation to provide that from and after the effective date
of the amendments which is expected to be the date of the closing of the
Investment and the Offer (the "Effective Date"), until the fifth anniversary of
the Effective Date, the Board of Directors must include at least three
Independent Directors. An "Independent Director" must meet the following
criteria: at no time while such director serves on the Company's Board of
Directors shall the director be, nor shall the director have been during the
three-year period prior to the Effective Date, (1) an affiliate or associate of
a Significant Shareholder (as defined below) or of any of their respective
affiliates or associates (collectively, the "Restricted Parties"), (2) a party
to, or an associate or an affiliate of, any person which is or was a party to
any transaction with any Restricted Party involving payments in excess of
$1,000,000 million in the aggregate, or (3) is otherwise a member of the same
family as any associate or affiliate of any Restricted Party. The term
"Significant Shareholder" means (a) Mr. Leven and any of his affiliates or
associates, (b) SDI, Meridian, and any of their successors, affiliates, or
associates, (c) any holder of shares of B Preferred Stock, and (d) any person or
persons or group (as such term is used within the meaning of Section 13(d) of
the Exchange Act) that beneficially owns or has the right to vote on any matter
more than 35% of the outstanding voting power of the Company. In addition,
proposed Section 12.1 of the Certificate of Incorporation provides that the
initial Independent Directors will be selected by the Company in accordance with
provisions of the Recapitalization Agreement. See "Proposal 5--New Board upon
Consummation of the Offer and the Investment." Section 12.1 further provides
that each person either nominated for election as an Independent Director or
elected by the Board as an Independent Director must have been approved by
resolution of the Board of Directors acting with the affirmative votes of a
majority of the Independent Directors then in office.
REQUIREMENTS FOR COMPANY ENTERING INTO CERTAIN TRANSACTIONS
The Company is seeking stockholder approval to add new Sections 12.2, 12.3
and 13 to the Company's Certificate of Incorporation.
Proposed Section 12.2 provides that from and after the Effective Date until
the fifth anniversary of the Effective Date, the Company may not effect any
Extraordinary Transaction (as defined below) with any person unless, prior to
the consummation of the Extraordinary Transaction, (1) the stockholders of the
Company have approved the terms and conditions of the Extraordinary Transaction
and (2) the Company
43
<PAGE>
has received from a nationally recognized investment banking firm a written
opinion for inclusion in a proxy statement to be delivered to the stockholders,
substantially to the effect that the consideration to be received by the
stockholders in the Extraordinary Transaction is fair to them from a financial
point of view. The term "Extraordinary Transaction" means any transaction which
would have the effect of causing the Class A Common Stock either to be held of
record or beneficially by less than 300 persons, or to be neither listed on any
national securities exchange nor authorized to be quoted on an interdealer
quotation system of any registered national securities association.
Proposed Section 12.3 provides that from and after the Effective Date until
the fifth anniversary of the Effective Date, the Company may not nor may it
permit any subsidiary to enter into or permit to exist any transaction,
including any purchase, sale, lease or exchange of property or the rendering of
service with any Restricted Party (an "Affiliate Transaction") unless the terms
thereof (1) are fair and no less favorable to the Company than those that could
be obtained in a comparable arms' length transaction with a person that is not a
Restricted Party, (2) if such Affiliate Transaction involves an amount in excess
of $2,000,000, are set forth in writing and have been approved by resolution of
the Board of Directors acting with the affirmative vote of a majority of the
Independent Directors and (3) if such Affiliate Transaction involves an amount
in excess of $5,000,000, the financial terms of which have been determined by a
nationally recognized investment banking, valuation or accounting firm to be
fair, from a financial point of view, to the Company.
Proposed Section 13 will provide that from and after the Effective Date
until the fourth anniversary of the Effective Date, the Company may not, except
upon a resolution of the Board of Directors acting with the affirmative vote of
a majority of the Independent Directors, purchase shares of Common Stock either
on the open market or pursuant to a tender or exchange offer or in any other
transaction (other than in an Extraordinary Transaction approved in accordance
with the proposed Section 12.2 of the Certificate of Incorporation described
above) at a per share price that is less then $7.50, if such transaction is
effected within 24 months after the Effective Date, or if effected after such
24-month period, at a price that is less than the highest bid price per share
for the preceding 52-week period. If the Company in any manner subdivides (by
stock split, stock dividend or otherwise) or combines (by reverse stock split or
otherwise) the outstanding shares of Common Stock, then effective provision must
be made by resolution of the Board of Directors acting with the affirmative vote
of a majority of the Independent Directors to adjust the prices referred to
above to give effect to any such change.
REASONS FOR THE AMENDMENTS
The amendments to the Certificate of Incorporation described in this
Proposal 2 were requested by the Board of Directors of the Company during the
negotiation of the Recapitalization Agreement in order to protect minority
stockholders of the Company by requiring that (1) the Company would not be
subjected to a transaction with a Restricted Party on terms that are not fair to
the Company, (2) the Board of Directors will include a minimum number of
Independent Directors, and (3) a trading market will continue to exist for the
Class A Common Stock without influence on the market attributable to purchases
of shares by the Company or its affiliates.
REQUIRED VOTE
The affirmative vote of a majority of the voting power of the outstanding
shares of Common Stock is required to approve and adopt the foregoing amendments
to the Company's Certificate of Incorporation. As a result of the Leven
Agreement and the Aronson Agreement and the expectation that Meridian, HSA and
directors and officers of the Company will vote in favor of this Proposal, the
Company believes that stockholder approval is assured for Proposal 2.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE FOR THE APPROVAL OF THE
AMENDMENTS TO THE COMPANY'S CERTIFICATE OF INCORPORATION TO ESTABLISH
REQUIREMENTS (1) FOR THE FUTURE COMPOSITION OF THE
44
<PAGE>
BOARD AND (2) FOR THE COMPANY ENTERING INTO TRANSACTIONS THAT (A) MAY CAUSE THE
CLASS A COMMON STOCK TO BE HELD OF RECORD OR BENEFICIALLY BY LESS THAN 300
PERSONS OR TO BE NEITHER LISTED ON A NATIONAL SECURITIES EXCHANGE NOR AUTHORIZED
TO BE QUOTED ON AN INTERDEALER QUOTATION SYSTEM OF ANY REGISTERED NATIONAL
SECURITIES ASSOCIATION, (B) INVOLVE THE COMPANY PURCHASING SHARES OF ITS COMMON
STOCK OR (C) ARE WITH CERTAIN PERSONS OR ENTITIES DIRECTLY OR INDIRECTLY
AFFILIATED WITH THE COMPANY.
PROPOSAL 3
TO APPROVE THE AMENDMENTS TO THE COMPANY'S CERTIFICATE OF INCORPORATION TO
(1) ELIMINATE SUPERMAJORITY REQUIREMENTS FOR STOCKHOLDER VOTING AND ADD
REQUIREMENTS FOR STOCKHOLDER APPROVAL FOR CHANGES TO SECTIONS OF THE CERTIFICATE
OF INCORPORATION WHICH ARE THE SUBJECT OF PROPOSAL 2 AND (2) ELIMINATE
PROHIBITIONS ON STOCKHOLDER ACTION BY WRITTEN CONSENT
Pursuant to the Recapitalization Agreement, the consummation of the
Investment and the Offer is conditioned upon the approval by the stockholders of
the Company of the proposed amendments to the Company's Certificate of
Incorporation described in both this Proposal 3 and in Proposal 2.
The following summary description of two of the Company's proposed
amendments to its Certificate of Incorporation does not purport to be complete
and is qualified in its entirety by reference to the form of Amendment to the
Certificate of Incorporation of USFS attached hereto as Appendix I.
ELIMINATION OF SUPERMAJORITY REQUIREMENTS FOR STOCKHOLDER VOTING AND ADDITION OF
STOCKHOLDER APPROVAL REQUIREMENTS
Article 11 of the Company's Certificate of Incorporation currently provides
that (1) Article 11 of the Certificate of Incorporation and the provisions of
the Certificate of Incorporation dealing with actions to be taken by
stockholders and the voting powers of Preferred Stock may not be amended,
altered, changed or repealed in any respect unless such amendment, alteration,
change or repeal is approved by the affirmative vote of holders of not less than
75% of the voting power of the outstanding Common Stock entitled to vote
thereon, voting together as a single class, and (2) any proposed amendment,
alteration or change to the Certificate of Incorporation, or repeal of any
provision of the Certificate of Incorporation that would amend, alter, change or
repeal the powers, preferences or special rights of the Class B Common Stock so
as to affect them adversely requires the affirmative vote of not less than 75%
of the outstanding shares of Class B Common Stock voting as a separate class.
Stockholder approval is being sought to amend Article 11 of the Certificate of
Incorporation to terminate all requirements for supermajority voting by
stockholders and to provide that the Company reserves the right to amend, alter
change, or repeal any provision contained in the Certificate of Incorporation in
the manner now or hereafter prescribed by statute. Currently, Delaware corporate
law requires a majority of the outstanding stock entitled to vote to amend a
company's certificate of incorporation.
Stockholder approval also is being sought to amend Article 11 of the
Certificate of Incorporation to provide that Articles 12 and 13 (the matters
discussed in Proposal 2) and Article 11 are not to be amended without the
approval of holders of shares representing a majority of the voting power of the
outstanding shares of voting stock of the Company other than shares held by any
Significant Shareholder.
ELIMINATION OF PROHIBITIONS ON STOCKHOLDER ACTION BY WRITTEN CONSENT
Section 9.1 of the Company's Certificate of Incorporation currently provides
that the stockholders of the Company may not consent in writing to the taking of
stockholder action without a meeting of stockholders duly called and held in
accordance with law and the Certificate of Incorporation and the By-Laws.
Stockholder approval is being sought to amend Section 9.1 of the Certificate of
Incorporation to eliminate the current prohibition on stockholder action by
written consent. If this amendment is approved,
45
<PAGE>
stockholders of the Company will be entitled to take action on any matter by
written consent, without a meeting, in accordance with Section 228 of the
Delaware General Corporation Law.
REASONS FOR THE AMENDMENT
The amendments to the Certificate of Incorporation described in this
Proposal 3 were requested by the Investor Group as a condition to completing the
Investment, except that the amendment to Article 11 with respect to the addition
of stockholder approval requirements was requested by the Board of Directors
during the negotiation of the Recapitalization Agreement in order to protect
minority stockholders of the Company.
REQUIRED VOTE
The affirmative vote of 75% of the voting power of the outstanding shares of
the (1) Common Stock and (2) Class B Common Stock, voting as a separate class,
is required to approve and adopt the foregoing amendments to the Company's
Certificate of Incorporation.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE FOR THE APPROVAL OF THE
AMENDMENTS TO THE COMPANY'S CERTIFICATE OF INCORPORATION TO (1) ELIMINATE
SUPERMAJORITY REQUIREMENTS FOR STOCKHOLDER VOTING AND ADD REQUIREMENTS FOR
STOCKHOLDER APPROVAL FOR CHANGES TO SECTIONS OF THE CERTIFICATE OF INCORPORATION
WHICH ARE THE SUBJECT OF PROPOSAL 2 AND (2) ELIMINATE PROHIBITIONS ON
STOCKHOLDER ACTION BY WRITTEN CONSENT.
PROPOSAL 4
PROPOSAL TO APPROVE THE AMENDMENT TO THE COMPANY'S AMENDED AND RESTATED
1996 STOCK OPTION PLAN
GENERAL
On September 27, 1996, the Board of Directors adopted, subject to the
approval of the Company's stockholders, the U.S. Franchise Systems, Inc. 1996
Stock Option Plan (as amended and restated, the "Option Plan"). USFS's
stockholders approved the Option Plan on October 11, 1996. The purpose of the
Option Plan is to promote the interests of the Company and its stockholders by
(1) 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; (2) motivating such
individuals by means of performance-related incentives to achieve long-range
performance goals; and (3) 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") is eligible to
participate under the Option Plan. The Option Plan originally authorized the
grant of awards to participants of a maximum of 325,000 shares of the Class A
Common Stock, which maximum number was subject to adjustment in certain
circumstances to prevent dilution or enlargement. On June 26, 1998, the
stockholders of the Company approved an amendment to the Option Plan to increase
the number of shares of Class A Common Stock available for grant thereunder to
725,000 shares. On January 25, 2000, the Board of Directors approved, subject to
stockholder approval at the Annual Meeting, an increase in the number of shares
of Class A Common Stock authorized for issuance under the Option Plan to 975,000
shares. On June 28, 2000, the Board of Directors approved, subject to
stockholder approval at the Annual Meeting, a further increase in the number of
shares of Class A Common Stock authorized for issuance under the Option Plan to
1,975,000 shares.
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").
46
<PAGE>
DESCRIPTION OF PROPOSED AMENDMENT
On January 25, 2000, the Board of Directors of the Company adopted an
amendment to the Option Plan which would, subject to the receipt of stockholder
approval, increase the number of shares of Class A Common Stock of the Company
available for grant thereunder to 975,000 shares from 725,000 shares. Since that
date, the Company has issued options for 106,707 shares (net of forfeitures) of
Class A Common Stock which would be covered by the increase of 250,000 shares to
be granted under the Option Plan and thus have been issued contingent on
stockholder approval of this increase. The proposed increase in the number of
authorized shares would ensure the uninterrupted continuation of the Option
Plan. On June 28, 2000, the Board of Directors of the Company adopted an
amendment to the Option Plan which would, subject to the receipt of stockholder
approval, further increase the number of shares of Class A Common Stock of the
Company available for grant thereunder to 1,975,000 shares from 975,000 shares.
The proposed increase in the number of authorized shares is intended to
(1) provide a sufficient number of available options to satisfy the requirements
under the new employment agreements the Company will enter into with Mr. Leven
and Mr. Romaniello (200,000 options and 250,000 options, respectively) and
(2) ensure the uninterrupted continuation of the Option Plan. If stockholder
approval of the increase in the maximum number of shares authorized for issuance
under the Option Plan is obtained, a total of 701,043 shares will be available
for future grants of options under the Option Plan without further stockholder
approval.
NEW PLAN BENEFITS
Because the Committee has discretion in determining the persons who will
receive grants of options under the Option Plan and the number of shares covered
by any such options (other than grants of options to be granted pursuant to the
new employment agreements to be entered into by the Company with each of
Mr. Leven and Mr. Romaniello), the persons to whom options will be granted in
the future and the number of options that will be granted in the future are not
determinable. The following table presents information on options that have been
or are expected to be granted under the Option Plan since January 25, 2000
subject to stockholder approval of this Proposal 4, as of the date of this Proxy
Statement.
<TABLE>
NUMBER OF
SHARES
DOLLAR VALUE UNDERLYING
NAME AND PRINCIPAL POSITION ($)(1) OPTIONS
---------------------------------------------------------- -- -------
<S> <C> <C>
Michael A. Leven -- Chairman of the Board and Chief --(2) 200,000
Executive Officer
Neal K. Aronson -- Executive Vice President and Chief -- 0
Financial Officer
Steven Romaniello -- President and Chief Operating Officer --(3) 265,000
Stephen D. Aronson -- Vice President and General Counsel -- 5,000
Executive Group (4 persons) -- 470,000
Non-Executive Officer Director Group (2 persons) -- 2,000
Non-Executive Officer Employee Group (41 persons) -- 153,450
</TABLE>
(1) The value of the listed options are not determinable at this time. Unless
otherwise noted, the exercise price of each of these options is (or will be,
as applicable) the closing price of a share of Class A Common Stock on the
Nasdaq Stock Market on the date of the relevant option grant.
(2) The options to be granted to Mr. Leven will have an exercise price
determined pursuant to Mr. Leven's new employment agreement with the
Company, which is expected to be the Initial Conversion/Exercise Price of
the B Preferred Stock. See "Proposal 1--Agreements Executed and To be
Executed in Connection with the Recapitalization Agreement--New Leven
Employment Agreement."
(3) 250,000 of the options granted to Mr. Romaniello will have an exercise price
determined pursuant to Mr. Romaniello's new employment agreement with the
Company, which is expected to be the Initial Conversion/Exercise Price of
the B Preferred Stock. See "Proposal 1--Agreements Executed and To be
Executed in Connection with the Recapitalization Agreement--Romaniello
Employment Agreement."
47
<PAGE>
Each of the options listed on the table above (except for those options
granted pursuant to the new employment agreements with Mr. Leven and
Mr. Romaniello) are expected to become vested and exercisable pursuant to the
terms of the Recapitalization Agreement immediately prior to consummation of the
Offer, and the Company expects to provide holders of all such vested options the
opportunity to surrender all or any portion of such vested options to the
Company at such time after the Offer as the Company is permitted to do so under
applicable law in exchange for a cash payment equal to the difference between
the applicable exercise price and $7.50. See "Proposal 1--Miscellaneous
Provisions of the Recapitalization Agreement--Accelerated Vesting of Options and
Restricted Shares."
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 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. The Stock
Option Committee currently serves as the Committee.
DURATION OF OPTION PLAN/AMENDMENT OF OPTION PLAN
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 stockholder 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
A total of 725,000 shares of Class A Common Stock are currently available
for awards under the Option Plan, which would increase to 1,975,000 shares if
the proposed amendment to the Option Plan is approved; provided that the maximum
number of shares with respect to which options may be granted to any participant
in any fiscal year is 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 (1) 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, (2) the number of shares or other securities of the
Company (or number and kind of other securities or property) subject to
outstanding options, and (3) 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
48
<PAGE>
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.
AWARDS
Under the Option Plan, the Committee may grant awards in the form of
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
of Class A Common Stock 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, (1) 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 (2) 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 (1) 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 hereafter be filed by the Company as part of a
registration statement relating to the Option Plan and (2) 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.
49
<PAGE>
FEDERAL INCOME TAX CONSEQUENCES
The following summary of the federal income tax consequences of the grant
and exercise of non-qualified and incentive stock options awarded under the
Option Plan, the disposition of shares of Class A Common Stock 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 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 non-qualified
stock option. Upon exercise of a non-qualified 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 280G 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 non-qualified 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
non-qualified 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 non-qualified
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 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. This
six month period of potential short-swing liability may be eliminated if the
option grant (1) is approved in advance by the Company's board of directors (or
a committee composed solely of two or more non-employee directors) or
(2) approved in advance, or subsequently ratified by the Company's stockholders
no later than the next annual meeting of stockholders. Consequently, the taxable
event for the exercise of an option that satisfies either of the conditions
described in clauses (1) or (2) 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
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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, 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 after 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 280G 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 (1) no gain or loss generally will be recognized upon surrender,
(2) 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 (3) 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 280G and 162(m) of the Code of compensation paid
to the executives designated in those Sections.
REQUIRED VOTE
The affirmative vote of a majority of the voting power of the outstanding
shares of Common Stock present (in person or by proxy) at the Annual Meeting is
required to approve and adopt the amendment to the Company's Amended and
Restated 1996 Stock Option Plan.
On January 25, 2000, Mr. Leven and Neal Aronson entered into agreements with
the Company pursuant to which they each agreed to vote the shares of Class A
Common Stock and Class B Common Stock over which they have the power to vote in
favor of the amendment to the Option Plan to increase the number of shares of
Class A Common Stock available for grant under the Option Plan to 975,000
shares. While such voting agreement does not address the increase in the number
of shares of Class A Common Stock available for grant under the Option Plan in
excess of 975,000 shares, the Company expects each of Mr. Leven and Mr. Aronson
to vote in favor of this Proposal 4. Because Mr. Leven and Mr. Aronson control
approximately 64.8% of the total voting power of the stockholders of the Company
as of the Record Date and Meridian and HSA control approximately 4.8% of the
total voting power of the stockholders of the Company as of the Record Date, the
Company believes that stockholder approval is assured for Proposal 4.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE FOR THE APPROVAL OF THE
AMENDMENT TO THE COMPANY'S AMENDED AND RESTATED 1996 STOCK OPTION PLAN.
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PROPOSAL 5
ELECTION OF DIRECTORS
The Board of Directors of the Company currently consists of nine 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 had been set at ten by the Board. There was,
however, a vacancy on the Board because Mr. Barry S. Sternlicht resigned from
the Board of Directors in January 2000. In light of the vacancy, the Board
recently reset the number of directors at nine. However, as described below
under "--New Board Upon Consummation of the Offer and the Investment," the Board
must increase its size to eleven directors effective upon the issuance of the
Preferred Stock to the Investors. The Board of Directors recommends the election
of the nine nominees listed below.
Each of the nominees has consented to being named in the 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 nine nominees. Management
of the Company has no reason to believe that any nominee will not serve if
elected, except that Messrs. Aronson, Adler, Goldstein and Hamamoto are expected
to resign from the Board upon the closing of the Investment and the Offer.
NOMINEES
MICHAEL A. LEVEN. Mr. Leven, age 62, has been Chairman and Chief Executive
Officer of the Company since October 1995. From October 1995 to June 2000,
Mr. Leven also served as President of the Company. 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 Hotels and Resorts Worldwide Inc. and of
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 Trustee of National Realty Trust, the largest
franchisee of Coldwell Banker Corporation, and a member of the Board of
Directors of both The Marcus Foundation and The Chief Executive Leadership
Institute, a non-profit leadership school. Mr. Leven is an uncle of Neal
Aronson, a director and the Executive Vice President and Chief Financial Officer
of the Company, and Stephen Aronson, the Company's Vice President, General
Counsel and Secretary.
STEVEN ROMANIELLO. Mr. Romaniello, age 33, has been President and Chief
Operating Officer since June 2000. From January 2000 to June 2000,
Mr. Romaniello served as Executive Vice President, Franchise Sales, Operations
and Administration of the Company. From January 1999 though December 1999,
Mr. Romaniello served as Executive Vice President, Franchise Sales and
Administration of the Company. 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.
NEAL K. ARONSON. Mr. Aronson, age 35, 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, a private
investment partnership with capital in excess of $2.0 billion. From June 1989 to
December 1991, Mr. Aronson was a principal of Acadia Partners, L.P. in New York,
New York, a private investment partnership with assets of approximately
$1.7 billion.
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Mr. Aronson is a nephew of Michael A. Leven and the brother of Stephen Aronson.
Mr. Aronson has served as a director of the Company since September 1995.
DEAN S. ADLER. Since 1996, Mr. Adler, age 43, has been a principal of
Lubert-Adler Partners, L.P., a private equity group specializing in the
acquisition and redevelopment of real estate. From 1988 to 1996, Mr. Adler was a
principal and Managing Director of private equity investments for CMS Companies,
a Philadelphia based investment firm that managed approximately $1.7 billion of
assets. Mr. Adler is a member of the Board of Directors of the Ableco Finance
LLC, a loan origination company, Developers Diversified Realty Corporation, a
major shopping center REIT, and Trans World Entertainment Corporation and
Electronics Boutique Holdings Corp., two Nasdaq specialty retailers. Mr. Adler
has served as a director of the Company since October 1996.
IRWIN CHAFETZ. Since 1990, Mr. Chafetz, age 64, has been 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 has served as a director of the Company since September 1995.
DOUGLAS G. GEOGA. Since January 2000, Mr. Geoga, age 44, has been President
of Hospitality Investment Fund, L.L.C., an affiliate of The Pritzker
Organization L.L.C., which engages in the business of making hospitality-related
investments and acting as an advisor with respect to such investments. From 1994
through 1999, Mr. Geoga was 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"), past chairman of the Government Affairs
Committee of the AH&MA, a director of the National Tourism Organization, Inc., a
director of Unitrin, Inc., a publicly-traded company engaged in various
insurance and consumer finance businesses and related activities, 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 48, 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 a trustee of the State University of New York at
Stony Brook Foundation. Mr. Goldstein has served as a director of the Company
since September 1995.
DAVID T. HAMAMOTO. Mr. Hamamoto, age 40, is a Co-Chief Executive Officer of
NorthStar Capital Investment Corp., 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 1988 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 has
served as a director of the Company since March 1998.
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JEFFREY A. SONNENFELD. Dr. Sonnenfeld, age 46, currently serves as the
Chairman and President of The Chief Executive Leadership Institute, a non-profit
educational organization. He is also an adjunct professor at Yale University's
School of Management. 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.
REQUIRED VOTE
The affirmative vote of a plurality of the shares of outstanding Common
Stock represented (in person or by proxy) at the Annual Meeting is required to
elect the nine nominees for directors. Stockholders will not be allowed to
cumulate their votes in the election of directors. The Company expects that
directors and officers of the Company and Meridian and HSA will vote their
shares in favor of the nine nominees for election. Therefore, the Company
expects each of the nine nominees for director will be elected.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE FOR ALL OF THE NINE
NOMINEES FOR ELECTION AS DIRECTORS.
NEW BOARD UPON CONSUMMATION OF THE OFFER AND THE INVESTMENT
The Company's Certificate of Incorporation currently provides that the
Company's directors serve for a term of one year and/or until their successors
are elected and qualified. However, pursuant to the terms of the
Recapitalization Agreement, upon consummation of the Offer and the Investment,
the Board of Directors will (1) increase its size to eleven members, (2) accept
the resignations of each director other than Messrs. Leven, Romaniello, Geoga,
Chafetz and Sonnenfeld and (3) appoint one person to serve with Messrs. Chafetz
and Sonnenfeld as Independent Directors and five directors designated by the
Investor Group (some of whom may also qualify as Independent Directors), at
least two of whom are not directors, officers, employees or representatives of
the Investor Group or any affiliate of the Investor Group, to fill the resulting
vacancies. The Company expects that the persons listed below will be the six new
directors that fill the resulting vacancies. Mr. Brill will serve with
Messrs. Chafetz and Sonnenfeld as the minimum of three Independent Directors
required under the proposed Section 12 of the Certificate of Incorporation.
Other directors may also meet the requirements to serve as Independent
Directors.
RONALD M. BRILL. Mr. Brill, age 56, has served as Executive Vice President
and Chief Administrative Officer of The Home Depot, Inc. since August 1995. His
areas of responsibility include mergers and acquisitions, business process
innovation, finance, public affairs, investor relations, legal, information
services, loss prevention and internal audit. Mr. Brill began his career at The
Home Depot, Inc. as the Controller in 1978, was elected Treasurer in 1980,
Vice-President--Finance in 1981, Senior Vice President and Chief Financial
Officer in 1984, Executive Vice President and Chief Financial Officer in 1993,
and was a member of the board of directors from 1987 until May 2000. Mr. Brill
currently serves on the Board of Trustees of the Atlanta Jewish Community Center
and Kennesaw State University; on the board of directors of the Atlanta High
Museum of Art, the Art Alliance for Contemporary Glass, and the Pilchuck Glass
School; and on the Governing Board of Woodward Academy.
LAURENCE S. GELLER. Mr. Geller, age 52, has served as the Chief Executive
Officer of Strategic Hotel Capital, a multinational ownership and asset
management services organization for first-class and luxury lodging real estate,
since May 1997. Mr. Geller served as Chairman of Geller & Co., a real estate,
gaming, tourism and lodging industry advisory company, from 1989 to May 1997.
Mr. Geller has served as a
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director of American Classic Voyages, a leading provider of overnight passenger
cruises among the Hawaiian Islands and on the Mississippi River system, since
December 1999.
ROBERT C. GLUSTROM. Mr. Glustrom, age 48, serves as President of
Broadstreet, Inc., a bank holding company, and as Chairman of AmTrade
International Bank based in Atlanta, Georgia and Miami, Florida. Mr. Glustrom
has extensive management experience. In 1985 he became President of a Hyatt
Development Corporation affiliated company and participated in the founding and
opening of an international retail water sports and boating company. In 1987,
Mr. Glustrom helped Mr. Colgate Holmes, who at that time was president of the
Ritz-Carlton Hotel Company, organize and develop the Holmes Hotel Company.
Mr. Glustrom has been a practicing attorney since 1976. Mr. Glustrom also serves
as a director of Harry's Farmers Market, Inc., a Nasdaq listed company.
PHILIP M. KAYMAN. Mr. Kayman, age 58, has been a partner of the Chicago law
firm Neal Gerber & Eisenberg since 1986. Mr. Kayman was a partner at the law
firm Friedman & Koven from 1973 until joining Neal Gerber & Eisenberg.
Mr. Kayman has served as a director of both PrivateBancorp Inc. and The
PrivateBank and Trust Company since 1991.
SCOTT D. MILLER. Mr. Miller, age 47, has been the president of Hyatt Hotels
Corporation since January 1, 2000. Prior to becoming president of Hyatt Hotels
Corporation, Mr. Miller served as executive vice president of the Hyatt
Development Corporation where, through his additional service as a member of the
managing committee, he supervised the extensive development currently underway
at Hyatt Hotels Corporation. For four years prior to joining Hyatt Development
Corporation, Mr. Miller served as president and Chief Executive Officer of
United Infrastructure Company, a world-wide enterprise engaged in infrastructure
ownership and operations. Previously, Mr. Miller was a founding partner of The
John Buck Company commercial real estate firm for 14 years. Mr. Miller is active
in various industry and professional organizations including the American
Hotel & Motel Association's Industry Real Estate Financing Advisory Council.
DAVID A. SHAPIRO. Mr. Shapiro, age 49, is a portfolio manager for Seneca
Capital Management, a $14 billion money management firm. As portfolio manager,
Mr. Shapiro has primary responsibility for the real estate securities portfolio
which is primarily invested in publicly traded real estate and real estate
related companies. Mr. Shapiro is also engaged in the real estate finance and
development business through Asset Holdings Group, a real estate finance company
that Mr. Shapiro founded in 1993. Mr. Shapiro serves as an advisor to, and is a
former director of First Mortgage Network (now Mortgage.com), a Nasdaq listed
Internet technology provider to the mortgage industry. Mr. Shapiro is a member
of the Urban Land Institute and serves on the UDMUC Council, and the National
Association of Real Estate Investment Trusts. Mr. Shapiro serves as a director
of RB Asset Inc. (formerly Riverbank America).
Except as disclosed under "--Nominees" and "Executive Officers," there are
no family relationships between any director, executive officer or person
expected to fill a director vacancy and any other director, executive officer or
person expected to fill a director vacancy of the Company.
OTHER ARRANGEMENTS FOR NOMINATION AS DIRECTOR
Pursuant to the terms of a Shareholders Agreement, dated as of March 12,
1998, by and among Hawthorn Suites Associates, Inc., HSA, Meridian, HRS, Inc.,
Mr. Leven, Neal K. Aronson and the Company (the "HSA Shareholders Agreement"),
as amended, subject to Meridian and HSA and/or their affiliates owning more than
an aggregate of 1,100,000 shares of Common Stock (as adjusted for stock splits,
reverse stock splits, reclassifications and other similar transactions or
adjustments), Meridian and HSA may propose a nominee for director of the Company
and the Company will use its best efforts to cause such nominee's election.
Pursuant to the terms of the HSA Shareholders Agreement, Meridian and HSA
initially nominated, and the Board of Directors initially elected, Mr. Geoga to
the Board of Directors in March 1998. At such time that Mr. Geoga (or his
successor) no longer is a director of the Company, Meridian and HSA may propose
to the Company as a nominee for election as a director of the Company a
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person who (1) has recognized standing in the business community, (2) is not a
former director, officer or employee of the Company and (3) does not have a
conflict of interest with the Company and is at that time either the President
of Hyatt Hotels Corporation or a person who is otherwise reasonably acceptable
to the Company.
In connection with the execution of the Recapitalization Agreement,
Meridian, HSA, Mr. Leven, Neal Aronson and the Company entered into a
termination agreement (the "Stockholders Termination Agreement") that provides
for the termination of the HSA Shareholders Agreement in its entirety after
consummation of the Offer and the Investment. The Stockholders Termination
Agreement provides that all of its provisions cease to be effective if the Offer
is not consummated or is materially amended, the Restricted Shares are not fully
vested by the closing of the Investment and the Offer or the Recapitalization
Agreement is terminated pursuant to its terms.
In connection with the execution of the Recapitalization Agreement, the
Investor Group, Mr. Leven, Mrs. Andrea Leven, Mr. Romaniello, and certain
members of their families have agreed to enter into the Stockholders Agreement
which contains provisions regarding agreements among the various parties as to
the composition of the Board of Directors after completion of the Offer and the
Investment. See "Proposal 1--Agreements Executed and to be Executed in
Connection with the Recapitalization Agreement--Stockholders Agreement."
Mr. Leven is employed as the Company's Chief Executive Officer and Chairman
of the Board. The Company has agreed to use its best efforts to have Mr. Leven
elected to the Board and to have him continue to serve on the Board during the
term of his employment.
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 as a director of the Company. Mr. Hamamoto was initially
elected to the Board in March 1998.
DIRECTOR COMPENSATION
On October 24, 1996, each person who was a non-employee director of the
Company at that time received an option to purchase 2,000 shares of Class A
Common Stock at an exercise price equal to the fair market value of the Class A
Common Stock on the grant date. 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 on the date each new non-employee director becomes a
director, such person receives a grant of options to purchase 2,000 shares of
Class A Common Stock at an exercise price equal to the fair market value of the
Class A Common Stock on the grant date. As an inducement to join the Company's
Audit Committee, on January 25, 2000, Messrs. Chafetz and Sonnenfeld were each
granted options to purchase 1,000 shares of Class A Common Stock at an exercise
price of $4.81 per share, the closing price of the Company's Class A Common
Stock on the Nasdaq National Market on that date. The Company does not pay cash
compensation to its directors for their services as directors. However, under
certain circumstances, the Company reimburses directors for reasonable
out-of-pocket expenses incurred in attending Board and Committee meetings.
MEETINGS OF THE BOARD OF DIRECTORS
During the year ended December 31, 1999, the Board of Directors held four
formal meetings. Each director attended at least 75% of the aggregate number of
Board of Directors meetings held and the total number of committee meetings on
which he served that were held during 1999, except for Douglas Geoga, who
attended two of the meetings of the Board of Directors.
COMMITTEES OF 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.
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The Audit Committee presently consists of Messrs. Chafetz and Sonnenfeld,
both of whom are outside directors of the Company. The functions of the Audit
Committee include (1) 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; (2) the review, in consultation with
the independent auditors of the plan and results of the annual audit and the
adequacy of the Company's internal accounting controls; (3) 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 (4) 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 one meeting during 1999.
The Compensation Committee presently consists of Messrs. Leven, Chafetz and
Sonnenfeld. The functions of the Compensation Committee include 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 did not hold a meeting during 1999.
The Stock Option Committee presently consists of Messrs. Chafetz and
Sonnenfeld, both of whom are outside directors of the Company. The functions of
the Stock Option Committee include administering the Option Plan and granting
options thereunder. The Stock Option Committee held three meetings during 1999.
The Board of Directors does not have a standing nominating committee, and
that function is being reserved to the full Board of Directors. Any stockholder
entitled to vote for the election of directors may nominate a person or persons
for election as director by complying in all respects with the requirements for
director nominations set forth in the Company's By-Laws.
EXECUTIVE OFFICERS
Messrs. Leven, Romaniello and Neal K. Aronson serve as executive officers of
the Company, as described under "--Nominees." Stephen D. Aronson also serves as
an executive officer of the Company. Mr. Aronson, age 38, has been Vice
President, General Counsel and Secretary of the Company since October 1999. From
October 1997 through October 1999, Mr. Aronson was the Company's Associate
General Counsel and Secretary. He served as Manager of Legal Services for the
Company from January 1997 through October 1997 and Manager of Business
Development from August 1996 through December 1996. From October 1995 through
August 1996, Mr. Aronson worked as a legal assistant at Sills Cummis Zuckerman
Radin Tischman Epstein & Gross. He served as President of Metropolitan
Memorabilia from April 1995 through October 1995. Mr. Aronson is a graduate of
the University of Chicago Law School and has been a member of the Georgia Bar
Association since 1997. He is a nephew of Mr. Leven and the brother of Mr. Neal
Aronson.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's directors, officers
and persons who own more than 10% of the outstanding Class A Common Stock to
file with the Commission reports of ownership and changes in ownership of the
Class A Common Stock held by such persons. Officers, directors and greater than
10% stockholders are also required to furnish the Company with copies of all
forms they file under this regulation. 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, 1999, the Company believes
that all Section 16(a) filing requirements applicable to its officers, directors
and greater than 10% stockholders were complied with, except that a Form 4
filing relating to one
57
<PAGE>
transaction made by an investment partnership of which Barry Sternlicht, a
former director of the Company, was a limited partner, was filed 15 days late.
Although it is not the Company's obligation to make filings pursuant to
Section 16 of the Exchange Act, the Company has adopted a policy requiring all
Section 16 reporting persons to report monthly to the general counsel of the
Company as to whether any transaction in the Company's securities occurred
during the previous month.
EXECUTIVE COMPENSATION
The following table provides certain summary information for the fiscal
years ended December 31, 1999, 1998 and 1997 concerning compensation of the
Company's Chief Executive Officer and each of the other four most highly
compensated executive officers of the Company whose total annual salary and
bonus exceeded $100,000 during the year ended December 31, 1999 (the "Named
Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION ------------
----------------------------------------- SECURITIES
NAME AND OTHER ANNUAL UNDERLYING
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1) OPTIONS (#)
------------------ -------- -------- -------- --------------- ------------
<S> <C> <C> <C> <C> <C>
Michael A. Leven.................. 1999 $412,735 $551,284(2)(3) $23,906 --
Chairman of the Board and 1998 400,735 265,963(3) 38,044
Chief Executive Officer 1997 389,063 237,250(3) 37,971
Neal K. Aronson................... 1999 $222,724 $289,000(3)(4) $ 3,102 --
Executive Vice President and 1998 213,725 143,000(3) 11,619
Chief Financial Officer 1997 207,500 118,750(3) 11,588
David E. Shaw, Sr................. 1999 $160,294 $ -- $ 2,493 --
Former Executive Vice
President-- 1998 158,145 -- 2,430 --
Administration(5) 1997 155,625 25,000 2,384 1,000
Steven Romaniello................. 1999 $ --(6) $682,400 $ 2,536 38,000(7)(8)
President and 1998 82,500 574,400 2,430 57,807(7)
Chief Operating Officer 1997 110,000 292,800 2,384 2,000(7)
Stephen D. Aronson................ 1999 $ 75,000 $ 50,000 $ 2,232 7,000(9)
Vice President and 1998 70,200 25,000 2,202 2,000(7)
General Counsel 1997 43,280 -- 2,196 --
</TABLE>
------------------------
(1) Includes life insurance, health insurance, long-term disability insurance,
automobile allowance and/or long-term home care.
(2) Includes $98,067 and $8,000 earned in 1998 and 1997, respectively, but paid
in 1999 due to underpayment of 1998 and 1997 bonuses.
(3) The amount of bonuses paid to Messrs. Leven and Aronson are determined
pursuant to their respective employment agreements.
(4) Includes $49,033 and $4,000 earned in 1998 and 1997, respectively, but paid
in 1999 due to underpayment of 1998 and 1997 bonuses.
(5) David E. Shaw, Sr. resigned from the Company on July 28, 1999.
(6) Effective with the fourth quarter of 1998, Mr. Romaniello's compensation
became primarily commission based, which compensation is recorded under the
Bonus column.
(7) Certain of Mr. Romaniello's and Stephen Aronson's options were repriced on
December 31, 1999. See "--Stock Option Committee Report on Stock Option
Repricings" below.
(8) Includes 23,000 options previously granted which were repriced on
December 31, 1999. See "--Stock Option Committee Report on Stock Option
Repricings" below.
(9) Consists of 7,000 options previously granted which were repriced on
December 31, 1999. See "--Stock Option Committee Report on Stock Option
Repricings" below.
58
<PAGE>
OPTION GRANTS IN 1999
The following table provides information concerning individual grants of
stock options during the year ended December 31, 1999 to the Named Executive
Officers. Each of these options was granted pursuant to the U.S. Franchise
Systems, Inc. 1996 Stock Option Plan and is subject to the terms of the Option
Plan. No stock appreciation rights were granted to the Named Executive Officers
during fiscal 1999.
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE VALUE
AT
INDIVIDUAL GRANTS ASSUMED ANNUAL
------------------------------------------------------ RATES OF STOCK
NUMBER OF PERCENT OF PRICE
SECURITIES TOTAL OPTIONS EXERCISE OR APPRECIATIONS FOR
UNDERLYING GRANTED TO BASE PRICE OPTION TERM(1)
OPTIONS EMPLOYEES IN ($ PER EXPIRATION -------------------
NAME GRANTED (#) FISCAL YEAR SHARE) DATE 5% ($) 10% ($)
---- ----------- ------------- ----------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Michael A. Leven......................... -- -- -- -- -- --
Neal K. Aronson.......................... -- -- -- -- -- --
David E. Shaw, Sr (2).................... -- -- -- -- -- --
Steven Romaniello........................ 15,000(3)* 0.017% $9.31(4) 1-26-06 $23,279 $52,932
6,000(5)** 0.007 $4.50 10-24-03 $ 5,528 $11,861
2,000(6)** 0.002 $4.50 12-1-04 $ 2,443 $ 5,390
15,000(7)** 0.017 $4.50 1-26-06 $23,279 $52,932
Stephen D. Aronson....................... 5,000(8)** 0.006 $4.50 10-24-03 $ 4,606 $ 9,884
2,000(9)** 0.002 $4.50 12-1-04 $ 2,443 $ 5,390
</TABLE>
------------------------------
* Reflects actual option grant made in 1999.
** Reflects repricing of previously granted options. See "Stock Option
Committee Report on Stock Option Repricings" below.
(1) The dollar amounts under these columns represent the potential realizable
value of each grant of option assuming that the market price of the Class A
Common Stock appreciates in value from the date of grant at the 5% and 10%
annual rates prescribed by the Commission and therefore are not intended to
forecast possible future appreciation, if any, of the price of the Class A
Common Stock.
(2) Pursuant to a letter agreement dated July 28, 1999 between the Company and
Mr. Shaw, vesting was accelerated with respect to 4,000 previously granted
options such that they became immediately exercisable.
(3) Options vest as follows: 30% (4,500 shares) on January 26, 2003, the fourth
anniversary of the date of grant; 25% (3,750 shares) on the fifth
anniversary of the date of grant; 25% (3,750 shares) on the sixth
anniversary of the date of grant; and 20% (3,000 shares) on the seventh
anniversary of the date of grant.
(4) On December 31, 1999, the exercise price for these options was repriced at
$4.50 per share, the fair market value of the Class A Common Stock based on
the closing price of the Class A Common Stock as reported on the Nasdaq
National Market on that date.
(5) Options vest as follows: 25% (1500 shares) on October 24, 1997, the first
anniversary of the date of grant; 25% (1500 shares) on October 24, 1998, the
second anniversary of the date of grant; 25% (1500 shares) on October 24,
1999, the third anniversary of the date of grant; 25% (1500 shares) on
October 24, 2000, the fourth anniversary of the date of grant.
(6) Options vest as follows: 25% (500 shares) on December 1, 1998, the first
anniversary of the date of grant; 25% (500 shares) on December 1, 1999, the
second anniversary of the date of grant; 25% (500 shares) on December 1,
2000, the third anniversary of the date of grant; 25% (500 shares) on
December 1, 2001, the fourth anniversary of the date of grant.
(7) Options vest as follows: 30% (4,500 shares) on January 26, 2003, the fourth
anniversary of the date of grant; 25% (3,750 shares) on the fifth
anniversary of the date of grant; 25% (3,750 shares) on the sixth
anniversary of the date of grant; and 20% (3,000 shares) on the seventh
anniversary of the date of grant.
(8) Options vest as follows: 25% (1,250 shares) on October 24, 1997, the first
anniversary of the date of grant; 25% (1,250 shares) on October 24, 1998,
the second anniversary of the date of grant; 25% (1,250 shares) on
October 24, 1999, the third anniversary of the date of grant; 25% (1,250
shares) on October 24, 2000, the fourth anniversary of the date of grant.
(9) Options vest as follows: 25% (500 shares) on December 1, 1998, the first
anniversary of the date of grant; 25% (500 shares) on December 1, 1999, the
second anniversary of the date of grant; 25% (500 shares) on December 1,
2000, the third anniversary of the date of grant; 25% (500 shares) on
December 1, 2001, the fourth anniversary of the date of grant.
59
<PAGE>
1999 YEAR-END OPTION VALUES
The following table provides information concerning the value of unexercised
options held by the Named Executive Officers as of December 31, 1999. No stock
options were exercised by the Named Executive Officers and there were no stock
appreciation rights outstanding during fiscal 1999.
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
IN-THE-MONEY
NUMBER OF UNEXERCISED OPTIONS AT FISCAL YEAR-END
OPTIONS AT FISCAL YEAR-END ($) (1)
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Michael A. Leven............................... -- -- -- --
Neal K. Aronson................................ -- -- -- --
David E. Shaw, Sr.............................. 4,000 -- -- --
Steven Romaniello.............................. 5,500 75,307 -- $254,163
Stephen D. Aronson............................. 4,750 2,250 -- --
</TABLE>
------------------------
(1) The value per option was calculated by determining the difference between
the closing price of the Class A Common Stock on December 31, 1999 as
reported on the Nasdaq National Market ($4.50 per share) and the exercise
price of the options.
STOCK OPTION COMMITTEE REPORT ON STOCK OPTION REPRICINGS
The Option Plan is administered by the Stock Option Committee, which
currently consists of Messrs. Chafetz and Sonnenfeld. As a result of declines in
the market price of the Class A Common Stock, on December 31, 1999, the Stock
Option Committee approved a stock option repricing program. At that time,
578,000 options, representing all stock options held by then current officers,
employees and consultants which had been previously granted under the Option
Plan and that had exercise prices above the market price for the Class A Common
Stock, were repriced to reflect an exercise price equal to $4.50, the closing
price of the Class A Common Stock as reported on the Nasdaq National Market on
December 31, 1999. The stock options were repriced because the Stock Option
Committee believed that stock option incentives are a significant factor in the
Company's ability to attract, retain and motivate employees who are critical to
the Company's long-term success. Consequently, the Stock Option Committee
determined that it was in the Company's best interest to reprice "out of the
money" options to enable the Company to retain and attract valued employees. The
vesting schedule and all other terms of the stock options remained unchanged.
Stock options issued to non-employee directors pursuant to the U.S. Franchise
Systems, Inc. 1996 Stock Option Plan for Non-Employee Directors were not
repriced.
STOCK OPTION COMMITTEE
Irwin Chafetz
Jeffrey A. Sonnenfeld
The following table provides information with respect to all repricings of
options held by the Named Executive Officers of the Company since the Company
became subject to the reporting requirements of
60
<PAGE>
the Exchange Act. Messrs. Leven and Neal Aronson do not hold any stock options
and did not benefit from this repricing.
<TABLE>
<CAPTION>
NUMBER OF EXERCISE PRICE LENGTH OF
SECURITIES AT ORIGINAL OPTION
UNDERLYING MARKET PRICE OF TIME OF TERM
OPTIONS STOCK AT TIME OF REPRICING NEW EXERCISE REMAINING
NAME DATE REPRICED REPRICING ($) ($) PRICE ($) AT DATE OF
---- -------- ---------- ---------------- -------------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Steven Romaniello............ 12/31/99 6,000 $4.50 $13.50 $4.50 3.8
2,000 4.50 8.13 4.50 4.9
15,000 4.50 9.31 4.50 6.0
Stephen D. Aronson........... 12/31/99 5,000 $4.50 $13.50 $4.50 3.8
2,000 4.50 8.13 4.50 4.9
</TABLE>
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with Messrs. Leven and
Neal Aronson and a letter agreement regarding resignation with David E. Shaw,
Sr. The material terms of these existing agreements are described below. In
addition, the Company (1) has entered into the Separation Agreement with Neal
Aronson which will terminate his employment with the Company and (2) will enter
into a new employment agreement with Mr. Leven which will supersede his existing
employment agreement and an employment agreement with Mr. Romaniello. See
"Proposal 1--Agreements Executed and to be Executed in Connection with the
Recapitalization Agreement."
LEVEN EMPLOYMENT AGREEMENT
Mr. Leven's employment agreement with the Company, as amended, 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
(1) $1,000 for each franchise agreement, up to 150 franchise agreements,
executed in each 12-month period commencing October 1st and ending on
September 30th during the term of the agreement, and (2) $2,000 for each
franchise agreement in excess of 150 franchise agreements entered into in each
such 12-month period.
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 the
agreement, 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
61
<PAGE>
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.
The Company will enter into a new employment agreement with Mr. Leven which
will become effective upon consummation of the Offer and the Investment. See
"Proposal 1--Agreements Executed and To Be Executed in Connection with the
Recapitalization Agreement--New Leven Employment Agreement" for a discussion of
the terms of this new employment agreement.
ARONSON EMPLOYMENT AGREEMENT
Neal Aronson's employment agreement, as amended, pursuant to which he serves
as Chief Financial Officer of the Company, is substantially similar to
Mr. Leven's agreement, except that (1) his base salary is $200,000 per year,
(2) his term life insurance is in the amount of $500,000, (3) his automobile
allowance is $750 per month, (4) his performance bonus is $500 for each
franchise agreement, up to 150 franchise agreements, executed within each
applicable 12-month period, and $1,000 for each franchise agreement in excess of
150 entered in each applicable 12-month period and (5) 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.
In connection with the execution of the Recapitalization Agreement, the
Company entered into a Separation Agreement with Mr. Aronson. The agreement
provides that Mr. Aronson will resign from his employment with the Company
60 days after the consummation of the Offer and the Investment and will receive
severance benefits in connection therewith. See "Proposal 1--Agreements Executed
and To Be Executed in Connection with the Recapitalization Agreement--Separation
Agreement" for a discussion of the agreement and the severance benefits.
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 Neal
Aronson.
SHAW RESIGNATION AGREEMENT
On July 28, 1999, the Company and David E. Shaw, Sr. entered into a letter
agreement in connection with his resignation as Executive Vice
President--Administration. The letter agreement provides for the Company to
provide group medical, dental, life and long term disability insurance to
Mr. Shaw and his wife at the same cost as all Company employees with the same
coverage indefinitely. The letter agreement further provided for the accelerated
vesting of 26,887 Restricted Shares and 32,265 Unrestricted Shares and the
accelerated vesting of 4,000 stock options owned by him. Pursuant to the letter
agreement, Mr. Shaw served as a consultant to the Company and was compensated at
a rate of $400 for each of the first 167 new franchise agreements entered into
by the Company from July 28, 1999 through December 31, 1999.
62
<PAGE>
ROMANIELLO EMPLOYMENT AGREEMENT
Steven Romaniello does not currently have a written employment agreement
with the Company. The Company will enter into an employment agreement with
Mr. Romaniello, currently the Company's President and Chief Operating Officer,
which will become effective upon the consummation of the Offer and the
Investment. See "Proposal 1--Agreements Executed and To Be Executed in
Connection with the Recapitalization Agreement--Romaniello Employment Agreement"
for a discussion of the terms of this employment agreement.
No other Named Executive Officer has an employment or severance agreement
with the Company.
REPORT OF THE COMPENSATION COMMITTEE
OF THE BOARD OF DIRECTORS
The Compensation Committee of the Board of Directors is responsible for:
(1) setting the Company's compensation philosophy and policies; (2) setting the
terms and the administration of compensation plans for officers of the Company;
(3) review and approval of pay recommendations for the executive officers of the
Company; and (4) initiation of all compensation actions for the Chief Executive
Officer of the Company. However, the salary of any annual performance bonus paid
to the Company's Chief Executive Officer and Chief Financial Officer are
determined in accordance with their respective employment agreements, and
beginning in the fourth quarter of 1998, the compensation of the Executive Vice
President, Franchise Sales and Administration (now the President and Chief
Operating Officer), has been primarily commission based.
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, its need to retain and attract valued employees and the
expectations for growth and future profitability. Compensation for most of the
Company's executive officers consists of a base compensation, performance bonus
and, in some cases, life insurance benefits and 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 historical 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.
In addition, the Compensation Committee has recently recognized the value of
providing significant portions of executive compensation in the form of stock
options, as evidenced by the provisions of the new employment agreements which
are expected to be entered into between the Company and each of Mr. Leven and
Mr. Romaniello. The Compensation Committee believes that stock option incentives
are a significant factor in the Company's ability to attract, retain and
motivate employees who are critical to the Company's long-term success.
Furthermore, the Compensation Committee recognizes that tying a portion of such
executive officers' compensation package to the price of the Class A Common
Stock will serve to motivate such officers and increases the likelihood for
continued growth and profitability of the Company, and the attaining of
increased value to the Company's stockholders.
Periodically, the members of the Compensation Committee review salary
recommendations for the Company's executives and then approve such
recommendations, with any modifications they deem
63
<PAGE>
appropriate. The salary recommendations are made based on evaluations of the
individual executive's past and expected future performance.
The Compensation Committee periodically evaluates the Company's compensation
policies and procedures with respect to executives to determine what
modifications, if any, should be implemented to further link executive
compensation with both individual and Company performance.
The Compensation Committee currently intends for all compensation paid to
the Named Executive Officers to be tax deductible to USFS pursuant to
Section 162(m) of the Code ("Section 162(m)"). Section 162(m) provides that
compensation paid to the Named Executive Officers in excess of $1,000,000 cannot
be deducted by USFS for federal income tax purposes unless, in general, such
compensation is performance based, is established by a committee of independent
directors, is objective and the plan or agreement providing for such performance
based compensation has been approved in advance by stockholders. The
Compensation Committee believes that the requirements of Section 162(m) are
uncertain at this time and may arbitrarily impact USFS. In the future, the
Compensation Committee may determine to adopt a compensation program that does
not satisfy the conditions of Section 162(m) if in its judgment, after
considering the additional costs of not satisfying Section 162(m), such program
is appropriate.
COMPENSATION COMMITTEE
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.
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 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
1999. There were no material transactions between the Company and any of the
members of the Compensation Committee during fiscal 1999. See "Proposal
1--Agreements Executed and to be Executed in Connection with the
Recapitalization Agreement" for a discussion of certain transactions and
agreements entered into or expected to be entered into by Mr. Leven in
connection with the Offer and the Investment.
64
<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
the Company's Class A Common Stock began trading, and ending December 31, 1999
(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
(a) the cumulative amount of dividends for the Measuring Period, assuming
dividend reinvestment, and (b) the change in share price between the beginning
and end of the Measuring Period, by (2) the share price between 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
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
U.S. FRANCHISE SYSTEMS, INC. NASDAQ STOCK MARKET INDEX S&P LODGING-HOTELS INDEX
<S> <C> <C> <C>
October 25, 1996 $100.00 $100.00 $100.00
December 31, 1996 $75.00 $106.03 $90.00
December 31, 1997 $74.07 $129.92 $125.94
December 31, 1998 $73.15 $183.08 $102.53
December 31, 1999 $33.33 $330.76 $102.52
</TABLE>
DOLLARS
<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....................................... $100.00 $100.00 $100.00
December 31, 1996...................................... 75.00 106.03 90.00
December 31, 1997...................................... 74.07 129.92 125.94
December 31, 1998...................................... 73.15 183.08 102.53
December 31, 1999...................................... 33.33 330.76 102.52
</TABLE>
65
<PAGE>
SECURITY OWNERSHIP OF MANAGEMENT AND PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of the Company's Class A Common Stock and Class B Common Stock as of
June 25, 2000 by (1) each person known by the Company to be the beneficial owner
of more than 5% of each class of the outstanding Common Stock; (2) each director
of the Company; (3) each Named Executive Officer; and (4) 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
CLASS A COMMON PERCENT OF CLASS B COMMON PERCENT OF PERCENT OF TOTAL
NAME OF BENEFICIAL OWNER STOCK (1) CLASS STOCK (1) CLASS VOTING POWER
------------------------ -------------- ---------- -------------- ---------- ----------------
<S> <C> <C> <C> <C> <C>
Michael A. Leven.............. 874,557(2) 5.1% 1,509,473(3) 55.7% 36.0%
Neal K. Aronson............... 892,771(4) 5.2 1,509,453(5) 55.7 36.1
Dean Adler.................... 75,500(6) * 0 0 *
Irwin Chafetz................. 371,100(7) 2.2 0 0 *
Douglas G. Geoga.............. 4,000(8) * 0 0 *
Richard D. Goldstein.......... 266,478(9) 1.5 0 0 *
David T. Hamamoto............. 401,500(10) 2.3 0 0 *
Andrea Leven.................. 233,032(11) 1.4 770,801(12) 28.5 *
Jeffrey A. Sonnenfeld......... 11,000(13) * 0 0 *
Steven Romaniello............. 198,716(14) 1.2 0 0 *
David E. Shaw, Sr............. 85,749(15) * 0 0 *
Stephen D. Aronson............ 9,250(16) * 0 0 *
Meridian Associates, L.P.,
HSA, Inc. and SDI, Inc., as
a group..................... 3,778,203(17) 21.9 2,707,919(17) 100.0 69.6%
All officers and directors as
a group (11 Persons)**...... 2,817,309 16.3 2,707,919 100.0 67.4%
</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 after June 25,
2000. 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. In connection with the closing of the Offer and the
Investment, all Restricted Shares will vest and will no longer be subject
to forfeiture, and all outstanding stock options under the Option Plan will
also vest. Due to the vesting of the Restricted Shares owned by members of
management of the Company, those members of management will no longer be
required to vote such Restricted Shares in the same manner that Mr. Leven
and/or Mr. Aronson vote their shares. See "Management Shares of Common
Stock." In addition, in connection with the Recapitalization Agreement,
Mr. Aronson has entered into an agreement which will obligate him to, among
other things, tender all of his shares of Common Stock in the Offer and
convert any of his remaining shares of Class B Common Stock that are not
accepted by the Company for purchase in the Offer into Class A Common Stock
by the first business day after the closing of the Offer and the
Investment. See "Proposal 1--Agreements Executed and to be Executed in
Connection with the Recapitalization Agreement--Aronson Agreement." Because
the above-mentioned provisions are conditional in nature (and even if the
Investment and the Offer were to close, it is impossible to ascertain
precisely how the beneficial ownership of these individuals would change),
the table above does not reflect that such changes in beneficial ownership
may occur, even though it is possible that such changes in beneficial
ownership will occur within 60 days of June 25, 2000.
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<PAGE>
(2) Consists of (i) 123,805 Restricted Shares 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) 310,401
Unrestricted Shares, 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.
(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) 206,934 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 1,509,453 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) stock options for 2,000 shares of Class A Common Stock at
$9.78 per share which are fully vested and (v) 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.
(7) Consists of (i) 365,100 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, (iii) stock options for
2,000 shares of Class A Common Stock at $10.00 per share which are fully
vested and (iv) stock options for 2,000 shares of Class A Common Stock at
$9.78 per share which are fully vested.
(8) Consists of (i) stock options for 2,000 shares of Class A Common Stock at
$13.00 per share which are fully vested and (ii) stock options for 2,000
shares of Class A Common Stock at $9.78 per share which are fully vested.
(9) Consists of (i) 79,778 shares as to which Mr. Goldstein 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) stock options for 2,000 shares of Class A Common Stock at
$9.78 per share which are fully vested and (v) 180,700 shares owned by
Alpine Hospitality Equities LLC ("Alpine Equities"). Mr. Goldstein shares
voting and investment power with respect to the shares owned by Alpine
Equities.
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<PAGE>
(10) Consists of (i) stock options for 2,000 shares of Class A Common Stock at
$13.00 per share which are fully vested; (ii) stock options for 2,000
shares of Class A Common Stock at $9.78 per share which are fully vested
and (iii) 397,500 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.
(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, U.S. Franchise Systems, Inc.
(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 all voted by Mr. Leven.
(13) 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, (iii) stock
options for 2,000 shares of Class A Common Stock at $10.00 per share which
are fully vested, and (iv) stock options for 2,000 shares of Class A
Common Stock at $9.78 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 5,500 shares of Class A Common Stock at $4.50
per share which are fully vested.
(15) Consists of (i) 8,000 shares as to which Mr. Shaw has sole voting and
investment power, (ii) 56,862 Unrestricted Shares, of which 34,117 shares
must be voted in the same manner as Mr. Leven votes his shares and 22,743
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 3,000 shares of Class A Common Stock at $13.50 per
share which are fully vested, and (v) stock options for 1,000 shares of
Class A Common Stock at $8.13 per share which are fully vested.
(16) Consists of (i) 4,500 shares as to which Mr. Aronson has sole voting and
investment power and (ii) stock options for 4,750 shares of Class A Common
Stock at $4.50 per share which are fully vested.
(17) Consists of (i) 2,099,775 shares of Class A Common Stock owned by Meridian
as to which it reports sole voting and dispositive power and (ii) 22,447
shares of Class A Common Stock owned by HSA, an affiliate of Meridian, as
to which it reports sole voting and dispositive power and (iii) 1,655,981
shares of Class A Common Stock and 2,707,919 shares of Class B Common
Stock beneficially owned by Michael Leven and Neal Aronson as to which
Messrs. Leven and Aronson have agreed to vote in favor of Proposals 1, 2
and 3 at the Annual Meeting pursuant to various voting agreements with
Meridian. See "Proposal 1--Agreement Executed and to be Executed in
Connection with the Recapitalization Agreement--Aronson Agreement" and
"--Levin Agreement." Meridian's business address is 200 West Madison
Street, Suite 3800, Chicago, Illinois 60606. Based upon information
included in a Schedule 13D filed on June 13, 2000 by Meridian, HSA and
SDI, SDI, Meridian and HSA may constitute a "group" within the meaning of
Rule 13d-5 under the Act, with respect to their
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<PAGE>
beneficial ownership of shares of Common Stock of USFS. However, each of
SDI, Meridian and HSA is of the view that the they are not acting as a
"group" for purposes of Section 13(d) under the Act and that they are not
otherwise required to attribute to each other the "beneficial ownership"
of securities "beneficially owned" by the other reporting entities within
the meaning of Rule 13d-3 promulgated under the Act, and each of them
disclaims control and beneficial ownership of any Class A Common Stock
owned by the other reporting entities.
The following table sets forth information regarding the beneficial
ownership of shares of Class A Common Stock by the persons anticipated to fill
the vacancies on the Board of Directors after the consummation of the Offer and
the Investment, as described under "Proposal 1--New Board upon Consummation of
the Offer and the Investment."
<TABLE>
<CAPTION>
PERCENT OF
SHARES OF CLASS A TOTAL
COMMON PERCENT OF SHARES OF CLASS B PERCENT VOTING
NAME OF BENEFICIAL OWNER STOCK(1) CLASS COMMON STOCK OF CLASS POWER
------------------------ ----------------- ---------- ----------------- -------- ----------
<S> <C> <C> <C> <C> <C>
Ronald M. Brill.................... 0 * 0 0 *
Laurence S. Geller................. 25,397(2) * 0 0 *
Robert C. Glustrom................. 0 * 0 0 *
Philip M. Kayman................... 0 * 0 0 *
Scott D. Miller.................... 0 * 0 0 *
David A. Shapiro................... 0 * 0 0 *
</TABLE>
------------------------
* Represents less than 1% of the outstanding shares, both in number and in
terms of voting power.
(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 after June 25,
2000.
(2) Reflects shares that Mr. Geller has the right to receive from Meridian as
payment by Pritzker family business interests for consulting and advisory
services rendered to certain Pritzker family business interests.
MANAGEMENT SHARES OF COMMON STOCK
BACKGROUND
Messrs. Leven and Neal Aronson are parties to 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 from the Company
5,485,259 shares of Class A Common Stock, which represented 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 outstanding Class A Common Stock in the
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<PAGE>
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 provided 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 June 25, 2000, 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 June 25, 2000, 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
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<PAGE>
Stock that was deemed to have been earned by virtue of the 1996 Amendment) will
be forfeited if the management holder of such shares (including either of
Messrs. Leven or Aronson) resigns from his or her employment with the Company
without "good reason" or is terminated for "cause" prior to the tenth
anniversary of the date such shares were acquired by the holder thereof from the
Company ("Termination Forfeiture"). See "--1996 Amendment."
Pursuant to the 1996 Amendment, one-half of the Restricted Shares were
deemed to be Unrestricted Shares.
Under both the Old Stock Purchase Agreements and the Amended Stock Purchase
Agreements, Earned Shares will be permanently vested (i.e., they will no longer
be subject to Termination Forfeiture) on September 29, 2005. Any Restricted
Shares that have not become Earned Shares by September 29, 2005 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) Restricted Shares
that do no become Unrestricted Shares as a result of such transaction will
retain their characteristics and potential benefits as Restricted Shares unless
the issue is expressly addressed in the documentation with respect to 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
(1) one-half of their Restricted Shares will be deemed to be Unrestricted
Shares, notwithstanding the fact that certain performance criteria had not been
met, (2) 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, (3) the Unrestricted
Shares held by Messrs. Leven and Aronson and by Mr. Leven's wife, including the
Unrestricted Shares referred to in clause (1) above, will be shares of Class B
Common Stock (with ten votes per share), (4) 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, (5) 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, (6) no additional shares
will be repurchased from Messrs. Leven and Aronson and reissued to other members
of management and (7) 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 June 25, 2000,
will be voted by the management
71
<PAGE>
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.
RECAPITALIZATION AGREEMENT
Pursuant to the Recapitalization Agreement, all Restricted Shares (including
those Restricted Shares held by Messrs. Leven and Aronson and other management
holders) will become vested immediately prior to consummation of the Offer and
the Investment and can be tendered in the Offer at the discretion of the holders
of such Restricted Shares.
CERTAIN OTHER AGREEMENTS RELATING TO COMMON STOCK
In connection with the acquisition of the Hawthorn brand on March 12, 1998,
Meridian, HSA, Michael A. Leven, Neal K. Aronson and the Company entered into
the HSA Shareholders Agreement. Pursuant to the HSA Shareholders Agreement,
Meridian and HSA 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, 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. The HSA Shareholders
Agreement is expected to be terminated upon completion of the Offer and the
Investment.
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 an affiliate of 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 execution of the Recapitalization Agreement, Neal Aronson
entered into an agreement with Meridian pursuant to which he agreed to terminate
this agreement and/or his rights thereunder when the Offer and the Investment
are consummated.
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 the
execution of the Recapitalization Agreement, Neal Aronson entered into an
agreement with Meridian pursuant to which he agreed to terminate this agreement
and/or his rights thereunder when the Offer and the Investment are consummated.
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. On March 3, 2000, the Company issued
48,290 shares of Class A Common Stock, valued at approximately $240,000 in
satisfaction of the first such milestone. As of June 25, 2000 obligations with
respect to $660,000 in such shares remain.
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<PAGE>
CERTAIN OTHER RELATIONSHIPS AND RELATED TRANSACTIONS
In addition to the following, please see Proposal 1 and "--Management Shares
of Common Stock" for a description of several other relationships and
transactions entered into by the Company with its executive officers and
directors since January 1, 1999.
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, which such right has expired. 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.
The Company will also be paid approximately $3.5 million over the first five
years to manage the Development Fund and has earned $2,125,000 of such payments
as of March 31, 2000 ($1,000,000 in 1998, $1,000,000 in 1999 and 125,000 in 2000
through March 31, 2000.)
On October 31, 1998 the Development Fund entered into a $60 million senior
credit facility with NationsBank, N.A. The Company is party to an Indemnity
Agreement dated October 31, 1998 in favor of NationsBank, N.A. ("Agent") and the
lenders party to the senior lending facility, which requires the Company to
indemnify Agent and the lenders under certain limited circumstances including,
but not limited to, fraud, intentional misrepresentation or misappropriation of
funds by the Company, the Development Fund, Constellation Lending Fund, LLC, or
Constellation Equity Corp. Availability under this credit facility has been
reduced to $12,000,000. Outstanding borrowings under the credit facility at
June 25, 2000 were approximately $8.7 million. As of February 21, 2000, the
managers of the Development Fund agreed that no additional projects will be
commenced in the future. In connection with the establishment of the Development
Fund, the Company committed to make a loan of up to $10 million to Constellation
Equity Corp., an entity controlled by NorthStar ("Constellation"). Constellation
will use the funds to make an investment which is subordinated to certain debt
and equity returns of investors in the Development Fund. The loan bears interest
at an annual rate of 8%, is non-recourse and is repayable from distributions and
payments made to Constellation from the Development Fund. As of June 30, 2000,
the Company had made loans of approximately $4.3 million in the aggregate to
Constellation ($2,663,725 in 1998, $3,003,626 in 1999 and ($1,321,443) in 2000
through June 25, 2000) and the Company expects to lend approximately an
additional $400,000 to Constellation in 2000. Due to the uncertainty surrounding
ultimate recoverability of the subordinated loans, the Company is accounting for
them on the cost-recovery basis, where interest income is recorded only after
recovery of principal.
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 pursuant to which the Company has received fees
of $260.00 in 1998 and $152,987 in 1999 and $66,458 in the first quarter of
2000. The Company recently terminated the management agreements with Rockport
and its affiliates. The Company considers the terms of the franchise, management
and financing arrangements with Rockport and its
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affiliates to be, or, with respect to the management agreements, were
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. The loan is subordinated to a guarantee provided by Ventures in
connection with a third-party senior loan in the principal amount of
approximately $65 million to its subsidiary that acquired 17 Best Inns hotels in
the Best Inns acquisition and is structurally subordinated to such third party
loan. The Company was committed to make up to $7.5 million of additional loans
to Ventures under certain circumstances, including if required by Ventures in
order to achieve compliance with certain debt service coverage ratios in order
to obtain an extension of the maturity date of the loan, or to obtain the
release of a property from the senior lender's liens in connection with a
condemnation, casualty or otherwise. No additional loans have been made as of
June 25, 2000.
In connection with the Best Inns acquisition, the Company entered into
franchise and management agreements with Ventures for the Acquired Hotels. Fees
under these agreements were to be deferred to the extent there was insufficient
cash flow at the Acquired Hotels to pay them. A portion of these fees were
deferred in the fourth quarter 1999 and the first quarter 2000.
In the fourth quarter of 1999, the Company was advised that the senior
lender informed Ventures of its intention to institute a "lock-box" arrangement,
thereby eliminating the payment of cash interest to the Company on its
subordinated loan while such arrangement is in place. The Company will continue
to receive interest in-kind payments, but will not include such in-kind payments
in income. In March 2000, the lock-box agreement was executed. The Company has
taken a $15.5 million reserve during the fourth quarter 1999 against the value
and accrued interest of the loan.
In connection with Ventures' acquisition of the Best Inn hotels, the Company
entered into the following additional transactions with Ventures and Alpine
Equities: (1) 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,
(2) the Company entered into a management contract and franchise agreements with
Ventures relating to the 17 Acquired Hotels, and (3) 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 Company received $1,361,406 in fees in 1998, $1,881,915 in fees in
1999 and $30,000 in fees in the first quarter of 2000 pursuant to the management
and franchise arrangements with the Alpine entities and the Company paid $3,833
and $45,332 in New Hotel Fees to Alpine Equities in 1998 and 1999, respectively.
On June 2, 2000, the Company entered into a series of agreements with
Ventures and certain of its affiliates relating to the arrangements described
above. Ventures and the Company agreed, among other things, to terminate the
Company's role as manager of the 17 Acquired Hotels and Ventures agreed to
terminate the Company's commitment to make up to $7.5 million of additional
subordinated loans. The Company agreed to make a payment of $2,400,000 in
connection with the termination of the $7,500,000 commitment, as well as a
payment of $100,000 in connection with the termination of the management
agreement and certain related obligations. One-half of the total $2,500,000
obligation was paid in cash, and
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the other half was paid through the issuance of a promissory note that bears
interest at the rate of 5% per annum and matures upon the earlier to occur of
October 2, 2000 and the closing of the Investment and the Offer. The Company
remains entitled to deferred management fees earned from the Acquired Hotels
prior to June 2, 2000, to the extent there is available cash to pay such fees.
The Conversion/Exchange Price of the B Preferred Stock is subject to
adjustment for specified losses that may arise relating to the arrangements with
Ventures and certain of its affiliates. See "Proposal 1--Terms of the
B Preferred Stock--Conversion/Exchange."
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 with the Company, and have opened
one Microtel and one Best Inn which have resulted in fees to the Company of $0,
$23,806 and $86,351 in 1997, 1998 and 1999, respectively and $16,460 in the
first quarter 2000. Fees through 1999 also include those attributable to a
management agreement, which is no longer in effect.
Mr. Leven's sons, Jonathan Leven and Robert Leven, were employed by the
Company during 1997, 1998 and 1999 and received total compensation of
$170,913.04 and $94,746.49, $141,011.96 and $119,150, and $130,611.87 and
$87,250, respectively.
PROPOSAL 6
RATIFICATION OF APPOINTMENT OF AUDITORS
The Board of Directors, upon the recommendation of the Audit Committee, has
appointed Deloitte & Touche LLP, independent certified public accountants, as
auditors of USFS's financial statements for the year ending December 31, 2000.
Deloitte & Touche LLP has acted as auditors for USFS since .
The Board of Directors has determined to afford stockholders the opportunity
to express their opinions on the matter of auditors, and, accordingly, is
submitting to the stockholders at the Annual Meeting a proposal to ratify the
Board of Directors' appointment of Deloitte & Touche LLP. If a majority of the
shares voted at the Annual Meeting, in person or by proxy, are not voted in
favor of the ratification of the appointment of Deloitte & Touche LLP, the Board
of Directors will interpret this as an instruction to seek other auditors.
It is expected that representatives of Deloitte & Touche LLP will be present
at the meeting and will be available to respond to questions. They will be given
an opportunity to make a statement if they desire to do so.
The affirmative vote of a majority of the voting power of the outstanding
shares of Common Stock represented (in person or by proxy) at the Annual Meeting
is required to ratify the appointment by the Board of Directors of Deloitte &
Touche LLP as the independent auditors of USFS's financial statements for the
year ending December 31, 2000.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR THE
RATIFICATION OF THE APPOINTMENT OF DELOITTE & TOUCHE LLP AS THE INDEPENDENT
AUDITORS OF USFS'S FINANCIAL STATEMENTS FOR THE YEAR ENDING DECEMBER 31, 2000.
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MISCELLANEOUS
SOLICITATION
The cost of this proxy solicitation will be borne by USFS. USFS may request
banks, brokers, fiduciaries, custodians, nominees and certain other record
holders to send proxies, proxy statements and other materials to their
principals at USFS's expense. Such banks, brokers, fiduciaries, custodians,
nominees and other record holders will be reimbursed by USFS for their
reasonable out-of-pocket expenses of solicitation. Solicitation by mail,
telephone, facsimile, or personal solicitation may also be done by directors,
executive officers or regular employees of the Company and its subsidiaries, for
which they will receive no additional compensation.
PROPOSALS OF STOCKHOLDERS
Proposals of stockholders (1) intended to be considered at USFS' 2001 Annual
Meeting of Stockholders, must be received by the Secretary of USFS on or after
, 2001, and not later than , 2001 and (2) to be
considered for inclusion in the Company's proxy statement and proxy for the 2001
Annual Meeting of Stockholders, must be received by the Secretary of USFS not
later than , 2001.
OTHER BUSINESS
The Board of Directors is not aware of any other matters to be presented at
the Annual Meeting other than those mentioned in this proxy statement and USFS's
Notice of Annual Meeting of Stockholders enclosed herewith. If any other matters
are properly brought before the Annual Meeting, however, it is intended that the
persons named in the proxy will vote as the Board of Directors directs.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The Commission allows the Company to incorporate by reference to documents
it previously filed with the Commission. All information incorporated by
reference is considered a part of this Proxy Statement and this Proxy Statement
should be read in connection with all such incorporated information. The
following information contained in documents previously filed with the
Commission accompany this Proxy Statement and are hereby incorporated by
reference into this Proxy Statement:
- Item 6--Selected Financial Data, Item 7--Management's Discussion and
Analysis of Financial Condition and Results of Operations, Item
7A--Quantitative and Qualitative Disclosure About Market Risk, Item
8--Financial Statements and Supplementary Data, and Item 9--Changes in and
Disagreements with Accountants on Accounting and Financial Disclosure
included in the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1999; and
- Item 1--Financial Statements and Item 2--Management's Discussion and
Analysis of Financial Condition and Results of Operations included in the
Company's Quarterly Report on Form 10-Q for the quarter ended March 31,
2000.
ADDITIONAL INFORMATION
USFS will furnish, without charge, a copy of its Annual Report on Form 10-K
for its year ended December 31, 1999, as amended by its Form 10-K/A, including
the exhibits to such Form 10-K and Form 10-K/A, as filed with the Commission,
upon the written request of any stockholder. Requests for such materials should
be directed to U.S. Franchise Systems, Inc., 13 Corporate Square, Suite 250,
Atlanta,
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Georgia 30329, Attention: Public Relations Department. Such information may also
be obtained free of charge by accessing the Commission's web site at
www.sec.gov.
By order of the Board of Directors
Michael A. Leven
CHAIRMAN OF THE BOARD
Atlanta, Georgia
, 2000
ALL STOCKHOLDERS ARE REQUESTED TO COMPLETE,
DATE, SIGN AND RETURN THE ENCLOSED PROXY PROMPTLY.
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APPENDIX A
[LOGO]
BANC OF AMERICA SECURITIES LLC 600 Montgomery Street
San Francisco, CA 94111
Tel 415-627-2000
June 2, 2000
Board of Directors
U.S. Franchise Systems, Inc.
13 Corporate Square
Suite 250
Atlanta, Georgia 30329
Members of the Board:
We understand that U.S. Franchise Systems, Inc., a Delaware corporation (the
'Company'), proposes to engage in a series of transactions (collectively, the
'Transactions') in which the Company will (i) sell to SDI, Inc. (the
'Investor'), upon the terms and subject to the conditions set forth in the
Recapitalization Agreement among the Company, the Investor, HSA Properties, Inc.
('HSA Properties') and Meridian Associates, L.P. ('Meridian') (such agreement,
together with the exhibits thereto and the ancillary agreements referred to
therein, the 'Recapitalization Agreement'), (a) 65,000 newly issued shares of
Series A 8.5% Cumulative Redeemable Preferred Stock, par value $0.01 per share
and (b) 10,000 newly issued shares of Series B 6.0% Cumulative
Redeemable/Exchangeable Convertible Preferred Stock, par value $0.01 per share;
and (ii) offer to purchase up to 8,666,666, but not less than 3,000,000, of the
outstanding shares of the Class A Common Stock, par value $0.01 per share, of
the Company (the 'Class A Common Stock'), and the Class B Common Stock, par
value $0.01 per share, of the Company (the 'Class B Common Stock', and together
with the Class A Common Stock, the 'Company Common Stock') at a price of $7.50
per share of Company Common Stock. The terms and conditions of the proposed
Transactions are more fully set forth in the Recapitalization Agreement.
You have requested our opinion as to whether, on the date hereof, the
proposed Transactions, taken as a whole, are fair from a financial point of view
to the holders of shares of Company Common Stock (other than the Investor, HSA
Properties, Meridian, Michael Leven, Andrea Leven, Neal Aronson, Steven
Romaniello, and any affiliate of the foregoing or any natural person otherwise
related to the foregoing by virtue of being a spouse, a descendent, or an
ancestor of such natural person or a trust solely for the benefit of such
natural person and/or such natural person's spouse, descendent or ancestor).
For purposes of the opinion set forth herein, we have:
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(i) reviewed certain publicly available financial statements and
other business and financial information of the Company;
(ii) reviewed certain internal financial statements and other
financial and operating data concerning the Company prepared
by the management of the Company;
(iii) analyzed certain financial forecasts of the Company prepared
by the management of the Company;
(iv) reviewed and discussed certain information concerning the
strategic, financial and operating prospects of the Company
with senior executives of the Company;
(v) reviewed and discussed with senior executives of the Company
certain published financial forecasts prepared by equity
analysts with respect to the Company;
(vi) discussed certain strategic, financial and operational
benefits anticipated from the proposed Transactions with the
management of the Company;
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(vii) reviewed and discussed information relating to certain
strategic, financial and operational alternatives with the
management of the Company;
(viii) discussed the past and current operations, financial
condition and prospects of the Company with senior
executives of the Company;
(ix) reviewed the pro forma impact of the proposed Transactions
on the Company's earnings per share on a cash basis, cash
flow, consolidated capitalization and financial ratios;
(x) reviewed the reported prices and trading activity of the
Company Common Stock;
(xi) compared the financial performance of the Company and the
prices and trading activity of the Company Common Stock with
the financial performance and stock prices and trading
activity of certain other publicly traded companies we
deemed relevant;
(xii) compared certain financial terms of the proposed Transaction
to corresponding financial terms, to the extent publicly
available, of certain other business transactions we deemed
relevant;
(xiii) discussed the contingent liabilities of the Company with the
management and senior executives of the Company;
(xiv) participated in discussions and negotiations among
representatives of the Company and the Investor and their
legal advisors;
(xv) reviewed the draft of the Recapitalization Agreement dated
May 31, 2000 and certain related documents; and
(xvi) performed such other analyses and considered such other
factors as we have deemed appropriate.
</TABLE>
We have assumed and relied upon, without independent verification, the
accuracy and completeness of the financial and other information reviewed by us
for the purposes of this opinion. In arriving at our opinion, we have relied
upon, without independent verification, the assessments of the management of the
Company of the strategic, financial and operational benefits anticipated from
the proposed Transactions. With respect to the financial forecasts, including
information relating to certain strategic, financial and operational benefits
anticipated from the proposed Transactions, we have assumed that they have been
reasonably prepared on bases reflecting the best currently available estimates
and good faith judgments of the future financial performance of the Company. We
have not made any independent valuation or appraisal of the assets or
liabilities of the Company, nor have we been furnished with any such appraisals.
We have also assumed that the final form of the Recapitalization Agreement will
be substantially similar to the last draft reviewed by us.
We have acted as sole financial advisor to the Board of Directors of the
Company in connection with this transaction and will receive fees for our
services, including a fee which is contingent and payable upon the completion of
the proposed Transactions. In addition, the Company has agreed to indemnify us
for certain liabilities arising out of our engagement. In the ordinary course of
our trading, brokerage, investment banking, principal investing, investment
management and financing activities, Banc of America Securities LLC or its
affiliates may at any time hold long or short positions or other investments,
and may trade or otherwise effect transactions, for our own account or the
accounts of customers, in equity securities of the Company. Further, we note
that we and our affiliates have certain lending relationships with certain
entities ('Pritzker Controlled Entities') controlled by the Pritzker family
business interests (who directly control the Investor, HSA Properties and
Meridian), have in the past acted as the agent for a Pritzker Controlled Entity
and are currently under discussions regarding a potential partnership with a
Pritzker Controlled Entity in a real estate oriented debt fund. In addition, the
Pritzker family business interests were a significant shareholder in Montgomery
Securities, a predecessor of Banc of America Securities LLC. In the past, Banc
of America Securities LLC or its affiliates have provided financial advisory and
financing services for the Company and have received fees for the rendering of
these services.
It is understood that this letter is solely for the benefit and use of the
Board of Directors of the Company in connection with and for the purposes of its
evaluation of the proposed Transactions and is not
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on behalf of, and shall not confer rights or remedies upon, any person other
than the Board of Directors of the Company. This opinion may not be disclosed,
referred to, or communicated (in whole or in part) to any third party for any
purpose whatsoever without our prior written consent in each instance, which
consent will not be unreasonably withheld or delayed, and except as required by
law or by a court of competent jurisdiction. However, this opinion may be
included in its entirety in any filing required to be made by the Company in
respect of the proposed Transactions with the Securities and Exchange Commission
or with any federal or state regulatory body that controls or governs the
franchise licenses of the Company, so long as this opinion is reproduced in such
filing in full and any description of or reference to a summary of this opinion
and the related analysis in such filing is in a form acceptable to us and our
counsel. In furnishing this opinion, we do not admit that we are experts within
the meaning of the term 'experts' as used in the Securities Act of 1933, as
amended (the 'Securities Act') and the rules and regulations promulgated
thereunder, nor do we admit that this opinion constitutes a report or valuation
within the meaning of Section 11 of the Securities Act. Our opinion is
necessarily based on economic, market and other conditions as in effect on, and
the information made available to us as of, the date hereof. It should be
understood that subsequent developments may affect this opinion and we do not
have any obligation to update, revise or reaffirm this opinion. This opinion
does not in any manner address the prices at which the Company Common Stock will
trade following consummation of the proposed Transactions. In addition, we
express no opinion or recommendation as to how the stockholders of the Company
should vote at the stockholders' meeting held in connection with the proposed
Transactions.
Based upon and subject to the foregoing, including all of the assumptions
and limitations set forth herein, we are of the opinion, on the date hereof,
that the proposed Transactions, taken as a whole, are fair from a financial
point of view to the holders of shares of Company Common Stock (other than the
Investor, HSA Properties, Meridian, Michael Leven, Andrea Leven, Neal Aronson,
Steven Romaniello, and any affiliate of the foregoing or any natural person
otherwise related to the foregoing by virtue of being a spouse, a descendent, or
an ancestor of such natural person or a trust solely for the benefit of such
natural person and/or such natural person's spouse, descendent or ancestor).
Very truly yours,
BANC OF AMERICA SECURITIES LLC
By:
[LOGO]
Name: Ron D. Sturzenegger
Title: Managing Director
A-3
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APPENDIX B
RECAPITALIZATION AGREEMENT
BY AND AMONG
U.S. FRANCHISE SYSTEMS, INC.
SDI, INC.,
MERIDIAN ASSOCIATES, L.P.
AND
HSA PROPERTIES, INC.
DATED JUNE 2, 2000
<PAGE>
TABLE OF CONTENTS
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RECITALS.................................................................... 1
AGREEMENT................................................................... 1
ARTICLE 1
Defined Terms............................................................. 1
ARTICLE 2 Tender Offer..................................................... 1
Section 2.1 Tender Offer................................................ 1
Section 2.2 Compliance.................................................. 2
Section 2.3 Conditions to Commencement of the Offer..................... 2
Section 2.4 Meridian and HSA Properties Shares.......................... 3
ARTICLE 3 Investment in Preferred Stock.................................... 3
Section 3.1 Authorization of the Preferred Stock........................ 3
Section 3.2 Purchase and Sale of the Preferred Stock.................... 3
Section 3.3 The Closing................................................. 3
ARTICLE 4 Conditions to Closing............................................ 4
Section 4.1 Conditions to each Party's Obligations...................... 4
Section 4.2 Additional Conditions to the Investors' Obligations......... 4
Section 4.3 Additional Conditions to the Company's Obligations.......... 6
ARTICLE 5 Covenants Pending the Closing.................................... 7
Section 5.1 Interim Operations of the Company........................... 7
Section 5.2 Negative Covenants.......................................... 7
Section 5.3 No Solicitation............................................. 9
Section 5.4 Approval by the Company's Stockholders...................... 10
Section 5.6 Filings; Other Action....................................... 11
Section 5.7 Access...................................................... 11
Section 5.8 Notification of Certain Matters............................. 11
Section 5.9 Publicity................................................... 11
Section 5.10 Options; Restricted Stock................................... 11
Section 5.11 Reasonable Efforts.......................................... 12
ARTICLE 6 Representations and Warranties................................... 12
Section 6.1 Representations and Warranties of Investors................. 12
Section 6.2 Representations and Warranties of the Company............... 14
ARTICLE 7 Indemnification and Insurance.................................... 20
ARTICLE 8 Termination...................................................... 21
Section 8.1 Termination by Mutual Consent............................... 21
Section 8.2 Termination by either Party................................. 21
Section 8.3 Termination by Investors.................................... 22
Section 8.4 Termination by the Company.................................. 22
Section 8.5 Effect of Termination and Abandonment....................... 22
Section 8.6 Liquidated Damages.......................................... 22
ARTICLE 9 Stockholder Protection........................................... 23
Section 9.1 NASDAQ Listing.............................................. 23
Section 9.2 Restrictions on Stock Acquisitions.......................... 23
Section 9.3 Affiliate Transactions...................................... 23
Section 9.4 Enforcement................................................. 23
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ARTICLE 10 Miscellaneous Provisions........................................ 23
Section 10.1 Payment of Expenses......................................... 23
Section 10.2 Modification or Amendment................................... 24
Section 10.3 Waiver of Conditions........................................ 24
Section 10.4 Captions.................................................... 24
Section 10.5 Governing Law............................................... 24
Section 10.6 Notices..................................................... 24
Section 10.7 Entire Agreement............................................ 24
Section 10.8 Assignment; Binding Effect.................................. 24
Section 10.9 Counterparts................................................ 24
Glossary
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Exhibit A Leven Agreement
Exhibit B Hawthorn Termination
Exhibit C Offer to Purchase
Exhibit D Aronson Agreement
Exhibit E Aronson Termination Agreement
Exhibit F Series A Preferred
Exhibit G Series B Preferred
Exhibit H Opinion of Company Counsel
Exhibit I Proxy Statement Outline
Exhibit J Stockholders Agreement
Exhibit K Registration Rights Agreement
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RECAPITALIZATION AGREEMENT
THIS RECAPITALIZATION AGREEMENT (the "AGREEMENT") is made as of June 2,
2000, by and among U.S. Franchise Systems, Inc., a Delaware corporation (the
"COMPANY"), SDI, Inc., a Nevada corporation ("SDI", together with its permitted
assignees collectively, the "INVESTORS"), HSA Properties, Inc., a Delaware
corporation ("HSA PROPERTIES"), and Meridian Associates, L.P., an Illinois
limited partnership ("MERIDIAN").
RECITALS
A. The Company desires to engage in a recapitalization transaction involving
an offer by the Company to purchase a portion of its outstanding common stock to
provide, among other things, liquidity for its stockholders who may wish to
receive cash for their shares.
B. The Investors desire to make an investment in new preferred stock of the
Company to facilitate the recapitalization transaction and provide cash to the
Company for other corporate purposes.
C. The board of directors of the Company (the "BOARD OF DIRECTORS") has
duly approved this Agreement and the various other agreements and arrangements
to which the Company is a party or which are otherwise contemplated by this
Agreement.
D. Simultaneously with or immediately after the execution and delivery of
this Agreement: (i) Meridian, Michael A. Leven and Andrea Leven are entering
into an agreement in the form of EXHIBIT A attached hereto (the "LEVEN
AGREEMENT"); and (ii) the Company, Michael A. Leven, Meridian, and HSA
Properties are entering into an agreement in the form of EXHIBIT B attached
hereto (the "HAWTHORN TERMINATION").
E. Banc of America Securities LLC ("BAS") has delivered a letter to the
Board of Directors expressing its opinion that the transactions contemplated by
this Agreement are fair to the Company and its stockholders (other than
specified Persons as to which BAS has expressed no opinion) from a financial
point of view.
AGREEMENT
For good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties hereto agree as follows:
ARTICLE 1
DEFINED TERMS
Capitalized terms and acronyms used herein as defined terms but not defined
herein shall have the meanings given to them in the Glossary attached hereto.
ARTICLE 2
TENDER OFFER
Section 2.1 TENDER OFFER. Pursuant to an Offer to Purchase conforming to
the requirements of applicable law, including the rules and regulations of the
SEC, this Agreement and EXHIBIT C attached hereto and otherwise in customary
form (the "OFFER TO PURCHASE"), and subject to the terms and conditions set
forth in this Agreement, the Company will commence (within the meaning of
Rule 13e-4 of the Exchange Act) as soon as practicable after the execution
hereof, and in any event within ten Business Days after the satisfaction or
waiver of the conditions set forth in SECTION 2.3, after the execution hereof,
an offer to purchase (the "OFFER") up to 8,666,666, but not less than 3,000,000,
of the outstanding shares of Class A Common Stock, $0.01 par value, of the
Company (the "CLASS A COMMON STOCK"), and Class B Common Stock, $0.01 par value,
of the Company (the "CLASS B COMMON STOCK" together with the Class A Common
Stock collectively, the "SHARES") at a price of $7.50 per Share, net to the
seller in cash and, subject only to the condition concerning the minimum number
of Shares tendered, the conditions set forth in the Offer to Purchase, and
applicable provisions of the Exchange Act, will accept for purchase and pay for
all Shares
<PAGE>
duly tendered, up to a maximum of 8,666,666 Shares, commencing at the later of
(such later date being referred to herein as the "SCHEDULED EXPIRATION DATE")
(a) 20 Business Days following commencement of the Offer and (b) 12:00 noon New
York time on the first Business Day following the satisfaction or waiver of all
conditions to the Investors' purchase of the Preferred Stock. The Offer to
Purchase and related documents distributed in connection with the Offer (the
"OFFER DOCUMENTS") shall be consistent with the terms and conditions contained
or referred to in the first sentence of this SECTION 2.1.
Section 2.2 COMPLIANCE. In connection with the Offer, the Company shall
comply in all material respects with the provisions of the Exchange Act and the
rules and regulations thereunder and other applicable laws. The Investor Group
and its counsel shall be given a reasonable opportunity to review and comment
upon the Offer Documents prior to their being first published, sent or given to
holders of Shares. The Company agrees that the Offer Documents, including any
amendments thereto, will not include any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements made therein, in light of the circumstances under which they were
made, not misleading; provided that the foregoing shall not apply to the extent
that any such untrue statement of a material fact or omission to state a
material fact was made by the Company in reliance upon and in conformity with
information concerning the Investor Group furnished to the Company by the
Investor Group specifically for use in the Offer Documents. The Company shall
not amend the Offer, extend the time for tenders of Shares, or waive any
condition to the Company's obligation to purchase Shares pursuant to the Offer,
without the consent of the Investor Group; provided, however, that the Company
may extend the Offer if at the Scheduled Expiration Date any of the conditions
to the Offer shall not have been satisfied or waived, or if less than the
maximum number of Shares have been tendered, in each case for up to an
additional 30 days beyond the Scheduled Expiration Date. If requested by the
Investor Group, the Company will: (i) extend the time for tenders of Shares
pursuant to the Offer for up to 30 days beyond the Scheduled Expiration Date;
(ii) extend the time for tenders of Shares pursuant to the Offer for an
additional 30 days (in addition to the 30 day period provided in the preceding
clause (i)) if the Investors shall have waived the conditions set forth in
SECTIONS 4.2(a) and 4.2(b); and (iii) waive any condition to the Offer that is a
condition to the Investors' obligation to purchase the Preferred Stock as set
forth in SECTION 4.2.
Section 2.3 CONDITIONS TO COMMENCEMENT OF THE OFFER. The obligation of the
Company to commence the Offer is subject to the fulfilment, at or before the
commencement date, of each of the following conditions:
(a) LITIGATION. No preliminary or permanent injunction or other order
issued by any United States federal or state court of competent jurisdiction
in the United States prohibiting the commencement or consummation of the
Offer shall be in effect or threatened.
(b) REPRESENTATIONS AND WARRANTIES. The representations and warranties
of the Investor Group contained in SECTION 6.1 shall be true in all material
respects.
(c) FAIRNESS OPINION. BAS shall not have withdrawn or modified its
fairness opinion relating to the transactions contemplated by this
Agreement, as delivered to the Board of Directors prior to the execution of
this Agreement.
(d) ARONSON AGREEMENTS. Neal Aronson and Meridian shall have executed
and delivered the agreement in the form of EXHIBIT D attached hereto. Neal
Aronson and the Company shall have executed and delivered the Termination
Agreement in the form of EXHIBIT E attached hereto (the "ARONSON
TERMINATION"). Neal Aronson shall have executed and delivered the Hawthorn
Termination.
(e) DEFENSE AGREEMENT. The Company and each of its directors shall
have entered into a joint defense agreement, in form and substance
satisfactory to the Investors, the Company and the Company's directors' and
officers' insurance carrier, providing, among other things, for (i) the
appointment of a single lead defense counsel (and as needed, one local
counsel) for the Company and
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each of its directors in the Stockholder Litigation, and any similar
litigation stating substantially the same cause of action for substantially
the same claim period, (ii) the appointment of separate counsel only for
limited purposes in the event that such lead counsel determines that it
cannot act for one or more defendant parties and (iii) the determination of
each director's rights to indemnification by other independent counsel
selected by such lead counsel and reasonably satisfactory to the Company.
(f) NASDAQ LISTING. The Company shall be reasonably satisfied that
(i) the issuance of the Preferred Stock will not result in the loss of
listing of the Shares on the NASDAQ Stock Market and (ii) the Class A Common
Stock issuable upon conversion of the B Preferred will be accepted on or
before the Closing Date for listing for trading on the NASDAQ Stock Market
pending official notice of issuance. The Investors shall have agreed to such
matters regarding the voting rights of the Preferred Stock that the NASDAQ
Stock Market may reasonably require in connection therewith.
Section 2.4 MERIDIAN AND HSA PROPERTIES SHARES. Meridian represents and
warrants that as of the date hereof it beneficially owns 2,099,775 Shares. HSA
Properties represents and warrants that as of the date hereof it beneficially
owns 22,447 Shares. Meridian and HSA Properties each agrees that it shall not
transfer, pledge, hypothecate or otherwise dispose of any interest in any of
such Shares prior to the completion of the Offer or the termination of this
Agreement. Meridian and HSA Properties each agrees that it shall not tender any
Shares for purchase pursuant to the Offer.
ARTICLE 3
INVESTMENT IN PREFERRED STOCK
Section 3.1 AUTHORIZATION OF THE PREFERRED STOCK. Subject to any required
stockholder approval, the Company has authorized the issuance and sale to the
Investors of 65,000 shares of its Series A 8.5% Cumulative Redeemable Preferred
Stock, par value $.01 per share (the "A PREFERRED") having the rights and
preferences set forth in EXHIBIT F attached hereto, and 10,000 shares of its
Series B 6.0% Cumulative Redeemable Convertible/Exchangeable Preferred Stock,
par value $.01 per share (the "B PREFERRED") having the rights and preferences
set forth in EXHIBIT G attached hereto. The A Preferred and the B Preferred are
collectively referred to herein as the "PREFERRED STOCK."
Section 3.2 PURCHASE AND SALE OF THE PREFERRED STOCK. Immediately
following the expiration of the Offer and simultaneously with the Company's
acceptance for purchase of Shares tendered in accordance with the Offer to
Purchase, the Company shall sell to each Investor and, subject to the terms and
conditions set forth herein, each Investor shall purchase from the Company, the
number of shares of A Preferred and B Preferred set forth opposite such
Investor's name on the Schedule of Investors attached hereto at a price of
$1,000 per share for the A Preferred and $1,000 per share for the B Preferred.
The purchase of Preferred Stock by the Investors is referred to herein as the
"INVESTMENT."
Section 3.3 THE CLOSING. The closing of the Investment (the "CLOSING")
shall take place at such place as shall be mutually agreeable to the Company and
the Investors immediately following the expiration of the Offer and
simultaneously with the acceptance for purchase and payment for Shares tendered
pursuant to the Offer, or at such other time as may be mutually agreeable to the
Company and the Investors. At the Closing, the Company shall deliver to each
Investor stock certificates evidencing the Preferred Stock to be purchased by
such Investor, registered in such Investor's or its nominee's name, upon payment
of the purchase price therefor by wire transfer of immediately available funds
to such account as the Company shall direct, in the amount set forth opposite
such Investor's name on the Schedule of Investors. Each certificate for
Preferred Stock and Class A Common Stock issuable upon conversion of the B
Preferred shall be imprinted with a legend in the customary form acknowledging
the private placement of the securities and the consequent limitations on the
transfer of the securities.
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ARTICLE 4
CONDITIONS TO CLOSING
Section 4.1 CONDITIONS TO EACH PARTY'S OBLIGATIONS. The respective
obligations of the Company, on the one hand, to accept for purchase Shares
tendered pursuant to the Offer and consummate the Investment, and the Investors,
on the other hand, to consummate the Investment are subject to the fulfillment,
at or before the Closing Date, of each of the following conditions:
(a) HSR ACT WAITING PERIOD; VIOLATION OF LAW. All applicable waiting
periods under the HSR Act shall have expired or been terminated and
consummation of the Offer and the Investment shall not result in violation
of any applicable law, order or regulation of the United States or any of
the several states or any foreign jurisdiction.
(b) LITIGATION. No preliminary or permanent injunction or other order
issued by any United States federal or state court of competent jurisdiction
in the United States prohibiting the consummation of the Offer or the
Investment shall be in effect or threatened.
(c) STOCKHOLDER APPROVAL; CHARTER AMENDMENTS. The issuance of the A
Preferred and the B Preferred and the Class A Common Stock issuable upon the
conversion/exchange of the B Preferred shall have been duly approved by the
stockholders of the Company in accordance with applicable law and the
certificate of incorporation and by-laws of the Company as contemplated by
SECTION 5.4. Stockholders of the Company shall have duly approved, in
accordance with applicable law and the certificate of incorporation and
by-laws of the Company, the amendments to the Company's certificate of
incorporation (the "CHARTER AMENDMENTS") as contemplated by SECTION 5.4 to
(i) eliminate supermajority voting requirements in Sections 11.1 thereof;
(ii) eliminate prohibitions on stockholder action by written consent in
Section 9.1 thereof; and (iii) adopt new Sections 12 and 13 described in
EXHIBIT I attached hereto.
(d) OFFER CONDITIONS. All conditions to the acceptance for purchase
and payment for Shares set forth in the Offer to Purchase shall have been
satisfied or waived in accordance with this Agreement.
(e) DIRECTORS. Directors of the Company other than Michael Leven,
Stephen Romaniello, and Douglas Geoga shall have tendered letters of
resignation effective as of the Closing Date and no such resignation shall
have been withdrawn or rescinded or delayed in its effectiveness. Directors
of the Company shall have taken actions necessary to cause the Board of
Directors of the Company to consist of eleven people effective immediately
following the effective time of the resignations described in the preceding
sentence. Michael Leven, Stephen Romaniello and Douglas Geoga, as directors
of the Company, shall have taken action required to appoint (i) as
Independent Directors under new Section 12 of the Company's Certificate of
Incorporation three persons mutually acceptable to the Company and the
Investors, and (ii) as other directors five people designated by the
Investor Group, two whom shall not be directors, officers, employees, agents
or representatives of the Investor Group or any Affiliate of the Investor
Group.
(f) NASDAQ LISTING. The Class A Common Stock issuable upon
conversion/exchange of the B Preferred shall have been listed for trading on
the NASDAQ Stock Market pending official notice of issuance.
Section 4.2 ADDITIONAL CONDITIONS TO THE INVESTORS' OBLIGATIONS. The
obligations of the Investors to consummate the Investment are subject to the
fulfillment, at or before the Closing Date, of the following additional
conditions:
(a) REPRESENTATIONS AND WARRANTIES; PERFORMANCE. The representations
and warranties of the Company contained in SECTION 6.2(b) shall be true and
correct in all respects on and as of the Closing Date with the same effect
as though made at and as of such date. The other representations and
warranties of the Company contained in SECTION 6.2 shall be true in all
respects on and as of the
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Closing Date (without regard to any "materiality" qualifications that may be
contained in those representations and warranties or any exceptions for
matters that would not reasonably be expected to have a Material Adverse
Effect on the Company) with the same effect as though made at and as of such
date, except (i) as affected by transactions permitted or contemplated by
this Agreement; or (ii) where the event or condition that caused such
representation and warranty to be untrue could not reasonably be expected to
have a Material Adverse Effect on the Company or materially and adversely
affect the consummation of the transactions contemplated by this Agreement.
The Company shall have duly performed and complied in all respects with all
agreements and covenants required by this Agreement to be performed or
complied with by it prior to or on the Closing Date (without regard to
materiality qualifications that may be contained in any such agreement or
covenant or any exceptions for matters that would not reasonably be expected
to have a Material Adverse Effect on the Company) except where the failure
to so comply results from or results in an event or condition that could not
reasonably be expected to have a Material Adverse Effect on the Company or
materially and adversely affect the consummation of the transactions
contemplated by this Agreement.
(b) NO MATERIAL ADVERSE CHANGE. Since the date of this Agreement, no
change shall have occurred in the assets, financial condition or results of
operations of the Company or its Subsidiaries, nor shall there have occurred
any other development, event or condition relating to or affecting the
Company or its Subsidiaries, that could reasonably be expected to have a
Material Adverse Effect on the Company. Without limiting the generality of
the foregoing: (i) there shall not have occurred after the date hereof any
development (including any discovery of fact) in any of the litigation
matters described in the Company Disclosure Letter or any other pending or
threatened litigation matter, as a result of which the litigation matter to
which such development relates could reasonably be expected to have a
Material Adverse Effect on the Company; provided that the filing of an
amended complaint in the Stockholder Litigation or another complaint in the
same venue (or in another federal court venue if pending cases in different
venues are able to be consolidated under the multi-district litigation panel
or pursuant to a motion to transfer venue [or in a state court venue if such
action is capable of being removed to a federal court and is then able to be
consolidated under the multi-district litigation panel or pursuant to a
motion to transfer venue]) shall not be deemed to have a Material Adverse
Effect on the Company if it states substantially the same cause of action
for substantially the same class period.
(c) CONSENTS. The Investors shall have received evidence, reasonably
satisfactory to the Investors and their legal counsel, that the Company and
its Subsidiaries have obtained all necessary waivers, consents and permits
required to permit the consummation of the Offer and the Investment without
the occurrence of a breach or default (or a condition which, with action of
third parties or the passage of time, or both, would constitute a breach or
default) under any note, bond, mortgage, indenture, license, franchise or
other material agreement to which the Company or any of its Subsidiaries is
a party or a breach or violation of any law, order or regulation applicable
to the Company or its Subsidiaries or the business of the Company and its
Subsidiaries, except for any breach or default that could not reasonably be
expected to have a Material Adverse Effect on the Company.
(d) CERTIFICATES OF DESIGNATION. The Company shall have duly adopted,
executed and filed with the Secretary of State of Delaware a Certificate of
Designation of Rights and Preferences establishing the terms and the
relative rights and preferences of the A Preferred and the B Preferred in
the forms set forth in EXHIBIT F and EXHIBIT G hereto (the "CERTIFICATES OF
DESIGNATION"), and the Company shall not have adopted or filed any other
document designating terms, relative rights or preferences of its Preferred
Stock. The Certificates of Designation shall be in full force and effect as
of the Closing under the laws of Delaware and shall not have been amended or
modified.
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(e) CLOSING DOCUMENTS. The Company shall have delivered to each
Investor all of the following documents:
(i) an Officer's Certificate, dated the date of the Closing, stating
that the conditions specified in SECTIONS 4.2(a) through 4.2(d),
inclusive, have been fully satisfied;
(ii) certified copies of (A) the resolutions duly adopted by the
Board of Directors authorizing the execution, delivery and performance of
this Agreement and each of the other agreements contemplated hereby, the
filing of the Certificates of Designation, the issuance and sale of the
Preferred Stock, the reservation for issuance as dividends on the A
Preferred an aggregate of 12,000 shares of A Preferred, the reservation
for issuance as dividends on the B Preferred an aggregate of 8,200 shares
of B Preferred, the reservation for issuance upon conversion of the B
Preferred an aggregate of 10,000,000 shares of Class A Common Stock and
the consummation of all other transactions contemplated by this
Agreement, and (B) the resolutions duly adopted by the Company's
stockholders authorizing the issuance and sale of the Preferred Stock and
the Class A Common Stock issuable upon conversion/exchange of the B
Preferred and the Charter Amendments.
(iii) certified copies of the Company's certificate of incorporation
as amended, the Certificates of Designation and the Company's by-laws,
each as in effect at the Closing;
(f) OPINION OF THE COMPANY'S COUNSEL. Each Investor shall have
received from Paul, Weiss, Rifkind, Wharton & Garrison legal counsel for the
Company, an opinion with respect to the matters set forth in EXHIBIT H
attached hereto, which shall be addressed to each Investor, dated the date
of the Closing and in form and substance reasonably satisfactory to each
Investor.
(g) PROCEEDINGS. All corporate and other proceedings taken or required
to be taken by the Company in connection with the transactions contemplated
hereby, including the Offer and the Investment, at or prior to the Closing
and all documents incident thereto shall be reasonably satisfactory in form
and substance to each Investor and its legal counsel.
(h) DELIVERY OF CERTIFICATES. At the Closing, the Company shall have
delivered to each Investor one or more certificates, representing the
Preferred Stock to be purchased by such Investor as set forth on the
Schedule of Investors attached hereto, duly executed and registered in the
name of such Investor, against payment by such Investor of the purchase
price thereof as set forth in the Schedule of Investors.
(i) ARONSON AGREEMENT. The Company shall have not agreed to any
modification, waiver or termination of any provision of the Aronson
Termination without the prior consent of the Investors.
Section 4.3 ADDITIONAL CONDITIONS TO THE COMPANY'S OBLIGATIONS. The
obligations of the Company to consummate the Investment are subject to the
fulfillment, at or before the Closing Date, of the following conditions:
(a) REPRESENTATIONS AND WARRANTIES; PERFORMANCE. The representations
and warranties of the Investor Group contained in SECTION 6.1 shall be true
on and as of the Closing Date with the same effect as though made at and as
of such date, except as affected by transactions permitted or contemplated
by this Agreement. The Investor Group shall have duly performed and complied
with all agreements and conditions required by this Agreement to be
performed or complied with by them prior to or on the Closing Date.
(b) PAYMENT OF INVESTMENT. At the Closing, the Investors shall have
paid to the Company an amount by wire transfer of funds equal to $75,000,000
against delivery by the Company to the Investors the certificates
representing the Preferred Stock.
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ARTICLE 5
COVENANTS PENDING THE CLOSING
Section 5.1 INTERIM OPERATIONS OF THE COMPANY. Except as contemplated
hereby, during the period from the date of this Agreement to the Closing Date,
the Company shall, and shall cause each of its Subsidiaries to:
(a) conduct its business only in the usual, regular and ordinary course;
(b) maintain all of its properties in normal repair, order and
condition, except for depreciation, ordinary wear and tear and damage by
unavoidable casualty, except where the failure could not reasonably be
expected to have a Material Adverse Effect on the Company;
(c) maintain its books of account and records in the usual, regular and
ordinary manner;
(d) use commercially reasonable efforts (without the payment of or
commitment to pay money (or other consideration that would be reportable at
any time as taxable income to the recipient) for stay bonuses or similar
inducements unless approved by Michael A. Leven and Steven Romaniello and,
if the amount exceeds $1 million in the aggregate, the Investors) to cause
the key employees of the Company and its Subsidiaries to remain employed by
the Company and its Subsidiaries on the Closing Date;
(e) at all times cause to be done all things necessary to maintain,
preserve and renew its corporate existence and use commercially reasonable
efforts to maintain all licenses, authorizations and permits necessary to
the conduct of its businesses, except where the failure could not reasonably
be expected to have a Material Adverse Effect on the Company;
(f) comply with all material obligations which it incurs pursuant to any
contract or agreement, whether oral or written, express or implied, as such
obligations become due to the extent to which the failure to so comply would
reasonably be expected to have a Material Adverse Effect upon the Company,
unless and except to the extent that the same are being contested in good
faith and by appropriate proceedings and adequate reserves (as determined in
accordance with GAAP) have been established on its books with respect
thereto;
(g) comply with all applicable laws, rules and regulations of all
governmental authorities, the violation of which would reasonably be
expected to have a Material Adverse Effect on the Company;
(h) continue in force existing insurance coverage or comparable
insurance coverage, to the extent available on commercially reasonable
terms; and
(i) file when due all reports required to be filed by it under the
Exchange Act and the rules and regulations adopted by the SEC thereunder.
Section 5.2 NEGATIVE COVENANTS. Except as contemplated hereby, during the
period from the date of this Agreement to the Closing Date, neither the Company
nor any of its Subsidiaries will, unless the Investor Group gives its prior
written approval (which shall not be unreasonably withheld, delayed or
conditioned):
(a) except as disclosed in the Company Disclosure Letter, amend or
otherwise change the Certificates of Designation or its certificate of
incorporation or by-laws, as each such document is in effect on the date
hereof;
(b) except as disclosed in the Company Disclosure Letter, incur any
indebtedness for borrowed money or enter into any guaranty or other similar
obligation with respect to the debts or other obligations of any other
Person (other than the endorsement of instruments for collection in the
ordinary course of business) or make any loan to or investment in any Person
excepting (i) loans from the Company to its wholly-owned Subsidiaries,
(ii) guarantees by the Company of the obligations of its
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wholly-owned Subsidiaries, (iii) investments by the Company in its wholly
owned Subsidiaries, and (iv) loans to, or guarantees on behalf of, the
reservation and marketing funds or loans to franchisees in the ordinary
course of business; provided that loans and guarantees pursuant to this
clause (iv) shall be either committed as of the date hereof and disclosed in
the Company Disclosure Letter or, if not so committed, shall not exceed
$100,000 in any single transaction or $400,000 in the aggregate (less any
development subsidies made after the date hereof pursuant to
SECTION 5.2(j)) and shall have been approved by Michael A. Leven and Steven
Romaniello;
(c) except as disclosed in the Company Disclosure Letter, directly or
indirectly issue or sell, or authorize for issuance or sale or enter into
any agreement providing for the issuance (contingent or otherwise) of,
(i) any notes or debt securities containing equity features (including,
without limitation, any notes or debt securities convertible into or
exchangeable for equity securities, issued in connection with the issuance
of equity securities or containing profit participation features), (ii) any
equity securities (or any securities convertible into or exchangeable for
any equity securities) other than the Preferred Stock and issuance of Shares
pursuant to exercise of options existing as of the date hereof, and other
than the issuance of shares of capital stock under existing agreements
described in the Company Disclosure Letter, or (iii) any option or rights to
acquire any equity securities, other than grants of options under existing
commitments described on the Company Disclosure Letter and other options
approved by Michael A. Leven and Steven Romaniello for grants to newly hired
or newly promoted employees;
(d) in the case of the Company and any wholly-owned Subsidiary, declare,
set aside, make or pay any dividend or other distribution with respect to
its capital stock or directly or indirectly redeem, purchase or otherwise
acquire, or permit any Subsidiary to redeem, purchase or otherwise acquire,
any of the Company's or such wholly-owned Subsidiary's equity securities
(including, without limitation, warrants, options and other rights to
acquire equity securities) other than purchases of Shares pursuant to the
Offer and repurchases of Shares from employees of the Company and its
Subsidiaries upon termination of employment pursuant to arrangements
heretofore entered into by the Company;
(e) acquire (by merger, consolidation, or acquisition of stock or
assets) any significant corporation, limited liability company, partnership
or other business organization or division thereof, merge or consolidate
with any corporation, limited liability company, partnership, or other
business organization, or enter into or modify any contract, agreement,
commitment or arrangement with respect to any of the foregoing;
(f) except as disclosed in the Company Disclosure Letter, pay or take
any action with respect to any new grants of any severance, change of
control, or termination pay other than in connection with the termination of
the hotel management business pursuant to policies or agreements of the
Company or any of its Subsidiaries in effect on the date hereof and other
arrangements approved by Michael A. Leven and Steven Romaniello, and if the
amount exceeds $1,000,000, the Investors;
(g) except for salary increases or other employee benefit arrangements
consistent with the usual, regular and ordinary course of business prior to
or on the date hereof, or heretofore described in writing to the Investor
Group, adopt or amend any bonus, profit sharing, compensation, stock option,
restricted stock, pension, retirement, deferred compensation, employment or
other employee benefit plan, agreement, trust, fund or arrangement for the
benefit or welfare of any employee;
(h) make any material and substantive changes in the fundamental
business of the Company or its Subsidiaries as conducted on the date hereof,
other than with respect to the Company's hotel management business;
(i) except as disclosed in the Company Disclosure Letter, incur or enter
into any commitment to make any capital expenditure having a value to the
Company or its Subsidiaries or cost of $25,000 or more in the aggregate;
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(j) except as disclosed in the Company Disclosure Letter, enter into any
development subsidy agreement or arrangement or any franchise or license
agreement with "key man" provisions or terms and conditions at variance in
any material respect from the Company's standard franchise/licensing
agreements; provided that the Company may grant development subsidies not to
exceed $100,000 in any single transaction or $400,000 in the aggregate (less
any loans to franchisees after the date hereof pursuant to SECTION 5.2(b))
if such development subsidies are approved by Michael A. Leven or Stephen
Romaniello.
(k) except as disclosed in the Company Disclosure Letter, enter into any
other agreement having a value to the Company or its Subsidiaries or cost of
$50,000 or more in the aggregate except in the usual, regular and ordinary
course of business;
(l) sell, lease or otherwise dispose of, or permit any Subsidiary to
sell, lease or otherwise dispose of, any material assets of the Company or
its Subsidiaries in any transaction or series of related transactions or
sell or permanently dispose of any of its or any Subsidiary's material
Proprietary Rights, excepting settlements of claims for money due on terms
and conditions that are approved by Michael A. Leven and Steven Romaniello;
or
(m) except as disclosed in the Company Disclosure Letter, take any
action, or fail to take any action, or cause or permit any Subsidiary to
take or fail to take any action, which would result in the invalidity,
abuse, misuse or unenforceability of its Proprietary Rights or which would
infringe upon any rights of other Persons, which in any case, could
reasonably be expected to have a Material Adverse Effect on the Company.
Section 5.3 NO SOLICITATION.
(a) From and after the date of this Agreement until the earlier of the
termination of this Agreement or the expiration of the Offer and the
purchase of Shares pursuant thereto, the Company will not, and will use
reasonable efforts to cause its directors, officers, employees, agents,
representatives, or investment bankers not to, directly or indirectly,
(i) solicit, initiate, or knowingly encourage any Acquisition Proposal,
(ii) engage in negotiations or discussions concerning, or provide any non-
public information to any person or entity in connection with, any
Acquisition Proposal, or (iii) agree to, approve, recommend or otherwise
endorse or support any Acquisition Proposal. As used herein, the term
"Acquisition Proposal" means any proposal relating to a possible
(i) merger, consolidation, tender or exchange offer, or similar transaction
involving the Company or any of its Subsidiaries, (ii) sale, lease or other
disposition, directly or indirectly, by merger, consolidation, share
exchange or otherwise, of any material Proprietary Rights or any other
assets of the Company or its Subsidiaries (other than the hotel management
business) representing, in the aggregate, 10% or more of the assets of the
Company or its Subsidiaries on a consolidated basis, (iii) acquisition of or
issuance, sale or other disposition of (including by way of merger,
consolidation, share exchange or any similar transaction) to any Person or
group of Persons (as defined and as interpreted by the SEC for purposes of
Section 13(d) of the Exchange Act and the Rules thereunder) securities (or
options, rights or warrants to purchase or securities convertible into, such
securities) representing 15% or more of the votes attached to the
outstanding securities of the Company, (iv) liquidation, dissolution, or
other similar type of transaction with respect to the Company,
(v) recapitalization of the Company whether or not similar, in whole or in
part, to the transactions contemplated by this Agreement, or
(vi) transaction which is similar, in whole or in part, in form, substance
or purpose to any of the foregoing transactions; provided, however, that the
term "Acquisition Proposal" shall not include the Offer or the Investment.
The Company will immediately cease any and all existing activities,
discussions or negotiations with any Person conducted heretofore with
respect to any Acquisition Proposal other than the Offer and the Investment.
(b) Notwithstanding the provisions of SECTION 5.3(a), the Company or its
Board of Directors may, directly or through representatives or agents on
behalf of the Board of Directors, (i) furnish non-
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public information to, or enter into discussions or negotiations with, any
Person in connection with an unsolicited bona fide Acquisition Proposal by
such Person, if (A) such Acquisition Proposal would, if consummated, result
in a transaction that would give all stockholders of the Company the
opportunity to receive cash or other property for not less than 75% of all
issued and outstanding Shares and, in the reasonable good faith judgment of
the Board of Directors, taking into account all considerations relevant to
such Acquisition Proposal such as conditions to closing and other
contingencies, would result in a transaction more favorable to the
stockholders, from a financial point of view, than the Offer (any such more
favorable Acquisition Proposal being referred to in this Agreement as a
"SUPERIOR PROPOSAL"), and (B) prior to furnishing such non-public
information to, or entering into discussions or negotiations with, such
Person, the Company's board of directors receives from such Person an
executed confidentiality agreement with customary confidentiality
provisions, or (ii) complying with Rule 14d-9 and Rule 14e-2 promulgated
under the Exchange Act or other applicable law with regard to an Acquisition
Proposal.
(c) In the event the Company receives a Superior Proposal, nothing
contained in this Agreement shall prevent the board of directors of the
Company from accepting or approving such Superior Proposal or recommending
such Superior Proposal to the stockholders, in which case, the board of
directors may terminate this Agreement and withdraw the Offer. Subject to
the right of termination set forth in SECTION 8.4, except to the extent
expressly set forth in this SECTION 5.3, nothing shall relieve the Company
from complying with all other terms of this Agreement.
Section 5.4 APPROVAL BY THE COMPANY'S STOCKHOLDERS. The Company will take
all reasonable action necessary in accordance with applicable law and its
certificate of incorporation and by-laws to convene a meeting of stockholders
(which may be the Company's annual meeting of stockholders) to be held at or
before the scheduled expiration date of the Offer to consider and vote upon:
(a) the approval and authorization of the issuance and sale of the Preferred
Stock to the Investors and the issuance of Common Stock issuable upon
conversion/exchange of the B Preferred, (b) the Charter Amendments, and
(c) such other matters as may be necessary or advisable to consummate the
transactions contemplated by this Agreement. The approval by stockholders of all
such matters is herein referred to as the "STOCKHOLDER APPROVAL". Subject to
requirements of applicable law, the board of directors of the Company shall
recommend such approval, adoption and authorization, and the Company shall take
all reasonable lawful action to solicit such approval, adoption and
authorization of the Stockholder Approval. At any such meeting of stockholders,
all of the Shares then owned by Meridian and its Affiliates will be voted in
favor of the Stockholder Approval. The Company's proxy statement with respect to
such meeting of stockholders (the "PROXY STATEMENT") will conform to the
requirements of this Agreement and EXHIBIT I attached hereto and, at the date
thereof and at the date of such meeting, will not include any untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements made therein, in light of the
circumstances under which they were made, not misleading; provided that the
foregoing shall not apply to the extent that any such untrue statement of a
material fact or omission to state a material fact was made by the Company in
reliance upon and in conformity with information concerning the Investor Group
furnished to the Company by the Investor Group specifically for use in the Proxy
Statement. No amendment or supplement to the Proxy Statement will be made by the
Company without consultation with the Investors and their legal counsel.
Section 5.5 SHAREHOLDER ARRANGEMENTS. The Investors agree that all
arrangements entered into between either of the Investors or any of their
Affiliates and Michael A. Leven, Neal K. Aronson and Stephen Romaniello shall
not be modified or terminated prior to the Closing Date without the prior
written consent of the Company, and that, except for the proposed Stockholders
Agreement attached as EXHIBIT J hereto and the proposed Registration Rights
Agreement attached as EXHIBIT K hereto, no further arrangements between any of
the Investors or their Affiliates and any of such named persons shall be entered
into prior to the Closing Date without the prior written consent of the Company
(which consent
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will not be unreasonably withheld, delayed or conditioned). On or before the
Closing Date, the Company shall execute and deliver the Registration Rights
Agreement in the form of EXHIBIT K attached hereto.
Section 5.6 FILINGS; OTHER ACTION. Subject to the terms and conditions
herein provided, the Company and the Investor Group shall: (a) promptly make
their respective filings and thereafter make any other required submissions
under the HSR Act with respect to the transactions contemplated by this
Agreement; and (b) use their reasonable best efforts promptly to take, or cause
to be taken, all other action and do, or cause to be done, all other things
necessary, proper or appropriate under applicable laws and regulations to
consummate and make effective the transactions contemplated by this Agreement;
provided that neither Investor Group nor the Company shall be required to take
any action that would reasonably be expected to have a Material Adverse Effect
on it. The Company shall, as promptly as reasonably practicable, take such
actions as may be necessary or advisable in connection herewith under applicable
state and federal laws relating to the regulation of franchising to amend or
supplement its Uniform Franchise Offering Circulars (the "UFOCS"), PROVIDED that
any and all amendments to the UFOCs shall be approved by the Investors before
being filed.
Section 5.7 ACCESS. Upon reasonable notice, the Company shall (and shall
cause each of its Subsidiaries to) afford the Investor Group's officers,
employees, counsel, accountants and other authorized representatives access,
during normal business hours throughout the period prior to the Closing Date, to
all of its properties, books, contracts, commitments and records, and, during
such period, the Company shall (and shall cause each of its Subsidiaries to)
furnish promptly to the Investor Group (a) a copy of each report, schedule and
other document filed or received by it pursuant to the requirements of federal
or state securities laws and (b) all other information concerning its business,
properties and personnel as the Investor Group may reasonably request; provided
that no investigation pursuant to this Section shall affect or be deemed to
modify any representation or warranty made by the parties to this Agreement. All
such information that may be made available to the Investor Group shall be
subject to the existing confidentiality agreement by which the Investor Group is
bound.
Section 5.8 NOTIFICATION OF CERTAIN MATTERS.
(a) The Company shall give prompt notice to the Investor Group of any
breach or default of this Agreement by or on the part of the Company and any
notice of, or other communication known to an executive officer of the
Company relating to, a default or event which, with notice or lapse of time
or both, would become a default under this Agreement subsequent to the date
of this Agreement and prior to the Closing Date. The Company shall give
prompt notice to the Investor Group of any notice or other communication
from any Person alleging that the consent of any Person is or may be
required in connection with the transactions contemplated by this Agreement.
(b) The Investor Group shall give prompt notice to the Company of any
breach or default of this Agreement by or on the part of the Investor Group
and any notice of, or other communication known to an executive officer of
any member of the Investor Group relating to, a default or event which, with
notice or lapse of time or both, would become a default under this Agreement
subsequent to the date of this Agreement and prior to the Closing Date. The
Investor Group shall give prompt notice to the Company of any notice or
other communication from any Person alleging that the consent of any Person
is or may be required in connection with the transactions contemplated by
this Agreement.
Section 5.9 PUBLICITY. The initial press release with respect to the
execution of this Agreement shall be a joint press release, and thereafter the
Company and Investor Group shall consult with each other in issuing any press
releases or otherwise making public statements with respect to the transactions
contemplated hereby and in making any filings with any federal or state
governmental or regulatory agency or with any national market system or
securities exchange with respect thereto.
Section 5.10 OPTIONS; RESTRICTED STOCK. The Company will take such actions
as are necessary to cause to be vested (and no longer subject to forfeiture)
immediately before the Closing Date (but subject
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to the Closing) all options outstanding under the Stock Option Plan and all
Restricted Stock. Holders of vested and exercisable options to purchase Shares
under the Stock Option Plan shall be afforded an opportunity to receive cash for
their vested and exercisable options (and receive the net value thereof) at or
following expiration of the Offer, and holders of Restricted Stock shall be
afforded an opportunity to tender their Shares pursuant to the Offer.
Section 5.11 REASONABLE EFFORTS. Each member of the Investor Group and the
Company shall use all commercially reasonable efforts to cause to be satisfied
all conditions to the Company's obligation to make the Offer and the Investors'
obligation to consummate the Investment and otherwise to consummate the
transactions contemplated by this Agreement.
ARTICLE 6
REPRESENTATIONS AND WARRANTIES.
Section 6.1 REPRESENTATIONS AND WARRANTIES OF INVESTORS. The Investor
Group jointly and severally represent and warrant to the Company that:
(a) CORPORATE ORGANIZATION. SDI, Inc. is a corporation duly organized,
validly existing and in good standing under the laws of its jurisdiction of
organization and is in good standing as a foreign corporation in each
jurisdiction where the properties owned, leased or operated, or the business
conducted, by it require such qualification and where failure to so qualify
or be in good standing either singly or in the aggregate would have a
Material Adverse Effect on SDI, Inc. Each permitted assignee of SDI, Inc.
that purchases Preferred Stock pursuant to this Agreement is a partnership
or limited liability company duly organized, validly existing and in good
standing under the laws of its jurisdiction of organization and is in good
standing as a foreign entity in each jurisdiction where the properties
owned, leased or operated or the business conducted, by it require such
qualification and where failure to so qualify or be in good standing either
singly or in the aggregate would have a Material Adverse Effect on such
permitted assignee. HSA Properties is a corporation duly organized, validly
existing and in good standing under the laws of its jurisdiction of
organization and is in good standing as a foreign corporation in each
jurisdiction where the properties owned, leased or operated or the business
is conducted, by it require such qualification and where failure to so
qualify or be in good standing either singly or in the aggregate would have
a Material Adverse Effect on HSA Properties. Each Investor has the corporate
power to carry on its respective businesses as it is now being conducted.
Meridian is a limited partnership duly organized, validly existing and in
good standing under the laws of its jurisdiction of organization and is in
good standing as a foreign entity in each jurisdiction where the properties
owned, leased or operated, or the business conducted, by it require such
qualification and where failure to so qualify or be in good standing either
singly or in the aggregate would have a Material Adverse Effect on Meridian.
(b) CORPORATE AUTHORIZATION. Each member of the Investor Group has
taken all required corporate or partnership action, as applicable, to
approve and adopt this Agreement, and this Agreement is a valid and binding
agreement of each member of the Investor Group, enforceable against them in
accordance with its terms.
(c) NO CONFLICTS. The execution and delivery of this Agreement by each
member of the Investor Group does not, and the consummation of the
transactions contemplated hereby by each member of the Investor Group will
not, (i) violate or conflict with the certificate of incorporation or
by-laws of SDI, Inc., or HSA Properties, the certificate of limited
partnership or limited partnership agreement of Meridian, or the certificate
of limited partnership or the certificate of organization or operating
agreement of any assignee of SDI, Inc., or (ii) assuming compliance with the
HSR Act, the Exchange Act and the rules and regulations thereunder, State
Laws, and Foreign Laws, constitute a breach or violation of, or a default
under, any law, rule or regulation or any judgment, decree, order,
governmental permit or license, or agreement, indenture or instrument of any
member of the Investor
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Group or to which any member of the Investor Group is subject, which breach,
violation or default would have a Material Adverse Effect on any member of
the Investor Group, or would prevent or materially and adversely affect the
consummation of the transactions contemplated hereby.
(d) COMPLIANCE WITH LAWS. Other than the filings pursuant to the HSR
Act, the Exchange Act, State Laws, and Foreign Laws, there are no filings
required to be made by the members of the Investor Group, and there are no
consents, approvals, permits or authorizations required to be obtained by
the members of the Investor Group, from governmental and regulatory
authorities of the United States and the several states in connection with
the execution and delivery of this Agreement by Meridian or the Investors
and the consummation of the transactions contemplated hereby by the members
of the Investor Group, other than such as may be required solely because the
Company is a party to this Agreement and other than such which the failure
to make or obtain would not, in the aggregate, have a Material Adverse
Effect on the members of the Investor Group, or would prevent or materially
and adversely affect the consummation of the transactions contemplated
hereby.
(e) INVESTMENT REPRESENTATIONS. Each Investor represents that it is
acquiring the Preferred Stock purchased hereunder and any Preferred Stock
distributed as dividends thereon and Class A Common Stock issuable upon
conversion/exchange of the B Preferred for its own account with the present
intention of holding such securities for purposes of investment, and that it
has no intention of selling such securities in a public distribution in
violation of the federal securities laws or any applicable state securities
laws; provided that nothing contained herein shall prevent any Investor and
subsequent holders of Preferred Stock and Class A Common Stock issuable upon
conversion/ exchange of the B Preferred from transferring such securities in
compliance with the applicable provisions of federal and state securities
laws.
(f) FINANCING. The Investors have, and on the Closing Date will have,
the funds necessary to purchase the Preferred Stock on the Closing Date
pursuant to this Agreement.
(g) ADVISORY FEE. No member of the Investor Group nor any of their
Affiliates nor any of their officers, directors, or employees, has employed
any broker or finder or incurred any liability for any advisory fees,
brokerage fees, commissions, or finder's fees in connection with this
Agreement or the transactions contemplated hereby that could result in any
liability to the Company or any of its Subsidiaries.
(h) SHAREHOLDER ARRANGEMENTS. The Investors have disclosed to the
Company the terms of all arrangements entered into between either of the
Investors or any of their Affiliates and Michael A. Leven, Neal K. Aronson
and Steven Romaniello and have provided the Company with true and correct
copies of all documents pertaining thereto.
(i) DISCLOSURE DOCUMENTS. The information with respect to the Investor
Group or any of their Affiliates that the Investor Group or any of their
Affiliates furnishes to the Company in writing specifically for use in the
Offer Documents, the Proxy Statement or any related documents, at the
respective times of the filing thereof with the SEC or such other
governmental entity, and at the time of any distribution or dissemination
thereof and, in the case of the Proxy Statement at the date it or any
amendment or supplement is mailed to stockholders of the Company and at the
time of the meeting of stockholders of the Company, will not contain any
untrue statement of a material fact or misstate any material fact necessary
in order to make the statements made therein, in light of the circumstances
under which they were made, not misleading.
(j) NO INTERESTED STOCKHOLDER. As of the date of this Agreement,
neither of the Investors, nor any affiliate (as defined in Section 203 of
the DGCL) of any of the Investors, is an "interested stockholder" as such
term is defined in Section 203 of the DGCL.
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Section 6.2 REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
represents and warrants to the Investor Group that:
(a) CORPORATE ORGANIZATION. Each of the Company and its Significant
Subsidiaries is a corporation, partnership or limited liability company duly
organized, validly existing and in good standing under the laws of its
respective jurisdiction of organization and is in good standing as a foreign
corporation, partnership or limited liability company in each jurisdiction
where the properties owned, leased or operated, or the business conducted by
it require such qualification and where failure to so qualify or be in good
standing would, either singly or in the aggregate, have a Material Adverse
Effect on the Company. Each of the Company and its Significant Subsidiaries
has the corporate, partnership or limited liability company power to carry
on its respective businesses as they are now being conducted. Except as
disclosed in the Company Disclosure Letter, each of the Company's
Subsidiaries is wholly-owned by the Company. All issued and outstanding
shares of capital stock of the Company's Significant Subsidiaries have been
validly issued and are fully paid and nonassessable.
(b) CAPITALIZATION. The authorized capital stock of the Company
consists of 36,000,000 shares of capital stock, of which (i) 35,000,000
shares are Common Stock, par value $0.01 per share (and which are herein
referred to as the Shares), of which 30,000,000 are designated as Class A
Common Stock and 5,000,000 are designated as Class B Common Stock and
(ii) 1,000,000 shares are preferred stock, par value $0.01 per share. As of
the close of business on June 1, 2000, there were 19,953,753 Shares issued
and outstanding of which 17,245,834 are designated as Class A Common Stock
and 2,707,919 are designated as Class B Common Stock. As of the same date,
there were no shares of preferred stock issued and outstanding. All of the
outstanding Shares have been validly issued and are fully paid and
nonassessable. As of the date hereof, except as disclosed in the Company
Disclosure Letter, the Company has no Shares reserved for issuance, except
that, as of the close of business on June 1, 2000, there were 885,207 shares
of Class A Common Stock reserved for issuance pursuant to unexercised
options granted and currently outstanding under the Stock Option Plan and
the Directors Option Plan and 2,707,919 shares of Class A Common Stock
reserved for issuance upon conversion of the shares of Class B Common Stock.
Except as set forth above or as disclosed in the Company Disclosure Letter,
there are no shares of capital stock of the Company authorized or
outstanding, and there are no outstanding subscriptions, options, warrants,
rights, convertible securities or other agreements or commitments of any
character relating to the issued or unissued capital stock or other
securities of the Company or any Subsidiary obligating the Company or any
Subsidiary to issue any securities. Except as disclosed in the Company
Disclosure Letter or the Company Reports, since April 30, 2000, no Shares
have been issued by the Company except pursuant to exercise of options under
the Stock Option Plan.
(c) CORPORATE AUTHORIZATION. Subject only to Stockholder Approval, the
Company has taken all required corporate action to authorize and adopt this
Agreement and approve the transactions contemplated hereby including the
Offer, the Investment and the Leven Agreement, Hawthorn Termination, and the
Registration Rights Agreement attached as EXHIBIT K hereto, and this
Agreement is a valid and binding agreement of the Company enforceable
against the Company in accordance with its terms. The Board of Directors has
(i) determined that each of the Offer and the Investment is fair to holders
of Shares, (ii) approved the making of the Offer and the purchase of Shares
pursuant to the Offer and (iii) resolved to recommend acceptance of the
Offer by the holders of Shares who wish to receive cash for their Shares at
the time the Offer is made.
(d) SEC FILINGS. As of their respective dates, neither the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 2000, Annual
Report on Form 10-K for the year ended December 31, 1999, Annual Report on
Form 10-K/A for the year ended December 31, 1999 (the March 31, 2000
Quarterly Report being referred to herein as the "LATEST COMPANY REPORT"),
nor the Proxy Statement with respect to the Company's 1999 annual meeting,
each in the form (including exhibits) filed with the SEC (collectively, the
"COMPANY REPORTS"), nor the Company's press releases
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contained, nor will any of the Company's future press releases or Quarterly
Reports on Form 10-Q contain, any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary
to make the statements made therein, in light of the circumstances in which
they were made, not misleading. The Company Reports, when filed, complied in
all material respects with all applicable requirements of the Exchange Act.
(e) FINANCIAL STATEMENTS. Each of the consolidated balance sheets,
included in or incorporated by reference into the Company Reports (including
the related notes and schedules) fairly presents in all material respects
the financial position of the entity or entities to which it relates as of
its date, and each of the consolidated statements of earnings and of changes
in financial position or equivalent statements, included in the Company
Reports (including any related notes and schedules) fairly presents in all
material respects the results of operations and changes in financial
position, as the case may be, of the entity or entities to which it relates
for the period set forth therein (subject, in the case of unaudited
statements to normal year-end audit adjustments), in each case in accordance
with generally accepted accounting principles consistently applied during
the periods involved, except as may be noted therein.
(f) NO ADVERSE CHANGE. Except as disclosed in the Company Reports, or
the Company Disclosure Letter, since December 31, 1999, there has not been
any change in the assets, financial condition or results of operations of
the Company and its Subsidiaries, that could reasonably be expected to have
a Material Adverse Effect on the Company. There has been no material adverse
change in the composition of the Company's and its Subsidiaries' sales force
since the date of this Agreement that could reasonably be expected to have a
Material Adverse Effect on the Company. There has been no change in the
Company's and its Subsidiaries' rates of new business generation since
March 31, 2000 that reflects, or could reasonably be expected to have, a
Material Adverse Effect on the Company.
(g) NO CONFLICTS. Except as disclosed in the Company Disclosure
Letter, the execution and delivery of this Agreement by the Company do not,
and the consummation of the transactions contemplated hereby by the Company
will not, (i) subject to Stockholder Approval, violate or conflict with the
certificate of incorporation or by-laws of the Company, or (ii) assuming
compliance with the HSR Act, the Exchange Act, State Laws and Foreign Laws,
constitute a breach or violation of, or a default under, any law, rule or
regulation or any judgment, decree, order, governmental permit or license,
to which the Company or any of its Subsidiaries is subject, or
(iii) constitute a breach or violation of, a default (or an event or
condition which, with notice or lapse of time, or both, would constitute a
default) under, permit the termination or change of, or cause or permit the
acceleration of the maturity of, any agreement, indenture, mortgage, bond,
note or instrument to which the Company or any of its Subsidiaries is a
party or by which the Company or any of its Subsidiaries is bound, which
conflict, breach, violation, default, termination, change or acceleration
would have a Material Adverse Effect on the Company. Except as disclosed in
the Company Disclosure Letter, the execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby will not
require the consent or approval of any other party to any agreement,
indenture, mortgage, bond, note or instrument to which the Company or any of
its Subsidiaries is a party or by which the Company or any of its
Subsidiaries is bound where the failure to obtain any such consent or
approval would have a Material Adverse Effect on the Company, or would
prevent or materially and adversely affect the consummation of the
transactions contemplated hereby.
(h) COMPLIANCE WITH LAWS. Except as disclosed in the Company
Disclosure Letter, other than the filings pursuant to the HSR Act, the
Exchange Act, State Laws and Foreign Laws, there are no filings required to
be made by the Company with, and there are no consents, approvals, permits
or authorizations required to be obtained by the Company from, governmental
and regulatory authorities of the United States and the several states in
connection with the execution and delivery of this Agreement by the Company
and the consummation of the transactions contemplated hereby by the
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Company, other than such as may be required solely because any member of the
Investor Group is a party to this Agreement and other than such which the
failure to make or obtain would not, in the aggregate, have a Material
Adverse Effect on the Company, or would prevent or materially and adversely
affect the consummation of the transactions contemplated hereby.
(i) PROPERTIES. The Company and its Subsidiaries own all of their
material assets reflected as owned by them on the Latest Company Report
(except for assets consumed, sold or otherwise disposed of in the usual,
regular and ordinary course of business), subject, in each case, to no
Encumbrance, except as set forth in the Latest Company Report, excepting any
Encumbrance the existence or enforcement of which could not reasonably be
expected to have a Material Adverse Effect on the Company. Except as
disclosed in the Company Disclosure Letter, the Company and its Subsidiaries
own all of their material Proprietary Rights relating to the Microtel,
Hawthorn and Best brands (the "BRANDS") subject to no Encumbrance arising by
express consent or agreement of the Company or its Affiliates. The Company
and its Subsidiaries own all other material Proprietary Rights they purport
to own, subject in each case to no Encumbrance excepting any Encumbrance
that could not reasonably be expected to have a Material Adverse Effect on
the Company. The material Proprietary Rights owned by the Company or its
Subsidiaries include all Proprietary Rights the use of which is reasonably
necessary for the continued conduct of the business of the Company and its
Subsidiaries as now conducted. To the knowledge of the Company and its
Subsidiaries, the use by the Company and its Subsidiaries of all Proprietary
Rights in the operation of the business of the Company and its Subsidiaries
does not cause any infringement of the Proprietary Rights of others, and
there are no claims against the Company or its Subsidiaries for such
infringement except as disclosed in the Company Reports or the Company
Disclosure Letter or except where such infringement could not reasonably be
expected to have a Material Adverse Effect on the Company. Neither the
Company nor any of its Affiliates is in breach or default of any agreement
relating to the acquisition or license by the Company or its Affiliates of
any material Proprietary Rights, nor has any event occurred nor does any
condition exist that, but for the giving of notice or passage of time, or
both, would constitute a breach or default thereunder except for any breach
or default that could not reasonably be expected to have a Material Adverse
Effect on the Company.
(j) TAXES. Except as disclosed in the Company Disclosure Letter, the
Company and its Subsidiaries have duly filed, when due or within proper
extensions of time, all federal, state, local and foreign income, sales,
use, employment, excise, premium, value added and other tax returns and
reports which are required to be filed by or on behalf of the Company and/or
its Subsidiaries or with respect to the income, deductions and credits of
the Company and its Subsidiaries, and have paid all taxes (including
estimated payments thereof), interest and penalties, if any, shown on such
returns, reports or notices. Neither the Company nor any of its Subsidiaries
has entered into agreements with the Internal Revenue Service or other
taxing authority to extend the period for the assessment and collection of
federal income taxes payable with respect to the income, deductions and
credits of the Company or its Subsidiaries for any period. Neither the
Company nor any of its Subsidiaries has received any notice of deficiency or
assessment with respect to any taxable year of the Company or its
Subsidiaries that has not been paid or otherwise discharged or adequately
reserved against. Except as disclosed in the Company Disclosure Letter, all
federal, state, local and foreign income, sales, use, employment, excise,
premium, value added and other taxes attributable to the income, business
operations, or properties of the Company or its Subsidiaries for periods
ending on or before December 31, 1999, have been paid or adequate provision
therefor has been made on the Company Reports.
(k) LITIGATION. Except as disclosed in the Company Disclosure Letter,
there are no judicial or administrative actions, suits or proceedings
pending or, to the knowledge of the Company or its Subsidiaries, threatened
that might reasonably be expected to result in a Material Adverse Effect on
the Company, or which question the validity of this Agreement or of any
action taken or to be taken in connection herewith.
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(l) WELFARE AND BENEFIT PLANS. The Company has provided the Investor
Group with a list of all severance pay, vacation, sick leave, fringe
benefit, medical, dental, life insurance, disability or other welfare plans,
savings, profit sharing or other retirement plans and all bonus or other
incentive plans, contracts, arrangements or practices (collectively,
excluding ordinary commissions and compensation paid to employees for their
services, the "Plans") maintained or contributed to by the Company or its
Affiliates and in which any one or more of the current or former employees
of the Company or its Affiliates (including beneficiaries of employees or
former employees) participates or is eligible to participate and each other
Plan in which any one or more current or former employees of the Company or
its Affiliates (including beneficiaries of employees or former employees)
has participated within the immediately preceding five years and for which
benefits accrue or the Company or its Affiliates otherwise incur or may
incur any material costs in any current or future period. The Company has
furnished or made available to the Investor Group true and complete copies
of all Plans currently in effect that have been reduced to writing, and
written summaries of the material terms of all unwritten Plans currently in
effect. All Plans are in compliance with all applicable provisions of ERISA,
as well as with all other applicable federal, state and local statutes,
ordinances and regulations. All material reports or other documents required
by law or contract to be filed with any governmental agency, or distributed
to Plan participants or beneficiaries, with respect to the Plans have been
timely filed or distributed. Neither the Company nor any Plan Affiliate nor
any trustee or any other fiduciary of any of the Plans has engaged in any
prohibited transaction within the meaning of sections 406 and 407 of ERISA
or section 4975 of the Code with respect to any of the Plans that has
occurred during the six-year period preceding the date of this Agreement.
The Company and the Plan Affiliates have not, during the past six years,
maintained, or been obligated to contribute to, or incurred any liability
with respect to, a Plan that is subject to the provisions of Title IV of
ERISA, and neither the Company, nor any Plan Affiliate, has incurred any
liability under section 4201 of ERISA with respect to any "multi-employer
plan" (as such term is defined in section 4001(a)(3) of ERISA) or any other
plan subject to Title IV of ERISA, and the consummation of the transactions
contemplated by this Agreement will not constitute a complete or partial
withdrawal from or with respect to any such "multi-employer plan" or other
plan subject to Title IV of ERISA or any collective bargaining agreement to
which the Company is a party or by which the Company is bound or otherwise
give rise to any liability of the Company in connection therewith. Each of
the Plans maintained by the Company which is intended to be "qualified"
within the meaning of section 401(a) of the Code and any trust maintained in
connection with any of the Plans which trust is intended to be so exempt
under section 501(a) of the Code has been determined by the IRS to be so
qualified and exempt, as the case may be, and such determinations have not
been modified, revoked or limited and nothing has occurred (or failed to
occur) since the receipt of such determination letters that would adversely
affect any such Plan's qualification or any such trust's exempt status. The
Company neither maintains nor is obligated to provide benefits under any
life, medical or health plan that provides benefits to retirees or other
terminated employees other than (a) benefit continuation rights under COBRA,
(b) benefits under insured plans maintained by the Company provided in the
event an employee is disabled at the time of termination of the employee's
employment with the Company, and (c) the conversion privileges provided
under such insured plans. The Company has complied with all of its material
obligations under COBRA, and will not incur any liability in connection with
the benefit continuation rights under COBRA with respect to its employees or
any other employees. No Plan is a multiple employer welfare arrangement. Any
Plan that is funded through a "welfare benefit fund" as defined in
section 419(e) of the Code has complied and continues to comply with all
material requirements of section 419 and 419A of the Code and regulations
thereunder. The Company does not maintain any unfunded deferred compensation
arrangement with respect to any employee or former employee, which has not
been properly accrued on the financial statements included in the Latest
Company Report. There are no current or former Plan Affiliates. Except as
set forth on the Company Disclosure Letter or as otherwise contemplated by
SECTION 5.10, the consummation of the transactions contemplated by this
Agreement will not (a) entitle any current or former employee of the Company
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to severance pay, unemployment compensation or any other payment,
(b) accelerate the time of payment or vesting of any payment, forgive any
indebtedness, or increase the amount of any compensation due to any such
employee or former employee, or (c) give rise to the payment of any amount
that would not be deductible pursuant to the terms of section 280G of the
Code.
(m) FRANCHISING MATTERS. Except as disclosed in the Company Reports or
the Company Disclosure Letter:
(i) VALIDITY OF FRANCHISE AGREEMENTS. The Company has provided or
made available to the Investors prior to the date hereof, true and
correct copies of all franchise and license agreements in effect as of
the date hereof for each of its three Brands. The Company has no rights
or interest in any franchise and license agreements other than with
respect to the Brands, and there are no outstanding options or rights to
enter into or acquire any of the Company's franchise and license
agreements from the Company or to enter into any other franchise and
license agreement with the Company. The Company has not granted any
subfranchising or developmental rights to its franchise systems in
countries other than the United States. All of the Company's franchise
and license agreements are valid, binding and enforceable against each
franchisee thereunder subject to any franchisee's or licensee's
bankruptcy, insolvency, receivership or similar proceeding under state or
federal law; there are no existing defaults by the Company or its
Subsidiaries thereunder; and no event has occurred which (with notice, or
lapse of time, or both) would constitute a default by the Company or its
Subsidiaries thereunder, which in any such case would permit any
franchisee or licensee to terminate its franchise or license agreement,
or that, individually or in the aggregate, could reasonably be expected
to have a Material Adverse Effect on the Company, and, to the knowledge
of the Company and its Subsidiaries, no event has occurred that (with
notice, or lapse of time, or both) would constitute a default by the
Company or its Subsidiaries thereunder which would permit any franchisee
or licensee to terminate its franchise or license agreement, or that,
individually or in the aggregate, could reasonably be expected to have a
Material Adverse Effect on the Company. There have been no fees received
by the Company pursuant to a franchise or license agreement that are
currently, or which with the execution of this Agreement, the
consummation of the transactions contemplated hereby, the passage of
time, or the giving of notice, or both, would be subject to a claim for
refund by a franchisee or licensee that could, individually or in the
aggregate, reasonably be expected to have a Material Adverse Effect on
the Company. The Company Disclosure Letter sets forth a summary schedule,
as of a specified recent date, of the term (without giving effect to
early termination provisions) and fee arrangements under each of the
Company's and its Subsidiaries franchise or license agreements.
(ii) UNIFORM FRANCHISE OFFERING CIRCULAR. The Company has prepared
and maintained each of its Uniform Franchise Offering Circulars ("UFOCS")
for the three Brands in an accurate and correct manner, has filed its
UFOCs in all states in which the Company offered or sold franchises which
required registration and approval prior to offers or sales of franchises
in such states and has not failed to file any required amendments or
renewals on a timely and accurate basis except where the failure to do so
could not reasonably be expected to have a Material Adverse Effect on the
Company. There are no misrepresentations or omissions of information in
the UFOCs that could reasonably be expected to have a Material Adverse
Effect on the Company. The Company has provided or made available to the
Investors prior to the date hereof, copies of all material correspondence
since January 1, 1998 affecting the registration and renewals of the
UFOCs in the applicable states. The Company and its Subsidiaries do not
and have not authorized their officers, directors or representatives to
furnish any materials or information which is in any way inconsistent
with the "earnings claim" information set forth in Item 19 of the UFOCs,
as that term is defined by federal and state franchising laws.
(iii) LITIGATION. There is no action, proceeding or investigation
pending or, to the knowledge of the Company and its Subsidiaries (after
reasonable investigation), threatened against or
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involving the Company or any of its Subsidiaries with any of its domestic
or international franchisees and to the Company's and its Subsidiaries'
knowledge (after reasonable investigation) there is no basis for any such
action, proceeding or investigation except for actions, proceedings or
investigations that could not reasonably be expected to have a Material
Adverse Effect on the Company. There are no pending or to the Company's
and its Subsidiaries' knowledge threatened causes of action by a
franchisee or group of franchisees against the Company, its Affiliates,
or their officers or directors except for actions, proceedings or
investigations that could not reasonably be expected to have a Material
Adverse Effect on the Company. Except as disclosed in the Latest Company
Report, neither the Company nor any of its Subsidiaries is subject to any
judgment, order or decree entered in any lawsuit or proceeding which has
or may have an adverse effect on its rights and interest in its franchise
agreements or its ability to assign those rights and interest. There are
not currently, nor have there ever been any administrative actions, cease
and desist orders or other administrative actions by any federal or state
agency which regulates franchising that would have a Material Adverse
Effect on the Company or which could materially and adversely affect the
transactions contemplated by this Agreement.
(iv) COMPLIANCE WITH LAWS. The Company and its Subsidiaries have
not violated any federal or state law or rule or regulation thereunder in
connection with the offer and sale of franchises, except for such
violations that could not reasonably be expected to have a Material
Adverse Effect on the Company. The Company and its Subsidiaries have not
violated any federal or state law or rule or regulation thereunder in
connection with the issuance of a notice of default or termination of any
franchise or license agreement that could reasonably be expected to have
a Material Adverse Effect on the Company. The Company and its
Subsidiaries have complied with all applicable federal and state
franchise termination, fair practices and relationship laws with respect
to the proper notice of default, time to cure, and the actual termination
of any of its franchisees as prescribed by such laws except where the
failure to comply could not reasonably be expected to have a Material
Adverse Effect on the Company.
(v) SPECIAL DISCOUNTS OR COMMITMENTS. The Company has not made to
any franchisee, or to any of its franchisees' employees or agents, or to
any other Person, any commitment to provide any special discount,
allowance or other accommodation other than as set forth in the Company's
franchise and license agreements delivered or made available to the
Investor Group prior to the date hereof or as disclosed in the UFOCs, or
to acquire any minimum or fixed volume of goods or services or to provide
any minimum or fixed volume of goods or services.
(vi) NO OTHER AGREEMENTS. Except as set forth in the franchise and
license agreements provided or made available to the Investors prior to
the date hereof, there are no other material agreements or special
arrangements with any franchisee as of the date hereof.
(vii) ADVERTISING FUND AND ADVISORY COUNCILS. The Company has at all
times complied fully with all agreements governing each of its three
advertising funds (the "FUNDS") except where the failure to comply could
not reasonably be expected to have a Material Adverse Effect on the
Company. The only covenants or agreements governing the Funds are
contained in the articles of incorporation, by-laws, management
agreements, standards manuals, and franchise and license agreements
previously delivered or made available to the Investor and the Funds and
all monies paid thereto have been allocated and used in all material
respects in accordance with such documents. The Company has provided the
Investor Group with all copies of documents pertaining to the Funds as
well as all documents relating to Franchisee Advisory Councils, Local
Advertising Cooperatives, Franchisee Associations, or related
organizations affecting the franchise systems.
(n) EXISTING PERMITS AND VIOLATIONS OF LAW. The Company and each of
its Subsidiaries has all licenses, permits, approvals, exemptions, orders,
approvals, franchises, qualifications, permissions,
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agreements and governmental authorizations required by law and required for
the conduct of the business of the Company and its Subsidiaries as currently
conducted, except where the failure to have the same would not have a
Material Adverse Effect on the Company. No action or proceeding is pending
or, to the knowledge of the Company, threatened that is reasonably likely to
result in a revocation, non-renewal, termination, suspension or other
material impairment of any material permits of the Company or its
Subsidiaries. The business of the Company and its Subsidiaries is not being
conducted in violation of any applicable law, except for such violations
that would not have a Material Adverse Effect on the Company. No
governmental entity has indicated in writing to any executive officer the
Company or any Subsidiary an intention to conduct an investigation or review
with respect to the Company or any Subsidiary other than, in each case,
those which would not have a Material Adverse Effect on the Company.
(o) CHANGE OF CONTROL AGREEMENTS. Except as disclosed in the Company
Disclosure Letter, neither the Company nor any of its Subsidiaries is a
party to any agreement or plan, including any stock option plan, stock
appreciation rights plan, restricted stock plan or stock purchase plan, any
of the benefits of which will be increased, or the vesting of the benefits
of which will be accelerated, by the consummation of the transactions
contemplated by this Agreement except as contemplated by SECTION 5.10.
Except as disclosed in the Company Disclosure Letter or as contemplated by
SECTION 5.10, the transactions contemplated by this Agreement will not
constitute a "change in control" under, require the consent from or the
giving of notice to any third party pursuant to, or accelerate the vesting
or lapse of repurchase rights under, any contract to which the Company or
any of its Subsidiaries is a party. Except as disclosed in the Company
Disclosure Letter or as contemplated by SECTION 5.10, there are no amounts
that will be payable by the Company to any officers of the Company (in their
capacity as officers) as a result of the transactions contemplated by this
Agreement other than in connection with the purchase of Shares pursuant to
the Offer.
(p) ADVISORY FEES. With the exception of a fee payable to BAS in its
capacity as financial advisor to the Company pursuant to a letter agreement
that has been delivered to Investor Group, neither the Company nor any of
its Subsidiaries nor any of their officers, directors, or employees, has
employed any broker or finder or incurred any liability for any advisory
fees, brokerage fees, commissions or finder's fees in connection with this
Agreement or the transactions contemplated hereby.
ARTICLE 7
INDEMNIFICATION AND INSURANCE.
Section 7.1 After the Closing Date, the certificate of incorporation and
bylaws of the Company and each of its Subsidiaries shall contain provisions with
respect to indemnification no less favorable than those set forth in the
certificate of incorporation and the bylaws of the Company and each of its
Subsidiaries on the date hereof, which provisions shall not be amended, modified
or otherwise repealed for a period of six years after the Closing Date in any
manner that would adversely affect the rights thereunder as of the Closing Date
of individuals who at the Closing Date were directors, officers, employees or
agents of the Company or such Subsidiary, unless such modification is required
after the Closing Date by law.
Section 7.2 The Company shall, and the Investor Group, to the extent of the
liability limit hereinafter provided, shall cause the Company, to the fullest
extent permitted under applicable law or under the Company's or such
Subsidiary's certificate of incorporation or bylaws or any indemnification
agreement in effect as of the date hereof, to indemnify and hold harmless, each
present and former director, officer or employee of the Company or any of its
Subsidiaries (collectively, the "INDEMNIFIED PARTIES") against any costs or
expenses (including attorneys' fees and disbursements), judgments, fines,
losses, claims, damages, liabilities and amounts paid in settlement in
connection with any claim, action, suit, proceeding or investigation, whether
civil, criminal, administrative or investigative, or otherwise (a) arising out
of or pertaining to the transactions contemplated by this Agreement (but
excluding any
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matter to the extent involving an Indemnified Party in a capacity other than as
a director, officer, employee or agent of the Company) or (b) with respect to
any acts or omissions occurring at or prior to the Closing Date, to the same
extent as provided in the Company's or such Subsidiary's certificate of
incorporation or bylaws or any applicable contract or agreement as in effect on
the Closing Date, in each case for a period of six years after the date hereof.
In the event of any such claim, action, suit, proceeding or investigation
(whether arising before or after the Closing Date) and subject to the specific
terms of any indemnification contract (except as provided in the joint defense
agreement contemplated by Section 2.3(e) insofar as it may affect the procedure
for the determination of entitlement to indemnification), (a) after the Closing
Date, the Company shall pay the reasonable fees and expenses of any counsel
retained by the Indemnified Parties, promptly after statements therefor are
received and (b) the Company shall cooperate in the defense of any such matter,
PROVIDED, HOWEVER, that in the event that any claim or claims for
indemnification are asserted or made within the foregoing six year period, all
rights to indemnification in respect of any such claim or claims shall continue
until the disposition of any and all such claims. Notwithstanding any contrary
provision of this SECTION 7.2, the liability of the Investor Group to cause the
Company and its Subsidiaries to indemnify and hold harmless their present and
former directors, officers and employees shall be limited to the aggregate
amount of cash and fair market value of property received by the Investors and
their successors in interest as payments in redemption of the Preferred Stock
(but excluding any amounts paid in redemption that represent accrued and unpaid
dividends on the Preferred Stock) and as distributions on the Preferred Stock,
excluding dividends accrued and paid in cash or in kind at the stated dividend
rates for the Preferred Stock and "Ordinary Dividends" (as defined in the
Certificates of Designation).
Section 7.3 In addition, the Company shall provide, for a period of not
less than six years after the Closing Date, the Company's current directors and
officers an insurance and indemnification policy that provides coverage for
events occurring at or prior to the Closing Date (the "D&O INSURANCE") that is
no less favorable than the existing policy or, if substantially equivalent
insurance coverage is unavailable, the best available coverage; PROVIDED,
HOWEVER, that the Company shall not be required to pay an annual premium for the
D&O Insurance in excess of 200% of the annual premium currently paid by the
Company for such insurance, but in such case shall purchase as much of such
coverage as possible for such amount.
Section 7.4 This ARTICLE 7 shall survive the consummation of the
transactions contemplated by this Agreement at the Closing Date, is intended to
benefit the Indemnified Parties, shall be binding on all successors and assigns
of the Company and shall be enforceable by the Indemnified Parties.
ARTICLE 8
TERMINATION
Section 8.1 TERMINATION BY MUTUAL CONSENT. This Agreement may be
terminated and the Offer may be abandoned at any time prior to the Closing Date,
before or after any Stockholder Approval, by the mutual consent of the Investors
and the Company.
Section 8.2 TERMINATION BY EITHER PARTY. This Agreement may be terminated
and the Offer may be terminated and abandoned by either the Investors or the
Company at any time prior to the Closing Date, before or after any Stockholder
Approval, if (a) the purchase of Shares pursuant to the Offer shall not have
become effective in accordance with the terms of the Offer to Purchase by
November 30, 2000, or Stockholder Approval shall not have been obtained by
October 15, 2000 (which date shall be automatically extended (to a date not
later than November 30, 2000) for each day in excess of 45 calendar days that
the SEC requires to initially review and comment on the preliminary Proxy
Statement and each day in excess of 20 calendar days thereafter that are
required to resubmit, and obtain SEC approval of the revisions to the
preliminary Proxy Statement) or (b) the Offer shall have expired or shall have
been terminated without the acceptance for purchase of any Shares pursuant
thereto; provided that the Company shall not have the right to terminate this
Agreement or the Offer pursuant to this clause if the termination or expiration
of the Offer without the purchase of Shares thereunder is in violation of the
terms of the Offer or this
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Agreement, and the Investors shall not have the right to terminate this
Agreement pursuant to this clause if the termination or expiration of the Offer
without the acceptance for purchase of Shares thereunder is by reason of a
breach of this Agreement by the Investor Group.
Section 8.3 TERMINATION BY INVESTORS. This Agreement may be terminated and
the Investment may be abandoned at any time prior to the Closing Date, before or
after any Stockholder Approval, by the Investors if: (a) any of the conditions
set forth in Sections 2.3(d) and (e) shall not have been fulfilled within 10
Business Days after the date of execution of this Agreement; or (b) the Company
shall have failed to comply in any material respect with any of the covenants or
agreements contained in this Agreement (including the obligation to commence the
Offer and accept for purchase and pay for Shares upon the terms and subject to
the conditions of the Offer) to be complied with or performed by the Company at
or prior to the Closing.
Section 8.4 TERMINATION BY THE COMPANY. This Agreement may be terminated
and the Offer may be abandoned at any time prior to the Closing Date, before or
after any Stockholder Approval, by the Company (a) if the Investor Group shall
have failed to comply in any material respect with any of the covenants or
agreements contained in this Agreement to be complied with or performed by the
Investor Group prior to the Closing or (b) if the Board of Directors shall
concurrently approve and the Company shall concurrently enter into a definitive
agreement providing for the implementation of a Superior Proposal.
Section 8.5 EFFECT OF TERMINATION AND ABANDONMENT. In the event of
termination of this Agreement and abandonment of the Offer pursuant to
SECTION 8.1, 8.2, 8.3 or 8.4, no party hereto (or any of its directors or
officers) shall have any liability or further obligation to any other party
hereto, except as provided in SECTIONS 8.6 and 8.7 and except that nothing
herein will relieve any party from liability for any breach of this Agreement.
Section 8.6 LIQUIDATED DAMAGES.
(a) In the event that: (i) any of the conditions set forth in
Sections 2.3(d) and (e) are not fulfilled within 10 Business Days after the
date of execution of this Agreement, (ii) the Company is in material breach
or default of its representations, warranties or covenants under this
Agreement and as a consequence thereof, the Investor Group exercises any
right to terminate this Agreement under SECTION 8.3 and abandon the
Investment, or (iii) the Company or the Company's or any of its
Subsidiaries' directors, officers, agent or representatives seeks, solicits,
negotiates, encourages, accepts, recommends, endorses, supports, consents
to, or acquiesces in an Acquisition Proposal in violation of SECTION 5.3 and
as a consequence thereof, the Investor Group exercises any right to
terminate this Agreement under SECTION 8.3 and abandon the Investment, the
Company shall (without duplication of any amounts paid under
Section 8.6(b)): (i) reimburse the Investor Group for their expenses
reasonably incurred for outside legal counsel in connection with
investigating the Company and preparation and negotiation of this Agreement
and the other agreements, documents, and instruments contemplated by this
Agreement, not to exceed $1,000,000; (ii) reimburse the Investor Group for
legal expenses reasonably incurred in any litigation or proceeding seeking
enforcement of this SECTION 8.6(a); and (iii) pay to the Investors interest
accruing, from the second Business Day after any such demand for payment to
the date such sum is paid, at the Applicable Rate.
(b) In the event the Board of Directors approve and the Company enters
into a definitive agreement providing for the implementation of a Superior
Proposal, the Company shall (without duplication of any amounts paid under
Section 8.6(a)): (i) pay to the Investors on demand, the sum of $3,000,000
to reimburse the Investors for the efforts they have made and will make, the
risks they have undertaken and will undertake, and the expenses they have
incurred and will incur in investigating the Company, negotiating the
transaction, arranging financing, and otherwise preparing to support the
Offer and consummate the Investment; (ii) reimburse the Investor Group for
their expenses reasonably incurred for outside legal counsel in connection
with investigating the Company and preparation
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and negotiation of this Agreement and the other agreements, documents, and
instruments contemplated by this Agreement, not to exceed $1,000,000;
(iii) reimburse the Investor Group for legal expenses reasonably incurred in
any litigation or proceeding seeking enforcement of this SECTION 8.6(b); and
(iv) pay to the Investors interest accruing, from the second Business Day
after any such demand for payment to the date such sum is paid, at the
Applicable Rate.
ARTICLE 9
STOCKHOLDER PROTECTION
Section 9.1 NASDAQ LISTING. From and after the Closing Date, to the extent
of its control over such matters, the Investor Group shall use reasonable
efforts to cause the Class A Common Stock of the Company to be listed for
trading on the NASDAQ Stock Market unless otherwise determined by the Board of
Directors acting with a majority vote of the Independent Directors.
Section 9.2 RESTRICTIONS ON STOCK ACQUISITIONS. From and after the Closing
Date until the fourth anniversary of the Closing Date, the Investor Group shall
not, and shall not cause or permit any Affiliate of the Investor Group to,
purchase shares of the Company's Common Stock either on the open market or
pursuant to a tender or exchange offer or in any other transaction (other than
in a transaction approved in accordance with Section 12 of the Company's
certificate of incorporation or in a transaction between or among the Investor
Group and their Affiliates) at a per share price that is less then $7.50, if
such transaction is effected within 24 months after the Closing Date, or if
effected after such 24 month period at a price that is less than the highest bid
price per share for the preceding 52 week period. If the Company shall in any
manner subdivide (by stock split, stock dividend or otherwise), combine (by
reverse stock split or otherwise), reclassify, recapitalize or take any similar
action with respect to the outstanding shares of common stock, then effective
provision shall be made by resolution of the Board of Directors with the
affirmative votes of a majority of the Independent Directors to adjust the price
referred to in this SECTION 9.2 to give effect to any such change.
Section 9.3 AFFILIATE TRANSACTIONS. From and after the Closing Date until
the fifth anniversary of the Closing Date, Investor Group shall not cause the
Company or any Subsidiary of the Company to enter into or permit to exist any
transaction, including any purchase, sale, lease or exchange of property or the
rendering of service with any member of the Investor Group or any of their
Affiliates (an "AFFILIATE TRANSACTION") unless the terms thereof (a) are fair
and no less favorable to the Company than those that could be obtained in a
comparable arms' length transaction with a person that is not a member of the
Investor Group or any of their Affiliates, (b) if such Affiliate Transaction
involves an amount in excess of $2.0 million, (i) are set forth in writing and
(ii) have been approved by resolution of the Board of Directors acting with the
affirmative votes of a majority of the Independent Directors and (c) if such
Affiliate Transaction involves an amount in excess of $5.0 million, the
financial terms of which have been determined by a nationally recognized
investment banking, valuation or accounting firm to be fair, from a financial
point of view, to the Company.
Section 9.4 ENFORCEMENT. The provisions of this ARTICLE 9 and the
provisions of ARTICLE 10 as they relate to ARTICLE 9 are for the benefit of the
Company's stockholders and shall be enforceable by or in the name of the Company
by any of the Independent Directors.
ARTICLE 10
MISCELLANEOUS PROVISIONS
Section 10.1 PAYMENT OF EXPENSES. Except as otherwise provided by
SECTION 8.6, whether or not the Offer and the Investment shall be consummated,
each party hereto shall pay its own expenses incident to preparing for, entering
into and carrying out this Agreement and the consummation of the Offer and the
Investment.
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<PAGE>
Section 10.2 MODIFICATION OR AMENDMENT. At any time prior to the Closing
Date, the parties hereto may, by written agreement, make any modification or
amendment of this Agreement approved by their respective boards of directors.
Except as contemplated by SECTION 2.2, this Agreement and the Exhibits hereto
shall not be modified or amended except pursuant to an instrument in writing
executed and delivered on behalf of each of the parties hereto. Notwithstanding
the foregoing, no amendment, modification, or waiver of any provision of
ARTICLE 7 or ARTICLE 9 shall be effective as against the Company or any
Indemnified Parties unless authorized by the Board of Directors acting with the
affirmative votes of a majority of the Independent Directors.
Section 10.3 WAIVER OF CONDITIONS. The conditions to each of the parties'
obligations to consummate the Offer and the Investment are for the sole benefit
of such party and may be waived by such party by a written instrument, in whole
or in part, to the extent permitted by applicable law.
Section 10.4 CAPTIONS. The Article, Section and paragraph captions herein
are for convenience of reference only, do not constitute part of this Agreement
and shall not be deemed to modify or otherwise affect any of the provisions
hereof.
Section 10.5 GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware.
Section 10.6 NOTICES. Any notice, request, instruction or other document
to be given hereunder by any party to the others shall be in writing and
delivered personally or sent by registered or certified mail, postage prepaid,
IF TO THE INVESTOR GROUP, addressed to SDI, Inc., at 200 West Madison Street,
Suite 3800, Chicago, Illinois 60606, Attention: Harold S. Handelsman (with a
copy to Katten Muchin Zavis, 525 West Monroe Street, Chicago, Illinois 60661,
Attention: David R. Shevitz and Bruce G. Wilson) AND IF TO THE COMPANY,
addressed to the Company at 13 Corporate Square, Suite 250, Atlanta, Georgia
30329, Attention: Stephen Aronson (with a copy to Paul, Weiss, Rifkind,
Wharton & Garrison, 1285 Avenue of America, New York, New York, 10019,
Attention: Robert B. Schumer and Paul D. Ginsberg), or to such other persons or
addresses as may be designated in writing by the party to receive such notice.
Section 10.7 ENTIRE AGREEMENT. This Agreement and its Exhibits and the
Offer Documents constitute the entire agreement, and supersedes all other prior
agreements and understandings, both written and oral, among the parties, with
respect to the subject matter hereof.
Section 10.8 ASSIGNMENT; BINDING EFFECT. Neither this Agreement, nor any
rights, obligations or interests hereunder, may be assigned by any party hereto,
except with the prior written consent of the other parties hereto; PROVIDED that
any Investor may designate, by written notice to the Company, an Affiliate of
such Investor to make its Investment in lieu of such Investor, in the event of
which designation all references herein to such Investor shall be deemed
references to such Affiliate except that all representations and warranties made
herein with respect to such Investor as of the date of this Agreement shall be
deemed representations and warranties made with respect to such Affiliate as of
the date of such designation; PROVIDED, FURTHER, that no such assignment shall
relieve the assigning Investor of any of its obligations hereunder without the
written consent of the Company. Subject to the preceding sentence, this
Agreement shall be binding upon, and shall inure to the benefit of, the parties
hereto and their respective successors and assigns.
Section 10.9 COUNTERPARTS. For the convenience of the parties hereto, this
Agreement may be executed in any number of counterparts, each such counterpart
being deemed to be an original instrument, and all such counterparts shall
together constitute the same agreement.
[SIGNATURE PAGE TO FOLLOW]
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IN WITNESS WHEREOF, this Agreement has been duly executed and delivered by
the duly authorized officers of the parties hereto on the date first written
above.
U.S. FRANCHISE SYSTEMS, INC.
By: /s/ Stephen D. Avonson
-----------------------------------
Name: Stephen D. Avonson
---------------------------------
Title: Vice President/General Counsel
---------------------------------
SDI, INC.
By: /s/ H.S. Handelsman
-----------------------------------
Name: H.S. Handelsman
---------------------------------
Title: Vice President
---------------------------------
MERIDIAN ASSOCIATES, L.P.
By: Meridian Investments, Inc.
Its General Partner
By: /s/ H.S. Handelsman
-----------------------------------
Name: H.S. Handelsman
---------------------------------
Title: Vice President
---------------------------------
HSA PROPERTIES, INC.
By: /s/ H.S. Handelsman
-----------------------------------
Name: H.S. Handelsman
---------------------------------
Title: Vice President
---------------------------------
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GLOSSARY OF DEFINED TERMS
"Affiliate" of any particular Person means any other Person, entity or
investment fund controlling, controlled by or under common control with such
particular Person and any partner of such Person which is a partnership.
"Affiliate" with respect to the Investors, HSA Properties, and Meridian, means,
in addition to the foregoing, any and all of the lineal descendants of Nicholas
J. Pritzker, deceased, any and all trusts for their benefit or for the benefit
of any of their spouses, and any Person owned or controlled by such lineal
descendants or trusts.
"Applicable Rate" means a fluctuating rate of interest corresponding to a
rate per annum equal to 3.0 percent in excess of the prime rate reported from
time to time in the WALL STREET JOURNAL.
"Business Day" shall mean any day other than a Saturday, a Sunday or a day
on which banks are required or permitted to be closed in the State of New York.
"Closing Date" means the date upon which the Investors' purchase of
Preferred Stock occurs.
"COBRA" means the Consolidated Omnibus Budget Reconciliation Act of 1985, as
amended.
"Code" means the Internal Revenue Code of 1986, as amended.
"DGCL" means the General Corporation Law of the State of Delaware.
"Directors' Option Plan" means the U.S. Franchise Systems, Inc. 1996 Stock
Option Plan for Non-Employee Directors.
"Encumbrance" with respect to any property means any mortgage, pledge, lien,
security interest, charge, encumbrance, conditional sale or title retention
agreement, option or other claim affecting such property or its use or
marketability.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Exchange Act" mean the Securities Exchange Act of 1934, as amended.
"Foreign Laws" means the applicable laws and regulations of any foreign
country.
"GAAP" mean generally accepted accounting principles consistently applied
from period to period.
"HSR Act" means the Hart Scott Rodino Antitrust Improvements Act of 1976, as
amended, and the federal regulation promulgated thereunder.
"Independent Directors" means the persons serving from time to time as
"Independent Directors" under new Section 12.1 of the Company's certificate of
incorporation.
"Investor Group" means, collectively, Meridian, HSA Properties, and the
Investors.
"Material Adverse Effect" with respect to any Person means a material
adverse effect on the assets, financial condition, results of operations, cash
flows, or business prospects of such Person and its Subsidiaries, taken as a
whole; provided, however, that a Material Adverse Effect shall not include
(i) changes in general economic or financial or market conditions, including
changes in the trading price of the Shares, (ii) changes in conditions or
circumstances generally affecting the lodging or franchising industry or
(iii) changes resulting from this Agreement or from the announcement of the
transactions contemplated hereby.
"Person" means an individual, a partnership, a limited liability company, a
corporation, an association, a joint stock company, a trust, a joint venture, an
unincorporated organization and a governmental entity or any department, agency
or political subdivision thereof.
"Plan Affiliate" means each Person with whom the Company constitutes or has
constituted all or part of a controlled group, or which would be treated or has
been treated with the Company as under common control or whose employees would
be treated or have been treated as employed by the Company, under section 414 of
the Code or section 4001(b) of ERISA.
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<PAGE>
"Proprietary Rights" means all (i) patents, patent applications, patent
disclosures and inventions, (ii) trademarks, service marks, trade dress, trade
names and corporate names and registrations and applications for registration
thereof, (iii) copyrights and registrations and applications for registration
thereof, (iv) mask works and registrations and applications for registration
thereof, (v) computer software, data and documentation, (vi) trade secrets and
other confidential information (including, without limitation, ideas, formulas,
compositions, inventions (whether patentable or unpatentable and whether or not
reduced to practice), know-how, manufacturing and production processes and
techniques, research and development information, drawings, specifications,
designs, plans, proposals, technical data, copyrightable works, financial and
marketing plans and customer and supplier lists and information), (vii) other
intellectual property rights, and (viii) copies and tangible embodiments thereof
(in whatever form or medium).
"Restricted Stock" means (i) the 123,805 shares of Class A Common Stock held
by Michael Leven, and designated as Restricted Shares under the Amended and
Restated Employee Stock Purchase Agreement between the Company and Michael
Leven, entered into as of September 29, 1995, as amended effective October 24,
1996 (the "Leven Stock Purchase Agreement"), (ii) the 233,032 Restricted Shares
held by Andrea Leven originally acquired under the Leven Employee Stock Purchase
Agreement, (iii) 589,865 Restricted Shares held by Neal Aronson acquired under
the Amended and Restated Employee Stock Purchase Agreement between the Company
and Neal K. Aronson entered into as of September 29, 1995, as amended effective
October 24, 1996 (the "Aronson Employee Stock Purchase Agreement"), and
(iv) 424,615 Shares that have been reallocated to other members of management or
transferred to members of Michael A. Leven's family.
"SEC" means the United States Securities and Exchange Commission.
"Significant Subsidiary" means any significant subsidiary of the Company
within the meaning of Regulation S-X under the Securities Exchange Act of 1934,
as amended.
"State Laws" mean the applicable laws and regulations of the several states
of the United States of America or any political subdivision thereof.
"Stockholder Litigation" means the complaint filed May 17, 2000 in the
United States District Court for the Northern District of Georgia, Atlanta
Division, Case No. 00-CV-1244, captioned FORREST P. GUNTER ON BEHALF OF HIMSELF
AND ALL OTHERS SIMILARLY SITUATED VS. U.S. FRANCHISE SYSTEMS, INC., MICHAEL A.
LEVEN, NEAL K. ARONSON, AND RICHARD GOLDSTEIN.
"Stock Option Plan" means the Company's Amended and Restated 1996 Stock
Option Plan.
"Subsidiary" means, with respect to any Person, any corporation, limited
liability company, partnership, association or other business entity of which
(i) if a corporation, a majority of the total voting power of shares of stock
entitled (without regard to the occurrence of any contingency) to vote in the
election of directors, managers or trustee thereof is at the time owned or
controlled, directly or indirectly, by that Person or one or more of the other
Subsidiaries of that Person or a combination thereof, or (ii) if a limited
liability company, partnership, association or other business entity, a majority
of the membership, partnership or other similar ownership interest thereof is at
the time owned or controlled, directly or indirectly, by any Person or one or
more Subsidiaries of that Person or combination thereof. For purposes hereof, a
Person or Persons shall be deemed to have a majority ownership interest in a
limited liability company, partnership, association or other business entity if
such Person or Persons shall be allocated a majority of partnership, association
or other business entity gains or losses or shall be or control the managing
director or general partner of such partnership, association or other business
entity. For purposes of this Agreement, Best Reservation Corporation, an
Illinois not-for-profit corporation, Microtel Reservations and Advertising
Fund, Inc., a Georgia not-for-profit corporation and Hawthorn Reservations and
Advertising Fund, Inc., a Georgia not-for-profit corporation, shall not be
deemed to be Subsidiaries of the Company or any of its Subsidiaries.
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APPENDIX C
FORM
OF
CERTIFICATE
SETTING FORTH A RESOLUTION CREATING A SERIES
OF PREFERRED STOCK DESIGNATED AS
"SERIES A 8.5% CUMULATIVE REDEEMABLE PREFERRED STOCK"
ADOPTED BY THE BOARD OF DIRECTORS OF
U.S. FRANCHISE SYSTEMS, INC.
PURSUANT TO THE PROVISIONS OF SECTION 151(g) OF TITLE 8 OF
THE DELAWARE CODE OF 1953, AS AMENDED.
We, the undersigned _______ _______ and _______ _______, respectively the
President and Secretary of U.S. Franchise Systems, Inc., a Delaware corporation
(hereinafter sometimes referred to as the "CORPORATION"), hereby certify as
follows:
FIRST: By the Certificate of Incorporation the total number of shares which
the Corporation may issue is set forth in Article Fourth as follows: "The total
number of shares of all classes of stock that the Corporation shall have
authority to issue is Thirty-Six Million (36,000,000), of which (a) Thirty-Five
Million (35,000,000) shall be shares of Common Stock, par value $.01 per share,
and (b) One Million (1,000,000) shall be shares of preferred stock, par value
$.01 per share"; and by the Certificate of Incorporation the shares of preferred
stock are authorized to be issued by the Board of Directors from time to time in
one or more series and the Board of Directors is expressly authorized to
determine in the resolution providing for the issuance of any series of
preferred stock, subject to the provisions of the Certificate of Incorporation,
the designation, dividend rate, redemption provisions, rights on liquidation or
dissolution, sinking fund provisions, conversion rights, voting power, and other
preferences and relative, participating, optional or other special rights, and
qualifications, limitations or restrictions, of shares of such series not fixed
and determined by the Certificate of Incorporation.
SECOND: The Board of Directors of the Corporation pursuant to the authority
so vested in it by the Certificate of Incorporation, and in accordance with the
provisions of Section 151(g) of the General Corporation Law of the State of
Delaware, as amended, at a meeting duly held, adopted the following resolution
creating a series of Preferred Stock designated as "Series A 8.5% Cumulative
Redeemable Preferred Stock":
"A RESOLUTION OF THE BOARD OF DIRECTORS OF
U.S. FRANCHISE SYSTEMS, INC. CREATING A
SERIES OF PREFERRED STOCK DESIGNATED AS
"SERIES A 8.5% CUMULATIVE REDEEMABLE PREFERRED STOCK."
Be It Resolved, that, pursuant to authority expressly granted to and vested
in the Board of Directors of U.S. Franchise Systems, Inc., hereinafter called
the "Corporation", by the provisions of the Certificate of Incorporation, the
Board of Directors of the Corporation hereby creates a series of the preferred
stock of the Corporation to consist initially of 77,000 shares, and hereby fixes
the designations, dividend rate, redemption provisions, rights on liquidation or
dissolution, conversion rights, voting powers, and other preferences and
relative, participating, optional or other special rights, and the
qualifications, limitation or restrictions thereof, of the shares of such series
(in addition to the designations, preferences and relative, participating,
optional or other special rights, and the qualifications, limitations or
restrictions thereof, set
<PAGE>
forth in the Certificate of Incorporation which are applicable to the Preferred
Stock of all series) as follows:
Section 1. DESIGNATION
The series of the Corporation's Preferred Stock, par value $.01 per share,
created by this resolution shall be designated as the "Series A 8.5% Cumulative
Redeemable Preferred Stock" and is hereinafter referred to in this resolution as
the "Series A Preferred Stock". Capitalized terms used herein and not otherwise
defined shall have the meanings set forth in SECTION 10.
Section 2. DIVIDENDS.
2.1. GENERAL OBLIGATION. When and as declared by the Corporation's board
of directors and to the extent permitted under the General Corporation Law of
the State of Delaware, the Corporation shall pay preferential dividends to the
holders of Series A Preferred Stock as provided in this SECTION 2. Except as
otherwise provided herein, dividends on each share of Series A Preferred Stock
(a "SHARE") shall accrue at the rate of 8.5% per annum, compounded quarterly, of
the Issue Price thereof, plus the amount of any accrued and unpaid dividends on
such Share through the most recent Dividend Reference Date, from and including
the date of issuance of such Share to and including the date on which the
Liquidation Value of such Share is paid in cash. Such dividends shall accrue
whether or not they have been declared and whether or not there are profits,
surplus or other funds of the Corporation legally available for the payment of
dividends. Such dividends shall be cumulative such that all accrued and unpaid
dividends shall be fully paid or declared with funds irrevocably set apart for
payment before any dividend, distribution or payment may be made with respect to
any Junior Securities. The date on which the Corporation initially issues any
Share shall be deemed to be its "date of issuance" regardless of the number of
times transfer of such Share is made on the stock records maintained by or for
the Corporation and regardless of the number of certificates which may be issued
to evidence such Share.
2.2. DIVIDEND REFERENCE DATES. All accrued dividends on outstanding Shares
of Series A Preferred Stock shall be payable (whether or not declared) on
March 31, June 30, September 30 and December 31 of each year (the "DIVIDEND
REFERENCE DATES"), beginning on the first Dividend Reference Date (the "FIRST
DIVIDEND REFERENCE DATE") following the first date of issuance of Series A
Preferred Stock.
2.3. PAYMENT OF DIVIDENDS IN KIND. At the option of the Corporation
(exercisable by resolution of the Board of Directors acting with the affirmative
votes of a majority of the Independent Directors), dividends accrued from time
to time on the Series A Preferred Stock at any time on or before the second
Anniversary Date, may be paid in the form of additional Shares of Series A
Preferred Stock (including fractional Shares expressed as a decimal rounded to
the nearest 1/1000 of a Share) having an initial Liquidation Value equal to the
amount of the dividend so paid. The Corporation shall at all times reserve and
keep available out of the authorized but unissued Shares of Series A Preferred
Stock, solely for the purpose of issuance as dividends on Series A Preferred
Stock, such maximum number of Shares of Series A Preferred Stock as may become
issuable as dividends on Series A Preferred Stock.
2.4. DISTRIBUTION OF PARTIAL DIVIDEND PAYMENTS. Except as otherwise
provided herein, if at any time the Corporation pays less than the total amount
of dividends then accrued with respect to any Share of Series A Preferred Stock,
such payment shall be distributed ratably among the holders of Series A
Preferred Stock based upon the number of Shares of Series A Preferred Stock held
by each such holder.
Section 3. LIQUIDATION.
Upon any liquidation, dissolution or winding up of the Corporation, whether
voluntary or involuntary, each holder of Series A Preferred Stock shall be
entitled to be paid, before any distribution or payment is made upon any Junior
Securities, an amount in cash equal to the aggregate Liquidation Value of all
Shares of Series A Preferred Stock held by such holder, and the holders of
Series A Preferred Stock shall not be entitled to any further payment. The
Corporation shall mail written notice of such liquidation, dissolution
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<PAGE>
or winding up, not less than 60 days prior to the payment date stated therein,
to each record holder of Series A Preferred Stock. Neither the consolidation or
merger of the Corporation into or with any other entity or entities, nor the
reduction of the capital stock of the Corporation, shall be deemed to be a
liquidation, dissolution or winding up of the Corporation within the meaning of
this SECTION 3.
Section 4. PRIORITY OF PREFERRED STOCK.
So long as any Series A Preferred Stock remains outstanding, neither the
Corporation or any Subsidiary shall redeem, purchase or otherwise acquire
directly or indirectly any Junior Securities, nor shall the Corporation or any
Subsidiary directly or indirectly pay or declare any dividend or make any
distribution upon any Junior Securities (other than dividends paid solely in
shares of capital stock of the Corporation consisting of Junior Securities), if
at the time of or immediately after any such redemption, purchase, acquisition,
dividend or distribution the Corporation has failed to pay in cash the full
amount of dividends accrued but unpaid on the Series A Preferred Stock or the
Corporation has failed to make any redemption of the Series A Preferred Stock
required hereunder; provided that the Corporation may purchase up to 8,666,666
shares of Common Stock on or promptly following the first date of issuance of
Series A Preferred Stock with proceeds of sale of Series A Preferred Stock and
Series B 6% Cumulative Redeemable Convertible/Exchangeable Preferred Stock of
the Corporation.
Section 5. REDEMPTIONS.
5.1. SCHEDULED REDEMPTION. On the seventh Anniversary Date, the
Corporation shall redeem in cash, out of funds legally available therefor, all
outstanding Shares of Series A Preferred Stock at a price per Share equal to the
Liquidation Value thereof as of the Redemption Date.
5.2. OPTIONAL REDEMPTION. In addition to the mandatory redemption
otherwise required by this SECTION 5, the Corporation shall have the option to
redeem all or any portion of the Shares of Series A Preferred Stock at any time
and from time to time on (upon the notice and otherwise in the manner set forth
in this SECTION 5), exercisable by resolution of the Board of Directors acting
with the affirmative votes of a majority of the Independent Directors.
5.3. REDEMPTION PAYMENT. For each Share which is to be redeemed, the
Corporation shall be obligated on the Redemption Date to pay to the holder
thereof (upon surrender by such holder at the Corporation's principal office of
the certificate representing such Share) an amount in immediately available
funds equal to the Liquidation Value of such Share as of the Redemption Date. If
the funds of the Corporation legally available for redemption of Shares on the
Redemption Date are insufficient to redeem the total number of Shares to be
redeemed on such date, those funds which are legally available shall be used to
redeem the maximum possible number of Shares ratably among the holders of the
Shares to be redeemed based upon the aggregate Liquidation Value of such Shares
held by each such holder. At any time thereafter when additional funds of the
Corporation are legally available for the redemption of Shares, such funds shall
immediately be used to redeem the balance of the Shares which the Corporation
has become obligated to redeem but which it has not redeemed.
5.4. NOTICE OF REDEMPTION. The Corporation shall mail written notice of
each redemption of any Series A Preferred Stock to each record holder of
Series A Preferred Stock not more than 60 nor less than 30 days prior to the
date on which such redemption is to be made. Upon mailing any notice of
redemption which relates to a redemption at the Corporation's option, the
Corporation shall become obligated to redeem the total number of Shares
specified in such notice at the time of redemption specified therein. In case
fewer than the total number of Shares represented by any certificate are
redeemed, a new certificate representing the number of unredeemed Shares shall
be issued to the holder thereof without cost to such holder within three
business days after surrender of the certificate representing the redeemed
Shares.
5.5. DETERMINATION OF THE NUMBER OF EACH HOLDER'S SHARES TO BE
REDEEMED. The number of Shares of Series A Preferred Stock to be redeemed from
each holder thereof in redemptions hereunder shall be the number of Shares
determined by multiplying the total number of Shares of Series A Preferred Stock
to be
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<PAGE>
redeemed times a fraction, the numerator of which shall be the total number of
Shares of Series A Preferred Stock then held by such holder and the denominator
of which shall be the total number of Shares of Series A Preferred Stock then
outstanding.
5.6. DIVIDENDS AFTER REDEMPTION DATE. From and after the Redemption Date
(unless the Corporation shall default in the payment of the redemption price
when due) dividends on Shares of Series A Preferred Stock called for redemption
or otherwise required to be redeemed on such Redemption Date shall cease to
accrue and such Shares shall no longer be deemed to be outstanding, and all
rights (except the right to receive the redemption price thereof) of the holder
thereof, as the holder of such Shares of Series A Preferred Stock, shall cease.
5.7. REDEEMED OR OTHERWISE ACQUIRED SHARES. Any Shares which are redeemed
or otherwise acquired by the Corporation shall be canceled and shall have the
status of authorized but unissued shares of Preferred Stock, undesignated as to
series, and shall not be reissued, sold or transferred as Shares of Series A
Preferred Stock.
5.8. OTHER REDEMPTIONS OR ACQUISITIONS. Neither the Corporation nor any
Subsidiary shall redeem or otherwise acquire any Series A Preferred Stock,
except as expressly authorized herein or pursuant to a purchase offer made
pro-rata to all holders of Series A Preferred Stock on the basis of the number
of Shares of Series A Preferred Stock owned by each such holder.
Section 6. VOTING RIGHTS.
6.1. GENERALLY. Except as otherwise provided herein and as otherwise
required by law, the Series A Preferred Stock shall have no voting rights;
provided that each holder of Series A Preferred Stock shall be entitled to
notice of all stockholders meetings at the same time and in the same manner as
notice is given to the stockholders entitled to vote at such meeting.
6.2. OTHER VOTING RIGHTS. The Corporation shall not merge or consolidate
with another entity or entities, sell all or substantially all of its assets or
dissolve or liquidate without the prior approval of the holder or holders of at
least a majority of the Series A Preferred Stock then outstanding voting
together as a separate class; provided that the Corporation may, without
obtaining such approval, merge with any wholly-owned Subsidiary so long as
(a) the Corporation is the surviving corporation, (b) the terms of the Series A
Preferred Stock are not changed and (c) the Series A Preferred Stock is not
exchanged for cash, securities or other property.
6.3. ADDITIONAL CLASS VOTING RIGHTS. In addition to any other vote or
consent required herein or by law, the vote or written consent of the holder or
holders of a majority of the then outstanding Shares of Series A Preferred Stock
shall be necessary for effecting or validating the following actions:
(a) Any authorization or any designation, whether by reclassification or
otherwise, of any new class or series of stock or any other securities
convertible into equity securities of the Corporation (or any increase in
the authorized or designated number of any such new class or series) ranking
senior to or on a parity with the Series A Preferred Stock as to payment of
dividends, distribution of assets upon liquidation, dissolution or
winding-up (whether voluntary or involuntary), voting, redemption or
otherwise; or
(b) Any action that results in any amendment, alteration, or repeal (by
merger or consolidation or otherwise) of any provisions of the Certificate
of Incorporation or any certificate amendatory thereof so as to materially
adversely affect any of the preferences, rights, powers or privileges of the
Series A Preferred Stock.
Section 7. REGISTRATION OF TRANSFER.
The Corporation shall keep at its principal office a register for the
registration of Series A Preferred Stock. Upon the surrender of any certificate
representing Series A Preferred Stock at such place, the
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<PAGE>
Corporation shall, at the request of the record holder of such certificate,
execute and deliver (at the Corporation's expense) a new certificate or
certificates in exchange therefor representing in the aggregate the number of
Shares represented by the surrendered certificate. Each such new certificate
shall be registered in such name and shall represent such number of Shares as is
requested by the holder of the surrendered certificate and shall be
substantially identical in form to the surrendered certificate, and dividends
shall accrue on the Shares of Series A Preferred Stock represented by such new
certificate from the date to which dividends have been fully paid on such Shares
of Series A Preferred Stock represented by the surrendered certificate.
Section 8. REPLACEMENT.
Upon receipt of an affidavit of the registered holder or other evidence
reasonably satisfactory to the Corporation of the ownership and the loss, theft,
destruction or mutilation of any certificate evidencing Shares of Series A
Preferred Stock, and in the case of any such loss, theft or destruction, upon
receipt of indemnity reasonably satisfactory to the Corporation (provided that
the holder's own unsecured indemnity agreement shall be satisfactory), or, in
the case of any such mutilation upon surrender of such certificate, the
Corporation shall (at its expense) execute and deliver in lieu of such
certificate a new certificate of like kind representing the number of Shares of
Series A Preferred Stock represented by such lost, stolen, destroyed or
mutilated certificate and dated the date of such lost, stolen, destroyed or
mutilated certificate, and dividends shall accrue on the Series A Preferred
Stock represented by such new certificate from the date to which dividends have
been fully paid on such lost, stolen, destroyed or mutilated certificate.
Section 9. FINANCIAL STATEMENTS. The Corporation shall (a) file when due
all of its reports, including, without limitation, annual and quarterly reports,
required to be filed by it under the Exchange Act and the rules and regulations
adopted by the SEC thereunder, and (b) if the Corporation is not subject to
Section 13 or 15(d) of the Exchange Act, the Corporation shall provide to the
holder or holders of Shares of Series A Preferred Stock the financial statements
that would be required to be included in the Corporation's annual and quarterly
reports filed with the SEC if the Corporation were subject to Section 13 or
15(d) of the Exchange Act, which shall be delivered or made available to the
holder or holders of Shares of Series A Preferred Stock when the Corporation
would be required to file periodic reports with the SEC under the Exchange Act
if it were subject to Section 13 or 15(d) of the Exchange Act.
Section 10. DEFINITIONS.
"AFFILIATE" of any particular Person means any other Person controlling,
controlled by or under common control with such particular Person.
"ANNIVERSARY DATE" mean each anniversary of the First Dividend Reference
Date.
"COMMON STOCK" means, collectively, the Corporation's Class A Common Stock,
par value $.01 per share the Corporation's Class B Common Stock, par value $.01
per share and any capital stock of any class of the Corporation hereafter
authorized which is not limited to a fixed sum or percentage of par or stated
value with respect to the rights of the holders thereof to participate in
dividends or in the distribution of assets upon any liquidation, dissolution or
winding up of the Corporation.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
"INDEPENDENT DIRECTORS" means, so long as Section 12 of the Certificate of
Incorporation is in effect, the directors of the Corporation who are serving as
Independent Directors (as defined in the Certificate of Incorporation); and
after Section 12 of the Certificate of Incorporation ceases to be effective,
Independent Directors means directors of the Corporation who are not a director,
officer, employee, agent, independent contractor or other representative of a
record or beneficial owner of Series A Preferred Stock or any Affiliate of such
owner.
"ISSUE PRICE" of any Share of Series A Preferred Stock is $1,000.00.
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<PAGE>
"JUNIOR SECURITIES" means any of the Corporation's equity securities other
than the Series A Preferred Stock.
"LIQUIDATION VALUE" of any Share of Series A Preferred Stock as of any
particular date shall be equal to the Issue Price plus all accrued but unpaid
dividends through the date of determination of Liquidation Value.
"PERSON" means an individual, a partnership, a limited liability company, a
corporation, an association, a joint stock company, a trust, a joint venture, an
unincorporated organization and a governmental entity or any department, agency
or political subdivision thereof.
"REDEMPTION DATE" as to any Share means the date specified in the notice of
any redemption given or required to be given by the Corporation; provided that
no such date shall be a Redemption Date unless the Liquidation Value of such
Share is actually paid in full on such date, and if not so paid in full, the
Redemption Date shall be the date on which such amount is fully paid.
"SEC" means the Securities and Exchange Commission.
"SUBSIDIARY" means any Person of which the Corporation owns, directly or
through one or more intermediaries, more than 50% of the outstanding capital
stock (or other ownership interests) possessing the voting power (under ordinary
circumstances) in electing the board of directors (or other governing body).
Section 11. AMENDMENT AND WAIVER.
No amendment, modification or waiver shall be binding or effective with
respect to any provision hereof without the (a) prior written consent of the
holder or holders of at least a majority of the Series A Preferred Stock
outstanding at the time such action is taken and (b) approval by resolution of
the Board of Directors acting with the affirmative votes of a majority of the
Independent Directors. No change in the terms hereof may be accomplished by
merger or consolidation of the Corporation with another corporation or entity
unless the Corporation has obtained the (a) prior written consent of the holder
or holders of a majority of the Series A Preferred Stock then outstanding and
(b) approval by resolution of the Board of Directors acting with the affirmative
votes of a majority of the Independent Directors.
Section 12. NOTICES.
Except as otherwise expressly provided hereunder, all notices referred to
herein shall be in writing and shall be delivered by registered or certified
mail, return receipt requested and postage prepaid, or by reputable overnight
courier service, charges prepaid, and shall be deemed to have been given when so
mailed or sent (a) to the Corporation, at its principal executive offices and
(b) to any stockholder, at such holder's address as it appears in the stock
records of the Corporation (unless otherwise indicated by any such holder).
THIRD: The Series A Preferred Stock shall initially consist of 77,000
shares, which number of shares may be increased or decreased (but not below the
number then outstanding plus the maximum number of additional shares required to
be reserved for issuance as dividends on the Series A Preferred Stock) from time
to time by the Board of Directors of the Corporation.
RESOLVED, FURTHER, that the appropriate officers of the Corporation are
hereby authorized and directed to execute and acknowledge a certificate setting
forth these resolutions and to cause such certificate to be filed and recorded,
all in accordance with the requirements of Section 151(g) of Title 8 of the
Delaware Code of 1953, as amended.
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<PAGE>
IN WITNESS WHEREOF, this Certificate has been made under the seal of U.S.
Franchise Systems, Inc., and has been signed by the undersigned ______________,
President, and _______ _______, Secretary, this ______ day of ____________2000.
--------------------------------------
PRESIDENT
[SEAL]
---------------------------------------------
SECRETARY
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<PAGE>
APPENDIX D
FORM
OF
CERTIFICATE
SETTING FORTH A RESOLUTION CREATING A SERIES
OF PREFERRED STOCK DESIGNATED AS
"SERIES B 6.0% CUMULATIVE REDEEMABLE
CONVERTIBLE/EXCHANGEABLE PREFERRED STOCK"
ADOPTED BY THE BOARD OF DIRECTORS OF
U.S. FRANCHISE SYSTEMS, INC.
PURSUANT TO THE PROVISIONS OF SECTION 151(g) OF TITLE 8 OF
THE DELAWARE CODE OF 1953, AS AMENDED.
We, the undersigned and , respectively the
President and Secretary of U.S. Franchise Systems, Inc., a Delaware corporation
(hereinafter sometimes referred to as the "Corporation"), hereby certify as
follows:
FIRST: By the Certificate of Incorporation the total number of shares which
the Corporation may issue is set forth in Article Fourth as follows: "The total
number of shares of all classes of stock that the Corporation shall have
authority to issue is Thirty-Six Million (36,000,000), of which (a) Thirty-Five
Million (35,000,000) shall be shares of Common Stock, par value $.01 per share,
and (b) One Million (1,000,000) shall be shares of preferred stock, par value
$.01 per share"; and by the Certificate of Incorporation the shares of preferred
stock are authorized to be issued by the Board of Directors from time to time in
one or more series and the Board of Directors is expressly authorized to
determine in the resolution providing for the issuance of any series of
preferred stock, subject to the provisions of the Certificate of Incorporation,
the designation, dividend rate, redemption provisions, rights on liquidation or
dissolution, sinking fund provisions, conversion rights, voting power, and other
preferences and relative, participating, optional or other special rights, and
qualifications, limitations or restrictions, of shares of such series not fixed
and determined by the Certificate of Incorporation.
SECOND: The Board of Directors of the Corporation pursuant to the authority
so vested in it by the Certificate of Incorporation, and in accordance with the
provisions of Section 151(g) of the General Corporation Law of the State of
Delaware, as amended, at a meeting duly held, adopted the following resolution
creating a series of Preferred Stock designated as "Series B 6.0% Cumulative
Redeemable Convertible/Exchangeable Preferred Stock":
"A RESOLUTION OF THE BOARD OF DIRECTORS OF
U.S. FRANCHISE SYSTEMS, INC. CREATING A
SERIES OF PREFERRED STOCK DESIGNATED AS
"SERIES B CUMULATIVE REDEEMABLE CONVERTIBLE/
EXCHANGEABLE PREFERRED STOCK."
Be It Resolved, that, pursuant to authority expressly granted to and vested
in the Board of Directors of U.S. Franchise Systems, Inc., hereinafter called
the "Corporation", by the provisions of the Certificate of Incorporation, the
Board of Directors of the Corporation hereby creates a series of the preferred
stock of the Corporation to consist initially of 18,200 shares, and hereby fixes
the designations, dividend rate, redemption provisions, rights on liquidation or
dissolution, conversion rights, voting powers, and other preferences and
relative, participating, optional or other special rights, and the
qualifications, limitation or restrictions thereof, of the shares of such series
(in addition to the designations, preferences and relative, participating,
optional or other special rights, and the qualifications, limitations or
restrictions thereof, set
<PAGE>
forth in the Certificate of Incorporation which are applicable to the Preferred
Stock of all series) as follows:
Section 1. DESIGNATION
The series of the Corporation's Preferred Stock, par value $.01 per share,
created by this resolution shall be designated as the "Series B 6.0% Cumulative
Redeemable Convertible/Exchangeable Preferred Stock" and is hereinafter referred
to in this resolution as the "Series B Preferred Stock". Capitalized terms used
herein and not otherwise defined shall have the meanings set forth in
SECTION 14.
Section 2. DIVIDENDS.
2.1. GENERAL OBLIGATION. When and as declared by the Corporation's board
of directors and to the extent permitted under the General Corporation Law of
the State of Delaware, the Corporation shall pay preferential dividends to the
holders of Series B Preferred Stock as provided in this SECTION 2. Except as
otherwise provided herein, dividends on each share of Series B Preferred Stock
(a "SHARE") shall accrue at the rate of 6.0% per annum, compounded quarterly, of
the Issue Price thereof, plus the amount of any accrued and unpaid dividends on
such Share through the most recent Dividend Reference Date, from and including
the date of issuance of such Share to and including the date on which the
Liquidation Value of such Share is paid in cash or the date on which such Share
is converted/exchanged into shares of Conversion Stock hereunder. Such dividends
shall accrue whether or not they have been declared and whether or not there are
profits, surplus or other funds of the Corporation legally available for the
payment of dividends. Such dividends shall be cumulative such that all accrued
and unpaid dividends shall be fully paid or declared with funds irrevocably set
apart for payment before any dividend, distribution or payment may be made with
respect to any Junior Securities. The date on which the Corporation initially
issues any Share shall be deemed to be its "date of issuance" regardless of the
number of times transfer of such Share is made on the stock records maintained
by or for the Corporation and regardless of the number of certificates which may
be issued to evidence such Share.
2.2. DIVIDEND REFERENCE DATES. All accrued dividends on outstanding Shares
of Series B Preferred Stock shall be payable (whether or not declared) on
March 31, June 30, September 30 and December 31 of each year (the "DIVIDEND
REFERENCE DATES"), beginning on the first Dividend Reference Date (the "FIRST
DIVIDEND REFERENCE DATE") following the first date of issuance of Series B
Preferred Stock.
2.3. PAYMENT OF DIVIDENDS IN KIND. At the option of the Corporation
(exercisable by resolution of the Board of Directors acting with the affirmative
votes of a majority of the Independent Directors), dividends accrued from time
to time on the Series B Preferred Stock at any time may be paid in the form of
additional Shares of Series B Preferred Stock (including fractional Shares
expressed as a decimal rounded to the nearest 1/1000 of a Share) having an
initial Liquidation Value equal to the amount of the dividend so paid. The
Corporation shall at all times reserve and keep available out of the authorized
but unissued Shares of Series B Preferred Stock, solely for the purpose of
issuance as dividends on Series B Preferred Stock, such maximum number of Shares
of Series B Preferred Stock as may become issuable as dividends on Series B
Preferred Stock.
2.4. DISTRIBUTION OF PARTIAL DIVIDEND PAYMENTS. Except as otherwise
provided herein, if at any time the Corporation pays less than the total amount
of dividends then accrued with respect to any Series B Preferred Stock, such
payment shall be distributed ratably among the holders of Series B Preferred
Stock based upon the number of Shares of Series B Preferred Stock held by each
such holder.
Section 3. PARTICIPATING DIVIDENDS.
If the Corporation declares or pays a dividend in cash on or in respect of
the Conversion Stock out of annual after-tax earnings (determined in accordance
with generally accepted accounting principles consistently applied) in any
fiscal year (an "ORDINARY DIVIDEND") then the Corporation shall pay to the
holders of Series B Preferred Stock at the time of payment thereof the Ordinary
Dividends which would have been
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paid on the shares of Conversion Stock that would have been held by the holders
of Series B Preferred Stock had such Series B Preferred Stock been
converted/exchanged immediately prior to the date on which a record is taken for
such Ordinary Dividend, or, if no record is taken, the date as of which the
record holders of Conversion Stock entitled to such Ordinary Dividends are to be
determined.
Section 4. LIQUIDATION.
Upon any liquidation, dissolution or winding up of the Corporation, whether
voluntary or involuntary, each holder of Series B Preferred Stock shall be
entitled to be paid, before any distribution or payment is made upon any Junior
Securities, an amount in cash equal to the aggregate Liquidation Value of all
Shares of Series B Preferred Stock held by such holder, and the holders of
Series B Preferred Stock shall not be entitled to any further payment. The
Corporation shall mail written notice of such liquidation, dissolution or
winding up, not less than 60 days prior to the payment date stated therein, to
each record holder of Series B Preferred Stock. Neither the consolidation or
merger of the Corporation into or with any other entity or entities, nor the
reduction of the capital stock of the Corporation, shall be deemed to be a
liquidation, dissolution or winding up of the Corporation within the meaning of
this SECTION 4.
Section 5. PRIORITY OF PREFERRED STOCK.
So long as any Series B Preferred Stock remains outstanding, neither the
Corporation or any Subsidiary shall redeem, purchase or otherwise acquire
directly or indirectly any Junior Securities, nor shall the Corporation or any
Subsidiary directly or indirectly pay or declare any dividend or make any
distribution upon any Junior Securities, if at the time of or immediately after
any such redemption, purchase, acquisition, dividend or distribution the
Corporation has failed to pay in cash the full amount of dividends accrued on
the Series B Preferred Stock or the Corporation has failed to make any
redemption of the Series B Preferred Stock required hereunder; provided that the
Corporation may purchase up to 8,666,666 shares of Common Stock on or promptly
following the first date of issuance of Series B Preferred Stock with proceeds
of sale of Series B Preferred Stock and Series A 8.5% Cumulative Redeemable
Preferred Stock of the Corporation.
Section 6. REDEMPTIONS.
6.1. SCHEDULED REDEMPTION. On the tenth Anniversary Date, the Corporation
shall, out of funds legally available therefor, redeem all outstanding Shares of
Series B Preferred Stock at a price per Share equal to the Liquidation Value
thereof as of the Redemption Date.
6.2. OPTIONAL REDEMPTION. In addition to the mandatory redemption
otherwise required by this SECTION 6, the Corporation shall have the option to
redeem all or any portion of the Shares of Series B Preferred Stock at any time
and from time to time on or after the seventh Anniversary Date (upon the notice
and otherwise in the manner set forth in this SECTION 6), exercisable by
resolution of the Board of Directors acting with the affirmative votes of a
majority of the Independent Directors.
6.3. REDEMPTION PAYMENT. For each Share which is to be redeemed, the
Corporation shall be obligated on the Redemption Date to pay to the holder
thereof (upon surrender by such holder at the Corporation's principal office of
the certificate representing such Share) an amount in immediately available
funds equal to the Liquidation Value of such Share as of the Redemption Date. If
the funds of the Corporation legally available for redemption of Shares on the
Redemption Date are insufficient to redeem the total number of Shares to be
redeemed on such date, those funds which are legally available shall be used to
redeem the maximum possible number of Shares ratably among the holders of the
Shares to be redeemed based upon the aggregate Liquidation Value of such Shares
held by each such holder. At any time thereafter when additional funds of the
Corporation are legally available for the redemption of Shares, such funds shall
immediately be used to redeem the balance of the Shares which the Corporation
has become obligated to redeem but which it has not redeemed.
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6.4. NOTICE OF REDEMPTION. The Corporation shall mail written notice of
each redemption of any Series B Preferred Stock to each record holder of
Series B Preferred Stock not more than 60 nor less than 30 days prior to the
date on which such redemption is to be made. Upon mailing any notice of
redemption which relates to a redemption at the Corporation's option, the
Corporation shall, subject to the rights arising out of any prior
conversion/exchange, become obligated to redeem the total number of Shares
specified in such notice at the time of redemption specified therein. In case
fewer than the total number of Shares represented by any certificate are
redeemed, a new certificate representing the number of unredeemed Shares shall
be issued to the holder thereof without cost to such holder within three
business days after surrender of the certificate representing the redeemed
Shares.
6.5. DETERMINATION OF THE NUMBER OF EACH HOLDER'S SHARES TO BE
REDEEMED. The number of Shares of Series B Preferred Stock to be redeemed from
each holder thereof in redemptions hereunder shall be the number of Shares
determined by multiplying the total number of Shares of Series B Preferred Stock
to be redeemed times a fraction, the numerator of which shall be the total
number of Shares of Series B Preferred Stock then held by such holder and the
denominator of which shall be the total number of Shares of Series B Preferred
Stock then outstanding.
6.6. DIVIDENDS AFTER REDEMPTION DATE. From and after the Redemption Date
(unless the Corporation shall default in the payment of the redemption price
when due) dividends on Shares of Series B Preferred Stock called for redemption
or otherwise required to be redeemed on such Redemption Date shall cease to
accrue and such Shares shall no longer be deemed to be outstanding, and all
rights (except the right to receive the redemption price thereof) of the holder
thereof, as the holder of such Shares of Series B Preferred Stock, shall cease.
6.7. REDEEMED OR OTHERWISE ACQUIRED SHARES. Any Shares which are redeemed
or otherwise acquired by the Corporation shall be canceled and shall have the
status of authorized but unissued shares of Preferred Stock, undesignated as to
series, and shall not be reissued, sold or transferred as Shares of Series B
Preferred Stock.
6.8. OTHER REDEMPTIONS OR ACQUISITIONS. Neither the Corporation nor any
Subsidiary shall redeem or otherwise acquire any Series B Preferred Stock,
except as expressly authorized herein or pursuant to a purchase offer made
pro-rata to all holders of Series B Preferred Stock on the basis of the number
of Shares of Series B Preferred Stock owned by each such holder.
Section 7. VOTING RIGHTS.
7.1. GENERALLY. The holders of the Series B Preferred Stock shall be
entitled to notice of all stockholders meetings in accordance with the
Corporation's bylaws, and the holders of the Series B Preferred Stock shall be
entitled to vote on all matters submitted to the stockholders for a vote
together with the holders of the Common Stock voting together as a single class,
with each Share of Series B Preferred Stock entitled to one vote per Share for
each share (including for this purpose, fractional shares) of Conversion Stock
issuable upon conversion/exchange of a Share of Series B Preferred Stock.
7.2. OTHER VOTING RIGHTS. The Corporation shall not merge or consolidate
with another entity or entities, sell all or substantially all of its assets or
dissolve or liquidate without the prior approval of the holder or holders of at
least a majority of the Series B Preferred Stock then outstanding voting
together as a single class; provided that the Corporation may, without obtaining
such approval, merge with any wholly-owned Subsidiary so long as (a) the
Corporation is the surviving corporation, (b) the terms of the Series B
Preferred Stock are not changed and (c) the Series B Preferred Stock is not
exchanged for cash, securities or other property.
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7.3. ADDITIONAL CLASS VOTING RIGHTS. In addition to any other vote or
consent required herein or by law, the vote or written consent of the holder or
holders of a majority of the then outstanding Shares of Series B Preferred Stock
shall be necessary for effecting or validating the following actions:
(a) Any authorization or any designation, whether by reclassification or
otherwise, of any new class or series of stock or any other securities
convertible into equity securities of the Corporation (or any increase in
the authorized or designated number of any such new class or series) ranking
senior to or on a parity with the Series B Preferred Stock as to payment of
dividends, distribution of assets upon liquidation, dissolution or
winding-up (whether voluntary or involuntary), voting, redemption or
otherwise; or
(b) Any action that results in any amendment, alteration, or repeal (by
merger or consolidation or otherwise) of any provisions of the Certificate
of Incorporation or any certificate amendatory thereof so as to materially
adversely affect any of the preferences, rights, powers or privileges of the
Series B Preferred Stock.
Section 8. CONVERSION/EXCHANGE.
8.1. CONVERSION/EXCHANGE PRICE
(a) The initial conversion/exchange price for the Series B Preferred
Stock shall be $7.50 per Share (as adjusted as provided in SECTION 8.1(b),
the "INITIAL CONVERSION PRICE").
(b) On the 90th day after the first date of issuance of Series B
Preferred Stock (the "RESET DATE"), the Initial Conversion Price shall be
adjusted so that the Initial Conversion Price then and thereafter in effect
shall be the lesser of (i) $7.50 and (ii) 130% of the Market Price as of the
Reset Date; provided that the Initial Conversion Price, as so adjusted,
shall not be less than $6.50.
(c) The "Conversion Price" shall be, initially, the Initial Conversion
Price and shall be adjusted from time to time as provided in this
SECTION 8, giving effect on the Reset Date to any other adjustment to the
Conversion Price provided in this SECTION 8 as a result of events on or
prior to the Reset Date.
8.2. CONVERSION/EXCHANGE PROCEDURE.
(a) Subject to the provisions for adjustment hereinafter set forth, any
holder of Series B Preferred Stock may convert/exchange at any time and from
time to time all or any portion of the Series B Preferred Stock (including
any fraction of a Share) held by such holder into a number of shares of
Conversion Stock computed by (i) multiplying (A) the number of Shares of
Series B Preferred Stock to be converted/exchanged times (B) 1,000 times
(C) the Initial Conversion Price and (ii) dividing the result by the
Conversion Price then in effect without giving effect to any adjustment to
the Conversion Price pursuant to SECTION 8.6.
(b) Each conversion/exchange of Series B Preferred Stock shall be deemed
to have been effected as of the close of business on the date on which the
certificate or certificates representing the Series B Preferred Stock to be
converted/exchanged have been surrendered at the principal office of the
Corporation, together with cash and/or Face Value of Series A Preferred
Stock equal to (i) the number of shares of Conversion Stock issuable upon
the conversion/exchange of the Series B Preferred Stock surrendered for
conversion/exchange multiplied by the Conversion Price then in effect, MINUS
(ii) the aggregate Liquidation Value of the Series B Preferred Stock
surrendered for conversion/exchange determined as of the effective date of
such conversion/exchange. At such time as such conversion/exchange has been
effected, the rights of the holder of such Series B Preferred Stock as such
holder shall cease and the Person or Persons in whose name or names any
certificate or certificates for shares of Conversion Stock are to be issued
upon such conversion/exchange shall be deemed to have become the holder or
holders of record of the shares of Conversion Stock represented thereby.
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(c) As soon as possible after a conversion/exchange has been effected
(but in any event within three business days in the case of subparagraph
(i) below), the Corporation shall deliver to the converting/exchanging
holder:
(i) a certificate or certificates representing the number of shares
of Conversion Stock issuable by reason of such conversion/exchange in
such name or names and in such denomination or denominations as the
converting/exchanging holder has specified;
(ii) the amount payable under subparagraph (f) below with respect to
such conversion/ exchange; and
(iii) a certificate representing any Shares (including fractional
Shares expressed as a decimal rounded to the nearest 1/1000) of Series B
Preferred Stock which were represented by the certificate or certificates
delivered to the Corporation in connection with such conversion/ exchange
but which were not converted/exchanged.
(d) The issuance of certificates for shares of Conversion Stock upon
conversion/exchange of Series B Preferred Stock shall be made without charge
to the holders of such Series B Preferred Stock for any issuance tax in
respect thereof or other cost incurred by the Corporation in connection with
such conversion/exchange and the related issuance of shares of Conversion
Stock. Upon conversion/ exchange of each Share of Series B Preferred Stock,
the Corporation shall take all such actions as are necessary in order to
ensure that the Conversion Stock issuable with respect to such conversion/
exchange shall be validly issued, fully paid and nonassessable.
(e) The Corporation shall not close its books against the transfer of
Series B Preferred Stock or of Conversion Stock issued or issuable upon
conversion/exchange of Series B Preferred Stock in any manner which
interferes with the timely conversion/exchange of Series B Preferred Stock.
The Corporation shall assist and cooperate with any holder of Shares
required to make any governmental filings or obtain any governmental
approval prior to or in connection with any conversion/exchange of Shares
hereunder (including, without limitation, making any filings required to be
made by the Corporation).
(f) If any fractional interest in a share of Conversion Stock would,
except for the provisions of this subparagraph (f), be deliverable upon any
conversion/exchange of the Series B Preferred Stock, the Corporation, in
lieu of delivering the fractional share therefor, shall pay an amount to the
holder thereof equal to the Market Price of such fractional interest as of
the date of conversion/exchange.
(g) The Corporation shall at all times reserve and keep available out of
its authorized but unissued shares of Conversion Stock, solely for the
purpose of issuance upon the conversion/exchange of the Series B Preferred
Stock, such maximum number of shares of Conversion Stock issuable upon the
conversion/exchange of all outstanding Series B Preferred Stock. All shares
of Conversion Stock which are so issuable shall, when issued, be duly and
validly issued, fully paid and nonassessable and free from all taxes, liens
and charges. The Corporation shall take all such actions as may be necessary
to assure that all such shares of Conversion Stock may be so issued without
violation of any applicable law or governmental regulation or any
requirements of any domestic securities exchange upon which shares of
Conversion Stock may be listed (except for official notice of issuance which
shall be immediately delivered by the Corporation upon each such issuance).
8.3. SUBDIVISION OR COMBINATION OF CONVERSION STOCK. If the Corporation at
any time subdivides (by any stock split, stock dividend, recapitalization,
reclassification or otherwise) one or more classes of its outstanding shares of
Conversion Stock into a greater number of shares, the Conversion Price in effect
immediately prior to such subdivision shall be proportionately reduced, and if
the Corporation at any time combines (by reverse stock split, reclassification
or otherwise) one or more classes of its outstanding shares of Conversion Stock
into a smaller number of shares, the Conversion Price in effect immediately
prior to such combination shall be proportionately increased. Such adjustment
shall be made whenever any of the
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events listed above shall occur. An adjustment made pursuant to this
SECTION 8.3 shall become effective retroactively with respect to
conversions/exchanges made subsequent to the record date in the case of a stock
split or dividend, and shall become effective on the effective date in the case
of a subdivision, combination or reclassification.
8.4. REORGANIZATION, RECLASSIFICATION, CONSOLIDATION, MERGER OR
SALE. Prior to the consummation of any Organic Change, the Corporation shall
make appropriate provisions (in form and substance satisfactory to the holders
of a majority of the Series B Preferred Stock then outstanding) to ensure that
each of the holders of Series B Preferred Stock shall thereafter have the right
to acquire and receive, in lieu of or in addition to (as the case may be) the
shares of Conversion Stock immediately theretofore issuable upon the
conversion/exchange of such holder's Shares of Series B Preferred Stock, such
shares of stock, securities or assets as such holder would have received in
connection with such Organic Change if such holder had converted/exchanged its
Shares of Series B Preferred Stock immediately prior to such Organic Change. In
each such case, the Corporation shall also make appropriate provisions (in form
and substance satisfactory to the holders of a majority of the Series B
Preferred Stock then outstanding) to ensure that the provisions of this
SECTION 8 and SECTIONS 9 and 10 hereof shall thereafter be applicable to the
Series B Preferred Stock (including, in the case of any such consolidation,
merger or sale in which the successor entity or purchasing entity is other than
the Corporation, an immediate adjustment of the Conversion Price to the value
for the Conversion Stock reflected by the terms of such consolidation, merger or
sale, and a corresponding immediate adjustment in the number of shares of
Conversion Stock issuable upon conversion/exchange of Series B Preferred Stock,
if the value so reflected is less than the Conversion Price in effect
immediately prior to such consolidation, merger or sale). The Corporation shall
not effect any such consolidation, merger or sale, unless prior to the
consummation thereof, the successor corporation (if other than the Corporation)
resulting from consolidation or merger or the corporation purchasing such assets
assumes by written instrument (in form reasonably satisfactory to the holders of
a majority of the Series B Preferred Stock then outstanding), the obligation to
deliver to each such holder such shares of stock, securities or assets as, in
accordance with the foregoing provisions, such holder may be entitled to
acquire.
8.5. CERTAIN EVENTS. If any event occurs of the type contemplated by the
provisions of SECTIONS 8.3 and 8.4 but not expressly provided for by such
provisions, then the Corporation's Board of Directors shall make an appropriate
adjustment in the Conversion Price so as to protect the rights of the holders of
Series B Preferred Stock; provided that no such adjustment shall increase the
Conversion Price as otherwise determined pursuant to this SECTION 8 or decrease
the number of shares of Conversion Stock issuable upon conversion/exchange of
each Share of Series B Preferred Stock.
8.6 SPECIAL ADJUSTMENTS. If the Corporation incurs Special Losses (as
defined below) from time to time after June 2, 2000, and prior to the fifth
Anniversary Date, then the Conversion Price shall be reduced on each date
Special Losses are incurred by an amount equal to (a) the aggregate Special
Losses, divided by the total number of issued and outstanding shares of
Conversion Stock of the Corporation (on a fully diluted basis) as of the date of
the adjustment, minus (b) the aggregate amount of all prior adjustments to the
Conversion Price under this SECTION 8.6. For purposes of this SECTION 8.6,
Special Losses means (i) the total amount of any and all losses incurred by the
Corporation after June 2, 2000 and prior to the fifth Anniversary Date, as a
result of payments, in the form of loans or otherwise, made or required to be
made to Alpine Hospitality Ventures, LLC ("ALPINE") (and potentially any other
Persons as may be required) by reason of the obligation of the Corporation in
Section 16 of that certain Supplements to Agreements dated April 28, 1998 (the
"Alpine Agreement"), or the release of such obligation by Alpine or any claim by
any Person in connection therewith, and all other associated out-of-pocket
costs, losses, damages and expenses (including, without limitation, reasonable
fees and expenses of attorneys) incurred by the Corporation and its Subsidiaries
in connection therewith, provided that Special Losses shall not include payment
of up to $2.5 million in the aggregate to Alpine Hospitality Holdings LLC or any
of its Affiliates in connection with the termination of certain of the Company's
management agreements and certain of the Company's
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obligations under the Alpine Agreement; and (ii) the total amount of any and all
losses incurred by the Corporation after June 2, 2000, and prior to the fifth
Anniversary Date by reason of any amounts paid by the Corporation in settlement
of claims or satisfaction of judgments in connection with any stockholder or
derivative litigation asserting a cause of action arising out of events or
circumstances occurring or existing before June 2, 2000 and any out-of-pocket
expenses incurred by the Corporation in the defense or settlement thereof,
including, but not limited to, the fees and expenses of legal counsel and
experts for the Corporation or its directors and officers, but only to the
extent not paid or reimbursed to the Corporation from available insurance.
8.7 MINIMUM ADJUSTMENT; ROUNDING. Notwithstanding anything herein to the
contrary, no adjustment of the Conversion Price shall be made pursuant to this
SECTION 8 in an amount less than $.01 per Share, and any such lesser adjustment
shall be carried forward and shall be made at the time and together with the
next subsequent adjustment which together with any adjustments so carried
forward shall amount to $.01 per Share or more. For the purpose of calculation
of fractional Shares of Series B Preferred Stock resulting from the
conversion/exchange of Series B Preferred Stock, fractional Shares shall be
expressed as a decimal rounded to the nearest 1/1,000 of a Share.
8.8. NOTICES.
(a) Immediately upon any adjustment of the Conversion Price, the
Corporation shall give written notice thereof to all holders of Series B
Preferred Stock setting forth in reasonable detail the calculation of such
adjustment.
(b) The Corporation shall give written notice to all holders of
Series B Preferred Stock at least 20 days prior to the date on which the
Corporation closes its books or takes a record (i) with respect to any
dividend or distribution upon Conversion Stock, (ii) with respect to any pro
rata subscription offer to holders of Conversion Stock or (iii) for
determining rights to vote with respect to any Organic Change, dissolution
or liquidation.
(c) The Corporation shall also give written notice to the holders of
Series B Preferred Stock at least 20 days prior to the date on which any
Organic Change shall take place.
Section 9. LIQUIDATING DIVIDENDS.
If the Corporation declares or pays a dividend upon the Conversion Stock or
makes any other distribution (whether pursuant to a merger, consolidation, or
otherwise) to holders of Conversion Stock as such (whether in cash, evidences of
its indebtedness or assets), excepting Ordinary Dividends and dividends payable
in shares of Conversion Stock (a "LIQUIDATING DIVIDEND"), then the Corporation
shall pay or distribute to each holder of Series B Preferred Stock at the time
of payment or distribution thereof the Liquidating Dividend that would have been
paid or distributed to such holder if such holder had held the number of shares
of Conversion Stock issuable upon conversion/exchange of such holder's Series B
Preferred Stock immediately before the date on which a record is taken for such
Liquidating Dividend, or, if no record is taken, the date as of which the record
holders of Conversion Stock entitled to such dividends or distributions are to
be determined.
Section 10. PURCHASE RIGHTS.
If at any time the Corporation grants, issues or sells any options,
Convertible Securities or rights to purchase stock, warrants, securities or
other property pro rata to the record holders of Conversion Stock (the "PURCHASE
RIGHTS"), then, in addition to the rights of the holders of Series B Preferred
Stock under SECTION 8, each holder of Series B Preferred Stock shall be entitled
to acquire, upon the terms applicable to such Purchase Rights, the aggregate
Purchase Rights that such holder could have acquired if such holder had held the
number of shares of Conversion Stock issuable upon conversion/exchange of such
holder's Series B Preferred Stock immediately before the date on which a record
is taken for the grant, issuance or
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sale of such Purchase Rights, or, if no such record is taken, the date as of
which the record holders of Conversion Stock are to be determined for the grant,
issue or sale of such Purchase Rights.
Section 11. REGISTRATION OF TRANSFER.
The Corporation shall keep at its principal office a register for the
registration of Series B Preferred Stock. Upon the surrender of any certificate
representing Series B Preferred Stock at such place, the Corporation shall, at
the request of the record holder of such certificate, execute and deliver (at
the Corporation's expense) a new certificate or certificates in exchange
therefor representing in the aggregate the number of Shares represented by the
surrendered certificate. Each such new certificate shall be registered in such
name and shall represent such number of Shares as is requested by the holder of
the surrendered certificate and shall be substantially identical in form to the
surrendered certificate, and dividends shall accrue on the Shares of Series B
Preferred Stock represented by such new certificate from the date to which
dividends have been fully paid on such Shares of Series B Preferred Stock
represented by the surrendered certificate.
Section 12. REPLACEMENT.
Upon receipt of an affidavit of the registered holder or other evidence
reasonably satisfactory to the Corporation of the ownership and the loss, theft,
destruction or mutilation of any certificate evidencing Shares of Series B
Preferred Stock, and in the case of any such loss, theft or destruction, upon
receipt of indemnity reasonably satisfactory to the Corporation (provided that
the holder's own unsecured indemnity agreement shall be satisfactory), or, in
the case of any such mutilation upon surrender of such certificate, the
Corporation shall (at its expense) execute and deliver in lieu of such
certificate a new certificate of like kind representing the number of Shares of
Series B Preferred Stock represented by such lost, stolen, destroyed or
mutilated certificate and dated the date of such lost, stolen, destroyed or
mutilated certificate, and dividends shall accrue on the Shares of Series B
Preferred Stock represented by such new certificate from the date to which
dividends have been fully paid on such lost, stolen, destroyed or mutilated
certificate.
Section 13. FINANCIAL STATEMENTS. The Corporation shall (a) file when due
all of its reports, including, without limitation, annual and quarterly reports,
required to be filed by it under the Exchange Act and the rules and regulations
adopted by the SEC thereunder, and (b) if the Corporation is not subject to
Section 13 or 15(d) of the Exchange Act, the Corporation shall provide to the
holder or holders of Shares of Series B Preferred Stock the financial statements
that would be required to be included in the Corporation's annual and quarterly
reports filed with the SEC if the Corporation were subject to Section 13 or
15(d) of the Exchange Act, which shall be delivered or made available to the
holder or holders of Shares of Series B Preferred Stock when the Corporation
would be required to file periodic reports with the SEC under the Exchange Act
if it were subject to Section 13 or 15(d) of the Exchange Act.
Section 14. DEFINITIONS.
"ANNIVERSARY DATE" means each anniversary of the First Dividend Reference
Date.
"COMMON STOCK" means, collectively, the Corporation's Class A Common Stock,
the Corporation's Class B Common Stock and any capital stock of any class of the
Corporation hereafter authorized which is not limited to a fixed sum or
percentage of par or stated value in respect to the rights of the holders
thereof to participate in dividends or in the distribution of assets upon any
liquidation, dissolution or winding up of the Corporation.
"CONVERSION STOCK" means shares of the Corporation's Class A Common Stock;
provided that if there is a change such that the securities issuable upon
conversion/exchange of the Series B Preferred Stock are issued by an entity
other than the Corporation or there is a change in the class of securities so
issuable, then the term "Conversion Stock" shall mean one share of the security
issuable upon conversion of the
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Series B Preferred Stock if such security is issuable in shares, or shall mean
the smallest unit in which such security is issuable if such security is not
issuable in shares.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
"FACE VALUE OF SERIES A PREFERRED STOCK" as of any particular date means the
liquidation preference as of such date of the Series A 8.5% Cumulative
Redeemable Preferred Stock of the Corporation.
"INDEPENDENT DIRECTORS" means, so long as Section 12 of the Certificate of
Incorporation is in effect, the directors of the Corporation who are serving as
Independent Directors (as defined in the Certificate of Incorporation); and
after Section 12 of the Certificate of Incorporation ceases to be effective,
Independent Directors means directors of the Corporation who are not a director,
officer, employee, agent, independent contractor or other representative of a
record or beneficial owner of Series B Preferred Stock or any Affiliate of such
owner.
"ISSUE PRICE" of any Share means $1,000.00.
"JUNIOR SECURITIES" means any of the Corporation's equity securities other
than the Series A 8.5% Cumulative Redeemable Preferred Stock and Series B
Preferred Stock.
"LIQUIDATION VALUE" of any Share as of any particular date shall be equal to
the Issue Price plus all accrued but unpaid dividends through the date of
determination of Liquidation Value.
"MARKET PRICE" of any security means the average of the closing prices of
such security's sales on all securities exchanges on which such security may at
the time be listed, or, if there has been no sales on any such exchange on any
day, the average of the highest bid and lowest asked prices on all such
exchanges at the end of such day, or, if on any day such security is not so
listed, the average of the representative bid and asked prices quoted in the
NASDAQ Stock Market as of 4:00 p.m., New York time, or, if on any day such
security is not quoted in the NASDAQ Stock Market, the average of the highest
bid and lowest asked prices on such day in the domestic over-the-counter market
as reported by the National Quotation Bureau, Incorporated, or any similar
successor organization, in each such case averaged over a period of 21 days
consisting of the day as of which "Market Price" is being determined and the 20
consecutive business days prior to such day. If at any time such security is not
listed on any securities exchange or quoted in the NASDAQ Stock Market or the
over-the-counter market, the "Market Price" shall be the fair value thereof
determined jointly by the Corporation and the holders of a majority of the
Series B Preferred Stock. If such parties are unable to reach agreement within a
reasonable period of time, such fair value shall be determined by an independent
appraiser experienced in valuing securities jointly selected by the Corporation
and the holders of a majority of the Series B Preferred Stock. The determination
of such appraiser shall be final and binding upon the parties, and the
Corporation shall pay the fees and expenses of such appraiser.
"ORGANIC CHANGE" means any recapitalization, reorganization,
reclassification, consolidation, merger, sale of all or substantially all of the
Corporation's assets to another Person or other transaction which is effected in
such a manner that holders of Common Stock are entitled to receive (either
directly or upon subsequent liquidation) Stock, securities or assets with
respect to or in exchange for Common Stock is referred to herein as an "Organic
Change".
"PERSON" means an individual, a partnership, a limited liability company, a
corporation, an association, a joint stock company, a trust, a joint venture, an
unincorporated organization and a governmental entity or any department, agency
or political subdivision thereof.
"REDEMPTION DATE" as to any Share means the date specified in the notice of
any redemption given or required to be given by the Corporation; provided that
no such date shall be a Redemption Date unless the Liquidation Value of such
Share is actually paid in full on such date, and if not so paid in full, the
Redemption Date shall be the date on which such amount is fully paid.
D-10
<PAGE>
"SEC" means the Securities and Exchange Commission.
"SUBSIDIARY" means any Person of which the Corporation owns, directly or
through one or more intermediaries, more than 50% of the outstanding capital
stock (or other ownership interests) possessing the voting power (under ordinary
circumstances) in electing the board of directors (or other governing body).
Section 15. AMENDMENT AND WAIVER.
No amendment, modification or waiver shall be binding or effective with
respect to any provision hereof without the (a) prior written consent of the
holder or holders of a majority of the Series B Preferred Stock outstanding at
the time such action is taken and (b) approval by resolution of the Board of
Directors acting with affirmative votes of a majority of Independent Directors.
No change in the terms hereof may be accomplished by merger or consolidation of
the Corporation with another corporation or entity unless the Corporation has
obtained the (a) prior written consent of the holder or holders of a majority of
the Series B Preferred Stock then outstanding and (b) approval by resolution of
the Board of Directors acting with affirmative votes of a majority of
Independent Directors.
Section 16. NOTICES.
Except as otherwise expressly provided hereunder, all notices referred to
herein shall be in writing and shall be delivered by registered or certified
mail, return receipt requested and postage prepaid, or by reputable overnight
courier service, charges prepaid, and shall be deemed to have been given when so
mailed or sent (a) to the Corporation, at its principal executive offices and
(b) to any stockholder, at such holder's address as it appears in the stock
records of the Corporation (unless otherwise indicated by any such holder).
THIRD: The Series B Preferred Stock shall initially consist of 18,200
shares, which number of shares may be increased or decreased (but not below the
number then outstanding plus the maximum number of additional shares required to
be reserved for issuance as dividends on the Series B Preferred Stock) from time
to time by the Board of Directors of the Corporation.
RESOLVED, FURTHER, that the appropriate officers of the Corporation are
hereby authorized and directed to execute and acknowledge a certificate setting
forth these resolutions and to cause such certificate to be filed and recorded,
all in accordance with the requirements of Section 151(g) of Title 8 of the
Delaware Code of 1953, as amended.
IN WITNESS WHEREOF, this Certificate has been made under the seal of U.S.
Franchise Systems, Inc., and has been signed by the undersigned ______________,
President, and _______ _______, Secretary, this ______ day of ____________ 2000.
--------------------------------------
PRESIDENT
[SEAL]
---------------------------------------------
SECRETARY
D-11
<PAGE>
APPENDIX E
ARONSON AGREEMENT
This Agreement is made as of June 2, 2000, between Meridian Associates,
L.P., an Illinois limited partnership ("MERIDIAN"), and Neal K. Aronson (the
"STOCKHOLDER").
RECITALS
SDI, Inc., a Nevada corporation, HSA Properties, Inc. a Delaware
corporation, and Meridian, have entered into a Recapitalization Agreement dated
as of June 2, 2000 (the "RECAPITALIZATION AGREEMENT"), with U.S. Franchise
Systems, Inc., a Delaware corporation (the "COMPANY"), contemplating, among
other things, an investment by the Investors in new Preferred Stock of the
Company and an offer by the Company to purchase shares of its Common Stock. The
Stockholder is the record and beneficial owner of 2,099,318 Shares of Common
Stock of the Company (the "STOCKHOLDER SHARES"). The Investor Group has
requested that the Stockholder enter into this Agreement simultaneously with the
execution and delivery of the Recapitalization Agreement.
AGREEMENT
For good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties hereby agree as follows:
Section 1. DEFINED TERMS. Capitalized words used in this Agreement as
defined terms shall have the meanings given to them in the Recapitalization
Agreement, unless otherwise defined herein.
Section 2. TERMINATION. Notwithstanding any of the provisions herein, the
Stockholder's obligations stated in this Agreement shall cease to be effective
if (a) the Offer shall have expired in accordance with its terms without the
acceptance for purchase of at least 3,000,000 Shares pursuant thereto, (b) the
Offer shall have been terminated or withdrawn for any reason (other than a
breach by the Stockholder of any of his obligations to the Company and/or the
Investor Group), (c) the Recapitalization Agreement is earlier terminated for
any reason (other than a breach by the Stockholder of any of his obligations to
the Company and/or the Investor Group) in accordance with SECTION 8.4 thereof or
otherwise, (d) the Offer shall have been amended or otherwise modified in any
material respect (other than the extension of time for tenders of Shares),
including, without limitation, to reduce the number of Shares which the Company
is offering to purchase or the price at which the Company will purchase Shares
pursuant thereto, or (e) the Restricted Stock shall not have fully vested (and
no longer be subject to forfeiture) immediately before the Closing Date (but
subject to the Closing).
Section 3. AGREEMENT REGARDING TENDER OFFER. The Stockholder shall, prior
to the expiration date of the Offer, duly tender all of his Stockholder Shares
to the Company for purchase pursuant to the Offer and shall not withdraw such
Stockholder Shares.
Section 4. VOTING SHARES. At any meeting of stockholders of the Company
called for this purpose, the Stockholder shall vote his Stockholder Shares and
any other shares of Common Stock of the Company as to which the Stockholder has
the power to vote, in person or by proxy, in favor of any resolution
authorizing, in accordance with the Recapitalization Agreement, the issuance of
the Preferred Stock and the Class A Common Stock issuable upon conversion of the
B Preferred, the Charter Amendments, and any other action necessary or advisable
in order to consummate the transactions contemplated by the Recapitalization
Agreement.
Section 5. AGREEMENT TO CONVERT. If the Offer is consummated in accordance
with its terms and the Company purchases any Shares but does not purchase all of
the Stockholder's Shares, the Stockholder will take all actions required to
exercise his right to convert his Shares that represent Class B Common Stock
into Shares that represent Class A Common Stock, effective on or before the
first Business Day after the Closing Date.
<PAGE>
Section 6. TERMINATION OF OTHER AGREEMENTS.
(a) The Stockholder shall take such actions and execute and deliver such
instruments as Meridian may deem reasonably necessary and appropriate to
terminate the Registration Rights Agreement among the Company, Alpine
Hospitality Equities LLC, Leven and Aronson dated April 28, 1998 (the
"Alpine Registration Rights Agreement") and the Registration and Tag-Along
Rights Agreement among Sextant Trading LLC, Lubert-Adler Real Estate
Opportunity Fund, L.P., Lubert-Adler Real Estate Opportunity Fund II, L.P.,
Lubert-Adler Capital Real Estate Opportunity Fund, L.P., the Company, Leven
and Aronson dated March, 1998 (the "Sextant/Lubert-Adler Agreement") and/or
the Stockholder's rights under those agreements, effective as of the Closing
Date.
(b) The Stockholder shall execute and deliver a Special Durable Power of
Attorney as of the date hereof (the "POWER OF ATTORNEY"), pursuant to which
Power of Attorney the Stockholder shall irrevocably appoint Michael A. Leven
as his true lawful attorney-in-fact to execute and deliver in the name and
on behalf of the Stockholder (i) the documents required to be executed and
delivered in order to terminate the Alpine Registration Rights Agreement and
for the rights of the Stockholder thereunder, (ii) the documents required to
be executed and delivered in order to terminate the Sextant/Lubert-Adler
Agreement and for the rights of the Stockholder thereunder and (iii) any
other documents required to be executed in connection with the matters
described in the preceding clauses (i) and (ii).
Section 7. AMENDMENT AND WAIVER. Except as otherwise provided herein, no
modification, amendment or waiver of any provision of this Agreement shall be
effective against Meridian or the Stockholder unless such modification,
amendment or waiver is approved in writing signed by the party to be bound. The
failure of any party to enforce any of the provisions of this Agreement shall in
no way be construed as a waiver of such provisions and shall not affect the
right of such party thereafter to enforce each and every provision of this
Agreement in accordance with its terms.
Section 8. SEVERABILITY. Whenever possible, each provision of this
Agreement shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be invalid,
illegal or unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability shall not affect
any other provision or any other jurisdiction, but this Agreement shall be
reformed, construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provision had never been contained herein.
Section 9. ENTIRE AGREEMENT. Except as otherwise expressly set forth
herein, this document together with the agreements dated the date hereof to
which the Stockholder is a party relating to the transactions contemplated by
the Recapitalization Agreement shall serve as the entire agreement of the
parties hereto concerning the subject matter of this Agreement and supersedes
and preempts any prior understandings, agreements or representations by or among
the parties, written or oral, which may have related to the subject matter
hereof in any way.
Section 10. SUCCESSORS AND ASSIGNS. Except as otherwise provided herein,
this Agreement shall bind and inure to the benefit of and be enforceable by
Meridian and the Stockholder and any subsequent holders of the Shares and the
respective successors and assigns of each of them.
Section 11. DESCRIPTIVE HEADINGS. The descriptive headings of this
Agreement are inserted for convenience only and do not constitute a part of this
Agreement.
Section 12. REMEDIES. Each of the parties hereto shall be entitled to
enforce its or his rights under this Agreement specifically to recover damages
by reason of any breach of any provision of this Agreement and to exercise all
other rights existing in its or his favor. The parties hereto agree and
acknowledge that money damages may not be an adequate remedy for any breach of
the provisions of this Agreement and that each party may in its or his sole
discretion apply to any court of law or equity of competent jurisdiction
E-2
<PAGE>
for specific performance and/or injunctive relief (without posting a bond or
other security) in order to enforce or prevent any violation of the provisions
of this Agreement.
Section 13. NOTICES. Any notice provided for in this Agreement shall be in
writing and shall be either personally delivered, or mailed first class
certified mail (postage prepaid and return receipt requested) or sent by
reputable overnight courier service (charges prepaid) to any other recipient at
the address indicated on the signature pages hereof, or at such address or to
the attention of such other Person as the recipient party has specified by prior
written notice to the sending party. Notices will be deemed to have been given
hereunder when delivered personally, when received if sent by U.S. mail and one
day after deposit with a reputable overnight courier service.
Section 14. GOVERNING LAW. All questions concerning the construction,
validity and interpretation of this Agreement shall be governed by the internal
law, and not the law of conflicts, of Delaware.
Section 15. COUNTERPARTS. This Agreement may be executed in separate
counterparts each of which shall be an original and all of which taken together
shall constitute one and the same agreement.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK;
SIGNATURE PAGE FOLLOWS.]
E-3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
day and year first written above.
MERIDIAN ASSOCIATES, L.P.
By: Meridian Investments Inc.
By: /s/ H.S. Handelsman
-----------------------------------
Name: H.S. Handelsman
---------------------------------
Its: Vice President
-----------------------------------
200 West Madison, Suite 3800
Chicago, Illinois 60606
Attention: Harold S. Handlesman
/s/ Neal Aronson
--------------------------------------
NEAL ARONSON
E-4
<PAGE>
APPENDIX F
LEVEN AGREEMENT
This Agreement is made as of June 2, 2000, between Meridian Associates,
L.P., an Illinois limited partnership ("MERIDIAN"), and Michael A. Leven and
Andrea Leven (the "STOCKHOLDERS").
RECITALS
SDI, Inc., a Nevada corporation, HSA Properties, Inc., a Delaware
corporation and Meridian have entered into a Recapitalization Agreement dated as
of the date hereof with US Franchise Systems, Inc., a Delaware corporation (the
"COMPANY"), contemplating, among other things, an investment by the Investors in
new Preferred Stock of the Company and an offer by the Company to purchase
shares of its Common Stock. The Stockholders are the record and beneficial
owners of an aggregate of 1,555,303 Shares of Common Stock of the Company (the
"SHARES"). The Investor Group has requested that the Stockholders enter into
this Agreement simultaneously with the execution and delivery of the
Recapitalization Agreement.
AGREEMENT
For good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties hereby agree as follows:
Section 1. DEFINED TERMS. Capitalized words used in this Agreement as
defined terms shall have the meanings given to them in the Recapitalization
Agreement, unless otherwise defined herein.
Section 2. STANDSTILL.
(a) The Stockholders agree, solely in their capacity as stockholders of
the Company, that for a period of 90 days subject to SECTION 4, the
Stockholders shall not sell or otherwise dispose of or exchange the Shares
for another class of securities except pursuant to a Superior Proposal,
solicit or enter into discussions with anyone else regarding an offer to
purchase or acquire their Shares (or enter into any agreement in advance to
sell or exchange their Shares if such an offer is made), or vote their
Shares in favor of a merger, consolidation, asset sale or similar
transaction relating to the Company, or provide information or take any
other action or make any statement that would reasonably be expected to
adversely affect the transactions contemplated by the Recapitalization
Agreement. The Stockholders will promptly advise Meridian of any proposals
or discussions known to the Stockholders regarding any Acquisition Proposal
or any attempt to acquire any of their Shares.
(b) It is understood and agreed that the undertaking of the Stockholders
in SECTION 2(a) applies to the Stockholders solely in their capacity as
stockholders of the Company and shall not apply to actions, judgments, or
decisions of Mr. Leven in his capacity as a director or officer of the
Company as may be necessary to discharge his fiduciary duties as a director
of the Company.
Section 3. VOTING OF SHARES.
At any meeting of stockholders of the Company called for this purpose, the
Stockholders shall vote their Shares and any other shares of Common Stock of the
Company as to which the Stockholders or either of them have the power to vote,
in person or by proxy, in favor of any resolution authorizing the issuance of
the Preferred Stock and the Class A Common Stock issuable upon conversion of the
B Preferred, the Charter Amendments, and any other matter necessary or advisable
in order to consummate the transactions contemplated by the Recapitalization
Agreement.
Section 4. TERMINATION
The undertakings of the Stockholders in SECTION 2(a) AND SECTION 3 shall
terminate if: (a) the Company's financial adviser advises the board of directors
of the Company or its special committee that it will be unable to render an
opinion, within five days after the date hereof and prior to the Offer, to the
<PAGE>
effect that the transactions contemplated by the Recapitalization Agreement are
fair to stockholders of the Company from a financial point of view, unless the
failure to do so results from the failure of the financial adviser to act in
good faith; or (b) the Offer is terminated or withdrawn pursuant to
SECTION 5.3(c) of the Recapitalization Agreement or the Recapitalization
Agreement is earlier terminated in accordance with SECTION 8.4 thereof.
Section 5. AGREEMENT REGARDING TENDER OFFER
The Stockholders shall not tender for purchase pursuant to the Offer more of
their Shares than will result in more than fifty percent (50%) of their Shares
being acquired by the Company pursuant to the Offer. If Shares tendered by the
Stockholders are subject to prorationing in the Offer, the Stockholders will
request that the Company purchase the Stockholders' Class A Common Stock before
purchasing any Class B Common Stock.
Section 6. AMENDMENT AND WAIVER. Except as otherwise provided herein, no
modification, amendment or waiver of any provision of this Agreement shall be
effective against Meridian or the Stockholders unless such modification,
amendment or waiver is approved in writing signed by the party to be bound. The
failure of any party to enforce any of the provisions of this Agreement shall in
no way be construed as a waiver of such provisions and shall not affect the
right of such party thereafter to enforce each and every provision of this
Agreement in accordance with its terms.
Section 7. SEVERABILITY. Whenever possible, each provision of this
Agreement shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be invalid,
illegal or unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability shall not affect
any other provision or any other jurisdiction, but this Agreement shall be
reformed, construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provision had never been contained herein.
Section 8. ENTIRE AGREEMENT. Except as otherwise expressly set forth
herein, this document, together with all other agreements to be executed and
delivered by Mr. Leven in connection with the transactions contemplated by the
Recapitalization Agreement, embodies the complete agreement and understanding
among the parties hereto with respect to the subject matter hereof and
supersedes and preempts any prior understandings, agreements or representations
by or among the parties, written or oral, which may have related to the subject
matter hereof in any way.
Section 9. SUCCESSORS AND ASSIGNS. Except as otherwise provided herein,
this Agreement shall bind and inure to the benefit of and be enforceable by
Meridian and the Stockholders and any subsequent holders of the Shares and the
respective successors and assigns of each of them, except that this Agreement
may not be assigned without the prior written consent of the Company, which is
an intended third party beneficiary of this provision.
Section 10. DESCRIPTIVE HEADINGS. The descriptive headings of this
Agreement are inserted for convenience only and do not constitute a part of this
Agreement.
Section 11. REMEDIES. Meridian shall be entitled to enforce its rights
under this Agreement specifically to recover damages by reason of any breach of
any provision of this Agreement and to exercise all other rights existing in its
favor. The parties hereto agree and acknowledge that money damages may not be an
adequate remedy for any breach of the provisions of this Agreement and that
Meridian may in its sole discretion apply to any court of law or equity of
competent jurisdiction for specific performance and/or injunctive relief
(without posting a bond or other security) in order to enforce or prevent any
violation of the provisions of this Agreement.
Section 12. NOTICES. Any notice provided for in this Agreement shall be in
writing and shall be either personally delivered, or mailed first class mail
(postage prepaid) or sent by reputable overnight courier service (charges
prepaid) to any other recipient at the address indicated on the signature pages
F-2
<PAGE>
hereof, or at such address or to the attention of such other Person as the
recipient party has specified by prior written notice to the sending party.
Notices will be deemed to have been given hereunder when delivered personally,
three days after deposit in the U.S. mail and one day after deposit with a
reputable overnight courier service.
Section 13. GOVERNING LAW. All questions concerning the construction,
validity and interpretation of this Agreement shall be governed by the internal
law, and not the law of conflicts, of Delaware.
Section 14. COUNTERPARTS. This Agreement may be executed in separate
counterparts each of which shall be an original and all of which taken together
shall constitute one and the same agreement.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK;
SIGNATURE PAGE FOLLOWS.]
F-3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
day and year first written above.
MERIDIAN ASSOCIATES, L.P.
By: Meridian Investments, Inc.
By: /s/ H.S. Handelsman
-----------------------------------
Name: H.S. Handelsman
--------------------------------------------------------------------------------
Its: Vice President
-----------------------------------
220 West Madison, Suite 3800
Chicago, Illinois 60606
Attention: Harold S. Handlesman
/s/ Michael A. Leven
--------------------------------------
Michael A. Leven
--------------------------------------
ANDREA E. LEVEN
F-4
<PAGE>
APPENDIX G
FORM OF
STOCKHOLDERS AGREEMENT
THIS STOCKHOLDERS AGREEMENT (the "AGREEMENT") is made as of June , 2000,
by and among Meridian Associates, L.P., an Illinois limited partnership
("MERIDIAN"), SDI, Inc., a Nevada corporation ("SDI, INC" together with its
permitted assignees, collectively, the "INVESTORS"), HSA Properties, Inc., a
Delaware corporation ("HSA PROPERTIES", together with the Investors and
Meridian, collectively, the "INVESTOR GROUP"), and Michael A. Leven, Andrea
Leven, Jonathan Leven, Robert Leven, and Adam Leven (collectively, the "LEVEN
STOCKHOLDERS"), and Steven Romaniello (the "ROMANIELLO"). The Investor Group,
the Leven Stockholders and Romaniello are collectively referred to as the
"STOCKHOLDERS" and individually as a "STOCKHOLDER."
RECITALS
The Leven Stockholders are holders of Common Stock of U.S. Franchise
Systems, Inc., a Delaware corporation (the "COMPANY"). Romaniello is or may
become a holder of Common Stock of the Company. Meridian is a holder of Common
Stock of the Company, and the Investors have agreed to purchase shares of the
Company's Series A 8.5% Cumulative Redeemable Preferred Stock and Series B 6.0%
Cumulative Redeemable Convertible/Exchangeable Preferred Stock on the terms and
subject to the conditions of a Recapitalization Agreement among the Investor
Group and the Company dated as of June , 2000 (the "RECAPITALIZATION
AGREEMENT").
The Company and some of the Stockholders are parties to a Stockholders'
Agreement dated March 12, 1998 as amended March 10, 1999 (the "HSA STOCKHOLDERS
AGREEMENT"), providing, among other things, for restrictions on transfers of
Common Stock held by them. By separate agreement, the parties to the HSA
Stockholders Agreement have agreed to terminate the HSA Stockholders Agreement
effective on the Closing Date under the Recapitalization Agreement (the
"EFFECTIVE DATE").
The Stockholders desire to enter into this Agreement for the purposes, among
others, of (i)assuring continuity in the management and ownership of the
Company, and (ii)limiting the manner and terms by which the Stockholders'
Preferred Stock and Common Stock may be transferred.
AGREEMENT
For good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties to this Agreement hereby agree as follows:
1. DEFINED TERMS. Capitalized terms used herein as defined terms and not
otherwise defined shall have them meanings given to them below:
"AFFILIATE" with respect to any Person, means any other Person, entity or
investment fund controlling, controlled by or under common control with such
Person and any partner of such Person which is a partnership. "AFFILIATE" with
respect to the Investor Group, means, in addition to the foregoing, any and all
of the lineal descendants of Nicholas J. Pritzker, deceased, any and all trusts
for their benefit or for the benefit of any of their spouses, and any Person
owned or controlled by such lineal descendants or trusts.
"BROKERS TRANSACTION" has the meaning provided in Section 4(4) of the
Securities Act of 1933.
"CERTIFICATE OF INCORPORATION" means the certificate of incorporation of the
Company, as amended, supplemented or restated from time to time.
"COMMON STOCK"means the Common Stock of the Company, $.01 par value.
"CURRENT MARKET PRICE" of any security means the average of the closing
prices of such security's sales on all securities exchanges on which such
security may at the time be listed, or, if there has been no sales on any such
exchange on any day, the average of the highest bid and lowest asked prices on
all such exchanges at the end of such day, or, if on any day such security is
not so listed, the average of the
<PAGE>
representative bid and asked prices quoted in the NASDAQ Stock Market as of
4:00 p.m., New York time, or, if on any day such security is not quoted in the
NASDAQ Stock Market, the average of the highest bid and lowest asked prices on
such day in the domestic over-the-counter market as reported by the National
Quotation Bureau, Incorporated, or any similar successor organization, on the
day as of which "CURRENT MARKET PRICE" is being determined.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
"FAMILY GROUP" with respect to any person, means such person's spouse and
descendants (whether natural or adopted) and any trust solely for the benefit of
such person and/or the person's spouse and/or descendants.
"INDEPENDENT THIRD PARTY" means any Person who, immediately prior to the
contemplated transaction, does not own in excess of 5% of the Company's Common
Stock and Underlying Common Stock on a fully-diluted basis (a "5% OWNER"), who
is not an Affiliate with any such 5% Owner and who is not in the Family Group of
any such 5% Owner or a trust for the benefit of such 5% Owner and/or such other
Persons.
"ORIGINAL SHARES" with respect to any Person or group means the Shares held
by such Person or group as of the Effective Date and Shares acquired after the
Effective Date pursuant to the exercise of options or conversion/exchange
rights.
"PERSON" means an individual, a partnership, a limited liability company, a
corporation, an association, a joint stock company, a trust, a joint venture, an
unincorporated organization and a governmental entity or any department, agency
or political subdivision thereof.
"PREFERRED STOCK" shall mean the Series B 6.0% Cumulative Redeemable
Convertible/Exchangeable Preferred Stock of the Company acquired by the Investor
Group pursuant to the Recapitalization Agreement.
"SHARES" means (i) any Common Stock held, purchased or otherwise acquired by
any Stockholder, (ii) any Preferred Stock purchased or otherwise acquired by any
Stockholder, (iii)any warrants purchased or otherwise acquired by any
Stockholder, (iv)any equity securities issued or issuable directly or indirectly
with respect to the Common Stock referred to in clause(i) above or the Preferred
Stock referred to in clause (ii) above (including the Underlying Common Stock)
by way of stock dividend or stock split or in connection with a combination of
shares, recapitalization, merger, consolidation or other reorganization, and
(v)any other shares of any class or series of capital stock of the Company held
by a Stockholder.
"UNDERLYING COMMON STOCK" shall mean (i) the Common Stock issued or issuable
upon conversion of the Preferred Stock and (ii) any equity securities issued or
issuable with respect to the securities referred to in clause (i) above by way
of stock dividend or stock split or in connection with a combination of shares,
recapitalization, merger, consolidation or other reorganization. Any person who
holds Preferred Stock will be deemed to be the holder of the Underlying Common
Stock obtainable upon conversation of such Preferred Stock and regardless of any
restriction on the exercise of the conversion of such Preferred Stock for
purposes of this Agreement.
2. RESTRICTIONS ON TRANSFER OF SHARES.
(a) TRANSFER OF SHARES. From and after the Effective Date, no
Stockholder shall sell, transfer, assign, pledge or otherwise dispose
(whether voluntarily or involuntarily, by operation of law or otherwise a
"TRANSFER") of any interest in any Shares, whether now owned or hereafter
acquired, in violation of the provisions of this Agreement. Each Stockholder
agrees not to consummate any Transfer subject to this Agreement until 20
days after the later of the delivery to the other Stockholders of such
Stockholder's Offer Notice or Sale Notice (if required by this Agreement),
unless the parties to the Transfer have been finally determined pursuant to
this SECTION 2 prior to the expiration of such 20 day period (the "ELECTION
PERIOD").
G-2
<PAGE>
(b) FIRST OFFER RIGHT. At least 20 days prior to making any Transfer of
any Shares, other than a Transfer of Shares held by the Investor Group, the
Stockholder intending to make such transfer (the "TRANSFERRING STOCKHOLDER")
shall deliver a written notice (the "OFFER NOTICE") to the other
Stockholders (the "OTHER STOCKHOLDERS"). The Offer Notice shall disclose in
reasonable detail the proposed number of Shares to be transferred, the
identity of the proposed transferee, and the proposed terms and conditions
of the Transfer and shall be accompanied by a bona fide offer to purchase
such Shares on such terms and conditions from an Independent Third Party or
other Person not an Affiliate of the Transferring Stockholder. Each Other
Stockholder may elect to purchase all (but not less than all) of its, his or
her Pro Rata Share (as defined below) of the Shares specified in the Offer
Notice at the price and on the terms specified therein by delivering written
notice of such election to the Transferring Stockholder as soon as practical
but in any event within 10 days after delivery of the Offer Notice. Any
Shares not elected to be purchased by the end of such 10 day period shall be
reoffered for the 10 day period prior to the expiration of the Election
Period by the Transferring Stockholder on a pro rata basis to the Other
Stockholders who have elected to purchase their Pro Rata Share. If any Other
Stockholders have elected to purchase Shares from the Transferring
Stockholder, the transfer of such Shares shall be consummated as soon as
practical after the delivery of the election notices, but in any event
within 10 days after the expiration of the Election Period. To the extent
that the Other Stockholders have not elected to purchase all of the Shares
being offered, the Transferring Stockholder may, within 30 days after the
expiration of the Election Period, transfer such Shares to the proposed
transferee named in the Offer Notice for the price per Share specified in
the Offer Notice and on the other terms and conditions stated in the Offer
Notice. The purchase price specified in any Offer Notice shall be payable
solely in cash at the closing of the transaction. Each Stockholder's "PRO
RATA SHARE" shall be based upon such Stockholder's proportionate ownership
of all Shares on a fully-diluted basis.
(c) PERMITTED TRANSFERS. The restrictions and rights contained in this
SECTION 2 shall not apply with respect to any Transfer of Shares:
(i) by a Leven Stockholder or Romaniello pursuant to applicable laws
of descent and distribution or among such Stockholder's Family Group;
provided, however, that the restrictions contained in this SECTION 2
shall continue to be applicable to the Shares after any such Transfer;
and provided, further, that the transferees of such Shares shall have
agreed in writing to be bound by the provisions of this Agreement
affecting the Shares so transferred;
(ii) by Michael and/or Andrea Leven in Brokers Transactions, after
notice to the Investor Group, at any time and from time to time after the
second anniversary of the Effective Date; provided that Michael and/or
Andrea Leven shall not be permitted to Transfer, in the aggregate, more
than one-third of their Original Shares before the third anniversary of
the Effective Date or more than two-thirds of their Original Shares
before the fourth anniversary of the Effective Date;
(iii) by a Leven Stockholder (other than Michael and Andrea Leven) in
Brokers Transactions at any time and from time to time after notice to
the Investor Group;
(iv) by Romaniello in Brokers Transactions, after notice to the
Investor Group, at any time and from time to time after the fourth
anniversary of the Effective Date; provided that Romaniello shall not be
permitted to Transfer, in the aggregate, more than one-third of his
Original Shares before the fifth anniversary of the Effective Date or
more than two-thirds of his Original Shares before the sixth anniversary
of the Effective Date; and
(v) by any Stockholder to the Company.
3. TAG-ALONG RIGHTS. In the event that the Investor Group proposes to
Transfer, in one or a series of related transactions, more than 20% of their
Original Shares to an Independent Third Party and not involving a "BROKERS
TRANSACTION" within the meaning of Rule 144 under the Securities Act of 1933,
they shall deliver a written notice (the "SALE NOTICE") to the Other
Stockholders, specifying in reasonable detail
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<PAGE>
the identity of the prospective transferee(s) and the terms and conditions of
the Transfer. The Other Stockholders may elect to participate in the
contemplated Transfer with respect to any Shares they then hold by delivering
written notice to the Investor Group within 10 days after delivery of the Sale
Notice. If any Other Stockholders have elected to participate in such Transfer,
the Investor Group and such Other Stockholders shall be entitled to sell in the
contemplated Transfer, at the same price and on the same terms, a number of
Shares equal to the product of (a)the quotient determined by dividing the
percentage of Shares owned by such person by the aggregate percentage of Shares
owned by Investor Group and the Other Stockholders participating in such sale
and (b)the number of Shares to be sold in the contemplated Transfer. The
Investor Group shall use its best efforts to obtain the agreement of the
prospective transferee(s) to the participation of the Other Stockholders in the
contemplated Transfer, and the Investor Group shall not transfer any of their
Shares to the prospective transferee(s) if the prospective transferee(s)
declines to allow the participation of the Other Stockholders. If any portion of
the Preferred Stock is included in any Transfer of Shares under this SECTION 3,
the Transfer of such Preferred Stock shall be treated as a transfer of the
Underlying Common Stock, and the purchase price for each share of Preferred
Stock shall be equal to the full purchase price determined hereunder for the
underlying Common Stock issuable upon conversion of the Preferred Stock to be
transferred less any price payable by the holder of the Preferred Stock in
connection with such conversion/exchange.
4. CO-SALE RIGHTS. In the event that the Investor Group proposes to
Transfer more than 50% of their Shares to an Independent Third Party, they may
deliver a written notice (the "CO-SALE NOTICE") to the Other Stockholders, not
less than 10 days prior to the date of such Transfer, specifying in reasonable
detail the identity of the prospective transferee(s) and the terms and
conditions of the proposed transfer and directing that the Stockholders shall
participate in such proposed Transfer. If the Investor Group gives the Co-Sale
Notice, each Stockholder shall participate in such Transfer and sell, at the
same price and on the same terms, a number of Shares equal to the product of
(a) the quotient determined by dividing the number of Shares owned by each
Stockholder by the aggregate number of Shares owned by all Stockholders and
(b) the number of Shares to be acquired by the proposed transferee. If any
portion of the Preferred Stock is included in any Transfer of Shares under this
SECTION 4, the Transfer of such Preferred Stock shall be treated as a transfer
of the Underlying Common Stock, and the purchase price for each share of
Preferred Stock shall be equal to the full purchase price determined hereunder
for the underlying Common Stock issuable upon conversion of the Preferred Stock
to be transferred less any price payable by the holder of the Preferred Stock in
connection with such conversion/exchange.
5. PLEDGE OF SHARES. From and after the Effective Date, no Shares may be
pledged without the prior written consent of the Investor Group which consent
may be withheld in their sole discretion.
6. TERMINATION OF RESTRICTIONS. The restrictions and rights set forth in
SECTION 2 shall continue with respect to each Share until the earlier of
(a) the date on which such Share has been transferred pursuant to SECTION 2
(other than SECTION 2(C)) or (B) the seventh anniversary of the Effective Date.
The restrictions and rights set forth in SECTION 2 shall terminate with respect
to the Shares held by the Leven Stockholders upon the termination of Michael
Leven's employment with the Company by reason of his death or disability or
under circumstances constituting termination by the Company without "cause" (as
defined in the applicable employment agreement) or termination by Mr. Leven for
"good reason" (as defined in the applicable employment agreement). The
restrictions and rights set forth in SECTION 2 shall terminate with respect to
the Shares held by Romaniello upon the termination of Romaniello's employment
with the Company by reason of his death or disability or under circumstances
constituting termination by the Company without "cause" (as defined in the
applicable employment agreement) or termination by Romaniello for "good reason"
(as defined in the applicable employment agreement). The restrictions and rights
set forth in SECTIONS 3, 4, and 5 shall terminate on the earlier of (i) the
seventh anniversary of the Effective Date and (ii) the date upon which the
Investor Group no longer holds 50% of their Original Shares.
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<PAGE>
7. ELECTION OF DIRECTORS.
(a) VOTING FOR DIRECTORS. On or as promptly as practicable after the
Effective Date, each of the Stockholders shall take all such lawful action,
including affirmatively voting the Shares owned by such Stockholder, as
necessary to cause the Company's Board of Directors to consist of eleven
persons and as necessary to remove incumbent directors so as to enable the
election of new directors as contemplated by this SECTION 7(A). Subject to
the provisions of SECTION 7(B) hereof, each of the Stockholders shall vote
all of the Shares owned or controlled by such Stockholder (i) at each annual
or special meeting of the Company's stockholders called for the purpose of
electing directors or (ii) by written consent (in lieu of a meeting) of the
Company's stockholders for the purpose of electing directors, in favor of
the following:
(A) the election to the Board of Directors of the six nominees
designated from time to time by the Investor Group, two of whom shall be
persons who are not directors, officers, employees, agents, or other
representatives of the Investor Group or any Affiliate of the Investor
Group; and
(B) election to the Board of Directors of Michael A. Leven as long as
Michael A. Leven is employed by the Company and thereafter as long as he
and his Family Group and his Affiliates, collectively, hold Shares or
options to acquire Shares representing in excess of 3% of the voting
power represented by the Common Stock of the Company outstanding,
calculated on a fully diluted basis;
(C) election to the Board of Directors of Romaniello as long as
Romaniello is employed by the Company; and
(D) election to the Board of Directors of at least three persons who
are designated or otherwise nominated in accordance with SECTION 12.1 of
the Certificate of Incorporation.
(b) REMOVAL; VACANCIES. Any director who is elected to the Board of
Directors of the Company pursuant to a designation under cfiSection
7(a) hereof (other than clause (D) of SECTION 7(A)) may be removed from the
Board of Directors with or without cause upon the request of the Stockholder
who designated such director and the Stockholder shall promptly take all
such lawful action as necessary to call or convene a special meeting of the
Company's stockholders as soon as reasonably practical and to affirmatively
vote their Shares at such meeting, or to execute a written consent of
stockholders in lieu of a meeting to give effect to such requested removal.
In the event that a director so elected resigns, is removed from office, or
otherwise ceases to serve on the Board of Directors of the Company, for any
reason, the vacancy shall be filled with an individual designated in
accordance with SECTION 7(A) hereof by the Stockholder who originally
designated such director (in the case of directors designated under clauses
(A), (B) or (C) of SECTION 7(A)) and by the remaining directors (in the case
of directors designated under clause (D) of SECTION 7(A)), and the
Stockholders shall promptly take all such lawful action as necessary to call
or convene a special meeting of the Company's stockholders as soon as
reasonably practical and to affirmatively vote their Shares at such meeting,
or to execute a written consent of stockholders in lieu of a meeting, to
elect such individual to the Board of Directors.
8. LEGEND. Each certificate evidencing Shares and each certificate issued
in exchange for or upon the transfer of any Shares (if such shares remain
subject to this Agreement after such transfer) shall be stamped or otherwise
imprinted with a legend in substantially the following form:
"The securities represented by this certificate are
subject to a Stockholders Agreement dated as of June ,
2000, among U.S. Franchise Systems, Inc. and certain of
its stockholders. A copy of such Stockholders Agreement is
on file at the principal offices of the Corporation."
The Company shall imprint such legend on certificates evidencing Shares
outstanding as of the Effective Date. The legend set forth above shall be
removed from the certificates evidencing any Shares that are no longer subject
to this Agreement by reason of a Transfer permitted by SECTION 2 hereof.
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9. TRANSFERS IN VIOLATION OF AGREEMENT. Any Transfer or attempted Transfer
of any Shares in violation of any provision of this Agreement shall be void, and
the Company shall not be required to record such Transfer on its books or treat
any purported transferee of such Shares as the owner of such shares for any
purpose.
10. AMENDMENT AND WAIVER. Except as otherwise provided herein, any
provision of this Agreement may be amended, modified, or waived if such
modification, amendment or waiver is approved in writing by the holders of at
least 90% of the Shares and Underlying Common Stock; provided that no such
covenant shall materially and adversely affect the right of any Stockholder who
did not consent thereto. The failure of any party to enforce any of the
provisions of this Agreement shall in no way be construed as a waiver of such
provisions and shall not affect the right of such party thereafter to enforce
each and every provision of this Agreement in accordance with its terms.
11. SEVERABILITY. Whenever possible, each provision of this Agreement shall
be interpreted in such manner as to be effective and valid under applicable law,
but if any provision of this Agreement is held to be invalid, illegal or
unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability shall not affect
any other provision or any other jurisdiction, but this Agreement shall be
reformed, construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provision had never been contained herein.
12. ENTIRE AGREEMENT. Except as otherwise expressly set forth herein, this
document embodies the complete agreement and understanding among the parties
hereto with respect to the subject matter hereof and supersedes and preempts any
prior understandings, agreements or representations by or among the parties,
written or oral, which may have related to the subject matter hereof in any way.
13. SUCCESSORS AND ASSIGNS. Except as otherwise provided herein, this
Agreement shall bind and inure to the benefit of and be enforceable by the
Stockholders and any subsequent holders of Shares and the respective successors
and assigns of each of them, so long as they hold Shares.
14. DESCRIPTIVE HEADINGS. The descriptive headings of this Agreement are
inserted for convenience only and do not constitute a part of this Agreement.
15. REMEDIES. The Stockholders shall be entitled to enforce their rights
under this Agreement specifically to recover damages by reason of any breach of
any provision of this Agreement and to exercise all other rights existing in
their favor. The parties hereto agree and acknowledge that money damages may not
be an adequate remedy for any breach of the provisions of this Agreement and
that any Stockholder may in his, her or its sole discretion apply to any court
of law or equity of competent jurisdiction for specific performance and/or
injunctive relief (without posting a bond or other security) in order to enforce
or prevent any violation of the provisions of this Agreement.
16. NOTICES. Any notice provided for in this Agreement shall be in writing
and shall be either personally delivered, or mailed first class mail (postage
prepaid) or sent by reputable overnight courier service (charges prepaid) to any
other recipient at the address indicated on the Schedules hereto and to any
subsequent holder of Shares subject to this Agreement at such address as
indicated by the Company's records, or at such address or to the attention of
such other person as the recipient party has specified by prior written notice
to the sending party. Notices will be deemed to have been given hereunder when
delivered personally, three days after deposit in the U.S. mail and one day
after deposit with a reputable overnight courier service.
17. GOVERNING LAW. All questions concerning the construction, validity and
interpretation of this Agreement shall be governed by the internal law, and not
the law of conflicts, of Delaware.
18. COUNTERPARTS. This Agreement may be executed in separate counterparts
each of which shall be an original and all of which taken together shall
constitute one and the same agreement.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
day and year first written above.
<TABLE>
<S> <C> <C>
INVESTOR GROUP: MERIDIAN ASSOCIATES, L.P.
By: Meridian Investments, Inc.
Its General Partner
By:
-----------------------------------------
Name:
-----------------------------------------
Its:
-----------------------------------------
SDI, INC.
By:
-----------------------------------------
Name:
-----------------------------------------
Its:
-----------------------------------------
HSA PROPERTIES INC.
By:
-----------------------------------------
Name:
-----------------------------------------
Its:
-----------------------------------------
200 West Madison, Suite 3800
Chicago, Illinois 60606
Attention: Harold S. Handelsman
LEVEN STOCKHOLDERS:
-----------------------------------------------
Michael A. Leven
-----------------------------------------------
Andrea E. Leven
-----------------------------------------------
Jonathan Leven
-----------------------------------------------
Robert Leven
-----------------------------------------------
Adam Leven
ROMANIELLO:
-----------------------------------------------
Steven Romaniello
</TABLE>
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APPENDIX H
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (this "AGREEMENT") is made as of June 2,
2000, by and among U.S. FRANCHISE SYSTEMS, INC., a Delaware corporation (the
"CORPORATION"), SDI INC., a Nevada corporation ("SDI", together with its
permitted assignees, collectively, the "INVESTORS"), MERIDIAN ASSOCIATES, L.P.,
an Illinois limited partnership ("MERIDIAN"), HSA PROPERTIES, INC., a Delaware
corporation ("HSA PROPERTIES", and together with Meridian and the Investors,
collectively, the "SECURITYHOLDERS"), and NEAL K. ARONSON ("ARONSON").
RECITALS
A. Currently, (i) Aronson beneficially owns shares of Common Stock of the
Corporation ("ARONSON SHARES"), and (ii) HSA Properties and Meridian own shares
of Class A Common Stock of the Corporation (the "HSA/MERIDIAN SHARES").
B. The Investors have agreed to purchase shares of the Corporation's
Series A 8.5% Cumulative Redeemable Preferred Stock and Series B 6.0% Cumulative
Redeemable Convertible/Exchangeable Preferred Stock (collectively, the "INVESTOR
SHARES", together with the HSA/Meridian Shares, collectively, the
"SECURITYHOLDER SHARES") pursuant to that certain Recapitalization Agreement of
even date herewith among the Corporation and the Securityholders (the
"RECAPITALIZATION AGREEMENT").
C. The Corporation deems it desirable to grant registration rights to
(i) Aronson in connection with the Aronson Shares, and (ii) HSA Properties and
Meridian in connection with the HSA/Meridian Shares.
D. The Corporation deems it desirable to enter into this Agreement in order
to induce the Investors to purchase the Investor Shares pursuant to the
Recapitalization Agreement.
AGREEMENTS
In consideration of the premises and the mutual covenants herein contained
and other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties hereto hereby agree as follows:
1. DEFINITIONS. As used in this Agreement.
"Commission" means the Securities and Exchange Commission.
"Common Stock" means shares of the Corporation's Class A and Class B Common
Stock, each with par value $.01.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"IPO" means the Corporation's first underwritten public offering of shares
of Common Stock pursuant to a registration statement filed with the Commission.
"Public Offering" means any offering by the Corporation of its equity
securities to the public pursuant to an effective registration statement under
the Securities Act or any comparable statement under any comparable federal
statute then in effect.
"Registrable Shares" means at any time (i) any shares of Common Stock then
outstanding which were issued upon conversion of the Investor Shares; (ii) any
shares of Common Stock then issuable upon conversion of the outstanding Investor
Shares; (iii) any shares of Common Stock then outstanding which were issued as,
or were issued directly or indirectly upon the conversion or exercise of other
securities issued as, a dividend or other distribution with respect or in
replacement of any shares referred to in (i) and (ii); (iv) any shares of Common
Stock then issuable directly or indirectly upon the conversion or exercise of
other securities which were issued as a dividend or other distribution with
respect to or in
<PAGE>
replacement of any shares referred to in (i) and (ii); (v) the Aronson Shares,
and (vi) the HSA/Meridian Shares.
"Securities Act" means the Securities Act of 1933, as amended.
2. DEMAND REGISTRATION.
2.1 REQUESTS FOR REGISTRATION.
(i) Subject to the terms of this Agreement, the holders of more than 50% of
the then outstanding Securityholder Shares may, at any time, request
registration under the Securities Act of all or part of their
Registrable Shares on Form S-1 or any similar long-form registration or,
if available, on Form S-2 or S-3 or any similar short-form registration
(a "DEMAND REGISTRATION"). Such request shall specify the number of
their Registrable Shares requested to be registered. Within 30 days
after receipt of any written request pursuant to this SECTION 2.1, the
Corporation will give written notice of such request to all other
holders of Registrable Shares and, subject to SECTION 2.3 below, will
include in such registration all Registrable Shares with respect to
which the Corporation has received written requests for inclusion within
30 days after delivery of the Corporation's notice.
(ii) The holders of the Securityholder Shares will be entitled to request
three Demand Registrations and the Corporation will pay all
Registration Expenses (as defined in SECTION 6 below) associated
therewith. The aggregate offering value of the Registrable Shares
requested to be registered in any Demand Registration must, in the good
faith judgment of the holders thereof, equal at least $5,000,000. A
registration will not constitute one of the permitted Demand
Registrations until it has become effective (unless such Demand
Registration has not become effective due solely to the fault of the
holders requesting such registration and such holders have not
reimbursed the Corporation for the reasonable expenses associated with
such registration), the first Demand Registration will not constitute
one of the permitted Demand Registrations unless the holders of the
Registrable Shares are able to register and, if such registration is an
underwritten registration, sell, at least 80% of the Registrable Shares
requested to be included in such registration, and the second Demand
Registration will not constitute one of the permitted Demand
Registrations unless the holders of the Registrable Shares are able to
register and sell at least 80% of the Registrable Shares requested to
be included in such registration.
2.2 RESTRICTIONS. The Corporation shall not be obligated to effect more
than one Demand Registration in any twelve-month period, and the Corporation
shall not be obligated to effect any Demand Registration within 60 days after
the effective date of a previous offering of Common Stock registered under the
Securities Act. The Corporation may postpone for up to 180 days the filing or
the effectiveness of a registration statement for a Demand Registration if the
Corporation's board of directors determines in its reasonable good faith
judgment that such Demand Registration would reasonably be expected to have a
material adverse effect on any proposal or plan by the Corporation or any of its
subsidiaries to engage in any acquisition (other than in the ordinary course of
business) or any merger, consolidation, tender offer, reorganization or similar
transaction; provided that (a) the Corporation may exercise its right to delay a
Demand Registration only once in any twelve-month period and (b) if a Demand
Registration is delayed hereunder, the holders of Registrable Shares initially
requesting such Demand Registration shall be entitled to withdraw such request
and, if such request is withdrawn, such Demand Registration shall not count as
one of the permitted Demand Registrations hereunder and the Corporation shall
pay all Registration Expenses in connection with such registration.
Notwithstanding anything to the contrary in SECTION 2.1 (iii), (x) the
Corporation may not prevent, delay or postpone any Demand Registration and
(y) the Securityholders shall not be subject to any lockup or similar agreements
following any Demand Registration for more than 270 days during any 360-day
period.
2.3 PRIORITY. If both the Registrable Shares held by the Securityholders
and the Aronson Shares are requested to be included in a Demand Registration
which is an underwritten offering and the managing
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<PAGE>
underwriters advise the Corporation in writing that in their opinion the number
of securities requested to be included exceeds the number of Registrable Shares
which can be sold in such offering, the Corporation will include in such
registration, FIRST, the Regisrable Shares held by the Securityholders requested
to be included in such Demand Registration, pro rata among the holders of such
Registrable Shares on the basis of the number of shares which are owned by such
Securityholders, and SECOND, the Aronson Shares requested to be included in such
Demand Registration.
2.4 SELECTION OF UNDERWRITERS. The holders of more than 50% of the
Registrable Shares included in any Demand Registration shall have the right to
select the investment banker(s) and manager(s) to administer the offering,
subject to the Corporation's approval which will not be unreasonably withheld.
3. PIGGYBACK REGISTRATION.
3.1 RIGHT TO PIGGYBACK. Whenever the Corporation proposes to register,
either for its own account or the account of a security holder or holders, any
of its securities under the Securities Act (other than pursuant to a Demand
Registration hereunder and other than pursuant to a registration statement on
Form S-8 or Form S-4, or their successors) and the registration form to be used
may be used for the registration of any Registrable Shares (a "PIGGYBACK
REGISTRATION"), the Corporation will give prompt written notice to all holders
of the Registrable Shares of its intention to effect such a registration and
will include in such registration all Registrable Shares (in accordance with the
priorities set forth in SECTIONS 3.2 below) with respect to which the
Corporation has received written requests for inclusion within 20 days after the
delivery of the Corporation's notice.
3.2 PRIORITY ON PIGGYBACK REGISTRATIONS. If a Piggyback Registration is an
underwritten primary registration on behalf of the Corporation and the managing
underwriters advise the Corporation in writing that in their opinion the number
of securities requested to be included in such registration exceeds the number
which can be sold in such offering, the Corporation will include in such
registration FIRST, the securities that the Corporation proposes to sell,
SECOND, the Registrable Shares held by the Securityholders requested to be
included in such registration, and THIRD, the Aronson Shares requested to be
included in such registration.
3.3 RIGHT TO TERMINATE REGISTRATION. The Corporation shall have the right
to withdraw any registration initiated by it under this SECTION 3 prior to the
effectiveness of such registration whether or not any holder of its securities
has elected to include securities in such registration.
4. HOLDBACK AGREEMENTS.
4.1 HOLDERS' AGREEMENTS. Each holder of Registrable Shares agrees not to
effect any public sale or distribution of equity securities of the Corporation,
or any securities convertible into or exchangeable or exercisable for such
securities during the seven days prior to and during the 90 days following the
effective date of any underwritten Demand Registration or any underwritten
Piggyback Registration in which Registrable Shares are included (except as part
of such underwritten registration) unless the underwriters managing the
registered public offering otherwise agree.
4.2 CORPORATION'S AGREEMENTS. The Corporation agrees (i) not to effect any
public sale or distribution of its equity securities, or any securities
convertible into or exchangeable or exercisable for such securities during the
seven days prior to, and during the 90 days following, the effective date of any
underwritten Demand Registration or any underwritten Piggyback Registration
(except as part of such underwritten registration or pursuant to registrations
on Form S-8, Form S-4 or any successor forms) unless the underwriters managing
the registered public offering otherwise agree, and (ii) to use its reasonable
best efforts to cause each holder of at least 1% (on a fully diluted basis) of
its equity securities, or any securities convertible into or exchangeable or
exercisable for such securities to agree not to effect any public sale or
distribution of any such securities during such periods (except as part of such
underwritten registration, if otherwise permitted), unless the underwriters
managing the registered public offering otherwise agree.
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<PAGE>
5. REGISTRATION PROCEDURES. Whenever the holders of Registrable Shares
have requested that any Registrable Shares be registered pursuant to this
Agreement, the Corporation will use its reasonable best efforts to effect the
registration and sale of such Registrable Shares in accordance with the intended
method of disposition thereof and, pursuant thereto, the Corporation will as
expeditiously as possible:
5.1 Prepare and file with the Commission a registration statement with
respect to such Registrable Shares and use its reasonable best efforts to
cause such registration statement to become effective (provided that before
filing a registration statement or prospectus, or any amendments or
supplements thereto, the Corporation will furnish copies of all such
documents proposed to be filed to the counsel or counsels for the sellers of
the Registrable Shares covered by such registration statement);
5.2 Prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus(es) used in
connection therewith as may be necessary to keep such registration statement
effective for a period of not less than nine months and comply with the
provisions of the Securities Act with respect to the disposition of all
securities covered by such registration statement during such period in
accordance with the intended methods of disposition by the sellers thereof
set forth in such registration statement;
5.3 Furnish to each seller of Registrable Shares such number of copies
of such registration statement, each amendment and supplement thereto, the
prospectus(es) included in such registration statement (including each
preliminary prospectus) and such other documents as such seller may
reasonably request in order to facilitate the disposition of the Registrable
Shares owned by such seller;
5.4 Use its reasonable best efforts to register or qualify such
Registrable Shares under such other securities or blue sky laws of such
jurisdictions as any seller reasonably requests and do any and all other
acts and things which may be reasonably necessary or advisable to enable
such seller to consummate the disposition in such jurisdictions of the
Registrable Shares owned by such seller (provided that the Corporation will
not be required to (i) qualify generally to do business in any jurisdiction
where it would not otherwise be required to qualify but for this
subparagraph, (ii) subject itself to taxation in any such jurisdiction, or
(iii) consent to general service of process in any such jurisdiction);
5.5 Notify each seller of such Registrable Shares, at any time when a
prospectus relating thereto is required to be delivered under the Securities
Act, of the happening of any event as a result of which the prospectus
included in such registration statement contains an untrue statement of a
material fact or omits any fact necessary to make the statements therein not
misleading, and, at the request of any such seller, the Corporation will
prepare a supplement or amendment to such prospectus so that, as thereafter
delivered to the Securityholders of such Registrable Shares, such prospectus
will not contain any untrue statement of a material fact or omit to state
any fact necessary to make the statements therein not misleading;
5.6 Cause all such Registrable Shares to be listed on each securities
exchange on which similar securities issued by the Corporation are then
listed;
5.7 Provide a transfer agent and registrar for all such Registrable
Shares not later than the effective date of such registration statement;
5.8 Enter into such customary agreements (including underwriting
agreements in customary form) and take all such other actions as the holders
of a majority of the Registrable Shares being sold or the underwriters, if
any, reasonably request in order to expedite or facilitate the disposition
of such Registrable Shares;
5.9 Make available for inspection by any seller of Registrable Shares,
any underwriter participating in any disposition pursuant to such
registration statement, and any attorney, accountant or other agent retained
by any such seller or underwriter, all financial and other records,
pertinent
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<PAGE>
corporate documents and properties of the Corporation, and cause the
Corporation's officers, directors, employees and independent accountants to
supply all information reasonably requested by any such seller, underwriter,
attorney, accountant or agent in connection with such registration
statement;
5.10 Advise each seller of such Registrable Shares, promptly after it
shall receive notice or obtain knowledge thereof, of the issuance of any
stop order by the Commission suspending the effectiveness of such
registration statement or the initiation or threatening of any proceeding
for such purpose and promptly use all reasonable efforts to prevent the
issuance of any stop order or to obtain its withdrawal if such stop order
should be issued;
5.11 Unless shorter notice is necessary under the circumstances, at
least forty eight (48) hours prior to the filing of any registration
statement or prospectus, or any amendment or supplement to such registration
statement or prospectus, furnish a copy thereof to each seller of such
Registrable Shares and refrain from filing any such registration statement,
prospectus, amendment or supplement to which counsel selected by the holders
of a majority of the Registrable Shares being registered shall have
reasonably objected on the grounds that such document does not comply in all
material respects with the requirements of the Securities Act or the
rules and regulations thereunder, unless, in the case of an amendment or
supplement, in the opinion of counsel for the Corporation the filing of such
amendment or supplement is reasonably necessary to protect the Corporation
from any liabilities under any applicable federal or state law and such
filing will not violate applicable laws; and
5.12 At the request of any seller of such Registrable Shares in
connection with an underwritten offering, furnish on the date or dates
provided for in the underwriting agreement, an opinion of counsel, addressed
to the underwriters and, to the extent permissible under applicable
accounting rules, the sellers of Registrable Shares, covering such matters
as such underwriters and, sellers may reasonably request, including such
matters as are customarily furnished in connection with an underwritten
offering; and (ii) a letter or letters from the independent certified public
accountants of the Corporation addressed to the underwriters and the sellers
of Registrable Shares, covering such matters as such underwriters and
sellers may reasonably request, in which letter(s) such accountants shall
state, without limiting the generality of the foregoing, that they are
independent certified public accountants within the meaning of the
Securities Act and that in their opinion the financial statements and other
financial data of the Corporation included in the registration statement,
the prospectus(es), or any amendment or supplement thereto, comply in all
material respects with the applicable accounting requirements of the
Securities Act.
6. REGISTRATION EXPENSES.
6.1 CORPORATION'S EXPENSES. All expenses incident to the Corporation's
performance of or compliance with this Agreement, including without limitation
all registration and filing fees, fees and expenses of compliance with
securities or blue sky laws, printing expenses, messenger and delivery expenses,
and fees and disbursements of counsel for the Corporation and all independent
certified public accountants, underwriters (excluding discounts and commissions)
and other persons retained by the Corporation (all such expenses being herein
called "Registration Expenses"), will be borne by the Corporation.
6.2 HOLDER'S EXPENSES. Notwithstanding anything to the contrary contained
herein, each holder of Registrable Shares will pay all attorney fees and
disbursements for counsel they retain in connection with the registration of
Registrable Shares, except that the Corporation will reimburse the holders of
Registrable Shares for the reasonable fees and disbursements of one counsel
chosen by the holders of more than 50% of such Registrable Shares in connection
with a Demand Registration.
7. INDEMNIFICATION.
7.1 BY THE CORPORATION. The Corporation agrees to indemnify, to the extent
permitted by law, each holder of Registrable Shares, its managers, officers and
directors and each person who controls such
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<PAGE>
holder (within the meaning of the Securities Act) against all losses, claims,
damages, liabilities and expenses (including without limitation, attorney's
fees) caused by any untrue or alleged untrue statement of material fact
contained in any registration statement, prospectus or preliminary prospectus,
or any amendment thereof or supplement thereto, or any omission or alleged
omission of a material fact required to be stated therein or necessary to make
the statements therein not misleading, except insofar as the same are caused by
or contained in any information furnished in writing to the Corporation by such
holder expressly for use therein or by such holder's failure to deliver a copy
of the registration statement or prospectus or any amendments or supplements
thereto after the Corporation has furnished such holder with a sufficient number
of copies of the same. In connection with an underwritten offering, the
Corporation will indemnify such underwriters, their officers and directors and
each person who controls such underwriters (within the meaning of the Securities
Act) to the same extent as provided above with respect to the indemnification of
the holders of Registrable Shares. The payments required by this SECTION 7.1
will be made periodically during the course of the investigation or defense, as
and when bills are received or expenses incurred.
7.2 BY EACH HOLDER. In connection with any registration statement in which
a holder of Registrable Shares is participating, each such holder will furnish
to the Corporation in writing such information and affidavits as the Corporation
reasonably requests for use in connection with any such registration statement
or prospectus and, to the extent permitted by law, will indemnify the
Corporation, its directors and officers and each person who controls the
Corporation (within the meaning of the Securities Act) against any losses,
claims, damages, liabilities and expenses resulting from any untrue or alleged
untrue statement of material fact contained in the registration statement,
prospectus or preliminary prospectus, or any amendment thereof or supplement
thereto, or any omission or alleged omission of a material fact required to be
stated therein or necessary to make the statements therein not misleading, but
only to the extent that such untrue statement or omission is contained in any
information or affidavit so furnished in writing by such holder; provided that
the obligation to indemnify will be several, not joint and several, among such
holders of Registrable Shares and the liability of each such holder of
Registrable Shares will be in proportion to and limited to the net amount
received by such holder from the sale of Registrable Shares pursuant to such
registration statement.
7.3 PROCEDURE. Any person entitled to indemnification hereunder will
(i) give prompt written notice to the indemnifying party of any claim with
respect to which it seeks indemnification and (ii) unless in such indemnified
party's reasonable judgment a conflict of interest between such indemnified and
indemnifying parties may exist with respect to such claim, permit such
indemnifying party to assume the defense of such claim with counsel reasonably
satisfactory to the indemnified party. If such defense is assumed, the
indemnifying party will not be subject to any liability for any settlement made
by the indemnified party without its consent (but such consent will not be
unreasonably withheld). An indemnifying party who is not entitled to, or elects
not to, assume the defense of a claim will not be obligated to pay the fees and
expenses of more than one counsel for all parties indemnified by such
indemnifying party with respect to such claim, unless in the reasonable judgment
of any indemnified party a conflict of interest may exist between such
indemnified party and any other of such indemnified parties with respect to such
claim.
7.4 SURVIVAL. The indemnification provided for under this Agreement will
remain in full force and effect regardless of any investigation made by or on
behalf of the indemnified party or any officer, director or controlling person
of such indemnified party and will survive the transfer of securities. The
Corporation also agrees to make such provisions as are reasonably requested by
any indemnified party for contribution to such party in the event the
Corporation's indemnification is unavailable for any reason.
8. COMPLIANCE WITH RULE 144. In the event that the Corporation
(a) registers a class of securities under Section 12 of the Exchange Act,
(b) issues an offering circular meeting the requirements of Regulation A under
the Securities Act, or (c) commences to file reports under Section 13 or
15(d) of the Exchange Act, then at the request of any holder who proposes to
sell securities in compliance with Rule 144 of the Commission, the Corporation
will (i) forthwith furnish to such holder a written statement
H-6
<PAGE>
of compliance with the filing requirements of the Commission as set forth in
Rule 144, as such rule may be amended from time to time, and (ii) make available
to the public and such holders such information as will enable the holders to
make sales pursuant to Rule 144.
9. PARTICIPATION IN UNDERWRITTEN REGISTRATIONS. No person may participate
in any registration hereunder which is underwritten unless such person
(a) agrees to sell its securities on the basis provided in any underwriting
arrangements approved by such person or persons entitled hereunder to approve
such arrangements, and (b) completes and executes all questionnaires, powers of
attorney, custody agreements, indemnities, underwriting agreements and other
documents reasonably required under the terms of such underwriting arrangements.
10. MISCELLANEOUS.
10.1 NO INCONSISTENT AGREEMENTS. The Corporation will not hereafter enter
into any agreement with respect to its securities which is inconsistent with the
rights granted to the holders of Registrable Shares in this Agreement.
10.2 ADJUSTMENTS AFFECTING REGISTRABLE SHARES. The Corporation will not
take any action, or permit any change to occur, with respect to its securities
which would adversely affect the ability of the holders of Registrable Shares to
include such Registrable Shares in a registration undertaken pursuant to this
Agreement or which would adversely affect the marketability of such Registrable
Shares in any such registration, including, without limitation, effecting a
stock split or combination of shares.
10.3 OTHER REGISTRATION RIGHTS. Except as provided in this Agreement, the
Corporation will not hereafter grant to any person or persons the right to
request the Corporation to register any equity securities of the Corporation, or
any securities convertible or exchangeable into or exercisable for such
securities, without the prior written consent of the holders of more than 50% of
the Registrable Shares, which consent may not be unreasonably withheld or
delayed if and to the extent such right is subordinate to the rights of the
holders of Registrable Shares. The Corporation will not include in any Demand
Registration any securities which are not Registrable Shares (for the purposes
of SECTION 2) unless and until all Registrable Shares requested to be registered
have first been so included.
10.4 SUCCESSORS AND ASSIGNS. Except as otherwise expressly provided
herein, all covenants and agreements contained in this Agreement by or on behalf
of any of the parties hereto will bind and inure to the benefit of the
respective successors and assigns of the parties hereto, whether so expressed or
not. In addition, and whether or not any express assignment has been made, the
provisions of this Agreement which are for the benefit of the Purchaser or
holders of Registrable Shares are also for the benefit of, and enforceable by,
any subsequent holders of such Registrable Shares.
10.5 SEVERABILITY. Whenever possible, each provision of this Agreement
will be interpreted in such manner as to be effective and valid under applicable
law, but if any provision of this Agreement is held to be prohibited by or
invalid under applicable law, such provision will be ineffective only to the
extent of such prohibition or invalidity, without invalidating the remainder of
this Agreement.
10.6 DESCRIPTIVE HEADINGS. The descriptive headings of this Agreement are
inserted for convenience of reference only and do not constitute a part of and
shall not be utilized in interpreting this Agreement.
10.7 NOTICES. Any notices required or permitted to be sent hereunder shall
be delivered personally or mailed, certified mail, return receipt requested, or
delivered by overnight courier service to the following addresses, or such other
address as any party hereto designates by written notice to the Corporation, and
shall be deemed to have been given upon delivery, if delivered personally, three
days
H-7
<PAGE>
after mailing, if mailed, or one business day after delivery to the courier, if
delivered by overnight courier service:
If to the Corporation, to:
U.S. Franchise Systems, Inc.
13 Corporate Square, Ste. 250
Atlanta, Georgia 30329
Attention: General Counsel
If to the Securityholders, to:
SDI, Inc.
200 West Madison, Suite 3800
Chicago, IL 60606
Attention: Douglas G. Geoga
with a copy to:
Katten Muchin & Zavis
525 West Monroe Street
Suite 1600
Chicago, Illinois 60661
Attention: Bruce Wilson, Esq.
If to Aronson, to:
Neal K. Aronson
10.8 GOVERNING LAW. All questions concerning the construction, validity
and interpretation of this Agreement, and the performance of the obligations
imposed by this Agreement, shall be governed by the laws of the State of Georgia
applicable to contracts made and wholly to be performed in that state.
10.9 FINAL AGREEMENT. This Agreement, together with the Stock Purchase
Agreement and all other agreements entered into by the parties hereto pursuant
to the Stock Purchase Agreement, constitutes the complete and final agreement of
the parties concerning the matters referred to herein, and supersedes all prior
agreements and understandings.
10.10 EXECUTION IN COUNTERPARTS. This Agreement may be executed in any
number of counterparts, each of which when so executed and delivered shall be
deemed an original, and such counterparts together shall constitute one
instrument.
10.11 NO STRICT CONSTRUCTION. The language used in this Agreement will be
deemed to be the language chosen by the parties hereto to express their mutual
intent, and no rule of strict construction will be used against any party.
H-8
<PAGE>
The parties hereto have executed this Agreement on the date first set forth
above.
THE CORPORATION:
U.S. FRANCHISE SYSTEMS, INC.
By: /s/ Stephen D. Avonson
-----------------------------------
Its: Vice President/General Counsel
-----------------------------------
SECURITYHOLDERS
MERIDIAN ASSOCIATES, L.P.
By: /s/ H.S. Handelsman
-----------------------------------
Its: Vice President
-----------------------------------
HSA PROPERTIES, INC.
By: /s/ H.S. Handelsman
-----------------------------------
Its: Vice President
-----------------------------------
SDI, INC.
By: /s/ H.S. Handelsman
-----------------------------------
Its: Vice President
-----------------------------------
NEAL K. ARONSON
/s/ Neal K. Aronson
--------------------------------------
NEAL K. ARONSON
H-9
<PAGE>
APPENDIX I
FORM OF
CERTIFICATE OF AMENDMENT
OF THE
CERTIFICATE OF INCORPORATION
OF
U.S. FRANCHISE SYSTEMS, INC.
------------------------------
Pursuant to Section 242 of the General
Corporation Law of the State of Delaware
------------------------------
U.S. FRANCHISE SYSTEMS, INC., a Delaware corporation (hereinafter called the
"Corporation"), does hereby certify as follows:
FIRST: Paragraph 9.1 of the Corporation's Certificate of Incorporation is
hereby amended to read in its entirety as set forth below:
9.1 ACTION BY WRITTEN CONSENT. The stockholders of the Corporation
entitled to take action on any matter may take such action by written
consent, without a meeting, in accordance with Section 228 of the Delaware
General Corporation Law
SECOND: Article 11 and paragraphs 11.1 and 11.2 of the Corporation's
Certificate of Incorporation are hereby amended to read in their entirety as set
forth below:
11. AMENDMENT. The Corporation reserves the right to amend, alter,
change, or repeal any provision contained in this Certificate of
Incorporation in the manner now or hereafter prescribed by statute, and all
rights conferred on stockholders herein are granted subject to this
reservation. The provisions of Sections 12 and 13 of the Certificate of
Incorporation and this Section 11 shall not be amended without the approval
of holders of shares representing a majority of the voting power of the
outstanding shares of voting stock of the Corporation other than any shares
held by any Significant Shareholder. For purposes of this Certificate of
Incorporation, the term Significant Shareholder shall mean (a) Michael A.
Leven and any of his affiliates or associates, (b) SDI, Inc., and Meridian
Associates, L.P., and any of their successors, affiliates, or associates,
(c) any holder of shares of Series B 6% Cumulative Redeemable
Convertible/Exchangeable Preferred Stock, and (d) any person or persons or
group (as such term is used within the meaning of Section 13(d) of the
Exchange Act) that beneficially owns or has the right to vote on any matter
more than 35% of the outstanding voting power of the Corporation. For
purposes of this Certificate of Incorporation, the terms "affiliate" and
"associate" shall have the meanings given to such terms in Rule 405 under
the Securities Act of 1933.
THIRD: The following Section 12 and paragraphs 12.1, 12.2 and 12.3 are
hereby added to the Corporation's Certificate of Incorporation as set forth
below:
I-1
<PAGE>
12. RESTRICTIONS ON CERTAIN ACTIVITIES
12.1 From and after [insert date of issuance of Series A Preferred Stock
and Series B Preferred Stock] (the "EFFECTIVE DATE") until the fifth
anniversary of the Effective Date, the Board of Directors shall include
at least three directors (the "INDEPENDENT DIRECTORS") which directors
shall meet the following qualifications. At no time while such Director
serves as an Independent Director shall the Director be, nor shall the
Director have been during the three year period prior to the Effective
Date, (i) an affiliate or associate of a Significant Shareholder or of
any of their respective affiliates or associates (collectively the
"RESTRICTED PARTIES"), (ii) a party to or an associate or an affiliate of
any person which is or was a party to any transaction with any Restricted
Party involving payments in excess of $1.0 million in the aggregate, or
(iii) is otherwise a member of the same family as any associate or
affiliate of any Restricted Party. The initial Independent Directors
shall be selected by the Corporation in accordance with Section 4.1(e) of
the Recapitalization Agreement, dated as of June 2, 2000 by and among the
Corporation, SDI, Inc., Meridian Associates, L.P. and HSA Properties,
Inc. Thereafter, persons either nominated for election as Independent
Directors or elected by the Board as Independent Directors must have been
approved by resolution of the Board of Directors acting with the
affirmative votes of a majority of the Independent Directors then in
office.
12.2 From and after the Effective Date until the fifth anniversary of the
Effective Date, the Corporation shall not effect any Extraordinary
Transaction with any person unless, prior to the consummation of such
Extraordinary Transaction, (i) the stockholders of the Corporation shall
have approved the terms and conditions of the Extraordinary Transaction
and (ii) the Corporation shall have received from a nationally recognized
investment banking firm, a written opinion for inclusion in a proxy
statement to be delivered to the stockholders, substantially to the
effect that the consideration to be received by the stockholders in the
Extraordinary Transaction is fair to them from a financial point of view.
For purposes hereof, the term "Extraordinary Transaction" means any
transaction which would have the effect of causing the common stock of
the Corporation either to be held of record or beneficially by less than
300 persons, or to be neither listed on any national securities exchange
nor authorized to be quoted on an interdealer quotation system of any
registered national securities association.
12.3 From and after the Effective Date until the fifth anniversary of the
Effective Date, the Corporation shall not nor shall it permit any
subsidiary to enter into or permit to exist any transaction, including
any purchase, sale, lease or exchange of property or the rendering of
service with any Restricted Party (an "AFFILIATE TRANSACTION") unless the
terms thereof (i) are fair and no less favorable to the Corporation than
those that could be obtained in a comparable arms' length transaction
with a person that is not a Restricted Party, (ii) if such Affiliate
Transaction involves an amount in excess of $2.0 million, (A) are set
forth in writing and (B) have been approved by resolution of the Board of
Directors acting with the affirmative votes of a majority of the
Independent Directors and (iii) if such Affiliate Transaction involves an
amount in excess of $5.0 million, the financial terms of which have been
determined by a nationally recognized investment banking, valuation or
accounting firm to be fair, from a financial point of view, to the
Corporation.
FOURTH: The following Section 13 is hereby added to the Corporation's
Certificate of Incorporation as set forth below:
13. PURCHASES OF COMMON STOCK BY THE CORPORATION.
From and after the Effective Date until the fourth anniversary of the
Effective Date, the Corporation shall not, except upon a resolution of
the Board of Directors acting with the affirmative votes of a majority of
the Independent Directors, purchase shares of the Corporation's common
stock either on the open market or pursuant to a tender or exchange offer
or in
I-2
<PAGE>
any other transaction (other than in an Extraordinary Transaction
approved in accordance with Section 12 of this Certificate of
Incorporation) at a per share price that is less then $7.50, if such
transaction is effected within 24 months after the Effective Date, or if
effected after such 24 month period at a price that is less than the
highest bid price per share for the preceding 52 week period. If the
Corporation shall in any manner subdivide (by stock split, stock dividend
or otherwise) or combine (by reverse stock split or otherwise) the
outstanding shares of common stock, then effective provision shall be
made by resolution of the Board of Directors with the affirmative votes
of a majority of the Independent Directors to adjust the prices referred
to in this SECTION 13 to give effect to any such change.
FIFTH: The foregoing amendments were duly adopted in accordance with Section
242 of the General Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, the undersigned has caused this Certificate to be duly
executed in its corporate name this ____ day of _______________, 2000.
U.S. FRANCHISE SYSTEMS, INC.
By: __________________________________
Name:
Title:
ATTEST:
By: __________________________________
Name:
Title:
I-3
<PAGE>
U.S. FRANCHISE SYSTEMS, INC.
13 Corporate Square, Suite 250
Atlanta, Georgia 30329
PROXY FOR THE ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON , 2000
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned stockholder(s) hereby appoints Stephen D. Aronson, with
full power of substitution, as attorney and proxy for, and in the name and
place of, the undersigned, and hereby authorizes him to represent and to vote
all of the stocks of Class A Common Stock and Class B Common Stock which the
undersigned is entitled to vote at the annual meeting of stockholders of U.S.
Franchise Systems, Inc., to be held at , ATLANTA, GEORGIA on , ,
2000, at .m., local time, and at any adjournments or postponements
of the annual meeting, upon the matters as set forth in the notice of annual
meeting of stockholders and proxy statement, receipt of which is hereby
acknowledged.
THIS PROXY, WHEN PROPERLY EXECUTED AND RETURNED IN A TIMELY MANNER, WILL
BE VOTED AT THE ANNUAL MEETING AND AT ANY ADJOURNMENTS OR POSTPONEMENTS OF
THE ANNUAL MEETING IN THE MANNER DIRECTED IN THIS PROXY BY THE UNDERSIGNED
STOCKHOLDER(S). IF NO CONTRARY INDICATION IS MADE, THE PROXY WILL BE VOTED
FOR PROPOSALS 1, 2, 3, 4 AND 6 AND FOR THE ELECTION OF THE NOMINEES IN
PROPOSAL 5 AND IN ACCORDANCE WITH THE JUDGMENT OF THE PERSON NAMED AS PROXY
IN THIS PROXY, ON ANY OTHER MATTERS THAT MAY PROPERLY COME BEFORE THE MEETING.
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY CARD PROMPTLY USING THE
ENCLOSED PREPAID ENVELOPE.
(continued, and to be signed and dated, on reverse side)
--------------------------------------------------------------------------------
FOLD AND DETACH HERE
<PAGE>
U. S. FRANCHISE SYSTEMS, INC
Please mark your votes as indicated in this example /X/
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR PROPOSALS 1, 2,
3, 4 AND 6 AND FOR THE NOMINEES NAMED IN PROPOSAL 5.
1. Approval of (a) the issuance and sale by the Company of its Preferred
Stock and (b) the issuance by the Company of its Class A Common Stock upon
the potential conversion/exchange of the B Preferred Stock, all in accordance
with the provisions of the Recapitalization Agreement
FOR AGAINST ABSTAIN
/ / / / / /
2. Approval and adoption of amendments to the Company's Certificate of
Incorporation to: (a) establish requirements for the Board of Directors to
include a minimum of three persons who meet specified standards of
independence; and (b) establish requirements for the Company entering into
transactions that (1) may cause the Class A Common Stock to be held of record
or beneficially by less than 300 persons or to be neither listed on a
national securities exchange nor authorized to be quoted on an interdealer
quotation system of any registered national securities association, (2)
involve the Company purchasing shares of its Common Stock or (3) are with
certain persons and entities directly or indirectly affiliated with the
Company.
FOR AGAINST ABSTAIN
/ / / / / /
3. Approval and adoption of amendments to the Company's Certificate of
Incorporation to: (a) eliminate the supermajority requirements for
stockholder voting in Section 11 of the Certificate of Incorporation and add
requirements for stockholder approval for changes to sections of the
Certificate of Incorporation which are the subject of Proposal 2; and (b)
eliminate the prohibitions on stockholder action by written consent in
Section 9 of the Certificate of Incorporation
FOR AGAINST ABSTAIN
/ / / / / /
4. Approval and adoption of an amendment to the Company's Amended and
Restated 1996 Stock Option Plan to increase the authorized Class A Common
Stock reserved for issuance under the Plan from 725,000 to 1,975,000.
FOR AGAINST ABSTAIN
/ / / / / /
5. Election of Directors NOMINEES:
(1) Michael A. Leven, (2) Neal K. Aronson, (3) Steven Romaniello, (4) Dean S.
Adler, (5) Irwin Chafetz, (6) Douglas G. Geoga, (7) Richard D. Goldstein, (8)
David T. Hamamoto, and (9) Jeffrey A. Sonnenfeld.
FOR ALL WITHOLD ALL FOR ALL EXCEPT
/ / / / / /
6. Ratification of Deloitte & Touche LLP as Auditors for Fiscal 2000.
FOR AGAINST ABSTAIN
/ / / / / /
7. Each of the persons named as proxies in this proxy are authorized, in such
person's discretion, to vote upon such other matters as may properly come
before the special meeting and any adjournments or postponements of the
special meeting.
Please date this proxy and sign it exactly as your name(s) appears hereon.
When stocks are held by joint tenants, both should sign. When signing as an
attorney, executor, administrator, trustee, guardian or other fiduciary,
please indicate your capacity. If you sign for a corporation, please print
full corporate name and indicate capacity of duly authorized officer
executing on behalf of the corporation. If you sign for a partnership, please
print full partnership name and indicate capacity of duly authorized person
executing on behalf of the partnership
Signature(s) Dated , 2000
------------------------------------------ --------
NOTE: PLEASE VOTE, SIGN EXACTLY AS NAME APPEARS ABOVE, DATE AND RETURN THIS
PROXY CARD PROMPTLY USING THE ENCLOSED PREPAID ENVELOPE
--------------------------------------------------------------------------------
FOLD AND DETACH HERE
<PAGE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
(MARK ONE)
<TABLE>
<C> <S>
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM TO
</TABLE>
COMMISSION FILE NUMBER 0-23941
------------------------
U.S. FRANCHISE SYSTEMS, INC.
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C>
DELAWARE 58-2361501
(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
13 CORPORATE SQUARE, SUITE 250 30329
ATLANTA, GEORGIA (Zip Code)
(Address of Principal Executive
Offices)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (404) 321-4045
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Class A Common Stock, $0.01 par value
TITLE OF EACH CLASS
Indicate by check mark whether the registrant: (1) has filed all reports
required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. / /
The aggregate market value of the outstanding shares of the registrant's
Class A Common Stock and Class B Common Stock held by non-affiliates of the
registrant was approximately $74,136,465 as of March 10, 2000. There were
17,245,834 shares of the registrant's Class A Common Stock and 2,707,919 shares
of the registrant's Class B Common Stock outstanding as of March 14, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive proxy statement to be delivered to
shareholders in connection with the Annual Meeting of Shareholders to be held on
May 25, 2000 are incorporated by reference in response to Part III of this
Report.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
PART I
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Annual Report on Form 10-K (this "Form 10-K"),
including statements under "Item 1. Business" and "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations," that
are not historical facts constitute "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995 (the "Reform
Act"). Certain, but not necessarily all, of such forward-looking statements can
be identified by the use of forward-looking terminology such as "believes,"
"expects," "may," "will," "should," or "anticipates" or the negative thereof or
other variations thereon or comparable terminology, or by discussions of
strategy that involve risks and uncertainties. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors which may cause
the actual results, performance or achievements of U.S. Franchise Systems, Inc.
(the "Company" or "USFS") and its subsidiaries to be materially different from
any future results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, but are not limited to, the
following: general economic and business conditions; aggressive competition in
the lodging and franchising industries; success of acquisitions and operating
initiatives; management of growth; risks relating to the Company's loans to, and
other investments in, franchisees; dependence on senior management; brand
awareness; general risks of the lodging and franchising industries; development
risk and construction; risk of loss of management contracts and uncertain future
of the management business; risk relating to the availability of financing for
franchisees; the existence or absence of adverse publicity; changes in business
strategy or development plan; availability, terms and deployment of capital;
business abilities and judgment of personnel; availability of qualified
personnel; labor and employee benefit costs; changes in, or failure to comply
with, government regulations; construction schedules; the costs and other
effects of legal and administrative proceedings; and other factors referenced in
this Form 10-K. The Company will not undertake and specifically declines any
obligation to publicly release the results of any revisions which may be made to
any forward-looking statement to reflect events or circumstances after the date
of such statements or to reflect the occurrence of anticipated or unanticipated
events. The Company does not intend to update the information contained herein
with respect to its exploration of potential strategic alternatives for any
future developments or circumstances unless and until there is a definitive
transaction agreement entered into between the Company and any third party or
until its exploration of potential alternatives is definitively terminated.
There can be no assurance whatsoever that any transaction between the Company
and any third party will take place or, even if one does occur, about the nature
and extent of any terms and conditions of any such potential transaction. See
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations--Risk Factors".
ITEM 1. BUSINESS.
USFS was formed in August 1995 to acquire, market and service
well-positioned brands with potential for rapid unit growth primarily through
franchising. The Company's brands, which are in the lodging industry, are
Microtel Inn & Suites, Hawthorn Suites and Best Inn & Suites. The Company
acquired the rights to these brands because of their potential for significant
growth, which reflects, among other things, their potential profitability for
franchisees at the property level and their positions in attractive segments of
the lodging industry. Microtel primarily competes in the budget and economy
segments, Hawthorn primarily in the upscale and mid-market segments, and Best
primarily in the mid-market and economy segments of the lodging industry. The
Company also manages certain properties on behalf of franchisees. Since it began
selling franchises in January 1996, the number of USFS branded hotel properties
open or in development has grown from 27 to 1,218 as of December 31, 1999,
consisting of 398 open, 120 under construction, 414 for which franchise
agreements had been executed but that were not under construction and 286
accepted applications from prospective franchisees. There can be no assurances
that hotels in
2
<PAGE>
development or for which applications have been accepted will result in open
hotels. See "Risk Factors--Dependence on, and Obstacles to, Hotel Openings."
As a franchisor, the Company licenses the use of its brand names to
independent hotel owners and operators (i.e., franchisees). The Company provides
its franchisees with a variety of benefits and services designed to:
(i) decrease development costs, (ii) shorten the time frame and reduce the
complexity of the construction process and (iii) increase occupancy rates,
revenues and profitability of the franchised properties. The Company offers
prospective franchisees a business format, design and construction assistance
(including architectural plans), quality standards, training programs, national
reservations systems, national and local advertising and promotional campaigns
and volume purchasing discounts.
The Company expects that its future revenues will consist primarily of
(i) franchise royalty fees, (ii) franchise application fees, (iii) various
management fees, (iv) international master license agreement fees, and
(v) payments made by vendors who supply the Company's franchisees with various
products and services. The Company recognizes franchise application fees as
revenue only upon the opening of the underlying hotels.
USFS announced that in recent months it received a number of unsolicited
inquiries regarding the possible sale of the Company, including inquiries from
several competitors. In response to those unsolicited inquiries, the Company
retained Banc of America Securities LLC as an advisor. The Company has had
discussions with several of those persons, although none resulted in offers
which were satisfactory to the Company and to the Board of Directors. The
Company has requested that Banc of America Securities assist the Company more
generally in evaluating strategic alternatives and opportunities that may be or
become available to the Company.
USFS does not intend to update the information contained herein with respect
to its exploration of potential strategic alternatives for any future
developments or circumstances unless and until there is a definitive transaction
agreement entered into between USFS and any third party or until its exploration
of potential alternatives is definitively terminated. There can be no assurance
whatsoever that any transaction between USFS and any third party will take place
or, even if one does occur, about the nature and extent of any terms and
conditions of any such potential transaction.
The Company was incorporated in Delaware in November 1997 for purposes of
acquiring the Hawthorn Suites brand. See "Acquisition of the Microtel, Hawthorn
Suites and Best Inns Systems--Hawthorn Acquisition." The Company's predecessor,
also known as USFS, was incorporated in Delaware in August 1995. The Company's
executive offices are located at 13 Corporate Square, Suite 250, Atlanta,
Georgia 30329 and its telephone number is (404) 321-4045. The term "the Company"
refers to USFS before the Hawthorn merger, and as the surviving corporation in
the merger.
BUSINESS STRATEGY
The Company's business strategy is to: (i) rapidly increase the number of
open Microtel, Hawthorn Suites and Best Inns hotels, (ii) operate its
administrative and franchisee support departments in order to maximize the
operating leverage inherent in the franchising business, and (iii) acquire
additional lodging or other service-oriented brands that provide attractive unit
economics to franchisees and significant growth opportunities for the Company.
To successfully accomplish its growth strategy, the Company supports its
franchisees in their efforts to develop, acquire, open and operate hotels by
assisting in the areas of public relations, construction, design, marketing,
finance, national accounts purchasing, training and in certain cases, by
providing financing and other development subsidies.
THE COMPANY'S LODGING FRANCHISE SYSTEMS
MICROTEL INN & SUITES. Microtels are distinctively styled hotels with a
residential look that offer travelers an attractive and consistent appearance,
clean, comfortable rooms and the safety of interior
3
<PAGE>
corridor room access, all for a competitive rate. Microtel typically is
categorized as a budget and economy hotel chain. Microtel's efficient
architectural design minimizes construction costs and maintenance expenses
through smaller room sizes, limited common areas, smaller land requirements and
built-in standardized furniture, all of which enable franchisees to own and
operate a Microtel at a lower cost. These lower costs may reduce a franchisee's
equity investment and may broaden its debt financing alternatives, thereby
expanding the appeal of the Microtel brand to prospective franchisees.
The Company acquired the Microtel brand in October 1995, at which time there
were 27 properties open or in development. The Company has realized the
following franchise sales growth over the past three years:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------------------
1999 1998 1997
MICROTEL FRANCHISE DATA -------- -------- --------
<S> <C> <C> <C>
Properties open (1)......................................... 179 124 64
Executed agreements and under construction................ 58 62 52
Executed agreements but not under construction............ 248 276 253
Accepted applications..................................... 101 115 77
--- --- ---
Total in development and accepted applications(2)........... 407 453 382
--- --- ---
OPEN PLUS IN DEVELOPMENT PLUS ACCEPTED APPLICATIONS......... 586 577 446
=== === ===
</TABLE>
------------------------
(1) The Company does not receive royalties from 27 hotels open as of
December 31, 1999.
(2) There can be no assurance that properties in development or for which
applications have been accepted will result in open hotels. During 1999,
five previously opened hotels ceased operating as a Microtel. Since the
Microtel brand was acquired by the Company, 35% of accepted applications did
not become executed agreements and 38% of executed agreements terminated
before resulting in open hotels. See "Risk Factors--Dependence on, and
Obstacles to, Hotel Openings."
In 1999, for Microtel hotels open one year or more, average daily rate,
occupancy and Revpar was $44.13, 60.8% and $26.93, respectively.
HAWTHORN SUITES. As an upscale, extended-stay hotel, Hawthorn Suites
provides the traveler with the convenience of a hotel and the amenities
typically found in an apartment. Hawthorn Suites' hotel rooms contain
full-service kitchens with appliances, cookware and utensils, video cassette
players, modem ports, exercise facilities and valet service. Hawthorn Suites
hotels also offer a hot breakfast buffet every morning and guests are invited to
an evening social hour. A center courtyard, an outdoor pool, a multi-use sport
court, a barbecue area and a retail store selling sundry and meal items, snacks
and beverages, will also be part of newly constructed Hawthorn Suites hotels. In
addition to participating in the upscale, extended-stay segment, the Company
also franchises (i) Hawthorn Suites LTD., a mid-price, all suites hotel brand
that is designed to meet the needs of both extended-stay and transient guests,
(ii) Hawthorn Suites Golf Resorts, an all suites lodging concept located on or
near golf courses and targeted to travelers who want to combine golf with a
meeting or conference retreat experience, (iii) Hawthorn Hotel & Suites,
designed for high barrier to entry locations, such as center city and airport
markets, featuring a minimum of 25% suites with the remainder being upgraded
hotel rooms, and (iv) Hawthorn Inn & Suites, designed for tertiary markets
featuring a minimum of 25% suites and the remainder being upgraded hotel rooms.
Hotels that are part of the Hawthorn Suites system use the Spirit
Reservation System ("Spirit"). Spirit is operated under contract with Hyatt
Hotels Corporation ("Hyatt") by CSC Outsourcing, Inc. ("CSC") and Sabre
Technology Solutions ("Sabre"). Spirit receives and processes calls made to a
toll-free number dedicated to Hawthorn Suites. The Spirit system is directly
linked by computer to all Hawthorn Suites hotels. Hyatt manages the voice and
Global Distribution System ("GDS") reservation activities for both Hawthorn
Suites and Hyatt through the Spirit Reservation Center located in Omaha,
Nebraska. Persons
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calling the Hyatt toll-free number who experience sold out Hyatts or no Hyatts
in their desired market are transferred to a Hawthorn Reservation Agent. There
can be no assurance that CSC and Sabre will continue to service Hawthorn Suites'
future reservation needs.
The Company acquired the right to franchise the Hawthorn brand in
March 1996, at which time there were 17 properties open or in development. The
Company has realized the following franchise sales growth over the past three
years:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------------------
1999 1998 1997
HAWTHORN SUITES FRANCHISE DATA -------- -------- --------
<S> <C> <C> <C>
Properties open............................................. 100 51 26
Executed agreements and under construction................ 40 29 14
Executed agreements but not under construction............ 132 96 54
Accepted applications..................................... 70 78 17
--- --- ---
Total in development and accepted applications(1)........... 242 203 85
--- --- ---
OPEN PLUS IN DEVELOPMENT PLUS ACCEPTED APPLICATIONS......... 342 254 111
=== === ===
</TABLE>
------------------------
(1) There can be no assurance that properties in development or for which
applications have been accepted will result in open hotels. During 1999, no
previously opened hotels ceased operating as a Hawthorn. Since the Company
acquired the franchise rights to the Hawthorn brand in March 1996, 32% of
accepted applications did not become executed agreements and 14% of executed
agreements terminated before resulting in open hotels. See "Risk
Factors--Dependence on, and Obstacles to, Hotel Openings."
In 1999, for properties in the Hawthorn system one year or more, average
daily rate, occupancy and Revpar was $84.52, 65.4% and $55.30, respectively.
BEST INNS & SUITES. Best Inns & Suites is primarily an economy and
mid-market hotel chain. Properties offer single, double, and in some cases suite
accommodations with limited kitchens and business services. All Best Inns
properties offer free local phone calls, complimentary breakfast, cable
television with one free movie and a sports channel or pay per view. Best Suites
provide accommodations with separate living, dining and work areas, plus a wet
bar, microwave and refrigerator, exercise room, meeting facilities and a
convenience store.
The Company acquired the Best Inns brand in April 1998, at which time there
were 38 properties open or in development. Since that time, the Company has
realized the following franchise sales growth:
<TABLE>
<CAPTION>
AS OF
DECEMBER 31,
-------------------
1999 1998*
BEST INNS FRANCHISE DATA (inception to date) -------- --------
<S> <C> <C>
Properties open............................................. 119 52
Executed agreements and under construction................ 22 12
Executed agreements but not under construction............ 34 21
Accepted applications..................................... 115 142
--- ---
Total in development and accepted applications(1)........... 171 175
--- ---
OPEN PLUS IN DEVELOPMENT PLUS ACCEPTED APPLICATIONS......... 290 227
=== ===
</TABLE>
------------------------
* The Best Inns brand was acquired on April 28, 1998.
(1) There can be no assurance that properties in development or for which
applications have been accepted will result in open hotels. During 1999,
seven previously opened hotels ceased operating as a
5
<PAGE>
Best Inns. Since the Company acquired the Best Inns brand in April 1998, 60%
of accepted applications did not become executed agreements and 11% of
executed agreements terminated before resulting in open hotels. See "Risk
Factors--Dependence on, and Obstacles to, Hotel Openings."
In 1999, for properties in the Best Inns system one year or more, average
daily rate, occupancy and Revpar was $47.94, 65.4% and $31.35, respectively.
HOTEL MANAGEMENT. When the Company acquired the Best Inn brand in 1998, it
also acquired the assets of a fee-based management company. In 1999, the Company
reduced the number of properties that it manages by 17 contracts. As of
December 31, 1999, the Company managed 24 hotels for various franchisees,
including 17 properties owned by one franchisee. See "Acquisition of the
Brands-Best Inns Acquisition." and "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations--Introduction." The Company is
currently evaluating the future prospects of its management business to
determine whether to continue to offer such services in the future. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Introduction."
OPERATIONS
FRANCHISE SALES. The Company employs a national franchise sales force
consisting of approximately 50 people. The primary objectives of the Company's
franchise sales strategy are to identify potential franchisees and possible
locations for each of the Company's brands and to create an awareness and
general acceptance of its products with numerous participants in the hospitality
industry, including hotel owners, lodging consultants, vendors and operators.
The franchise sales force seeks to achieve these objectives through the
implementation of a multi-faceted sales strategy, which includes cold calling,
telemarketing, direct mail, trade advertising and public relations. In addition
to stock option grants, the compensation program is structured so that each
franchise salesperson earns 100% of his or her annual income in commissions.
6
<PAGE>
DESIGN AND CONSTRUCTION. The Company's design and construction department
provides development expertise in the disciplines associated with new
construction and renovation, with emphasis on low development costs, low
maintenance expense, quality construction and profit maximization for its
franchisees. The Company provides detailed architectural plans, CAD-CAM computer
files, specifications, system standards and manuals, and makes the services of
the department available to franchisees at various stages of the development
process. In order to maintain product quality and brand identity, the design and
construction department reviews the architectural plans of its franchisee's
projects.
QUALITY ASSURANCE. Franchise quality control is accomplished through
inspections prior to a franchisee's entry into the system and on an ongoing
basis. Quality assurance programs promote consistent standards throughout each
of the Company's franchise systems. The Company inspects each property up to
twice per year. Hotels that fail to meet certain franchise standards are
notified and are generally given 30 days to either correct the conditions that
led to the failure or to implement a plan to correct the failure. If they do not
correct the deficiencies, the Company can terminate the license.
MARKETING. The Company has two distinct marketing efforts. The first is
intended to build awareness of USFS among franchisees and shareholders. The
second marketing initiative is the brand-building campaigns for Microtel, Best
Inns and Hawthorn Suites. The Company utilizes television and newspaper
advertising, newsletters (both in print and in electronic/internet formats),
direct mail, trade press advertising and special web site pages on usfsi.com,
microtelinn.com, hawthorn.com and bestinn.com, as well as direct contact by the
franchise sales organization.
CENTRAL RESERVATIONS SYSTEM. Microtel's and Best Inns' central reservations
center in Marion, Illinois utilizes the Company's FIRST reservations system,
which communicates with the hotels via the Internet. Hawthorn outsources its
central reservations operation to SPIRIT, the reservation system used by Hyatt
hotels.
CORPORATE COMMUNICATIONS. A targeted corporate communications program
supports marketing and franchise sales efforts by promoting awareness of the
Company and its brands. The Company works closely with such lodging industry
trade publications as HOTEL BUSINESS, HOTEL & MOTEL MANAGEMENT, LODGING and
BUSINESS TRAVEL NEWS. The Company also works to reach consumers and develop
storylines with such national outlets as CNN and USA TODAY, as well as daily and
business publications in local markets that regularly report on individual hotel
ground breaks and openings. To spearhead public relations at the local level,
the Company employs a public relations manager who acts as liaison with
franchisees and the local press. The manager places stories, helps plan local
public relations campaigns and special events, and publishes a monthly
newsletter for each brand.
TRAINING. The Company maintains training programs that are designed to
teach its franchisees how to best utilize the Company's reservations system and
marketing programs, as well as the fundamentals of hotel operations such as
recruiting, housekeeping, repairs and maintenance and personnel policies. The
Company also provides special on-site training upon request. In addition, each
franchise sales person must complete a structured initial training program and
regular retraining.
FRANCHISE RESOURCES. The franchise resources department functions as a
single point of contact for all franchisees to call for support on all issues
prior to, during, and after construction. Franchise resources acts as a liaison
between the franchisee and all departments of the Company.
PURCHASING. The Company has established relationships with various vendors
to make volume purchasing discounts for certain products, services, furnishings
and equipment available to its franchisees. In certain cases, the Company
receives payments from the vendors.
MANAGEMENT. The Company currently provides hotel management services to
certain franchisees. Such services include property oversight and accounting.
However, the Company recently has reduced the number of its management contracts
and there is no assurance that the Company will continue providing
7
<PAGE>
such services in the future. See "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations."
FRANCHISE AGREEMENTS
The Company's franchise agreements grant hotel owners the right to utilize
one of the brand names associated with the Microtel, Hawthorn Suites or Best
Inns hotel systems under long-term franchise agreements. In order to qualify for
a franchise from the Company, a candidate must undergo a screening process,
which typically includes a review of the potential franchisee's financial
condition and the proposed lodging location. A representative of the Company
conducts a site inspection to determine whether the location meets standards and
whether the brand name selected is appropriate at that location. All of the
Company's franchise agreements offer an area of exclusivity to each location,
the degree of which is negotiated individually with each franchisee. The
Company's current standard agreements are typically 20-year terms although
actual lengths vary. The standard franchise agreements generally require
franchisees to satisfy certain development milestones.
Each franchise agreement provides for the payment of two primary types of
on-going fees: a royalty fee and a reservation and marketing fee, both of which
are based upon a percentage of the franchisee's gross room revenues. The royalty
fee is intended to cover the operating expenses of the franchisor, such as costs
incurred in providing quality assurance, administrative support and other
franchise services, and to provide the Company with operating profits. The
reservation and marketing fee is collected for administrative convenience by the
Company and remitted to independent not-for-profit reservation and marketing
corporations which exist for each of the three brands. The Company spends the
reservation and marketing funds on behalf of the franchisees for such services
as a reservation system, national advertising and certain promotional programs
(see "Reservations and Advertising Funds"). Reservation and marketing fees
collected by the Company on behalf of the three not-for-profit corporations
typically range from two (2%) percent to three (3%) percent of each franchisee's
gross room revenues per year. Franchisees also typically pay a franchise
application fee to the Company, the amount of which varies.
The terms of the Company's current standard forms of franchise agreements
state that, by year of operation, franchisees are required to pay the following
ongoing royalty fees (each, as a percentage of gross room revenues), although
actual fees may vary:
<TABLE>
<CAPTION>
MICROTEL HAWTHORN BEST
-------- -------- --------
<S> <C> <C> <C>
Year 1...................................................... 4.0% 5.0% 3.0%
Year 2...................................................... 5.0% 5.0% 4.0%
Year 3 and thereafter....................................... 6.0% 5.0% 5.0%
</TABLE>
The Company has agreed, and may agree in the future, to offer a wide range
of incentives to various franchisees, including providing loans, development
subsidies or discounted fees. The Company's standard form of franchise agreement
is terminable by the Company if the franchisee fails to maintain certain quality
standards or to pay royalties, reservation and marketing fees or other charges.
ACQUISITION OF THE BRANDS
MICROTEL ACQUISITION. The Company acquired the Microtel brand from Hudson
Hotel Corporation ("Hudson") on October 5, 1995. As part of the purchase of the
Microtel brand, royalties are payable to Hudson as follows: 1.0% of the
"revenues subject to royalties" on the first 100 Microtel properties opened
after the closing, 0.75% of such revenues for the next 150 Microtel properties
opened, and 0.50% of such revenues for each Microtel property opened after the
first 250.
The Microtel Acquisition Agreement requires the Company to satisfy a
development schedule, which requires the Company to have a specified number of
new Microtel properties open or under construction by certain target dates. The
Company has satisfied the development schedule to date and must have 250
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<PAGE>
newly executed Microtel franchises open or under construction by December 31,
2001 in order to avoid being in default under the last remaining target. For
purposes of meeting this target, the 27 Microtel properties that do not pay
royalties to the Company and, if open or under construction, the additional 23
Microtel Inn properties and 10 Microtel Suites hotels that are currently
entitled to be built by certain parties without the payment of royalties to the
Company pursuant to the Microtel Acquisition Agreement, are excluded.
As of March 10, 2000, the Company had open or under construction 223
Microtel properties which counted toward satisfying the development schedule.
Therefore, from March 10, 2000 until December 31, 2001, the Company is required
to break ground on an additional 27 Microtel brand hotels in order to avoid
being in default under the Microtel Acquisition Agreement. If the Company fails
to so satisfy the development schedule, it may cure its default by making a
$1,000,000 payment to Hudson.
Upon the Company's initial public offering in 1996, the provisions of the
Microtel Acquisition Agreement which allowed Hudson the right to reacquire all
the rights to the Microtel System and all operating assets associated therewith
upon a default by the Company of its obligations under the agreement terminated
and are of no further effect. Accordingly, the Company has the exclusive right
to franchise the Microtel brand.
HAWTHORN ACQUISITION. 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 Company now has the exclusive right to franchise the
Hawthorn Suites brand of hotels and to retain 100% of the royalties derived
therefrom.
BEST INNS ACQUISITION. On April 28, 1998, the Company completed its
acquisition of the exclusive worldwide franchise rights to the Best Inns hotel
brands, including the franchise agreements for the existing Best Inns hotels. In
addition, the Company acquired management contracts and certain other assets
relating to the management of hotels on behalf of third party owners. To
facilitate the transaction, the Company made a $15 million unsecured
subordinated loan to Alpine Hospitality Ventures LLC ("Ventures") at an interest
rate of 12% per annum, interest on which will be paid in cash to the extent
available and otherwise will be paid-in-kind. The loan is subordinated to a
guarantee provided by Ventures in connection with a third-party senior loan in
the principal amount of approximately $65 million to its subsidiary that
acquired 17 Best Inns hotels in the Best Inns acquisition and is structurally
subordinated to such third party loan. In the fourth quarter of 1999, the
Company was advised that the senior lender informed Ventures of its intention to
institute a "lock-box" arrangement, thereby eliminating the payment of cash
interest to the Company while such arrangement is in place. The Company will
continue to receive interest in-kind payments, but will not include such in-kind
payments in income. In March 2000, the lock-box agreement was executed. The
Company has taken a $15.5 million reserve during the fourth quarter 1999 against
the value and accrued interest of the loan. If the senior debt is not paid
currently, certain management and franchisee fees could be deferred until cash
is available. A portion of these fees were deferred in the fourth quarter 1999.
The Company is also committed to make up to $7.5 million of additional loans to
Ventures under certain circumstances, including if required by Ventures in order
to make a capital contribution to the owner of the properties in order to
achieve compliance with certain debt service coverage ratios in order to obtain
an extension of the maturity date of the loan, or to obtain the release of a
property from the senior lender's liens in connection with a condemnation,
casualty or otherwise. No such additional loans have been made as of
December 31, 1999 but it is possible the loan, or a portion thereof, will be
required to be made in the future. The Company manages the hotels owned by the
subsidiary of Ventures. Commencing April 2001, the Company may be obligated to
reimburse the owner of the properties for as much as 90% of the management fee
if the owner's net profit for the 12-month period then ended, and each
subsequent 12-month period, falls below a specified level. If the performance of
the hotels does not materially improve by April 2001, the Company expects to
have to make a payment to the owner of the properties. In addition, the senior
lender to these properties has advised Ventures in March 2000 that it currently
has the right to require the termination of the
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<PAGE>
management contract, but is not doing so at this time. The Company also issued
to Alpine Hospitality Equities LLC ("Alpine Equities"), an affiliate of
Ventures, 350,000 shares (the "Alpine Shares") of Class A Common Stock for a
purchase price of $1.6 million. Alpine Equities was granted certain demand and
piggy-back registration rights on customary terms with respect to the Alpine
Shares, as well as certain tag-along rights on certain sales of Common Stock
made by Messrs. Leven and Aronson. Additionally, the Company agreed to pay to
Alpine Equities $1,000 per year for each hotel added to the Best Inns system
after the closing of the transaction, provided that such new hotels are paying
royalties to the Company or any of its affiliates. 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 Equities and Ventures.
ESTABLISHMENT OF DEVELOPMENT FUND
On March 17, 1998, NorthStar Constellation, LLC (together with its
affiliates, "NorthStar"), Lubert-Adler Real Estate Opportunity Funds (together
with its affiliates, "Lubert-Adler") and Constellation Equity Corp., an entity
controlled by NorthStar ("Constellation"), formed Constellation Development Fund
(the "Development Fund"). The Development Fund was established, in part, to
provide capital that will allow the Company to expand its Microtel and Hawthorn
Suites brands into high visibility, difficult to develop areas by providing debt
and equity financing to selected local developers. NorthStar, Lubert-Adler and
Constellation agreed to contribute to the Development Fund up to $50 million of
equity capital. On October 31, 1998 the Development Fund entered into a
$60 million senior credit facility with NationsBank, N.A. As of December 31,
1999 the Development Fund has invested in seven Microtel and two Hawthorn Suites
hotels which are in different stages of development. As of February 21, 2000,
the managers of the Development Fund agreed that no additional projects will be
commenced in the future. In connection with the establishment of the Development
Fund, the Company committed to make a loan of up to $10 million to
Constellation. Constellation will use the funds to make an investment which is
subordinated to certain debt and equity returns of investors in the Development
Fund. The loan bears interest at an annual rate of 8%, is non-recourse and is
repayable from distributions and payments made to Constellation from the
Development Fund. As of December 31, 1999, the Company had made loans of
approximately $5.7 million in the aggregate to Constellation and the Company
expects to lend approximately an additional $400,000 to Constellation in 2000.
Due to the uncertainty surrounding ultimate recoverability of the subordinated
loans, the Company is accounting for them on the cost-recovery basis, where
interest income is recorded only after recovery of principal. The Company will
be paid $3.5 million over the first five years to manage the Development Fund
and has earned $2 million of such payments as of December 31, 1999. In
connection with this transaction, the Company also sold an aggregate of 500,000
shares of Class A Common Stock to NorthStar and Lubert-Adler for $5.6 million.
Rights of Northstar and Lubert-Adler to acquire additional shares of Class A
common stock have expired. In addition, David T. Hamamoto, Co-Chief Executive
Officer of NorthStar was elected to the Board of Directors of the Company. Dean
Adler, a director of the Company, serves as a manager of Lubert-Adler, and
Mr. Adler, along with Mr. Hamamoto and Mr. Aronson, serve as managers of the
Development Fund.
THE HOTEL FRANCHISING AND LODGING INDUSTRIES
HOTEL FRANCHISING. Over the years, owners of hotels not affiliated with
regional or national lodging companies have increasingly chosen to join hotel
franchise chains. The Company and other hotel franchise chains provide a number
of services designed to directly or indirectly increase hotel occupancy rates,
revenues and profitability. The Company believes that hotel operators often view
franchise chain membership as an important means of remaining competitive with
hotels that are either owned by or affiliated with national or regional lodging
companies. In determining whether to affiliate with a franchise chain, hotel
operators will compare costs of affiliation with the incremental revenues
anticipated to be derived from chain membership, and any benefit the owner
perceives may be available with financing sources or if the hotel is sold in the
future. Costs of affiliation include capital expenditures and operating costs
required to
10
<PAGE>
meet a chain's quality and operating standards, plus the ongoing payment of
franchise royalties and assessments for the reservations system and marketing
programs maintained by the franchisor.
LODGING INDUSTRY. The lodging industry has traditionally been divided into
five segments, each of which is identified by the average daily room rate
generally charged by hotel operators in the segment (the "ADR"). These
categories include, in descending order of ADR, luxury, upscale, mid-price,
economy and budget. Hotels are further segmented into limited-service and
full-service, depending on the degree of food and beverage and other services
offered, and hotels are also segmented into transient hotels, which serve short-
term guests, and extended-stay hotels, which serve guests on multiple night or
multiple week stays. The Company's franchised properties typically operate in
the budget and economy segments of the limited-service sectors through its
Microtel brand, the economy and mid-price segment through its Best Inns brand
and the upscale and mid-price segments through its Hawthorn Suites brand. In
1999, hotel owners in general were faced with a more difficult environment due
to declining occupancy rates, lower percentages of room rate increases,
increased room supply and higher interest rates. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of
Operations-Introduction."
COMPETITION
Competition among national brand franchisors and smaller chains in the
lodging industry to expand their franchise systems is significant. Competition
intensified in the franchising business in 1999 as new entrants that were
primarily builders or acquirors of hotels established franchising initiatives
during the year. The Company believes that competition for the sale of lodging
franchises is based principally upon (i) the name recognition and perceived
value and quality of the brand, (ii) the nature and quality of services provided
to franchisees, (iii) the franchisee's view of the relationship of building or
conversion costs and operating expenses to the potential for revenue and
profitability during operation and upon sale, (iv) the franchisee's ability to
finance and buy or sell the property, (v) the size and performance of the chain,
and (vi) the fees charged and financial assistance made available to the
franchisee. The Company's franchisees compete for guests with franchisees of,
and properties owned or operated by, other hotel chains, independent properties
and owner-operated chains. The success of the Company's franchisees affects the
profitability of the Company, as the Company's receipt of royalty fees under its
franchise agreements is tied directly to the gross room revenues earned by its
franchisees. In choosing a particular hotel, consumers consider differences in
room rates, quality and condition of accommodations, name recognition,
availability of alternative lodging (including short-term lease apartments),
service levels, reputation, safety, reservation systems and location.
Both among consumers and potential franchisees, Microtel competes with
independent hotels and regional/national brands, including but not limited to,
Comfort Inn-Registered Trademark-, Days Inn-Registered Trademark-, Econo
Lodge-Registered Trademark-, Fairfield Inn-Registered Trademark-, Sleep
Inn-Registered Trademark-, Red Roof Inn-Registered Trademark-, Budgetel
Inn-Registered Trademark-, Super 8-Registered Trademark-, Ramada
Limited-Registered Trademark-, Motel 6-Registered Trademark-, Jameson
Inns-Registered Trademark-, Travelodge-Registered Trademark-,
Thriftlodge-Registered Trademark-, Knights Inn-Registered Trademark-, Red Carpet
Inn-Registered Trademark- and Scottish Inns-Registered Trademark-. Best Inns
hotels compete for consumers and/or potential franchisees with independent
hotels and regional/ national brands, including but not limited to, Budgetel
Inn-Registered Trademark-, Comfort Inn-Registered Trademark-, Days
Inn-Registered Trademark-, Fairfield Inn-Registered Trademark-, Hampton
Inn-Registered Trademark-, La Quinta-Registered Trademark-, and Red Roof
Inn-Registered Trademark-. Hawthorn Suites properties compete for consumers
and/or potential franchisees with independent hotels and regional/national
brands, including but not limited to, Residence Inn-Registered Trademark-,
Homewood Suites-Registered Trademark-, Summerfield Suites-Registered Trademark-,
Woodfin Suites-Registered Trademark-, AmeriSuites-Registered Trademark-, Hampton
Inn and Suites-Registered Trademark-, Fairfield Suites-Registered Trademark-,
MainStay-Registered Trademark-, Candlewood-Registered Trademark-, Wingate
Inn-Registered Trademark-, Towne Place-Registered Trademark- and Courtyard by
Marriott-Registered Trademark-. Many of the Company's competitors are affiliated
with larger chains with substantially more properties, greater marketing budgets
and greater brand identity than the Company.
REGULATION
The sale of franchises is regulated by various state laws, as well as by the
Federal Trade Commission ("FTC"). The FTC requires that franchisors make
extensive disclosure to prospective franchisees, although it does not require
registration of offers to prospective franchisees. The required disclosure is
11
<PAGE>
made through a Uniform Franchise Offering Circular, which must be provided to
potential franchisees at least 10 days prior to execution of a franchise
agreement. A number of states require registration and disclosure in connection
with franchise offers and sales. In addition, several states have "franchise
relationship laws" that limit the ability of franchisors to terminate franchise
agreements or to withhold consent to the renewal or transfer of these
agreements. While the Company's franchising operations have not been materially
adversely affected by such existing regulations, the Company cannot predict the
effect of any future legislation or regulation. Additionally, various federal,
state, and local laws and regulations may affect activities undertaken by the
Company in connection with the financing of franchisees. In particular, the
Company may be required to obtain a license or to register in certain states in
order to underwrite or promote loans to be made by third party lenders or to
make loans directly to franchisees.
EMPLOYEES
As of December 31, 1999 the Company and its subsidiaries employed 142 full
time and two part time employees and the three affiliated reservations and
marketing not-for-profit corporations together employed 28 full time and five
part-time employees. None of the Company's or the not-for-profit reservation and
marketing corporations' employees are represented by unions. Management
considers its employee relations to be satisfactory.
TRADEMARKS AND LICENSES
The Company either owns or has filed applications with regard to certain
trademarks and service marks, including, among others, US FRANCHISE SYSTEMS,
MICROTEL, MICROTEL with design, HAWTHORN SUITES, HAWTHORN SUITES with the tree
logo, HAWTHORN SUITES LTD. with design, BEST INNS OF AMERICA, BEST SUITES OF
AMERICA and BEST INNS & SUITES. The Company considers its marks to be material
to its business and certain of the marks are also registered with or
applications for registration are pending with various state and foreign
government agencies. The Company is not aware of any material adverse claim
concerning its owned or licensed marks, however the Company is contesting an
opposition to the registration (but not to the use) of certain Best Inns marks.
See "Item 3--Legal Proceedings."
ITEM 2. PROPERTIES.
The principal executive and administrative offices of the Company are
located at 13 Corporate Square, Suite 250, Atlanta, Georgia 30329. The Company
currently leases a total of 15,852 square feet of office space at the foregoing
address, pursuant to a lease that expires on September 30, 2005. The Company
also leases a total of 8,542 square feet of office space at 1205 Skyline Drive,
Marion, Illinois 62959 pursuant to a lease that expires on September 30, 2000.
ITEM 3. LEGAL PROCEEDINGS.
The Company is and may become party to claims and litigations that arise in
its normal course of business, including but not limited to those listed below.
In management's opinion, except for certain of the matters described below, the
outcome of any currently pending matters is not expected to have a material
adverse effect on the Company's consolidated financial statements.
Nomura Asset Capital Corporation has commenced an action against the Company
and its subsidiary seeking damages in an amount not less than $704,910. Nomura
has also asserted that it is entitled to foreclose on $432,949 in loan
participations previously funded by the Company and pledged to Nomura. The
complaint alleges, among other things, that the Company owes Nomura this amount
in connection with certain construction loans Nomura has made to the Company's
franchisees. The Company has filed a counterclaim for unspecified damages. The
Company cannot predict the outcome of this matter.
12
<PAGE>
Best Western International and Cal-Vegas LP have filed notices of opposition
to the registration (but not to the use) by the Company of certain Best Inns
marks. The Company believes that the opposition rights of Cal-Vegas have
expired, and is contesting the Best Western opposition. While the Company cannot
predict the outcome of this matter, it does not believe that it will have a
material adverse effect on the Company's ability to market the Best Inns brands
or on the Company's consolidated financial statements.
The Company and certain subsidiaries are defendants in an action brought in
the United States District Court, Southern District of Illinois by the owner of
nine Best Inn properties for alleged mismanagement under management agreements
that the Company assumed in connection with its 1998 acquisition of the Best
Inns brand. USFS Management, Inc., a subsidiary of the Company, has filed a
counterclaim alleging fraudulent conduct by the owner and certain of his
affiliates. Discovery and settlement discussions are ongoing, and the Company is
opposing the claim. The amount of damages the plaintiff is seeking is
unspecified, and the Company cannot predict the outcome of this matter. The
Company believes it has meritorious defenses and is contesting this matter
vigorously.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted during the fourth quarter ended December 31, 1999 to
a vote of security holders of the Company.
13
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Class A Common Stock is traded on the Nasdaq National Market
under the symbol USFS. As of March 10, 2000, there were 68 holders of record of
the Company's Class A Common Stock and 3 holders of record of the Company's
Class B Common Stock. Management of the Company believes that there are in
excess of 1,100 beneficial holders of its Class A Common Stock. The following
table shows the range of reported high and low bid prices per share of Class A
Common Stock.
<TABLE>
<CAPTION>
1998 HIGH LOW
---- -------- --------
<S> <C> <C>
First quarter............................................... $13.63 $9.00
Second quarter.............................................. 12.75 7.63
Third quarter............................................... 7.88 3.94
Fourth quarter.............................................. 9.88 4.38
</TABLE>
<TABLE>
<CAPTION>
1999 HIGH LOW
---- -------- --------
<S> <C> <C>
First quarter............................................... $14.63 $8.88
Second quarter.............................................. 23.19 12.50
Third quarter............................................... 22.00 14.31
Fourth quarter.............................................. 16.88 4.25
</TABLE>
DIVIDEND POLICY. The Company has not declared or paid any cash dividends on
its Class A or Class B Common Stock. The Company currently intends to retain any
earnings for use in its business and therefore does not anticipate paying any
cash dividends in the foreseeable future. Any future determination to pay cash
dividends will be made by the Board of Directors in light of the Company's
earnings, financial position, capital requirements and such other factors as the
Board of Directors deems relevant.
COMMITMENTS TO ISSUE SHARES. In connection with a letter agreement with
Leisure Hotel Management dated February 3, 1998, the Company has authorized the
issuance of up to $900,000 worth of shares of Class A Common Stock upon the
attainment of certain development milestones. On March 3, 2000, the Company
issued 48,290 shares of Class A Common Stock, valued at approximately $240,000,
in satisfaction of the first such milestone. The Company is also obligated to
grant options for shares of Class A Common Stock under its employee stock option
plan to certain members of the Company's franchise salesforce in the event they
achieve specified sales benchmarks in 2000.
ITEM 6. SELECTED FINANCIAL DATA.
Presented below is selected consolidated historical financial information of
the Company and its subsidiaries for the years ended December 31, 1999, 1998 and
1997, respectively. The selected financial data has been derived from the
consolidated financial statements which were audited by the Company's
independent public accountants and should be read in conjunction with the
Company's Consolidated Financial Statements (and the related notes and schedules
thereto, including Note 12, "Segment Reporting") included under "Item 8.
Financial Statements and Supplementary Data" of this Report and "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" of this Report.
14
<PAGE>
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) 1999 1998 1997
----------------------------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues................................................. $ 19,696 $ 10,584 $ 1,867
Expenses................................................. 33,382 13,468 10,814
Net loss after tax....................................... 13,748 2,884 8,947
Loss applicable to common
Stockholders............................................. 13,748 2,884 8,947
Net loss applicable to common
Stockholders per share................................... 0.69 0.16 0.71
Weighted average common
Shares outstanding (1)................................... 19,886,030 17,670,591 12,563,772
BALANCE SHEET DATA (at period end):
Working capital.......................................... 6,348 $ 15,936 $ 12,144
Total assets............................................. 70,712 84,176 36,351
Total liabilities........................................ 13,874 14,467 32,153
Redeemable Preferred Stock (2)........................... -- --
Redeemable Common Stock.................................. 324 324 324
Stockholders' equity..................................... $ 56,514 $ 69,385 $ 3,874
</TABLE>
------------------------
(1) Includes 3,128,473 shares for the periods ended December 31, 1999, 1998, and
1997, respectively, of Class A Common Stock that are redeemable under
certain circumstances by the Company for reasons not under the Company's
control.
(2) On January 1, 1997, all the outstanding shares of redeemable preferred stock
were converted into $18,477,000 aggregate principal amount of 10%
subordinated debentures due September 29, 2007. The subordinated debentures
and associated interest were paid off with a portion of the proceeds from
the equity offering on May 19, 1998.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
GENERAL
This "Management's Discussion and Analysis of Financial Condition and
Results of Operations" should be read in conjunction with the consolidated
financial statements included herein of the Company and its subsidiaries.
Certain statements under this caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations" constitute "forward-looking
statements" under the Reform Act. See "Special Note Regarding Forward-Looking
Statements" and "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations--Risk Factors". Comparisons have been made
between the years ended December 31, 1999, 1998 and 1997 for the purposes of the
following discussion.
INTRODUCTION
Although 1999 was a challenging year in a number of respects, USFS recorded
record revenues, income from operations (before giving effect to certain charges
described below), franchise sales and hotel openings. The Company was profitable
on an operating basis (before giving effect to certain charges described below)
for the first time ever.
However, during 1999, the Company began to feel the effects of the
increasingly difficult environment now being encountered by some of its
franchisees. The hotel industry continues to experience declining
15
<PAGE>
occupancies and percentages of room rate increases, and increases in the costs
of doing business, particularly in the limited services segment. Additionally,
hotel operators face increasing new room supply and higher interest rates. As a
result, the Company believes its franchise royalty and management fee income
suffered in 1999 due to timing delays of hotel openings and financial
performance of certain hotels. Furthermore, the Company believes that during
1999 the number of hotel companies participating in the hotel franchising
business increased. As reported in its Form 10-Q for the quarter ended
September 30, 1999, the Company is addressing this more competitive environment
by adding additional personnel in franchise services, quality, marketing and
training to provide additional support to customers which will result in higher
corporate overhead in 2000.
The effects of this more difficult and competitive environment caused the
Company to record a special charge of approximately $19.3 million in 1999. Of
the total charge, approximately $1 million relates to cash expenditures to be
made in 2000. The largest portion of the charge ($17.1 million) came from
reserves against the Company's loan portfolio, only approximately $0.4 million
of which relates to cash expenditures to be made in 2000. Of the $17.1 million
charge, $15.5 million related to reserves taken against the principal and
accrued interest on the loan made to Ventures in connection with the 1998
acquisition of the Best Inns brand. See "Item 1. Business--Acquisition of the
Brands--Best Inns Acquisition." In the fourth quarter 1999, the Company was
advised by Ventures that the senior lender to its operating subsidiary planned
to institute a "lock-box" arrangement because of the deteriorating financial
condition of the 17 hotels owned by that subsidiary. The lock-box arrangement,
which was executed in March 2000, effectively precludes the payment of cash
interest to the Company while such arrangement is in place. The Company will
continue to receive interest as in-kind payments. Based upon the current
performance level of the properties owned by the subsidiary of Ventures and the
institution of a lock-box by the senior lender, the Company concluded that the
value of the loan was impaired and therefore it was appropriate to take a
reserve against the value of the loan and the accrued interest. The Company did
not recognize the paid-in-kind interest interest income in the fourth quarter of
1999. Unless performance of these properties improves, the Company does not
intend to include in income the pay-in-kind interest related to the Ventures
loan in 2000.
To the extent that the difficult environment encountered by the Company's
franchisees during 1999 continues in 2000, the Company's royalty and management
fee revenues and profitability could be adversely affected and all or a portion
of the Company's remaining loan portfolio ($14.3 million net of $16.1 million of
reserves at December 31, 1999) could become impaired.
The difficult environment confronting hotel operators combined with the lack
of scale of the Company's hotel management operations has caused the Company to
begin to reevaluate the future prospects of its hotel management business line.
During 1999, 17 management contracts were terminated, leaving the Company with
24 contracts at December 31, 1999. As of March 10, 2000 the Company has agreed
to terminate three additional contracts, leaving the Company with 21 contracts
(including 17 with the operating subsidiary of Ventures). The Company is
currently considering various alternatives related to the remaining contracts.
Accordingly, because the Company is managing fewer properties, hotel management
revenues will decline substantially in 2000 as compared to 1999. If the Company
determines not to continue to provide management services, the Company may be
required to take a non-recurring charge related to exiting the management
business line in 2000. The amount of this charge cannot be determined at this
time.
USFS announced that in recent months it received a number of unsolicited
inquiries regarding the possible sale of the Company, including inquiries from
several competitors. In response to those unsolicited inquiries, the Company
retained Banc of America Securities LLC as an advisor. The Company has had
discussions with several of those persons, although none resulted in offers
which were satisfactory to the Company and to the Board of Directors. The
Company has requested that Banc of America Securities assist the Company more
generally in evaluating strategic alternatives and opportunities that may be or
become available to the Company.
16
<PAGE>
USFS does not intend to update the information contained herein with respect
to its exploration of potential strategic alternatives for any future
developments or circumstances unless and until there is a definitive transaction
agreement entered into between USFS and any third party or until its exploration
of potential alternatives is definitively terminated. There can be no assurance
whatsoever that any transaction between USFS and any third party will take place
or, even if one does occur, about the nature and extent of any terms and
conditions of any such potential transaction.
RESULTS OF OPERATIONS
REVENUES:
The Company derived revenues from the following sources:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1999 1998 1997
<S> <C> <C> <C>
Royalty and other fee income........................... $14,607,000 $ 7,578,000 $ 769,000
Franchise application fees............................. 5,089,000 3,006,000 1,098,000
----------- ----------- ----------
TOTAL.................................................. $19,696,000 $10,584,000 $1,867,000
</TABLE>
1999 REVENUES COMPARED TO 1998 REVENUES
Royalty and other fee income increased $7.0 million for the year ended
December 31, 1999. The largest portion of the increase was in royalties
($5.9 million), which increased from $4.5 million to $10.4 million. This
increase resulted from an increase in the number of royalty paying hotels from
197 at the end of 1998 to 370 at the end of 1999. In addition, management
company revenues increased $0.5 million from $1.4 million to $1.9 million,
primarily due to the fact that 1998 only had a partial year of management
company results (USFS obtained management contracts on April 28, 1998 in
connection with the Best Inns acquisition). Management fee revenue is expected
to decline substantially in 2000 as discussed in the Introduction. Other fee
income increased $0.6 million primarily because of an increase in national
accounts revenue. Franchise application fees increased $2.1 million as a result
of an increase in the number of hotels opened during the year from 107 in 1998
to 182 in 1999.
1998 REVENUES COMPARED TO 1997 REVENUES
Royalty and other fee income increased $6.8 million in 1998 compared to
1997. The largest portion of the increase related to higher royalties
($4.3 million), which increased from $0.2 million to $4.5 million. This increase
resulted from the increase in the number of royalty paying hotels from 43 at the
end of 1997 to 197 at the end of 1998. In 1998, USFS began receiving hotel
management fees from third party property owners resulting from the completion
of the Best Inns acquisition on April 28, 1998. Hotel management fees were
$1.4 million in 1998. Other fee income increased $1.1 million due primarily to
the first year of management fees from Constellation Development Fund
($1.0 million) which was formed in March 1998. Franchise application fees
increased $1.9 million, as a result of an increase in the number of hotels
opened during the year from 42 in 1997 to 107 in 1998.
17
<PAGE>
EXPENSES:
The Company's expenses are in the following areas:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1999 1998 1997
<S> <C> <C> <C>
General and administrative............................ $12,175,000 $11,590,000 $ 9,083,000
Franchise sales commissions........................... 4,878,000 2,216,000 641,000
Depreciation and amortization......................... 1,677,000 1,393,000 571,000
Interest income....................................... (2,469,000) (2,493,000) (1,386,000)
Interest expense...................................... 762,000 1,905,000
Bad debt reserve...................................... 17,121,000 -- --
TOTAL EXPENSES........................................ $33,382,000 $13,468,000 $10,814,000
</TABLE>
1999 EXPENSES COMPARED TO 1998 EXPENSES
Total expenses increased $19.9 million from 1998 to 1999. In 1999, total
expenses included approximately $19.3 million of special charges, $17.1 million
of which related to bad debt reserves (only approximately $0.4 million of which
relates to cash expenditures to be made in 2000), $1.4 million of which was in
general and administrative expenses and $0.6 million of which was in commission
expense. Excluding such charges, total expenses increased $0.6 million from
$13.5 million in 1998 to $14.1 million in 1999.
18
<PAGE>
Excluding $1.4 million of the charges recorded in 1999, general and
administrative expenses otherwise decreased $0.8 million from $11.6 million in
1998 to $10.8 million in 1999. The primary reasons for this decline include:
(i) a reduction of approximately $0.4 million in compensation expense resulting
primarily from the change to a completely incentive-based plan for senior sales
personnel; (ii) a reduction in professional fees of approximately $0.2 million;
(iii) a reversal of approximately $0.2 million of a reserve taken in a previous
year in anticipation of a move to a new office space that was no longer required
after the Company executed an addendum to the lease for its existing office
space in July 1999, and (iv) lower marketing expenses of approximately
$0.4 million. This decline was partially offset by a $0.4 million increase in
general and administrative expenses related to the management business line.
Expenses associated with the management business line increased from
$0.9 million in 1998 to $1.3 million in 1999 primarily as a result of a full
year of operations in 1999 compared to 1998.
The $1.4 million of special charges included in general and administrative
expenses includes: (i) approximately $0.5 million related to the deposit
forfeiture and associated expenses resulting from the abandonment of the
proposed acquisition by the Company of an existing Hawthorn Suites hotel in
Atlanta, Georgia; (ii) a reserve of approximately $0.3 million related primarily
to the improvements associated with a parcel of land held for resale;
(iii) approximately $0.3 million related to various legal expenses, the primary
portion of which related to the disposition of a dispute over development fees
owed to a builder for two hotels built on behalf of the Company; and
(iv) approximately $0.3 million of other charges.
Franchise sales commissions increased $2.7 million primarily due to the
increased number of hotel openings in 1999 compared to 1998. Commission expense
for 1999 includes a net commission adjustment of approximately $0.6 million
primarily related to a non-recurring charge for license agreements defaulted due
to noncompliance with agreed upon milestones and a change in commissions for
executive management.
Depreciation and amortization expense increased approximately $0.3 million
for the year ended December 31, 1998 primarily due to increased amortization
related to issuance of development subsidies.
Interest income was substantially similar in 1999 and 1998. The Company did
not record pay-in-kind interest related to the loan to Ventures in the fourth
quarter of 1999, and does not expect to recognize pay-in-kind interest in 2000.
Therefore, interest income is expected to decline in 2000 compared to 1999.
Bad debt reserves increased by approximately $17.1 million in 1999 due
primarily to a $15.5 million reserve taken against the principal amount and
accrued interest of the note to Ventures and a $1.6 million reserve taken
against termination of the Nomura loan program and various monies due from
franchisees.
In May 1998, the Company repaid all outstanding debt with proceeds from its
common stock offering. Therefore, interest expense declined by $0.8 million in
1999 compared to 1998.
1998 EXPENSES COMPARED TO 1997 EXPENSES
Expenses increased approximately $2.7 million in 1998 compared to 1997.
General and administrative expenses increased $2.5 million in 1998 compared
to 1997, the largest portions of which are: (i) the addition of a management
company (approximately $0.9 million) due to the addition of the management
business on April 28, 1998 in connection with the Best Inn Acquisition,
(ii) additional salaries and wage-related costs pertaining to the increased
number of executed and open hotels (approximately $0.7 million), and
(iii) increased travel expenses (approximately $0.5 million) and (iv) increased
administrative expenses and other external advisory services (approximately
$0.4 million).
Franchise sales commissions increased $1.6 million due to the increased
number of hotel openings in 1998 compared to 1997.
19
<PAGE>
Depreciation and amortization expense increased $0.8 million in 1998
compared to 1997 primarily due to (i) increased amortization related to the
acquisitions of the Hawthorn and Best Inns brands (approximately $0.6 million)
and (ii) increased depreciation due to the implementation of a new reservation
system, computers and related business equipment (approximately $0.2 million).
Interest income increased $1.1 million primarily due to additional loans to
franchisees and interest earned on the cash proceeds from the Company's
May 1998 equity offering. Interest expense decreased $1.1 million due to the
payoff of the Company's outstanding indebtedness in connection with the
May 1998 equity offering.
NET LOSS--A summary of operating results is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1999 1998 1997
<S> <C> <C> <C>
Loss after taxes...................................... ($13,748,000) ($2,884,000) ($8,947,000)
Loss applicable to common stockholders................ ($13,748,000) ($2,884,000) ($8,947,000)
</TABLE>
1999 NET LOSS COMPARED 1998 NET LOSS
The Company's net loss increased by $10.9 million in 1999 compared to 1998.
Excluding the $19.3 million in special charges in 1999, the Company earned net
profits from operations of approximately $5.5 in 1999 compared to a net loss
from operations of $2.9 million in 1998 representing an improvement of
approximately $8.4 million compared to 1998. The increase in profit from
operations is due primarily to the number of hotel openings and operating hotels
resulting in increased application fees and royalty revenues, various management
fees, and a reduction in interest expense due to the pay-off of the Company's
outstanding indebtedness in 1998. The Company had accumulated net operating loss
carry-forwards for income tax purposes of $12.7 million and $13.9 million as of
December 31, 1999 and 1998, respectively. Given the uncertainty regarding
eventual use of the carry-forward due to the limited operating history of the
Company, management recorded a valuation allowance for the full amount of the
deferred tax asset as of December 31, 1999.
1998 NET LOSS COMPARED TO 1997 NET LOSS
The Company's net loss decreased by $6.1 million during 1998 primarily due
to the increased number of hotel openings and operating hotels resulting in
increased application fees and royalty revenues, various management fees, a
reduction in interest expense due to the pay-off of the Company's outstanding
indebtedness and an increase in interest income. The Company had accumulated net
operating loss carry-forwards for income tax purposes of $13.9 million and
$11.5 million as of December 31, 1998 and 1997, respectively. Given the
uncertainty regarding eventual use of the carry-forward due to the limited
operating history of the Company, management recorded a valuation allowance for
the full amount of the deferred tax asset as of December 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
On October 24, 1996, the Company completed a public offering of 1,825,000
shares of Class A Common Stock at $13.50 per share. Net proceeds were
approximately $21 million, all of which have been spent by the Company.
On May 19, 1998, the Company completed a public offering of 4,250,000 shares
of Class A Common Stock at $10.50 per share. The Company received net proceeds
of approximately $41 million, of which approximately $30 million was used to
repay all of its outstanding indebtedness, including all principal and accrued
interest. The remaining $11 million was held either as cash or cash equivalents
to be used for working capital and general corporate purposes. Cash and cash
equivalents were $6.3 million as of
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December 31, 1999. In management's opinion, based on the Company's current
operations, the Company's capital resources, including its cash on hand and
borrowing capability, are sufficient to fund operations for the next 12 months.
In connection with the establishment of the Development Fund (see "Item 1.
Business--Development Fund"), the Company committed to make a loan of up to
$10 million to Constellation. Constellation will use the funds to make an
investment which is subordinated to certain debt and equity returns of investors
in the Development Fund. The loan bears interest at an annual rate of 8%, is
non-recourse and is repayable from distributions and payments made to
Constellation from the Development Fund. As of December 31, 1999, the Company
had made loans of approximately $5.7 million in the aggregate to Constellation,
and expects to lend approximately an additional $400,000 to Constellation. Due
to the uncertainty surrounding ultimate recoverability of the subordinated
loans, the Company is accounting for them on the cost-recovery basis, where
interest income is recorded only after recovery of principal. In addition, the
Company sold an aggregate of 500,000 shares of Class A Common Stock to NorthStar
and Lubert-Adler for $5.6 million. Rights of NorthStar and Lubert-Adler to
acquire additional shares of Class A common stock have expired. The Company will
be paid $3.5 million over the first five years to manage the Development Fund
and has earned $2 million of such payments as of December 31, 1999.
In connection with the Best Inns Acquisition (see "Item 1.
Business--Acquisition of the Brands-Best Inns Acquisition"), the Company made a
$15 million unsecured subordinated loan to Ventures at an interest rate of 12%
per annum, interest on which will be paid in cash to the extent available and
otherwise will be paid-in-kind. The loan is subordinated to a guarantee provided
by Ventures in connection with a third-party senior loan in the principal amount
of approximately $65 million to its subsidiary that acquired 17 Best Inns hotels
in the Best Inns acquisition and is structurally subordinated to such third
party loan. In the fourth quarter 1999, the Company was advised that the senior
lender informed Ventures of its intention to institute a "lock-box" arrangement,
thereby eliminating the payment of cash interest to the Company while such
arrangement is in place. The Company will continue to receive interest in-kind
payments but will not include such in-kind payments in income. In March 2000,
the lock-box agreement was executed. The Company has taken a $15.5 million
reserve during the fourth quarter 1999 against the loan and accrued interest. If
the senior debt is not paid currently, certain management and franchisee fees
could be deferred until cash is available. A portion of these fees were deferred
in the fourth quarter 1999. The Company also committed to make up to
$7.5 million of additional loans to Ventures under certain circumstances,
including if required by Ventures in order to make a capital contribution to the
owner of the properties in order to achieve compliance with certain debt service
coverage ratios in order to obtain an extension of the maturity date of the
loan, or to obtain the release of a property from the senior lender's liens in
connection with a condemnation, casualty or otherwise. No such additional loans
have been made as of December 31, 1999, but it is possible the loan, or a
portion thereof, will be required to be made in the future. The Company manages
the hotels owned by the subsidiary of Ventures. Commencing April 2001, the
Company may be obligated to reimburse the owner of the properties for as much as
90% of the management fee if the owner's net profit for the 12-month period then
ended, and each subsequent 12-month period, falls below a specific level. If the
performance of the hotels does not materially improve by April 2001, the Company
expects to have to make a payment to the owner of the properties. In addition,
the senior lender to these properties has advised Ventures in March 2000 that it
currently has the right to require the termination of the management contract,
but is not doing so at this time. The Company also issued to Alpine Equities, an
affiliate of Ventures, 350,000 shares of Class A Common Stock for a purchase
price of $1.6 million. Additionally, the Company agreed to pay to Alpine
Equities $1,000 per year for each hotel added to the Best Inns system after the
closing of the transaction, provided that such new hotels are paying royalties
to the Company or any of its affiliates.
The Company currently has no outstanding lines of credit in place. The
Company currently uses cash and its own stock as its primary capital resource.
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For the year ended December 31, 1999, the Company had a net loss of
$13.7 million. The net cash used in operating activities was $0.3 million. The
net use of cash was primarily in accounts receivable, prepaid expenses and
deposits. Net cash used was partially offset by cash inflows of application fees
for executed franchise agreements, depreciation and amortization, non-cash
compensation cost related to the Company's employee stock option plans and
increases in accrued expenses.
For the year ended December 31, 1998, the Company had a net loss of
$2.9 million. The net cash used in operating activities was $11.6 million. The
net use of cash was primarily a result of increases in promissory notes
receivable related to the application fees on executed franchise agreements,
increases in deferred commissions paid to salesmen for executed franchise
agreements, and increases in loans to franchisees. Net cash used was partially
offset by cash inflows of application fees for executed franchise agreements,
depreciation and amortization, non-cash compensation cost related to the
Company's employee stock option plans and increases in commissions payable.
For the year ended December 31, 1999, net cash used in investing activities
was $9.5 million which was primarily a result of the issuance of development
subsidies to franchisees and loans to Constellation Development Fund.
For the year ended December 31, 1998, net cash used in investing activities
was $17.0 million which was primarily a result of the issuance of the previously
discussed long term notes receivable, issuance of development subsidies to
franchisees, acquisition of property and equipment and acquisition of franchise
rights.
For the year ended December 31, 1999, net cash provided by financing
activities was $0.2 million resulting from the exercise of stock options.
For the year ended December 31, 1998, net cash provided by financing
activities was $28.8 million which was a result of the issuance of common stock,
partially offset by repayment of the Company's outstanding indebtedness.
YEAR 2000 COMPUTER MATTER.
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions or customer
reservations or engage in similar normal business activities. The Company has
devoted substantial resources and time to analyzing and remediating Year 2000
Issues that are within the Company's control that may significantly impact the
Company's operations. Based on these efforts, the Company has experienced no
material disruptions or adverse effects due to Year 2000 issues and management
believes that the Year 2000 Issue will not pose material operational problems
for its computer systems and does not expect that any remaining costs of
compliance will have a materially adverse impact on the results of operations
during any quarterly or annual reporting period. The Company does not believe
that its operations and systems are vulnerable to those third parties' failure
to remediate their own Year 2000 Issues. There can be no guarantee that the
systems of other companies on which the Company's operations and systems rely
will not have an adverse effect in the Company's systems or results of
operations. There can be no assurances that circumstances will not arise in the
future that will require management to take action in addition to what has
already been performed on the Year 2000 Issues.
SEASONALITY.
Royalties generated by gross room revenues of franchised properties are
expected to be the largest source of revenue for the Company for the immediate
future. The Company expects to experience seasonal revenue patterns similar to
those experienced by the lodging industry generally. The summer
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months, because of increase in leisure travel, are expected to produce higher
revenues for the Company than other periods. Accordingly, the Company may
experience lower revenues and profits in the first and fourth quarters and
higher revenues and profits in the second and third quarters.
INFLATION.
The rate of inflation has not had a material effect on the revenues or
operating results of the Company since its inception.
RESERVATIONS AND ADVERTISING FUNDS
During 1998, the Company created independent reservations and advertising
not-for-profit corporations owned by its franchisees (the "Funds") for the
purpose of collecting and disbursing reservations and advertising fees related
to the Microtel and Hawthorn brands. In connection with the creation of the
Funds, the Company ceased reporting reservations and advertising fees and
expenses related to these Funds within its consolidated financial statements
effective April 1, 1998. Any deficits arising from reservations and advertising
operations for quarterly periods prior to April 1, 1998 have been included in
general and administrative expenses. The Company manages the reservations and
advertising programs on behalf of the Funds, and has made interest-bearing loans
at 8.5% in aggregate principal amounts, net of reserves, of approximately
$1.0 million to the Microtel Fund to supplement reservation, advertising, and
promotional efforts, and may make additional loans in the future. The Company
also administers reservations and advertising programs on behalf of Best Inns
franchisees by virtue of its management of Best Reservations Corp., an Illinois
not-for-profit corporation and has made interest-bearing loans at 8.5% in
aggregate principal amounts of approximately $0.8 million to Best Reservation
Corp. as of December 31, 1999, and may make additional loans in the future.
RISK FACTORS
In evaluating the Company and its business, the following risks should be
considered. These are not the only risks the Company faces. Some risks are not
yet known to the Company and others that the Company does not consider material
but could later turn out to be so. All of these risks could adversely affect the
Company's business:
MANAGEMENT OF GROWTH
The Company has experienced rapid growth in the number of its employees and
the scope of its operations since its inception. This growth has resulted in,
and is expected to continue to create, new and increased responsibilities for
management personnel, as well as added demands on the Company's operating and
financial systems. The Company's success will depend on its ability to manage
this growth while implementing its strategy. The efforts of key management
personnel and the Company's ability to attract or develop new management
personnel and to integrate these new employees into its overall operations will
be crucial to continued growth. The recent aggressive competition in the
franchise business has made it more difficult and more costly to attract
qualified personnel. If the Company is unable to manage growth effectively, the
Company's business and results of operations could be materially and adversely
affected.
DEPENDENCE ON, AND OBSTACLES TO, HOTEL OPENINGS
The Company expects that in the future its principal source of revenue will
be franchise fees received from its franchisees. Accordingly, future revenues
will be highly dependent on the timing and the number of open hotels and their
gross room revenues. There are numerous factors beyond the control of the
Company which affect the probability and timing of a hotel opening and the
ability or desire for a hotel to stay in the Company's franchise system. These
factors include, but are not limited to, the ability of a
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potential hotel owner to (i) secure adequate financing or satisfy financing
payments during the construction period; (ii) locate an appropriate site of a
hotel; (iii) obtain all necessary state and local construction, occupancy or
other permits and approvals; (iv) obtain necessary construction materials; and
(v) reach a satisfactory level of profitability at the hotel. Under industry and
general economic conditions that prevailed in 1999 and that are expected to
continue in 2000, hotel developers have had and may continue to have difficulty
accessing needed capital and attaining satisfactory levels of profitability. As
a result, the number and timing of franchised hotel openings, and accordingly
the Company's franchise fees, could be adversely affected if current conditions
do not improve. Additionally, there can be no assurance that accepted franchise
applications will result in executed franchise agreements or that executed
franchise agreements will result in open properties. Deteriorating conditions in
the lodging industry can be expected to adversely affect the likelihood that
properties in development will open on a timely basis or at all.
LIMITED OPERATING HISTORY; NET LOSSES; OUR RESULTS FLUCTUATE AND THESE
FLUCTUATIONS CAN BE UNPREDICTABLE
The Company began operating in October 1995 and therefore has a limited
operating history upon which investors can evaluate its performance. While the
Company was profitable during the first three quarters of 1999, the Company
incurred significant charges in the fourth quarter of 1999 that resulted in a
net loss for the year. There can be no assurance that the Company will be
profitable in the future. Additionally, events outside our control, including
those set forth in other risk factors, may cause the Company to experience
fluctuations in revenues and operating results. As a result, the Company's
future results may be below market expectations, including the expectations of
financial analysts and investors. A failure to meet such expectations may
adversely affect the trading price of the Company's Class A Common Stock.
MANAGEMENT, BY VIRTUE OF OWNERSHIP OF SUPERVOTING CLASS B COMMON STOCK, CONTROLS
THE COMPANY
Holders of Class A Common Stock are entitled to one vote per share and
holders of Class B Common Stock are entitled to ten votes per share. Each share
of Class B Common Stock is convertible at any time into one share of the
Class A Common Stock and, with limited exceptions, will convert automatically
upon any transfer thereof. Michael A. Leven, Chairman, President and Chief
Executive Officer, and Neal K. Aronson, Executive Vice President and Chief
Financial Officer, have the right to vote all of the outstanding shares of
Class B Common Stock, which, together with shares of Class A Common Stock which
they beneficially own (including stock held by other members of management),
represent approximately 65% of the combined voting power of the Company's
outstanding Common Stock. By reason of their right to vote the Class B Common
Stock, Messrs. Leven and Aronson will be able to (i) elect all of the Company's
directors (except as otherwise contractually provided), (ii) amend the Charter
with respect to most matters, (iii) effect a merger, sale or other major
corporate transaction, (iv) defeat any unsolicited takeover attempt and
(v) generally direct the affairs of the Company (including in a manner that may
benefit themselves disproportionately relative to other shareholders).
SUCCESSFUL COMPLETION AND INTEGRATION OF ACQUISITIONS
One element of the Company's business strategy is to continuously evaluate
acquisitions and business combinations. These acquisitions may be of brands in
the lodging industry or in other industries, or of businesses that the Company
does not expect to franchise, which would require the Company to develop
expertise in areas that it does not currently operate. There can be no assurance
that the Company will identify and complete suitable acquisitions or if
completed, that such acquisitions will be successfully integrated. The Company
did not engage in any such transaction in 1999. Acquisitions involve numerous
risks, including difficulties assimilating new operations and brands. There can
be no assurance that any
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acquisitions would result in long-term benefits to the Company or that
management would be able to manage effectively the resulting business.
DEPENDENCE ON SENIOR MANAGEMENT
The success of the Company is largely dependent on the efforts and abilities
of its senior management and certain other key personnel, particularly
Messrs. Leven, Aronson and Steve Romaniello, Executive Vice President-Franchise
Sales and Administration. The Company's success will depend in large part on its
ability to retain these individuals and other current members of its senior
management team and to attract and retain qualified personnel in the future. The
loss of members of senior management or of certain other key employees or the
Company's inability to retain and attract other qualified employees could have
an adverse impact on the Company's business and results of operations. Certain
franchise agreements have stipulations which allow franchisees to exit without
penalty if certain members of management are no longer affiliated with the
Company. The Company does not maintain key person life insurance on behalf of
the lives of any of its officers or employees.
COMPETITION FOR NEW FRANCHISE PROPERTIES AND HOTEL GUESTS
Competition among national brand franchisers and smaller chains in the
lodging industry to grow their franchise systems is fierce and intensified
during 1999. During 1999, an increasing number of hotel companies announced new
franchise initiatives. As a result, the Company believes there has been a marked
increase in franchise sales personnel throughout the lodging industry and more
aggressive financial incentives are being offered to hotel owners and
developers. Many of the Company's competitors are affiliated with larger chains
with substantially more properties, greater marketing budgets and greater brand
identity than the Company and its brands. There can be no assurance that the
Company can franchise a sufficient number of properties to generate operating
efficiencies that will enable it to compete with these larger chains. See
"Business--Competition."
GENERAL RISKS OF THE LODGING INDUSTRY
The Company is exposed to general risks of the lodging industry in a number
of ways. First, as a franchiser and manager, the Company's franchise royalty and
management fee revenues vary directly with its franchisees' gross room revenues.
As a result, the Company's franchise and management businesses are, and will be,
affected by risks experienced by hotel operators generally. In fact, because of
factors adversely affecting the lodging industry such as lower occupancy rates,
lower percentages of daily rate growth, higher interest rates and increased room
supply competition, the Company is currently evaluating the future prospects of
its management business to determine whether to continue to offer management
services. Second, to the extent the Company directly or indirectly makes equity
or debt investments in hotel properties, those investments will be subject to
the risks experienced by the underlying properties. Third, the Company may
directly acquire ownership interests in its branded hotel properties in order to
promote the brand or for other reasons. To the extent that the Company owns or
leases hotel properties, it will be subjected to the risks of a hotel operator.
The segments in which hotels franchised under the Company's brands currently
operate or plan to operate, may be adversely affected by changes in national or
local economic conditions and other local market conditions, such as an
oversupply of or a reduction in demand for lodging or a scarcity of potential
sites in a geographic area, changes in travel patterns, extreme weather
conditions, changes in governmental regulations that influence or determine
wages, prices, construction costs or methods of operation, changes in interest
rates, the availability of financing, and changes in real estate tax rates and
other operating expenses. In addition, due in part to the strong correlation
between the lodging industry's performance and economic conditions, the lodging
industry is subject to cyclical changes in revenues and profits. In fact, the
Company believes that hotel operators were negatively affected during 1999 by
increased room supply, weaker room demand and higher interest rates, among other
things. These risks may have been exacerbated by the relatively illiquid nature
of real estate holdings.
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Downturns or prolonged adverse conditions in real estate or capital markets
or in national or local economies could have a material adverse impact on the
Company's ability to locate new franchisees, the timing of new hotel openings,
the number of rooms at newly-opened hotels, and the amount of royalty and
management fee income earned by the Company and could result in the cancellation
of the Company's franchise agreements and management contracts and increase
risks of impairment on loans or other investments made by the Company directly
or indirectly to or in franchisees and developers and potential deferral or loss
of the interest income associated with such potential write-offs. In fact,
during 1999, 12 of the Company's franchised hotels left their respective systems
and 17 of the Company's management contracts were terminated. In addition to the
aforementioned risks, the Company's current and potential future investments in
or ownership of hotel properties creates a risk of decreased earnings due to
losses related to start-up expenses or ongoing losses due to shortfalls in
expected performance of a hotel. In addition, any guaranty required to secure
construction or permanent loan financing could adversely affect the Company's
financial condition.
The Company expects to experience seasonal revenue patterns similar to those
experienced by participants in the lodging industry generally. Accordingly, the
summer months, because of increases in leisure travel, are expected to produce
higher revenues for the Company than other periods during the year.
DEVELOPMENT AND OWNERSHIP RISK
The Company's success depends upon the development or conversion and opening
of hotels. As a result, it is subject to risks experienced by hotel developers.
These risks, which are applicable to Microtels as new construction properties,
and to Hawthorn and Best Inns as both new construction and conversion
properties, include delays in the commencement or completion of construction,
failure to obtain all necessary zoning and construction permits, discovery of
environmental hazards, unavailability of financing on favorable terms, if at
all, the failure of developed properties to achieve desired revenue or
profitability levels once opened, competition for suitable development sites
from competing franchise chains, the risk of incurring substantial costs in the
event a development project must be abandoned prior to completion, changes in
governmental rules, regulations and interpretations and general economic and
business conditions. The Company's revenues may also be adversely affected by
increases in interest rates, which could increase the costs of financing new
hotel construction or the conversion of existing hotels. Any one of these risks
could discourage or prohibit potential franchisees from beginning or completing
hotel projects or harm the profitability of an open hotel, which could result in
the termination of franchise agreements and management contracts.
If the Company leases and/or owns hotel properties or makes, directly or
indirectly, equity or debt investments in hotel properties, it would be subject
to risks experienced by hotel operators generally. The Company recently incurred
costs of approximately $0.5 million in connection with its abandoned purchase of
a Hawthorn Suites property, representing a portion of a forfeited deposit and
transaction costs.
RISKS RELATING TO THE FINANCING OF FRANCHISEES
The Company participates, from time to time, in construction loans, equity
investments, and long-term mortgage loans made to franchisees. In particular,
the Company has committed to lend up to $10 million to Constellation Equity
Corp. ("Constellation") to be invested by Constellation in Constellation
Development Fund, LLC (the "Development Fund") and to be used by the Development
Fund to provide debt and equity financing to selected developers. As of
December 31, 1999, the Company has loaned approximately $5.7 million in the
aggregate to Constellation and expects to loan approximately an additional
$400,000 to Constellation in 2000. The loan to Constellation is subordinated to
returns of other members. If such returns are not met, this loan could be
jeopardized. Due to the uncertainty surrounding the ultimate recoverability of
the subordinated loan, the Company is accounting for them on a cost-recovery
basis, where interest income is recorded only after recovery of principal. As of
December 31,
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1999, the Development Fund has invested in seven Microtels and two Hawthorn
Suites hotels which are in different stages of development. As of February 21,
2000 the managers of the Development Fund agreed that no additional projects
will be commenced in the future. In addition, the Company made a $15 million
unsecured subordinated loan to Alpine Hospitality Ventures LLC ("Ventures") in
connection with the Best Inns acquisition at an interest rate of 12% per annum,
interest on which will be paid in cash to the extent available and otherwise to
be paid in-kind. The loan is subordinated to a guaranty provided by Ventures in
connection with a third party senior loan in the principal amount of
approximately $65 million to its subsidiary that acquired 17 Best Inns hotels in
the Best Inns transaction and is structurally subordinated to such third party
loan. The Company is also committed to make additional loans of up to
$7.5 million to Ventures under certain circumstances. No such additional loans
were made as of December 31, 1999, but it is possible that the loan, or a
portion thereof, will be required to be made in the future. Each of Ventures and
Constellation is a highly leveraged entity and there can be no assurances that
any loans to Ventures or Constellation will be repaid. In the fourth quarter
1999, the Company was advised by Ventures that the senior lender to its
operating subsidiary planned to institute a "lock-box" arrangement because of
the deteriorating financial condition of the operating subsidiary. In
March 2000, the lock-box agreement was executed. The lock-box arrangement
effectively precludes the payment of cash interest to the Company while such
arrangement is in place. The Company will continue to receive interest in-kind
payments but will not include such in-kind payments in income. Recognition of
such in-kind payments as income is dependent upon the amount of underlying
property values of the borrower, relative to other lenders and shareholders.
There can be no assurance that those values will continue to be sufficient to
permit the Company to continue to record such interest income and, in fact, no
such income has been recognized by the Company in the fourth quarter 1999, and
the Company does not currently expect to record income in 2000. In fact, the
Company has taken a reserve of approximately $15.5 million associated with the
principal and accrued interest of the loan.
The Company has also made various loans and advances to individual
franchisees, the reservation and marketing funds for the Microtel and Best Inns
brands, and loan participations in a financing program with Nomura Asset Capital
Corp. See "Item 3. Legal Proceedings" for a discussion of a pending litigation
concerning these loan participations. The Company is subject to the risks
experienced by lenders generally, including risks of franchisee/borrower
defaults and bankruptcies. Among other things, the ability of the borrowers to
repay these loans will be affected by the factors discussed under "General Risks
of the Lodging Industry" and "Development and Ownership Risk." The failure of a
borrower to pay interest could have a material adverse effect on the Company's
results of operations. In the event of default under such loans, the Company, as
a lender, would bear the risk of loss of principal to the extent the value of
the collateral was not sufficient to pay lenders, which may be more senior in
the capital structure. As of December 31, 1999, in addition to the loans to
Ventures and Constellation, the Company had outstanding loans made to borrowers
of approximately $8.6 million aggregate principal amount (net of approximately
$1.1 million of reserves). If the financial condition of the borrowers of these
loans were to worsen, the loans could be deemed to be impaired, which could
result in a significant charge to the Company and future interest income related
to these loans could be deferred or eliminated which could have a materially
adverse effect on future income. In connection with equity investments, the
Company would be subject to risks as an equity investor. See
"Business--Regulation."
REGULATION
The sale of franchises is regulated by various state laws, as well as by the
FTC. To the extent that the Company manages, owns or leases hotel properties, it
will be subject to additional governmental regulations. For example, owners and
operators of hotels are subject to numerous federal, state and local government
regulations, including those relating to the preparation and sale of food and
beverages (such as health and liquor license laws) and building and zoning
requirements. Under the Americans with Disabilities Act of 1990 (the "ADA"), all
public accommodations are required to meet certain federal requirements related
to access and use by disabled persons. The determination that hotels owned,
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managed or leased by the Company are not in compliance with the ADA could result
in the imposition of fines, and award of damages to private litigants or
significant expense to the Company in bringing these hotels into compliance.
Additionally, various national, state and local laws and regulations may affect
activities undertaken by the Company in connection with providing financing to
franchisees. In particular, the Company may be required to obtain a license or
to register in certain states in order to arrange loans to be made to
franchisees. See "Business--Regulation."
DEPENDENCE ON SPIRIT RESERVATION SYSTEM
Franchisees of the Hawthorn brand open one year or greater derived
approximately 21% of their reservations through the Spirit Reservation System,
which is operated under contract with Hyatt Hotels Corporation by CSC
Outsourcing, Inc. ("CSC") and Sabre Technology Solutions ("Sabre"). There can be
no assurance that CSC and Sabre will continue to service Hawthorn Suites'
reservations needs in the future. See "Business--The Company's Lodging Franchise
Systems--Hawthorn Suites".
ABSENCE OF DIVIDENDS
The Company has not paid a dividend on its Common Stock since its inception.
The Company intends to retain any earnings to finance its growth and for general
corporate purposes and therefore does not anticipate paying any cash dividends
in the foreseeable future. See "Dividend Policy". In addition, future financing
agreements may contain limitations on the payment of cash dividends or other
distributions of assets to the holders of Common Stock.
ANTI-TAKEOVER DEVICES
Certain identical provisions of the Certificate of Incorporation and the
By-laws of the Company may be deemed to have anti-takeover effects and may
delay, deter or prevent a change in control of the Company that stockholders
might otherwise consider in their best interests. These provisions (i) allow
only the Board of Directors, the Chairman of the Board of Directors or the Chief
Executive Officer of the Company to call special meetings of the stockholders,
(ii) eliminate the ability of stockholders to take any action without a meeting,
(iii) establish certain advance notice procedures for nomination of candidates
for election as directors and for stockholder proposals to be considered at
stockholders' meeting, (iv) generally authorize the issuance of one or more
classes of "blank check" preferred stock, with such designations, rights and
preferences as may be determined from time to time by the Board of Directors,
(v) require approval of holders of 75% of the outstanding Class B Common Stock
for the Board of Directors to create a series of Preferred Stock with general
voting rights or with the right to elect a majority of directors under any
circumstances and (vi) require approval of holders of 75% of the outstanding
voting power to amend or repeal items (i), (ii) or (v) above or this item (vi).
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
U.S. FRANCHISE SYSTEMS, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1999
AND 1998 AND FOR THE THREE YEARS ENDED DECEMBER 31, 1999:
Independent Auditors' Report.............................. 30
Consolidated Statements of Financial Position............. 31
Consolidated Statements of Operations..................... 32
Consolidated Statements of Stockholders' Equity........... 33
Consolidated Statements of Cash Flows..................... 34
Notes to Consolidated Financial Statements................ 35
</TABLE>
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INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
U.S. Franchise Systems, Inc.:
We have audited the accompanying consolidated statements of financial
position of U.S. Franchise Systems, Inc. and subsidiaries (the "Company") as of
December 31, 1999 and 1998 and the related consolidated statements of
operations, stockholders' equity (deficit), and cash flows for the three years
ended December 31, 1999. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company at December 31,
1999 and 1998 and the results of its operations and its cash flows for the three
years ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
Atlanta, Georgia
March 14, 2000
30
<PAGE>
U.S. FRANCHISE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and temporary cash investments....................... $ 6,339,000 $ 15,966,000
Accounts receivable--Net.................................. 2,315,000 2,108,000
Deposits and prepaid expenses............................. 536,000 315,000
Promissory notes receivable............................... 1,898,000 980,000
Deferred commissions...................................... 2,564,000 1,754,000
------------ ------------
TOTAL CURRENT ASSETS.................................. 13,652,000 21,123,000
PROMISSORY NOTES RECEIVABLE................................. 12,369,000 24,667,000
PROPERTY AND EQUIPMENT--Net................................. 2,141,000 3,396,000
FRANCHISE RIGHTS--Net....................................... 24,691,000 25,490,000
DEFERRED COMMISSIONS........................................ 6,525,000 7,215,000
DEVELOPMENT SUBSIDIES--Net.................................. 10,837,000 1,263,000
OTHER ASSETS--Net........................................... 497,000 1,022,000
------------ ------------
TOTAL ASSETS.......................................... $ 70,712,000 $ 84,176,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 227,000 $ 498,000
Commissions payable....................................... 1,516,000 1,464,000
Deferred application fees................................. 3,686,000 1,973,000
Accrued expenses.......................................... 1,875,000 1,252,000
------------ ------------
TOTAL CURRENT LIABILITIES............................. 7,304,000 5,187,000
DEFERRED APPLICATION FEES................................... 6,570,000 9,280,000
------------ ------------
TOTAL LIABILITIES..................................... 13,874,000 14,467,000
REDEEMABLE STOCK:
Common shares, par value $0.01 per share; issued and
outstanding 3,128,473 (net of 58,807 shares in Treasury at
December 31, 1999 and December 31, 1998) entitled to
redemption under certain circumstances at $324,000 (net of
$6,000 in Treasury) as of December 31, 1999 and December
31, 1998.................................................. 324,000 324,000
STOCKHOLDERS' EQUITY:
Common shares, par value $0.01 per share; authorized
30,000,000 shares of Class A Common Stock and 5,000,000
shares of Class B Common Stock; issued and outstanding
14,063,496 Class A shares and 2,707,919 Class B shares at
December 31, 1999; issued and outstanding 14,038,721 Class
A shares and 2,707,919 Class B shares at December
31,1998................................................... 167,000 167,000
Capital in excess of par.................................. 90,293,000 89,416,000
Accumulated deficit....................................... (33,946,000) (20,198,000)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY............................ 56,514,000 69,385,000
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS(1)EQUITY............... $ 70,712,000 $ 84,176,000
============ ============
</TABLE>
See notes to consolidated financial statements.
31
<PAGE>
U.S. FRANCHISE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE YEARS ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
1999 1998 1997
------------ ----------- -----------
<S> <C> <C> <C>
REVENUES:
Royalty and other fee income........................ $ 14,607,000 $ 7,578,000 $ 769,000
Franchise application fees.......................... 5,089,000 3,006,000 1,098,000
------------ ----------- -----------
19,696,000 10,584,000 1,867,000
EXPENSES:
General and administrative.......................... 12,175,000 11,590,000 9,083,000
Franchise sales commissions......................... 4,878,000 2,216,000 641,000
Depreciation and amortization....................... 1,677,000 1,393,000 571,000
Interest income..................................... (2,469,000) (2,493,000) (1,386,000)
Interest expense.................................... 762,000 1,905,000
Bad debt reserves................................... 17,121,000
------------ ----------- -----------
33,382,000 13,468,000 10,814,000
NET LOSS BEFORE TAXES........................... (13,686,000) (2,884,000) (8,947,000)
Income taxes.......................................... 62,000 0 0
------------ ----------- -----------
NET LOSS AFTER TAXES............................ $(13,748,000) $(2,884,000) $(8,947,000)
============ =========== ===========
Weighted average number of common shares
outstanding......................................... 19,886,030 17,670,591 12,563,772
Loss per share (Basic).............................. $ (0.69) $ (0.16) $ (.71)
============ =========== ===========
</TABLE>
See notes to consolidated financial statements.
32
<PAGE>
U.S. FRANCHISE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE YEARS ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
COMMON STOCK CAPITAL TOTAL
---------------------- IN EXCESS ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT OF PAR DEFICIT EQUITY
----------- -------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Balance as of December 31, 1996.... 9,394,115 $ 94,000 $20,549,000 $ (8,367,000) $12,276,000
Issuance of capital
stock--acquisition of computer
software......................... 30,303 -- 250,000 -- 250,000
Fair value of options granted...... -- -- 295,000 -- 295,000
Net loss........................... -- -- -- (8,947,000) (8,947,000)
----------- -------- ----------- ------------ -----------
Balance as of December 31, 1997.... 9,424,418 $ 94,000 $21,094,000 $(17,314,000) $ 3,874,000
=========== ======== =========== ============ ===========
Issuance of capital stock--Hawthorn
acquisition...................... 2,222,222 22,000 17,754,000 -- 17,776,000
Development fund................... 500,000 5,000 5,602,000 -- 5,607,000
Stock offering..................... 4,250,000 43,000 40,758,000 -- 40,801,000
Best acquisition................... 350,000 3,000 3,890,000 -- 3,893,000
Fair value of options granted...... -- -- 318,000 -- 318,000
Net loss........................... (2,884,000) (2,884,000)
----------- -------- ----------- ------------ -----------
Balance as of December 31, 1998.... 16,746,640 167,000 89,416,000 (20,198,000) 69,385,000
=========== ======== =========== ============ ===========
Stock options exercised............ 24,775 -- 211,000 211,000
Fair value of options granted...... 666,000 666,000
Net Income (loss).................. -- -- -- (13,748,000) (13,748,000)
----------- -------- ----------- ------------ -----------
Balance as of December 31, 1999.... $16,771,415 $167,000 $90,293,000 $(33,946,000) $56,514,000
=========== ======== =========== ============ ===========
</TABLE>
See notes to consolidated financial statements.
33
<PAGE>
U.S. FRANCHISE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss............................................ $(13,748,000) $ (2,884,000) $ (8,947,000)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization....................... 1,677,000 1,393,000 571,000
Deferred compensation amortization.................. 666,000 318,000 295,000
Gain on sale of land................................ (185,000)
Land impairment..................................... 279,000
Changes in assets and liabilities:
(Increase) in accounts receivable, prepaid
expenses and deposits........................... (428,000) (1,449,000) (519,000)
(Increase) Decrease in promissory notes
receivable...................................... 11,380,000 (6,337,000) (3,075,000)
(Increase) in deferred commissions................ (120,000) (3,777,000) (3,009,000)
Increase (Decrease) in other assets............... 756,000 (1,231,000) 187,000
Increase (Decrease) in accounts payable........... (271,000) (640,000) 459,000
Increase (Decrease) in accrued expenses........... 623,000 404,000 (120,000)
Increase in commissions payable................... 52,000 293,000 334,000
Increase (Decrease) in deferred application
fees............................................ (997,000) 2,265,000 3,323,000
Increase in subordinated debentures paid in
kind............................................ 935,000
------------ ------------ ------------
Net cash used in operating activities............... (316,000) (11,645,000) (9,566,000)
INVESTING ACTIVITIES:
Issuance of long-term note receivable............... (15,000,000)
Issuance of development subsidies................... (9,957,000) (1,190,000) (109,000)
Acquisition of property and equipment............... (261,000) (3,918,000) (5,162,000)
Proceeds from sale of properties.................... 809,000 5,752,000
Acquisition of franchise rights..................... (113,000) (2,690,000) (178,000)
------------ ------------ ------------
Net cash used in investing activities............... (9,522,000) (17,046,000) (5,449,000)
FINANCING ACTIVITIES:
Repayment of subordinated debt...................... (19,866,000)
Issuance of common stock, net....................... 211,000 48,633,000 --
Redemption of common stock.......................... (6,000)
Principal payments on borrowings.................... (277,000)
------------ ------------ ------------
Net cash provided by (used in) financing
activities........................................ 211,000 28,767,000 (283,000)
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND TEMPORARY
CASH INVESTMENTS.................................... (9,627,000) 76,000 $(15,298,000)
CASH AND TEMPORARY INVESTMENTS
Beginning of period................................. 15,966,000 15,890,000 31,188,000
------------ ------------ ------------
End of period....................................... $ 6,339,000 $ 15,966,000 $ 15,890,000
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest.............................. $ 762,000 $ 1,009,000
============ ============
Noncash activities:
Issuance of 30,303 shares of Class A common stock
for
Reservations System Software........................ $ 250,000
============
</TABLE>
See notes to consolidated financial statements.
34
<PAGE>
U.S. FRANCHISE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999 AND 1998 AND
FOR THE THREE YEARS ENDED DECEMBER 31, 1999
1. ORGANIZATION AND BASIS OF PRESENTATION
U.S. Franchise Systems, Inc. (the "Company") was incorporated in
November 1997 for purposes of acquiring the Hawthorn Suites brand. See "Hawthorn
Acquisition." 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. The
consolidated financial statements include the accounts of the Company and its
wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
MICROTEL INNS AND SUITES FRANCHISING, INC.: On September 7, 1995, the
Company entered into an agreement (the "Microtel Agreement") with Hudson Hotels
Corporation ("Hudson") to acquire the exclusive worldwide franchising rights and
operating assets of the Microtel hotel system (the "Microtel Acquisition"). The
Microtel Agreement requires the Company to pay a royalty for the right to use,
and license others to use, certain trademarks, service marks, and trade names
associated with the Microtel hotel system.
HAWTHORN SUITES FRANCHISING, INC.: 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 Company now has the exclusive right to
franchise the Hawthorn Suites brand of hotels and to retain 100% of the
royalties derived therefrom.
BEST FRANCHISING, INC.: On April 28, 1998, the Company completed its
acquisition of the exclusive worldwide franchise rights to the Best Inns hotel
brands, including the franchise agreements for the existing Best Inns hotels. In
addition, the Company acquired management contracts and certain other assets
relating to the management of hotels on behalf of third-party owners.
RESERVATIONS AND ADVERTISING FUNDS: In 1998, the Company created
independent reservations and advertising not-for-profit corporations owned by
its franchisees (the "Funds") for the purpose of collecting and disbursing
reservations and advertising fees related to the Microtel and Hawthorn brands.
In connection with the creation of the Funds, the Company ceased reporting
reservations and advertising fees and expenses within its consolidated financial
statements effective April 1, 1998. Any deficits arising from reservations and
advertising operations for quarterly periods prior to April 1, 1998 have been
included in general and administrative expenses.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Application fee revenue and related costs--Initial franchise fee revenue
consists of application fees received by the Company's subsidiaries from
prospective franchisees. Such fees are recognized in income when the underlying
hotels open. Franchise sales commissions, and other related selling costs are
deferred until the underlying hotels open, at which time such costs are charged
to expense.
Royalty and other fee revenue--The Company recognizes royalty and other fee
income on the accrual method.
Allowance for doubtful trade accounts--During the years ended December 31,
1999, 1998 and 1997, the Company charged $530,000, $116,000 and $10,000
respectively as an allowance for estimated uncollectible accounts, and reduced
the allowance by $239,000, $59,000 and $39,000 respectively. Allowance for
35
<PAGE>
U.S. FRANCHISE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1999 AND 1998 AND
FOR THE THREE YEARS ENDED DECEMBER 31, 1999
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
doubtful account balances as of December 31, 1999 and 1998 was $313,000 and
$56,000, respectively. Charges to the account are made on a specific
identification basis.
Cash and temporary cash investments--The Company considers its investments
with an original maturity of three months or less to be cash equivalents.
Franchise rights--Franchise rights represent the cost of acquiring such
rights and are amortized on a straight-line basis over 25 years for Microtel,
31 years for Hawthorn and 33 years for Best Inns.
Development subsidies--Development subsidies consist of subsidies granted to
assist in the conversion or construction for prospective or existing
franchisees. They are amortized over the operating life of the license
agreement.
Impairment of long-lived assets--Long-lived assets, principally intangibles,
are evaluated quarterly and written down to fair value when management believes
that the unamortized balance cannot be recovered through future undiscounted
cash flows. Assets held for sale are carried at the lower of cost or net
realizable value. See note 4 and 5.
Other assets--Other assets primarily consist of architectural drawings and
renderings (amortized over 15 years) and loan participations. Accumulated
amortization for the years ended December 31, 1999 and 1998 was $279,000 and
$183,000, respectively.
Income taxes--The Company has adopted the provisions of SFAS 109,
"Accounting for Income Taxes," which requires the use of the asset and liability
approach in accounting for income taxes.
Fair value of financial instruments--The carrying amounts of cash and cash
equivalents, trade and notes receivables, other current assets, accounts
payable, accrueds, and notes payable meeting the definition of a financial
instrument approximate fair value.
Stock-based compensation plans--The Company has elected to account for its
stock option plans in accordance with SFAS 123, "Accounting for Stock-Based
Compensation." Under the provisions of SFAS 123, compensation is recognized for
the fair value of options granted over the vesting period.
Earnings per share--In February 1997, the Financial Accounting Standards
Board issued SFAS 128, "Earnings per Share," which simplifies the standards for
computing earnings per share (EPS) information and makes the computation
comparable to international EPS standards. SFAS 128 replaces the presentation of
"primary" (and when required "fully diluted") EPS with a presentation of "basic"
and "diluted" EPS. Net income per share--basic is computed based on net income
divided by the weighted average common shares outstanding. If required, net
income per share--diluted is computed by dividing net income by the weighted
average common and common shares during the year plus the incremental shares
that would have been outstanding under stock option plans.
Management estimates--The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
36
<PAGE>
U.S. FRANCHISE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1999 AND 1998 AND
FOR THE THREE YEARS ENDED DECEMBER 31, 1999
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
New accounting pronouncements: The Company adopted SOP 98-5 "Reporting on
the Cost of Start-up Activities" in fiscal year 1999. The effect on the
financial statements was not material. In June 1998, the Financial Accounting
Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" ("SFAS 133"), which was modified by SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities- Deferral of the
effective date of FASB Statement No. 133." SFAS 133 requires that an entity
recognize all derivatives as either assets or liabilities in the balance sheet
and measure those instruments at fair value. The Company plans to adopt
SFAS 133 beginning in the first quarter of 2001, and does not presently expect
such adoption to have any material effect on the Company's financial statements
at that time.
Reclassifications--Certain amounts in the prior year financial statements
have been reclassified to conform with the 1999 financial statement
presentation.
3. NOTES RECEIVABLE
In connection with the Best Inns Acquisition, the Company made a
$15 million unsecured subordinated loan to Alpine Hospitality Ventures LLC
("Ventures") at an interest rate of 12% per annum, interest on which will be
paid in cash to the extent available and otherwise will be paid-in-kind. The
loan is subordinated to a guarantee provided by Ventures in connection with a
third-party senior loan in the principal amount of approximately $65 million to
its subsidiary that acquired 17 Best Inns hotels in the Best Inns acquisition
and is structurally subordinated to such third-party loan. In the fourth quarter
1999, the Company was advised that the senior lender informed Ventures of its
intention to institute a "lock-box" arrangement, thereby eliminating the payment
of cash interest to the Company while such arrangement is in place, although
in-kind payment of interest accrues instead. Unless the properties improve
materially, the Company does not expect to recognize such in-kind interest as
income. In March 2000, the lock-box agreement was executed. During the fourth
quarter 1999, the Company took a reserve of $15.5 million against the loan and
accrued interest. If senior debt is not serviced currently, certain management
and franchise fees could be deferred until cash is available. A portion of these
fees were deferred in the fourth quarter 1999. The Company is also committed to
make up to $7.5 million of additional loans to Ventures under certain
circumstances, including, if required by Ventures in order to make a capital
contribution to the owner of the properties in order to achieve compliance with
certain debt service coverage ratios in order to obtain an extension of the
maturity date of the loan, or to obtain the release of a property from the
senior lender's liens in connection with a condemnation, casualty or otherwise.
No such additional loans were made as of December 31, 1999, but it is possible
that additional loans may be required in the future. The Company manages the
hotels owned by a subsidiary of Ventures. Commencing April 1, 2001, the Company
may be obligated to reimburse the owner of the properties for as much as 90% of
the management fee if the owner's net profit for the 12-month period then ended,
and each subsequent 12-month period, falls below a specified level. If the
performance of the hotels does not materially improve by April 2001, the Company
expects to have to make payments to the owner of the properties. In addition,
the senior lender to these properties has advised Ventures in March 2000 that it
currently has the right to require the termination of the management contract,
but is not doing so at this time. In 1999 and 1998, the Company earned franchise
royalty fees of $0.7 million and $0.5 million, respectively, and management fees
of $1.2 million and $0.9 million, respectively, from the owner of the
properties. The Company also issued to Alpine Hospitality Equities LLC ("Alpine
Equities"), an affiliate
37
<PAGE>
U.S. FRANCHISE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1999 AND 1998 AND
FOR THE THREE YEARS ENDED DECEMBER 31, 1999
3. NOTES RECEIVABLE (CONTINUED)
of Ventures, 350,000 shares (the "Alpine Shares") of Class A Common Stock for a
purchase price of $1.6 million. Alpine Equities was granted certain demand and
piggy-back registration rights on customary terms with respect to the Alpine
Shares, as well as certain tag-along rights on certain sales of Common Stock
made by the Company's CEO (Mr. Leven), and CFO (Mr. Aronson). Additionally, the
Company agreed to pay to Alpine Equities $1,000 per year for each hotel added to
the Best Inns system after the closing of the transaction, provided that such
new hotels are paying royalties to the Company or any of its affiliates.
The Company manages the reservations and advertising programs on behalf of
the Microtel Reservation and Advertising Fund and has made interest bearing
loans at 8.5% in an aggregate principal amount, net of reserves, of
approximately $1.0 million to the Microtel Fund to supplement reservation,
advertising and promotional efforts and may make additional loans in the future.
The Company also administers reservations and advertising programs on behalf of
Best Inns franchisees by virtue of its management of Best Reservations Corp, an
Illinois not-for-profit corporation and has made interest bearing loans at 8.5%
to the Best Reservation Corp. in aggregate principal amount of approximately
$0.8 million as of December 31, 1999, and may make additional loans in the
future.
On March 17, 1998, NorthStar Constellation, LLC (together with its
affiliates, "NorthStar"), Lubert-Adler Real Estate Opportunity Funds (together
with its affiliates, "Lubert-Adler") and Constellation Equity Corp., an entity
controlled by NorthStar ("Constellation"), formed Constellation Development Fund
LLC (the "Development Fund"). The Development Fund was established, in part, to
provide capital that will allow the Company to expand its Microtel and Hawthorn
Suites brands into high visibility, difficult to develop areas by providing debt
and equity financing to selected local developers. NorthStar, Lubert-Adler and
Constellation agreed to contribute to the Development Fund equity up to
$50 million. On October 31, 1998 the Development Fund entered into a
$60 million senior credit facility with NationsBank, N.A. As of December 31,
1999 the Development Fund has invested in seven Microtel and two Hawthorn Suites
hotels which are in different stages of development. As of February 21, 2000 the
managers of the Development Fund agreed that no additional projects would be
commenced in the future. In connection with the establishment of the Development
Fund, the Company committed to make a loan of up to $10 million to
Constellation. Constellation will use the funds to make an investment which is
subordinated to certain debt and equity returns of investors in the Development
Fund. The loan bears interest at an annual rate of 8%, is non-recourse and is
repayable from distributions and payments made to Constellation from the
Development Fund. As of December 31, 1999, the Company had made loans of
approximately $5.7 million in the aggregate to Constellation and the Company
expects to lend approximately an additional $400,000 to Constellation in 2000.
Due to the uncertainty surrounding ultimate recoverability of the subordinated
loan, the Company is accounting for it on the cost-recovery basis, where
interest income is recorded only after recovery of principal. The Company will
be paid $3.5 million over the first five years to manage the Development Fund,
$2 million of which was earned as of December 31, 1999. In connection with this
transaction, the Company also sold an aggregate of 500,000 shares of Class A
Common Stock to NorthStar and Lubert-Adler for $5.7 million. Rights of NorthStar
and Lubert-Adler to acquire additional shares of Class A Common Stock have
expired. In addition, David T. Hamamoto, Co-Chief Executive Officer of NorthStar
was elected to the Board of Directors of the Company. Dean Adler, a director of
the Company, serves as a manager of Lubert-Adler, and Mr. Adler, along with
Mr. Hamamoto and Mr. Aronson, serve as managers of the Development Fund.
38
<PAGE>
U.S. FRANCHISE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1999 AND 1998 AND
FOR THE THREE YEARS ENDED DECEMBER 31, 1999
3. NOTES RECEIVABLE (CONTINUED)
The Company accepts promissory notes as part of the initial purchase price
of a franchise. No revenue is recognized upon receipt of such notes until such
time as the hotel opens and the notes are repaid by the franchisee. The balance
of such notes as of December 31, 1999 and 1998 were $3.0 million and
$2.9 million, respectively.
Additionally, the Company makes loans to certain franchisees to assist in
the construction and initial operation of the hotels. The amount of such loans
was $4.4 million and $4.0 million as of December 31, 1999 and 1998,
respectively, net of reserve for uncollectible amounts of $651,000 in 1999 and
$0 in 1998.
4. INTANGIBLE ASSETS
The Company has intangible assets related to the acquisition of its various
franchise rights which are carried at cost net of accumulated amortization. A
summary of such costs is as follows:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Deferred franchise rights.......................... $26,810,000 $26,696,000
Accumulated amortization........................... 2,119,000 1,206,000
----------- -----------
Net deferred franchise rights...................... $24,691,000 $25,490,000
=========== ===========
</TABLE>
The Company grants development subsidiaries to certain franchisees in
connection with the construction and conversion of properties into one of its
brands. A summary of such deferred costs is as follows:
<TABLE>
<CAPTION>
1999 1998
----------- ----------
<S> <C> <C>
Development subsidies............................... $11,137,000 $1,299,000
Accumulated amortization............................ 300,000 36,000
----------- ----------
Development subsidies net........................... $10,837,000 $1,263,000
=========== ==========
</TABLE>
During 1999, the Company determined that certain development subsidies would
not be recoverable from future cash flow and therefore has written off such
assets in the amount of $123,000.
39
<PAGE>
U.S. FRANCHISE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1999 AND 1998 AND
FOR THE THREE YEARS ENDED DECEMBER 31, 1999
5. PROPERTY AND EQUIPMENT
Property and equipment is recorded at historical cost and consisted of the
following at December 31, 1999 and 1998, respectively:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Land............................................... -- $ 1,122,000
Construction in progress........................... -- 198,000
Furniture, fixtures, and equipment................. $ 659,000 594,000
Computer equipment and software.................... 2,162,000 1,978,000
----------- -----------
2,821,000 3,892,000
Less accumulated depreciation...................... 1,109,000 496,000
----------- -----------
1,712,000 3,396,000
Real Estate held for sale.......................... 429,000
----------- -----------
$ 2,141,000 $ 3,396,000
=========== ===========
</TABLE>
PC based computer software is depreciated on a straight-line basis over a
period of three years. The reservation system and accounting system software are
depreciated on a straight-line basis over a period of five years. Computer
equipment is depreciated using the 200% declining-balance method over a period
of five years. The remaining fixed assets are depreciated using the 200%
declining-balance method over a period of seven years. Depreciation expense was
$316,000, $365,000 and $108,000 for the years ended December 31 1999, 1998 and
1997, respectively.
Land (with associated improvements) is held for sale in Redding, California.
It is expected to be sold during 2000. The land and associated improvements were
written down to net realizable value in fiscal 1999 resulting in a $279,000
reserve.
The Company recorded a reserve of approximately $0.5 million in the fourth
quarter of 1999 in connection with the abandoned purchase of a Hawthorn Suites
property, representing a portion of a forfeited deposit and associated
transaction costs.
6. REDEEMABLE PREFERRED STOCK AND SUBORDINATED DEBENTURES
Until December 31, 1996, the cumulative redeemable exchangeable preferred
stock earned cumulative dividends at an annual dividend rate of 10%, payable in
additional shares of redeemable preferred stock. On January 1, 1997, the Company
exercised its option to exchange the redeemable preferred stock at its
liquidation value of $18,477,000 into 10% subordinated debentures due
September 29, 2007. In May 1998, the Company repaid all outstanding principal
and interest on the subordinated debentures with a portion of the proceeds from
its $41 million equity offering (See Note 7).
7. STOCKHOLDERS EQUITY
The Company has two classes of common stock: Class A Common Stock, par value
$.01 per share and Class B Common Stock, par value $.01 per share outstanding at
December 31, 1999 and 1998, respectively. Shares of Class A Common Stock and
Class B Common Stock are identical in all respects except that:
40
<PAGE>
U.S. FRANCHISE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1999 AND 1998 AND
FOR THE THREE YEARS ENDED DECEMBER 31, 1999
7. STOCKHOLDERS EQUITY (CONTINUED)
(i) holders of Class B Common Stock are entitled to ten votes per share and
holders of Class A Common Stock are entitled to one vote per share; and
(ii) the shares of Class B Common Stock are convertible into Class A Common
Stock at the option of the holder and, with limited exceptions, upon the
transfer thereof. There are 30 million shares of Class A Common Stock and
5 million shares of Class B Common Stock authorized for issuance.
On October 24, 1996, the Company completed an initial public offering of
1,825,000 shares of Class A Common Stock at $13.50 per share. Net proceeds to
the Company were approximately $21 million. On May 19, 1998, the Company
completed a public offering of 4,250,000 shares of Class A Common Stock at
$10.50 per share. Net proceeds were approximately $41 million, of which
approximately $30 million was used by the Company to repay all of its
outstanding indebtedness including all principal and accrued interest and the
remaining $11 million of which was either used for working capital and general
corporate purposes or is currently available as cash balances.
41
<PAGE>
U.S. FRANCHISE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1999 AND 1998 AND
FOR THE THREE YEARS ENDED DECEMBER 31, 1999
8. STOCK PURCHASED BY EMPLOYEES
Under the terms of certain employee stock purchase agreements, Company
management holds 4,027,886 shares of unrestricted stock and 1,344,457 shares of
restricted stock at December 31, 1999.
The Company repurchased 30,921 unrestricted and 26,886 restricted shares
(57,807 shares in the aggregate) from two management employees who left the
Company during 1997 at $.1034 and $.1137 per share, respectively, pursuant to
the terms of the departing management employees' respective employee stock
purchase agreements. As of December 31, 1999 and 1998 the 57,807 shares are held
by the Company as treasury stock. Pursuant to the terms of their respective
employee stock purchase agreements, certain management shareholders had the
right to purchase, at any time, the repurchased shares from the Company at the
price paid by the Company. Such shareholders permanently declined the option to
repurchase such shares. Restricted shares and certain unrestricted shares are
subject to five year and ten year vesting periods, respectively, subject to,
among other things, certain management employees' continued employment by the
Company. Any shares which are forfeited will be repurchased by the Company and
reoffered to certain management shareholders at $.1034 or $.1137 per share, as
applicable, based on the price paid by the management employee for the shares.
Compensation expense will be recorded to the extent the fair value of the
reoffered shares exceeds $.1034 or $.1137, as applicable. All restricted shares
are subject to an earnings test formula based upon increases in the Company's
earnings before interest, taxes, and depreciation and are deemed earned upon the
satisfaction of these performance criteria (the "Earned Shares"). Earned Shares
are subject to forfeiture if the holder's employment ceases with the Company
before September 29, 2005. Any restricted shares that have not been earned by
September 29, 2005 will be redeemed by the Company and reissued to the original
stockholders of the Company (other than certain management shareholders) pro
rata based on their original holdings of common stock. Restricted shares and all
other shares subject to the employee stock purchase agreements held by other
members of management have been classified as redeemable common stock in the
balance sheet because they are redeemable by the Company under certain
circumstances for reasons beyond the Company's control.
9. STOCK OPTION PLANS
The Company has stock option plans which reserve shares of Class A Common
Stock for its officers, employees, consultants and advisors (the "Employee
Plan") and for its non-employee directors (the "Directors Plan"). Under the
Employee Plan, the Option Committee of the Board of Directors may grant options
for up to 975,000 shares of the Company's Class A Common Stock taking into
effect the amendment to the Employee Plan increasing by 250,000 the number of
options under the Employee Plan. The amendment was approved by the Board of
Directors of the Company subject to shareholder approval; however, holders of a
majority of the Company's voting stock entered into a Voting Agreement with the
Company dated January 25, 2000 which ensures such approval. The options
generally have a maximum life of seven years. Under the Directors Plan, the
Company may grant options to its non-employee directors for up to 125,000 shares
of the Company's Class A Common Stock. Non-employee directors are each awarded
options to purchase 2,000 shares upon their election to the Board of Directors.
In addition, commencing on January 1, 1998, each non-employee director receives
a grant of 2,000 stock options on January 1 of each year they continue to serve
on the Board. The director options become exercisable on the first anniversary
of the grant date and their maximum life is ten years. Options outstanding under
the Company's stock option plan have been granted at prices equal to the market
value of the stock on the
42
<PAGE>
U.S. FRANCHISE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1999 AND 1998 AND
FOR THE THREE YEARS ENDED DECEMBER 31, 1999
9. STOCK OPTION PLANS (CONTINUED)
date of the grant and vest over a 1, 4, or 5 year period. On December 31, 1999,
all stock options were repriced for all current employees and consultants to
$4.50 per share, resulting in incremental fair value of $327,000, which is
recognized over the remaining vesting period of the options. The Company is also
obligated to grant options for shares of Class A common stock to certain members
of its franchise sales force in the event they achieve specified sales
benchmarks in 2000.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions.
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Expected life (years).............................. 3.8 3.9 3.8
Expected volatility................................ 34.8% 30.0% 30.1%
Risk free interest rate............................ 5.9% 6.0% 6.0%
Dividend Yield..................................... 0.0% 0.0% 0.0%
</TABLE>
Activity related to the Company's two stock option plans is summarized as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------------------- ------------------------- -------------------------
WEIGHTED WEIGHTED WEIGHTED
AVG. AVG. AVG.
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
-------- -------------- -------- -------------- -------- --------------
<S> <C> <C> <C> <C> <C> <C>
Options as of January 1.............. 484,857 $ 9.28 228,500 $11.39 178,500 $13.48
Granted.............................. 322,400 10.99 326,757 7.66 105,700 8.66
Forfeited............................ (62,175) 10.77 (70,400) 9.38 (55,700) 12.72
Exercised............................ (24,775) 8.51 0 0 0
------- ------ ------- ------ ------- ------
Options as of December 31............ 720,307 $ 4.90 484,857 $ 9.28 228,500 $11.39
======= ====== ======= ====== ======= ======
Options exercisable as of December
31................................. 161,793 53,163 39,950
Weighted-average fair value of
options granted during the year.... $10.99 $ 2.23 $ 2.78
====== ====== ======
</TABLE>
43
<PAGE>
U.S. FRANCHISE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1999 AND 1998 AND
FOR THE THREE YEARS ENDED DECEMBER 31, 1999
9. STOCK OPTION PLANS (CONTINUED)
The following table summarizes information about stock options outstanding
at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------- -------------------------------
NUMBER WEIGHTED AVERAGE WEIGHTED NUMBER WEIGHTED
RANGE OF OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE
EXERCISE PRICES DEC. 31, 1999 CONTRACTUAL LIFE EXERCISE PRICE DEC. 31, 1999 EXERCISE PRICE
----------------------------- -------------- ---------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
.10340 to .11375............. 30,921 2.49 $0.11 7,730 $0.11
$4.50........................ 578,000 3.31 4.50 103,813 4.50
$5.81........................ 32,000 3.61 5.81 -- --
$8.13 to $13.50.............. 52,500 0.15 11.55 50,250 11.59
------- ---- ----- ------- -----
.10340 to $13.50............. 693,421 3.05 $4.90 161,793 $6.49
======= ==== ===== ======= =====
Performance
Based Options*............... 26,886
=======
Total options **........... 720,307
=======
</TABLE>
------------------------
* Performance Based options have been granted to an employee at an average
exercise price of $0.105 per share. Vesting of these options is conditional
on the Company's achieving certain profitability targets. Compensation cost
will be estimated and recorded for these options when management can
reasonably estimate the likelihood that the performance criteria will be
achieved by the Company.
** The fair value of options granted or repriced during the years ended
December 31, 1999 and 1998 was $975,000 and $610,000 respectively, which is
being amortized as compensation expense over the vesting period.
Compensation expense of $503,000, $318,000 and $295,000 was recorded for the
years ended December 31, 1999, 1998, and 1997 respectively. In 1999,
compensation expense includes $132,000 associated with the repricing of the
stock options during the fourth quarter.
44
<PAGE>
U.S. FRANCHISE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1999 AND 1998 AND
FOR THE THREE YEARS ENDED DECEMBER 31, 1999
10. INCOME TAXES
Deferred income taxes in the accompanying consolidated statement of
financial position includes the following amounts of deferred tax assets and
liabilities at December 31, 1999 and 1998, respectively:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
DEFERRED TAX LIABILITIES:
Deferred expenses................................ $(2,845,000) $(2,955,000)
Other............................................ (964,000) (251,000)
----------- -----------
Total.............................................. $(3,809,000) $(3,206,000)
=========== ===========
DEFERRED TAX ASSETS:
Operating loss carryforwards..................... $ 4,814,000 $ 6,781,000
Deferred revenue................................. 2,973,000 3,905,000
Compensation cost................................ 0 259,000
Allowances and reserves.......................... 6,650,000 0
Other............................................ 1,079,000 112,000
----------- -----------
Total.............................................. 15,516,000 11,057,000
----------- -----------
Valuation allowance................................ (11,707,000) (7,851,000)
----------- -----------
Net deferred tax asset (liability)................. $ 0 $ 0
=========== ===========
</TABLE>
As of December 31, 1999 and 1998, the Company had accumulated net operating
loss carryforwards of $12,667,000 and $13,890,000, respectively which begin to
expire in the year 2010.
During the years ended December 31, 1999, and 1998 the Company increased the
valuation allowance against its net deferred tax asset by $3.9 million and
$1.6 million, respectively due to the uncertainty of the realizability of net
deferred tax assets.
The following is a reconciliation of the statutory tax rate to the effective
tax rate of the Company at December 31, 1999 and 1998, respectively:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Statutory federal rate...................................... 34% 34%
Statutory state rate less federal effect.................... 4% 4%
Effect of income not subject to tax.........................
Change in valuation allowance............................... (38%) (38%)
--- ---
Effective tax rate.......................................... --% --%
=== ===
</TABLE>
11. SEGMENT REPORTING
The Company currently owns three brands and operates a management company in
the United States. Other/corporate represents overhead and assets not
specifically allocable to the brands or the management
45
<PAGE>
U.S. FRANCHISE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1999 AND 1998 AND
FOR THE THREE YEARS ENDED DECEMBER 31, 1999
11. SEGMENT REPORTING (CONTINUED)
company. Revenues, net income directly attributable to the business segment,
identifiable assets, and capital expenditures are estimated as follows.
<TABLE>
<CAPTION>
MANAGEMENT OTHER/
MICROTEL HAWTHORN BEST COMPANY CORPORATE CONSOLIDATED
----------- ----------- ------------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues
1999................. $ 6,497,000 $ 7,276,000 $ 4,005,000 $1,918,000 $ -- $ 19,696,000
1998................. $ 4,355,000 $ 3,750,000 $ 1,072,000 $1,407,000 $ -- $ 10,584,000
1997................. $ 1,664,000 $ 203,000 $ -- $ -- $ -- $ 1,867,000
Net Income (loss)
1999................. $ 3,193,000 $ 4,625,000 $(11,833,000) $ 433,000 $(10,166,000) $(13,748,000)
1998................. $ 3,748,000 $ 2,455,000 $ 2,034,000 $ 454,000 $(11,575,000) $ (2,884,000)
1997................. $ 1,139,000 $ (25,000) $ -- -- $(10,061,000) $ (8,947,000)
Identifiable Assets
1999................. $19,343,000 $32,048,000 $ 12,576,000 $ 646,000 $ 6,099,000 $ 70,712,000
1998................. $19,199,000 $24,358,000 $ 22,026,000 $ 917,000 $ 17,676,000 $ 84,176,000
1997................. $18,215,000 $ 2,957,000 $ -- $ -- $ 15,179,000 $ 36,351,000
Capital Expenditures
1999................. $ 12,000 $ 56,000 $ 57,000 $ 36,000 $ 213,000 $ 374,000
1998................. $ 3,360,000 $18,362,000 $ 4,583,000 $ 35,000 $ 523,000 $ 26,863,000
1997................. $ 4,167,000 $ 178,000 -- $ -- $ 995,000 $ 5,340,000
</TABLE>
12. LEASES
The Company leases certain equipment and office space used in its
operations. Rental expense under operating leases was $343,000, $461,000 and
$366,000 for the years ended December 31, 1999, 1998 and 1997, respectively. The
future minimum rental commitments under non-cancelable operating leases at
December 31, 1999 were as follows:
<TABLE>
<S> <C>
2000........................................................ $ 449,000
2001........................................................ 348,000
2002........................................................ 329,000
2003........................................................ 291,000
2004........................................................ 285,000
Beyond...................................................... 221,000
----------
Total....................................................... $1,923,000
==========
</TABLE>
46
<PAGE>
U.S. FRANCHISE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1999 AND 1998 AND
FOR THE THREE YEARS ENDED DECEMBER 31, 1999
13. COMMITMENTS AND CONTINGENCES
The Microtel Acquisition Agreement requires the Company to satisfy a
development schedule, which requires the Company to have a specified number of
new Microtel properties open or under construction by certain target dates. The
Company has satisfied the development schedule to date and must have 250 newly
executed Microtel franchises open or under construction by December 31, 2001 in
order to avoid being in default under the last remaining target. For purposes of
meeting this target, the 27 Microtel properties that do not pay royalties to the
Company and, if open or under construction, the additional 23 Microtel Inn
properties and 10 Microtel Suites hotels that are currently entitled to be built
by certain parties without the payment of royalties to the Company pursuant to
the Microtel Acquisition Agreement, are excluded. As of March 10, 2000, the
Company had opened or under construction 223 Microtel properties which counted
toward satisfying the development schedule. Therefore, from March 10, 2000 until
December 31, 2001, the Company is required to break ground on an additional 27
Microtel brand hotels in order to avoid being in default under the Microtel
Acquisition Agreement. If the Company fails to so satisfy the development
schedule, it may cure its default by making a $1,000,000 payment to Hudson.
The Company has committed to make loans and other payments to Ventures and
the Development Fund (See Note 3).
The Company has agreed to provide development subsidies to various
franchisees to the extent certain milestones are achieved.
The Company has employment agreements with its Chief Executive Officer and
Chief Financial Officer. The agreements are for a ten year term expiring on
September 30, 2005 and provide minimum salary levels and other fringe benefits.
The Company is subject to litigation in the ordinary course of its business.
In the opinion of management, the outcome of such litigation will not have a
material impact of the earnings, financial position or cash flow of the Company.
The Company is currently in litigation with respect to certain financing
programs under which the Company retained an ongoing participation. Management
has reserved approximately $800,000 with respect to the termination of the loan
program as of December 31, 1999.
In connection with a letter agreement with Leisure Hotel Management dated
February 3, 1998, the Company has authorized the issuance of up to $900,000
worth of shares of Class A Common Stock upon the attainment of certain
development milestones. On March 3, 2000, the Company issued 48,290 shares of
Class A Common Stock, valued at approximately $240,000, in satisfaction of the
first such milestone. The Company is also obligated to grant options for shares
of Class A Common Stock to certain members of the Company's franchise salesforce
in the event they achieve specified sales benchmarks in 2000.
47
<PAGE>
U.S. FRANCHISE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1999 AND 1998 AND
FOR THE THREE YEARS ENDED DECEMBER 31, 1999
14. SELECTED QUARTERLY FINANCIAL DATA--(UNAUDITED)
<TABLE>
<CAPTION>
1999 FIRST SECOND THIRD FOURTH TOTAL YEAR
---- ----------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenue..................... $ 3,176,000 $ 4,751,000 $ 6,992,000 $ 4,777,000 $ 19,696,000
Net income (loss)........... 505,000 1,513,000 3,034,000 (18,800,000) (13,748,000)
Income (loss) applicable to
common stockholders....... $ 505,000 $ 1,513,000 $ 3,034,000 $(18,800,000) $(13,748,000)
Weighted avg shares
outstanding............... 19,875,113 19,880,326 19,891,538 19,898,888 19,886,030
Weighted avg shares
outstanding--dilutive..... 20,023,661 20,044,600 20,087,111 -- --
Net income (loss) per
share--basic and dilutive
(a)....................... $ .03 $ .08 $ .15 $ (.94) $ (.69)
=========== =========== =========== ============ ============
</TABLE>
<TABLE>
<CAPTION>
1998 FIRST SECOND THIRD FOURTH TOTAL YEAR
---- ----------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenue..................... $ 1,296,000 $ 2,795,000 $ 3,354,000 $ 3,139,000 $ 10,584,000
Net income (loss)........... (1,855,000) (1,256,000) 109,000 118,000 (2,884,000)
Income (loss) applicable to
common stockholders....... $(1,855,000) $(1,256,000) $ 109,000 $ 118,000 $ (2,884,000)
Weighted avg shares
outstanding............... 13,094,249 17,837,891 19,875,113 19,875,113 17,670,591
Net income (loss) per
share--
basic (a)................. $ (.14) $ (.07) $ .01 $ .01 $ (.16)
=========== =========== =========== ============ ============
</TABLE>
------------------------
(a) Due to the changes in the numbers of shares outstanding, quarterly per share
amounts do not add to the total for the year.
48
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
There have been no disagreements on accounting and financial disclosure
matters which are required to be described by Item 304 of Regulation S-K.
PART III
Items 10, 11, 12, and 13 to be furnished by amendment hereto on or prior to
April 30, 2000 or the Company will otherwise have filed a definitive Proxy
Statement involving the election of directors pursuant to Regulation 14A which
will contain such information.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(A) 1. FINANCIAL STATEMENTS:
See Table of Contents to Financial Statements ("Item 8. Financial Statements
and Supplementary Data").
2. FINANCIAL STATEMENT SCHEDULES:
No schedules are included with this Report, as they are not applicable or
the information required to be set forth therein is included in the consolidated
financial statements or notes thereto.
3. EXHIBITS: The following exhibits are filed with or incorporated by
reference into this Report. Except as otherwise indicated, the exhibit number
corresponds to the exhibit number in the referenced document.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
--------------------- ------------------------------------------------------------
<C> <S>
2.1 Agreement and Plan of Merger, dated December 9, 1997,
between U.S. Franchise Systems, Inc. and USFS
Hawthorn, Inc. (incorporated by reference from the Company's
Registration Statement on Form S-4 (Registration
No. 333-46185)).
2.2 Contribution Agreement, dated December 9, 1997, among
Hawthorn Suites Associates, HSA Properties, Inc., USFS
Hawthorn, Inc. and U.S. Franchise Systems, Inc.
(incorporated by reference from the Company's Registration
Statement on Form S-4 (Registration No. 333-46185)).
3.1 Certificate of Incorporation (incorporated by reference from
the Company's Registration Statement on Form S-4
(Registration No. 333-46185)).
3.2 By-laws (incorporated by reference from the Company's
Registration Statement on Form S-4 (Registration
No. 333-46185)).
4.2 Specimen Class A Common Stock Certificate (incorporated by
reference from the Company's Registration Statement on
Form S-4 (Registration No. 333-46185)).
4.3 Specimen Class B Common Stock Certificate (incorporated by
reference from the Company's Registration Statement on
Form S-4 (Registration No. 333-46185)).
4.4 Shareholders Agreement, dated as of March 12, 1998 by and
among Hawthorn Suites Associates, HSA Properties, Inc.,
Michael A. Leven, Neal K. Aronson and U.S. Franchise
Systems, Inc. (incorporated by reference from the Company's
Quarterly Report on Form 10-Q for the quarterly period ended
March 31, 1998 (File No. 0-23941)).
4.5 Registration and Tag-Along Rights Agreement dated as of
March 17, 1998 between (i) U.S. Franchise Systems, Inc.,
(ii) Sextant Trading LLC, Lubert-Adler Real Estate
Opportunity Fund,
</TABLE>
49
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
--------------------- ------------------------------------------------------------
<C> <S>
L.P., Lubert-Adler Real Estate Opportunity Fund II, L.P. and
Lubert-Adler Capital Real Estate Opportunity Fund, L.P., and
(iii) Michael Leven and Neal K. Aronson (incorporated by
reference from the Company's Quarterly Report on Form 10-Q
for the quarterly period ended March 31, 1998 (File
No. 0-23941)).
4.6 Registration Rights Agreement dated as of April 28, 1998
among U.S. Franchise Systems, Inc., Alpine Hospitality
Equities LLC, Michael A. Leven and Neal K. Aronson
(incorporated by reference from the Company's Quarterly
Report on Form 10-Q for the quarterly period ended
March 31, 1998 (File No. 0-23941)).
10.3 Joint Venture Agreement between Microtel Franchise and
Development Corporation and U.S. Franchise Systems, Inc.
dated as of September 7, 1995 (incorporated by reference
from the Company's Registration Statement on Form S-1
(Registration No. 333-11427)).
10.5 Amended and Restated Stockholders' Agreement, dated as of
September 29, 1995, as amended on October 11, 1996, among
the Company and the Original Investors (incorporated by
reference from the Company's Registration Statement on
Form S-1 (Registration No. 333-11427)).
10.6 Amended and Restated Employee Stock Purchase Agreement
between U.S. Franchise Systems, Inc. and Michael A. Leven,
entered into as of September 29, 1995, as amended effective
October 24, 1996 (incorporated by reference from the
Company's Registration Statement on Form S- 1 (Registration
No. 333-11427)).
10.7 Amended and Restated Employee Stock Purchase Agreement
between U.S. Franchise Systems, Inc. and Neal K. Aronson,
entered into as of September 29, 1995, as amended effective
October 24, 1996 (incorporated by reference from the
Company's Registration Statement on Form S-1 (Registration
No. 333-11427)).
10.8 Employment Agreement by and between U.S. Franchise
Systems, Inc. and Michael A. Leven, dated October 1, 1995
(incorporated by reference from the Company's Registration
Statement on Form S-1 (Registration No. 333-11427)).
10.9 Employment Agreement by and between U.S. Franchise
Systems, Inc. and Neal K. Aronson, dated October 1, 1995
(incorporated by reference from the Company's Registration
Statement on Form S-1 (Registration No. 333-11427)).
10.10 Voting Agreement between Michael A. Leven and Andrea Leven
entered into on October 30, 1996 (incorporated by reference
from the Company's Registration Statement on Form S-1
(Registration No. 333-11427)).
10.11 Voting Agreement between Michael A. Leven and Neal K.
Aronson entered into on October 30, 1996 (incorporated by
reference from the Company's Registration Statement on
Form S-1 (Registration No. 333-11427)).
10.12 Office Lease Agreement between Hallwood Real Estate
Investors Fund XV and U.S. Franchise Systems, Inc., dated
September 25, 1995 (incorporated by reference from the
Company's Registration Statement on Form S-1 (Registration
No. 333-11427)).
10.13 First Amendment to Office Lease between Hallwood 95, L.P.,
and U.S. Franchise Systems, Inc., dated May 20, 1996
(incorporated by reference from the Company's Registration
Statement on Form S-1 (Registration No. 333-11427)).
10.14 U.S. Franchise Systems, Inc. Amended and Restated 1996 Stock
Option Plan (incorporated by reference from the Company's
Registration Statement on Form S-8 (Registration
No. 333-5707, Exhibit 4.3).
</TABLE>
50
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
--------------------- ------------------------------------------------------------
<C> <S>
10.15 U.S. Franchise Systems, Inc. 1996 Stock Option Plan for
Non-Employee Directors (incorporated by reference from the
Company's Registration Statement on Form S-1 (Registration
No. 333-11427)).
10.17 Voting Agreement between Michael A. Leven and Andrea Leven
entered into on March 12, 1998 (incorporated by reference
from Exhibit 10.11 to the Company's Registration Statement
on Form S-4 (Registration No. 333-46185)).
10.18 Voting Agreement between Michael A. Leven and Neal K.
Aronson entered into on March 12, 1998 (incorporated by
reference from Exhibit 10.13 to the Company's Registration
Statement on Form S-4 (Registration No. 333-46185)).
10.21 Agreement of Purchase and Sale between America's Best
Inns, Inc. and The Other Selling Entities Listed on
Schedule I thereto and Best Acquisition, Inc., dated
December 15, 1997. The Registrant agrees to furnish copies
of the schedules hereto supplementally to the Commission on
request (incorporated by reference from the Company's
Registration Statement on Form S-4 (Registration
No. 333-46185)).
10.22 Promissory Note, dated March 18, 1998, from Constellation
Equity Corp. to the Registrant in the principal amount of
$10 million. (incorporated by reference from Exhibit 10.22
to the Company's Annual Report on Form 10-K for the year
ended December 31, 1999 (File No. 0-23941)).
10.23 Management Services Agreement, dated March 17, 1998, between
the Registrant and Constellation Development Fund LLC.
(incorporated by reference from Exhibit 10.23 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1997 (File No. 0-23941)).
10.24 Asset Transfer Agreement dated as of April 28, 1998 among
Best Acquisition, Inc., Alpine Hospitality Ventures LLC,
RSVP-BI OPCO, LLC, RSVP-ABI REALCO, LLC, America's Best
Inns, Inc. and the entities identified on Schedule 1
thereto. The Company agrees to furnish copies of the
schedules hereto supplementally on request (incorporated by
reference from the Company's Quarterly Report on Form 10-Q
for the quarterly period ended March 31, 1998 (File
No. 0-23941)).
10.25 Securities Purchase Agreement dated as of April 28, 1998 by
and between U.S. Franchise Systems, Inc. and Alpine
Hospitality Equities LLC. The Company agrees to furnish
copies of the schedules hereto supplementally on request
(incorporated by reference from the Company's Quarterly
Report on Form 10-Q for the quarterly period ended
March 31, 1998 (File No. 0-23941)).
10.26 Hotel Management Agreement made and entered into on
April 28, 1998 by and among Alpine Hospitality Ventures LLC,
RSVP-BI OPCO, LLC, RSVP-ABI REALCO, LLC and USFS
Management, Inc. (incorporated by reference from the
Company's Quarterly Report on Form 10-Q for the quarterly
period ended March 31, 1998 (File No. 0-23941)).
10.27 Amended and Restated License Agreement dated April 28, 1998
by and between Best Franchising, Inc. and RSVP-BI OPCO, LLC
(incorporated by reference from the Company's Quarterly
Report on Form 10-Q for the quarterly period ended
March 31, 1998 (File No. 0-23941)).
10.30 Senior Subordinated Note Purchase Agreement dated as of
April 28, 1998 between Alpine Hospitality Ventures LLC and
U.S. Franchise Systems, Inc. The Company agrees to furnish
copies of the schedules hereto supplementally on request
(incorporated by reference from the
</TABLE>
51
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
--------------------- ------------------------------------------------------------
<C> <S>
Company's Quarterly Report on Form 10-Q for the quarterly
period ended March 31, 1998 (File No. 0-23941)).
10.31 Subscription Agreement dated as of March 17, 1998 between
(i) U.S. Franchise Systems, Inc., (ii) Sextant Trading LLC,
and (iii) 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.
(incorporated by reference from the Company's Quarterly
Report on Form 10-Q for the quarterly period ended
March 31, 1998 (File No. 0-23941)).
10.32* Amendment No. 1 to Employment Agreement by and between U.S.
Franchise Systems, Inc. and Michael A. Leven, dated as of
January 19, 1997
10.33* Amendment No. 1 to Employment Agreement by and between U.S.
Franchise Systems, Inc. and Neal K. Aronson, dated as of
January 19, 1997
10.34* Second Amendment to Office Lease by and between Hallwood 95,
L.P. and U.S. Franchise Systems, Inc., dated July 16, 1999.
10.35* Microtel Inns and Suites Franchising, Inc. current form of
License Agreement for Microtel hotels
10.36* Hawthorn Suites Franchising, Inc. current form of License
Agreement for Hawthorn hotels
10.37* Best Franchising, Inc. current form of License Agreement for
Best Inns hotels
21.1* List of Subsidiaries of U.S. Franchise Systems, Inc.
23.1* Consent of Deloitte & Touche, LLP.
27.1* Financial Data Schedule for the years ended December 31,
1999, 1998 and 1997, submitted to the Securities and
Exchange Commission in electronic format.
</TABLE>
------------------------
* Filed herewith.
Copies of the exhibits are available at a charge of $.25 per page upon
written request to the Secretary of the Company at 13 Corporate Square, Suite
250, Atlanta, Georgia 30329.
(B) REPORTS ON FORM 8-K
During the period from October 1, 1999 to December 31, 1999 the Company did
not file any reports on Form 8-K.
52
<PAGE>
SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
<TABLE>
<S> <C> <C>
U.S. FRANCHISE SYSTEMS, INC.
(REGISTRANT)
By /s/ MICHAEL A. LEVEN
-----------------------------------------
Michael A. Leven
CHAIRMAN OF THE BOARD, PRESIDENT AND CHIEF
EXECUTIVE OFFICER
</TABLE>
Dated March 30, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on March 30, 2000 by the following persons on
behalf of the Registrant in the capacities indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLES
--------- ------
<C> <S>
/s/ MICHAEL A. LEVEN Chairman, President and Chief Executive
------------------------------------------- Officer and Director (Principal Executive
(Michael A. Leven) Officer)
/s/ NEAL K. ARONSON Executive Vice President, Chief Financial
------------------------------------------- Officer and Director (Principal Financial
(Neal K. Aronson) and Accounting Officer)
/s/ DEAN ADLER
------------------------------------------- Director
(Dean Adler)
/s/ IRWIN CHAFETZ
------------------------------------------- Director
(Irwin Chafetz)
/s/ DOUG GEOGA
------------------------------------------- Director
(Doug Geoga)
/s/ RICHARD D. GOLDSTEIN
------------------------------------------- Director
(Richard D. Goldstein)
/s/ DAVID T. HAMAMOTO
------------------------------------------- Director
(David T. Hamamoto)
/s/ STEVE ROMANIELLO
------------------------------------------- Director
(Steve Romaniello)
/s/ JEFFREY A. SONNENFELD
------------------------------------------- Director
(Jeffrey A. Sonnenfeld)
</TABLE>
53
<PAGE>
EXHIBIT INDEX
<TABLE>
<C> <S>
10.32 Amendment No. 1 to Employment Agreement by and between U.S.
Franchise Systems, Inc. and Michael A. Leven, dated as of
January 19, 1997
10.33 Amendment No. 1 to Employment Agreement by and between U.S.
Franchise Systems, Inc. and Neal K. Aronson, dated as of
January 19, 1997
10.34 Second Amendment to Office Lease by and between Hallwood 95,
L.P. and U.S. Franchise Systems, Inc., dated July 16, 1999
10.35 Microtel Inns and Suites Franchising, Inc. current form of
License Agreement for Microtel hotels
10.36 Hawthorn Suites Franchising, Inc. current form of License
Agreement for Hawthorn hotels
10.37 Best Franchising, Inc. current form of License Agreement for
Best Inns hotels
21.1 List of Subsidiaries of U.S. Franchise Systems, Inc.
23.1 Consent of Deloitte & Touche, LLP.
27.1 Financial Data Schedule for the years ended December 31,
1999, 1998 and 1997, submitted to the Securities and
Exchange Commission in electronic format.
</TABLE>
54
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2000
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-23941
-----------
U.S. FRANCHISE SYSTEMS, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 58-2361501
(State or other jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
13 Corporate Square, Suite 250 30329
Atlanta, Georgia (Zip Code)
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (404) 321-4045
-----------
Indicate by check mark whether the registrant: (1) has filed all
reports required by Sections 12, 13, or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
There were 17,245,834 shares of the registrant's Class A Common Stock
and 2,707,919 shares of the registrant's Class B Common Stock outstanding as of
April 30, 2000.
<PAGE>
U.S. FRANCHISE SYSTEMS, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Statements of Financial Position at December 31, 2000 and March 31, 1999 (Unaudited).......... 3
Consolidated Statements of Operations for the three months ended March 31, 2000 and March 31, 1999
(Unaudited) ............................................................................................... 4
Consolidated Statements of Cash Flows for the three months ended March 31, 2000 and March 31, 1999
(Unaudited) ............................................................................................... 5
Notes to Consolidated Financial Statements (Unaudited) .................................................... 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...................... 7
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.......................................................................................... 19
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.................................................................. 19
ITEM 3. DEFAULTS UPON SENIOR SECURITIES............................................................................ 20
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........................................................ 20
ITEM 5. OTHER INFORMATION.......................................................................................... 20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K........................................................................... 20
SIGNATURES................................................................................................. 21
EXHIBIT INDEX.............................................................................................. 22
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
U.S. FRANCHISE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
--------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and temporary cash investments................................................... $ 5,776,000 $ 6,339,000
Accounts receivable................................................................... 3,360,000 2,315,000
Deposits and prepaid expenses......................................................... 182,000 536,000
Promissory notes receivable........................................................... 2,359,000 1,898,000
Deferred commissions.................................................................. 4,249,000 2,564,000
--------- ----------
TOTAL CURRENT ASSETS.......................................................... 15,926,000 13,652,000
PROMISSORY NOTES RECEIVABLE.............................................................. 11,116,000 12,369,000
PROPERTY AND EQUIPMENT-Net............................................................... 2,053,000 2,141,000
FRANCHISE RIGHTS-Net..................................................................... 24,463,000 24,691,000
DEFERRED COMMISSIONS..................................................................... 5,254,000 6,525,000
DEVELOPMENT SUBSIDIES.................................................................... 11,593,000 10,837,000
OTHER ASSETS-Net......................................................................... 493,000 497,000
------------ -----------
TOTAL ASSETS.................................................................. $ 70,898,000 $ 70,712,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable...................................................................... $ 582,000 $ 227,000
Commissions payable................................................................... 758,000 1,516,000
Deferred application fees............................................................. 5,052,000 3,686,000
Accrued expenses...................................................................... 2,534,000 1,875,000
------------ ------------
TOTAL CURRENT LIABILITIES..................................................... 8,926,000 7,304,000
DEFERRED APPLICATION FEES................................................................ 5,095,000 6,570,000
------------ ------------
TOTAL LIABILITIES............................................................. 14,021,000 13,874,000
REDEEMABLE STOCK:
Common shares, par value $0.01 per share; issued and outstanding
3,128,473 (net of 58,807 shares in Treasury at March 31, 2000 and
December 31, 1999) entitled to redemption under certain circumstances at $324,000
(net of $6,000 in Treasury) as of March 31, 2000 and December 31, 1999................... 324,000 324,000
STOCKHOLDERS' EQUITY:
Common shares, par value $0.01 per share; authorized 30,000,000 shares
of Class A Common Stock and 5,000,000 shares of Class B Common Stock;
issued and outstanding 14,117,361 Class A shares and 2,707,919 Class B
shares at March 31, 2000; issued and outstanding 14,063,496 Class A shares and
2,707,919 Class B shares at December 31, 1999............................................. 167,000 167,000
Capital in excess of par............................................................... 90,687,000 90,293,000
Accumulated deficit.................................................................... (34,301,000) (33,946,000)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY............................................................. 56,553,000 56,514,000
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............................................. $ 70,898,000 $ 70,712,000
============ ============
</TABLE>
See notes to consolidated financial statements.
<PAGE>
U.S. FRANCHISE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 2000 MARCH 31, 1999
-------------- --------------
<S> <C> <C>
REVENUES:
Royalty and Other Fee Income Income ........... $3,873,000 $ 2,559,000
Franchise application fees..................... 918,000 617,000
---------- -----------
4,791,000 3,176,000
EXPENSES:
General and administrative.................... 4,112,000 2,422,000
Franchise sales commissions................... 804,000 659,000
Depreciation and amortization 439,000 341,000
Interest income............................... (209,000) (751,000)
--------- ---------
NET INCOME (LOSS) BEFORE TAXES (355,000) 505,000
Income taxes 0 0
-----------------------------------------------------------
NET INCOME (LOSS) AFTER TAXES ($355,000) $505,000
===========================================================
Weighted average number of common shares
outstanding 19,934,572 19,875,113
Weighted average number of common shares
outstanding, assuming dilution
20,023,661
Earnings (loss) per share (Basic) ($0.02) $0.03
Earnings (loss) per share (Diluted) $0.03
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
U.S. FRANCHISE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 2000 MARCH 31, 1999
-------------- --------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net Income/(Loss)................................................................... ($355,000) $505,000
Adjustments to reconcile net loss to net cash provided by/(used in) operating
activities:
Depreciation and amortization.................................................... 439,000 341,000
Deferred compensation amortization............................................... 129,000 122,000
Changes in assets and liabilities:
Decrease/(Increase) in accounts receivable, prepaid expenses & deposits.......... (691,000) (91,000)
Decrease/(Increase) in promissory notes receivable............................... 792,000 (2,170,000)
Decrease/(Increase) in deferred commissions...................................... (414,000) (646,000)
Decrease/(Increase) in other assets.............................................. 76,000 (1,974,000)
(Decrease)/Increase in accounts payable.......................................... 355,000 (315,000)
(Decrease)/Increase in accrued expenses.......................................... 659,000 (186,000)
(Decrease)/Increase in commissions payable....................................... (758,000) (594,000)
(Decrease)/Increase in deferred application fees................................. (109,000) 989,000
----------- -----------
NET CASH PROVIDED BY/(USED IN) OPERATING ACTIVITIES 123,000 (4,019,000)
----------- -----------
INVESTING ACTIVITIES:
Acquisition of property and equipment................................................ (76,000) (76,000)
Issuance of development subsidies ................................................... (635,000) 0
Acquisition of franchise rights ..................................................... 0 (3,000)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES............................................ (711,000) (79,000)
----------- -----------
FINANCING ACTIVITIES:
Exercise of stock options ........................................................... 25,000 0
NET DECREASE IN CASH AND CASH EQUIVALANTS (563,000) (4,098,000)
CASH AND TEMPORARY INVESTMENTS
Beginning of period................................................................. 6,339,000 15,966,000
--------- ----------
End of period....................................................................... $5,776,000 $11,868,000
========== ===========
SUPPLEMENTAL DISCLOSURE OF CASHFLOW INFORMATION:
Non cash activities:
Issuance of 48,290 shares as a form of development subsidy $220,000
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
U.S. FRANCHISE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange
Commission for reporting on Form 10-Q. Accordingly, certain information and
footnotes required by generally accepted accounting principles for complete
financial statements have been omitted. In the opinion of management, all
adjustments, consisting of normal recurring adjustments, which are necessary
for a fair presentation of financial position and results of operations, have
been made. These interim financial statements should be read in conjunction
with the consolidated financial statements and notes thereto, presented in
the U.S. Franchise Systems, Inc. ("USFS" or the "Company") Annual Report on
Form 10-K for the year ended December 31, 1999, filed with the Securities and
Exchange Commission. The results of operations for the three months ended
March 31, 2000 are not necessarily indicative of results that may be expected
for the full year.
2. RECLASSIFICATIONS
Certain amounts in the March 31, 2000 statement of operations and
consolidated statement of cash flows have been reclassified to conform to
current year classifications.
3. EARNINGS PER SHARE
Basic earnings per common share are computed using the weighted
average number of common shares outstanding during the period. Diluted
earnings per common share incorporates the incremental shares issuable upon
the assumed exercise of stock options. Most of the Company's stock options
were excluded from the calculation of diluted earnings per share because they
were antidilutive, but these options could be dilutive in the future.
4. STOCK OPTION PLANS
The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option-pricing model with the following
weighted average assumptions.
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
31-MARCH-00 31-MARCH-99
------------ ------------
<S> <C> <C>
NEW STOCK OPTION GRANTS
Expected life(years) 4.0 3.6
Expected volatility 44% 36%
Risk free interest rate 6% 5.9%
Dividend yield 0% 0%
Number of options granted 173,450 203,550
Weighted average exercise price 4.81 9.03
FORFEITURES AND EXERCISES:
Number of options forfeited 20,975 14,500
Number of options exercised 5,575 0
STOCK OPTION EXPENSE $93,184 $87,000
</TABLE>
5. SEGMENT REPORTING
The Company owns three hotel brands and operates a management
company primarily in the United States. Other/Corporate represents overhead
and assets not specifically allocable to the brands or the management
company. Revenues, expenses and capital expenditures directly attributable to
each business segment are reflected as such and
<PAGE>
shown below. Common expenses and common capital expenditures are classified
in other/corporate.
THREE MONTHS ENDED, MARCH 31, 2000
<TABLE>
<CAPTION>
MICROTEL HAWTHORN BEST MANAGEMENT OTHER CONSOLIDATED
COMPANY CORPORATE
REVENUE
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
March 31, 2000 $ 1,498,000 $ 2,040,000 $ 887,000 $ 366,000 $ 0 $ 4,791,000
March 31, 1999 1,098,000 1,049,000 576,000 453,000 0 3,176,000
NET INCOME (LOSS)
---------------------------------------------------------------------------------------------------------------------------------
March 31, 2000 $ 1,123,000 $ 1,540,000 $ 584,000 $ (450,000) $(3,152,000) $ (355,000)
March 31, 1999 769,000 867,000 815,000 134,000 (2,080,000) 505,000
CAPITAL EXPENDITURES
---------------------------------------------------------------------------------------------------------------------------------
March 31, 2000 $ 0 $ 0 $ 0 $ 3,000 $ 73,000 $ 76,000
March 31, 1999 2,000 1,000 2,000 46,000 25,000 76,000
</TABLE>
6. COMMITMENTS AND CONTINGENCIES
Two former employees of the Company have commenced an action
alleging wrongful termination and seeking unspecified damages. The Company
has filed a counterclaim for unspecified damages. The Company believes it has
meritorious defenses but can not predict the outcome of this matter.
The Company is currently in litigation with respect to certain
financing programs under which the Company retained an ongoing participation.
Management has reserved approximately $800,000 with respect to the
termination of the loan program as of December 31, 1999.
On April 11, 2000, the Company and certain subsidiaries settled a
lawsuit which was brought by the owner of nine Best Inn properties for
alleged mismanagement under management agreements that the Company assumed in
connection with its 1998 acquisition of the Best Inns brand. USFS Management,
Inc., a subsidiary of the Company, had also filed a counterclaim alleging
fraudulent conduct by the owner and certain of his affiliates, which was also
settled. In connection with the settlement, in the first quarter of 2000 the
Company and the subsidiaries accrued $510,000 in settlement payments and
related legal costs. The franchise agreements with the owner remain in effect.
In addition, the Company is subject to litigation in the ordinary
course of its business. In the opinion of management, the outcome of such
litigation will not have a material impact of the earnings, financial
position or cash flow of the Company.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
This "Management's Discussion and Analysis of Financial Condition
and Results of Operations" should be read in conjunction with the
consolidated financial statements included herein of the Company and its
subsidiaries. Certain statements under this caption "Management's Discussion
and Analysis of Financial Condition and Results of Operations" constitute
"forward-looking statements" under the Private Securities Litigation Reform
Act of 1995 (the "Reform Act"). Certain, but not necessarily all, of such
forward-looking statements can be identified by the use of forward-looking
terminology such as "believes," "expects," "may," "will," "should," or
"anticipates" or the negative thereof or other variations thereon or
comparable terminology, or by discussions of strategy that involve risks and
uncertainties. Such forward-looking statements involve known and unknown
risks, uncertainties and other factors which may cause the actual results,
performance or achievements of U.S. Franchise Systems, Inc. ("USFS" or the
"Company") and its subsidiaries to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, but are not limited to, the
following: general economic and business conditions; aggressive competition
in the lodging and franchising industries; success of acquisitions and
operating initiatives; management of growth; risks relating to the Company's
loans to and other investments in franchisees; dependence on senior
management; brand awareness; general risks of the lodging and franchising
industries; development risk and construction; risk of loss of management
contracts; risk relating to the availability of financing for franchisees;
the existence or absence of adverse publicity; changes in business strategy
or development plan; availability, terms and deployment of capital; business
abilities and judgment of personnel; availability of qualified personnel;
labor and employee benefit costs; changes in, or failure to comply with,
government regulations; construction schedules; and the costs and other
effects of legal and administrative proceedings and other factors referenced
below under the sub-heading "Risk Factors" in this Form 10-Q. The Company
will not undertake and specifically declines any obligation to publicly
release the results of any revisions which may be made to any forward-looking
statement to reflect events or circumstances after the date of such
statements or to reflect the occurrence of anticipated or unanticipated
events. The Company does not intend to update the information contained
herein with respect to its exploration of potential strategic alternatives
for any future
<PAGE>
developments or circumstances unless and until there is a definitive
transaction agreement entered into between the Company and any third party or
until its exploration of potential alternatives is definitively terminated.
There can be no assurance whatsoever that any transaction between the Company
and any third party will take place or, even if one does occur, about the
nature and extent of any terms and conditions of any such potential
transaction. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations-Risk Factors".
The Company was formed to acquire, market and service
well-positioned brands with potential for rapid unit growth through
franchising. The Company's brands, which are in the lodging industry, are
Microtel Inn & Suites, Hawthorn Suites and Best Inn & Suites. The Company
acquired the rights to these brands because of their potential for
significant growth, which reflects, among other things, their potential
profitability for franchisees at the property level and their positions in
attractive segments of the lodging industry. Microtel primarily competes in
the budget and economy segments, Hawthorn primarily in the upscale and
mid-market segments, and Best primarily in the mid-market and economy
segments of the lodging industry. The Company also manages certain properties
on behalf of franchisees.
As a franchisor, the Company licenses the use of its brand names to
independent hotel owners and operators (i.e. franchisees). The Company
provides its franchisees with a variety of benefits and services designed to
(i) decrease development costs, (ii) shorten the time frame and reduce the
complexity of the construction process and (iii) increase the occupancy
rates, revenues and profitability of the franchised properties. The Company
offers prospective franchisees access to financing, a business format, design
and construction assistance (including architectural plans), quality
standards, training programs, national reservations systems, national and
local advertising and promotional campaigns and volume purchasing discounts.
The Company expects that its future revenues will consist primarily
of (i) franchise royalty fees, (ii) franchise application fees, (iii) various
management fees, (iv) international master license agreement fees, and (v)
payments made by vendors who supply the Company's franchisees with various
products and services. The Company recognizes franchise application fees as
revenue only upon the opening of the underlying hotels.
The Company's predecessor was incorporated in Delaware in August
1995. The Company was incorporated in Delaware on November 26, 1997 and
merged with its predecessor on March 12, 1998 with the Company as the
surviving corporation. The Company's executive offices are located at 13
Corporate Square, Suite 250, Atlanta, Georgia 30329 and its telephone number
is (404) 321-4045.
INTRODUCTION
The Company believes that it continues to feel the effects of the
more difficult and competitive environment in the hotel franchising and
management business. To the extent that the difficult environment encountered
by the Company's franchisees during 1999 and the first quarter of 2000
continues in 2000, the Company's royalty and management fee revenues and
profitability could be adversely affected and all or a portion of the
Company's remaining loan portfolio ($9.1 million net of $1.1 million of
reserves at March 31, 2000) could become impaired.
The Company continues to reevaluate the future prospects of its
hotel management business line. During 1999, 17 management contracts were
terminated, leaving the Company with 24 contracts at December 31, 1999. The
Company terminated three additional contracts in the first quarter
2000, leaving the Company with 21 contracts (including 17 with the operating
subsidiary of Alpine Equity Ventures, LLC ("Ventures")). The Company is
currently considering various alternatives related to the remaining
contracts. Accordingly, because the Company is managing fewer properties,
hotel management revenues will decline substantially in 2000 as compared to
1999. In the three
<PAGE>
months ended March 31, 2000, hotel management revenues were $366,0000 as
compared to $453,000 for the three months ended March 31, 1999. If the
Company determines not to continue to provide management services, the
Company will be required to take a non-recurring charge related to exiting
the management business line. The amount of this charge cannot be determined
at this time.
The Company, with the assistance of Banc of America Securities,
continues to explore strategic alternatives and opportunities that may be or
become available to the Company.
USFS DOES NOT INTEND TO UPDATE THE INFORMATION CONTAINED HEREIN WITH
RESPECT TO ITS EXPLORATION OF POTENTIAL STRATEGIC ALTERNATIVES FOR ANY FUTURE
DEVELOPMENTS OR CIRCUMSTANCES UNLESS AND UNTIL THERE IS A DEFINITIVE
TRANSACTION AGREEMENT ENTERED INTO BETWEEN USFS AND ANY THIRD PARTY OR UNTIL
ITS EXPLORATION OF POTENTIAL ALTERNATIVES IS DEFINITIVELY TERMINATED. THERE
CAN BE NO ASSURANCE WHATSOEVER THAT ANY TRANSACTION BETWEEN USFS AND ANY
THIRD PARTY WILL TAKE PLACE OR, EVEN IF ONE DOES OCCUR, ABOUT THE NATURE AND
EXTENT OF ANY TERMS AND CONDITIONS OF ANY SUCH POTENTIAL TRANSACTION.
<PAGE>
Comparisons have been made between the three months ended March 31,
2000 and the three months ended March 31, 1999 for the purposes of the
following discussion:
RESULTS OF OPERATIONS
FRANCHISE SALES GROWTH- The Company has realized Microtel franchise
sales growth as follows:
FRANCHISE SALES GROWTH
<TABLE>
<CAPTION>
AS OF MARCH 31,
---------------------------------------------------------------------------------------------- -------------- ------------------
MICROTEL FRANCHISE DATA 2000 1999
---------------------------------------------------------------------------------------------- -------------- ------------------
<S> <C> <C>
Properties open (1) 190 135
Executed agreements and under construction 56 65
Executed franchise agreements but not under construction 253 270
Accepted applications 102 51
-------------- ------------------
Total in development and accepted applications (2) 411 386
---------------------------------------------------------------------------------------------- -------------- ------------------
OPEN PLUS IN DEVELOPMENT AND ACCEPTED APPLICATIONS 601 521
---------------------------------------------------------------------------------------------- -------------- ------------------
</TABLE>
(1) The Company does not receive royalties from 27 hotels open as of March
31, 2000.
(2) There can be no assurance that properties in development or for which
applications have been accepted will result in open hotels. During the three
months ended March 31, 2000, two previously opened hotels ceased operating as
a Microtel. Since the Microtel brand was acquired by the Company, 36% of
accepted applications did not become executed agreements and 38% of executed
agreements terminated before resulting in open hotels. See "Rick Factors-
Dependence on, and Obstacles to, Hotel Openings.
During the first quarter 2000, for Microtel hotels open one year or
more, average daily rate, occupancy and revenue per available room ("Rev
Par") were $42.80, 52.7% and $22.54 compared to $41.70, 51.9%, and $21.64 in
first quarter 1999.
The Company has realized Hawthorn Suites franchise sales growth as
follows:
<TABLE>
<CAPTION>
AS OF MARCH 31,
---------------------------------------------------------------------------------------------- -------------- ------------------
HAWTHORN SUITES FRANCHISE DATA 2000 1999
---------------------------------------------------------------------------------------------- -------------- ------------------
<S> <C> <C>
Properties open (1) 110 54
Executed agreements and under construction 40 38
Executed franchise agreements but not under construction 135 111
Accepted applications 66 69
-------------- ------------------
Total in development and accepted applications(2) 241 218
---------------------------------------------------------------------------------------------- -------------- ------------------
OPEN PLUS IN DEVELOPMENT AND ACCEPTED APPLICATIONS 351 272
---------------------------------------------------------------------------------------------- -------------- ------------------
</TABLE>
(1) The Company does not receive royalties from 1 hotel open as of March
31, 2000.
(2) There can be no assurance that properties in development or for which
applications have been accepted will result in open hotels. During the three
months ended March 31, 2000, no previously opened hotels ceased operating as
a Hawthorn. Since the Hawthorn brand was acquired by the Company, 32% of
accepted applications did not become executed agreements and 15% of executed
agreements terminated before resulting in open hotels. See "Rick Factors-
Dependence on, and Obstacles to, Hotel Openings.
During the first quarter 2000, for properties in the Hawthorn system
one year or more, average daily rate, occupancy and Rev Par were $84.00,
64.3% and $53.99 compared to $84.88, 59.7%, and $50.63 in first quarter 1999.
<PAGE>
The Company has realized Best Inns franchise sales growth as follows:
<TABLE>
<CAPTION>
AS OF MARCH 31,
---------------------------------------------------------------------------------------------- -------------- ------------------
BEST INNS FRANCHISE DATA 2000 1999
---------------------------------------------------------------------------------------------- -------------- ------------------
<S> <C> <C>
Properties open 125 65
Executed agreements and under construction 28 19
Executed franchise agreements but not under construction 31 26
Accepted applications 128 103
-------------- ------------------
Total in development and accepted applications (1) 187 148
---------------------------------------------------------------------------------------------- -------------- ------------------
OPEN PLUS IN DEVELOPMENT AND ACCEPTED APPLICATIONS 312 213
---------------------------------------------------------------------------------------------- -------------- ------------------
</TABLE>
(1) There can be no assurance that properties in development or for which
applications have been accepted will result in open hotels. During the
three months ended March 31, 2000, four previously opened hotels
ceased operating as a Best Inns. Since the Best brand was acquired by
the Company, 64% of accepted applications did not become executed
agreements and 4% of executed agreements terminated before resulting
in open hotels. See "Rick Factors-Dependence on, and Obstacles to,
Hotel Openings.
During the first quarter 2000, for properties in the Best Inns system
one year or more, average daily rate, occupancy and Rev Par were $53.25,
54.4% and $28.96 compared to $48.06 58.1%, and $27.94 in first quarter 1999.
REVENUE- The Company has derived revenues from the following sources:
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 2000 MARCH 31, 1999
------------------ ------------------
<S> <C> <C>
Royalty and other fee Income........................... 3,873,000 $2,559,000
Franchise application fees............................. 918,000 617,000
--------- ----------
TOTAL.................................................. $4,791,000 $3,176,000
</TABLE>
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999
Royalty and other fee income increased approximately $1.3 million
for the three months ended March 31, 2000 as compared to the prior year's
comparable period. The increase is primarily attributable to (i) the increase
in royalty paying hotels from 224 to 397 and (ii) signing of an international
master license agreement ($100,000). The revenue increase was offset by an
$87,000 decrease in hotel management fees and a $125,000 decline in the
management fees received from Constellation Development Fund. During the
three months ended March 31, 2000, hotel management fees were $366,000
compared to $453,000 for the three months ended March 31, 1999. Management
fee revenues is expected to continue to decline substantially as discussed in
the Introduction. During the three months ended March 31, 2000, management
fees for Constellation Development Fund were $125,000 compared to $250,000 in
the same period last year.
Franchise application fees increased approximately $0.3 million for
the three months ended March 31, 2000 as compared to the prior year's
comparable period primarily due to an increase in the number of hotels opened
during the quarter.
EXPENSES-The Company's expenses were as summarized below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 2000 MARCH 31, 1999
------------------ ------------------
<S> <C> <C>
General and administrative.......................... $4,112,000 $2,422,000
Franchise sales commissions......................... 804,000 659,000
Depreciation and amortization..... 439,000 341,000
Interest income..................................... (209,000) (751,000)
--------- ---------
TOTAL............................................... $5,146,000 $2,671,000
</TABLE>
<PAGE>
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999
General and administrative expenses increased by approximately
$1,690,000 including certain charges totaling $760,000 for the three months
ended March 2000 as compared to the prior year's comparable period. The
$760,000 charge reflected in the three months ended March 2000 pertained to a
settlement of a legal dispute involving the Company's management subsidiary
and to costs associated with the Company's review and evaluation of strategic
alternatives.
Excluding those certain charges, general and administrative expenses
increased $930,000 primarily related to (1) an increase in personnel and
associated costs due to more open hotels ($421,000); (2) increased
professional fees ($253,000); and (3) increased marketing expenses ($194,000).
Franchise sales commissions increased $145,000 for the three months
ended March 31, 2000 as compared to the comparable prior year's period
primarily due to an increase in the number of hotels opened during the
quarter.
Depreciation and amortization expense increased $98,000 primarily
due to additional amortization related to development subsidies.
Interest income, resulting primarily from promissory notes
receivable and investments in cash and marketable securities, decreased
$542,000 primarily due to the fact the Company recorded no interest income
during the first quarter of 2000 related to a $15 million loan made to Alpine
Hospitality Ventures and a reduced amount of cash available for investments
in marketable securities. The Company does not expect to recognize
pay-in-kind interest on the loan to Ventures in 2000.
LIQUIDITY AND CAPITAL RESOURCES
The Company had approximately $5.8 million in cash or equivalents as
of March 31, 2000. In management's opinion, based on the Company's current
operations, the Company's capital resources, including its cash on hand and
borrowing capability, are sufficient to fund operations for the next 12
months. The Company currently has no outstanding lines of credit in place.
For the three months ended March 31, 2000, the Company had a net
loss of $355,000. Net cash provided by operating activities was $123,000 and
the primary operating adjustments to net income was a decrease in promissory
notes receivable ($792,000) a decrease in commissions payable ($758,000), and
an increase in accrued expenses ($659,000). For the three months ended March
31, 2000, net cash provided by investing activities was $711,000 with the
primary investment being development subsidies issued to franchisees
($635,000). For the three months ended March 31, 2000, net cash provided in
financing activities was $25,000 resulting from the exercise of stock options
by certain current and former employees.
As of March 31, 2000, the Company had loans outstanding of
approximately $4.4 million in the aggregate to Constellation Equity Corp.
("Constellation") and expects to lend up to an additional $400,000 to
Constellation. Due to uncertainties surrounding ultimate recoverability of
these loans, the Company is accounting for them on the cost recovery basis,
where interest income is recorded only after recovery of principal.
<PAGE>
As of March 31, 2000, the Company had made a $15 million unsecured
subordinated loan to Ventures. In the fourth quarter of 2000, the Company
took a $15.5 million reserve against this loan and accrued interest thereon.
The Company also is committed to make up to $7.5 million of additional loans
to Ventures under certain circumstances. The Company manages the 17 hotels
owned by a subsidiary of Ventures, all of which are franchises of the
Company. Certain management and franchise fees related to these hotels could
be deferred if the senior debt owed by the owner of those hotels is not paid
currently. A portion of these fees were deferred in the first quarter 2000.
Commencing April 2001, the Company may be obligated to reimburse the owner of
those hotels for as much as 90% of the management fee if the owner's net
profit for the 12-month period then ended, and each subsequent 12-month
period, falls below a specified level.
YEAR 2000 COMPUTER MATTER
The Year 2000 Issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
Company's computer programs that have time-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result
in a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions
or customer reservations or engage in similar normal business activities. The
Company has experienced no material disruptions or adverse effects due to
Year 2000 issues and management believes that the Year 2000 Issue will not
pose material operational problems for its computer systems and does not
expect that any remaining costs of compliance will have a materially adverse
impact on the results of operations during any quarterly or annual reporting
period. The Company does not believe that its operations and systems are
vulnerable to those third parties' failure to remediate their own Year 2000
Issues. There can be no guarantee that the systems of other companies on
which the Company's operations and systems rely will not have an adverse
effect in the Company's systems or results of operations. There can be no
assurances that circumstances will not arise in the future that will require
management to take action in addition to what has already been performed on
the Year 2000 Issues.
SEASONALITY
Royalties generated by gross room revenues of franchised properties are
expected to be the largest source of revenue for the Company for the
immediate future. The Company expects to experience seasonal revenue patterns
similar to those experienced by the lodging industry generally. The summer
months, because of increase in leisure travel, are expected to produce higher
revenues for the Company than other periods. Accordingly, the Company may
experience lower revenues and profits in the first and fourth quarters and
higher revenues and profits in the second and third quarters.
RISK FACTORS
In evaluating the Company and its business, the following risks
should be considered. These are not the only risks the Company faces. Some
risks are not yet known to the Company and others that the Company does not
consider material but could later turn out to be so. All of these risks could
adversely affect the Company's business:
MANAGEMENT OF GROWTH
The Company has experienced rapid growth in the number of its
employees and the scope of its operations since its inception. This growth
has resulted in, and is expected to continue to create, new and increased
responsibilities for management personnel, as well as added demands on the
Company's operating and financial systems. The Company's success will depend
on its ability to manage this growth while implementing its strategy. The
efforts of key management personnel and the Company's ability to attract or
develop
<PAGE>
new management personnel and to integrate these new employees into its
overall operations will be crucial to continued growth. The recent aggressive
competition in the franchise business has made it more difficult and more
costly to attract qualified personnel. If the Company is unable to manage
growth effectively, the Company's business and results of operations could be
materially and adversely affected.
DEPENDENCE ON, AND OBSTACLES TO, HOTEL OPENINGS
The Company expects that in the future its principal source of
revenue will be franchise fees received from its franchisees. Accordingly,
future revenues will be highly dependent on the timing and the number of open
hotels and their gross room revenues. There are numerous factors beyond the
control of the Company which affect the probability and timing of a hotel
opening and the ability or desire for a hotel to stay in the Company's
franchise system. These factors include, but are not limited to, the ability
of a potential hotel owner to (i) secure adequate financing or satisfy
financing payments during the construction period; (ii) locate an appropriate
site of a hotel; (iii) obtain all necessary state and local construction,
occupancy or other permits and approvals; (iv) obtain necessary construction
materials; and (v) reach a satisfactory level of profitability at the hotel.
Under industry and general economic conditions that prevailed in 1999, the
first quarter of 2000 and that are expected to continue in 2000, hotel
developers have had and may continue to have difficulty accessing needed
capital and attaining satisfactory levels of profitability. As a result, the
number and timing of franchised hotel openings, and accordingly the Company's
franchise fees, could be adversely affected if current conditions do not
improve. Additionally, there can be no assurance that accepted franchise
applications will result in executed franchise agreements or that executed
franchise agreements will result in open properties. Deteriorating conditions
in the lodging industry can be expected to adversely affect the likelihood
that properties in development will open on a timely basis or at all.
LIMITED OPERATING HISTORY; NET LOSSES; OUR RESULTS FLUCTUATE AND THESE
FLUCTUATIONS CAN BE UNPREDICTABLE
The Company began operating in October 1995 and therefore has a
limited operating history upon which investors can evaluate its performance.
While the Company was profitable during the first three quarters of 1999, the
Company incurred significant charges in the fourth quarter of 1999 that
resulted in a net loss for the year and recorded a net loss, after certain
charges, for the first quarter 2000. There can be no assurance that the
Company will be profitable in the future. Additionally, events outside our
control, including those set forth in other risk factors, may cause the
Company to experience fluctuations in revenues and operating results. As a
result, the Company's future results may be below market expectations,
including the expectations of financial analysts and investors. A failure to
meet such expectations may adversely affect the trading price of the
Company's Class A Common Stock.
MANAGEMENT, BY VIRTUE OF OWNERSHIP OF SUPERVOTING CLASS B COMMON STOCK,
CONTROLS THE COMPANY
Holders of Class A Common Stock are entitled to one vote per share
and holders of Class B Common Stock are entitled to ten votes per share. Each
share of Class B Common Stock is convertible at any time into one share of
the Class A Common Stock and, with limited exceptions, will convert
automatically upon any transfer thereof. Michael A. Leven, Chairman,
President and Chief Executive Officer, and Neal K. Aronson, Executive Vice
President and Chief Financial Officer, have the right to vote all of the
outstanding shares of Class B Common Stock, which, together with shares of
Class A Common Stock which they beneficially own (including stock held by
other members of management), represent approximately 65% of the combined
voting power of the Company's outstanding Common Stock. By reason of their
right to vote the Class B Common Stock, Messrs. Leven and Aronson will be
able to (i) elect all of the Company's directors (except as otherwise
contractually provided), (ii) amend the Charter with respect to most matters,
(iii) effect a merger, sale or other major corporate transaction, (iv) defeat
any unsolicited takeover attempt
<PAGE>
and (v) generally direct the affairs of the Company (including in a manner
that may benefit themselves disproportionately relative to other
shareholders).
SUCCESSFUL COMPLETION AND INTEGRATION OF ACQUISITIONS
One element of the Company's business strategy is to continuously
evaluate acquisitions and business combinations. These acquisitions may be of
brands in the lodging industry or in other industries, or of businesses that
the Company does not expect to franchise, which would require the Company to
develop expertise in areas that it does not currently operate. There can be
no assurance that the Company will identify and complete suitable
acquisitions or if completed, that such acquisitions will be successfully
integrated. The Company did not engage in any such transaction in 1999.
Acquisitions involve numerous risks, including difficulties assimilating new
operations and brands. There can be no assurance that any acquisitions would
result in long-term benefits to the Company or that management would be able
to manage effectively the resulting business.
DEPENDENCE ON SENIOR MANAGEMENT
The success of the Company is largely dependent on the efforts and
abilities of its senior management and certain other key personnel,
particularly Messrs. Leven, Aronson and Steve Romaniello, Executive Vice
President-Franchise Sales and Administration. The Company's success will
depend in large part on its ability to retain these individuals and other
current members of its senior management team and to attract and retain
qualified personnel in the future. The loss of members of senior management
or of certain other key employees or the Company's inability to retain and
attract other qualified employees could have an adverse impact on the
Company's business and results of operations. Certain franchise agreements
have stipulations which allow franchisees to exit without penalty if certain
members of management are no longer affiliated with the Company. The Company
does not maintain key person life insurance on behalf of the lives of any of
its officers or employees.
COMPETITION FOR NEW FRANCHISE PROPERTIES AND HOTEL GUESTS
Competition among national brand franchisers and smaller chains in
the lodging industry to grow their franchise systems is fierce and
intensified during 1999 and during the first quarter of 2000. During 1999, an
increasing number of hotel companies announced new franchise initiatives. As
a result, the Company believes there has been a marked increase in franchise
sales personnel throughout the lodging industry and more aggressive financial
incentives are being offered to hotel owners and developers. Many of the
Company's competitors are affiliated with larger chains with substantially
more properties, greater marketing budgets and greater brand identity than
the Company and its brands. There can be no assurance that the Company can
franchise a sufficient number of properties to generate operating
efficiencies that will enable it to compete with these larger chains.
GENERAL RISKS OF THE LODGING INDUSTRY
The Company is exposed to general risks of the lodging industry in a
number of ways. First, as a franchiser and manager, the Company's franchise
royalty and management fee revenues vary directly with its franchisees' gross
room revenues. As a result, the Company's franchise and management businesses
are, and will be, affected by risks experienced by hotel operators generally.
In fact, because of factors adversely affecting the lodging industry such as
lower occupancy rates, lower percentages of daily rate growth, higher
interest rates and increased room supply competition, the Company is
currently evaluating the future prospects of its management business to
determine whether to continue to offer management services. Second, to the
extent the Company directly or indirectly makes equity or debt investments in
hotel properties, those investments will be subject to the risks experienced
by the underlying properties. Third, the Company may
<PAGE>
directly acquire ownership interests in its branded hotel properties in order
to promote the brand or for other reasons. To the extent that the Company
owns or leases hotel properties, it will be subjected to the risks of a hotel
operator.
The segments in which hotels franchised under the Company's brands
currently operate or plan to operate, may be adversely affected by changes in
national or local economic conditions and other local market conditions, such
as an oversupply of or a reduction in demand for lodging or a scarcity of
potential sites in a geographic area, changes in travel patterns, extreme
weather conditions, changes in governmental regulations that influence or
determine wages, prices, construction costs or methods of operation, changes
in interest rates, the availability of financing, and changes in real estate
tax rates and other operating expenses. In addition, due in part to the
strong correlation between the lodging industry's performance and economic
conditions, the lodging industry is subject to cyclical changes in revenues
and profits. In fact, the Company believes that hotel operators were
negatively affected during 1999 and during the first quarter of 2000 by
increased room supply, weaker room demand and higher interest rates, among
other things. These risks may have been exacerbated by the relatively
illiquid nature of real estate holdings.
Downturns or prolonged adverse conditions in real estate or capital
markets or in national or local economies could have a material adverse
impact on the Company's ability to locate new franchisees, the timing of new
hotel openings, the number of rooms at newly-opened hotels, and the amount of
royalty and management fee income earned by the Company and could result in
the cancellation of the Company's franchise agreements and management
contracts and increase risks of impairment on loans or other investments made
by the Company directly or indirectly to or in franchisees and developers and
potential deferral or loss of the interest income associated with such
potential write-offs. In fact, during the first quarter 2000, six of the
Company's franchised hotels left their respective systems and three of the
Company's management contracts were terminated. In addition to the
aforementioned risks, the Company's current and potential future investments
in or ownership of hotel properties creates a risk of decreased earnings due
to losses related to start-up expenses or ongoing losses due to shortfalls in
expected performance of a hotel. In addition, any guaranty required to secure
construction or permanent loan financing could adversely affect the Company's
financial condition.
The Company expects to experience seasonal revenue patterns similar
to those experienced by participants in the lodging industry generally.
Accordingly, the summer months, because of increases in leisure travel, are
expected to produce higher revenues for the Company than other periods during
the year.
DEVELOPMENT AND OWNERSHIP RISK
The Company's success depends upon the development or conversion and
opening of hotels. As a result, it is subject to risks experienced by hotel
developers. These risks, which are applicable to Microtels as new
construction properties, and to Hawthorn and Best Inns as both new
construction and conversion properties, include delays in the commencement or
completion of construction, failure to obtain all necessary zoning and
construction permits, discovery of environmental hazards, unavailability of
financing on favorable terms, if at all, the failure of developed properties
to achieve desired revenue or profitability levels once opened, competition
for suitable development sites from competing franchise chains, the risk of
incurring substantial costs in the event a development project must be
abandoned prior to completion, changes in governmental rules, regulations and
interpretations and general economic and business conditions. The Company's
revenues may also be adversely affected by increases in interest rates, which
could increase the costs of financing new hotel construction or the
conversion of existing hotels. Any one of these risks could discourage or
prohibit potential franchisees from beginning or completing hotel projects or
harm the profitability of an open hotel, which could result in the
termination of franchise agreements and management contracts.
<PAGE>
If the Company leases and/or owns hotel properties or makes,
directly or indirectly, equity or debt investments in hotel properties, it
would be subject to risks experienced by hotel operators generally. During
1999, the Company incurred costs of approximately $0.5 million in connection
with its abandoned purchase of a Hawthorn Suites property, representing a
portion of a forfeited deposit and transaction costs.
RISKS RELATING TO THE FINANCING OF FRANCHISEES
The Company participates, from time to time, in construction loans,
equity investments, and long-term mortgage loans made to franchisees. In
particular, the Company has committed to lend up to $10 million to
Constellation Equity Corp. ("Constellation") to be invested by Constellation
in Constellation Development Fund, LLC (the "Development Fund") and to be
used by the Development Fund to provide debt and equity financing to selected
developers. As of March 31, 2000, the Company has loaned approximately $4.4
million in the aggregate to Constellation and expects to loan up to an
additional $400,000 to Constellation in the remainder of 2000. The loan to
Constellation is subordinated to returns of other members. If such returns
are not met, this loan could be jeopardized. Due to the uncertainty
surrounding the ultimate recoverability of the subordinated loan, the Company
is accounting for them on a cost-recovery basis, where interest income is
recorded only after recovery of principal. As of March 31, 2000, the
Development Fund has invested in seven Microtels and two Hawthorn Suites
hotels which are in different stages of development. As of February 21, 2000,
the managers of the Development Fund agreed that no additional projects will
be commenced in the future.
In addition, the Company made a $15 million unsecured subordinated
loan to Alpine Hospitality Ventures LLC ("Ventures") in connection with the
Best Inns acquisition at an interest rate of 12% per annum, interest on which
will be paid in cash to the extent available and otherwise to be paid
in-kind. The loan is subordinated to a guaranty provided by Ventures in
connection with a third party senior loan in the principal amount of
approximately $65 million to its subsidiary that acquired 17 Best Inns hotels
in the Best Inns transaction and is structurally subordinated to such third
party loan. The Company is also committed to make additional loans of up to
$7.5 million to Ventures under certain circumstances. No such additional
loans were made as of March 31, 2000, but it is possible that the loan, or a
portion thereof, will be required to be made in the future. Both Ventures and
Constellation are highly leveraged entities and there can be no assurances
that any loans to Ventures or Constellation will be repaid. In the fourth
quarter 1999, the Company was advised by Ventures that the senior lender to
its operating subsidiary planned to institute a "lock-box" arrangement
because of the deteriorating financial condition of the operating subsidiary.
In March 2000, the lock-box agreement was executed. The lock-box arrangement
effectively precludes the payment of cash interest to the Company while such
arrangement is in place. The Company will continue to receive interest
in-kind payments but will not include such in-kind payments in income.
Recognition of such in-kind payments as income is dependent upon the amount
of underlying property values of the borrower, relative to other lenders and
shareholders. There can be no assurance that those values will continue to be
sufficient to permit the Company to continue to record such interest income
and, in fact, no such income was recognized by the Company in the fourth
quarter 1999 or the first quarter 2000 and the Company does not currently
expect to record income in 2000. In fact, the Company has taken a reserve of
approximately $15.5 million associated with the principal and accrued
interest of the loan.
The Company has also made various loans and advances to individual
franchisees, the reservation and marketing funds for the Microtel and Best
Inns brands, and loan participations in a financing program with Nomura Asset
Capital Corp. See "Legal Proceedings" for a discussion of a pending
litigation concerning these loan participations. The Company is subject to
the risks experienced by lenders generally, including risks of
franchisee/borrower defaults and bankruptcies. Among other things, the
ability of the borrowers to repay these loans will be affected by the factors
discussed under "General Risks of the Lodging Industry" and "Development and
Ownership Risk." The failure of a borrower to pay interest could have a
material adverse effect on the Company's results of operations. In the event
of default under such loans, the Company,
<PAGE>
as a lender, would bear the risk of loss of principal to the extent the value
of the collateral was not sufficient to pay lenders, which may be more senior
in the capital structure. As of March 31, 2000, in addition to the loans to
Ventures and Constellation, the Company had outstanding loans made to
borrowers of approximately $9.1 million aggregate principal amount (net of
approximately $1.1 million of reserves). If the financial condition of the
borrowers of these loans were to worsen, the loans could be deemed to be
impaired, which could result in a significant charge to the Company and
future interest income related to these loans could be deferred or eliminated
which could have a materially adverse effect on future income. In connection
with equity investments, the Company would be subject to risks as an equity
investor. See "Business-Regulation."
REGULATION
The sale of franchises is regulated by various state laws, as well
as by the FTC. To the extent that the Company manages, owns or leases hotel
properties, it will be subject to additional governmental regulations. For
example, owners and operators of hotels are subject to numerous federal,
state and local government regulations, including those relating to the
preparation and sale of food and beverages (such as health and liquor license
laws) and building and zoning requirements. Under the Americans with
Disabilities Act of 1990 (the "ADA"), all public accommodations are required
to meet certain federal requirements related to access and use by disabled
persons. The determination that hotels owned, managed or leased by the
Company are not in compliance with the ADA could result in the imposition of
fines, and award of damages to private litigants or significant expense to
the Company in bringing these hotels into compliance. Additionally, various
national, state and local laws and regulations may affect activities
undertaken by the Company in connection with providing financing to
franchisees. In particular, the Company may be required to obtain a license
or to register in certain states in order to arrange loans to be made to
franchisees. See "Business-Regulation."
DEPENDENCE ON SPIRIT RESERVATION SYSTEM
Franchisees of the Hawthorn brand open one year or greater derived
approximately 21% of their reservations through the Spirit Reservation
System, which is operated under contract with Hyatt Hotels Corporation by CSC
Outsourcing, Inc. ("CSC") and Sabre Technology Solutions ("Sabre"). There can
be no assurance that CSC and Sabre will continue to service Hawthorn Suites'
reservations needs in the future.
ABSENCE OF DIVIDENDS
The Company has not paid a dividend on its Common Stock since its
inception. The Company intends to retain any earnings to finance its growth
and for general corporate purposes and therefore does not anticipate paying
any cash dividends in the foreseeable future. In addition, future financing
agreements may contain limitations on the payment of cash dividends or other
distributions of assets to the holders of Common Stock.
ANTI-TAKEOVER DEVICES
Certain identical provisions of the Certificate of Incorporation and
the By-laws of the Company may be deemed to have anti-takeover effects and
may delay, deter or prevent a change in control of the Company that
stockholders might otherwise consider in their best interests. These
provisions (i) allow only the Board of Directors, the Chairman of the Board
of Directors or the Chief Executive Officer of the Company to call special
meetings of the stockholders, (ii) eliminate the ability of stockholders to
take any action without a meeting, (iii) establish certain advance notice
procedures for nomination of candidates for election as directors and for
stockholder proposals to be considered at stockholders' meeting, (iv)
generally authorize the issuance of one or more classes of "blank check"
preferred stock, with such designations, rights and preferences as may be
determined from time to time by the Board of Directors, (v) require approval
of holders
<PAGE>
of 75% of the outstanding Class B Common Stock for the Board of Directors to
create a series of Preferred Stock with general voting rights or with the
right to elect a majority of directors under any circumstances and (vi)
require approval of holders of 75% of the outstanding voting power to amend
or repeal items (i), (ii) or (v) above or this item (vi).
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is and may become party to claims and litigations that
arise in its normal course of business, including but not limited to those
listed below. In management's opinion, except for certain of the matters
described below, the outcome of any currently pending matters is not expected
to have a material adverse effect on the Company's consolidated financial
statements.
Nomura Asset Capital Corporation has commenced an action against the
Company and its subsidiary seeking damages in an amount not less than
$704,910. Nomura has also asserted that it is entitled to foreclose on
$432,949 in loan participations previously funded by the Company and pledged
to Nomura. The complaint alleges, among other things, that the Company owes
Nomura this amount in connection with certain construction loans Nomura has
made to the Company's franchisees. The Company has filed a counterclaim for
unspecified damages. The Company cannot predict the outcome of this matter.
Best Western International and Cal-Vegas LP have filed notices of
opposition to the registration (but not to the use) by the Company of certain
Best Inns marks. The Company believes that the opposition rights of Cal-Vegas
have expired, and is contesting the Best Western opposition. While the
Company cannot predict the outcome of this matter, it does not believe that
it will have a material adverse effect on the Company's ability to market the
Best Inns brands or on the Company's consolidated financial statements.
Two former employees of the Company have commenced an action
alleging wrongful termination and seeking unspecified damages. The Company
has filed a counterclaim for unspecified damages. The Company believes it has
meritorious defenses but can not predict the outcome of this matter.
On April 11, 2000, the Company and certain subsidiaries settled a
lawsuit which was brought by the owner of nine Best Inn properties for
alleged mismanagement under management agreements that the Company assumed in
connection with its 1998 acquisition of the Best Inns brand. USFS Management,
Inc., a subsidiary of the Company, had also filed a counterclaim alleging
fraudulent conduct by the owner and certain of his affiliates, which was also
settled. In connection with the settlement, in the first quarter of 2000 the
Company and its subsidiaries accrued $510,000 in settlement payments and
related legal costs. The franchise agreements with the owner remain in effect.
ITEM 2. CHANGES IS SECURITIES AND USE OF PROCEEDS
In connection with a letter agreement with Leisure Hotel Management
dated February 3, 1998, the Company has authorized the issuance of up to
$900,000 worth of shares of Class A Common Stock upon the attainment of
certain development milestones. On March 3, 2000, the Company issued 48,290
shares of Class A Common Stock, valued at approximately $240,000, in
satisfaction of the first such milestone. The Company believes that this
transaction is exempt from registration under the Securities Act of 1933, as
amended, (the "Act") by virtue of Section 4(2) of the Act.
<PAGE>
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during
the quarter.
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A) EXHIBITS:
EXHIBIT DESCRIPTION
NUMBER
27.1 Financial Data Schedule.
B) REPORTS ON FORM 8-K
During the period from January 1, 2000 to March 31, 2000,
the Company did not file any reports on Form 8-K.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
U.S. FRANCHISE SYSTEMS, INC.
By /s/ Michael A. Leven By /s/ Neal K. Aronson
----------------------------- -----------------------------
Michael A. Leven Neal K. Aronson
CHAIRMAN OF THE BOARD, PRESIDENT EXECUTIVE VICE PRESIDENT AND CHIEF
AND CHIEF EXECUTIVE OFFICER FINANCIAL OFFICER
Dated: May 12, 2000
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
NUMBER
27.1 Financial Data Schedule.
<PAGE>
FORM OF
U.S. FRANCHISE SYSTEMS, INC.
AMENDED AND RESTATED 1996 STOCK OPTION PLAN
SECTION 1. Purpose. The purposes of this U.S. Franchise Systems, Inc. 1996
Stock Option Plan are to promote the interests of U.S. Franchise Systems, Inc.
("USFS" or the "Company") and its stockholders by (i) attracting and retaining
exceptional officers and other key employees of the Company and its
Subsidiaries, and consultants, advisors and others whom the Committee determines
possess skills that would be an asset to the Company or any of its Subsidiaries;
(ii) motivating such individuals by means of performance-related incentives to
achieve longer-range performance goals; and (iii) enabling such individuals to
participate in the long-term growth and financial success of the Company.
SECTION 2. Definitions. As used in the Plan, the following terms shall have
the meanings set forth below:
"Affiliate" shall mean (i) any entity that, directly or indirectly, is
controlled by or controls the Company and (ii) any entity in which the Company
has a significant equity interest, in either case as determined by the
Committee.
"Board" shall mean the Board of Directors of the Company.
"Change of Control" shall mean the occurrence of any of the following: (i)
the sale, lease, transfer, conveyance or other disposition, in one or a series
of related transactions, of all or substantially all of the assets of the
Company to any "person" or "group" (as such terms are used in Sections 13(d)(3)
and 14(d)(2) of the Exchange Act) other than the Permitted Holders, (ii) any
person or group, other than the Permitted Holders, is or becomes the "beneficial
owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act, except that
a person shall be deemed to have "beneficial ownership" of all shares that any
such person has the right to acquire, whether such right is exercisable
immediately or only after the passage of time), directly or indirectly, of more
than 50% of the total voting power of the voting stock of the Company, including
by way of merger, consolidation or otherwise or (iii) during any period of two
consecutive years, individuals who at the beginning of such period constituted
the Board (together with any new directors whose election by such Board or whose
nomination for election by the stockholders of the Company was approved by a
vote of a majority of the directors of the Company then still in office who were
either directors at the beginning of such period or whose election or nomination
for election was previously so approved) cease for any reason to constitute a
majority of the Board.
"Code" shall mean the Internal Revenue Code of 1986, as amended from time
to time.
"Committee" shall mean (i) a committee of the Board designated by the Board
to administer the Plan and composed of not less two directors, each of whom is
intended to be a "Non-Employee Director" (within the meaning of Rule 16b-3) and
an "outside director" (within the meaning of Code section 162(m)) to the extent
Rule 16b-3 and Code section 162(m), respectively, are applicable to the Company
or (ii) if at any time such a committee has not been so designated by the Board,
the Board or any authorized committee thereof.
"Company" shall mean U.S. Franchise Systems, Inc., together with any
successor thereto.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended.
"Fair Market Value" shall mean, (A) with respect to any property other
<PAGE>
than Shares, the fair market value of such property determined by such methods
or procedures as shall be established from time to time by the Committee and (B)
with respect to the Shares, as of any date, (i) the mean between the high and
low sales prices of the Shares as reported on the composite tape for securities
traded on the New York Stock Exchange for such date (or if not then trading on
the New York Stock Exchange, the mean between the high and low sales price of
the Shares on the stock exchange or over-the-counter market on which the Shares
are principally trading on such date), or if, there were no sales on such date,
on the closest preceding date on which there were sales of Shares or (ii) in the
event there shall be no public market for the Shares on such date, the fair
market value of the Shares as determined in good faith by the Committee.
"Incentive Stock Option" shall mean a right to purchase Shares from the
Company that is granted under Section 6 of the Plan and that is intended to meet
the requirements of Section 422 of the Code or any successor provision thereto.
"Non-Qualified Stock Option" shall mean a right to purchase Shares from the
Company that is granted under Section 6 of the Plan and that is not intended to
be an Incentive Stock Option.
"Option" shall mean an Incentive Stock Option or a Non-Qualified Stock
Option.
"Option Agreement" shall mean any written agreement, contract, or other
instrument or document evidencing any Option, which may, but need not, be
executed or acknowledged by a Participant.
"Participant" shall mean any officer or other key employee (including any
prospective officer or key employee) of the Company or its Subsidiaries, and any
consultant, advisor or other person whom the Committee determines possesses
skills that would be an asset to the Company or any of its Subsidiaries, in each
case who is eligible for an Option under Section 5 and selected by the Committee
to receive an Option under the Plan.
"Permitted Holders" shall mean, as of the date of determination, any and
all of Neal K. Aronson and Michael A. Leven, their spouses, their siblings and
their siblings' spouses, their parents and descendants of any of them (whether
natural or adopted) (collectively, the "Family Group") and (iii) any trust
established and maintained primarily for the benefit of any member of the Family
Group and any entity controlled by any member of the Family Group.
"Person" shall mean any individual, corporation, partnership, association,
joint-stock company, trust, unincorporated organization, government or political
subdivision thereof or other entity.
"Plan" shall mean this U.S. Franchise Systems, Inc. 1996 Stock Option Plan.
"Rule 16b-3" shall mean Rule 16b-3 as promulgated and interpreted by the
SEC under the Exchange Act, or any successor rule or regulation thereto as in
effect from time to time.
"SEC" shall mean the Securities and Exchange Commission or any successor
thereto and shall include the Staff thereof.
"Shares" shall mean shares of the Class A Common Stock of the Company, $.01
par value, or such other securities of the Company (i) into which such common
shares shall be changed by reason of a recapitalization, merger, consolidation,
split-up, combination, exchange of shares or other similar transaction or (ii)
as may be determined by the Committee pursuant to Section 4(b).
"Subsidiary" shall mean (i) any entity that, directly or indirectly, is
<PAGE>
controlled by the Company and (ii) any entity in which the Company has a
significant equity interest, in either case as determined by the Committee
"Substitute Awards" shall have the meaning specified in Section 4(c).
SECTION 3. Administration. (a) The Plan shall be administered by the
Committee. Subject to the terms of the Plan and applicable law, and in addition
to other express powers and authorizations conferred on the Committee by the
Plan, the Committee shall have full power and authority to: (i) designate
Participants; (ii) determine the type or types of Options to be granted to a
Participant; (iii) determine the number of Shares to be covered by, or with
respect to which payments, rights, or other matters are to be calculated in
connection with, Options; (iv) determine the terms and conditions of any Option;
(v) determine whether, to what extent, and under what circumstances Options may
be settled or exercised in cash, Shares, other securities, or other property, or
canceled, forfeited, or suspended and the method or methods by which Options may
be settled, exercised, canceled, forfeited, or suspended; (vi) determine
whether, to what extent, and under what circumstances cash, Shares, other
securities, other property, and other amounts payable with respect to an Option
shall be deferred either automatically or at the election of the holder thereof
or of the Committee; (vii) interpret, administer reconcile any inconsistency,
correct any default and/or supply any omission in the Plan and any instrument or
agreement relating to, or Option made under, the Plan; (viii) establish, amend,
suspend, or waive such rules and regulations and appoint such agents as it shall
deem appropriate for the proper administration of the Plan; and (ix) make any
other determination and take any other action that the Committee deems necessary
or desirable for the administration of the Plan.
(b) Unless otherwise expressly provided in the Plan, all designations,
determinations, interpretations, and other decisions under or with respect to
the Plan or any Option shall be within the sole discretion of the Committee, may
be made at any time and shall be final, conclusive, and binding upon all
Persons, including the Company, any Affiliate, any Participant, any holder or
beneficiary of any Option, and any shareholder.
(c) The mere fact that a Committee member shall fail to qualify as a "Non-
Employee Director" or "outside director" within the meaning of Rule 16b-3 and
Code section 162(m), respectively, shall not invalidate any Option granted by
the Committee which Option is otherwise validly made under the Plan.
(d) No member of the Committee shall be liable for any action or
determination made in good faith with respect to the Plan or any Option granted
hereunder.
SECTION 4. Shares Available for Options.
(a) Shares Available. Subject to adjustment as provided in Section 4(b),
the aggregate number of Shares with respect to which Options may be granted
under the Plan shall be 1,975,000 and the maximum number of Shares with respect
to which Options may be granted to any Participant in any fiscal year shall be
250,000. If, after the effective date of the Plan, any Shares covered by an
Option granted under the Plan, or to which such an Option relates, are
forfeited, or if an Option has expired, terminated or been canceled for any
reason whatsoever (other than by reason of exercise or vesting) and in either
such case a Participant has received no benefits of ownership with respect to
the forfeited Shares or the Shares to which such expired, terminated or canceled
Option relates (other than voting rights and dividends that were forfeited in
connection with such forfeiture, expiration, termination or cancellation), then
the Shares covered by such Option shall, to the maximum extent permitted under
Section 162(m) of the Code during any period when Section 162(m) is applicable
to the Company, again be, or shall become, Shares with respect to which Options
may be granted hereunder.
<PAGE>
(b) Adjustments. In the event that the Committee determines that any
dividend or other distribution (whether in the form of cash, Shares, other
securities, or other property), recapitalization, stock split, reverse stock
split, reorganization, merger, consolidation, split-up, spin-off, combination,
repurchase, or exchange of Shares or other securities of the Company, issuance
of warrants or other rights to purchase Shares or other securities of the
Company, or other similar corporate transaction or event affects the Shares such
that an adjustment is determined by the Committee in its discretion to be
appropriate in order to prevent dilution or enlargement of the benefits or
potential benefits intended to be made available under the Plan, then the
Committee shall, in such manner as it may deem equitable, adjust any or all of
(i) the number of Shares or other securities of the Company (or number and kind
of other securities or property) with respect to which Options may be granted,
(ii) the number of Shares or other securities of the Company (or number and kind
of other securities or property) subject to outstanding Options, and (iii) the
grant or exercise price with respect to any Option or, if deemed appropriate,
make provision for a cash payment to the holder of an outstanding Option in
consideration for the cancellation of such Option.
(c) Substitute Awards. Options may, in the discretion of the Committee, be
made under the Plan in assumption of, or in substitution for, outstanding awards
previously granted by the Company or its Affiliates or a company acquired by the
Company or with which the Company combines ("Substitute Awards"). The number of
Shares underlying any Substitute Awards shall be counted against the aggregate
number of Shares available for Options under the Plan.
(d) Sources of Shares Deliverable Under Options. Any Shares delivered
pursuant to an Option may consist, in whole or in part, of authorized and
unissued Shares or of treasury Shares.
SECTION 5. Eligibility. Any officer or other key employee of the Company or
any of its Subsidiaries (including any prospective officer or key employee), and
any consultant, advisor or other person whom the Committee determines possesses
skills that would be an asset to the Company or any of its Subsidiaries, who is
not a member of the Committee, shall be eligible to be designated a Participant.
SECTION 6. Stock Options.
(a) Grant. Subject to the provisions of the Plan, the Committee shall have
sole and complete authority to determine the Participants to whom Options shall
be granted, the number of Shares to be covered by each Option, the exercise
price therefor and the conditions and limitations applicable to the exercise of
the Option. The Committee shall have the authority to grant Incentive Stock
Options, or to grant Non-Qualified Stock Options, or to grant both types of
Options. In the case of Incentive Stock Options, the terms and conditions of
such grants shall be subject to and comply with such rules as may be prescribed
by Section 422 of the Code, as from time to time amended, and any regulations
implementing such statute. All Options when granted under the Plan are intended
to be Non-Qualified Stock Options, unless the applicable Option Agreement
expressly states that the Option is intended to be an Incentive Stock Option. If
an Option is intended to be an Incentive Stock Option, and if for any reason
such Option (or any portion thereof) shall not qualify as an Incentive Stock
Option, then, to the extent of such nonqualification, such Option (or portion
thereof) shall be regarded as a Non-Qualified Stock Option appropriately granted
under the Plan; provided that such Option (or portion thereof) otherwise
complies with the Plan's requirements relating to Non-Qualified Stock Options.
(b) Exercise Price. The Committee shall establish the exercise price at the
time each Option is granted, which exercise price shall be set forth in the
applicable Option Agreement.
(c) Exercise. Each Option shall be exercisable at such times and
<PAGE>
subject to such terms and conditions as the Committee may, in its sole
discretion, specify in the applicable Option Agreement or thereafter. The
Committee may impose such conditions with respect to the exercise of Options,
including without limitation, any relating to the application of federal or
state securities laws, as it may deem necessary or advisable;
(d) Payment. No Shares shall be delivered pursuant to any exercise of an
Option until payment in full of the aggregate exercise price therefor is
received by the Company. Such payment may be made in cash, or its equivalent,
or, if and to the extent permitted by the Committee, (i) by exchanging Shares
owned by the optionee (which are not the subject of any pledge or other security
interest and which have been owned by such optionee for at least six months) or
(ii) if permitted by and subject to such rules as may be established by the
Committee, through delivery of irrevocable instructions to a broker to sell such
Shares and deliver promptly to the Company an amount equal to the aggregate
exercise price, or by a combination of the foregoing, provided that the combined
value of all cash and cash equivalents and the Fair Market Value of any such
Shares so tendered to the Company as of the date of such tender is at least
equal to such aggregate exercise price.
SECTION 7. Amendment and Termination.
(a) Amendments to the Plan. The Board may amend, alter, suspend,
discontinue, or terminate the Plan or any portion thereof at any time; provided
that no such amendment, alteration, suspension, discontinuation or termination
shall be made without shareholder approval if such approval is necessary to
comply with any tax or regulatory requirement, including for these purposes any
approval requirement which is a prerequisite for exemptive relief from Section
16(b) of the Exchange Act or necessary to qualify the options granted hereunder
as performance based compensation for purposes of Code Section 162(m) (provided
that the Company is subject to the requirements of Section 16 of the Exchange
Act or Code Section 162(m), as the case may be, as of the date of such action).
(b) Amendments to Options. The Committee may waive any conditions or rights
under, amend any terms of, or alter, suspend, discontinue, cancel or terminate,
any Option theretofore granted, prospectively or retroactively; provided that
any such waiver, amendment, alteration, suspension, discontinuance, cancellation
or termination that would impair the rights of any Participant or any holder or
beneficiary of any Option theretofore granted shall not to that extent be
effective without the consent of the affected Participant, holder or
beneficiary.
(c) Adjustment of Options Upon the Occurrence of Certain Unusual or
Nonrecurring Events. The Committee is hereby authorized to make adjustments in
the terms and conditions of, and the criteria included in, Options in
recognition of unusual or nonrecurring events (including, without limitation,
the events described in Section 4(b) hereof) affecting the Company, any
Affiliate, or the financial statements of the Company or any Affiliate, or of
changes in applicable laws, regulations, or accounting principles, whenever the
Committee determines that such adjustments are appropriate in order to prevent
dilution or enlargement of the benefits or potential benefits intended to be
made available under the Plan.
SECTION 8. Change of Control. In the event of a Change of Control after the
date of the adoption of this Plan, any outstanding Options then held by
Participants which are unexercisable or otherwise unvested shall automatically
be deemed exercisable or otherwise vested, as the case may be, as of immediately
prior to such Change of Control.
SECTION 9. General Provisions.
<PAGE>
(a) Nontransferability. Each Option and each right under any Option shall
be exercisable only by the Participant during the Participant's lifetime, or, if
permissible under applicable law, by the Participant's legal guardian or
representative. No Option may be assigned, alienated, pledged, attached, sold or
otherwise transferred or encumbered by a Participant otherwise than by will or
by the laws of descent and distribution and any such purported assignment,
alienation, pledge, attachment, sale, transfer or encumbrance shall be void and
unenforceable against the Company or any Affiliate; provided that the
designation of a beneficiary shall not constitute an assignment, alienation,
pledge, attachment, sale, transfer or encumbrance.
(b) No Rights to Options. No Participant or other Person shall have any
claim to be granted any Option, and there is no obligation for uniformity of
treatment of Participants, or holders or beneficiaries of Options. The terms and
conditions of Options and the Committee's determinations and interpretations
with respect thereto need not be the same with respect to each Participant
(whether or not such Participants are similarly situated).
(c) Share Certificates. All certificates for Shares or other securities of
the Company or any Affiliate delivered under the Plan pursuant to any Option or
the exercise thereof shall be subject to such stop transfer orders and other
restrictions as the Committee may deem advisable under the Plan or the rules,
regulations, and other requirements of the Securities and Exchange Commission,
any stock exchange upon which such Shares or other securities are then listed,
and any applicable Federal or state laws, and the Committee may cause a legend
or legends to be put on any such certificates to make appropriate reference to
such restrictions.
(d) Withholding. A Participant may be required to pay to the Company or any
Affiliate and the Company or any Affiliate shall have the right and is hereby
authorized to withhold from any Option, from any payment due or transfer made
under any Option or under the Plan or from any compensation or other amount
owing to a Participant the amount (in cash, Shares, other securities, or other
property) of any applicable withholding taxes in respect of an Option, its
exercise, or any payment or transfer under an Option or under the Plan and to
take such other action as may be necessary in the opinion of the Company to
satisfy all obligations for the payment of such taxes.
(e) Option Agreements. Each Option hereunder shall be evidenced by an
Option Agreement which shall be delivered to the Participant and shall specify
the terms and conditions of the Option and any rules applicable thereto,
including but not limited to the effect on such Option of the death, disability
or termination of employment or service of a Participant and the effect, if any,
of such other events as may be determined by the Committee.
(f) No Limit on Other Compensation Arrangements. Nothing contained in the
Plan shall prevent the Company or any Affiliate from adopting or continuing in
effect other compensation arrangements, which may, but need not, provide for the
grant of options (subject to shareholder approval if such approval is required),
and such arrangements may be either generally applicable or applicable only in
specific cases.
(g) No Right to Employment. The grant of an Option shall not be construed
as giving a Participant the right to be retained in the employ of, or in any
consulting relationship to, the Company or any Affiliate. Further, the Company
or an Affiliate may at any time dismiss a Participant from employment or
discontinue any consulting relationship, free from any liability or any claim
under the Plan, unless otherwise expressly provided in the Plan or in any Option
Agreement.
(h) No Rights as Stockholder. Subject to the provisions of the applicable
Option, no Participant or holder or beneficiary of any Option shall have any
rights as a stockholder with respect to any Shares to be distributed
<PAGE>
under the Plan until he or she has become the holder of such Shares.
(i) Governing Law. The validity, construction, and effect of the Plan and
any rules and regulations relating to the Plan and any Option Agreement shall be
determined in accordance with the laws of the State of Delaware.
(j) Severability. If any provision of the Plan or any Option is or becomes
or is deemed to be invalid, illegal, or unenforceable in any jurisdiction or as
to any Person or Option, or would disqualify the Plan or any Option under any
law deemed applicable by the Committee, such provision shall be construed or
deemed amended to conform the applicable laws, or if it cannot be construed or
deemed amended without, in the determination of the Committee, materially
altering the intent of the Plan or the Option, such provision shall be stricken
as to such jurisdiction, Person or Option and the remainder of the Plan and any
such Option shall remain in full force and effect.
(k) Other Laws. The Committee may refuse to issue or transfer any Shares or
other consideration under an Option if, acting in its sole discretion, it
determines that the issuance or transfer of such Shares or such other
consideration might violate any applicable law or regulation or entitle the
Company to recover the same under Section 16(b) of the Exchange Act, and any
payment tendered to the Company by a Participant, other holder or beneficiary in
connection with the exercise of such Option shall be promptly refunded to the
relevant Participant, holder or beneficiary. Without limiting the generality of
the foregoing, no Option granted hereunder shall be construed as an offer to
sell securities of the Company, and no such offer shall be outstanding, unless
and until the Committee in its sole discretion has determined that any such
offer, if made, would be in compliance with all applicable requirements of the
U.S. federal and any other applicable securities laws.
(l) No Trust or Fund Created. Neither the Plan nor any Option shall create
or be construed to create a trust or separate fund of any kind or a fiduciary
relationship between the Company or any Affiliate and a Participant or any other
Person. To the extent that any Person acquires a right to receive payments from
the Company or any Affiliate pursuant to an Option, such right shall be no
greater than the right of any unsecured general creditor of the Company or any
Affiliate.
(m) No Fractional Shares. No fractional Shares shall be issued or delivered
pursuant to the Plan or any Option, and the Committee shall determine whether
cash, other securities, or other property shall be paid or transferred in lieu
of any fractional Shares or whether such fractional Shares or any rights thereto
shall be canceled, terminated, or otherwise eliminated.
(n) Headings. Headings are given to the Sections and subsections of the
Plan solely as a convenience to facilitate reference. Such headings shall not be
deemed in any way material or relevant to the construction or interpretation of
the Plan or any provision thereof.
SECTION 16. Term of the Plan.
(a) Effective Date. The Plan shall be effective as of the date of its
approval by the shareholders of the Company.
(b) Expiration Date. No Option shall be granted under the Plan after
October 24, 2003. Unless otherwise expressly provided in the Plan or in an
applicable Option Agreement, any Option granted hereunder may, and the
authority of the Board or the Committee to amend, alter, adjust, suspend,
discontinue, or terminate any such Option or to waive any conditions or
rights under any such Option shall, continue after October 24, 2003.
