-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QwXb6xOkRt797ps4p9CePlv63McJM4OtI9jFN48r/Gf2H80KU8AJEewEU+XiDU/8 vra++0amO8pscnStbJsz7w== 0000950146-96-001781.txt : 19961015 0000950146-96-001781.hdr.sgml : 19961015 ACCESSION NUMBER: 0000950146-96-001781 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 10 FILED AS OF DATE: 19961011 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: US FRANCHISE SYSTEMS INC CENTRAL INDEX KEY: 0001020350 STANDARD INDUSTRIAL CLASSIFICATION: HOTELS & MOTELS [7011] IRS NUMBER: 582190911 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-11427 FILM NUMBER: 96642396 BUSINESS ADDRESS: STREET 1: 13 CORPORATE SQUARE STREET 2: STE 250 CITY: ATLANTA STATE: GA ZIP: 30329 BUSINESS PHONE: 4043214045 MAIL ADDRESS: STREET 1: 13 CORPORATE SQUARE STREET 2: STE 250 CITY: ATLANTA STATE: GA ZIP: 30329 S-1/A 1 As filed with the Securities and Exchange Commission on October 11, 1996 Registration No. 333-11427 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 _____________ AMENDMENT NO. 1 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 _____________ U.S. FRANCHISE SYSTEMS, INC. (Exact name of registrant as specified in its charter) _____________ Delaware (State or other jurisdiction of 7011 58-2190911 incorporation or (Primary Standard Industrial (I.R.S. Employer organization) Classification Code Number) Identification Number) 13 Corporate Square, Suite 250 Atlanta, Georgia 30329 (404) 321-4045 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) _____________ Michael A. Leven Chairman, President and Chief Executive Officer U.S. Franchise Systems, Inc. 13 Corporate Square, Suite 250 Atlanta, Georgia 30329 (404) 321-4045 (Name, address, including zip code, and telephone number, including area code, of agent for service) _____________ Copies to: Judith R. Thoyer, Esq. Patricia A. Ceruzzi, Esq. Paul, Weiss, Rifkind, Wharton & Garrison Sullivan & Cromwell 1285 Avenue of the Americas 125 Broad Street New York, New York 10019-6064 New York, New York 10004 (212) 373-3000 (212) 558-4000 _____________ Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. [ ] _____________ CALCULATION OF REGISTRATION FEE ------------------------------------------------------------------------------ Title of Each Class Proposed Maximum of Securities to be Registered Aggregate Amount of Offering Price(1)(2) Registration Fee(3) - ------------------------------------------------------------------------------ Class A Common Stock $37,432,500 $12,377.66 - ------------------------------------------------------------------------------ (1) Includes shares which may be purchased by the Underwriters solely to cover over-allotments, if any. (2) Estimated solely for purposes of calculating the registration fee. (3) In connection with the initial filing by the Registrant of this Registration Statement on September 5, 1996, the Registrant paid a registration fee of $8,534.48. The maximum aggregate offering price has subsequently been increased by $12,682,500. Accordingly, the Registrant has increased the maximum dollar value being registered and has paid an additional filing fee of $3,843.18 in accordance with Rule 457(o). _____________ The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine. Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securitiesmay not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This Prospectus shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any State in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such State. [U.S. Franchise Systems, Inc. logo] SUBJECT TO COMPLETION, DATED OCTOBER 11, 1996 2,325,000 Shares U.S. Franchise Systems, Inc. Class A Common Stock ($0.01 par value) Of the 2,325,000 shares of Class A Common Stock offered hereby, 1,825,000 shares are being sold by U.S. Franchise Systems, Inc. ("USFS" or the "Company") and 500,000 shares are being sold by the Selling Stockholders. The Company will not receive any of the proceeds from the sale of shares of Class A Common Stock by the Selling Stockholders. See "Selling Stockholders". Prior to this offering, there has been no public market for the Class A Common Stock. It is currently estimated that the initial public offering price per share will be between $12.00 and $14.00. See "Underwriting" for information relating to the method of determining the initial public offering price. The Company has two classes of authorized Common Stock: Class A Common Stock and Class B Common Stock. The holders of Class A Common Stock are entitled to one vote per share and the holders of Class B Common Stock are entitled to ten votes per share. Otherwise, the rights of the holders of Class A Common Stock and the holders of Class B Common Stock are substantially identical. Certain members of management own all of the outstanding shares of Class B Common Stock. Upon completion of the Offering, such members of management will control approximately 78% of the combined voting power of the Class A Common Stock and the Class B Common Stock. Shares of Class B Common Stock are convertible into shares of Class A Common Stock on a share-for-share basis. Both classes will generally vote together as one class on all matters submitted to a vote of stockholders, including the election of directors. See "Description of Capital Stock". Application has been made for the quotation of the Class A Common Stock on the NASDAQ National Market System upon completion of the Offering under the symbol "USFS". The Common Stock offered hereby involves a high degree of risk. See "Risk Factors" beginning on page 9. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. --------------------------------------------------------------------------- Underwriting Proceeds to Price to Discounts and Proceeds to Selling Public Commissions(1) Company(2) Stockholders --------------------------------------------------------------------------- Per Share $ $ $ $ --------------------------------------------------------------------------- Total(3) $ $ $ $ --------------------------------------------------------------------------- (1) See "Underwriting" for indemnification arrangements. (2) Before deducting estimated expenses of $700,000 payable by the Company. (3) The Company and the Selling Stockholders have granted to the Underwriters a 30-day option to purchase up to an additional 273,750 and 75,000 shares of Class A Common Stock, respectively, solely to cover over-allotments. If this option is exercised in full, total Price to Public, Underwriting Discounts and Commissions, Proceeds to Company and Proceeds to Selling Stockholders will be $ , $ , $ and $ , respectively. See "Underwriting." The shares of Class A Common Stock offered hereby are being offered by the several Underwriters named herein, subject to prior sale and acceptance by the Underwriters and subject to their right to reject any order in whole or in part. It is expected that the Class A Common Stock will be available for delivery on or about , 1996, at the offices of Schroder Wertheim & Co. Incorporated, New York, New York. Schroder Wertheim & Co. Montgomery Securities , 1996. U S F r a n c h i s e [Map of United States showing plot points of Microtel Inns Properties Open, Microtel Inns Executed Franchise, Agreements, Hawthorn Suites Properties Open, Hawthorn Suites Executed Franchise, Agreements.] IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVERALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE CLASS A COMMON STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. 2 Photos and discriptions of Hotel Properties PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements (including the notes thereto) appearing elsewhere in this Prospectus. As used in this Prospectus, unless the context otherwise requires, the terms "USFS" and "Company" include U.S. Franchise Systems, Inc. and its subsidiaries and their operations. The offering of shares of the Class A Common Stock, par value $0.01 per share (the "Class A Common Stock"), of U.S. Franchise Systems, Inc. is referred to herein as the "Offering". Unless otherwise indicated, all information included in this Prospectus (i) assumes that the Underwriters' over-allotment option will not be exercised and (ii) has been adjusted to give effect to the reclassification of the Company's Common Stock, par value $.10 per share (the "Old Common Stock"), pursuant to which each share of Old Common Stock will become 9.67 shares of Class A Common Stock, and to the exchange of 2,707,919 shares of such Class A Common Stock held by certain members of management for the same number of shares of a newly created class of common stock to be designated Class B Common Stock, par value $0.01 per share (the "Class B Common Stock" and together with the Class A Common Stock, the "Common Stock", and the foregoing reclassification and exchange, the "Reclassification"). THE COMPANY General U.S. Franchise Systems, Inc. was formed in August 1995 to acquire, market and expand high-quality, well-positioned brands with potential for rapid unit growth through the sale of franchises to third-party operators. The Company's initial brands, both of which are in the lodging industry, are the Microtel(R) budget brand ("Microtel") and the Hawthorn Suites(R) upscale, extended-stay brand ("Hawthorn Suites"). The Company acquired the rights to these brands because of their potential for significant growth, which reflects, among other things, their profitability for franchisees at the property level and their positions in attractive segments of the lodging industry. The Company has assembled an experienced management team and sales force led by its Chairman, President and Chief Executive Officer, Michael A. Leven, who has 35 years of experience in the lodging industry, and its Executive Vice President and Chief Financial Officer, Neal K. Aronson, a former principal of the New York investment firm Odyssey Partners, L.P. Mr. Leven most recently served as President and Chief Operating Officer of Holiday Inn Worldwide (1990-95) and President and Chief Operating Officer of Days Inn of America, Inc. (1985-90), franchisors of the two largest lodging brands in the world. The Company has hired and trained a staff of 73 employees, including a 28-person sales force, which management believes is the third largest franchise sales organization in the lodging industry. Mr. Leven and the Company's sales force have collectively sold over 2,200 hotel franchises on behalf of other hotel chains. Since acquiring the Microtel brand in October 1995 and establishing a sales force by January 1996, the Company has executed 145 franchise agreements and accepted applications for an additional 74 hotels as of September 30, 1996, expanding the number of states in which Microtels are or may be located from 10 to 44. Since acquiring the exclusive rights to franchise hotels under the Hawthorn Suites brand in March 1996 and establishing a sales force by July 1996, the Company has executed five franchise agreements and accepted applications for 16 additional hotel sites as of September 30, 1996. As a franchisor, USFS licenses the use of its brand names to independent hotel owners and operators (i.e., franchisees). The Company provides its franchisees with a variety of benefits and services designed to (i) decrease 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 access to financing, a business format, design and construction assistance (including architectural plans), uniform quality standards, training programs, national reservations systems, national and local advertising and promotional campaigns and volume purchasing discounts. The Company does not currently build, own or manage properties. The Company expects that its future revenues will consist primarily of (i) franchise royalty fees, (ii) franchise application fees, (iii) reservation and marketing fees, (iv) various fees and other revenues from third-party financing arranged by the Company for its franchisees and (v) payments made by vendors who supply the Company's franchisees with various products and services. Currently, the Company derives substantially all of its revenues from reservation and marketing fees collected from its franchisees. The Company also receives cash from its franchisees in the form of application fees, which are recognized as revenue only upon the opening of the 3 underlying hotels. See the Consolidated Financial Statements and the related Notes included elsewhere in this Prospectus and "Management's Discussion and Analysis of Financial Condition and Results of Operations". Microtel The Microtel system currently includes 27 hotels operating under the Microtel Inn(R) and Microtel Inn & Suites(R) brand names. In addition, the Company has executed one franchise agreement for a hotel to be operated under the Microtel Suites brand name. Microtel properties operate in the budget segment of the lodging industry, which is the lowest priced segment in the industry (with an average daily room rate in 1995 of approximately $36) and which has experienced favorable growth in room demand relative to growth in room supply. For the six months ended June 1996, the rate of growth in room demand exceeded the rate of growth in room supply in the budget segment by 3.4 times, significantly higher than comparable ratios for any other segment in the lodging industry during this period. According to an industry study, the rate of growth in room demand relative to the rate of growth in room supply was 2.0x in the luxury segment, 1.1x in the upscale segment, 1.3x in the mid-price segment and 1.5x in the economy segment over the same period. Microtels are distinctively styled hotels with a residential look that offer travelers an attractive and consistent appearance, clean, comfortable rooms and the safety of interior corridor access, all for a competitive room rate. Management believes that Microtel is one of the only brands in the budget segment that franchises only newly constructed, interior corridor properties. In contrast, many other budget hotels are older properties with rooms that are accessible only through outside entrances and that may have been converted from independent hotels or other brands. Management believes that Microtels' strict new construction and interior corridor requirements provide travelers with a brand that is among the safest, most consistent and highest quality in the budget segment. Evidence of the appeal of Microtels to hotel guests is found in its "intent-to-return" rating, which measures guests' overall satisfaction and willingness to return to a Microtel in the future. In surveys of approximately 5,000 Microtel guests conducted by franchisees from 1989 to 1994, more than 95% of Microtel guests expressed an intent to return to a Microtel in the future. The Company believes that Microtels offer franchisees significant financial advantages. Microtels are designed to minimize construction costs and maintenance expenses by incorporating smaller room sizes, limited common areas, relatively smaller land requirements and built-in standardized furniture, all of which enable franchisees to build 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. See "Business--Microtel". Hawthorn Suites The Hawthorn Suites(R) system, which currently includes 18 open Hawthorn Suites hotels, targets the upscale segment of the rapidly growing extended-stay lodging market, which is defined as guests that stay five or more consecutive nights. Hotels in this segment offer guests the amenities of an apartment with the convenience and flexibility of a hotel. According to an industry study, extended-stay rooms accounted for over 30% of all hotel room nights sold in the United States in 1995. Another industry study indicates that the supply of dedicated extended-stay rooms accounted for only 1.3% of the total number of hotel rooms. Extended-stay properties offer attractive economics to franchisees because of the relatively high occupancy rates in this segment and the lower operating costs relative to similarly priced, full-service hotel properties. Extended-stay hotels experienced occupancy rates of approximately 80% in 1995 compared to approximately 65% for the lodging industry as a whole during the same period. Hawthorn Suites hotels offer large suites equipped with full kitchens and work spaces, laundry facilities and exercise rooms, daily housekeeping, 24-hour front-desk service, complimentary hot breakfast and hospitality hours. Hawthorn Suites hotels include both newly constructed properties and conversions of pre-existing hotels and apartment buildings. The Company has also recently developed prototypes for a mid-price, all-suite hotel brand, called Hawthorn Suites LTD, which is designed to meet the needs of both extended-stay and short-term guests. See "Business--Hawthorn Suites". The agreement pursuant to which the Company acquired the exclusive worldwide rights to franchise the Hawthorn Suites brand of hotels (the "Hawthorn Acquisition Agreement") limits the Company's ability to franchise 4 certain types of all-suite and full-service lodging brands prior to June 26, 1998 and any non-lodging brands prior to June 26, 1997. For a more complete discussion of the terms and conditions of the Hawthorn Acquisition Agreement, see "Risk Factors--Risks Relating to Hawthorn Acquisition Agreement", "--Limitations on New Brands" and "Business--Acquisition of the Microtel and Hawthorn Suites Systems". Business Strategy The Company's business strategy is to (i) rapidly increase the number of open Microtels and Hawthorn Suites, (ii) operate its administrative and franchisee support departments in order to maximize the operating leverage inherent in the franchising business and (iii) acquire additional lodging or other service-oriented brands that provide attractive unit economics to franchisees and significant growth opportunities for the Company (to the extent permitted under the Hawthorn Acquisition Agreement). See "Business--Acquisition of the Microtel and Hawthorn Suites Systems". The Company has developed several programs designed to accelerate the opening of new properties and expand its brands' attractiveness to franchisees. First, in May 1996, the Company reached an agreement in principle with Nomura Asset Capital Corporation ("NACC"), a subsidiary of The Nomura Securities Co., Ltd., one of the world's largest investment banks ("Nomura Securities"), pursuant to which NACC would make available to prospective Microtel and Hawthorn Suites franchisees up to $200 million in construction and long-term mortgage financing, subject to certain terms and conditions. This program is intended to add speed and certainty to the hotel development process, enabling the Company's franchisees to devote more time to identifying acceptable hotel sites and developing properties and less time obtaining financing. There can be no assurance, however, that any loans will be made under this program. See "Business--Special Programs--Franchisee Financing Facility." Second, the Company has reached an understanding in principle with a hotel developer to construct Microtels for lease to prospective franchisees. This program, "American Dream(sm) by Microtel" (the "American Dream Program"), is designed to enable hotel operators with limited capital resources and/or little or no building experience to operate, and possibly to own, a Microtel and thereby increase the number of potential Microtel franchisees. See "Business--Special Programs--American Dream Program." Third, the Company has extended the Microtel and Hawthorn Suites brands from two to five distinct products, which the Company believes increases the appeal and viability of the brands to franchisees by offering multiple formats that can be tailored to specific markets, development requirements and guest preferences. To date, more than 50% of the Microtel franchises sold by the Company relate to Microtel Inn & Suites or Microtel Suites, two formats designed by the Company after its acquisition of the Microtel brand. The Company was formed in August 1995 as a Delaware corporation. Its executive offices are located at 13 Corporate Square, Suite 250, Atlanta, Georgia 30329. Its telephone number is (404) 321-4045. 5 THE OFFERING Common Stock offered by: The Company 1,825,000 shares of Class A Common Stock The Selling Stockholders 500,000 shares of Class A Common Stock Common Stock to be outstanding after the Offering 9,872,490 shares of Class A Common Stock 2,707,919 shares of Class B Common Stock 12,580,409 total shares of Common Stock Use of Proceeds The proceeds of the Offering will be used for working capital and general corporate purposes, which may include (i) funding the Company's remaining obligations (approximately $2 million) under the agreement pursuant to which it acquired the Microtel brand (the "Microtel Acquisition Agreement"), (ii) acquiring additional lodging or other service-oriented brands or exclusive franchise rights (to the extent permitted under the Hawthorn Acquisition Agreement), (iii) making initial deposits in connection with the American Dream Program until qualified lessees can be identified, (iv) investing in financing programs developed by its wholly owned subsidiary, US Funding Corp., and (v) investing in entities that make equity investments in hotel properties built and managed by certain franchisees with the potential for multi-unit development. See "Use of Proceeds", "Business-- Acquisition of the Microtel and Hawthorn Suites Systems" and "--Special Programs". Voting Rights Shares of Class A Common Stock have one vote per share, while shares of Class B Common Stock have ten votes per share. The Class B Common Stock, the holders of which have effective control of the Company, is voted only by Messrs. Leven and Aronson. Class B Common Stock is convertible into Class A Common Stock on a share-for-share basis and, with limited exceptions, will automatically convert into Class A Common Stock upon transfer. The Class B Common Stock is not being offered by this Prospectus. See "Risk Factors--Control by Management and Anti-Takeover Effect of Dual Classes of Stock", "Description of Capital Stock--Common Stock" and "Principal Stockholders--Management's Shares of Common Stock". Nasdaq National Market symbol USFS 6 SUMMARY FINANCIAL AND OTHER DATA The following table sets forth consolidated financial information for the Company and its subsidiaries as of December 31, 1995 and June 30, 1996, for the period from August 28, 1995, the date of the Company's inception, to December 31, 1995 and for the six months ended June 30, 1996. The table includes operating data for the Company since its inception and should be read in conjunction with the Consolidated Financial Statements and related Notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations", which are contained elsewhere in this Prospectus. Period from August 28, 1995 to Six Months Ended December 31, 1995 June 30, 1996 ------------------ ---------------- (In thousands of dollars, except share and per share data) Statement of Operations Data: Revenues $ -- $ 395 Operating expenses 1,327 3,849 Operating loss 1,327 3,454 Interest income 195 331 Interest expense 36 72 Net loss 1,168 3,195 Loss applicable to common stockholders 1,645 4,033 Net loss applicable to common stockholders per share (1) 0.15 0.38 Weighted average number of common shares outstanding (2) 10,755,409 10,755,409 Balance Sheet Data (at period end): Working capital $ 13,265 $ 8,029 Total assets 18,072 19,027 Total liabilities 1,845 5,992 Redeemable Preferred Stock 16,759 17,597 Redeemable Common Stock 330 330 Stockholders' deficit 862 4,892 (1) Based upon 8,047,490 shares of Class A Common Stock and 2,707,919 shares of Class B Common Stock assumed to be outstanding after the Reclassification but before the Offering. (2) Includes 3,186,294 shares of Class A Common Stock that are redeemable under certain circumstances by the Company for reasons not under the Company's control. See "Principal Stockholders--Management's Shares of Common Stock". 7 Franchised Hotels
Microtel (1) Hawthorn Suites (2) ------------------------------------- -------------------------------------- As of As of As of As of December 31, 1995 September 30, 1996 December 31, 1995 September 30, 1996 ------------------ ------------------ ------------------ ------------------ Properties Open 23 27 17 18 Properties Under Construction 0 7 0 2 Executed Franchise Agreements 3 145 0 5 Franchise Applications Accepted (3) 10 74 0 16
(1) The Company will not receive royalties from the 23 Microtels open as of December 31, 1995 and from 26 of the 27 Microtels open as of September 30, 1996, but does receive marketing fees from the franchisees of these properties. See "Business--Microtel" and "Business--Acquisition of the Microtel and Hawthorn Suites Systems". (2) The Company will not receive royalties from the 17 Hawthorn Suites hotels open as of December 31, 1995 and the 18 Hawthorn Suites hotels open as of September 30, 1996, but does receive reservation and marketing fees from the franchisees of these properties. See "Business--Hawthorn Suites" and "Business--Acquisition of the Microtel and Hawthorn Suites Systems." (3) Represents franchise applications as to which the Company has approved the proposed site and the prospective franchisee but has not yet executed a franchise agreement. Operating Data(1) Microtel -------------------------------------- For the Six Months Ended For the Year Ended ------------------ December 31, June 30, June 30, 1995 1995 1996 - ------------------------------------------------------------ Average Daily Room Rate ("ADR") $35.75 $34.32 $35.40 Average Occupancy 69.3 % 66.1 % 66.6 % Average Revenue Per Available Room $24.77 $22.68 $23.57 Number of Hotels 15 15 15 Hawthorn Suites ------------------------------------- For the Six Months For the Year Ended Ended ------------------ December 31, June 30, June 30, 1995 1995 1996 - ----------------------------------------------------------- Average Daily Room Rate ("ADR") $78.27 $77.50 $82.02 Average Occupancy 78.1 % 77.8 % 80.6 % Average Revenue Per Available Room $61.13 $60.29 $66.11 Number of Hotels 15 15 15 (1) Includes data only from those Microtels and Hawthorn Suites hotels that have been operating as part of the applicable franchise system for two years or more as of June 30, 1996. 8 RISK FACTORS The following risks should be carefully considered in evaluating the Company and its business before purchasing the Class A Common Stock offered by this Prospectus. Such risks represent all material risks associated with an investment in the Class A Common Stock. Limited Operating History; Dependence on Hotel Openings The Company began operating in October 1995 and therefore has a very limited operating history upon which investors can evaluate the Company's performance. While the Company believes that it has a well-conceived strategy and that it has assembled an experienced and well-qualified management team to implement this strategy, the Company has incurred losses to date and there can be no assurance that the Company will be profitable in the future. As of June 30, 1996, the Company had an accumulated deficit of $4,970,000. The Company expects that in the future a principal source of revenues will be royalty fees received from its franchisees. However, the terms of the Microtel Acquisition Agreement and the Hawthorn Acquisition Agreement expressly provide that the Company is not entitled to royalties with respect to Microtels and Hawthorn Suites hotels that were open or under construction, or with respect to which franchise agreements had been executed or applications accepted, at the time of the acquisition by the Company of the right to franchise these brands. Similarly, the Company is not entitled to royalties with respect to the 23 additional Microtels and the 10 Microtel all-suites hotels that Hudson Hotels Corporation, the entity from which the Company acquired the Microtel brand ("Hudson"), its affiliates and certain other persons are entitled to franchise pursuant to the terms of the Microtel Acquisition Agreement. Of the existing Microtel and Hawthorn Suites properties, the Company is entitled to receive royalty fees from one Microtel. Accordingly, the Company is dependent upon future hotel openings to recognize franchise application fees as revenue and to generate franchise royalty fees. 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. See "Business--Acquisition of the Microtel and Hawthorn Suites Systems". Management, By Virtue of Ownership of Supervoting Class B Common Stock, Will Control the Company Following the Offering Holders of the Company's Class A Common Stock are entitled to one vote per share and holders of the Company's Class B Common Stock are entitled to ten votes per share. Each share of Class B Common Stock is convertible at any time into one share of Class A Common Stock and, with limited exceptions, converts automatically upon any transfer thereof. Immediately after the Offering, Mr. Leven and Mr. Aronson will have the right to vote all of the outstanding shares of Class B Common Stock, which, together with their shares of Class A Common Stock, will represent approximately 78% of the combined voting power of the Company's outstanding Common Stock after the Offering. 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, (ii) amend the Charter with respect to most matters, (iii) effect a merger, sale of assets or other major corporate transaction, (iv) defeat an unsolicited takeover attempt and (v) generally direct the affairs of the Company. However, Mr. Leven and Mr. Aronson do not have any agreements or other obligations to vote together on matters involving the Company (although Mr. Aronson has granted Mr. Leven the right to vote some of his shares of Class A Common Stock and some of his shares of Class B Common Stock). See "Description of Capital Stock", "Principal Stockholders", and "Certain Relationships and Related Transactions". 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 continued growth will depend on its ability to manage this growth while implementing its strategy. The efforts of key management personnel and the Company's ability to attract or develop new management personnel and to integrate these new employees into its overall operations will be crucial to continued growth. If the Company is unable to manage growth effectively, the Company's business and results of operations could be materially and adversely affected. See "Management". Dependence on Senior Management The success of the Company is largely dependent on the efforts and abilities of its senior management and certain other key personnel, particularly Mr. Leven, Chairman, President and Chief Executive Officer, Mr. Aronson, 9 Executive Vice President and Chief Financial Officer, and Steven Romaniello, Executive Vice President, Franchise Sales and Development. The Company's success will depend in large part on its ability to retain these individuals and other current members of its senior management team and to attract and retain qualified personnel in the future. The loss of members of senior management or of certain other key employees or the Company's inability to retain other qualified employees could have an adverse impact on the Company's business and results of operations. Currently, except with respect to Mr. Leven, the Company does not maintain key person life insurance on behalf of the lives of any of its officers or employees. See "Management". The terms of the Company's 10% Cumulative Redeemable Exchangeable Preferred Stock (the "Redeemable Preferred Stock") expressly require the Company to redeem any shares of Redeemable Preferred Stock outstanding in the event the employment of Mr. Leven is terminated by the Company for any reason (including resignation) at a redemption price per share equal to $100 plus all accrued and unpaid dividends thereon. As of June 30, 1996, the aggregate redemption price for all outstanding shares of Redeemable Preferred Stock, including accrued but unpaid dividends thereon, was $17,597,000. In addition, the Hawthorn Acquisition Agreement, by its terms, may be terminated by HSA Properties, L.L.C. ("HSA"), the entity from which the Company acquired the exclusive rights to franchise the Hawthorn Suites brand, if Mr. Leven is no longer employed by the Company, or upon his death or disability, at any time prior to a permitted transfer of the Company's rights thereunder or, if earlier, the satisfaction by the Company of certain hotel development levels set forth in such agreement. See "Risk Factors--Mandatory Redemption of Redeemable Preferred Stock", "Description of Capital Stock--Preferred Stock" and "Business--Acquisition of the Microtel and Hawthorn Suites Systems". Management's Discretion With Respect to Proceeds of the Offering Although the Company intends to apply the net proceeds of the Offering in the manner described under "Use of Proceeds", the Company's management has broad discretion as to the precise allocation of the net proceeds, the timing of expenditures and all other aspects of the use thereof. As a result, the success of the Company will be substantially dependent upon the discretion and judgment of the management of the Company with respect to the application and allocation of the net proceeds. See "Use of Proceeds". Risks Relating to Microtel Acquisition Agreement The Microtel Acquisition Agreement obligates the Company to execute new franchise agreements and have open or under construction a specified number of Microtels each year. Specifically, the Microtel Acquisition Agreement requires that there are, on a cumulative basis, at least 50 new Microtels open or under construction by December 1997, 100 by December 1998, 175 by December 1999, and 250 by December 2000. The Microtel Acquisition Agreement further provides that if the Company is unable to comply with the development schedule for two consecutive years but opens or has under construction at least 75% of the number of Microtels required by such schedule, the Company may cure the default by paying a $1 million penalty within 30 days of notice of such default. If the Company fails to comply with this development schedule and to make the requisite cure payment or payments, all rights to the Microtel system automatically revert to Hudson. There can be no assurance that the Company will comply with the foregoing development schedule, and the Company's failure to meet such schedule or to pay the requisite cure payments would have a material adverse effect on the Company. See "Business--Acquisition of the Microtel and Hawthorn Suites Systems". Risks Relating to Hawthorn Acquisition Agreement Under the Hawthorn Acquisition Agreement, the Company is obligated to execute a minimum number of Qualified License Agreements (as defined below) for new Hawthorn Suites by certain dates (the "Termination Standard"). Specifically, the Hawthorn Acquisition Agreement requires that the Company have executed, on a cumulative basis, a minimum of 10 Qualified License Agreements by June 26, 1997, 20 by June 26, 1998, 40 by June 26, 1999, 60 by June 26, 2000, 80 by June 26, 2001, and 100 by June 26, 2002. The term "Qualified License Agreement" is generally defined in the Hawthorn Acquisition Agreement as any license agreement granted by the Company for the use of the Hawthorn Suites brand, provided that (i) the hotel to which such agreement relates is an all-suites hotel (i.e., a hotel in which greater than 50% of the available rooms are suites) with more than 40 suites, (ii) all application fees required to be paid by the franchisee to the Company have been paid, (iii) the licensee owns or controls through long-term lease the land on which the hotel is located or is to be constructed and (iv) the average number of suites in hotels covered by Qualified License Agreements is greater than 50. If the Company fails to meet any of these development milestones and the default has not been cured prior to the delivery of a default notice, HSA may terminate the Hawthorn Acquisition Agreement. 10 If the Company meets the Termination Standard, but fails to achieve specified higher development goals (the "Royalty Reduction Standard"), the percentage of franchise royalties payable to HSA will increase. The Hawthorn Acquisition Agreement may also be terminated, at the election of HSA, on the death, disability, retirement, resignation or termination of employment of Mr. Leven as Chief Executive Officer of the Company prior to such time as the Royalty Reduction Standard has been met or such time as there are 75 new Hawthorn Suites with a minimum aggregate total of 11,375 rooms ("Hawthorn Brand Saturation"). See "Business--Acquisition of the Microtel and Hawthorn Suites Systems". Limitations on New Brands Under the Hawthorn Acquisition Agreement, the Company and its affiliates are generally restricted until June 26, 1998 from franchising any lodging brands other than (i) Hawthorn Suites brand hotels, (ii) Microtel brand hotels and (iii) other limited-service, non-suite hotel brands with an ADR of $49 and under. Until June 26, 1997, the Company must also refrain from franchising any brands outside of the lodging industry. In addition, until such time as Hawthorn Brand Saturation has been achieved or, if Hawthorn Brand Saturation is not achieved, for the duration of the term (unless earlier terminated) of the Hawthorn Acquisition Agreement and for six months thereafter, the Company may not franchise another all-suite hotel brand (other than Microtels costing under a certain amount to construct). If the Company decides to franchise another all-suite hotel brand after Hawthorn Brand Saturation has been achieved, HSA has the option to sell its interest in the Hawthorn Suites brand and system of operation to the Company for a sum equal to 10 times the portion of franchise royalty fees earned or accrued by HSA in the 12 months prior to such sale. See "Business--Acquisition of the Microtel and Hawthorn Suites Systems". Competition for New Franchise Properties and Hotel Guests Competition among national brand franchisors and smaller chains in the lodging industry to grow their franchise systems is intense. The Company believes that competition for the sale of lodging franchises is based principally upon (i) the perceived value and quality of the brand, (ii) the nature and quality of services provided to franchisees, (iii) the franchisees' view of the relationship of building or conversion costs and operating expenses to the potential for revenues and profitability during operation and upon sale and (iv) the franchisee's ability to finance and sell the property. The Company's franchisees are generally in intense competition for guests with franchisees of other hotel chains, independent properties and owner-operated chains. The success of the Company's franchisees 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 or motel, consumers consider differences in room rates, quality and condition of accommodations, name recognition, availability of alternative lodging (including short-term lease apartments), service levels, reputation, safety, reservation systems and convenience of location. Both among consumers and potential franchisees, Microtel competes with budget and economy hotels such as Comfort Inn(R), Days Inn(R), Econo Lodge,(R) Fairfield Inn(R), Sleep Inn(R), Red Roof Inn(R), Budgetel Inn(R), Super 8(R), Ramada Limited(R), Motel 6(R), Jameson Inns(R), Travelodge(R), Thriftlodge(R), Knights Inn(R), Red Carpet Inn(R) and Scottish Inns(R). In the upscale, extended-stay sector, Hawthorn Suites hotels compete for consumers and potential franchisees with Residence Inn(R), Homewood Suites(R), Summerfield Suites(R) and Woodfin Suites(R). In the transient suites sector of the lodging industry, where the Company will be competing through its Hawthorn Suites LTD brand, the Company's principal competitors will include AmeriSuites(R), Hampton Inn and Suites(R), Fairfield SuitesSM, MainStaySM, CandlewoodSM, Wingate InnSM, Towne PlaceSM and Courtyard by Marriott(R), among others. Many of the Company's competitors are affiliated with larger chains with substantially more properties, greater marketing budgets and greater brand identity than the Company. There can be no assurance that the Company can franchise a sufficient number of properties to generate operating efficiencies that will enable it to compete with these larger chains. General Risks of the Lodging Industry Although the Company does not currently own hotel properties, because the Company's revenues vary directly with its franchisees' gross room revenues, the Company's business is impacted by the effects of risks experienced by hotel operators generally. The budget, extended-stay and transient suite segments of the lodging industry, the segments in which hotels franchised under the Company's brands currently operate or plan to operate, may be adversely affected by changes in national or local economic conditions and other local market conditions, such as an oversupply of or a reduction in demand for lodging or a scarcity of potential sites in a geographic area, changes 11 in travel patterns, extreme weather conditions, changes in governmental regulations that influence or determine wages, prices, construction costs or methods of operation, changes in interest rates, the availability of financing for operating or capital needs and changes in real estate tax rates and other operating expenses. In addition, due in part to the strong correlation between the lodging industry's performance and economic conditions, the lodging industry is subject to cyclical changes in revenues and profits. These risks may be exacerbated by the relatively illiquid nature of real estate holdings. Downturns or prolonged adverse conditions in real estate or capital markets or in national or local economies could have a material adverse impact on the Company's ability to locate new franchisees. As a hotel franchisor, the Company expects to experience seasonal revenue patterns similar to those experienced by participants in the lodging industry generally. Accordingly, the summer months, because of increases in leisure travel, are expected to produce higher franchise royalty revenues for the Company than other periods during the year. In addition, developers of new hotels typically attempt, whenever feasible, to schedule the opening of a new property to occur prior to the spring and summer seasons. This may have a seasonal impact on the Company's revenues, a significant portion of which is not recognized until the opening of a property. Accordingly, the Company may experience lower revenues and profits in the first and fourth quarters and higher revenues and profits in the second and third quarters. Development Risk Although the Company does not currently own hotel properties, because its revenues are dependent on the revenues of its franchisees, the Company is subject to risks associated with developing hotel properties. These risks, which are applicable to Microtels as new construction properties and Hawthorn Suites as both new construction and conversion properties, include delays in completion of construction, failure to obtain all necessary zoning and construction permits, discovery of environmental hazards, unavailability of financing on favorable terms, if at all, the failure of developed properties to achieve desired revenue or profitability levels once opened, competition for suitable development sites from competing franchise chains, 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. In addition, in connection with the American Dream Program, the Company may in the future lease and, ultimately, own Microtels. To the extent the Company leases and/or owns hotel properties it would be subject to risks experienced by hotel operators generally. Risks Relating to the Franchisee Financing Facility In May 1996, the Company reached an agreement in principle with NACC, pursuant to which NACC would make available to the Company's franchisees over a two-year period up to $200 million in construction and long-term mortgage financing, subject to certain terms and conditions (the "Franchisee Financing Facility"). Under the Franchisee Financing Facility, the ultimate decision regarding the provision of loans to franchisees will be made by NACC. There can be no assurance that any loans will be made in connection with the Franchisee Financing Facility or any other financing facility. See "Business--Special Programs--Franchisee Financing Facility". The Company generally does not make construction or mortgage loans to its franchisees. However, in connection with the Franchisee Financing Facility, the Company may in the future participate in construction loans and long-term mortgage loans made to franchisees, including through direct subordinated loans to such franchisees. In such cases, the Company would be subject to the risks experienced by lenders generally, including risks of franchisee/borrower defaults and bankruptcies. In the event of a default under such loans, the Company, as a subordinated lender, would bear the risk of loss of principal to the extent the value of the collateral was not sufficient to pay both the senior lender and the Company, as subordinated lender. See "Risk Factors--Regulation" and "Business--Special Programs--Franchisee Financing Facility". Regulation The sale of franchises is regulated by various state laws, as well as by the Federal Trade Commission (the "FTC"). The FTC requires that franchisors make extensive disclosure to prospective franchisees, although it does not require registration of offers to prospective franchisees. A number of states require registration and disclosure in connection with franchise offers and sales. In addition, several states have "franchise relationship laws" that limit the ability of 12 franchisors to terminate franchise agreements or to withhold consent to the renewal or transfer of these agreements. While the Company's franchising operations currently are not materially adversely affected by such regulations, the Company cannot predict the effect any future legislation or regulation may have on its business operations or financial condition. Additionally, various national, state and local laws and regulations may affect activities undertaken by the Company in connection with the Franchisee Financing Facility and under an agreement with PMC Commercial Trust ("PMC"), pursuant to which the Company has agreed to, among other things, make available to potential Microtel franchisees information regarding PMC's financing programs for land acquisition and construction costs (the "PMC Agreement"). 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 by NACC or PMC, as the case may be, under such programs or in the event the Company determines to make loans itself under the Franchisee Financing Facility. See "Business--Special Programs--Franchisee Financing Facility" and "--PMC Agreement". Mandatory Redemption of Redeemable Preferred Stock As of June 30, 1996, there were 163,500 shares of the Company's Redeemable Preferred Stock outstanding. Pursuant to the terms of the Company's Amended and Restated Certificate of Incorporation (the "Charter"), the Company is required, upon the earlier of (i) September 29, 2007 or (ii) a Change of Control (as defined below) of the Company, to redeem each outstanding share of Redeemable Preferred Stock at a cash price per share equal to $100 plus all accrued and unpaid dividends thereon. A "Change of Control" is defined generally as (A) the sale of all or substantially all of the Company's assets, (B) the transfer of more than 50% of its Common Stock to persons who are not employees of the Company and were not stockholders prior to the Offering or (C) the termination of the employment of Mr. Leven for any reason by the Company (including resignation). If Mr. Leven's employment were to be terminated by the Company for any reason or the Company were to otherwise experience a Change of Control, the Company would be obligated to redeem all outstanding shares of Redeemable Preferred Stock at a cost, as of June 30, 1996, of $17,597,000. See "Description of Capital Stock--Preferred Stock". No Prior Market for Class A Common Stock; Possible Volatility of Stock Price Prior to the Offering, there has been no public market for the Class A Common Stock, and there can be no assurance that a regular trading market for the Class A Common Stock will develop after the Offering or that, if developed, it will be sustained. The initial public offering price of the Class A Common Stock will be determined by negotiation between the Company and the Underwriters based on several factors and will not necessarily reflect the market price of the Class A Common Stock after the Offering or the price at which the Class A Common Stock may be sold in the public market after the Offering. The market price for the Class A Common Stock may be significantly affected by such factors as the Company's operating results, changes in any earnings estimates publicly announced by the Company or by analysts, announcements of new brands acquired by the Company or its competitors, seasonal effects on revenues and various factors affecting the economy in general. In addition, the stock market has experienced a high level of price and volume volatility, and market prices for the stock of many companies, especially newly public companies, have experienced wide price fluctuations not necessarily related to the fundamentals or operating performance of such companies. Dilution The amount by which the initial public offering price per share of Class A Common Stock exceeds the pro forma net tangible book value per share of Common Stock after the Offering constitutes dilution to investors in the Offering. Based on an assumed initial public offering price of $13.00 per share (the midpoint of the range of prices set forth on the cover of this Prospectus), purchasers of shares of Class A Common Stock in the Offering would experience an immediate and substantial dilution of net tangible book value of $12.06 per share. See "Dilution". Absence of Dividends 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, the terms of the Company's Redeemable Preferred Stock contain, and future financing agreements may contain, limitations on the payment of cash dividends or other distributions of assets to the holders of Common Stock. See "Dividend Policy". 13 Anti-Takeover Devices Certain provisions of the Charter and the Company's Amended and Restated By-Laws (the "By-laws") that will become operative prior to or simultaneously with the closing of the Offering may be deemed to have anti-takeover effects and may delay, deter or prevent a change in control of the Company that stockholders might otherwise consider in their best interests. These provisions (i) allow only the Board of Directors, the Chairman of the Board of Directors or the Chief Executive Officer of the Company to call special meetings of the stockholders, (ii) eliminate the ability of stockholders to take any action without a meeting, (iii) establish certain advance notice procedures for nomination of candidates for election as directors and for stockholder proposals to be considered at stockholders' meetings, (iv) generally authorize the issuance of one or more classes of "blank check" preferred stock (in addition to the Redeemable 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), (v) and (vi) above. See "Description of Capital Stock--Delaware Law and Certain Charter and By-Law Provisions". Shares Eligible for Future Sale Upon the consummation of the Offering, the Company will have 9,872,490 shares of Class A Common Stock outstanding and 2,707,919 shares of Class B Common Stock outstanding. Of these shares, the 2,325,000 shares of Class A Common Stock offered hereby will be freely tradeable by persons other than affiliates of the Company, without restriction under the Securities Act of 1933, as amended (the "Securities Act"). In addition, approximately 9,425,000 shares of Class A Common Stock (including shares of Class A Common Stock into which the Class B Common Stock is convertible) will be eligible for sale under Rule 144 beginning on September 29, 1997 (subject to certain volume limitations and other restrictions prescribed by Rule 144). At such time as at least 20% of the outstanding Common Stock has been registered for public sale, certain holders of Common Stock (who, following the Offering, will own in the aggregate 7,547,490 shares of Class A Common Stock and 2,707,919 shares of Class B Common Stock) will have "piggyback" registration rights permitting such holders to include a portion of their shares (including, in the case of Class B Common Stock, the shares of Class A Common Stock into which such shares are convertible), at the Company's expense, in certain registration statements filed by the Company (the "piggyback shares"). The maximum number of shares of Class A Common Stock that may be included in such registration by such holders is determined by multiplying all of the piggyback shares by a fraction, the numerator of which is the number of shares being registered by the Company and the denominator of which is the number of shares to be outstanding after such registration (excluding the piggyback shares). In addition, subsequent to September 29, 2000, holders of a majority of such shares will have the right to request on one occasion (subject to certain limitations) that such shares (including, in the case of Class B Common Stock, the shares of Class A Common Stock into which such shares are convertible) be registered for resale under the Securities Act at the Company's expense. See "Certain Relationships and Related Transactions" and "Description of Capital Stock--Registration Rights". No prediction can be made as to the effect, if any, that sales of shares of Class A Common Stock or the availability of such shares for sale will have on the market prices prevailing from time to time. The Company, its officers and directors and certain of its other stockholders have agreed with the Underwriters not to sell or otherwise dispose of any of their shares of Class A Common Stock or Class B Common Stock for a period of 180 days from the date of this Prospectus without the prior written consent of the representatives of the Underwriters. Nevertheless, the possibility that substantial amounts of Class A Common Stock (including those shares into which the Class B Common Stock is convertible) may be sold in the public market may adversely affect prevailing market prices for the Class A Common Stock and could impair the Company's ability to raise equity capital in the future. 14 USE OF PROCEEDS The net proceeds to the Company from the sale of the shares of Class A Common Stock offered hereby are estimated to be approximately $21,364,000 ($24,673,887 if the Underwriters' over-allotment option is exercised in full), based on an initial public offering price of $13.00 per share (the midpoint of the range of prices set forth on the cover of this Prospectus), after deducting the underwriting discounts and commissions and estimated expenses of the Offering payable by the Company. The proceeds of the Offering will be used for working capital and general corporate purposes, which may include (i) funding the Company's remaining obligations (approximately $2 million) under the Microtel Acquisition Agreement , (ii) acquiring additional lodging or other service-oriented brands or exclusive franchise rights (to the extent permitted under the Hawthorn Acquisition Agreement), (iii) making initial deposits in connection with the American Dream Program until qualified lessees can be identified, (iv) investing in financing programs developed by its wholly owned subsidiary, US Funding Corp., and (v) investing in entities that make equity investments in hotel properties built and managed by certain franchisees with the potential for multi-unit development. The Company currently has no agreements, commitments or formal understandings with respect to any acquisitions and, accordingly, is unable to estimate the aggregate amount of the net proceeds that may be used for any such purposes. Pending such uses, the Company intends to invest such funds in cash and marketable securities; provided that the Company intends to invest and to use the net proceeds of the Offering so as not to be considered an investment company within the meaning of the Investment Company Act of 1940. See "Business--Acquisition of the Microtel and Hawthorn Suites Systems", "--Business Strategy--Acquisitions" and "--Special Programs". The Offering is also intended to increase the Company's equity base, provide a public market for the Company's Class A Common Stock, facilitate future access by the Company to the public equity markets and possibly provide an additional form of currency for future acquisitions. DIVIDEND POLICY The Company has never declared or paid cash dividends on its Common Stock. The Company currently intends to retain its earnings to provide funds for the operation and expansion of its business and, therefore, does not anticipate declaring or paying cash dividends in the foreseeable future. The terms of the Company's Redeemable Preferred Stock prohibit the Company from declaring or paying dividends on its Common Stock at any time when dividends have not been paid in full with respect to its Redeemable Preferred Stock (although dividends are payable in additional shares of Redeemable Preferred Stock). Any payment of future dividends will be at the discretion of the Board of Directors and will depend upon, among other things, the Company's earnings, financial condition, capital requirements, level of indebtedness, contractual restrictions with respect to the payment of dividends and other relevant factors. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources" and "Description of Capital Stock--Preferred Stock". 15 CAPITALIZATION The following table sets forth the capitalization of the Company at June 30, 1996 on a historical basis and on a pro forma basis reflecting the Reclassification, certain amendments (collectively, the "1996 Amendment") to be made to the agreements pursuant to which Messrs. Leven and Aronson purchased shares of Old Common Stock (the "Old Stock Purchase Agreements"), and the Offering (including the application of the proceeds therefrom), assuming an initial public offering price per share of $13.00 (the midpoint of the range of prices set forth on the cover of this Prospectus). The table should be read in conjunction with the Selected Financial Data and the Consolidated Financial Statements of the Company and the Notes thereto included elsewhere in this Prospectus. See "Selected Financial Data", "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Principal Stockholders--Management's Shares of Common Stock". June 30, 1996 ----------------------------- Historical Pro Forma -------------- -------------- Long Term Debt Due to Hudson $ 731,000 $ 731,000 Redeemable Stock 10% Cumulative Redeemable Exchangeable Preferred Stock, par value $.01 per share; up to 525,000 authorized; 163,500 shares issued and outstanding as of June 30, 1996 17,597,000 17,597,000 Redeemable shares of Class A Common Stock, par value $.01 per share; 3,186,294 shares issued and outstanding as of June 30, 1996(1) 330,000 Redeemable shares of Class A Common Stock, par value $0.01 per share; 2,006,559 shares issued and outstanding after the Reclassification, the 1996 Amendment and the Offering(1) -- 208,000 Stockholders' Equity (Deficit) Common Stock, par value $.01 per share; 7,569,115 shares of Class A Common Stock issued and outstanding as of June 30, 1996 78,000 Common Stock, par value $0.01 per share; 30,000,000 shares of Class A Common Stock and 5,000,000 shares of Class B Common Stock authorized; 7,865,931 shares of Class A Common Stock and 2,707,919 shares of Class B Common Stock issued and outstanding after the Reclassification, the 1996 Amendment and the Offering(2) 106,000 Capital in excess of par 21,458,000 Accumulated Deficit (4,970,000) (4,970,000) -------------- -------------- Total Stockholders' Equity (Deficit) (4,892,000) 16,594,000 -------------- -------------- Total Capitalization $13,766,000 $35,130,000 ============== ============== (1) These shares are redeemable under certain conditions by the Company for reasons not under the Company's control. See "Principal Stockholders--Management's Shares of Common Stock". (2) Excludes 325,000 shares of Class A Common Stock reserved for issuance under the U.S. Franchise Systems, Inc. 1996 Stock Option Plan (the "Option Plan") and 125,000 shares of Class A Common Stock reserved for issuance under the U.S. Franchise Systems, Inc. 1996 Stock Option Plan for Non-Employee Directors ("The Directors Plan"). 16 DILUTION At June 30, 1996, the net tangible book value of the Company was a deficit of $9,569,000 or ($0.89) per share of outstanding Common Stock (taking into account the Reclassification). After giving effect to the Reclassification and to the sale of the 1,825,000 shares of Class A Common Stock being offered by the Company hereby at an assumed initial offering price of $13.00 per share (the midpoint of the range of prices set forth on the cover page of this Prospectus) and the application of the net proceeds therefrom (after deducting estimated offering expenses and underwriting discounts and commissions), the pro forma net tangible book value of the Company at June 30, 1996 would have been $11,795,000, or $0.94 per share, representing an immediate increase in net tangible book value of $1.83 per share to existing stockholders and an immediate dilution of $12.06 per share to persons purchasing shares of Class A Common Stock in the Offering. The following table illustrates this per share dilution:
Assumed initial public offering price per share (1) $13.00 Net tangible book value per share of Common Stock at June 30, 1996 (adjusted for the Reclassification but excluding the Offering) $(0.89) Increase in net tangible book value per share of Common Stock attributable to new investors in the Offering 1.83 Pro forma net tangible book value per share of Common Stock after the Offering 0.94 --------- Dilution per share to purchasers of Class A Common Stock in the Offering $12.06 ---------
(1) Before deduction of underwriting discounts and commissions and offering expenses. The following table sets forth, as of June 30, 1996, and after giving effect to the Reclassification and the Offering, the number of shares of Common Stock issued by the Company, the total consideration paid and the average price per share paid by existing stockholders and to be paid by purchasers of shares in the Offering, assuming that shares purchased in the Offering are sold at $13.00 per share (the midpoint of the range of prices set forth on the cover page of this Prospectus) and before deducting the underwriting discounts and commissions and estimated offering expenses payable by the Company:
Shares Purchased Total Consideration -------------------------- ------------------------- ------------ Average Price Number Percent Amount Percent Per Share --------------- --------- -------------- --------- ------------ Existing Stockholders 10,755,409 85.0% $ 1,112,000 5.0% $ 0.10 New Investors 1,825,000(1) 15.0 23,725,000 95.0 $13.00 --------------- --------- -------------- --------- ------------ 12,580,409 100.0% $24,837,000 100.0% =============== ========= ============== =========
(1) Does not include shares of Class A Common Stock to be purchased in the Offering from the Selling Stockholders, as the Company will not receive any proceeds from the sale of such shares. 17 SELECTED FINANCIAL DATA Set forth below is certain selected consolidated historical financial information of the Company and its subsidiaries as of December 31, 1995 and June 30, 1996, for the period from August 28, 1995, the date of the Company's inception, to December 31, 1995 and the six months ended June 30, 1996. Such information has been derived from the Company's Consolidated Financial Statements and related Notes thereto as of such dates and with respect to such periods, which financial statements have been audited by Deloitte & Touche LLP, independent auditors. Their report on the Company's financial statements as of such dates and for such periods is included elsewhere in this Prospectus. See the Consolidated Financial Statements and related Notes included elsewhere in this Prospectus and "Management's Discussion and Analysis of Financial Condition and Results of Operations". Period from August 28, 1995 to Six Months Ended December 31, 1995 June 30, 1996 ---------------------- ---------------- (in thousands of dollars, except share and per share data) Statement of Operations Data: Revenues ....................................$ -- $ 395 Operating expenses ....................... 1,327 3,849 Operating loss ............................ 1,327 3,454 Interest income ........................... 195 331 Interest expense .......................... 36 72 Net loss .................................... 1,168 3,195 Loss applicable to common stockholders ............................. 1,645 4,033 Net loss applicable to common stockholders per share (1) .......... 0.15 0.38 Weighted average number of common shares outstanding (2) ....................... 10,755,409 10,755,409 Balance Sheet Data (at period end): Working capital ...........................$ 13,265 $ 8,029 Total assets ............................... 18,072 19,027 Total liabilities ........................ 1,845 5,992 Redeemable Preferred Stock ............ 16,759 17,597 Redeemable Common Stock ................ 330 330 Stockholders' deficit ................... 862 4,892 (1) Based upon 8,047,490 shares of Class A Common Stock and 2,707,919 shares of Class B Common Stock assumed to be outstanding after the Reclassification but before the Offering. (2) Includes 3,186,294 shares of Class A Common Stock that are redeemable under certain circumstances by the Company for reasons not under the Company's control. See "Principal Stockholders--Management's Shares of Common Stock". 18 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General The Company was formed in August 1995 to acquire, market and expand high-quality, well-positioned brands with potential for rapid unit growth through the sale of franchises to third-party operators. The Company commenced operations in October 1995 and has since focused on acquiring brands and developing the infrastructure necessary to increase the size and scope of each brand. Since October 1995, the Company has acquired two lodging brands--Microtel (October 1995) and Hawthorn Suites (March 1996). The Company has hired and trained a staff of 73 employees, including a franchise sales force of 28, which management believes is the third largest franchise sales organization in the lodging industry. In addition, the Company has hired executive and other management employees to head its marketing, administration, construction and design, finance, training, personnel, national accounts purchasing and public relations departments. As a result of these hirings, the Company believes that it has established the infrastructure sufficient to support significant growth of its brands without further large increases in its senior management team. Most of the Company's employees have extensive experience with franchise companies in general and lodging companies specifically. In addition, the Company has prepared documentation required under various federal and state laws for the sale of new franchises under both the Microtel and Hawthorn Suites brands, including a Uniform Franchise Offering Circular (a "UFOC"), a form of Franchise Agreement and an application form for each brand. Subsidiaries of the Company are currently registered to sell Microtels and Hawthorn Suites hotels in all 50 states. The Company has also developed the marketing materials, architectural and construction plans, training programs, reservation systems and franchisee assistance programs to support the sale of Microtel and Hawthorn Suites franchises. In order to support its franchise sales effort, the Company has arranged for a third party to make financing available to its franchisees. In May 1996, the Company reached an agreement in principle with NACC with respect to the Franchisee Financing Facility, pursuant to which NACC would make available to the Company's franchisees, over a two-year period, up to $200 million in construction and long-term mortgage financing, subject to certain terms and conditions. Under the Franchisee Financing Facility, the ultimate decision regarding the provision of loans to franchisees will be made by NACC. See "Business--Special Programs--Franchisee Financing Facility". Results of Operations Comparison of the four month period ended December 31, 1995 to the six month period ended June 30, 1996 General. Although the Company was formed in August 1995, it did not begin operations until October 1995, making the period from August 28, 1995 (inception) to December 31, 1995 (the "1995 Period") effectively a three month time period from an operations perspective. During the 1995 Period, the Company's primary focus was the hiring of its executive staff and the acquisition of the Microtel brand. The Company experienced a three to four month period between the closing of its acquisition of the exclusive worldwide franchising rights of the Microtel hotel system (the "Microtel Acquisition") and the beginning of significant franchise sales activities, during which time the Company (i) hired and trained its key executive staff and franchise sales personnel, (ii) developed sales materials, prototypical architectural drawings and various employee and franchisee training manuals and (iii) completed legal documentation and filings necessary to allow the Company to sell franchises in all states. The Company experienced a similar three to four month lag period between the closing of its acquisition of the exclusive worldwide rights to franchise hotels under the Hawthorn Suites brand (the "Hawthorn Acquisition") and the beginning of significant franchise sales activities. Accordingly, the full-time franchise sales efforts for the Microtel and Hawthorn Suites brands did not begin until January 1996 and July 1996, respectively. The Company did not acquire the rights to royalties related to properties that were open or under development at the time of the Microtel Acquisition or the Hawthorn Acquisition, although the Company will receive reservation and marketing fees from the franchisees of such properties. See "Business--Acquisition of the Microtel and Hawthorn Suites Systems". 19 The table below summarizes the results of the Company's franchise sales efforts as of the dates below. Executed Franchise Properties Franchise Applications Under Microtel Agreements Accepted (1) Construction - ------------------------ --------------- ---------------- ----------------- December 31, 1995 3 10 0 March 31, 1996 47 32 1 June 30, 1996 93 63 1 September 30, 1996 145 74 7 Hawthorn Suites - ------------------------ June 30, 1996 0 1 0 September 30, 1996 5 16 2 (1) Represents franchise applications as to which the Company has approved the proposed site and the prospective franchisee but has not yet executed a franchise agreement. Revenue. The Company generated $395,000 of revenues, representing reservation and marketing fees collected from franchisees, during the six months ended June 30, 1996. The Company began collecting such fees from Microtel and Hawthorn Suites franchisees in February 1996 and April 1996, respectively, and, accordingly, no such revenues were earned during the 1995 Period. While the Company recognizes reservation and marketing fees as revenues, such fees are intended to reimburse the Company for the expenses associated with providing support services to its franchisees and do not produce any profit for the Company. The Company also received franchise application fees of $2,722,000 for the six months ended June 30, 1996, compared to $120,000 for the 1995 Period. However, such fees are recognized as revenue only when the applicable hotel opens, and therefore, the Company did not recognize revenues related to such fees during the applicable periods. Expenses. Reservation and marketing costs were $13,000 for the 1995 Period and $490,000 for the six months ended June 30, 1996. The increase in marketing and reservation costs in the latter period reflects the availability of reservation and marketing fees paid to the Company by franchisees, as well as additional spending by the Company to promote the Microtel brand to travelers. In the second half of 1996 and through 1997 as well, the Company expects to spend more on marketing and reservations than it receives from its franchisees, as it continues its efforts to build recognition and acceptance of its newly-acquired brands among the traveling public. Sales commissions of $41,000 were paid during the 1995 Period for the three license agreements executed during such period compared to commissions of $1,241,000 which were paid with respect to the 90 license agreements executed during the six months ended June 30, 1996, reflecting the higher level of sales activity in the latter period. Such payments will not be recognized as expenses until the applicable hotel opens and the related application fee is recognized as revenue. Other franchise sales and advertising costs, which are costs related to the Company's franchise sales effort, were $550,000 for the 1995 Period and $1,263,000 for the six months ended June 30, 1996. This increase primarily relates to the addition of six sales people in connection with the Hawthorn Acquisition. Corporate salaries, wages and benefits, which are non-selling personnel costs, were $423,000 during the 1995 Period and $993,000 for the six months ended June 30, 1996. Approximately $120,000 of this increase was the result of 11 hirings made necessary by the Hawthorn Acquisition. The remainder reflects the comparison of the six months ended June 30, 1996 with the 1995 Period, which was effectively a three-month operating period. Other general and administrative expenses were $215,000 during the 1995 Period compared to $835,000 (including a $200,000 non-recurring charge related to the anticipated termination of the Company's corporate office lease) for the six months ended June 30, 1996. In addition to the $200,000 non-recurring charge, the difference reflects the increased activity experienced by the Company during the first six months of 1996 as compared to the last three months of 1995, when it was in its start-up phase. Depreciation and amortization expense includes depreciation of equipment for the corporate and regional sales offices, amortization of the cost of acquiring the Microtel brand and the exclusive rights to franchise the Hawthorn Suites brand, amortization of consulting payments made to Hudson under the Microtel Acquisition Agreement and amortization of costs related to the formation of the Company. Such costs were $126,000 in the 1995 Period and $268,000 in the six months ended June 30, 1996. Other Income/Expense. During the 1995 Period and the six months ended June 30, 1996, interest expense of $36,000 and $72,000, respectively, was accrued on the remaining portion of the purchase price of the Microtel 20 brand. Interest income of $195,000 in the 1995 Period and $331,000 in the six months ended June 30, 1996 resulted from investments in cash and marketable securities held by the Company. Net Loss. The Company had a net loss of $1,168,000 and net loss applicable to common stockholders of $1,645,000 (including $477,000 of accumulated but undeclared and unpaid dividends on Redeemable Preferred Stock) for the 1995 Period. For the six months ended June 30, 1996, the net loss was $3,195,000 and the loss applicable to common stockholders was $4,033,000 (including $838,000 of accumulated but undeclared and unpaid dividends on the Redeemable Preferred Stock). The Company had a net operating loss carryforward for income tax purposes on December 31, 1995 and June 30, 1996 of $1,037,000 and $2,792,000, respectively. Given the limited operating history of the Company, management has recorded a valuation allowance for the full amount of the deferred tax asset on December 31, 1995 and June 30, 1996 . Liquidity and Capital Resources The Company has financed its operations since its inception primarily through a private placement of securities, franchise application fees and interest income. In October 1995, the Company raised approximately $17.5 million in gross proceeds through sales of shares of Old Common Stock and Redeemable Preferred Stock. Franchise application fees and interest income generated cash of $120,000 and $195,000, respectively, for the 1995 Period and $2,306,000 and $331,000, respectively, for the six months ended June 30, 1996. In the 1995 Period, the Company invested $3,720,000, of which $3,428,000 related to the Microtel Acquisition, $137,000 went toward the acquisition of equipment and $155,000 was for organization costs. Of the approximately $3.4 million spent to acquire the Microtel brand, $1,437,000 was paid in the form of a note, with the remainder paid in cash. In the six months ended June 30, 1996, the Company spent a total of $388,000, $271,000 of which was used to purchase equipment and $117,000 was spent primarily on legal costs relating to the Hawthorn Acquisition. In the future, the Company will support the American Dream Program by committing to make initial deposits under such program until qualified lessees can be identified. In the event a qualified lessee is not identified for a particular property, the Company may become the lessee under the program. If the Company becomes the lessee with respect to a particular property, it may also acquire the Microtel from the franchisee under the terms of the American Dream Program. See "Business--Special Programs--American Dream Program". The Company anticipates that the net proceeds of the Offering, together with cash on hand and interest thereon, will be sufficient to fund the Company's working capital requirements and to carry out part of the Company's business strategy. See "Business--Business Strategy". The Company may fund its future cash needs through additional equity or debt offerings, although there can be no assurance that the Company will be able to do so. The Company had outstanding indebtedness related to the Microtel Acquisition of $1,437,000 as of both December 31, 1996 and June 30, 1996. As of June 30, 1996, there were 163,500 shares of the Company's Redeemable Preferred Stock outstanding. Pursuant to the terms of the Charter, the Company is required, upon the earlier of (i) September 29, 2007 or (ii) a Change of Control of the Company, to redeem each outstanding share of Redeemable Preferred Stock at a cash price per share equal to $100 plus all accrued and unpaid dividends thereon. If Mr. Leven's employment were to be terminated by the Company for any reason (including resignation) or the Company were to otherwise experience a Change of Control, the Company would be obligated to redeem all outstanding shares of Redeemable Preferred Stock at a cost, as of June 30, 1996, of $17,597,000. See "Risk Factors--Mandatory Redemption of Redeemable Preferred Stock" and "Description of Capital Stock--Preferred Stock". Seasonality As a hotel franchisor, the Company expects to experience seasonal revenue patterns similar to those experienced by participants in the lodging industry generally. Accordingly, the summer months, because of increases in leisure travel, are expected to produce higher franchise royalty revenues for the Company than other periods during the year. In addition, developers of new hotels typically attempt, whenever feasible, to schedule the opening of a new property to occur prior to the spring and summer seasons. This may have a seasonal impact on the Company's revenues, a significant portion of which is not recognized until the opening of a property. Accordingly, the Company may experience lower revenues and profits in the first and fourth quarters and higher revenues and profits in the second and third quarters. Inflation The rate of inflation has not had a material effect on the revenues or operating results of the Company since its inception. 21 BUSINESS Overview U.S. Franchise Systems, Inc. ("USFS" or the "Company") was formed in August 1995 to acquire, market and expand high-quality, well-positioned brands with potential for rapid unit growth through the sale of franchises to third-party operators. The Company's initial brands, which are in the lodging industry, are the Microtel budget hotel brand ("Microtel") and the Hawthorn Suites upscale, extended-stay hotel brand ("Hawthorn Suites"). The Company acquired the rights to these brands because of their potential for significant growth, which reflects, among other things, their profitability for franchisees at the property level and their positions in attractive segments of the lodging industry. The Company has assembled an experienced management team and sales force led by its Chairman, President and Chief Executive Officer, Michael A. Leven, who has 35 years of experience in the lodging industry, and its Executive Vice President and Chief Financial Officer, Neal K. Aronson, a former principal of the New York investment firm Odyssey Partners, L.P. Mr. Leven most recently served as President and Chief Operating Officer of Holiday Inn Worldwide (1990-95) and President and Chief Operating Officer of Days Inn of America, Inc. (1985-90), franchisors of the two largest lodging brands in the world. The Company has hired and trained a staff of 73 employees, including a 28-person sales force, which management believes is the third largest franchise sales organization in the lodging industry. Mr. Leven and the Company's sales force have collectively sold over 2,200 hotel franchises on behalf of other hotel chains. Since acquiring the Microtel brand in October 1995 and establishing a sales force by January 1996, the Company has executed 145 franchise agreements and accepted applications for an additional 74 hotels as of September 30, 1996, expanding the number of states in which Microtels are or may be located from 10 to 44. Since acquiring the exclusive rights to franchise the Hawthorn Suites brand in March 1996 and establishing a sales force by July 1996, the Company has executed five franchise agreements and accepted applications for 16 additional hotel sites as of September 30, 1996. As a franchisor, USFS licenses the use of its brand names to independent hotel owners and operators (i.e., franchisees). The Company provides its franchisees with a variety of benefits and services designed to (i) decrease development costs, (ii) shorten the time frame and reduce the complexity of the construction process and (iii) increase the occupancy rates, revenues and profitability of the franchised properties. The Company offers prospective franchisees access to financing, a business format, design and construction assistance (including architectural plans), uniform quality standards, training programs, national reservations systems, national and local advertising and promotional campaigns and volume purchasing discounts. The Company does not currently build, own or manage properties. The Company expects that its future revenues will consist primarily of (i) franchise royalty fees, (ii) franchise application fees, (iii) reservation and marketing fees, (iv) various fees and other revenues from third-party financing arranged by the Company for its franchisees and (v) payments made by vendors who supply the Company's franchisees with various products and services. Currently, the Company derives substantially all of its revenues from reservation and marketing fees collected from its franchisees. The Company also receives cash from its franchisees in the form of application fees, which are recognized as revenue only upon the opening of the underlying hotels. See the Consolidated Financial Statements and the related Notes included elsewhere in this Prospectus and "Management's Discussion and Analysis of Financial Condition and Results of Operations". Business Strategy The Company's business strategy is to (i) rapidly increase the number of open Microtels and Hawthorn Suites, (ii) operate its administrative and franchisee support departments in order to maximize the operating leverage inherent in the franchising business and (iii) acquire additional lodging or other service-oriented brands that provide attractive unit economics to franchisees and significant growth opportunities for the Company (to the extent permitted under the Hawthorn Acquisition Agreement). See "--Acquisition of the Microtel and Hawthorn Suites Systems". Growth of the Franchise Systems. The Company is focused on accelerating the growth of the Microtel and Hawthorn Suites franchise systems through the sale of franchises to third-party owners and operators. To this end, the Company has hired a 28-person sales force (which the Company believes is the third largest in the lodging industry) whose members have sold 150 franchises and secured an additional 90 franchise applications on behalf of the Company since its inception. The Company also benefits from the extensive experience of Mr. Leven, who has served as President and Chief Operating Officer of the franchisors of the world's two largest lodging brands. The sales force targets a broad 22 pool of potential franchisees, including both franchisees with experience developing and operating multiple hotel properties and single-unit franchisees, including first-time hotel owners. In addition to direct sales, management is actively developing programs designed to accelerate the growth of the Microtel and Hawthorn Suites systems. For example, the Company has developed a financing program through which NACC would make construction and long-term mortgage financing available to franchisees. This program is intended to add speed and certainty to the hotel development process, enabling franchisees to spend more time identifying hotel locations and developing properties and less time obtaining financing. The Company has also created the American Dream Program, which is designed to enable first-time hotel owners to lease and own a Microtel with a low initial investment and thereby increase the number of potential Microtel franchisees. The Company expects to participate in the American Dream Program by committing to make initial deposits on and to lease Microtels under this program until qualified lessees can be identified. See "--Special Programs". Finally, the Company has extended the Microtel and Hawthorn Suites brands from two products at the time of their respective acquisitions (Microtel Inn and Hawthorn Suites) to five products currently (including Microtel Inn & Suites, Microtel Suites and Hawthorn Suites LTD). The Company believes that brand extensions allow it to capitalize on the recognition of its brands among consumers and franchisees and to compete in new markets without the costs associated with acquiring an existing brand. Of the 145 Microtel franchise agreements executed by the Company since the Microtel Acquisition, over 50% relate to Microtel Inn & Suites or Microtel Suites, two of the products that the Company developed since acquiring the Microtel brand. Operating Leverage. The Company expects to benefit in the future from the operating leverage inherent in its cost structure. As new Microtels and Hawthorn Suites open, the Company expects that recurring royalty revenues (derived from its franchisees' gross room revenues) will represent an increasing percentage of the Company's total revenues. At the same time, the Company expects to incur relatively limited incremental expenses associated with these royalty revenues because the Company (i) has hired and trained the sales force and has staffed teams of marketing, franchise administration, construction and design, reservations and other professionals at levels it believes are necessary to support the intended expansion of the Microtel and Hawthorn Suites brands and (ii) earns reservation and marketing fees from franchisees to offset a large portion of its expenditures on these activities. At the same time, the Company, as a franchisor, does not incur the significant capital costs and operating expenses associated with owning hotels. Acquisitions. A principal focus of the Company's business strategy is on the acquisition of additional lodging and other service-oriented franchise brands. In evaluating potential acquisitions, the Company seeks brands that have clear market positions and significant multi-unit expansion potential, are profitable and relatively easy to manage at the unit level and, at the same time, can be integrated on a cost-effective basis into the Company's franchise sales and franchisee support organization. From time to time, the Company engages in discussions with owners of various lodging and non-lodging brands. However, under the terms of the Hawthorn Acquisition Agreement, the Company is generally prohibited until June 26, 1998 from franchising any lodging brand other than (i) Hawthorn Suites brand hotels, (ii) Microtel brand hotels and (iii) other limited-service, non-suite hotel brands with an ADR of $49 and under. In addition, until June 26, 1997, the Company generally may not franchise any non-lodging brands. Also, until 175 Hawthorn Suites with 11,375 rooms have been developed, the Company may not franchise another all-suite hotel brand (other than Microtels costing under a certain amount to construct). As of September 30, 1996, the Company did not have any agreements, commitments or formal understandings with third parties regarding possible acquisitions. See "--Acquisition of the Microtel and Hawthorn Suites Systems". The Hotel Franchising and Lodging Industries Hotel Franchising. In recent years, owners of hotels not affiliated with regional or national lodging companies have increasingly chosen to join hotel franchise chains. The Company and other hotel franchise chains provide a number of services designed to directly or indirectly increase hotel occupancy rates, revenues and profitability. The Company believes that hotel operators often view franchise chain membership as an important means of remaining competitive with hotels that are either owned by or affiliated with national or regional lodging companies. In determining whether to affiliate with a franchise chain, hotel operators will compare costs of affiliation with the incremental revenues anticipated to be derived from chain membership. Costs of affiliation include capital expenditures and operating costs required to meet a chain's quality and operating standards, plus the ongoing payment of franchise royalties and assessments for the reservations system and marketing programs maintained by the franchisor. 23 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"). According to an industry study, in 1995 the various segments and their respective ADRs were: budget (approximately $36), economy (approximately $47), mid-price (approximately $61), upscale (approximately $80) and luxury (approximately $118). Hotels are further segmented into limited-service and full-service, depending on the degree of food and beverage and other services offered, and hotels are also segmented into transient hotels, which serve short-term guests, and extended-stay hotels, which serve guests on multiple night or multiple week stays. The Company's franchised properties operate in the budget segment of the limited-service sector through its Microtel brand and the extended-stay segment through its Hawthorn Suites brand. The lodging industry as a whole has shown significant improvement in recent years. Industry reports indicate that the lodging industry marked its third consecutive year of profitability in 1995, resulting from a favorable supply/ demand relationship, with increases in room demand exceeding increases in room supply in 1992, 1993, 1994 and 1995. According to a study prepared in January 1996, these trends are expected to continue, with demand projected to increase at 2.5% annually from 1996 to 1998 compared to projected supply growth of 2.0% for this same period. However, demand historically has been sensitive to shifts in economic activity, which has resulted in cyclical changes in room and occupancy rates, and there can be no assurance that industry projections will be met. The Company believes that the budget and the extended-stay segments of the lodging industry offer particularly attractive industry dynamics relative to other segments of the lodging industry, for the reasons set forth below. Budget Segment. Room supply growth in the budget segment has been and is expected to continue to be lower than in the other segments of the market. Growth since 1994 in the numbers of rooms in the various segments, according to an industry report, was as follows: Annual Room Supply Growth (in %) 1996 (through Segment 1994 1995 June) ------------- ------ ------ --------------- Luxury 1.0% 0.9% 1.4% Upscale 2.0 1.9 2.7 Mid-price 2.0 2.4 2.7 Economy 1.1 2.0 1.7 Budget 0.3 0.6 0.5 Another study indicates that room supply growth in the budget segment through 1998 is expected to be the lowest of all five segments. The industry report referred to above also shows that the relationship between growth in room demand and room supply in the budget segment continues to be favorable relative to other segments of the lodging industry. The following table compiled from such report compares the ratio of room demand growth to room supply growth since 1994. Ratio of Change in Room Demand to Change in Room Supply 1996 (through Segment 1994 1995 June) ------------- ------ ------ --------------- Luxury 4.4x 2.4x 2.0x Upscale 1.9 1.4 1.1 Mid-price 2.1 1.6 1.3 Economy 2.4 1.5 1.5 Budget 4.0 2.2 3.4 Extended-Stay Segment. The extended-stay segment consists of hotels that offer rooms with full kitchen facilities and that target travelers staying five or more consecutive nights. This segment is a growing segment of the lodging industry, as travelers' demand for better value and for environments that feel more like home have contributed to increased demand for extended-stay rooms. Corporate downsizing has resulted in an increasing need for consultants, long-term project work and growth in corporate training programs. Moreover, with extensive corporate relocations each year, more people are away from home on longer trips. Leisure and vacation travelers are also discovering the value of extended- 24 stay hotels. According to lodging consultant D.K. Shifflet & Associates Ltd., approximately 292 million extended-stay room nights were sold in the United States in 1995, representing over 30% of all hotel room nights sold in the United States during the year. However, dedicated extended-stay rooms constituted only 1.3% of the lodging industry's total rooms at the end of 1995. While growth in room supply in the extended-stay sector is expected to outpace room supply growth in other segments of the lodging industry in the next several years, management believes that the projected growth in supply will be insufficient to meet demand for extended-stay rooms. Extended-stay properties offer attractive economics to franchisees because of the relatively high occupancy rates in this segment and the lower operating costs relative to similarly priced, full-service hotel properties. According to an industry survey, in 1995, extended-stay properties experienced an average occupancy rate of 80.8%, compared to an overall average occupancy rate for the lodging industry of 65.5%. Due to the longer average stay of the extended-stay guest and lower guest turnover, operators of extended-stay hotels enjoy reduced staffing needs, both at the front desk and in housekeeping, relative to operators of transient hotels. At the same time, reduced guest turnover contributes to lower supply costs, as hotel operators are not required to replenish amenities such as soap and shampoo on a daily basis. These factors, combined with the elimination of the high costs of operating full service restaurants, allow extended-stay hotels to realize higher profit margins than typical full-service hotels. Microtel Microtels include three types of properties: Microtel Inns, which have single and double rooms; Microtel Suites, which are all-suite properties; and Microtel Inn & Suites, which contain singles, doubles and suites. All Microtels operate in the budget segment of the lodging industry, which is the lowest priced segment in the industry with an average daily room rate in 1995 of approximately $36. Microtels are distinctively styled hotels with a residential look that offer travelers an attractive and consistent appearance, clean, comfortable rooms and the safety of interior corridor room access, all for a competitive room rate. Management believes that the Microtel system is one of the only brands in the budget segment that franchises only newly constructed, interior corridor properties. In contrast, many other budget hotels are older properties with rooms that are accessible only through outside entrances and that may have been converted from independent hotels or other brands. Management believes that Microtels' strict new construction and interior corridor requirements provide travelers with a brand that is among the safest, most consistent and highest quality in the budget segment. The Company believes that Microtels offer financial advantages to franchisees. Microtels feature a distinctive architectural design that minimizes construction costs and maintenance expenses through smaller room sizes, limited common areas, smaller land requirements and built-in standardized furniture, all of which enable franchisees to own and operate a Microtel at a lower cost. These lower costs may reduce a franchisee's equity investment and may broaden its debt financing alternatives, thereby expanding the appeal of the Microtel brand to prospective franchisees. Today's security conscious, value oriented travelers have shown their approval of Microtels. Although there were no national advertising or significant promotional campaigns prior to the Company's acquisition of the Microtel brand, the 15 properties open more than two years as of June 30, 1996 achieved a 69.3% occupancy rate in 1995 compared to an approximately 61.9% occupancy rate for the budget sector as a whole. Further evidence of the appeal of Microtels is found in its "intent-to-return" rating, which measures customers' overall satisfaction and willingness to return to a Microtel in the future. Based on surveys of approximately 5,000 Microtel guests conducted by franchisees from 1989 to 1994, more than 95% of Microtel guests expressed an intent to return to a Microtel in the future. Since acquiring the Microtel brand in October 1995 and establishing its sales force by January 1996, the Company has realized franchise sales growth as follows: As of As of December 31, 1995 September 30, 1996 ------------------ ------------------ Microtel Franchise Data(1) Properties Open 23 27 Properties Under Construction 0 7 Executed Franchise Agreements 3 145 Franchise Applications Accepted 10 74 (1) The Company will not receive royalties from the 23 Microtels open as of December 31, 1995 and from 26 of the 27 Microtels open as of September 30, 1996, but does receive reservation and marketing fees from the franchisees of these properties. See "--Acquisition of the Microtel and Hawthorn Suites Systems". 25 Microtels are designed to offer the following advantages to franchisees: Lower Construction Costs. Compact and consistently designed rooms, vinyl exteriors, minimal public space and the elimination of low profit margin areas such as kitchen and restaurant facilities, exercise rooms and expansive lobbies combine to lower total development costs. As a result, a Microtel can be completed for as little as $23,000 per room (including soft costs, furniture, fixtures and equipment, but excluding land costs). These lower construction 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. Lower Land Costs/More Available Sites. Microtels' innovative architectural designs, particularly their smaller room size, built-in standardized furniture and limited public areas, eliminate wasted space, enabling Microtels to be built on as little as one acre of land. In addition to minimizing development costs, the ability to build a Microtel on smaller parcels of land significantly increases the number of available sites, some of which have traditionally been unsuitable for hotel projects. Shorter Construction Time. The Company provides Microtel franchisees with a detailed construction prototype (including mechanical and electrical working drawings) that requires a local architect only to make changes related to site adaptation and local zoning codes. Microtel franchisees may choose from among several different prototypes depending upon the size of the property and the number and type of rooms. The Company also provides its franchisees with ongoing construction and design assistance during the building phase. The result is a shorter construction period (estimated at a total of 120 to 151 days), which reduces construction period interest costs and accelerates market entry and the growth of the Microtel system. Lower Operating Costs. Compact rooms, built-in standardized furniture and minimal public space lower the number of people required to clean and maintain a Microtel, reduce heat, light and power consumption, minimize repair and maintenance costs and reduce capital expenditures. Lower Reservation Costs. The Company maintains a toll-free referral system on behalf of its franchisees, which is designed to generate guest reservations at a lower cost. The toll-free number connects callers to an operator who refers callers directly to the appropriate Microtel. By reducing the need for complex and high-cost computer hardware, software and training at the property level, less of the franchisees' reservation and marketing fees must be dedicated to maintaining a reservation system, allowing a greater portion of such fees to fund brand marketing expenditures to end consumers. For the hotel guest, Microtel provides a high quality, aesthetically appealing, safe and secure property at a competitive room rate, as described in greater detail below: Strong Price/Value Relationship. A Microtel has a residential-looking exterior, attractive landscaping and interior corridor design, differentiating it from other budget properties, many of which are older and have exterior guest room entrances. As one of the only 100% interior corridor, new construction brands in the budget segment, Microtel provides the safety and price conscious customer with an appealing alternative to other budget hotels. High Quality/Consistent Product. All Microtels are newly constructed in accordance with working drawings provided by the Company. The Company does not allow conversions from existing properties, as is permitted by many of its competitors. Strict adherence to these construction standards is monitored by Microtel's in-house design and construction department, which must approve all franchisee building plans. Management believes that the result is one of the most consistent chains in the budget segment. Focus on Safety and Security. Microtels are designed with security in mind, featuring interior corridors, well-lit lobbies, hallways and parking areas and a single general access entrance through the lobby to all guest rooms. All Microtels that have been built subsequent to the Microtel Acquisition contain, and all Microtels built in the future will contain, electronic door-locking systems as an additional security feature. These features, particularly popular with women travelers, combine to provide enhanced safety for Microtel guests. Hawthorn Suites As an upscale, extended-stay hotel, Hawthorn Suites provide the traveler with the convenience of a hotel and the amenities typically found in an apartment. Hawthorn Suites' hotel rooms contain full-service kitchens with appliances, 26 cookware and utensils, video cassette players, modem ports, exercise facilities and valet service. Hawthorn Suites hotels also offer a hot breakfast buffet every morning and guests are invited to an evening social hour held four times a week. A center courtyard, an outdoor pool, a multi-use sport court, a barbecue area and a retail store selling sundry and meal items, snacks and beverages, will also be part of newly constructed Hawthorn Suites hotels. In addition to participating in the upscale, extended-stay segment through its Hawthorn Suites brand, the Company has recently developed a prototype called Hawthorn Suites LTD. Hawthorn Suites LTD is a mid-price, all-suites hotel brand that is designed to meet the needs of both the extended-stay and transient guests. The prototype developed by the Company for Hawthorn Suites LTD targets development costs and average daily rates approximately 20% below those for Hawthorn Suites hotels. Hotels that are part of the Hawthorn Suites system use the Spirit Reservation System ("Spirit"), a system operated by Regency Systems Solutions ("Regency"), which 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. Regency, which is owned by Hyatt Hotel Corporation ("Hyatt"), also currently operates the reservation system for Hyatt hotels. The Company benefits from a unique relationship with Hyatt. Persons calling the Hyatt toll-free number who experience a sold out Hyatt or no Hyatt in their desired market are automatically referred to the closest Hawthorn Suites hotel. Revenue generated from reservations made through the Spirit system accounted for 25% of Hawthorn Suites' total room sales in 1995. Management believes its franchisees derive substantial benefits from use of the Spirit system at a low cost. As and when Hawthorn Suites LTD properties are opened, these properties will also be linked to the Spirit system and will benefit in the manner described above from any overflow at Hyatt hotels. There can be no assurance, however, that Regency will continue to service the Company's or Hyatt's reservation needs in the future or that the Company will continue to use the reservation services of Regency. Operations The following departments of the Company are responsible for identifying potential franchisees and locations, obtaining franchise applications, executing franchise agreements, assisting franchisees in building and opening properties and providing ongoing support, training and services: Franchise Sales. The Company employs a national franchise sales force consisting of 28 people who, collectively with Mr. Leven, have sold over 2,200 hotel franchises as employees of other hotel chains. The primary objectives of the Company's franchise sales strategy are to identify potential franchisees and possible locations for each of the Company's brands and to create an awareness and general acceptance of its products with numerous participants in the hospitality industry, including hotel owners, lodging consultants, vendors, operators and educational institutions. The sales force seeks to achieve these objectives through the implementation of a multi-faceted sales strategy, which includes cold calling, telemarketing, direct mail, trade advertising and public relations. The compensation program is structured so that each franchise salesperson is expected to earn at least 50% of his or her annual income in sales commissions. Design and Construction. The Company's design and construction department provides development expertise in the disciplines associated with new construction and renovation, with emphasis on low development costs, low maintenance expense, quality construction and profit maximization for its franchisees. The Company provides detailed architectural plans, CAD-CAM computer files, specifications, system standards and manuals, and makes the services of the department available to franchisees at various stages of the development process. In addition, in order to maintain consistent product quality and brand identity, the design and construction department approves, among other things, all architectural plans of Microtel and Hawthorn Suites franchisees. Quality Assurance. Quality control is essential to maintaining and increasing the value of the Company's brands and in generating repeat business among travelers. Franchise quality control is accomplished through inspections prior to a franchisee's entry into the system and on an ongoing basis. Quality assurance programs promote uniform standards throughout each of the Company's franchise systems, an important factor in increasing consumer demand for lodging facilities. The Company inspects each property two times per year. Hotels that fail to meet certain franchise standards are notified and are generally given 30 days to either correct the conditions that led to the failure or to implement a plan to correct the failure. If they do not correct the deficiencies, the Company can rescind the franchise. Since the Company acquired the Microtel brand, one property has been terminated from the Microtel system due to quality deficiencies. 27 Marketing. The Company's marketing strategy is designed to increase brand awareness among potential franchisees and consumers. In the franchise community, the Company's marketing campaign is focused on publications that target the hospitality industry, direct mail and attendance at industry trade shows. In targeting the end consumer, the Company supplies franchise properties with a marketing guide, local radio spots, print advertising, outdoor billboard designs and rack cards. In addition, national directories are published for each brand and made available to hotel guests at the property level, through advertising and via the Internet. In 1996, the primary vehicles for advertising the Microtel brand to end consumers and reinforcing Microtel's national message that "There's Room for Everyone" have been USA Today, the Internet and billboards at 20 major airports in the communities where Microtels are located (including two prominently displayed billboards at Atlanta's Hartsfield Airport during the 1996 Olympic games). Microtel's Internet address is http://www.microtelinn.com. Due to the nature of the extended-stay market, direct sales (i.e. sales and marketing efforts by the hotel operator targeted at local demand generators) plays a major role in marketing for Hawthorn Suites. Specialized pre-opening and post-opening collateral material is targeted to travel agents, travel planners and buyers of extended-stay rooms, instead of the end consumer. Hawthorn Suites' Internet address is http://www.hawthorn.com. Public Relations. A targeted public relations program supports both the marketing and franchise sales efforts by promoting awareness of the Company generally. Since its inception, the Company has been featured in such national publications as in USA Today, Business Week and National Business Employment Weekly (a subsidiary of The Wall Street Journal), as well as industry trade publications such as Hotel & Motel Management, Hotel Business, Lodging, Lodging Hospitality, Hotels, Travel Weekly, Crittenden/Hotel & Motel Real Estate News and Real Estate Forum. Training. The Company maintains mandatory training programs for its franchisees that are designed to teach franchisees how to best utilize the Company's reservations system and marketing programs, as well as the fundamentals of hotel operations, such as recruiting, housekeeping, repairs and maintenance and personnel policies. The Company also provides special on-site training upon request. The Company has developed and maintains a library of training videos, cassettes and tapes, as well as printed training material, which are available to franchisees. In addition, each franchise sales person must complete a structured initial training program and regular retraining. Franchise Services. The franchise services department functions as a single point of contact for all franchisees to call for support on all issues prior to, during and after construction. Franchise services acts as a liaison between the franchisee and all departments of the Company. The Company recognizes the personal service aspect of the franchising business and intends to assign a designated member of the franchise service department to each franchisee. Purchasing. The Company provides its franchisees with volume purchasing discounts for products, services, furnishings and equipment used in construction and ongoing operations. The Company has established relationships with vendors to the lodging industry and negotiates discounts for purchases by its customers. In certain cases, the Company receives payments from the vendors as well. Currently, the Company does not maintain inventory, directly supply any of the products or extend credit to franchisees for such purchases. Franchise Agreements The Company's franchise agreements grant hotel owners the right to utilize one of the brand names associated with the Microtel or Hawthorn Suites hotel systems under long-term franchise agreements. In order to qualify for a franchise from the Company, a candidate must undergo a screening process, which typically includes a review of the potential franchisee's operational ability and financial condition and the proposed lodging location. A representative of the Company conducts a site inspection to determine whether the location meets standards and whether the brand name selected is appropriate at that location. The Company considers such factors as accessibility, visibility, location, economics, demographics, the extent of commercial development and, in the case of Hawthorn Suites conversions, facility condition. When executed, both Microtel and Hawthorn Suites franchise agreements offer an area of exclusivity to each location, the degree of which is negotiated individually with each franchisee. The Company's current standard agreements are for 20-year terms for new construction properties and 10-year terms for conversion properties (in the case of Hawthorn Suites only). The standard franchise agreements generally require franchisees to satisfy certain development milestones, including a requirement that construction begin within six to nine months of execution of the franchise agreement, although generally there exists a 30-day cure period. Franchisees are required to pay royalty fees to the Company based upon the gross room revenues of the franchised 28 hotel during the term of the agreement and an application fee. Franchise application fees are non-refundable and are generally collected from potential franchisees by the time the franchise agreement is executed. Franchise fees are comprised of two components: a royalty portion and a reservation and marketing portion, both of which are based upon a percentage of the franchisee's gross room revenues. The royalty portion of the franchise fee is intended to cover the operating expenses of the franchisor, such as costs incurred in providing quality assurance, administrative support and other franchise services, and to provide the Company with operating profits. The reservation and marketing portion of the franchise fee is intended to reimburse the Company for the expenses associated with providing such franchise services as a reservation system, national advertising and certain promotional programs. Marketing and reservation fees do not produce any profit for the Company, but mitigate a significant cost of business for franchisees and are an important consideration for potential franchisees when evaluating competing brands. The Company does not receive royalty fees from those Microtels and those Hawthorn Suites hotels that were open or under development at the time the Company acquired the right to franchise the respective brands. The Company does, however, receive reservation and marketing fees from the franchisees of these properties. The terms of the Company's current standard forms of franchise agreements state that, by year of operation, franchisees are required to pay the following ongoing royalty fees and reservation and marketing fees (each, as a percentage of gross room revenues), although the actual fees may vary: Microtel Hawthorn Suites ------------- --------------------- Franchise Royalty Fees - ------------------------------------- Year 1 4.0% 5.0% Year 2 5.0% 5.0% Year 3 and thereafter 6.0% 5.0% Reservation and Marketing Fees - ------------------------------------- Year 1 3.0% 2.5% Year 2 2.5% 2.5% Year 3 and thereafter 2.0% 2.5% Total Franchise Fees - ------------------------------------- Year 1 7.0% 7.5% Year 2 7.5% 7.5% Year 3 and thereafter 8.0% 7.5% During the first quarter of 1996, when the Company began its full-time franchise sales efforts, prospective franchisees were offered a three month royalty-free period during Year 1 as an inducement to join the Company's franchise system. The Company is no longer offering this discount and currently has no intention to do so in the future. With respect to Hawthorn Suites, two franchisees have received discounts from the Company's standard fee structure. Discounts were granted in these two instances due to the unique property size and accelerated opening schedule of these franchises. With respect to both Microtel and Hawthorn Suites, the Company also has agreed in certain situations to dedicate a portion of a particular franchisee's marketing fees to local (as opposed to national) promotion of the applicable brand. The Company has modified its standard forms of license agreements in an attempt to reduce negotiations with potential franchisees, modifications that the Company believes have reduced the burden on its sales force and administrative staff. The Company believes that these changes make the Company's franchise agreements more attractive to potential franchisees without sacrificing the protection typically afforded to franchisors under franchise agreements. The Company's standard form of franchise agreement is terminable by the Company if the franchisee fails to maintain certain quality standards or to pay royalties, reservation and marketing fees or other charges. In the event of termination, the Company is generally entitled to liquidated damages. Special Programs American Dream Program. American Dream by Microtel is a unique program that the Company has developed to enable potential first-time hotel owners with limited financial resources and/or little or no building experience to lease and ultimately acquire a Microtel (the "American Dream Program"). Under the American Dream Program, qualified potential Microtel franchisees would lease a Microtel for an initial deposit and, at the lessees' option, acquire the hotel for additional payments over a fixed period. The American Dream Program is designed to accelerate the 29 growth of the Microtel system by permitting those who otherwise could not afford to build a Microtel an opportunity to become a hotel owner. Although the Company did not begin marketing this program until August 1996, five franchise agreements were executed under this program by September 30, 1996. The Company has reached an understanding in principle with TAD Properties, L.L.C. ("TAD"), an affiliate of Motels of America, Inc. ("MOA"), pursuant to which TAD or one of its affiliates will be the exclusive developer, franchisee and owner-lessor of properties under the American Dream Program. MOA owns and manages more than 140 hotels, making it one of the largest owners of limited-service hotel properties in the United States. The Company will support the American Dream Program by committing to make initial deposits on individual properties and to lease the hotels until qualified lessees can be identified. In the event a qualified lessee is not identified for a particular property, the Company may become the lessee under the program. If the Company becomes the lessee with respect to a particular property, it may also acquire the Microtel from the franchisee under the terms of the American Dream Program. However, no specific amount of capital has been committed to this program. The Company's UFOC is being amended to describe the American Dream Program. See "--Regulation". Franchisee Financing Facility. In May 1996, the Company reached an agreement in principle with NACC, pursuant to which NACC would make available to the Company's franchisees, over a two year period, up to $200 million in construction and long-term mortgage financing, subject to certain terms and conditions (the "Franchisee Financing Facility"). The Company believes that the Franchisee Financing Facility can add speed and certainty to the development process by enabling the Company's franchisees to devote more time to identifying acceptable hotel locations and constructing properties and less time obtaining financing. The Company is currently revising its UFOC to describe the Franchisee Financing Facility. See "--Regulation". Under the Franchisee Financing Facility, neither the Company nor the subsidiary through which the Company operates the program, US Funding Corp., is obligated to provide any credit or credit support. Rather, it is expected that US Funding Corp. will provide the Company's franchisees with access to financing from NACC. Under the Franchisee Financing Facility, NACC is expected to provide eligible franchisees with 27-to-30 month construction loans, which convert into 10-year mortgage loans at maturity or earlier under certain circumstances. The program is expected to be subject to a comprehensive underwriting process, which will be conducted by US Funding Corp. and NACC and which will be separate from the franchise application process. The ultimate decision as to whether to make any loan will be made by NACC. There can be no assurance that applications preliminarily approved by US Funding Corp. under this program will ultimately result in loans being made. To date, no loans have been made to franchisees under the Franchisee Financing Facility. Franchisees will be required to contribute at least 30% of the development cost (through the contribution of cash or other assets), financing the remaining portion from the facility. During the construction phase, interest will accrue and principal payments will be deferred. The loans will become secured by the hotel property and will be non-recourse to the franchisee once the franchisee has received a certificate of occupancy for the property. In addition to facilitating the development process, the Company expects to earn revenues when its franchisees borrow under the Franchisee Financing Facility. Specifically, the Company expects to receive to a portion of certain upfront fees payable by the franchisee to NACC, plus a portion of certain ongoing interest charges payable by the franchisee during the construction phase. For many reasons, a loan preliminarily approved under this program may not be made, including if NACC does not approve the loan or if conditions to lending are not satisfied. Although the Company generally does not make construction or mortgage loans to its franchisees, the Company is considering becoming a participant in both the construction loans and the long-term mortgage loans made to franchisees under this program, including by making direct subordinated loans to franchisees. In such cases, the Company would be subject to the risks ordinarily experienced by lenders, including risks of franchisee/borrower defaults and bankruptcies. In the event of a default in construction and/or long-term mortgage loans, the Company, as a subordinated lender, would bear the risk of loss of principal to the extent the value of the collateral was not sufficient to pay both the senior lender and the Company, as subordinated lender. If the Company were to make loans directly, its UFOC would have to be further amended before any such loans could be offered or made. See "--Regulation". PMC Agreement. Under an agreement with PMC Commercial Trust, a Texas real estate investment trust ("PMC"), the Company has also agreed to make available to potential Microtel franchisees information regarding PMC's financing programs for land acquisition and construction costs (the "PMC Agreement"). The Company earns a marketing fee based on the average principal amount of the outstanding and performing loans extended by PMC to Microtel franchisees. The Company and PMC jointly agree as to which franchisee loan applications will be covered by the PMC Agreement, but the Company may not participate in the approval or underwriting of any loan applications, and PMC, in its sole discretion, 30 determines whether and the terms under which loans will be made. The PMC Agreement may be terminated by either party upon 30 days' notice. The Company is currently updating its UFOC to describe this program. See "--Regulation". Acquisition of the Microtel and Hawthorn Suites Systems Microtel Acquisition. On September 7, 1995, the Company entered into the Microtel Acquisition Agreement with Hudson, a public company then called Microtel Franchise and Development Corporation, to acquire the exclusive worldwide franchising rights and operating assets of the Microtel hotel system. The purchase price for these franchise rights and operating assets was $3,037,000, of which the Company paid $1,600,000 at the closing on October 5, 1995 and agreed to pay a total of $1,437,000 over the following three years, plus interest at 10% (for a total payment of approximately $1,700,000). In addition, royalties are payable to Hudson, as described below, for the right to all trade names, trademarks, service marks and other intellectual property used in connection with the Microtel business, including the Microtel name (the "Proprietary Marks"). The operating assets of the Microtel system acquired from Hudson included (i) all prototype architectural plans and designs used in connection with the Microtel business and (ii) the Microtel reservation referral system, directories, manuals and marketing materials. Pursuant to the Microtel Acquisition, the Company also acquired Hudson's rights under then existing Microtel franchising agreements relating to the 27 Microtels open or under development at the time of the acquisition. Although the Company acquired the existing franchises from Hudson and is obligated to fulfill all of the obligations of the franchisor thereunder, Hudson retained the right to receive all franchise royalties and franchise renewal fees payable by the existing franchisees under such agreements. The Microtel Acquisition Agreement does, however, permit the Company to retain any reservation and marketing fees and any other one-time or non-recurring fees or charges payable to the franchisor under the applicable franchise agreement, such as those relating to the initial placement, substitution, amendment, organization, termination or transfer of the franchise. The Microtel Acquisition Agreement also grants Hudson, its affiliates and certain other persons the right to acquire from the Company up to an additional 23 Microtel hotel franchises and up to an additional 10 Microtel all-suites hotels and to retain the franchise application fees and the franchise royalties from such franchises (provided Hudson, its affiliates or such other persons own and operate the hotels covered by such franchises). Since the closing of the Microtel Acquisition, Hudson, its affiliates or such other persons have executed franchise agreements for eight additional Microtels, which, when opened, will be included in the 23 Microtel franchises referred to above. In consideration for the transfer of the Proprietary Marks, the Microtel Acquisition Agreement provides that, for each new Microtel or Microtel all-suites hotel (collectively, the "Microtel Properties") opened after the closing of the Microtel Acquisition, other than the additional franchises referred to in the preceding paragraph, the Company is required to pay monthly royalties to Hudson as follows: 1.0% of the "revenues subject to royalties" on the first 100 Microtels opened after the closing, 0.75% of such revenues for the next 150 Microtels opened, and 0.50% of such revenues for each Microtel opened after the first 250 have opened. "Revenues subject to royalties" generally are those payable by the franchisees to the Company based on gross room revenues, as well as other royalty payments payable by such franchisees under the applicable franchise agreement. The Company is entitled to all other fees (other than termination fees, which must be shared with Hudson) payable by the Microtel franchisees, including the franchise application fees, all of the remaining royalties, reservation and marketing fees and fees applicable to any financing arranged through the Company. The Microtel Acquisition Agreement requires the Company to satisfy a development schedule, which requires that new Microtel Properties be opened or under construction in the following numbers, on a cumulative basis, by December of each of the following years: Number of Microtel Year Properties(1) ------------------ --------------------- 1996 0 1997 50 1998 100 1999 175 2000 250 (1) Excluding (i) the 27 Microtels that were open or under construction or with respect to which franchise agreements had been executed or applications accepted at the time of the Microtel Acquisition and (ii) the 23 additional Microtels 31 (with respect to which eight franchise agreements have been executed since the closing of the Microtel Acquisition) and the 10 Microtel all-suites hotels that Hudson, its affiliates and certain other persons are entitled to franchise under the Microtel Acquisition Agreement. Under the Microtel Acquisition Agreement, the development schedule is deemed to have been complied with unless such schedule has not been met for two consecutive years (including 1996, where applicable). That is, the Company will not violate its development obligations under the Microtel Acquisition Agreement unless it has failed to meet the targets for two consecutive years. If, however, at the end of any two year period, at least 75% (but less than 100%) of the number of Microtel Properties scheduled to have been opened by such date have been opened, the Microtel Acquisition Agreement permits the Company to cure the default by paying a fee of $1 million. Upon such payment, the Company will be deemed to have fully complied with the development schedule for such two year period (including when determining whether it complies with such schedule in future periods). The Microtel Acquisition Agreement further provides that, in the event the Company fails to satisfy the development schedule, fails to pay any monies due to Hudson or otherwise fails to fulfill its material obligations under the Microtel Acquisition Agreement, in each case subject to the Company's right to cure such breach within the applicable notice and cure periods, all of the rights to the Microtel system and all operating assets associated therewith will revert to Hudson. In such instance, the Company will, however, retain the rights to any franchise royalty payments due to it under franchise agreements entered into by the Company after the closing of the Microtel Acquisition, less a servicing fee payable to Hudson in an amount equal to 0.75% of all revenues subject to royalties under such agreements. Also in connection with the Microtel Acquisition, Hudson agreed to provide consulting services to the Company over the three-year period beginning October 5, 1995, for which the Company agreed to pay Hudson a total of $700,000 ($400,000 of which was paid at the closing of the Microtel Acquisition). The Company also received warrants to purchase 100,000 common shares of Hudson at an exercise price of $8.375 per share. The warrants expire on September 1, 2000. Hawthorn Acquisition. On March 27, 1996, the Company entered into the Hawthorn Acquisition Agreement with HSA, an entity indirectly controlled by the Pritzker family, pursuant to which the Company acquired the exclusive, worldwide rights to franchise and to control the development and operation of the Hawthorn Suites brand of hotels (the "Hawthorn Acquisition"). In connection with the Hawthorn Acquisition, HSA also assigned to the Company all of HSA's rights in the licenses (other than the right to receive royalty payments) for the then existing Hawthorn Suites brand hotels (the "Existing Hawthorn Hotels"), HSA's agreement with Regency to provide reservation support services and certain other agreements relating to the operation of the Hawthorn Suites brand hotels. No money was paid by the Company at the closing of the Hawthorn Acquisition. The Company is, however, required to make royalty payments to HSA under circumstances described below. Under the Hawthorn Acquisition Agreement, the Company remits to HSA all franchise royalty fees paid to the Company by franchisees of the Existing Hawthorn Hotels, with the Company and HSA generally dividing royalty fees paid with respect to any Hawthorn Suites brand hotels opened subsequent to the Hawthorn Acquisition (the "New Hotels"), as described below. All other fees and other charges payable under the licenses for the Existing Hawthorn Hotels or New Hotels, including marketing and advertising fees and origination or initial franchise application fees, will be retained by the Company. Pursuant to the Hawthorn Acquisition Agreement, as indicated on the chart below, the percentage of such royalties payable to HSA will decrease as the aggregate number of rooms in New Hotels increases. Division of Franchise Royalties Rooms(1) HSA Company --------------------- ------- ---------- First 3,600 Rooms: 66.7% 33.3% Next 3,150 Rooms: 50.0% 50.0% Next 2,160 Rooms: 37.5% 62.5% Next 4,410 Rooms: 33.3% 66.7% Above 13,320 Rooms: 25.0% 75.0% (1) For this purpose, a suite is considered to be one "room". 32 In the event, however, that the Company fails to achieve certain specified development milestones (the "Royalty Reduction Standard"), the royalty fees payable to HSA will increase. Specifically, the amount of additional royalty fees payable to HSA during the period that the Company fails to comply with the Royalty Reduction Standard is determined by multiplying the Company's share of royalty fees (in dollars) for the calendar quarter in which the default occurs by a fraction, the numerator of which is the number of additional Qualified License Agreements required in order for the Company to comply with the Royalty Reduction Standard and the denominator of which is the minimum number of Qualified License Agreements required in order for the Company to have complied with the Royalty Reduction Standard. The Hawthorn Acquisition Agreement further provides that if the franchise royalty payable by a New Hotel is less than 4% of that hotel's gross room revenue, the percentage of the royalty payable to HSA for that particular hotel will increase. The Hawthorn Acquisition Agreement also restricts the Company's ability to franchise other hotel brands for certain periods if the Company fails to meet certain development targets. Specifically, the agreement provides that unless and until such time as the Company's franchisees have opened 175 Hawthorn Suites with a minimum aggregate total of 11,375 rooms ("Hawthorn Brand Saturation"), the Company generally may not franchise another all-suite hotel brand. The Company's new combined extended-stay/transient all-suite hotel property, Hawthorn Suites LTD, may be counted toward Hawthorn Brand Saturation so long as they are "all suite" hotels, as defined below. The Company may, however, franchise Microtel Suites at any time so long as they cost $40,000 (subject to adjustment for inflation) or less per suite to build, excluding the cost of land. For purposes of the Hawthorn Acquisition Agreement, a hotel that is at least 50% suites or uses "suites" in its name is an "all-suite" hotel. If the Company decides to franchise or license another all-suite hotel brand after Hawthorn Brand Saturation is achieved, HSA retains the option within a limited period to sell its right and interest in the Hawthorn Suites brand and system of operation, including the relevant intellectual property and the royalty stream, to the Company for a sum equal to 10 times the franchise royalty fees earned or accrued by HSA in the 12 months prior to such sale. Until the earlier of June 26, 1998 and the date on which Hawthorn Brand Saturation is achieved, the Company is restricted from franchising any lodging brand other than (i) Hawthorn Suites hotels, (ii) Microtel hotels and (iii) other limited-service, non-suite hotels with an ADR of $49 and under. In addition, until June 26, 1997, the Company must also refrain from franchising any non-lodging brands. Until Hawthorn Brand Saturation is achieved, the Company is obligated to receive HSA's approval for any material changes in its approved standard form franchise agreement, and all UFOCs and related materials delivered to prospective franchisees. The Hawthorn Acquisition Agreement also requires that the Company have a total of at least 15 full-time sales persons selling licenses for the Hawthorn Suites and Microtel brands and that the Company spend more than $100,000 in each of 1996 and 1997 to promote the Hawthorn Suites brand. The Hawthorn Acquisition Agreement requires that the Company adhere to a development schedule under which a minimum number of Qualified License Agreements must be executed as of certain dates (the "Termination Standard"). The term Qualified License Agreements is defined in the Hawthorn Acquisition Agreement to mean a license granted by the Company to use the Hawthorn brand, provided that (i) the licensed hotel is an all-suites hotel (i.e., a hotel in which at least 50% of the rooms are suites or that uses "suites" in its name) with more than 40 suites, (ii) the Company has received all application fees from the licensee and (iii) the licensee either owns or controls through long-term lease the land on which the hotel is located or to be constructed. If any of these development milestones are not met and the default has not been cured prior to the delivery of a default notice, HSA may elect to terminate the Hawthorn Acquisition Agreement. If HSA opts to terminate the Hawthorn Acquisition Agreement, the Company may only retain a percentage of the franchise royalties to which it would otherwise be entitled on previously opened hotels. The portion retained by the Company ranges from 15% to 40% of the franchise royalties it would have received but for the termination, depending on the percentage of the Termination Standard achieved. As noted above, in the event that the Company surpasses the Termination Standard, but fails to meet the higher Royalty Reduction Standard, or for such time as HSA opts not to terminate for failure to achieve the Termination Standard, the percentage of franchise royalties payable to HSA increases. 33 The minimum development requirements are as follows: Development Schedule (Qualified License Agreements) Royalty Reduction Date Standard Termination Standard ------------------ --------------------------------------- June 27, 1997 20 10 December 27, 1997 30 N/A June 27, 1998 40 20 June 27, 1999 65 40 June 27, 2000 90 60 June 27, 2001 115 80 June 27, 2002 140 100 The Hawthorn Acquisition Agreement may also be terminated by the mutual agreement of the parties or in various other circumstances, including, at the election of HSA, on the death, disability, retirement, resignation or termination of the employment of Michael A. Leven as Chief Executive Officer of the Company prior to a permitted transfer of the Company's rights under such agreement or, if earlier, prior to such time as the Royalty Reduction Standard has been met or the Hawthorn Brand Saturation achieved. If the Hawthorn Acquisition Agreement is terminated for any reason, HSA has the right to require the Company to continue to administer the licenses for Hawthorn Suites brand hotels then in effect as of the date of such termination for up to one year in exchange for a fee equal to 0.5% of the gross room revenues of such hotels. Seasonality In the future, royalties generated by gross room revenues of franchised properties are expected to be the principal source of revenue for the Company. As a result, the Company expects to experience seasonal revenue patterns similar to those experienced by the lodging industry generally. Accordingly, the summer months, because of increases in leisure travel, are expected to produce higher revenues for the Company than other periods during the year. See "Management's Discussion and Analysis of Financial Condition and Results of Operations". Competition Competition among national brand franchisors and smaller chains in the lodging industry to grow their franchise systems is intense. The Company believes that competition for the sale of lodging franchises is based principally upon (i) the perceived value and quality of the brand, (ii) the nature and quality of services provided to franchisees, (iii) the franchisee's view of the relationship of building or conversion costs and operating expenses to the potential for revenues and profitability during operation and upon sale and (iv) the franchisee's ability to finance and sell the property. The Company's franchisees are generally in intense competition for guests with franchisees of other hotel chains, independent properties and owner-operated chains. The success of the Company's franchisees 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 convenience of location. Both among consumers and potential franchisees, Microtel competes with budget and economy hotels such as Comfort Inn(R), Days Inn(R), Econo Lodge(R), Fairfield Inn(R), Sleep Inn(R), Red Roof Inn(R), Budgetel Inn(R), Super 8(R), Ramada Limited(R), Motel 6(R), Jameson Inns(R), Travelodge(R), Thriftlodge(R), Knights Inn(R), Red Carpet Inn(R) and Scottish Inns(R). In the upscale, extended-stay sector, Hawthorn Suites hotels compete for consumers and potential franchisees with Residence Inn(R), Homewood Suites(R), Summerfield Suites(R) and Woodfin Suites(R). In the transient suites sector of the lodging industry, where the Company will be competing through its Hawthorn Suites LTD brand, the Company's principal competitors will include AmeriSuites(R), Hampton Inn and Suites(R), Fairfield SuitesSM, MainStaySM, CandlewoodSM, Wingate InnSM, Towne PlaceSM and Courtyard by Marriott(R), among others. Many of the Company's competitors are affiliated with larger chains with substantially more properties, greater marketing budgets and greater brand identity than the Company. There can be no assurance that the Company can franchise a sufficient number of properties to generate the operating efficiencies to enable it to compete with these larger chains. 34 Regulation The sale of franchises is regulated by various state laws, as well as by the FTC. The FTC requires that franchisors make extensive disclosure to prospective franchisees, although it does not require registration of offers to prospective franchisees. The required disclosure is made through a Uniform Franchise Offering Circular (a "UFOC"), which must be provided to potential franchisees at least 10 days prior to execution of a franchise agreement. A number of states require registration and disclosure in connection with franchise offers and sales. In addition, several states have "franchise relationship laws" that limit the ability of franchisors to terminate franchise agreements or to withhold consent to the renewal or transfer of these agreements. While the Company's franchising operations currently are not materially adversely affected by such regulations, the Company cannot predict the effect any future legislation or regulation may have on its business operations or financial condition. Additionally, various national, state and local laws and regulations may affect activities undertaken by the Company in connection with the Franchisee Financing Facility and the PMC Agreement. 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 NACC and PMC under such programs or in the event the Company determines to make loans itself under the Franchisee Financing Facility. See "--Special Programs--Franchisee Financing Facility" and "--PMC Agreement." Trademarks and Licenses The Company owns and uses certain trademarks and service marks, including, among others, US FRANCHISE SYSTEMS, USFS, US FUNDING CORP., MICROTEL, MICROTEL with design, MICROTEL INN, MICROTEL SUITES, MICROTEL INN & SUITES, AMERICAN DREAM, AMERICAN DREAM BY MICROTEL, "FIRST THE HOTEL, THEN THE MOTEL, NOW MICROTEL" and "SAVINGS YOU CAN SLEEP ON". The Company's rights to such trademarks and service marks will last indefinitely so long as the Company continues to use and police the marks and, with respect to registered marks, to renew filings with the applicable government agencies. Pursuant to the Hawthorn Acquisition Agreement, the Company is the exclusive licensee of the Hawthorn Suites brand of hotels. Pursuant to such right, the Company uses certain other marks, including, among others, HAWTHORN SUITES, the tree logo, HAWTHORN SUITES with the tree logo and the Company's newly created brand, HAWTHORN SUITES LTD. Upon the expiration of the 99-year term of the Hawthorn Acquisition Agreement (unless sooner terminated), HSA will transfer all of its right, interest and title in those marks to the Company. The Company considers the foregoing marks to be material to its business and certain of such marks are registered with or applications for registration are pending in the United States Patent and Trademark Office. Certain of the marks are also registered with or applications for registration are pending with various state and foreign government agencies. The Company is not aware of any adverse claim concerning its owned or licensed marks. Employees As of October 7, 1996, the Company had 73 employees. None of the Company's employees are represented by unions. The Company considers its employee relations to be satisfactory. 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 10,083 square feet of office space at the foregoing address, pursuant to a lease that expires September 30, 2000. The Company expects to leave its current office space due to its growth and therefore is in the process of discussing with its landlord the possibility of leasing additional space in the office park in which its current office is located. Legal Proceedings The Company is not a party to any material litigation. However, claims and litigation may arise in the normal course of business. 35 MANAGEMENT Directors and Executive Officers The following table sets forth certain information with respect to the directors and executive officers of the Company and their ages as of October 1, 1996. Name Age Office or Position Held - ----------------------- ----- ----------------------------------------------- Michael A. Leven 58 Chairman, President and Chief Executive Officer Neal K. Aronson 31 Executive Vice President, Chief Financial Officer and Director David E. Shaw, Sr. 53 Executive Vice President--Administration Steven Romaniello 29 Executive Vice President--Franchise Sales and Development Dean S. Adler 39 Director Irwin Chafetz 60 Director Richard D. Goldstein 44 Director Jeffrey A. Sonnenfeld 42 Director Barry S. Sternlicht 35 Director Each director is elected to serve until a successor is elected and qualified or, if earlier, until the director's death, resignation or removal. Officers, subject to the terms of their respective employment agreements, serve at the pleasure of the Board of Directors. See "--Employment Agreements". Each of the directors of the Company, other than Dean Adler and Jeffrey A. Sonnenfeld, has served as such since September 30, 1995. Messrs. Adler and Sonnenfeld were elected to the Board of Directors on October 11, 1996, effective as of the effective date of the Registration Statement of which this Prospectus is a part. Certain additional information concerning the persons listed above is set forth below. Michael A. Leven, Chairman, President and Chief Executive Officer. Mr. Leven has been Chairman, President and Chief Executive Officer of the Company since October 1995. From October 1990 to September 1995, Mr. Leven was President and Chief Operating Officer for Holiday Inn Worldwide in Atlanta, Georgia. From April 1985 to May 1990, he was President and Chief Operating Officer of Days Inn of America, Inc. in Atlanta, Georgia. Mr. Leven is a director of Starwood Lodging Trust, the nation's largest hotel REIT. Mr. Leven is also a member of the Board of Governors of the American Red Cross, a Director of the Biomedical Services Board of the American Red Cross and a Trustee of National Realty Trust, the largest franchisee of Coldwell Banker Corporation, a subsidiary of HFS Incorporated. On September 27, 1991, approximately 16 months after Mr. Leven resigned from Days Inn, Days Inn filed a voluntary petition under Chapter 11 of Title 11 of the United States Bankruptcy Code. Mr. Leven is an uncle of Mr. Aronson. Neal K. Aronson, Executive Vice President, Chief Financial Officer and Director. Mr. Aronson has been Executive Vice President and Chief Financial Officer of the Company since October 1995. Mr. Aronson was the founding partner of Growth Capital Partners in New York, New York, and was with the partnership from September 1994 to October 1995. From December 1993 to September 1994, he was Managing Director of Rosecliff, Inc., a private equity investment group in New York, New York. From January 1992 to December 1993, he was a principal of Odyssey Partners, L.P. in New York, New York. From June 1989 to December 1991, Mr. Aronson was a principal of Acadia Partners, L.P. in New York, New York. Mr. Aronson is a nephew of Michael A. Leven. David E. Shaw, Sr., Executive Vice President, Administration. Mr. Shaw has been Executive Vice President, Administration of the Company since October 1995. From January 1991 to September 1995 he was Vice President of Operations Administration for Holiday Inn Worldwide in Atlanta, Georgia. From July 1990 to January 1991, Mr. Shaw was Executive Vice President, Administration for Hospitality Franchise Systems, Inc. (now known as HFS Incorporated) in Wayne, New Jersey. Steven Romaniello, Executive Vice President, Franchise Sales and Development. Mr. Romaniello has been Executive Vice President, Franchise Sales and Development of the Company since August 1996. From October 1995 through July 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. 36 Dean S. Adler, Director. Since 1988, Mr. Adler has been a principal and Managing Director of private equity investments for CMS Companies ("CMS"), a Philadelphia based investment firm that manages approximately $1.7 billion of assets. Mr. Adler is a member of the Board of Directors of the Lane Company, which specializes in the management and development of multifamily housing, Jacoby Development, Inc., which specializes in shopping center development, and RMS Technologies, a leading provider of information technology services to federal and other governmental institutions. Irwin Chafetz, Director. Since 1990, Mr. Chafetz has been the President and a Director of Interface Group-Massachusetts, Inc., a privately held company that owns and operates GWV International, New England's largest tour operator. From 1990 until April 1995, Mr. Chafetz was a Vice President and Director of the Interface Group-Nevada, Inc., which owned and operated COMDEX, a computer trade show that is the largest American trade show. From 1989 to 1995, Mr. Chafetz was also a Vice President and a director of Las Vegas Sands, Inc., which owned the Sands Hotel and Casino in Las Vegas and the adjacent Sands Expo and Convention Center. Mr. Chafetz is a member of the Board of Directors of Syratech Corporation, a New York Stock Exchange listed company, and of Back Bay Restaurants Group, Inc., a Nasdaq company. Richard D. Goldstein, Director. Since 1990, Mr. Goldstein has been a Managing Director of Alpine Capital Group Inc., a specialized investment banking firm located in New York. Prior to joining Alpine, Mr. Goldstein was a partner at the law firm of Paul, Weiss, Rifkind, Wharton & Garrison. Mr. Goldstein serves as Trustee, member of the Executive Committee and Treasurer of the Queens College Foundation, Trustee of the North Shore Hospital System and a member of the Corporate Advisory Board of the State University of New York at Stony Brook. Jeffrey A. Sonnenfeld, Director. Since 1989, Mr. Sonnenfeld has been a Professor of Organization and Management at the Goizueta Business School of Emory University in Atlanta, Georgia, where Mr. Sonnenfeld is currently the Director of the Center for Leadership & Career Studies. Mr. Sonnenfeld has published five books and numerous articles in the areas of career management, executive training and development, and the management of corporate social performance. Mr. Sonnenfeld serves on the Board of Directors of the American Association of Retired Persons, Moseley Securities Corporation, National Council on the Aging, Transmedia-CBS, Inc., and the Hyatt Executive Travel Council. Barry S. Sternlicht, Director. Since 1993, Mr. Sternlicht has been the President and Chief Executive Officer of Starwood Capital Group, L.P. ("Starwood Capital"), a real estate investment firm that he founded in 1993. From 1991 to 1993, Mr. Sternlicht was the President of Starwood Capital Partners, L.P., predecessor of Starwood Capital. Mr. Sternlicht is the Chairman of the Board of Starwood Lodging Trust, the nation's largest hotel REIT, in which Starwood Capital controls 30% of the stock. He is the co-Chairman of the Board of Westin Hotel & Resorts Company, which Starwood purchased in 1995 for $537 million. Mr. Sternlicht is also a trustee of Equity Residential Properties Trust, a multi-family REIT, and of Angeles Participating Mortgage Trust, which is also a REIT. Agreements Regarding Board Positions Pursuant to the terms of a Stockholders' Agreement entered into in connection with the initial capitalization of the Company (the "Old Stockholders' Agreement"), the original investors in the Company (the "Original Investors"), which included Messrs. Leven and Aronson, agreed to cause the Board of Directors to consist of five members and to vote their shares of Old Common Stock to elect as a director the stockholder of the Company or his nominee (other than Messrs. Leven and Aronson) holding, together with his immediate family members, the largest number of shares of Old Common Stock. Irwin Chafetz, together with his two sons, has been the largest stockholder of the Company (other than Messrs. Leven and Aronson) since the initial capitalization of the Company and was elected to the Board pursuant to this provision. Pursuant to the Old Stockholders' Agreement, the Original Investors also agreed to vote their shares of Old Common Stock in favor of the election of Messrs. Leven and Aronson as directors of the Company and granted Mr. Leven the right to nominate persons to fill the remaining two board positions. Pursuant to this provision, Mr. Leven nominated Messrs. Goldstein and Sternlicht to serve as directors, who were then elected to serve as such by the Original Investors. The foregoing governance provisions were deleted as part of amendments to the Old Stockholders' Agreement that will become effective simultaneously with the completion of the Offering. See "Certain Relationships and Related Transactions--Transactions Entered into in Connection with the Offering--Restated Stockholders' Agreement". 37 Compensation of Directors In 1995, directors of the Company were not paid any cash compensation for their services but were reimbursed for their out-of-pocket expenses. The Company recently adopted a stock option plan for its non-employee directors, the material terms of which are described in "--Stock Option Plans--Directors Plan" below, and authorized the payment of $5,000 annually to each director as compensation for services provided. Messrs. Leven and Aronson, as employees of the Company, are not eligible to participate in the Directors Plan (as defined below), and accordingly, will receive no compensation as directors other than $5,000 in annual compensation and reimbursement for out-of-pocket expenses incurred in connection with their service as directors. Executive Compensation The following table sets forth information with respect to the compensation of Michael A. Leven, the Company's Chairman, President and Chief Executive Officer, and Neal K. Aronson, Executive Vice President and Chief Financial Officer of the Company. No other executive officers of the Company received salary and bonus in excess of $100,000 for the period from August 28, 1995, the date of the Company's inception, through December 31, 1995. The Company anticipates that during 1996, its most highly compensated officers and their estimated salaries will be: Mr. Leven ($375,000), Mr. Aronson ($200,000), Steven Romaniello ($100,000) and David Shaw, Sr. ($150,000). In addition to their respective base salaries, Messrs. Leven, Aronson and Romaniello will each receive a bonus based on the number of franchises sold during 1996. See "--Employment Agreements". The Company may also pay discretionary bonuses. Summary Compensation Table
Long Term Compensation ---------------------------------- 1995 Awards Payouts ----------------------- --------- Annual Compensation Restricted ---------------------------------------- Name and Principal Other Annual Options/ LTIP All Other Position Salary Bonus Compensation Stock Awards SARs Payouts Compensation - ------------------ ----------------------- --------------- ------------- --------- --------- --------------- Michael A. Leven - ------------------ Chairman, President and Chief Executive Officer $93,750 $153,000(1)(2) $0 -- -- -- -- - ------------------ Neal K. Aronson - ------------------ Executive Vice President and Chief Financial Officer $50,000 $151,500(1)(2) $0 -- -- -- -- - ------------------
(1) Mr. Leven and Mr. Aronson each received a transaction bonus of $150,000 for their efforts in organizing the Company and successfully negotiating and completing the Microtel Acquisition on behalf of the Company. (2) Mr. Leven and Mr. Aronson, pursuant to the terms of their respective employment agreements with the Company, are each entitled to receive bonuses based upon the number of franchises sold each year. See "--Employment Agreements". During 1995, neither Mr. Leven nor Mr. Aronson received a bonus for the three franchises sold during 1995, although the Company accrued $3,000 and $1,500 for bonuses owed to Mr. Leven and Mr. Aronson, respectively, with respect to such franchise agreements. Employment Agreements The Company has entered into employment agreements with Messrs. Leven and Aronson, the material terms of which are described below. Michael A. Leven. Mr. Leven's employment agreement with the Company provides for his employment as Chairman of the Board of Directors, President and Chief Executive Officer of the Company for a 10-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. 38 Mr. Leven's employment agreement provides for a performance bonus of (i) $1,000 for each franchise agreement executed in a given Year (defined as each 12 month period commencing October 1st and ending on September 30th of each year during the term of such agreement) up to 150 franchise agreements and (ii) $2,000 for each franchise agreement above the first 150 franchise agreements entered into in a given Year. Mr. Leven's employment agreement also contains confidentiality provisions that prohibit him from disclosing company trade secrets at any time in the future and from disclosing any confidential information relating to the Company for a period extending five years after the termination of his employment agreement. In addition, the agreement contains non-competition provisions that prohibit Mr. Leven from competing in the franchising business generally and in the business of franchising, operating or managing of hotels and motels for a period of five years following the termination of his employment for "cause" or his resignation without "good reason". The enforceability of these non-disclosure and non-competition provisions under Georgia law, which governs Mr. Leven's agreement, is uncertain. In addition to allowing Mr. Leven to resign at any time for "good reason", his employment agreement provides that, after the first five years of such agreement and provided the Redeemable Preferred Stock has been redeemed, Mr. Leven may resign at any time upon six months notice. If his resignation is without "good reason", the Company is required to pay Mr. Leven only his base salary, unused vacation time, and performance bonus actually earned through the effective date of resignation. The employment agreement further provides that if Mr. Leven resigns without good reason during the first five years, he will not be liable for any consequential damages or damages for loss of economic opportunity or profits to the Company. If Mr. Leven resigns for "good reason", or if his employment is terminated "without cause", he is entitled to severance pay in accordance with the terms of his employment agreement. For the purpose of Mr. Leven's employment agreement, "good reason" includes, but is not limited to, the failure to elect and continue Mr. Leven's membership on the Board of Directors of the Company or his involuntary relocation outside of Atlanta, Georgia. In addition, pursuant to the Company's By-Laws, Mr. Leven's employment agreement may not be terminated without the approval of 75% of the Board of Directors (excluding Mr. Leven). Neal K. Aronson. Mr. Aronson's employment agreement, pursuant to which he is to serve as Chief Financial Officer of the Company, is substantially similar to Mr. Leven's agreement, except that (i) his base salary is $200,000 per year, (ii) the term life insurance benefit is $500,000, (iii) his automobile allowance is $750 per month, (iv) the bonus is $500 for each franchise agreement executed within a Year (as defined above) up to 150 franchise agreements, and $1,000 for each agreement executed in any Year in excess of 150 and (v) Mr. Aronson is not entitled to receive long-term disability or long-term home care insurance coverage from the Company. Pursuant to the Company's By-Laws, Mr. Aronson's employment agreement may not be terminated without the approval of 75% of the Board of Directors (excluding Mr. Aronson). See "Principal Stockholders--Management's Shares of Common Stock" as to the effect of termination of employment on the Class A Common Stock held by Messrs. Leven and Aronson. Stock Option Plans 1996 Stock Option Plan. On September 27, 1996, the Board of Directors of the Company (the "Board") adopted, subject to the approval of the Company's stockholders, the U.S. Franchise Systems, Inc. 1996 Stock Option Plan (the "Option Plan"). The Company's stockholders approved the Option Plan on October 11, 1996. The following is a summary of the material features of the Option Plan. The purpose of the Option Plan is to promote the interests of the Company and its stockholders by (i) attracting and retaining exceptional officers and other key employees of the Company and its subsidiaries; (ii) motivating such individuals by means of performance-related incentives to achieve long-range performance goals and (iii) enabling such individuals to participate in the long-term growth and financial success of the Company. Any officer or other key employee of the Company or any of its subsidiaries who is not a member of the committee that administers the Option Plan (the "Option Committee") shall be eligible to participate under the Option Plan. The Option Committee consists of two or more members of the Board designated by the Board to administer the Option Plan, each of whom is intended to be a "Non-Employee Director" (within the meaning of Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) and an "outside director" (within the meaning of Internal Revenue Code (the "Code") section 162(m)) to the extent Rule 16b-3 and section 162(m), respectively, are applicable to the Company. 39 The Option Plan authorizes the grant of awards to participants of a maximum of 325,000 shares of the Company's Class A Common Stock ("Shares"), which maximum number is subject to adjustment in certain circumstances to prevent dilution or enlargement. Awards under the Option Plan may be made in the form of (i) nonqualified stock options and (ii) stock options intended to qualify as incentive stock options under section 422 of the Code; provided that the maximum number of Shares with respect to which stock options may be granted to any participant in the Option Plan in any calendar year may not exceed 250,000. If, after the effective date of the Option Plan, any Shares covered by an award granted under the Option Plan, or to which such an award relates, are forfeited, or if an award has expired, terminated or been canceled for any reason whatsoever (other than by reason of exercise), then the Shares covered by such award shall again be, or shall become, Shares with respect to which awards may be granted under the Option Plan. Non-qualified and incentive stock options granted under the Option Plan shall be subject to such terms, including exercise price and timing of exercise, and conditions as may be determined by the Option Plan 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 Option Plan 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) subject to such rules as may be established by the Committee, through delivery of irrevocable instructions to a broker to sell the Shares being acquired upon exercise of the option and to deliver promptly to the Company an amount equal to the aggregate exercise price, or by a combination of the foregoing. The Board may amend, alter, suspend, discontinue or terminate the Option Plan or any portion thereof at any time; provided that no such amendment, alteration, suspension, discontinuation or termination shall be made without stockholder 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 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). Directors Plan. On September 27, 1996, the Board of Directors adopted, subject to the approval of the Company's stockholders, the U.S. Franchise Systems, Inc. 1996 Stock Option Plan for Non-Employee Directors (the "Directors Plan"). The Directors Plan was approved by the Company's stockholders on October 11, 1996. The purpose of the Directors Plan is to secure for the Company the benefits of the additional incentive inherent in the ownership of Shares by non-employee directors of the Company and to help the Company secure and retain the services of such non-employee directors. The Directors Plan is intended to be a self-governing formula plan. To this end, the Directors Plan requires minimal discretionary action by any administrative body with regard to any transaction under the Directors Plan. To the extent, if any, that questions of administration arise, such issues will be resolved by the Board of Directors. Eligible persons under the Directors Plan are directors of the Company who are not employees of the Company or any affiliate of the Company ("Outside Directors"). A maximum of 125,000 Shares has been reserved by the Company for issuance pursuant to options under the Directors Plan, which number is subject to adjustment in certain circumstances in order to prevent dilution or enlargement. If, after the effective date of the Directors Plan, any Shares covered by an award granted under the Directors Plan, or to which such an award relates, are forfeited, or if an award has expired, terminated or been canceled for any reason whatsoever (other than by reason of exercise), then the Shares covered by such award shall again be, or shall become, Shares with respect to which awards may be granted under the Directors Plan. As of the effective date of the Offering, each Outside Director will be granted an option to purchase 2,000 shares of Class A Common Stock. Thereafter, each person who is an Outside Director as of January 1st of each calendar year during the term of the Directors Plan shall receive an option to purchase 2,000 shares of Class A Common Stock as of such date. All options granted under the Directors Plan shall be "nonqualified" stock options subject to the provisions of section 83 of the Code. Options shall become exercisable on the first anniversary of the date of grant provided that the optionee shall continue to serve as a director of the Company on such date, and shall terminate on the earliest of the following: (i) the expiration of ten years from the date of grant, (ii) the expiration of one year from the termination of the optionee's 40 service as an Outside Director due to death or disability, (iii) the date the optionee's service as an Outside Director terminates for cause (as defined in the Directors Plan) and (iv) the expiration of three months from the date the optionee's service as an Outside Director terminates other than by reason of death, disability or cause. The exercise price per share of Class A Common Stock purchasable under each option granted upon the consummation of the Offering shall be the initial public offering price per share, and the exercise price per share of Class A Common Stock purchasable under all other options granted under the Directors Plan shall be the Fair Market Value (as defined in the Directors Plan) of a share of Class A Common Stock on the date the option is granted. Shares of Class A Common Stock purchased upon the exercise of an option are to be paid for in cash, check or money order or by shares of Class A Common Stock owned by the optionee for at least six months prior to exercise. The Directors Plan may be terminated or amended at any time by the Board of Directors; provided that (i) such amendment complies with all applicable laws and applicable stock exchange listing requirements, (ii) the provisions of the Directors Plan with respect to eligibility for participation or the timing or amount of grants of awards and the option price shall not be amended more than once every six months (other than to comport with changes in the Code or the Employee Retirement Income Security Act of 1974, as amended) and (iii) any amendment for which stockholder 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 (provided that the Company is subject to the requirements of such section as of the date of such action), shall not be effective until such approval has been obtained. 41 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Transactions Entered into in Connection with the Offering Reclassification. In connection with the Offering, the Company intends to effect the Reclassification. Pursuant to the Reclassification, each share of Old Common Stock will be converted into 9.67 shares of Class A Common Stock. Also in connection with the Offering, pursuant to the 1996 Amendment (see "Principal Stockholders--Management's Shares of Common Stock"), Mr. Leven, his wife, Andrea Leven, and Mr. Aronson will exchange 2,707,919 shares of Class A Common Stock held directly by them (which shares do not include those shares of Class A Common Stock that will continue to be held as Restricted Shares (as defined herein) pursuant to the 1996 Amendment) for the same number of shares of Class B Common Stock. See "Description of Capital Stock--Common Stock" for a description of the relative rights of holders of Class A Common Stock and Class B Common Stock. Voting. Simultaneously with the completion of the Offering, Mr. Leven will enter into a voting agreement with his wife, Andrea, pursuant to which she will grant him the right to vote all of the 233,032 shares of Class A Common Stock and all of the 770,801 shares of Class B Common Stock to be owned by her following the Offering. At the same time, Mr. Leven will enter into a voting agreement with Mr. Aronson, pursuant to which Mr. Aronson will grant Mr. Leven the right to vote 111,347 shares of his Class A Common Stock and 311,007 shares of his Class B Common Stock. Mr. Aronson will continue to vote the remaining 1,198,466 shares of his Class B Common Stock. As a result of these agreements, Mr. Leven will vote a total of 942,440 shares of Class A Common Stock and 1,509,453 shares of Class B Common Stock, which shares together represent approximately 43.4% of the total outstanding voting power of the Company immediately following the Offering. Immediately following the Offering, Messrs. Leven and Aronson will have the right to vote a total of 1,773,533 shares of Class A Common Stock and 2,707,919 shares of Class B Common Stock, which will represent approximately 78% of the outstanding voting power of the Common Stock after the Offering. Accordingly, Messrs. Leven and Aronson will be able to (i) elect all of the Company's directors, (ii) amend the Charter with respect to most matters, (iii) effect a merger, sale of assets or other major corporate transaction, (iv) defeat an unsolicited takeover attempt and (v) generally direct the affairs of the Company. However, Mr. Leven and Mr. Aronson do not have any agreements or other obligations to vote together on matters involving the Company. See "Risk Factors--Management, By Virtue of Ownership of Supervoting Class B Common Stock, Will Control the Company Following the Offering" and "Principal Stockholders--Management's Shares of Common Stock". Restated Stockholders' Agreement. Effective simultaneously with the closing of the Offering, the Company will amend and restate the Old Stockholders' Agreement that was entered into with the Original Investors in connection with the initial capitalization of the Company (the "Restated Stockholders' Agreement"). The purpose of the amendment is to remove certain voting and corporate governance provisions that were determined to be more suitable for a private company, including provisions (i) restricting the transfer of shares of Old Common Stock, (ii) authorizing each of the Original Investors to cause the Company's remaining stockholders to sell their interests in the Company in certain circumstances, (iii) fixing the size of the Board of Directors at five, (iv) pursuant to which the Original Investors agreed to vote for Messrs. Leven and Aronson and the Original Investor (other than Messrs. Leven and Aronson) owning the most shares of Old Common Stock (or his nominee) as directors of the Company, (v) that generally prohibited Messrs. Leven and Aronson from transferring their shares of Old Common Stock for a three-year period ending in September 1998 and (vi) granting the Original Investors preemptive rights in certain circumstances. The Restated Stockholders' Agreement continues only to grant the Original Investors certain piggy-back registration rights, although such rights are not exercisable until 20% of the Company's outstanding Common Stock has been registered under the Securities Act, and the right to cause the Company to file a registration statement under the Securities Act on one occasion, commencing September 29, 2000. See "Shares Eligible for Future Sale" and "Description of Capital Stock--Registration Rights". 1996 Amendment. See "Principal Stockholders--Management's Shares of Common Stock--1996 Amendment" for a description of amendments to Messrs. Leven's and Aronson's Old Stock Purchase Agreements and those of certain other executive officers of the Company. 42 Miscellaneous In consideration for their efforts in organizing the Company and negotiating and consummating the Microtel Acquisition, Messrs. Leven and Aronson each received a bonus of $150,000 from the Company. The Company has obtained $15 million of key man life insurance on the life of Mr. Leven. Howard and Lawrence Chafetz, sons of Irwin Chafetz, a director of the Company, have established a limited liability company to acquire and operate Microtels. To date, the limited liability company has not acquired any Microtel franchises or entered into any agreements with the Company regarding the same. The Company expects to invest from time to time in entities that make investments in Microtel and Hawthorn Suites franchisees with a successful track record of multi-unit development. The Company will receive management fees and other fees based on the total investments made by these entities. To date, no investments have been made by these entities. 43 PRINCIPAL STOCKHOLDERS The following table sets forth (i) as of October 1, 1996 and (ii) as adjusted for the Reclassification and the 1996 Amendment and for the sale by the Company of the shares of Class A Common Stock pursuant to the Offering, certain information regarding the beneficial ownership of the Class A Common Stock and the Class B Common Stock by each person known by the Company to be the beneficial owner of 5% or more of the outstanding Class A Common Stock or Class B Common Stock, by each of the Company's directors and by all directors and executive officers of the Company as a group. Unless otherwise indicated, the persons listed below have sole investment and sole voting power with respect to the shares of Class A Common Stock and Class B Common Stock listed across from their names in the table below. See "--Management's Shares of Common Stock" for a discussion of restrictions on certain shares of Class A Common Stock held by Mr. Leven and Mr. Aronson.
Beneficial Ownership Prior to the Offering and Beneficial Ownership Subsequent the Reclassification to the Offering --------------------- --------------------------------------------------- Shares of Shares Shares Total Name and Address of Common of of Total Voting Beneficial Owner Stock % Class A Class B Equity** Power ----------------------------------------- ------- -------------- --------------- ----------- -------- (Class A and Class B) Michael A. Leven 13 Corporate Square Suite 250 Atlanta, Georgia 30329 185,031(1) 16.6% 942,440(2) 1,509,453(3) 19.5% 43.4% Neal K. Aronson 13 Corporate Square Suite 250 Atlanta, Georgia 30329 233,223(4) 21.0% 942,440(5) 1,509,453(6) 19.5% 34.7% Dean Adler CMS Companies 1926 Arch Street Philadelphia, PA 19103 0 * 0 0 * * Irwin Chafetz (7) c/o The Interface Group 300 First Avenue Needham, MA 02194 30,000 2.7% 290,100 0 * * Richard D. Goldstein (8) c/o Alpine Microtel LLC 1285 Avenue of the Americas New York, NY 10019 16,500 1.5% 159,555 0 * * Andrea Leven c/o U.S. Franchise Systems, Inc. 13 Corporate Square Suite 250 Atlanta, Georgia 30329 103,809(9) 9.3% 233,032(10) 770,801(11) 8.0% * Jeffrey A. Sonnenfeld 1602 Mizell Drive Room 310 Atlanta, Georgia 30322 0 * 0 0 * * Barry Sternlicht (12) c/o Starwood Capital Group 3 Pickwick Plaza Greenwich, CT 06830 31,000 2.8% 299,770 0 * * All officers and directors as a group (9 persons)** 526,340 47.3% 2,818,725 2,707,919 43.9% 80.9%
* Represents less than 1% of the outstanding Common Stock, both in number and in terms of voting power. ** Duplications eliminated. 44 (1) Consists of (i) 31,422 shares held directly by Mr. Leven as Unrestricted Shares under his Old Stock Purchase Agreement, over which Mr. Leven has sole voting and investment power, (ii) 55,612 shares held by Mr. Leven's wife as Unrestricted Shares, (iii) 24,192 shares that were designated as Unrestricted Shares under the Old Stock Purchase Agreement, which have been reallocated to other members of management and are voted by them in the same manner that Mr. Leven votes his Unrestricted Shares, (iv) 25,608 shares that were designated as Restricted Shares under Mr. Leven's Old Stock Purchase Agreement, which are voted by Mr. Leven in the same proportion as the Original Investors (other than Messrs. Leven and Aronson) vote their shares and (v) 48,197 shares that were designated as Restricted Shares under Mr. Leven's Old Stock Purchase Agreement, which were given by Mr. Leven to his wife and are voted in the same proportion as the Original Investors (other than Messrs. Leven and Aronson) vote their shares. Mr. Leven disclaims beneficial ownership of the shares owned by his wife. The number shown in the table does not include 103,806 shares that have been transferred by Mr. Leven to his adult sons. (2) Consists of (i) 123,815 shares held directly by Mr. Leven, which will continue as Restricted Shares following the 1996 Amendment and as to which Mr. Leven has sole voting power, (ii) 233,032 Restricted Shares held by Mr. Leven's wife, which are voted by Mr. Leven, (iii) 365,012 Unrestricted Shares, which have been reallocated to other members of management and are voted in the same manner that Mr. Leven votes his shares, (iv) 109,234 shares that were designated as Restricted Shares pursuant to Mr. Leven's Old Stock Purchase Agreement, which have been reallocated to other members of management and by virtue of the 1996 Amendment 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. (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) 95,097 shares held directly by Mr. Aronson as Unrestricted Shares under his Old Stock Purchase Agreement, over which Mr. Aronson has sole voting and investment power, (ii) 16,127 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 Unrestricted Shares and (iii) 121,999 shares that were designated as Restricted Shares under Mr. Aronson's Old Stock Purchase Agreement, which are voted by Mr. Aronson in the same proportion as the Original Investors (other than Messrs. Leven and Aronson) vote their shares. (5) Consists of (i) 589,865 shares held directly by Mr. Aronson, which will continue as Restricted Shares following the 1996 Amendment and as to which Mr. Aronson has sole voting power, (ii) 109,234 shares that were designated as Restricted Shares pursuant to Mr. Aronson's Old Stock Purchase Agreement, which have been reallocated to other members of management and by virtue of the 1996 Amendment are voted by them in the same manner that Mr. Aronson votes his shares and (iii) 243,341 shares that were designated as Unrestricted Shares under the Old Stock Purchase Agreements, which have been reallocated to other members of management and are voted by them in the same manner that Mr. Aronson votes his shares. Mr. Aronson has transferred voting power to Mr. Leven with respect to 111,347 of such shares. (6) 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. (7) Prior to the 1996 Amendment, Mr. Chafetz, by virtue of provisions in the Old Stock Purchase Agreements that required Messrs. Aronson and Leven to vote their Restricted Shares in the same manner and the same proportion as the Original Investors (other than Messrs. Leven and Aronson), effectively had the right to vote a portion of such Restricted Shares. These provisions were eliminated in the 1996 Amendment. (8) Such shares are owned by G(2) Investment Partners, an investment partnership of which Mr. Goldstein is a general partner. Mr. Goldstein shares voting and investment power with respect to such shares. Prior to the 1996 Amendment, G(2) Investment Partners, by virtue of provisions in the Old Stock Purchase Agreements that required Messrs. Aronson and Leven to vote their Restricted Shares in the same manner and the same proportion as the Original Investors (other than Messrs. Leven and Aronson), effectively had the right to vote a portion of such Restricted Shares. These provisions were eliminated in the 1996 Amendment. (9) Consists of (i) 55,612 Unrestricted Shares of Old Common Stock received from Mr. Leven and (ii) 48,197 Restricted Shares of Old Common Stock received from Mr. Leven. 45 (10) Represents shares that were designated under Mr. Leven's Old Stock Purchase Agreement as Restricted Shares, which will continue as the same following the 1996 Amendment and which have been transferred to Mrs. Leven. Pursuant to a voting agreement to be entered into simultaneously with the closing of the Offering, Mrs. Leven has transferred voting power with respect to these shares to Mr. Leven. (11) 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 to be entered into simultaneously with the closing of the Offering, are voted by Mr. Leven. (12) Such shares are owned by Starwood Opportunity Fund II, L.P., a Delaware limited partnership whose general partner is Starwood Capital, which is indirectly controlled by Mr. Sternlicht. Prior to the 1996 Amendment, the holder of such shares, by virtue of provisions in the Old Stock Purchase Agreements that required Messrs. Aronson and Leven to vote their Restricted Shares in the same manner and the same proportion as the Original Investors (other than Messrs. Leven and Aronson), effectively had the right to vote a portion of such Restricted Shares. These provisions were eliminated in the 1996 Amendment. Personal Holding Company Tax. Under section 541 of the Code, a personal holding company is subject to a 39.6% tax on its undistributed personal holding company income (the "PHC Tax"). In order to be considered a personal holding company in any taxable year, a corporation must satisfy two tests. First, at any time during the last half of the taxable year more than 50% in value of its outstanding stock must be owned, directly or indirectly, by or for not more than five individuals (the "Stock Ownership Test"). Second, at least 60% of its adjusted ordinary gross income for the taxable year must be personal holding company income, which generally consists of passive forms of income such as dividends, interest, rents and royalties, as defined for tax purposes, but generally does not include income from the provision of services (the "Income Test"). Certain attribution rules that are included as part of the Stock Ownership Test could be interpreted in such a manner as to result in the Stock Ownership Test being satisfied in the case of the Company. While there can be no assurance that the Company will not satisfy both the Stock Ownership Test and the Income Test, the Company believes that the nature of its activities and its expected sources of income will be such that the PHC Tax will not apply. Management's Shares of Common Stock Background. On October 5, 1995, simultaneously with the closing of the Microtel Acquisition, Messrs. Leven and Aronson purchased 51% of the then outstanding Old Common Stock for an aggregate purchase price of $567,245 or $1.00 per share (the "Original Issue Price") (equal to approximately $.10 per share, as adjusted for the Reclassification). Twenty-five percent (25%) of the then outstanding Old 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 were reallocable 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 Old Common Stock in the form of Unrestricted Shares. The remaining shares of Old Common Stock acquired by Messrs. Leven and Aronson, representing 26% of the then outstanding Old Common Stock, 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 Old Common Stock in the form of Restricted Shares. Messrs. Leven and Aronson elected to be taxed on such shares pursuant to section 83(b) of the Code and therefore the Company will not be entitled to a deduction if the fair market value of such shares at the time the restrictions or the risks of forfeiture lapse is greater than the Original Issue Price. 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 Old Common Stock (the "Old Stock Purchase Agreements") to eliminate the restrictions with respect to one-half of the Restricted Shares, so that an additional 13% of the pre-Offering outstanding Old Common Stock will become Unrestricted Shares, effective as of the completion of the Offering (the "1996 Amendment"). See "--1996 Amendment" below for a description of the amendment. Reallocation of Shares. The Old Stock Purchase Agreements provide that Unrestricted Shares representing 5% of the Old Common Stock then outstanding and Restricted Shares representing 6% of the Old Common Stock 46 then outstanding are reallocable to other members of the Company's management. Such agreements further provide for the appointment of a Compensation Committee (which has subsequently been renamed the Stock Allocation Committee) to determine the exact allocation of shares to other members of the Company's management. The Stock Allocation Committee, which will continue in effect following the Offering, currently consists of Messrs. Leven, Aronson and Chafetz. By virtue of the 1996 Amendment, no further reallocations will be made. To date, the Stock Allocation Committee has allocated shares of Old Common Stock representing a total of approximately 7.7% of the pre-Offering outstanding Old Common Stock (approximately 3.6% from the Unrestricted Shares and approximately 4.1% from the Restricted Shares) to other members of management. By virtue of the 1996 Amendment, these holders are required to vote those reallocated 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 (prior to the 1996 Amendment, such management members were required to vote those reallocated shares that were Restricted Shares in the same manner and the same proportions as the Original Investors in the Company (other than Messrs. Leven and Aronson) voted their shares of Old Common Stock). With respect to those reallocated shares that are Unrestricted Shares, the 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 reallocation of the remaining reallocable shares (approximately 3.3% of the pre-Offering Old Common Stock) was eliminated by the 1996 Amendment. All shares which have been reallocated to other members of management pursuant to the Old Stock Purchase Agreements are subject to a vesting schedule, which provides that Unrestricted Shares vest over a five year period and Restricted Shares vest over a 10 year period, in each case provided that the management employee remains employed by the Company (and with Restricted Shares subject to further vesting requirements based on the Company's performance). Any unvested shares that are forfeited upon the termination of such employment are to be repurchased by the Company and resold to Mr. Leven or Mr. Aronson, as the case may be (depending on who owned the shares originally), at the Original Issue Price. Upon such resale, the shares continue as Unrestricted Shares or Restricted Shares in the same manner as had they not been so forfeited. Unrestricted Shares. Following the 1996 Amendment, there will be no restrictions on the Unrestricted Shares and such shares will not be subject to the risk of reallocation. 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") will impose, substantial risks of forfeiture on Restricted Shares. Prior to the 1996 Amendment, the Old Stock Purchase Agreements provided that, until such shares became "Earned Shares", there were substantial limitations on the holders' right to vote and to receive dividends with respect to such shares. For example, Messrs. Leven and Aronson and their permitted transferees were required to vote their Restricted Shares (other than those that become Earned Shares) in the same manner and the same proportions as the Original Investors (excluding Messrs. Leven and Aronson) voted their shares, and were generally not entitled to receive dividends with respect to Restricted Shares. Such limitations will be removed by the 1996 Amendment, so that Messrs. Leven and Aronson will be 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 13% of the pre-Offering outstanding Old Common Stock that is 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". The performance criteria that had to be achieved under the Old Stock Purchase Agreements in order for Restricted Shares to become Earned Shares were as follows: (1) 1/26 of the Restricted Shares would become Earned Shares 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), although no Restricted Shares would become Earned Shares until Adjusted EBITDA for a fiscal year reached or exceeded $3,000,000. 47 (2) The amount of Restricted Shares that could become Earned Shares was based on the highest annual Adjusted EBITDA at any time and from time to time. In all calculations, increments less than $1,000,000 were ignored. For example, if Adjusted EBITDA in a fiscal year was $3,000,000 to $3,999,999.99, then 3/26 of the Restricted Shares would become Earned Shares; if, thereafter, Adjusted EBITDA for a fiscal year was $10,100,000, then 10/26 (i.e., an additional 7/26) would become Earned Shares. Accordingly, all of the Restricted Shares would become Earned Shares only at such time as the Company had Adjusted EBITDA of $26,000,000 or more in a fiscal year. (3) Once Restricted Shares become Earned Shares, such shares are not affected by a decline in annual Adjusted EBITDA in subsequent fiscal years. However, once Adjusted EBITDA of $3,000,000 or more had been attained, if the annual Adjusted EBITDA declined in a subsequent fiscal year from the highest level at which Restricted Shares had become Earned Shares, additional Restricted Shares would not become Earned Shares until the average annual Adjusted EBITDA for the fiscal years including and following the year of such decline in annual Adjusted EBITDA was greater than the level of annual Adjusted EBITDA at which Restricted Shares were last earned. As of the date hereof, except pursuant to the 1996 Amendment, as described below, no Restricted Shares had become Earned Shares. Pursuant to the 1996 Amendment, one-half (i.e., 13/26) of the Restricted Shares will be deemed to be Earned Shares and will no longer be subject to the risk of Termination Forfeiture. Under both the Old Stock Purchase Agreements and the Amended Stock Purchase Agreements, Earned Shares (other than the 13% referred to above that were deemed to have been earned by virtue of the 1996 Amendment) will be permanently vested (i.e., they will no longer be subject to Termination Forfeiture) on September 29, 2005. Any Restricted Shares that have not become Earned Shares by September 29, 2005 will be redeemed by the Company at the Original Issue Price and offered to the Original Investors (other than Messrs. Leven and Aronson) pro rata at the Original Issue Price based on their original holdings of Old Common Stock. Under both the Old Stock Purchase Agreements and the Amended Stock Purchase Agreements, in the event that all or substantially all of the Company's stock or all or substantially all assets are transferred or sold, or upon a merger or other business combination, Earned Shares automatically become Unrestricted Shares. In addition, under both the Old Stock Purchase Agreements and the Amended Stock Purchase Agreements, any remaining Restricted Shares will automatically become Unrestricted Shares to the extent that value for the entire Company indicated by the gross sale price in such transaction results in an internal rate of return to the Original Investors of at least 40% on a compounded annual basis (after taking into account the amount and timing of all distributions and payments received by such Original Investors from the Company, after considering Unrestricted and Earned Shares then held by Messrs. Leven and Aronson, and after giving effect to Restricted Shares that become Unrestricted Shares as a result of such transaction). 1996 Amendment. The Company and Messrs. Leven and Aronson have agreed to amend their respective Old Stock Purchase Agreements, effective upon the completion of the Offering. The 1996 Amendment provides that (i) one-half of their Restricted Shares (representing approximately 11% of the Old Common Stock outstanding before the Offering) will be deemed to be Unrestricted Shares, notwithstanding the fact that performance criteria relating to Adjusted EBITDA have not been met, (ii) their remaining Restricted Shares (which constitute, in the aggregate, approximately 9% of the Old Common Stock outstanding before the Offering) will become Earned Shares at the rate of 1/13 of all of the remaining number of Restricted Shares (including the approximately 4% held by other members of management) for every $1,000,000 of annual Adjusted EBITDA, but only after Adjusted EBITDA for a fiscal year equals or exceeds $14,000,000, (iii) the Unrestricted Shares referred to in clause (i) above, will be vested and not subject to Termination Forfeiture, (iv) the Unrestricted Shares held by Messrs. Leven and Aronson and by Mr. Leven's wife, including the Unrestricted Shares referred to in clause (i) above, will be shares of Class B Common Stock (with ten votes per share), (v) 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, (vi) 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, (vii) no additional shares will be subject to reallocation to other members of management and (viii) 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 will also be 48 deemed to be Earned Shares. Such shares, representing approximately 2% of the Old Common Stock outstanding before the Offering, will be shares of Class A Common Stock and will be voted by the management holders thereof in the same manner that Mr. Leven votes his shares, as will any Restricted Shares still held by such management holders. Current Ownership. The following table sets forth, as of August 1, 1996, the ownership of the Unrestricted Shares and Restricted Shares, as a percentage of the then outstanding Common Stock prior to the Offering, and adjusted to take into account the 1996 Amendment.
Prior to the As Adjusted for the 1996 Amendment 1996 Amendment ----------------------------- ----------------------------- Unrestricted Restricted Unrestricted Restricted Total --------------- ------------- --------------- ------------- ---------- Michael A. Leven (1) 12.825% 10.969% 18.310% 5.480% 23.794% Neal K. Aronson 8.550 10.969 14.030 5.480 19.518 Other Members of Management (2) 3.625 4.062 5.660 2.040 7.688 --------------- ------------- --------------- ------------- ---------- 25.000% 26.000% 38.000% 13.000% 51.000% =============== ============= =============== ============= ==========
(1) Includes shares transferred from Mr. Leven to members of his immediate family in transactions permitted under his Old Stock Purchase Agreement. (2) Includes certain shares that were not included in the numbers referenced in note 1 above and that have been reallocated to Jonathan Leven and Robert Leven (employees of the Company and sons of Mr. Leven), as members of the Company's management, in accordance with the terms of Mr. Leven's Old Stock Purchase Agreement. See "Principal Stockholders" for details regarding the beneficial ownership of the foregoing shares, as adjusted for the Reclassification, the 1996 Amendment and the Offering. 49 SELLING STOCKHOLDERS The following table sets forth certain information regarding (i) the beneficial ownership of Class A Common Stock by the Selling Stockholders as of October 1, 1996 (adjusted for the Reclassification), (ii) the number of shares of Class A Common Stock being offered hereby by each Selling Stockholder and (iii) their beneficial ownership of the Class A Common Stock after the Offering. Unless otherwise indicated, each Selling Stockholder listed below has sole voting and investment power with respect to the shares listed across from its name in the table. No members of the Company's management or its Board of Directors will be selling shares pursuant to the Offering.
Beneficial Ownership Prior Beneficial Ownership to the Offering After the Offering ---------------------- Shares of Shares Class A Shares % of Class A Common Stock of Class A % of Total Name Common Stock % Being Sold Common Stock Equity Voting Power Ronald N. Beck 48,350 * 17,471 30,879 * * H. Pierre Eilian, M.D. 9,670 * 2,195 7,475 * * Jonathan D. Eilian 9,670 * 2,195 7,475 * * Nancy B. and Howard Feinglass 38,680 * 3,800 34,880 * * Sonia E. Gardner 38,680 * 8,782 29,898 * * Glenbrook Partners, L.P. 77,360 * 17,563 59,797 * * Goolock Associates 299,770 2.8% 68,057 231,713 1.8% * Indenture of Trust F/B/O Alyssa Michelle Berlin 49,955 * 11,342 38,613 * * Indenture of Trust F/B/O Elana Danielle Berlin 49,964 * 11,343 38,621 * * Indenture of Trust F/B/O Nicole Amy Berlin 49,964 * 11,343 38,621 * * Indenture of Trust F/B/O Jeremy J. Kaufthal 49,964 * 11,343 38,621 * * Indenture of Trust F/B/O Jonathan S. Kaufthal 49,964 * 11,343 38,621 * * Indenture of Trust F/B/O Joshua M. Kaufthal 49,955 * 14,343 38,612 * * Jeffrey J. Keenan 154,720 1.4% 5,269 149,451 1.2% * Marc Lasry 38,680 * 8,782 29,898 * * Leon Levy 145,050 1.4% 32,931 112,119 * * Microtopp Associates 328,780 3.1% 74,643 254,137 2.0% * David A. Mintz 19,340 * 3,866 15,474 * * Nash Grandchildren 1986 Trust 299,770 2.8% 100,000 199,770 1.6% * Donald Rechler 29,101 * 1,647 27,454 * * Rodger Rechler 29,101 * 1,317 27,784 * * Schwartz Microtel Investors, L.L.C. 336,266 3.1% 83,425 252,841 2.0% * Total 500,000
* Represents less than 1% of the outstanding Common Stock, both in number and in terms of voting power. 50 DESCRIPTION OF CAPITAL STOCK The following description of the Company's capital stock does not purport to be complete and is subject in all respects to applicable Delaware law and to the provisions of the Company's Charter and By-laws, as amended, copies of which have been filed as exhibits to the Registration Statement of which this Prospectus is a part. The authorized capital stock of the Company consists of 35,000,000 shares of Common Stock, par value $0.01 per share, of which 30,000,000 shares have been designated as Class A Common Stock and 5,000,000 shares have been designated as Class B Common Stock, and 1,000,000 shares of Preferred Stock, par value $.01 per share (the "Preferred Stock"), of which up to 525,000 have been designated as Redeemable Preferred Stock. Immediately after the completion of the Offering, 9,872,490 shares of Class A Common Stock will be outstanding and 2,707,919 shares of Class B Common Stock will be outstanding. In addition, 450,000 shares of Class A Common Stock will be reserved for issuance under the Option Plans and 2,707,919 shares of Class A Common Stock will be reserved for issuance upon conversion of Class B Common Stock. Currently, 163,500 shares of Redeemable Preferred Stock are outstanding. Common Stock Holders of the 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 on all matters to be voted upon by the stockholders. Holders of Class A Common Stock and Class B Common Stock do not have cumulative voting rights and, therefore, holders of shares possessing a majority of the voting power can elect all of the directors. In such event, the holders of the remaining shares will not be able to elect any directors. Holders of Class A Common Stock and Class B Common Stock are entitled to share ratably such dividends as may be declared from time to time by the Board of Directors out of funds legally available therefor, subject to the terms of the Redeemable Preferred Stock and of agreements governing the Company's indebtedness. The Company does not anticipate paying cash dividends in the foreseeable future. See "Dividend Policy". In the event of the liquidation, dissolution or winding up of the Company, the holders of Class A Common Stock and Class B Common Stock are entitled to share ratably in all assets remaining after payment of liabilities and the liquidation preference and any accrued but unpaid dividends with respect to any then outstanding Preferred Stock. In the event of any merger or consolidation of the Company with or into any other corporation pursuant to which shares of Class A Common Stock and Class B Common Stock are converted into other securities, cash or other property, shares of Class A Common Stock and shares of Class B Common Stock shall be converted into the identical consideration at the same rate per share, except that any voting securities into which Class B Common Stock shall be converted shall have ten times the voting power of any otherwise identical securities into which Class A Common Stock is converted, unless the holders of a majority of the shares of each such class shall have approved such merger or consolidation. Shares of Class B Common Stock are convertible at the option of the holder into shares of Class A Common Stock on a share-for-share basis. In addition, shares of Class B Common Stock will automatically convert into shares of Class A Common Stock upon any transfer thereof, other than a transfer by a holder of Class B Common Stock to (i) an immediate family member of such holder or (ii) any trust or partnership of which all of the beneficiaries or partners, as the case may be, are such holder and/or immediate family members of such holder, so long as the transferee authorizes Mr. Leven or Mr. Aronson to vote such transferred shares. Holders of Class A Common Stock and Class B Common Stock have no preemptive or redemption rights and are not subject to further calls or assessments by the Company, except as otherwise provided in the Amended Stock Purchase Agreements. Application has been made for quotation of the Class A Common Stock, subject to official notice of issuance, on the National Market System of The Nasdaq Stock Market ("Nasdaq") under the symbol "USFS". The Transfer Agent and Registrar for the Class A Common Stock is Wachovia Bank of North Carolina, N.A. Preferred Stock The Board of Directors has the authority, without any vote or action by the stockholders, to issue Preferred Stock in one or more series and to fix the designations, preferences, rights, qualifications, limitations and restrictions thereof, including the voting rights, dividend rights, dividend rate, conversion rights, terms of redemption (including sinking fund provisions), redemption price or prices, liquidation preferences and the number of shares constituting any series; 51 provided, however, that the Board of Directors may not create a series of Preferred Stock with general voting rights or with the right to elect more than 50% of the Board under any circumstances without the approval of holders of 75% of the outstanding Class B Common Stock. On September 29, 1995, pursuant to the "blank-check" authority vested in the Board by the Company's Charter, the Board of Directors adopted a resolution creating the Redeemable Preferred Stock, consisting of up to 525,000 shares (which number may be decreased, but not increased, by the Board without a vote of the stockholders). By its terms, the Redeemable Preferred Stock ranks prior to the Common Stock and all other classes of the Company's capital stock with respect to dividend rights and rights upon the liquidation, dissolution or winding up of the Company. Shares of Redeemable Preferred Stock accrue dividends cumulatively in additional shares of Redeemable Preferred Stock at an annual rate of 10% on the $100 liquidation preference. The Company may redeem the Redeemable Preferred Stock in whole or in part at its discretion at any time and must redeem any outstanding shares of the Redeemable Preferred Stock on September 29, 2007 or within 10 business days of a Change of Control (as defined below) of the Company, at a redemption price per share equal to $100 plus all accrued but unpaid dividends thereon. A Change of Control is defined generally as (i) the sale or transfer of all or substantially all of the Company's assets to any person that is not an affiliate of the Company, (ii) the sale or transfer (whether by merger, consolidation or otherwise) of a majority of the Common Stock, in the aggregate to persons who (a) were not Original Investors, (b) are not employees of the Company or (c) are not members of the immediate family or of a trust or partnership for the benefit of any person described in clauses (a) or (b) above or an affiliate of any of the foregoing or (iii) the termination of employment for any reason by the Company (including by way of resignation) of Mr. Leven. In addition, the Company may, at any time, elect to require the holders of shares of Redeemable Preferred Stock to exchange all or part of their shares of Redeemable Preferred Stock for Subordinated Debentures due September 29, 2007 in the aggregate principal amount per share equal to $100 plus all accrued but unpaid dividends thereon. Interest on the Subordinated Debentures is payable one-half in cash and one-half through the issuance of additional Subordinated Debentures. Certain Effects of Authorized but Unissued Stock Authorized but unissued shares of Common Stock and Preferred Stock are available for future issuance without stockholder approval, except as may otherwise be required under Nasdaq rules. These additional shares may be utilized for a variety of corporate purposes, including future public offerings to raise additional capital, corporate acquisitions and employee benefit plans. The existence of authorized but unissued and unreserved Common Stock and Preferred Stock may enable the Board of Directors to issue shares to persons friendly to current management, which could render more difficult or discourage an attempt to obtain control of the Company by means of a proxy contest, tender offer, merger, or otherwise, and thereby protect the continuity of the Company's management. Registration Rights Pursuant to the terms of the Restated Stockholders' Agreement, the Company has granted the Original Investors piggyback and demand registration rights, which permit such persons to cause the Company to register their shares of Class A Common Stock (including shares of Class A Common Stock into which shares of Class B Common Stock are convertible) under the Securities Act in certain circumstances. The demand registration rights generally provide that, at any time after September 29, 2000, the holders of a majority of the shares of Class A Common Stock (including the shares of Class B Common Stock referred to above) registrable under such Agreement have the right to cause the Company to file one registration statement under the Securities Act covering all or part of such shares of Class A Common Stock (including the shares into which the shares of Class B Common Stock are convertible) and that the Company will use its best efforts to effect such registration. With respect to piggyback registration rights, at any time following such time that greater than 20% of the outstanding Common Stock has been registered under the Securities Act, the Company is required to notify the holders of Common Stock registrable under such Agreement that the Company intends to register some of its securities and, if requested by such holder, to include a portion of their shares of Common Stock in such registration ("piggyback shares"). The maximum number of shares of Class A Common Stock that may be included in such registration is determined by multiplying all of the piggyback shares by a fraction, the numerator of which is the number of shares being registered by the Company and the denominator of which is the number of shares to be outstanding after such registration (excluding the piggyback shares). The Company generally is obligated to bear the expenses, other than underwriting discounts, sales commissions and 52 transfer taxes, if any, of the registration of such shares. Any exercise by the holders of such registration rights may hinder efforts by the Company to arrange future financings and may have an adverse impact on the market price of the Class A Common Stock. Delaware Law and Certain Charter and By-Law Provisions The Company is a Delaware corporation and is subject to Section 203 of the Delaware General Corporation Law ("DGCL"). In general, Section 203 prevents an "interested stockholder" (defined generally as a person owning 15% or more of a corporation's outstanding voting stock) from engaging in a "business combination" (as defined in such section) with a Delaware corporation for three years following the date such person became an interested stockholder unless (i) before such person became an interested stockholder, the board of directors of the corporation approved the transaction in which the interested stockholder became an interested stockholder or approved the business combination; (ii) upon consummation of the transaction that resulted in the interested stockholder becoming an interested stockholder, the interested stockholder owns at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced (excluding shares owned by persons who are both officers and directors of the corporation, and held by certain employee stock ownership plans) or (iii) following the transaction in which such person became an interested stockholder, the business combination is approved by the board of directors of the corporation and authorized at a meeting of stockholders by the affirmative vote of the holders of at least two-thirds of the outstanding voting stock of the corporation not owned by the interested stockholder. Messrs. Leven and Aronson are interested stockholders under the DGCL. However, since their acquisition of the Company's securities was approved in advance by the Company's Board of Directors, they would not be prohibited from engaging in a business combination with the Company. In addition, certain provisions of the Company's Charter and By-laws summarized in the following paragraphs will become operative prior to or simultaneously with the completion of the Offering and may be deemed to have an anti-takeover effect and may delay, defer or prevent an attempt to obtain control of the Company by means of a proxy contest, tender offer, merger or other transaction that a stockholder might consider in its best interest, including those attempts that might result in a premium over the market price for the shares held by stockholders. Special Meeting of Stockholders. The Charter provides that special meetings of stockholders of the Company may be called only by the Board of Directors, the Chairman of the Board of Directors or the Chief Executive Officer. This provision will make it more difficult for stockholders to take actions opposed by the Board of Directors. This provision may not be amended or repealed without the approval of holders of at least 75% of the outstanding voting power of the Company. This provision of the Charter may not be amended or repealed without the approval of holders of at least 75% of the outstanding voting power of the Company. Stockholder Action by Written Consent. The Charter provides that no action required or permitted to be taken at any annual or special meeting of the stockholders of the Company may be taken without a meeting, and the power of stockholders of the Company to consent in writing, without a meeting, to the taking of any action is specifically denied. This provision may not be amended or repealed without the approval of holders of at least 75% of the outstanding voting power of the Company. This provision of the Charter may not be amended or repealed without the approval of holders of at least 75% of the outstanding voting power of the Company. Prohibition on Issuance of Voting Preferred Stock. The Charter provides that the Board of Directors cannot create a series of Preferred Stock with general voting rights or with the right to elect more than 50% of the Board under any circumstances without the approval of holders of 75% of the outstanding Class B Common Stock. This provision may not be amended or repealed without the approval of holders of at least 75% of the outstanding voting power of the Company. Advance Notice Requirements for Stockholder Proposals and Director Nominations. The By-laws provide that stockholders seeking to bring business before an annual meeting of stockholders, or to nominate candidates for election as directors at an annual or special meeting of stockholders, must provide timely notice thereof in writing. To be timely, a stockholder's notice must be delivered to or mailed and received at the principal executive offices of the Company not less than 70 days nor more than 90 days prior to the meeting; provided, however, that in the event that the date of the annual meeting is advanced by more than 20 days or delayed by more than 70 days from such anniversary date, notice by the stockholder to be timely must be received no earlier than the close of business on the ninetieth day prior to such annual meeting and not later than the close of business on the later of the seventieth day prior to such annual meeting or the tenth day following the day on which public announcement of the date of 53 such meeting is first made. The By-laws also specify certain requirements for a stockholder's notice to be in proper written form. These provisions may preclude some stockholders from bringing matters before the stockholders at an annual or special meeting or from making nominations for directors at an annual or special meeting. Termination of Employment Agreements. The By-laws provide that approval of 75% of the Board of Directors is required to terminate the employment agreements of Messrs. Leven or Aronson. Limitation of Liability and Indemnification Agreements The Charter provides that to the fullest extent permitted by the DGCL, a director of the Company shall not be liable to the Company or its stockholders for monetary damages for breach of fiduciary duty as a director. Under current Delaware law, liability of a director may not be limited (i) for any breach of the director's duty of loyalty to the Company or its stockholders, (ii) for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law, (iii) in respect of certain unlawful dividend payments or stock redemptions or repurchases and (iv) for any transaction from which the director derives an improper personal benefit. The effect of the provision of the Charter is to eliminate the rights of the Company and its stockholders (through stockholders' derivative suits on behalf of the Company) to recover monetary damages against a director for breach of the fiduciary duty of care as a director (including breaches resulting from negligent or grossly negligent behavior) except in the situations described in clauses (i) through (iv) above. This provision does not limit or eliminate the rights of the Company or any stockholder to seek nonmonetary relief such as an injunction or rescission in the event of a breach of a director's duty of care. In addition, the Charter provides that the Company shall indemnify its directors, officers, employees and agents to the extent not prohibited by Delaware law. In addition, prior to the completion of the Offering, the Company intends to enter into agreements (the "Indemnification Agreements") with each of the directors of the Company pursuant to which the Company will agree to indemnify each such director against claims, liabilities, damages, expenses, losses, costs, penalties or amounts paid in settlement (collectively, "Losses") incurred by such director and arising out of his capacity as a director, executive officer, employee and/or agent of the Company to the maximum extent permitted by applicable law. In addition, such director or officer shall be entitled to an advance of expenses to the maximum extent authorized or permitted by law to meet the obligations indemnified against. The Indemnification Agreements also obligate the Company to purchase and maintain insurance for the benefit and on behalf of its directors insuring against all liabilities that may be incurred by such director in or arising out of his capacity as a director, officer, employee and/or agent of the Company. To the extent that the Board of Directors or the stockholders of the Company may in the future wish to limit or repeal the ability of the Company to indemnify directors, such repeal or limitation may not be effective as to directors who are currently parties to the Indemnification Agreements, because their rights to full protection are contractually assured by the Indemnification Agreements. It is anticipated that similar contracts may be entered into, from time to time, with future directors and with executive officers of the Company. 54 UNDERWRITING Subject to the terms and conditions of the Underwriting Agreement, each of the Underwriters named below, and each of the Underwriters for whom Schroder Wertheim & Co. Incorporated and Montgomery Securities are acting as representatives (the "Representatives"), has severally agreed to purchase from the Company and the Selling Stockholders an aggregate of 2,325,000 shares of Class A Common Stock at the Price to Public less the underwriting discounts and commissions set forth on the cover page of this Prospectus, in the amounts set forth below opposite their respective names. Number of Shares of Underwriter Class A Common Stock ---------------------------------------- ---------------------- Schroder Wertheim & Co. Incorporated Montgomery Securities ---------------------- Total 2,325,000 ====================== The Underwriting Agreement provides that the Underwriters' obligation to pay for and accept delivery of the shares of Class A Common Stock offered hereby is subject to certain conditions precedent and that the Underwriters will be obligated to purchase all such shares, excluding shares covered by the over-allotment option, if any are purchased. The Underwriters have informed the Company and the Selling Stockholders that no sales of Class A Common Stock will be confirmed to discretionary accounts. The Company and the Selling Stockholders have been advised by the Underwriters that they propose initially to offer the Class A Common Stock to the public at the public offering price set forth on the cover page of this Prospectus and to certain dealers at such price, less a concession not in excess of $ per share. The Underwriters may allow and such dealers may reallow a concession not in excess of $ per share to certain other brokers and dealers. After the Offering, the public offering price, the concession and reallowances to dealers and other selling terms may be changed by the Underwriters. The Company and the Selling Stockholders have granted to the Underwriters an option exercisable for 30 days after the date of this Prospectus to purchase up to an aggregate of 348,750 additional shares of Class A Common Stock to cover overallotments, if any, at the same price per share to be paid by the Underwriters for the other shares of Class A Common Stock offered hereby. If the Underwriters purchase any such additional shares pursuant to the overallotment option, each Underwriter will be committed, subject to certain conditions, to purchase a number of the additional shares of Class A Common Stock proportionate to such Underwriter's initial commitment. The Company, its directors and executive officers, and certain other stockholders have agreed with the Representatives, for a period of 180 days after the date of this Prospectus, not to issue, sell, offer to sell, grant any options for the sale of, or otherwise dispose of any shares of Class A Common Stock or Class B Common Stock or any rights to purchase shares of the same (other than stock issued or options granted pursuant to the Company's stock incentive plans), without the prior written consent of the Representatives. See "Shares Eligible for Future Sale." The Company and the Selling Stockholders have agreed to indemnify the Underwriters against certain liabilities that may be incurred in connection with the sale of the Class A Common Stock, including liabilities arising under the Securities Act, and to contribute to payments that the Underwriters may be required to make with respect thereto. Prior to the Offering, there has been no public market for the Class A Common Stock. The initial public offering price for the Class A Common Stock will be determined by negotiation among the Company, the Selling Stockholders and the Representatives. Among other factors considered in determining the Price to Public will be prevailing market and economic conditions, projected revenues and earnings of the Company, the state of the Company's business operations, an assessment of the Company's management, and consideration of the above factors in relation to market valuation of companies in related businesses and other factors deemed relevant. There can be no assurance, however, that the prices at which the Class A Common Stock will sell in the public market after the Offering will not be lower than the Price to Public. 55 SHARES ELIGIBLE FOR FUTURE SALE Upon completion of the Offering, 9,872,490 shares of Class A Common Stock will be outstanding and 2,707,919 shares of Class B Common Stock will be outstanding. Of these shares, the 2,325,000 shares of Class A Common Stock sold in the Offering will be freely tradeable by persons other than "affiliates" of the Company, without restriction under the Securities Act. Further, 8,047,490 shares of Class A Common Stock and all 2,706,557 shares of Class B Common Stock will be "restricted" securities within the meaning of Rule 144 and may not be sold in the absence of registration under the Securities Act unless an exemption from registration is available, including the exemptions contained in Rule 144. However, approximately 9,425,000 shares of Class A Common Stock (including 2,707,919 shares of Class A Common Stock into which the Class B Common Stock is convertible) will be eligible for sale under Rule 144 beginning on September 29, 1997 (subject to certain volume and other restrictions prescribed by Rule 144). As defined in Rule 144, an "affiliate" of an issuer is a person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, such issuer. In general, under Rule 144 as currently in effect, a person (or persons whose shares are aggregated), including an "affiliate" as that term is defined below, who has paid for shares is entitled, beginning two years from the later of the date of acquisition of the shares from the Company or from an affiliate of the Company, to sell within any three-month period up to that number of shares that does not exceed the greater of 1% of the then outstanding shares or the average weekly trading volume of the then outstanding shares during the four calendar weeks preceding each such sale. A person (or persons whose shares are aggregated) who is not deemed an affiliate of the Company and who has paid for his shares is entitled, beginning three years from the later of the date of the acquisition from the Company or from an affiliate of the Company, to sell such shares under Rule 144(k) without regard to the volume limitations described above. Affiliates continue to be subject to such volume limitations after the three-year holding period. The Company, its officers and directors and certain of its other current stockholders, who collectively hold 2,818,725 shares of Class A Common Stock and 2,707,919 shares of Class B Common Stock, have agreed that they will not dispose of any shares of Class A Common Stock or Class B Common Stock, or any securities convertible or exchangeable for shares of Class A Common Stock, for a period of 180 days after the date of this Prospectus without the written consent of the Representatives of the Underwriters. After the Offering, certain holders of shares of Common Stock will be entitled to have shares included in certain registration statements filed by the Company. See "Description of Common Stock--Registration Rights". Following the Offering, the Company intends to file a registration statement on Form S-8 under the Securities Act to register shares of Class A Common Stock issuable upon the exercise of stock options granted under the Option Plans. Shares of Class A Common Stock issued upon the exercise of stock options after the effective date of such registration statement generally will be available for sale in the open market. Immediately following the Offering, options to purchase shares of Class A Common Stock will be outstanding under the Option Plans. VALIDITY OF THE CLASS A COMMON STOCK The validity of the shares of Class A Common Stock offered hereby will be passed upon for the Company by Paul, Weiss, Rifkind, Wharton & Garrison, New York, New York, and for the Underwriters by Sullivan & Cromwell, New York, New York. EXPERTS The Consolidated Financial Statements included in this Prospectus and the Registration Statement have been audited by Deloitte & Touche LLP, independent auditors, as stated in their report appearing herein, and are included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. AVAILABLE INFORMATION The Company has filed with the Securities and Exchange Commission (the "Commission") a registration statement on Form S-1 (herein, together with all amendments and exhibits, referred to as the "Registration Statement") under the Securities Act. This Prospectus does not contain all of the information set forth in the Registration Statement, certain parts of which are omitted in accordance with the rules and regulations of the Commission. For further information, reference is hereby made to the Registration Statement. Statements contained 56 in this Prospectus as to the contents of any contract or other document are not necessarily complete, and in each such instance reference is made to the copy of such contract or document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference. As a result of the Offering, the Company will become subject to the informational requirements of the Exchange Act, and in accordance therewith will file reports, proxy statements and other information with the Commission. The Registration Statement, as well as all periodic reports and other information filed by the Company pursuant to the Exchange Act, may be inspected and copied at the public reference facilities maintained by the Commission at 450 Fifth Street N.W., Washington, D.C. 20549, and at the regional offices of the Commission located at 7 World Trade Center, 7th Floor, New York, New York 10048 and Citicorp Center, 500 Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such materials may be obtained from the World Wide Web site that the Commission maintains at http://www.sec.gov. and from the Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. 57 U.S. FRANCHISE SYSTEMS, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page --------- INDEPENDENT AUDITORS' REPORT ................................... F-2 CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1995 AND JUNE 30, 1996 AND FOR THE PERIOD FROM AUGUST 28, 1995 (INCEPTION) TO DECEMBER 31, 1995 AND FOR THE SIX MONTHS ENDED JUNE 30, 1996: Consolidated Statements of Financial Position .................. F-3 Consolidated Statements of Operations .......................... F-4 Consolidated Statements of Stockholders' Deficit ............... F-5 Consolidated Statements of Cash Flows .......................... F-6 Notes to Consolidated Financial Statements ..................... F-7 F-1 INDEPENDENT AUDITORS' REPORT Board of Directors and Stockholders of U.S. Franchise Systems, Inc.: We have audited the accompanying consolidated statements of financial position of U.S. Franchise Systems, Inc. and subsidiaries (the "Company") as of December 31, 1995 and June 30, 1996 and the related consolidated statements of operations, stockholders' deficit, and cash flows for the periods from August 28, 1995 (inception) to December 31, 1995 and the six months ended June 30, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 1995 and June 30, 1996 and the results of its operations and its cash flows for the periods from August 28, 1995 (inception) to December 31, 1995 and the six months ended June 30, 1996, in conformity with generally accepted accounting principles. Deloitte & Touche LLP August 9, 1996 (October 11, 1996 as to Note 11) F-2 U.S. FRANCHISE SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL POSITION December 31, June 30, 1995 1996 --------------- -------------- Assets CURRENT ASSETS: Cash and temporary cash investments $13,893,000 $12,732,000 Accounts receivable 122,000 Deposits 87,000 87,000 Prepaid expenses 399,000 349,000 -------------- ------------- Total current assets 14,379,000 13,290,000 PROMISSORY NOTES RECEIVABLE 416,000 EQUIPMENT--Net 134,000 389,000 FRANCHISE RIGHTS 3,371,000 3,369,000 DEFERRED COMMISSIONS 41,000 1,282,000 OTHER ASSETS 147,000 281,000 -------------- ------------- $18,072,000 $19,027,000 ============== ============= Liabilities and Stockholders' Deficit CURRENT LIABILITIES: Accounts payable $ 201,000 $ 375,000 Commissions payable 22,000 572,000 Deferred application fees 120,000 2,842,000 Accrued expenses 65,000 376,000 Royalties due to HSA Properties 390,000 Due to Hudson Hotels Corporation 706,000 706,000 -------------- ------------- Total current liabilities 1,114,000 5,261,000 DUE TO HUDSON HOTELS CORPORATION 731,000 731,000 -------------- ------------- Total liabilities 1,845,000 5,992,000 -------------- ------------- REDEEMABLE STOCK: Preferred shares, par value $0.01 per share; authorized 525,000 shares; issued and outstanding 163,500 shares; cumulative, exchangeable (entitled in redemption to $16,759,000 and $17,597,000 at December 31, 1995 and June 30, 1996, respectively) 16,759,000 17,597,000 -------------- ------------- Common shares, par value $0.01 per share; issued and outstanding 3,186,294 Class A shares (see Note 11) entitled in redemption (under certain conditions) to $330,000 at December 31, 1995 and June 30, 1996 330,000 330,000 -------------- ------------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' DEFICIT: Common shares, par value $0.01 per share; authorized 30,000,000 shares of Class A Common Stock and 5,000,000 shares of Class B Common Stock; issued and outstanding 4,861,196 Class A shares and 2,707,919 Class B shares (see Note 11) 78,000 78,000 Capital in excess of par 228,000 Accumulated deficit (1,168,000) (4,970,000) -------------- ------------- Total stockholders' deficit (862,000) (4,892,000) -------------- ------------- $18,072,000 $19,027,000 ============== ============= See notes to consolidated financial statements. F-3 U.S. FRANCHISE SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Period From August 28, 1995 Six Months (Inception) to Ended December 31, June 30, 1995 1996 ---------------- ------------- REVENUES $ -- $ 395,000 ---------------- ------------- EXPENSES: Marketing and reservations 13,000 490,000 Other franchise sales and advertising 550,000 1,263,000 Corporate salaries, wages, and benefits 423,000 993,000 Other general and administrative 215,000 835,000 Depreciation and amortization 126,000 268,000 ---------------- ------------- 1,327,000 3,849,000 ---------------- ------------- LOSS FROM OPERATIONS 1,327,000 3,454,000 OTHER INCOME (EXPENSE): Interest income 195,000 331,000 Interest expense (36,000) (72,000) ---------------- ------------- NET LOSS $ 1,168,000 $ 3,195,000 ================ ============= LOSS APPLICABLE TO COMMON STOCKHOLDERS $ 1,645,000 $ 4,033,000 ================ ============= WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 10,755,409 10,755,409 ================ ============= NET LOSS APPLICABLE TO COMMON STOCKHOLDERS PER SHARE $ 0.15 $ 0.38 ================ ============= See notes to consolidated financial statements. F-4 U.S. FRANCHISE SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT PERIOD FROM AUGUST 28, 1995 (INCEPTION) TO DECEMBER 31, 1995 AND THE SIX MONTHS ENDED JUNE 30, 1996
Common Stock ---------------------- Total Capital in Accumulated Stockholders' Shares Amount Excess of Par Deficit Deficit ------------ ---------------------- --------------- ---------------- BALANCE--August 28, 1995 -- $ -- $ -- $ -- $ -- Issuance of capital stock 7,569,115 78,000 705,000 783,000 Undeclared dividends on redeemable preferred stock (477,000) (477,000) Net loss (1,168,000) (1,168,000) ------------ ---------------------- --------------- ---------------- BALANCE--December 31, 1995 7,569,115 78,000 228,000 (1,168,000) (862,000) Redemption of capital stock (322,669) (3,000) (33,000) (36,000) Issuance of capital stock 322,669 3,000 36,000 39,000 Undeclared dividends on redeemable preferred stock (231,000) (607,000) (838,000) Net loss (3,195,000) (3,195,000) ------------ ---------------------- --------------- ---------------- BALANCE--June 30, 1996 7,569,115 $78,000 $ -- $(4,970,000) $(4,892,000) ============ ====================== =============== ================
See notes to consolidated financial statements. F-5 U.S. FRANCHISE SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Period From Six Months August 28, 1995 Ended (Inception) to June 30, December 31, 1995 1996 ------------------ --------------- OPERATING ACTIVITIES: Net loss $(1,168,000) $(3,195,000) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 126,000 268,000 Increase in accounts receivable, prepaid expenses and deposits (699,000) (189,000) Increase in promissory notes receivable (416,000) Increase in deferred commissions (41,000) (1,241,000) Increase in other assets (150,000) Increase in accounts payable and accrued expenses 266,000 485,000 Increase in commissions payable 22,000 550,000 Increase in deferred application fees 120,000 2,722,000 Increase in royalties due to HSA Properties 390,000 ------------------ --------------- Net cash used in operating activities (1,374,000) (776,000) ------------------ --------------- INVESTING ACTIVITIES: Acquisition of equipment (137,000) (271,000) Acquisition of franchise rights (1,991,000) (117,000) ------------------ --------------- Net cash used in investing activities (2,128,000) (388,000) ------------------ --------------- FINANCING ACTIVITIES: Issuance of redeemable preferred stock (net of $67,000 issuance cost) 16,283,000 Issuance of capital stock 1,112,000 36,000 Redemption of capital stock (33,000) ------------------ --------------- Net cash provided by financing activities 17,395,000 3,000 ------------------ --------------- NET INCREASE (DECREASE) IN CASH AND TEMPORARY CASH INVESTMENTS 13,893,000 (1,161,000) CASH AND TEMPORARY CASH INVESTMENTS--Beginning of period -- 13,893,000 ------------------ --------------- CASH AND TEMPORARY CASH INVESTMENTS--End of period $13,893,000 $12,732,000 ================== =============== NONCASH ACTIVITIES: Undeclared dividends accrued on redeemable preferred stock $ 477,000 $ 838,000 ================== =============== Portion of purchase price due to Hudson Hotels Corporation in future years, discounted at 10% $ 1,437,000 $ -- ================== ===============
See notes to consolidated financial statements. F-6 U.S. FRANCHISE SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1995 AND JUNE 30, 1996 AND FOR THE PERIOD FROM AUGUST 28, 1995 (INCEPTION) TO DECEMBER 31, 1995 AND FOR THE SIX MONTHS ENDED JUNE 30, 1996 1. BASIS OF PRESENTATION AND ORGANIZATION U.S. Franchise Systems, Inc. (the "Company") was incorporated under the laws of the State of Delaware on August 28, 1995 to acquire, market, and license distinct franchise brands principally within the United States. The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries: Microtel Inns and Suites Franchising, Inc. (and its wholly owned subsidiary Microtel International, Inc.); Hawthorn Suites Franchising, Inc. ("HSF"); and US Funding Corp. ("US Funding"). The consolidated financial statements also include the accounts of the marketing and reservation funds of the Microtel and Hawthorn hotel systems. All significant intercompany balances and transactions have been eliminated in consolidation.1. BASIS OF PRESENTATION AND ORGANIZATION Microtel Inns and Suites Franchising, Inc. On October 5, 1995, the Company entered into an agreement (the "Microtel Agreement") with Hudson Hotels Corporation ("Hudson") to acquire the exclusive worldwide franchising rights and operating assets of the Microtel hotel system (the "Microtel Acquisition") for $3,037,000. The Company paid $1,600,000 at closing and agreed to pay $1,437,000 (see Note 6) over the next three years with interest at 10%. The Company also agreed to pay $700,000 for consulting services, $400,000 of which was paid at closing, with the remainder payable over two years. As part of the Microtel Agreement, the Company received warrants to purchase 100,000 common shares of Hudson through September 1, 2000 at an exercise price of $8.375 per share. The Microtel Agreement requires the Company to pay a royalty for the right to use, and license others to use, certain trademarks, service marks, and trade names (the "Microtel Proprietary Marks") associated with the Microtel hotel system (see Note 10). This acquisition was accounted for as a purchase of franchise rights. The Company did not acquire physical facilities, employee base, sales force, production techniques or an existing customer base in conjunction with the acquisition of the worldwide franchising rights. Pursuant to a Trademark, Service Mark, and System License Agreement (the "Microtel License Agreement"), the Company granted to Microtel Inns and Suites Franchising, Inc. the exclusive right to use, and to license others to use, the Microtel Proprietary Marks and Microtel hotel system in connection with the operation of hotels under the Microtel hotel system. Hawthorn Suites Franchising, Inc. On March 27, 1996, the Company entered into an agreement with HSA Properties, L.L.C. ("HSA") to acquire the exclusive worldwide franchising rights with respect to the Hawthorn hotel system (the "Hawthorn Agreement"). The Company made no payment to HSA at closing but agreed to remit to HSA a portion of the royalties the Company actually receives from future Hawthorn franchisees. The Company did not acquire physical facilities, employee base, sales force, production techniques or an existing customer base in conjunction with the acquisition of the worldwide franchising rights. Pursuant to a Trademark, Service Mark, and System License Agreement which expires in April 1998 (the "Hawthorn License Agreement"), the Company granted to HSF, its wholly owned subsidiary, the exclusive right to use, and to license others to use, the Hawthorn proprietary marks in connection with the Hawthorn hotel system (see Note 10). Marketing and Reservation Funds The Company collects reservation and marketing fees from its franchisees and uses such funds at its discretion to develop, support and enhance the reservation systems and marketing programs of the Microtel and Hawthorn hotel systems. The related revenues and expenses are reported gross in the accompanying financial statements. F-7 U.S. FRANCHISE SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) AS OF DECEMBER 31, 1995 AND JUNE 30, 1996 AND FOR THE PERIOD FROM AUGUST 28, 1995 (INCEPTION) TO DECEMBER 31, 1995 AND FOR THE SIX MONTHS ENDED JUNE 30, 1996 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Application Fee Revenue and Related Costs--Initial franchise fee revenue consists of application fees received by the Company's subsidiaries from prospective franchisees. Such fees are recognized in income when the underlying hotels open for business. Related franchise sales commissions are also deferred until the underlying hotels open for business, at which time such costs are charged to expense. Cash and Temporary Cash Investments--The Company considers its investments with an original maturity of three months or less to be cash equivalents. Included in "cash and temporary cash investments" are the following:
December 31, 1995 June 30, 1996 ------------------ ---------------- Cash in bank deposit accounts $ 518,000 $ 1,792,000 Money market funds 13,375,000 10,940,000 ------------------ ---------------- $13,893,000 $12,732,000 ================== ================
Franchise Rights--Franchise rights represent the cost of acquiring such rights and are amortized on a straight-line basis over 15 years. Accumulated amortization was $57,000 at December 31, 1995 and $176,000 at June 30, 1996. Impairment of Long-Lived Assets--The Company has adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed of" ("SFAS 121"), as of January 1, 1996. The adoption of SFAS 121 in 1996 did not have a material effect on the financial condition or operations of the Company. Long-lived assets, principally intangibles, are evaluated annually and written down to fair value when management believes that the unamortized balance cannot be recovered through future undiscounted cash flows. Income Taxes--The Company has adopted the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," which requires the use of the asset and liability approach in accounting for income taxes. Stock Plans--The Company has elected to account for stock plans in accordance with SFAS No. 123, "Accounting for Stock-Based Compensation." Accordingly, compensation expense will likely result from the award of stock options, restricted stock and similar awards to employees. Per Share Amounts--Per share amounts are determined by dividing loss applicable to common stockholders by weighted average shares outstanding. Weighted average shares include redeemable common shares outstanding. Loss applicable to common stockholders represents net loss adjusted for accrued dividends on the redeemable preferred stock. All references in the financial statements to the number of shares and per share amounts of the Company's common stock have been retroactively restated to reflect the increased number of common shares outstanding resulting from a stock split (See Note 11). 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. F-8 U.S. FRANCHISE SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) AS OF DECEMBER 31, 1995 AND JUNE 30, 1996 AND FOR THE PERIOD FROM AUGUST 28, 1995 (INCEPTION) TO DECEMBER 31, 1995 AND FOR THE SIX MONTHS ENDED JUNE 30, 1996 3. REDEEMABLE PREFERRED STOCK The cumulative redeemable exchangeable preferred stock (the "redeemable preferred stock") earns cumulative dividends at an annual dividend rate of 10%, payable in additional shares of redeemable preferred stock when declared. The redeemable preferred stock is, at the Company's option, redeemable or exchangeable into 10% subordinated debentures due September 29, 2007 at $100 per share plus accrued and unpaid dividends (the "Liquidation Value") at any time before September 29, 2007. If issued, 50% of the interest due on the debentures may be paid partially in kind by the issuance of additional debentures at the option of the Company, with the balance of interest payable in cash. On September 29, 2007, the redeemable preferred stock is required to be redeemed at the Liquidation Value. 4. EQUIPMENT Equipment is recorded at historical cost and consisted of the following: December 31, June 30, 1995 1996 --------------- ----------- Furniture and fixtures $ 25,000 $ 56,000 Computer equipment and software 16,000 69,000 Office equipment 21,000 32,000 Architectural plans and renderings 75,000 251,000 --------------- ----------- 137,000 408,000 Accumulated depreciation (3,000) (19,000) --------------- ----------- $134,000 $389,000 =============== =========== Architectural plans and renderings are depreciated on a straight-line basis over a period of 15 years. Computer software is depreciated on a straight-line basis over a period of 3 years. Computer equipment is depreciated using the 200% declining-balance method over a period of 5 years. The remaining fixed assets are depreciated using the 200% declining-balance method over a period of 7 years. 5. LEASES The Company leases certain equipment and office space used in its operations. Rental expense under operating leases was $41,000 for the period from August 28, 1995 to December 31, 1995 and $111,000 for the six months ended June 30, 1996. The future minimum rental commitments under noncancelable operating leases at June 30, 1996 were as follows: 1996 $131,000 1997 259,000 1998 203,000 1999 207,000 2000 146,000 ----------- Total minimum payments $946,000 =========== F-9 U.S. FRANCHISE SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) AS OF DECEMBER 31, 1995 AND JUNE 30, 1996 AND FOR THE PERIOD FROM AUGUST 28, 1995 (INCEPTION) TO DECEMBER 31, 1995 AND FOR THE SIX MONTHS ENDED JUNE 30, 1996 6. DUE TO HUDSON HOTELS CORPORATION The Company is required to pay Hudson $1,437,000 ($1,700,000 discounted at a rate of 10%), which represents the balance due for the assets of the Microtel hotel system (see Note 1), payable on October 5, annually, as follows: 1996 $ 706,000 1997 277,000 1998 454,000 ------------ 1,437,000 Less current portion (706,000) ------------ $ 731,000 ============ 7. PREPAID EXPENSES Pursuant to the Microtel Agreement, Hudson is required, for a period of three years, to consult with and assist in establishing the Company as an operating entity in the business of selling and administering franchises utilizing the Microtel hotel system. An initial payment in the amount of $400,000 was made to Hudson in October 1995 and recorded as a prepaid expense. The Company is obligated to pay an additional $150,000 in each of 1996 and 1997 in connection with such consulting arrangements. Such amounts are being amortized over the term of the Microtel Agreement. Amortization expense of $58,000 and $117,000 was charged to expense for the period ended December 31, 1995 and for the six months ended June 30, 1996, respectively. 8. STOCK PURCHASED BY EMPLOYEES On October 5, 1995, as part of the initial capitalization of the Company, two of its officers (the "Original Management Investors") purchased 567,245 shares of common stock (51% of the total issued) pursuant to "Stock Purchase Agreements." Of such Shares, 278,061 were unrestricted (the "Unrestricted Shares") and the remaining shares were restricted (the "Restricted Shares") as to voting rights and the ability to receive dividends as well as being subject to ten year vesting and an earnings test. Included in the shares issued pursuant to the Stock Purchase Agreements were Unrestricted Shares representing 5% of the then outstanding common stock and Restricted Shares representing 6% of the then outstanding common stock, which were reallocable to other members of the Company's management at the discretion of a committee of the Board of Directors called the Stock Allocation Committee. During the six month period ended June 30, 1996, shares representing 7.7% of the then outstanding common stock (3.6% from the Unrestricted Shares and 4.1% from the Restricted Shares) were reallocated to other members of management. All reallocated shares are subject to a vesting schedule, so that reallocated Unrestricted Shares vest over a five-year period and reallocated Restricted Shares vest over a ten-year period, in each case provided that the recipient remains employed by the Company. Any reallocated shares which are forfeited are repurchased by the Company and reoffered to the Original Management Investors at $1.00 per share. Restricted Shares are earned using a formula based upon increases in earnings before interest, taxes, and depreciation. Earned shares would generally be forfeited if the holder's employment ceases before September 29, 2005. Any Restricted Shares that have not been earned by September 29, 2005 will be redeemed by the Company and reissued to the original stockholders of the Company pro rata based on their original holdings of common stock. Restricted Shares held by the two officers and all reallocated shares held by other members of management have been classified as redeemable common stock in the balance sheet because they are redeemable by the Company in certain circumstances for reasons not under the Company's control. In the event that substantially all of the Company's stock or assets are transferred or sold, or upon a business combination, earned shares automatically become unrestricted. In addition, any remaining Restricted Shares at the time of a merger or sale of the Company become unrestricted to the extent that the then value of the Company results in an internal rate of return to the original stockholders of the Company of 40%, compounded annually. F-10 U.S. FRANCHISE SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) AS OF DECEMBER 31, 1995 AND JUNE 30, 1996 AND FOR THE PERIOD FROM AUGUST 28, 1995 (INCEPTION) TO DECEMBER 31, 1995 AND FOR THE SIX MONTHS ENDED JUNE 30, 1996 The Company accounts for stock plans under the provisions of FASB Statement 123, "Accounting for Stock-Based Compensation." As the fair value of the stock purchased by officers and other employees described above approximated the purchase price of $1.00 (or $1.10 in certain cases), no compensation has been recorded. The Stock Purchase Agreements were amended in 1996 (see Note 11). 9. INCOME TAXES Deferred income taxes in the accompanying consolidated statement of financial position includes the following amounts of deferred tax assets and liabilities: December 31, June 30, 1995 1996 --------------- -------------- Deferred tax liability $ (487,000) Deferred tax asset 441,000 2,125,000 Valuation allowance (441,000) (1,638,000) --------------- -------------- Net deferred income taxes $ -- $ -- =============== ============== The deferred tax liability results primarily from the deferral of franchise sales commissions for financial reporting purposes. The deferred tax asset results from tax net operating loss carryforwards and the deferral of initial franchise fees for financial reporting purposes. For income tax purposes, as of June 30, 1996, the Company had accumulated net operating loss carryforwards of $2,792,000 which expire through the year 2011. The following is a reconciliation of the statutory rate to the effective rate of the Company: December 31, June 30, 1995 1996 --------------- ----------- Statutory federal rate 34.0% 34.0% Statutory state rate less federal effect 4.0 4.0 Other -- (1.0) Change in valuation allowance (38.0) (37.0) --------------- ----------- Effective tax rate -- % -- % --------------- ----------- 10. COMMITMENTS The Company, as part of the Microtel Agreement, is required to fulfill certain obligations under such Agreement. These include the following: To execute franchise agreements and to have open or under development the following number of Microtel hotels each December annually: Number Year of Hotels - -------- ------------ 1997 50 1998 100 1999 175 2000 250 F-11 U.S. FRANCHISE SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) AS OF DECEMBER 31, 1995 AND JUNE 30, 1996 AND FOR THE PERIOD FROM AUGUST 28, 1995 (INCEPTION) TO DECEMBER 31, 1995 AND FOR THE SIX MONTHS ENDED JUNE 30, 1996 10. COMMITMENTS (Continued) The above development schedule is considered to have been complied with unless such schedule is not met for two consecutive years. If 75% of the development level has been met, a fee of $1,000,000 may be paid and upon such payment, the Company will be deemed to be in compliance with such schedule. Hudson will retain the right to receive franchise application fees and all franchise royalty payments under existing agreements at October 5, 1995 or under agreements for which franchise applications had been received as of October 5, 1995, except for the reservation and marketing fees, which are retained by the Company. As part of the Microtel Acquisition, Hudson retained the right to franchise and to receive royalties on 60 franchises either issued or which may be issued in the future to Hudson, its affiliates and certain other persons. For each new franchise other than the 60 issued or which may be issued to Hudson, its affiliates and such other persons, the Company is required to remit to Hudson a continuing monthly royalty equal to 1.0% of the revenues subject to royalties on the first 100 properties opened by the Company, 0.75% for the next 150 properties, and 0.5% for each new property after the first 250 properties. If any of the above obligations are not met, including the payment of amounts due to Hudson (see Note 6), all of the rights to the Microtel system may, at Hudson's discretion, revert back to Hudson. In the event Hudson exercises its right to the Microtel system, the Company, through Microtel Inns and Suites Franchising, Inc., will retain the rights to any franchise royalty payments due under franchises granted by the Company and its subsidiary, less certain processing fees due to Hudson. The Company, as part of the Hawthorn Agreement, is required to fulfill certain obligations under such agreement. These include the following: To execute qualified franchise agreements, as defined in the Hawthorn Agreement, for the operation of the following number of Hawthorn hotels (the "Termination Standard") on June 27, annually: Number of Year Hotels ------------------ ------------ 1997 10 1998 20 1999 40 2000 60 2001 80 2002 100 If the above franchising schedule is not met, HSA has the right to terminate the Hawthorn Agreement, at which time the Company would lose its right to franchise the Hawthorn brand. The Company will retain the rights to a percentage of the franchise royalty payments received from new franchises in existence as of the effective date of the termination based on the level of achievement of the Termination Standard. For franchises open or under construction or with respect to which franchise agreements had been executed as of March 27, 1996, the date on which the Company acquired the rights to franchise the Hawthorn brand (the "Existing Hawthorn Hotels"), the Company is required to remit to HSA a continuing royalty of 100% of franchise royalty and termination fees received. For each new franchise (i.e., other than Existing Hawthorn Hotels) the Company is required to remit to HSA a continuing royalty ranging from 25.3% to 67.3% (based on the number of hotel rooms) of franchise royalty fees collected. The Company owns a 1% interest in HSA which entitles the Company to receive 1% of the gross revenues received by F-12 U.S. FRANCHISE SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) AS OF DECEMBER 31, 1995 AND JUNE 30, 1996 AND FOR THE PERIOD FROM AUGUST 28, 1995 (INCEPTION) TO DECEMBER 31, 1995 AND FOR THE SIX MONTHS ENDED JUNE 30, 1996 10. COMMITMENTS (Continued) HSA from the Company with respect to all new franchises. Royalties due to HSA on new Hawthorn hotels are subject to increase if the royalties required to be paid under franchise agreements are less than 4% of gross room revenues or if the number of qualified franchise agreements for new Hawthorn hotels on new franchises is less than the following: Number of Date Hotels ----------------------- ------------ June 27, 1997 20 December 27, 1997 30 June 27, 1998 40 June 27, 1999 65 June 27, 2000 90 June 27, 2001 115 June 27, 2002 140 The Company is required to employ at least 15 persons devoted to the sales and promotion of the Hawthorn and Microtel brands and is required to spend not less than $100,000 on marketing during 1996 and 1997 promoting the Hawthorn brand. The Company is required to reimburse HSA for amounts previously advanced by HSA to a reservation and advertising fund in connection with the Existing Hawthorn Hotels in an amount not to exceed $179,000. Under the Hawthorn Acquisition Agreement, the Company and its affiliates are generally restricted until June 27, 1998 from franchising any lodging brands other than (i) Hawthorn brand hotels, (ii) Microtel brand hotels, and (iii) other limited-service non-suite hotels with an average daily rate of $49 and under. Until June 27, 1997, the Company generally must also refrain from franchising any brands outside of the lodging industry. 11. SUBSEQUENT EVENTS On October 11, 1996, the shareholders approved the creation of two classes of common stock: Class A Common Stock, par value $.01 per share and Class B Common Stock, par value $.01 per share, and to split and reclassify each share of its existing common stock, par value $.10 per share, into 9.67 shares of Class A common stock. In connection with the Reclassification, certain members of management and related stockholders holding 2,707,919 shares of Class A Common Stock will exchange such shares for the same number of shares of Class B Common Stock. Shares of Class A Common Stock and Class B Common Stock will be identical in all respects except that (i) holders of Class B Common Stock shall be entitled to ten votes per share and holders of Class A Common Stock will be entitled to one vote per share and (ii) the Class B Common Stock will be convertible into Class A Common Stock at the option of the holder and, with limited exceptions, upon the transfer thereof. Following the Reclassification, there will be 30 million shares of Class A Common Stock and 5 million shares of Class B Common Stock authorized for issuance. All references in the financial statements to the number of shares and per share amounts of the Company's common stock have been retroactively restated to reflect the increased number of common shares outstanding. In addition, prior to and contingent upon the completion of the proposed public offering, the Stock Purchase Agreements described in Note 8 were amended to revise the vesting requirements with respect to 50% of the Restricted Shares (approximately 13% of the Common Stock outstanding before the offering). Such shares will be deemed to be earned and vested shares notwithstanding the fact that performance criteria have not been met by the Company. Remaining Restricted Shares will be Class A Common Stock when earned under the Agreements. No effect has been given in the historical financial statements for the change in vesting requirements. F-13 Company Logos No dealer, salesman or other individual has been authorized to give any information or to make any representations not contained in this Prospectus in connection with the Offering covered by this Prospectus. If given or made, such information or representations must not be relied upon as having been authorized by the Company or the Underwriters. This Prospectus does not constitute an offer to sell, or a solicitation of an offer to buy, the Class A Common Stock in any jurisdiction where, or to any person to whom, it is unlawful to make such offer or solicitation. Neither the delivery of this Prospectus nor any sale made hereunder shall, under any circumstances, create any implication that there has not been any change in the facts set forth in this Prospectus or affairs of the Company since the date hereof. ------------ TABLE OF CONTENTS Page --------- Prospectus Summary 3 The Company 3 Risk Factors 9 Use of Proceeds 15 Dividend Policy 15 Capitalization 16 Dilution 17 Selected Financial Data 18 Management's Discussion and Analysis of Financial Condition and Results of Operations 19 Business 22 Management 36 Certain Relationships and Related Transactions 42 Principal Stockholders 44 Selling Stockholders 50 Description of Capital Stock 51 Underwriting 55 Shares Eligible for Future Sale 56 Validity of Class A Common Stock 56 Experts 56 Available Information 56 Index to Consolidated Financial Statements F-1 Until , 1996 (25 days after the commencement of the Offering), all dealers effecting transactions in the Class A Common Stock, whether or not participating in this distribution, may be required to deliver a Prospectus. This is in addition to the obligation of dealers to deliver a Prospectus when acting as Underwriters and with respect to their unsold allotments or subscriptions. ============================================================================= 2,325,000 Shares [U.S. Franchise Systems, Inc. logo] U.S. Franchise Systems, Inc. Class A Common Stock ($0.01 par value) Schroder Wertheim & Co. Montgomery Securities , 1996 ============================================================================= PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 13. Other Expenses of Issuance and Distribution The following table sets forth all expenses, other than underwriting discounts and commissions, in connection with the issuance and distribution of the securities registered hereby. All the amounts shown are estimates, except for the Securities and Exchange Commission registration fee, the NASD filing fee and the Nasdaq National Market listing fee. All of the following fees and expenses will be paid by the Company. Securities and Exchange Commission registration fee $ 12,377.66 NASD filing fee 4,243.25 Nasdaq National Market listing fee 50,000.00 Printing and engraving expenses * Legal fees and expenses 400,000.00 Accounting fees and expenses 300,000.00 Blue Sky fees and expenses (including counsel fees and expenses) 20,000.00 Transfer Agent and Registrar fees and expenses * Miscellaneous * ------------- Total $ * ============= * To be supplied by amendment. Item 14. Indemnification of Directors and Officers Section 145(a) of the General Corporation Law of the State of Delaware provides that a Delaware corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that he is or was a director, officer, employee or agent of the corporation or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation or enterprise, against expenses, judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no cause to believe his conduct was unlawful. Section 145(b) provides that a Delaware corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that such person acted in any of the capacities set forth above, against expenses actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted under similar standards, except that no indemnification may be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the court in which such action or suit was brought shall determine that despite the adjudication of liability, such person is fairly and reasonably entitled to be indemnified for such expenses which the court shall deem proper. Section 145 further provides that to the extent a director or officer of a corporation has been successful in the defense of any action, suit or proceeding referred to in subsections (a) and (b) or in the defense of any claim, issue, or matter therein, he shall be indemnified against expenses actually and reasonably incurred by him in connection therewith; that indemnification provided for by Section 145 shall not be deemed exclusive of any other rights to which the indemnified party may be entitled; and that the corporation may purchase and maintain insurance on behalf of a director or officer of the corporation against any liability asserted against him or incurred by him in any such capacity or arising out of his status as such whether or not the corporation would have the power to indemnify him against such liabilities under such Section 145. Section 102(b)(7) of the General Corporation Law provides that a corporation in its original certificate of incorporation or an amendment thereto validly approved by stockholders may eliminate or limit personal liability of II-1 members of its board of directors or governing body for breach of a director's fiduciary duty. However, no such provision may eliminate or limit the liability of a director for breaching his duty of loyalty, failing to act in good faith, engaging in intentional misconduct or knowingly violating a law, paying a dividend or approving a stock repurchase which was illegal, or obtaining an improper personal benefit. A provision of this type has no effect on the availability of equitable remedies, such as injunction or rescission, for breach of fiduciary duty. The Company's Charter contains such a provision. The Company's Charter further provides that the Company shall indemnify its officers and directors and, to the extent authorized by the Board of Directors, employees and agents of the Company, to the fullest extent permitted by and in the manner permissible under the laws of the State of Delaware. In addition, prior to the completion of the Offering, the Company intends to enter into agreements (the "Indemnification Agreements") with each of the directors of the Company pursuant to which the Company will agree to indemnify each director against claims, liabilities, damages, expenses, losses, costs, penalties or amounts paid in settlement (collectively, "Losses") incurred by such director and arising out of his capacity as a director, officer, employee and/or agent of the Company to the maximum extent permitted by applicable law. In addition, each director shall be entitled to an advance of expenses to the maximum extent authorized or permitted by law to meet the obligations indemnified against. The Indemnification Agreements also obligate the Company to purchase and maintain insurance for the benefit and on behalf of each of its directors insuring such director in or arising out of his capacity as a director, officer, employee and/or agent of the Company. Item 15. Recent Sales of Unregistered Securities During the past three years, the Company has issued the following securities, none of which have been registered under the Securities Act. On September 29, 1995, as part of the initial capitalization of the Company, the Company issued a total of 1,112,245 shares of Old Common Stock to the Original Investors, for an aggregate purchase price of $1,112,245 or $1.00 per share. The offer and sale of such securities was made pursuant to the exemption provided by Section 4(2) of the Securities Act. On September 29, 1995, simultaneously with the issuances of Old Common Stock described above, the Company also issued a total of 163,500 shares of Redeemable Preferred Stock to the Original Investors, for an aggregate consideration of $16,350,000 or $100 per share. The offer and sale of such securities was made pursuant to the exemption provided by Section 4(2) of the Securities Act. In addition, since September 29, 1995 the Company has from time to time issued shares of Old Common Stock to members of management. Specifically, the Company has issued a total of 152,240 shares of Old Common Stock for an aggregate consideration of $155,576.80. Such shares were first purchased by the Company from Messrs. Leven and Aronson pursuant to the Old Stock Purchase Agreements and then reallocated and reissued to other members of management pursuant to the terms thereof. See "Principal Stockholders--Management's Shares of Common Stock". Item 16. Exhibits and Financial Statement Schedules (a) Exhibits. Exhibit Number Description ------- -------------------------------------------------------------------- 1.1* Form of Underwriting Agreement 3.1 Amended and Restated Certificate of Incorporation of U.S. Franchise Systems, Inc. 3.2 Amended and Restated Bylaws of U.S. Franchise Systems, Inc. 4.1 Specimen Common Stock Certificate of U.S. Franchise Systems, Inc. 5.1* Opinion of Paul, Weiss, Rifkind, Wharton & Garrison. 10.1** Form of License Agreement for Microtels. 10.2** Form of License Agreement for Hawthorn Suites hotels. II-2 10.3** Joint Venture Agreement between Microtel Franchise and Development Corporation and U.S. Franchise Systems, Inc., dated as of September 7, 1995. The Registrant agrees to furnish a copy of any omitted schedule supplementally to the Commission upon request. 10.4** Master Franchise Agreement between HSA Properties, L.L.C. and U.S. Franchise Systems, Inc., dated as of March 27, 1996. The Registrant agrees to furnish a copy of any omitted schedule supplementally to the Commission upon request. 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. 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 simultaneously with the closing of the Offering. 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 simultaneously with the closing of the Offering. 10.8** Employment Agreement by and between U.S. Franchise Systems, Inc. and Michael A. Leven, dated as of October 1, 1995. 10.9** Employment Agreement by and between U.S. Franchise Systems, Inc. and Neal K. Aronson, dated as of October 1, 1995. 10.10* Voting Agreement between Michael A. Leven and Andrea Leven, to be entered into simultaneously with the closing of the Offering. 10.11 Voting Agreement between Michael A. Leven and Neal K. Aronson, to be entered into simultaneously with the closing of the Offering. 10.12** Office Lease Agreement between Hallwood Real Estate Investors Fund XV and U.S. Franchise Systems, Inc., dated September 25, 1995. 10.13** First Amendment to Office Lease between Hallwood 95, L.P. and U.S. Franchise Systems, Inc., dated May 20, 1996. 10.14* U.S. Franchise Systems, Inc. 1996 Stock Option Plan. 10.15* U.S. Franchise Systems, Inc. 1996 Stock Option Plan for Non-Employee Directors. 10.16 Term Sheet, dated May 14, 1996, between the Company and NACC regarding the Franchisee Financing Facility. 21.1** List of Subsidiaries of U.S. Franchise Systems, Inc. 23.1* Consent of Paul, Weiss, Rifkind, Wharton & Garrison (contained in the opinion filed as Exhibit 5.1 hereto). 23.2 Consent of Deloitte & Touche LLP. 23.3** Consent of Dean S. Adler. 23.4** Consent of Jeffrey A. Sonnenfeld. 24.1** Power of Attorney from officers and directors (contained on signature page). 27.1** Financial Data Schedule. * To be filed by amendment. ** Previously Filed. (b) Financial Statement Schedules. none required. Item 17. Undertakings Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the provisions described under Item 15 above, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification for such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of II-3 appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The undersigned registrant hereby undertakes: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To provide to the Underwriters at the closing specified in the underwriting agreements certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. II-4 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Atlanta, State of Georgia, on October 11, 1996. By: /s/ Michael A. Leven Michael A. Leven Chairman, President and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, as amended, this registration statement has been signed by the following persons on October 11, 1996 in the capacities indicated. Signatures Title or Capacities -------------------------- ---------------------------------- * Chairman, President, Chief ________________________ Executive Officer and Michael A. Leven Director (Principal Executive Officer) * ________________________ Irwin Chafetz Director * ________________________ Richard D. Goldstein Director * ________________________ Barry Sternlicht Director By /s/ Neal K. Aronson Executive Vice President, ________________________ Chief Financial Officer and Neal K. Aronson Director (Principal Financial Attorney-in-Fact and Accounting Officer) II-5 INDEX TO EXHIBITS Exhibit Number Description Page -------- ------------------------------------------------------------ ------- 1.1* Form of Underwriting Agreement 3.1 Amended and Restated Certificate of Incorporation of U.S. Franchise Systems, Inc. 3.2 Amended and Restated Bylaws of U.S. Franchise Systems, Inc. 4.1 Specimen Common Stock Certificate of U.S. Franchise Systems, Inc. 5.1* Opinion of Paul, Weiss, Rifkind, Wharton & Garrison. 10.1** Form of License Agreement for Microtels. 10.2** Form of License Agreement for Hawthorn Suites hotels. 10.3** Joint Venture Agreement between Microtel Franchise and Development Corporation and U.S. Franchise Systems, Inc., dated as of September 7, 1995. The Registrant agrees to furnish a copy of any omitted schedule supplementally to the Commission upon request. 10.4** Master Franchise Agreement between HSA Properties, L.L.C. and U.S. Franchise Systems, Inc., dated as of March 27, 1996. The Registrant agrees to furnish a copy of any omitted schedule supplementally to the Commission upon request. 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. 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 simultaneously with the closing of the Offering. 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 simultaneously with the closing of the Offering. 10.8** Employment Agreement by and between U.S. Franchise Systems, Inc. and Michael A. Leven, dated as of October 1, 1995. 10.9** Employment Agreement by and between U.S. Franchise Systems, Inc. and Neal K. Aronson, dated as of October 1, 1995. 10.10* Voting Agreement between Michael A. Leven and Andrea Leven, to be entered into simultaneously with the closing of the Offering. 10.11 Voting Agreement between Michael A. Leven and Neal K. Aronson, to be entered into simultaneously with the closing of the Offering. 10.12** Office Lease Agreement between Hallwood Real Estate Investors Fund XV and U.S. Franchise Systems, Inc., dated September 25, 1995. 10.13** First Amendment to Office Lease between Hallwood 95, L.P. and U.S. Franchise Systems, Inc., dated May 20, 1996. 10.14* U.S. Franchise Systems, Inc. 1996 Stock Option Plan. 10.15* U.S. Franchise Systems, Inc. 1996 Stock Option Plan for Non-Employee Directors. 10.16 Term Sheet, dated May 14, 1996, between the Company and NACC regarding the Franchisee Financing Facility. 21.1** List of Subsidiaries of U.S. Franchise Systems, Inc. 23.1* Consent of Paul, Weiss, Rifkind, Wharton & Garrison (contained in the opinion filed as Exhibit 5.1 hereto). 23.2 Consent of Deloitte & Touche LLP. 23.3** Consent of Dean S. Adler. 23.4** Consent of Jeffrey A. Sonnenfeld. 24.1** Power of Attorney from officers and directors (contained on signature page). 27.1** Financial Data Schedule. * To be filed by amendment. ** Previously Filed. EX-3.1 2 CERTIFICATE OF INCORPORATION AMENDED AND RESTATED CERTIFICATE OF INCORPORATION of U.S. FRANCHISE SYSTEMS, INC. ---------------------------- U.S. FRANCHISE SYSTEMS, INC., a corporation organized and existing under the laws of the State of Delaware (hereinafter called the "Corporation"), hereby certifies pursuant to Sections 242 and 245 of the General Corporation Law of the State of Delaware (the "General Corporation Law") as follows: FIRST: The Corporation's name is U.S. Franchise Systems, Inc. and it was originally incorporated under such name. SECOND: The Certificate of Incorporation of the Corporation was filed with the Secretary of State on August 28, 1995. An Amended and Restated Certificate of Incorporation was filed with the Secretary of State on September 27, 1995. A Certificate of Designation to the Amended and Restated Certificate of Incorporation was filed with the Secretary of State on September 29, 1995. THIRD: The Certificate of Incorporation, as heretofore amended, is hereby further amended to effect one or more of the amendments or changes authorized by the General Corporation Law, to wit: 1. To change the designation of the currently authorized Common Stock, par value $.10 per share, to Class A Common Stock, par value $.01 per share (the "Class A Common Stock"). 2 2. To authorize an increase in the number of authorized shares of newly-designated Class A Common Stock from Two Million (2,000,000) to Thirty Million (30,000,000). 3. To change each issued share of newly-designated Class A Common Stock into 9.67 shares of Class A Common Stock; provided that if, as a result of such change, any holder of Class A Common Stock would receive a fractional share (based on multiplying such holder's shares of Class A Common Stock prior to such change, by 9.67), then in lieu thereof, such holder shall receive cash (based upon the initial public offering price of shares of Class A Common Stock sold pursuant to the Corporation's initial public offering or, if such offering is not consummated within 90 days of the filing hereof, based on a per share price of $13). 4. To authorize Five Million (5,000,000) shares of a new class of Common Stock, par value $.01 per share, and to designate the same as Class B Common Stock (the "Class B Common Stock"). 5. To fix the designation and relative rights, preferences and limitations of the Class A Common Stock and Class B Common Stock. 6. To provide that special meetings of the stockholders of the Corporation may be called only at the direction of the Board of Directors of the Corporation (the "Board of Directors") by resolution adopted by the affirmative vote of a majority of the entire Board or by the Chairman or the Chief Executive Officer of the Corporation and must be called by such officers at the written request of the Board of Directors, and to require for amendment of the provision described in this 3 paragraph a greater proportion of the voting power of holders of shares of the Corporation's capital stock than is required by the General Corporation Law. 7. To provide that any action taken by the stockholders of the Corporation cannot be taken by the written consent of such stockholders without a meeting, and to require for amendment of the provision described in this paragraph a greater proportion of the voting power of holders of shares of the Corporation's capital stock than is required by the General Corporation Law. FOURTH: This Amended and Restated Certificate of Incorporation amends and restates the Certificate of Incorporation of the Corporation, as previously amended and now in effect. This Amended and Restated Certificate of Incorporation was adopted by the Board of Directors and stockholders of the Corporation entitled to vote in respect thereof in the manner and by the vote prescribed by Section 242 of the General Corporation Law to read as follows: 1. Name. The name of the corporation is U.S. Franchise Systems, Inc. (the "Corporation"). 2. Address; Registered Office and Agent. The address of the Corporation's registered office is 1209 Orange Street, Wilmington, New Castle County, State of Delaware; and its registered agent at such address is Corporation Trust Company. 3. Purposes. The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law. 4 4. Number and Designation of Shares of Capital Stock. The total number of shares of all classes of stock that the Corporation shall have authority to issue is Thirty-Six Million (36,000,000), of which (a) Thirty-Five Million (35,000,000) shall be shares of Common Stock, par value $.01 per share, and (b) One Million (1,000,000) shall be shares of preferred stock, par value $.01 per share (the "Preferred Stock"), which includes up to 525,000 shares of 10% Cumulative Redeemable Exchangeable Preferred Stock (the "Redeemable Preferred Stock"). 4.1 Common Stock. The common stock, par value $.01 per share, shall be divided into Class A Common Stock and Class B Common Stock. There shall be Thirty Million (30,000,000) shares of Class A Common Stock and Five Million (5,000,000) shares of Class B Common Stock (the Class A Common Stock and Class B Common Stock are sometimes collectively referred to herein as the "Common Stock"). Immediately upon the effectiveness of this Amended and Restated Certificate of Incorporation, each share of common stock of the Corporation, par value $.10 per share, that is issued and outstanding immediately prior to such effectiveness shall be changed into and reclassified as 9.67 shares of Class A Common Stock. All shares of Common Stock will be identical and will entitle the holders thereof to the same rights and privileges, except as otherwise provided herein. (a) Voting Rights. Except as otherwise set forth herein or as otherwise required by law, in all matters, every holder of Class A Common Stock shall be entitled to one (1) vote in person or by proxy for each share of Class A Common Stock standing in such holder's name on the transfer books of the Corporation and every holder of Class B Common Stock shall be entitled to ten 5 (10) votes in person or by proxy for each share of Class B Common Stock standing in such holder's name on the transfer books of the Corporation. Holders of Common Stock shall not have cumulative voting rights. Except as otherwise provided herein or required by law, the holders of Class A Common Stock and Class B Common Stock shall vote together as a single class on all matters. The number of authorized shares of any class or classes of stock may be increased or decreased (but not below the number of shares thereof then outstanding) by the affirmative vote of holders of a majority of the voting power of the Common Stock of the Corporation irrespective of the provisions of Section 242(b)(2) of Delaware Law. (b) Dividends. Subject to the rights of holders of Preferred Stock, and subject to any other provisions of this Amended and Restated Certificate of Incorporation, as amended from time to time, holders of Class A Common Stock and Class B Common Stock shall be entitled to receive such dividends and other distributions in cash, property or shares of stock of the Corporation as may be declared thereon by the Board of Directors of the Corporation (the "Board of Directors") from time to time out of assets or funds of the Corporation legally available therefor. Shares of Class A Common Stock and Class B Common Stock will rank on a par with each other as to dividends. No dividend in cash, property or shares of stock of the Corporation may be declared and paid on any shares of Common Stock unless a dividend of the same character (i.e., cash, property or shares of stock of the Corporation) is simultaneously declared and paid on all Common Stock, except as set forth in the sentence immediately following. If stock dividends are paid on shares of Common Stock, then the dividends paid with respect to (i) the 6 Class A Common Stock shall be paid with shares of Class A Common Stock and (ii) the Class B Common Stock shall be paid with shares of Class B Common Stock. In the case of dividends or other distributions consisting of other voting securities of the Corporation, the Corporation shall declare and pay such dividends in two separate classes of such voting securities, identical in all respects, except that the voting rights of each such security paid to the holders of Class A Common Stock shall be one-tenth of the voting rights of each such security paid to the holders of Class B Common Stock, and such security paid to the holders of Class B Common Stock shall convert into the security paid to the holders of Class A Common Stock upon the same terms and conditions applicable to the Class B Common Stock. In the case of dividends or other distributions consisting of securities convertible into, or exchangeable for, voting securities of the Corporation, the Corporation shall provide that such convertible or exchangeable securities and the underlying securities be identical in all respects (including, without limitation, the conversion or exchange rate), except that the voting rights for the underlying securities of the convertible or exchangeable security paid to the holders of Class A Common Stock shall be one-tenth of the voting rights of each underlying security of the convertible or exchangeable security paid to the holders of the Class B Common Stock, and such underlying securities paid to the holders of the Class B Common Stock shall convert into the underlying securities paid to the holders of Class A Common Stock upon the same terms and conditions applicable to the Class B Common Stock. The rate per share of each share dividend declared and paid on the Class A Common Stock shall be identical to the simultaneous dividend per share declared and paid on the Class B Common Stock. 7 No offering of rights to subscribe for shares of capital stock may be made to holders of Class A Common Stock or Class B Common Stock unless an identical offering is made simultaneously to the holders of the other class, except that if the offering is of rights to subscribe for shares of Common Stock, the holders of the Class A Common Stock shall be offered the right to subscribe for shares of Class A Common Stock and the holders of Class B Common Stock shall be offered the right to subscribe for shares of Class B Common Stock. All such rights offerings shall offer the respective holders of Class A Common Stock and Class B Common Stock the right to subscribe at the same rate per share. (c) Liquidation Rights, Merger, Etc. In the event of any dissolution, liquidation or winding up of the affairs of the Corporation, whether voluntary or involuntary, after payment or provision for payment of the debts and other liabilities of the Corporation and after making provision for the holders of each series of Preferred Stock, if any, the remaining assets and funds of the Corporation, if any, shall be divided among and paid ratably to the holders of the Class A Common Stock and the Class B Common Stock treated as a single class. For purposes of this Section 4.1(c), a merger or consolidation of the Corporation with or into any other corporation shall not constitute a dissolution, liquidation or winding up of the affairs of the Corporation. In the event of any merger or consolidation of the Corporation with or into any other corporation pursuant to which shares of Class A Common Stock and Class B Common Stock are converted into other securities, cash or other property, the shares of Class A Common Stock and Class B Common Stock shall be converted into the identical consideration at the same rate per share, except that any 8 voting securities into which Class B Common Stock shall be converted shall have ten (10) times the voting power of any otherwise identical securities into which Class A Common Stock is converted, unless the holders of a majority of the shares of each such class shall have approved such merger or consolidation. (d) Conversion Rights of Class B Common Stock. (i) Optional Conversion. Subject to and upon compliance with the provisions of this Section 4.1(d), each holder of shares of Class B Common Stock shall be entitled to convert, at any time and from time to time, any and all of the shares of such holder's Class B Common Stock, on a one-for-one basis, into shares of Class A Common Stock. Each conversion of shares of Class B Common Stock into shares of Class A Common Stock pursuant to this Section 4.1(d) shall be effected by the surrender of the certificate or certificates representing the shares to be converted (the "Converting Shares") at the principal office of the Corporation (or such other office or agency of the Corporation as the Corporation may designate by written notice to the holders of Class B Common Stock) at any time during its usual business hours, together with written notice by the holder of such Converting Shares, stating that such holder desires to convert the Converting Shares, or a stated number of the shares represented by such certificate or certificates, into an equal number of shares of Class A Common Stock (the "Converted Shares"). Such notice shall also state the name or names (with addresses) and denominations in which the certificate or certificates for Converted Shares are to be issued and shall include instructions for the delivery thereof. Promptly after such surrender and the receipt of such written notice, the Corporation will issue and deliver 9 in accordance with the surrendering holder's instructions the certificate or certificates evidencing the Converted Shares issuable upon such conversion, and the Corporation will deliver to the converting holder a certificate or certificates (which shall contain such legends, if any, as were set forth on the surrendered certificate or certificates) representing any shares that are represented by the certificate or certificates that were delivered to the Corporation in connection with such conversion, but which were not converted. Such conversion, to the extent permitted by law, shall be deemed to have been effected as of the close of business on the date on which (A) such certificate or certificates shall have been surrendered, (B) such notice shall have been received by the Corporation and (C) any payment required pursuant to Section 4.1(f) shall have been made, and at such time the rights of the holder of the Converting Shares as such holder shall cease and the person or persons in whose name or names the certificate or certificates for the Converted Shares are to be issued upon such conversion shall be deemed to have become the holder or holders of record of the Converted Shares. Upon issuance of shares in accordance with this Section 4.1(d), such Converted Shares shall be deemed to be duly authorized, validly issued, fully paid and non-assessable. All Converting Shares shall be retired and canceled. (ii) Automatic Conversion. Except as otherwise provided in the following paragraph, each share of Class B Common Stock shall automatically convert into one (1) share of Class A Common Stock upon the transfer (including any transfer by operation of law, including to any estate of a holder thereof) of such share, effective on the date on which a certificate representing such share is presented for transfer on the books of the Corporation. As promptly as 10 practicable following the surrender for transfer of a certificate representing shares of Class B Common Stock and the payment in cash of any amount required by the provisions of Section 4.1(f), the Corporation will deliver or cause to be delivered a certificate or certificates representing the number of full shares of Class A Common Stock issuable upon such transfer and automatic conversion, issued in such name or names as such holder may direct. Such automatic conversion shall be deemed to have been effected immediately prior to the close of business on the date of transfer. Upon the date any automatic conversion under this Section 4.1(d)(ii), all rights of the holder of the transferred shares of Class B Common Stock shall cease, and the new owner or owners of such shares shall be treated for all purposes as having become the record holder or holders of an equivalent number of shares of Class A Common Stock. The foregoing provision for automatic conversion shall not apply to any transfer by a holder of Class B Common Stock (other than by will or through intestate succession) to any immediate family member (which shall mean, with respect to any person, such person's spouse, parents, children and grandchildren and the spouse of such person's children and grandchildren) of such holder or to any trust or partnership of which all the beneficiaries or partners, as the case may be, are such holder and/or an immediate family member of such holder, provided that the transferee of such shares grants the exclusive power to vote such shares to the person who had such right prior to such transfer. Shares of Class B Common Stock shall be registered in the names of the beneficial owners thereof and not in "street" or "nominee" name. For this purpose, a "beneficial owner" of any shares of Class B Common Stock shall mean a 11 person who, or an entity which, possesses the power, either singly or jointly, to direct the voting of such shares. (iii) Reservation of Shares. The Corporation shall at all times reserve and keep available out of its authorized but unissued shares of Class A Common Stock, solely for the purpose of issuance upon the conversion of shares of Class B Common Stock, such number of shares of such class as are then issuable upon the conversion of all outstanding shares of Class B Common Stock; provided, that, nothing contained herein shall be construed to preclude the Corporation from satisfying its obligations in respect of the conversion of the outstanding shares of Class B Common Stock by delivery of shares of Class A Common Stock held in the treasury of the Corporation. The Corporation covenants that if any shares of Class A Common Stock required registration with or approval of any governmental authority under any federal or state law before such shares of Class A Common Stock may be issued upon conversion, the Corporation will use reasonable efforts to cause such shares to be duly registered or approved, as the case may be. The Corporation will use its reasonable efforts to list the shares of Class A Common Stock required to be delivered upon conversion prior to such delivery upon each national securities exchange (including, if applicable, The Nasdaq Stock Market) upon which the outstanding Class A Common Stock is listed or quoted at the time of such delivery. The Corporation covenants that all shares of Class A Common Stock that shall be issued upon conversion of the shares of fully paid and nonassessable Class B Common Stock will, upon issue, be fully paid and nonassessable. 12 (e) Stock Splits, Adjustments. If the Corporation shall in any manner subdivide (by stock split, stock dividend or otherwise) or combine (by reverse stock split or otherwise) the outstanding shares of the Class A Common Stock or the Class B Common Stock (other than the 9.67-for-one stock split being effected immediately upon the effectiveness hereof), then the outstanding shares of such other classes of Common Stock will be subdivided or combined, as the case may be, to the same extent, share and share alike, and effective provision shall be made for the protection of the conversion rights hereunder. In case of any reorganization, reclassification or change of shares of the Common Stock subsequent to the date hereof (other than a change in par value or from par to no par value as a result of a subdivision or combination), or in case of any consolidation of the Corporation with one or more corporations or a merger of the Corporation with another corporation (other than a consolidation or merger in which the Corporation is the resulting or surviving corporation and which does not result in any reclassification or change of outstanding shares of Common Stock), each holder of a share of Class B Common Stock shall have the right at any time thereafter, so long as the conversion right hereunder with respect to such share would exist had such event not occurred, to convert such share into the kind and amount of shares of stock and other securities and properties (including cash) receivable upon such reorganization, reclassification, change, consolidation or merger by a holder of the number of shares of Class A Common Stock, into which such shares of Class B Common Stock might have been converted immediately prior to such reorganization, reclassification, change, consolidation or merger. In the event of such a reorganization, reclassification, 13 change, consolidation or merger, effective provision shall be made in the certificate of incorporation of the resulting or surviving corporation or otherwise for the protection of the conversion rights of the shares of Class B Common Stock. (f) No Charge. The issuance of certificates for any shares of Class A Common Stock upon conversion of shares of Class B Common Stock shall be made without charge to the holders of such shares for any issuance or transfer tax in respect thereof or other cost incurred by the Corporation in connection with such conversion and the related issuance of shares of Class A Common Stock; provided, however, that the Corporation shall not be required to pay any tax that may be payable in respect of any transfer involved in the issuance and delivery of any certificate in a name other than that of the holder of the Class B Common Stock that is converted. 4.2 Preferred Stock. (a) The shares of Preferred Stock may be issued from time to time in one or more series of any number of shares, provided that the aggregate number of shares issued and not canceled of any and all such series shall not exceed the total number of shares of Preferred Stock hereinabove authorized, and with distinctive serial designations, all as shall hereafter be stated and expressed in the resolution or resolutions providing for the issue of such shares of Preferred Stock from time to time adopted by the Board of Directors pursuant to authority so to do which is hereby vested in the Board of Directors or as is stated and expressed in this Amended and Restated Certificate of Incorporation. Each series of shares of Preferred Stock (i) may have such voting powers, full or limited, or may be without 14 voting powers; provided, however, that, unless holders of at least seventy-five percent (75%) of the outstanding shares of Class B Common Stock have approved the issuance of such shares of Preferred Stock, the Board of Directors may not issue any shares of Preferred Stock that have the right (A) to vote for the election of directors under ordinary circumstances or (B) under any circumstances to elect fifty percent (50%) or more of the directors of the Corporation; (ii) may be subject to redemption at such time or times and at such prices; (iii) may be entitled to receive dividends (which may be cumulative or non-cumulative) at such rate or rates, on such conditions and at such times, and payable in preference to, or in such relation to, the dividends payable on any other class or classes or series of stock; (iv) may have such rights upon the dissolution of, or upon any distribution of the assets of, the Corporation; (v) may be made convertible into or exchangeable for shares of any other class or classes or of any other series of the same or any other class or classes of shares of the Corporation or any securities of the Corporation at such price or prices or at such rates of exchange and with such adjustments; (vi) may be entitled to the benefit of a sinking fund to be applied to the purchase or redemption of shares of such series in such amount or amounts; (vii) may be entitled to the benefit of conditions and restrictions upon the creation of indebtedness of the Corporation or any subsidiary, upon the issue of any additional shares (including additional shares of such series or of any other series) and upon the payment of dividends or the making of other distributions on, and the purchase, redemption or other acquisition by the Corporation or any subsidiary of, any outstanding shares of the Corporation and (viii) may have such other relative, participating, optional or other special rights, qualifications, 15 limitations or restrictions thereof, all as shall be stated in said resolution or resolutions providing for the issue of such shares of Preferred Stock. Any of the voting powers, designations, preferences, rights and qualifications, limitations or restrictions of any such series of Preferred Stock may be made dependent upon facts ascertainable outside of the resolution or resolutions providing for the issue of such Preferred Stock adopted by the Board pursuant to the authority vested in it by this Section 4.2, provided that the manner in which such facts shall operate upon the voting powers, designations, preferences, rights and qualifications, limitations or restrictions of such series of Preferred Stock is clearly and expressly set forth in the resolution or resolutions providing for the issue of such Preferred Stock. The term "facts" as used in the next preceding sentence shall have the meaning given to it in Section 151(a) of the General Corporation Law. Shares of Preferred Stock of any series that have been redeemed (whether through the operation of a sinking fund or otherwise) or that if convertible or exchangeable, have been converted into or exchanged for shares of any other class or classes or for securities of the Corporation shall have the status of authorized and unissued shares of Preferred Stock of the same series and may be reissued as a part of the series of which they were originally a part or may be reclassified and reissued as part of a new series of shares of Preferred Stock to be created by resolution or resolutions of the Board or as part of any other series of shares of Preferred Stock, all subject to the conditions or restrictions on issuance set forth in the resolution or resolutions adopted by the Board of Directors providing for the issue of any series of shares of Preferred Stock. 16 (b) Subject to the provisions of any applicable law or of the By-laws of the Corporation, as from time to time amended, with respect to the closing of the transfer books or the fixing of a record date for the determination of stockholders entitled to vote and except as otherwise provided by law or by the resolution or resolutions, or by the provisions of this Amended and Restated Certificate of Incorporation, providing for the issue of any series of shares of Preferred Stock, the holders of outstanding shares of Common Stock shall exclusively possess voting power for the election of directors and for all other purposes, each holder of record of shares of Common Stock being entitled to the number of votes established herein for each share of Common Stock standing in his or her name on the books of the Corporation. Except as otherwise provided by the resolution or resolutions, or by the provisions of this Amended and Restated Certificate of Incorporation, providing for the issue of any series of shares of Preferred Stock, the holders of shares of Common Stock shall be entitled, to the exclusion of the holders of shares of Preferred Stock of any and all series, to receive such dividends as from time to time may be declared by the Board. In the event of any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, after payment shall have been made to the holders of shares of Preferred Stock of the full amount to which they shall be entitled pursuant to the resolution or resolutions, or by the provisions of this Amended and Restated Certificate of Incorporation, providing for the issue of any series of shares of Preferred Stock, the holders of shares of Common Stock shall be entitled, to the exclusion of the holders of shares of Preferred Stock of any and all series, to share, ratably according to the number of shares of 17 Common Stock held by them, in all remaining assets of the Corporation available for distribution to its stockholders. 4.3 Redeemable Preferred Stock. On September 29, 1995, pursuant to the authority heretofore granted to the Board of Directors to issue Preferred Stock in series, the Board of Directors adopted a resolution providing for the issuance of the Redeemable Preferred Stock, with such powers, preferences, rights, qualifications, limitations and restrictions as were set forth in such resolution and in the related Certificate of Designation, a copy of which is attached hereto as Exhibit A. 4.4 Issuance and Consideration. Subject to the provisions of this Amended and Restated Certificate of Incorporation and except as otherwise provided by law, the stock of the Corporation, regardless of class, may be issued for such consideration and for such corporate purposes as the Board may from time to time determine. 5. Election of Directors. Members of the Board of Directors may be elected either by written ballot or by voice vote. 6. Limitation of Liability. No director of the Corporation shall be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, provided that this provision shall not eliminate or limit the liability of a director (a) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (b) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (c) under Section 174 of the General Corporation Law or (d) for any transaction from which the 18 director derived any improper personal benefits. Any repeal or modification of the foregoing provision shall not adversely affect any right or protection of a director of the Corporation existing at the time of such repeal or modification. 7. Indemnification. 7.1 To the extent not prohibited by law, the Corporation shall indemnify any person who is or was made, or threatened to be made, a party to any threatened, pending or completed action, suit or proceeding (a "Proceeding"), whether civil, criminal, administrative or investigative, including, without limitation, an action by or in the right of the Corporation to procure a judgment in its favor, by reason of the fact that such person, or a person of whom such person is the legal representative, is or was a director or officer of the Corporation, or, at the request of the Corporation, is or was serving as a director or officer of any other corporation or in a capacity with comparable authority or responsibilities for any partnership, joint venture, trust, employee benefit plan or other enterprise (an "Other Entity"), against judgments, fines, penalties, excise taxes, amounts paid in settlement and costs, charges and expenses (including attorneys' fees, disbursements and other charges). Persons who are not directors or officers of the Corporation (or otherwise entitled to indemnification pursuant to the preceding sentence) may be similarly indemnified in respect of service to the Corporation or to an Other Entity at the request of the Corporation to the extent the Board at any time specifies that such persons are entitled to the benefits of this Article 7. 7.2 The Corporation shall, from time to time, reimburse or advance to any director or officer or other person entitled to indemnification 19 hereunder the funds necessary for payment of expenses, including attorneys' fees and disbursements, incurred in connection with any Proceeding, in advance of the final disposition of such Proceeding; provided, however, that, if required by the General Corporation Law, such expenses incurred by or on behalf of any director or officer or other person may be paid in advance of the final disposition of a Proceeding only upon receipt by the Corporation of an undertaking, by or on behalf of such director or officer (or other person indemnified hereunder), to repay any such amount so advanced if it shall ultimately be determined by final judicial decision from which there is no further right of appeal that such director, officer or other person is not entitled to be indemnified for such expenses. 7.3 The rights to indemnification and reimbursement or advancement of expenses provided by, or granted pursuant to, this Article 7 shall not be deemed exclusive of any other rights to which a person seeking indemnification or reimbursement or advancement of expenses may have or hereafter be entitled under any statute, this Amended and Restated Certificate of Incorporation, the By-laws, any agreement, any vote of stockholders or disinterested directors or otherwise, both as to action in his or her official capacity and as to action in another capacity while holding such office. 7.4 The rights to indemnification and reimbursement or advancement of expenses provided by, or granted pursuant to, this Article 7 shall continue as to a person who has ceased to be a director or officer (or other person indemnified hereunder) and shall inure to the benefit of the executors, administrators, legatees and distributees of such person. 20 7.5 The Corporation shall have power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of an Other Entity, against any liability asserted against such person and incurred by such person in any such capacity, or arising out of such person's status as such, whether or not the Corporation would have the power to indemnify such person against such liability under the provisions of this Article 7, the By-laws or under Section 145 of the General Corporation Law or any other provision of law. 7.6 The provisions of this Article 7 shall be a contract between the Corporation, on the one hand, and each director and officer who serves in such capacity at any time while this Article 7 is in effect and any other person entitled to indemnification hereunder, on the other hand, pursuant to which the Corporation and each such director, officer, or other person intend to be, and shall be, legally bound. No repeal or modification of this Article 7 shall affect any rights or obligations with respect to any state of facts then or theretofore existing or there after arising or any proceeding theretofore or thereafter brought or threatened based in whole or in part upon any such state of facts. 7.7 The rights to indemnification and reimbursement or advancement of expenses provided by, or granted pursuant to, this Article 7 shall be enforceable by any person entitled to such indemnification or reimbursement or advancement of expenses in any court of competent jurisdiction. The burden of proving that such indemnification or reimbursement or advancement of expenses is 21 not appropriate shall be on the Corporation. Neither the failure of the Corporation (including its Board, its independent legal counsel and its stockholders) to have made a determination prior to the commencement of such action that such indemnification or reimbursement or advancement of expenses is proper in the circumstances nor an actual determination by the Corporation (including its Board, its independent legal counsel and its stockholders) that such person is not entitled to such indemnification or reimbursement or advancement of expenses shall constitute a defense to the action or create a presumption that such person is not so entitled. Such a person shall also be indemnified for any expenses incurred in connection with successfully establishing his or her right to such indemnification or reimbursement or advancement of expenses, in whole or in part, in any such proceeding. 7.8 Any director or officer of the Corporation serving in any capacity (a) another corporation of which a majority of the shares entitled to vote in the election of its directors is held, directly or indirectly, by the Corporation or (b) any employee benefit plan of the Corporation or any corporation referred to in clause (a) shall be deemed to be doing so at the request of the Corporation. 7.9 Any person entitled to be indemnified or to reimbursement or advancement of expenses as a matter of right pursuant to this Article 7 may elect to have the right to indemnification or reimbursement or advancement of expenses interpreted on the basis of the applicable law in effect at the time of the occurrence of the event or events giving rise to the applicable Proceeding, to the extent permitted by law, or on the basis of the applicable law in effect at the time such indemnification or reimbursement or advancement of expenses is sought. 22 Such election shall be made, by a notice in writing to the Corporation, at the time indemnification or reimbursement or advancement of expenses is sought; provided, however, that if no such notice is given, the right to indemnification or reimbursement or advancement of expenses shall be determined by the law in effect at the time indemnification or reimbursement or advancement of expenses is sought. 8. Action by Stockholders. 8.1 No Action by Written Consent. The stockholders of the Corporation entitled to take action on any matter may not consent in writing to the taking of any such action without a meeting of stockholders duly called and held in accordance with law and this Amended and Restated Certificate of Incorporation and the By-laws. 8.2 Meetings of Stockholders. The annual meeting of stockholders for the election of directors and the transaction of such other business as may be brought before such meeting in accordance with this Amended and Restated Certificate of Incorporation shall be held at such hour and on such business day in each year as may be determined by resolution adopted by the affirmative vote of a majority of the entire Board of Directors (the "entire Board"). Except as otherwise required by law, special meetings of stockholders may be called only at the direction of the Board of Directors by resolution adopted by the affirmative vote of a majority of the entire Board or by the Chairman or by the Chief Executive Officer. Upon a written request by the Board of Directors to call a special meeting of stockholders, the Chairman, the President or the Chief Executive Officer shall call such meeting. Except as otherwise required by law, stockholders of the Corporation shall not have 23 the right to request or call a special meeting of the stockholders. Annual and special meetings of stockholders shall not be called or held otherwise than as herein provided. 9. Adoption, Amendment and/or Repeal of By-Laws. The Board of Directors may from time to time adopt, amend or repeal the By-laws; provided, however, that any By-laws adopted or amended by the Board of Directors may be amended or repealed, and any By-laws may be adopted, by the stockholders of the Corporation by vote of a majority of the holders of shares of stock of the Corporation entitled to vote in the election of directors of the Corporation. 10. Amendment of Certain Articles. 10.1 The provisions set forth in Article Ten, Article Eight and Section 4.2 (a)(i) may not be amended, altered, changed or repealed in any respect unless such amendment, alteration, change or repeal is approved by the affirmative vote of holders of not less than seventy-five percent (75%) of the voting power of the outstanding shares of the Corporation entitled to vote thereon, voting together as a single class. In addition, any proposed amendment, alteration or change to this Amended and Restated Certificate of Incorporation, or repeal of any provision of this Amended and Restated Certificate of Incorporation, which would amend, alter, change or repeal the powers, preferences or special rights of the shares of Class B Common Stock so as to affect them adversely, the affirmative vote of not less than seventy-five percent (75%) of the outstanding shares of Class B Common Stock voting as a separate class, shall be required in addition to the vote otherwise required pursuant to this Article Ten. 24 10.2 Subject to the provisions of Section 10.1 of this Article Ten, the Corporation reserves the right to amend, alter, change or repeal any provision contained in this Amended and Restated 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. 25 IN WITNESS WHEREOF, this Amended and Restated Certificate of Incorporation of the Corporation, which restates, integrates and amends the provisions of the certificate of incorporation of the Corporation, as heretofore amended, and which was duly approved pursuant to resolutions adopted by the Board of Directors of the Corporation and approved by the stockholders of the Corporation at a meeting of such stockholders, in accordance with the requirements of Sections 141, 242 and 245 of the General Corporation Law, has been executed by the undersigned, who hereby affirms on __________ __, 1996, under penalties of perjury, that the statements contained herein have been examined by him and are true and correct. U.S. FRANCHISE SYSTEMS, INC. By: /s/ Neal K. Aronson ------------------------------- Neal K. Aronson Executive Vice President and Chief Financial Officer Exhibit A U.S. FRANCHISE SYSTEMS, INC. CERTIFICATE OF DESIGNATION OF 10% CUMULATIVE REDEEMABLE EXCHANGEABLE PREFERRED STOCK SETTING FORTH THE POWERS, PREFERENCES, RIGHTS, QUALIFICATIONS, LIMITATIONS AND RESTRICTIONS OF SUCH SERIES OF PREFERRED STOCK Pursuant to Section 151 of the Delaware General Corporation Law, U.S. Franchise Systems, Inc., a Delaware corporation (the "Company"), DOES HEREBY CERTIFY: That pursuant to the authority conferred upon the Board of Directors of the Company by the Amended and Restated Certificate of Incorporation of the Company (the "Certificate of Incorporation"), the Board of Directors of the Company on September 29, 1995 adopted the following resolution creating a series of Preferred Stock designated as 10% Cumulative Redeemable Exchangeable Preferred Stock, and such resolution has not been modified and is in full force and effect on the date hereof: RESOLVED that, pursuant to the authority vested in the Board of Directors of the Company in accordance with the provisions of the Certificate of Incorporation, a series of the class of authorized Preferred Stock, par value $.01 per share, of the Company is hereby created and that the designation and number of shares thereof and the voting powers, preferences and relative, participating, optional and other special rights of the shares of such series, and the qualifications, limitations and restrictions thereof are as follows: Section 1. Designation and Number. 1.1 The shares of such series shall be designated as "10% Cumulative Redeemable Exchangeable Preferred Stock" (the "Preferred Stock"). The number of shares initially constituting the Preferred Stock shall be 525,000 which number may be decreased (but not increased) by the Board of Directors without a vote of stockholders; provided, however, that such number may not be decreased below the number of then outstanding shares of Preferred Stock. 1.2 The Preferred Stock shall, with respect to dividend rights and rights on liquidation, dissolution or winding up, rank prior to all other classes and series of capital stock of the Company now or hereafter authorized including, without limitation, the common stock of the Company. No class or series of capital stock of the Company that ranks senior to or on parity with the Preferred Stock shall be created unless approved by holders of a majority of the Preferred Stock. 1.3 Capitalized terms used herein and not otherwise defined shall have the meanings set forth in Section 7 below. Section 2. Dividends and Distributions. 2.1 The holders of shares of Preferred Stock, in preference to the holders of shares of common stock and of any shares of other capital stock of the Company, shall be entitled to receive, when, as and if declared by the Board of Directors, out of the assets of the Company legally available therefor, cumulative dividends at an annual rate on the Liquidation Preference thereof equal to 10%, calculated on the basis of a 360-day year consisting of twelve 30-day months, compounding semi-annually on June 30 and December 31, accruing and payable in additional shares of Preferred Stock on such Business Day as may be fixed from time to time by the Board of Directors for the payment of dividends (each such date being referred to herein as a "Dividend Payment Date"); provided, however, that such dividends shall continue to accrue, and compound annually, to the extent not declared payable. 2.2 Dividends payable pursuant to Section 2(a) shall begin to accrue and be cumulative from the Issue Date, and shall accrue on a daily basis, in each case whether or not declared. Dividends paid on the shares of Preferred Stock in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares of Preferred Stock at the time outstanding. The Board of Directors may fix a record date for the determination of holders of shares of Preferred Stock entitled to receive payment of a dividend declared thereon, which record date shall be no more than 60 days or less than 10 days prior to the date fixed for the payment thereof. 2.3 The holders of shares of Preferred Stock shall not be entitled to receive any dividends or other distributions except as provided herein. Section 3. Certain Restrictions. 3.1 Whenever dividends payable on shares of Preferred Stock as provided in Section 2 are not paid in full, at such time and thereafter until all unpaid dividends, whether or not declared, on the outstanding shares of Preferred Stock shall have been paid in full or declared and set apart for payment, or whenever the Company shall not have redeemed shares of Preferred Stock at a time required by Section 4(b) or (d) at such time and thereafter until all redemption obligations provided in Section 4(b) or (d) that have come due shall have been satisfied or all necessary funds have been set apart for payment, the Company shall not declare or pay dividends, or make any other distributions, on any shares of Junior Stock. 2 3.2 Whenever dividends payable on shares of Preferred Stock as provided in Section 2 are not paid in full, at such time and thereafter until all unpaid dividends payable, whether or not declared, on the outstanding shares of Preferred Stock shall have been paid in full or declared and set apart for payment, or whenever the Company shall not have redeemed shares of Preferred Stock at a time required by Section 4(b) or (d) at such time and thereafter until all redemption obligations provided in Section 4(b) or (d) that have come due shall have been satisfied or all necessary funds have been set apart for payment, the Company shall not redeem, purchase or otherwise acquire for consideration, or require the conversion of, any shares of Junior Stock. 3.3 The Company shall not permit any Subsidiary of the Company, or cause any other Person, to purchase or otherwise acquire for consideration any shares of capital stock of the Company unless the Company could, pursuant to Section 3(b), purchase such shares at such time and in such manner. Section 4. Redemption; Exchange at Company's Option. 4.1 Subject to the restrictions contained in Section 3, the Company shall have the right, at its sole option and election, to redeem the shares of Preferred Stock, in whole or in part, on not less than 10 days notice of the date of redemption (any such redemption date pursuant to this Section 4(a) being referred to herein as an "Optional Redemption Date") at a price per share (the "Optional Redemption Price") equal to (x) 100% of the Liquidation Preference of such share plus (y) an amount per share equal to all accrued and unpaid dividends thereon, whether or not declared or payable, to the applicable Optional Redemption Date, in immediately available funds. 4.2 On September 29, 2007 (the "Mandatory Redemption Date"), the Company shall redeem all of the shares of Preferred Stock then outstanding at a price per share (the "Mandatory Redemption Price") equal to (x) 100% of the Liquidation Preference per share plus (y) an amount per share equal to all accrued and unpaid dividends thereon, whether or not declared or payable, to the Mandatory Redemption Date, in immediately available funds. 4.3 4.3.1 (A) At any time, the Company shall have the right, at its sole option and election, on not less than 30 days notice of the date of the required conversion (the "Exchange Date"), to require all the holders of Preferred Stock to exchange all or part of their shares of Preferred Stock into Subordinated Debentures in an aggregate principal amount for each share of Preferred Stock so exchanged equal to (x) 100% of the Liquidation Preference per share plus (y) an amount per share equal to all accrued and unpaid dividends thereon, whether or not declared or payable, to the Exchange Date. 3 4.3.2 On the Exchange Date, the Company shall deliver to or upon the written order of the holder of the Preferred Stock being so exchanged a certificate or certificates representing the Subordinated Debentures into which the shares of Preferred Stock being exchanged (the "Exchanged Shares") may be or have been exchanged in accordance with the provisions of this Section 4(c). Subject to the satisfaction of the following provisions of this paragraph and of this Section 4, such exchange shall be deemed to have been made immediately prior to the close of business on the Exchange Date. 4.4 On the date that is 10 Business Days after the occurrence of a Change of Control (the "Change of Control Redemption Date"), the Company shall redeem all of the shares of Preferred Stock then outstanding at a price per share (the "Change of Control Redemption Price") equal to (x) 100% of the Liquidation Preference per share plus (y) an amount per share equal to all accrued and unpaid dividends thereon, whether or not declared or payable, to the Change of Control Redemption Date, in immediately available funds. 4.5 If pursuant to Section 4(a) or (c) less than all shares of Preferred Stock at the time outstanding are to be redeemed or exchanged, as the case may be, the shares to be redeemed or exchanged, as the case may be, shall be determined pro rata. 4.6 Notice of any redemption or exchange of shares of Preferred Stock pursuant to Section 4(a), 4(b), 4(c) or 4(d) shall be mailed at least 10 (or 5 in the case of redemption under Section 4(d)), but not more than 60, days prior to the date fixed for redemption or exchange to each holder of shares of Preferred Stock to be redeemed or converted, at such holder's address as it appears on the transfer books of the Company. In order to facilitate the redemption or exchange of shares of Preferred Stock, the Board of Directors may fix a record date for the determination of shares of Preferred Stock to be redeemed or exchanged, or may cause the transfer books of the Company for the Preferred Stock to be closed, not more than 60 days or less than 30 days prior to the date fixed for such redemption or exchange. 4.7 Notice of redemption or exchange having been given as aforesaid, upon payment of the Optional Redemption Price, Mandatory Redemption Price or Change of Control Redemption Price or delivery of the Subordinated Debentures, as the case may be, in respect of shares of Preferred Stock to be redeemed or exchanged pursuant to Section 4(a), 4(b), 4(c) or 4(d), notwithstanding that any certificates for such shares shall not have been surrendered for cancellation, from and after the date of redemption or exchange designated in the notice of redemption or exchange, (i) the shares of Preferred Stock represented thereby shall no longer be deemed outstanding, (ii) the rights to receive dividends thereon shall cease to accrue, (iii) all rights of the holders of shares of Preferred Stock to be redeemed or exchanged shall cease and terminate, excepting only the right to receive the Optional Redemption Price, the Mandatory Redemption Price, Change of Control Redemption 4 Price or the Subordinated Debentures and (iv) interest shall accrue on the Subordinated Debentures in accordance with their terms. Section 5. Liquidation, Dissolution or Winding Up. 5.1 If the Company shall commence a voluntary case under the United States bankruptcy laws or any applicable bankruptcy, insolvency or similar law of any other country, or consent to the entry of an order for relief in an involuntary case under any such law or to the appointment of a receiver, liquidator, assignee, custodian, trustee, sequestrator (or other similar official) of the Company or of any substantial part of its property, or make an assignment for the benefit of its creditors, or admit in writing its inability to pay its debts generally as they become due, or if a decree or order for relief in respect of the Company shall be entered by a court having jurisdiction in the premises in an involuntary case under the United States bankruptcy laws or any applicable bankruptcy, insolvency or similar law of any other country, or appointing a receiver, liquidator, assignee, custodian, trustee, sequestrator (or other similar official) of the Company or of any substantial part of its property, or ordering the winding up or liquidation of its affairs, and on account of any such event the Company shall liquidate, dissolve or wind up, or if the Company shall otherwise liquidate, dissolve or wind up, no distribution shall be made to the holders of shares of Junior Stock unless, prior thereto, the holders of shares of Preferred Stock shall have received the Liquidation Preference, plus all accrued and unpaid dividends, whether or not declared or currently payable, to the date of distribution, with respect to each share. 5.2 Neither the consolidation or merger of the Company with or into any other Person nor the sale or other distribution to another Person of all or substantially all the assets, property or business of the Company shall be deemed to be a liquidation, dissolution or winding up of the Company for purposes of this Section 5. Section 6. Certain Remedies. Any registered holder of Preferred Stock shall be entitled to an injunction or injunctions to prevent breaches of the provisions of this Certificate of Designation and to enforce specifically the terms and provisions of this Certificate of Designation in any court of the United States or any state thereof having jurisdiction, this being in addition to any other remedy to which such holder may be entitled at law or equity. 5 Section 7. Definitions. For the purposes of this Certificate of Designation of Preferred Stock, the following terms shall have the meanings indicated: "Affiliate" shall have the meaning ascribed to such term in Rule 12b-2 of the General Rules and Regulations under the Exchange Act. "Business Day" shall mean any day other than a Saturday, Sunday or other day on which commercial banks in the City of New York are authorized or required by law or executive order to close. "Change of Control" shall mean (i) the sale or transfer of all or substantially all of the Company's assets to any Person that is not an Affiliate of the Company, (ii) the sale or transfer (whether by merger, consolidation or otherwise) of a majority (i.e., greater than 50%) of the Common Stock, in the aggregate, to Persons who are: (a) not purchasers of capital stock of the Company pursuant to the offering described in the Company's Confidential Investment Memorandum, dated August 19, 1995, (b) not an employee of the Company, or (c) not a member of the immediate family of or a trust or partnership for the benefit of any person described in clauses (a) or (b) or an immediate family member of any such person or any Affiliate of the foregoing, or (iii) the termination of employment for any reason by the Company (including resignation) of Michael Leven. "common stock" of the Company shall mean the Common Stock and any other common stock of the Company issued from time to time. "Common Stock" shall mean the Common Stock, par value $.10 per share, of the Company. "Issue Date" shall mean the first date on which shares of Preferred Stock are issued. "Junior Stock" shall mean any capital stock of the Company ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Preferred Stock. "Liquidation Preference" with respect to a share of Preferred Stock shall mean $100. "Person" shall mean any individual, firm, corporation, partnership, trust, incorporated or unincorporated association, joint venture, joint stock company, limited liability company, government (or an agency or political subdivision thereof) or other entity of any kind, and shall include any successor (by merger or otherwise) of such entity. 6 "Subordinated Debentures" shall mean the 10% Subordinated Debentures due September 29, 2007 of the Company, substantially in the form of Exhibit A hereto. "Subsidiary" of any Person shall mean any corporation or other entity of which a majority of the voting power of the voting equity securities or equity interest, or rights to profits, is owned, directly or indirectly, by such Person. IN WITNESS WHEREOF, U.S. Franchise Systems, Inc. caused this Certificate to be duly executed in its corporate name on this 29th day of September, 1995. U.S. FRANCHISE SYSTEMS, INC. By: /s/ Neal K. Aronson ------------------------------ Name: Neal K. Aronson Title: Incorporator 7 EXHIBIT A TO CERTIFICATE OF DESIGNATION [FORM OF 10% SUBORDINATED DEBENTURE DUE SEPTEMBER 29, 2007] THIS SECURITY (AND ANY INTEREST HEREIN) MAY NOT BE TRANSFERRED, OFFERED, SOLD, ASSIGNED, PLEDGED, HYPOTHECATED, ENCUMBERED OR OTHERWISE DISPOSED OF UNLESS SUCH TRANSFER, OFFER, SALE, ASSIGNMENT, PLEDGE, HYPOTHECATION, ENCUMBRANCE OR OTHER DISPOSITION COMPLIES WITH THE PROVISIONS OF A STOCKHOLDERS' AGREE MENT DATED AS OF SEPTEMBER 29, 1995 (A COPY OF WHICH IS ON FILE WITH THE SECRETARY OF THE COMPANY AND WILL BE MAILED TO THE HOLDER WITHOUT CHARGE WITHIN 15 DAYS AFTER RECEIPT BY THE COMPANY OF A WRITTEN REQUEST THEREFOR FROM SUCH HOLDER). NO TRANSFER, OFFER, SALE, ASSIGNMENT, PLEDGE, HYPOTHECATION, ENCUMBRANCE OR OTHER DISPOSITION OF THIS SECURITY (OR ANY INTEREST HEREIN) MAY BE MADE EXCEPT AS OTHERWISE PROVIDED IN SUCH STOCKHOLDERS' AGREEMENT AND (A) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 (THE "ACT") AND ANY APPLICABLE STATE SECURI TIES AND "BLUE SKY" LAWS, OR (B) IF THE COMPANY HAS BEEN FURNISHED WITH AN OPINION OF COUNSEL FOR THE HOLDER, WHICH OPINION AND COUNSEL SHALL BE REASONABLY SATIS FACTORY TO THE COMPANY, TO THE EFFECT THAT SUCH TRANSFER, OFFER, SALE, ASSIGNMENT, PLEDGE, HYPOTHECA TION, ENCUMBRANCE OR OTHER DISPOSITION IS EXEMPT FROM THE REGISTRATION PROVISIONS OF SECTION 5 OF THE ACT AND THE RULES AND REGULATIONS IN EFFECT THEREUNDER AND ANY SIMILAR REGISTRATION REQUIREMENT UNDER SUCH STATE SECURITIES, OR "BLUE SKY", LAWS. U.S. FRANCHISE SYSTEMS, INC. SUBORDINATED DEBENTURE DUE SEPTEMBER 29, 2007 $ ____________ Atlanta, Georgia ---------, ---- FOR VALUE RECEIVED, the undersigned, U.S. FRANCHISE SYSTEMS, INC., a Delaware corporation (the "Company"), promises to pay to the order of __________________________ or its registered assigns (the "Holder"), the principal sum of ______________________ __________________ Dollars ($ ) on September 29, 2007 (the "Maturity Date"), with interest thereon from time to time as provided herein. 1. Preferred Stock. This Subordinated Debenture (this "Debenture") is one of the Debentures (the "Debentures") issued in exchange for the Company's 10% Cumulative Redeemable Exchangeable Preferred Stock. 2. Interest. The Company promises to pay interest on the principal amount of this Debenture at the rate of 10.0% per annum. The Company shall pay accrued interest semi-annually on the last Business Day of each June and December of each year (each date upon which interest shall be so payable, an "Interest Payment Date"). Interest on this Debenture shall be paid one-half in cash and one-half through the issuance of additional Debentures to the Holder. Cash interest shall be paid by wire transfer of immediately available funds to an account designated by the Holder. Interest on this Debenture shall accrue from the date of issuance until repayment of the principal and pay ment of all accrued interest in full. Interest shall be computed on the basis of a 360-day year of twelve 30-day months. Notwithstanding the foregoing provisions of this Section 2, but subject to applicable law, any overdue principal of and overdue interest on this Debenture shall bear interest, payable on demand in immediately available funds, for each day from the date payment thereof was due to the date of actual payment, at a rate equal to the rate of interest otherwise in effect pursuant to this Section 2 plus 2% per annum. Subject to applicable law, any interest that shall accrue on overdue interest on this Debenture as provided in the preceding sentence and shall not have been paid in full on or before the next Interest Payment Date to occur after the Interest Payment Date on which the overdue interest became due and payable shall itself be deemed to be overdue interest on this Debenture to which the preceding sentence shall apply. 3. Mandatory Prepayment Upon a Change of Control. (a) On the date that is 10 Business Days after the occurrence of a Change of Control (the "Change of Control Prepayment Date"), the Company shall prepay in full the outstanding principal amount of and accrued interest on this Debenture and the other Debentures. (b) Any prepayment pursuant to the terms of Section 3(a) shall be subject to the provisions of Section 6. (c) The Company shall give written notice to the Holder of any mandatory prepayment pursuant to this Section 3 at least 5 Business Days prior to the date of such prepayment. 2 4. Optional Prepayment. (a) Upon notice given to the Holder as provided in subsection (b) of this Section 4, the Company, at its option, may prepay all or any portion of this Debenture, pro rata with the prepayment of all other Debentures, at any time, by paying an amount equal to the outstanding principal amount of this Debenture, or the portion of this Debenture called for prepayment, together with interest accrued and unpaid thereon to the date fixed for prepayment without penalty or premium. (b) The Company may give written notice of prepayment of this Debenture or any portion thereof not less than 10 nor more than 60 days prior to the date fixed for such prepayment. Upon notice of prepayment being given by the Company, the Company covenants and agrees, subject to Section 6, that it will prepay, on the date therein fixed for prepayment, this Debenture or the portion hereof so called for prepayment, at the outstanding principal amount thereof or the portion thereof so called for prepayment together with interest accrued and unpaid thereon to the date fixed for such prepayment. 5. Defaults and Remedies. (a) Events of Default. An "Event of Default" shall occur if: (i) the Company shall default in the payment of the principal of this Debenture or any of the other Debentures, when and as the same shall become due and payable, whether at maturity or at a date fixed for prepayment or by acceleration or otherwise; or (ii) the Company shall default in the payment of any installment of interest on this Debenture or any of the other Debentures according to its terms, when and as the same shall become due and payable and such default shall continue for a period of 5 days; or (iii) an involuntary proceeding shall be commenced or an involuntary petition shall be filed in a court of competent jurisdiction seeking (a) relief in respect of the Company or any Subsidiary, or of a substantial part of its property or assets, under Title 11 of the United States Code, as now constituted or hereafter amended, or any other Federal or state bankruptcy, insolvency, receivership or similar law, (b) the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for the Company or any Subsidiary, or for a substantial part of its property or assets, or (c) the winding up or liquidation of the Company or any Subsidiary; and such proceeding or petition shall continue undismissed for 60 days, or an order or decree approving or ordering any of the foregoing shall be entered; or (iv) the Company or any Subsidiary shall (a) voluntarily commence any proceeding or file any petition seeking relief under Title 11 of the United States Code, as now constituted or hereafter amended, or any other Federal or state 3 bankruptcy, insolvency, receivership or similar law, (b) consent to the institution of, or fail to contest in a timely and appropriate manner, any proceeding or the filing of any petition described in paragraph (viii) of this Section 7(a), (c) apply for or consent to the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for the Company or any Subsidiary, or for a substantial part of its property or assets, (d) file an answer admitting the material allegations of a petition filed against it in any such proceeding, (e) make a general assignment for the benefit of creditors, (f) become unable, admit in writing its inability or fail generally to pay its debts as they become due or (g) take any action for the purpose of effecting any of the foregoing. (b) Acceleration. If an Event of Default occurs under clauses (a)(iii) or (iv) of this Section 5, then the outstanding principal of and all accrued interest on this Debenture shall automatically become immediately due and payable, without presentment, demand, protest or notice of any kind, all of which are expressly waived. If any other Event of Default occurs and is continuing, the Holder of this Debenture, by written notice to the Company, may, subject to Section 6, declare the principal of and accrued interest on this Debenture to be due and payable immediately. Upon such declaration, such principal and interest shall become immediately due and payable. 6. Subordination. (a) Loans Subordinated. Notwithstanding any provision of this Debenture to the contrary, the Company covenants and agrees, and the Holder by acceptance of this Debenture likewise covenants and agrees: (i) that all payments and prepayments of principal of and interest on this Debenture (all such amounts being collectively referred to as "Amounts Payable") shall be subordinated to the extent set forth in Sections 6(b) through 6(i) hereof to the prior payment in full of all Senior Obligations; (ii) this Section 6 shall constitute a continuing offer to all Persons who become holders of, or continue to hold, Senior Obligations (irrespective of whether such Senior Obligations were created or acquired before or after the issuance of this Debenture); (iii) the provisions of this Section 6 and Section 3(b) are made for the benefit of all present and future holders of Senior Obligations (and their successors and assigns), and shall be enforceable by them directly against the Holder; (iv) all present and future holders of Senior Obligations (and their successors and assigns) are third party beneficiaries of the provisions of this Section 6 and of Section 3(b), and the provisions of this Section 6 and of Section 3(b) shall be enforceable by such holders of Senior Obligations (and their successors and assigns) directly against the Holder; and 4 (v) the holders of Senior Obligations may demand specific performance of this Section 6 and Section 3(b), whether or not the Company or any Holder shall have complied with any of the provisions of this Section 6 or Section 3(b) applicable to it, at any time when the Holder or the Company shall have failed to comply with any of the provisions of this Section 6 or of Section 3(b). The Holder and the Company hereby irrevocably waive any defense based on the adequacy of a remedy at law that might be asserted as a bar to such remedy of specific performance. (b) Priority and Payment Over of Proceeds in Certain Events. (i) Upon any payment or Distribution of Assets of the Company to creditors of the Company, upon the dissolution, winding up, liquidation, arrangement, reorganization, adjustment, protection, relief or composition of the Company or its debts, whether in any bankruptcy, insolvency, arrangement, reorganization, receivership, relief or similar proceedings or upon an assignment for the benefit of creditors or any other marshalling of the assets and liabilities of the Company or otherwise, any payment or distribution of any kind (whether in cash, property or securities) that otherwise would be payable or deliverable upon or with respect to any Amount Payable shall be paid or delivered directly, to the holders of Senior Obligations for application (in the case of cash) to or as collateral (in the case of non-cash property or securities) for the payment or prepayment of the Senior Obligations until such Senior Obligations shall have been paid in full, except that the Holder may, pursuant to a plan of reorganization under Chapter 11 of the Bankruptcy Code of 1978, as amended, or any similar provision of any successor legislation thereto, receive securities that are subordinate to the Senior Obligations to at least the same extent as this Debenture. (ii) The Company shall not make any payment on or with respect to any Amount Payable irrespective of whether upon acceleration or otherwise if, at such time, a Default on Senior Obligations shall have occurred (or, if as a result of such payment, a Default on Senior Obligations would occur) and a Blockage Period (as defined below) shall be in effect. A Blockage Period shall begin upon the receipt by the Holder of a notice or notices ("Default Notice") (which shall either be in writing or telephonic and, if telephonic, confirmed in writing) from the representative of the holders of the Senior Obligations, or such a holder, stating that a Default on Senior Obligations has occurred (or would occur as a result of such payment) and that the Blockage Period has commenced and shall end on the earliest of (i) (A) the date such Default is cured or waived if the Default on Senior Obligations to which the Default Notice refers is a default in payment of any Senior Obligations or (B) the 720th day after the beginning of such period if the Default on Senior Obligations to which the Default Notice refers is not a default in payment of any Senior Obligations, (ii) the date upon which all such Defaults on Senior Obligations shall cease to exist or shall have been cured or waived and (iii) the 180th day after the occurrence of a Triggering Event (the "Blockage Period"). Immediately following the last day of the Blockage Period, the Company shall pay all Amounts Payable then due; provided, however, that, if during a Blockage Period the holders of Senior Obligations accelerates the Senior 5 Obligations or commences judicial action to enforce the Senior Obligations, all Amounts Payable, if any, that are received by the Holder thereafter (unless and until such acceleration is rescinded or such judicial action ceases to be pending) shall be for the benefit of and paid over to the holders of Senior Obligations as provided in clause (iii) below. (iii) All payments or distributions upon or with respect to any Amount Payable that are received by the Holder that are not expressly permitted under this Section 6 shall be segregated from other funds and property held by the Holder, shall be received in trust for the benefit of the holders of the Senior Obligations, and shall be forthwith paid over in the same form as so received (with any necessary endorsement) to the holders of Senior Obligations to be applied (in the case of cash) to or held as collateral (in the case of non-cash property or securities) for the payment or prepayment in full of the Senior Obligations. (iv) So long as any Senior Obligations remain outstanding, the Holder will not be entitled to: (A) take, demand, or receive, indirectly, by set-off, redemption, purchase or in any manner, any voluntary prepayment or other payment or realization of any Amount Payable in amounts or in a manner which are in violation of the provisions of this Section 6; (B) cancel or otherwise discharge any Amounts Payable or subordinate any such Amounts Payable to any indebtedness of the Company; or (C) prior to the end of any applicable Blockage Period, accelerate payment of the scheduled maturity of any amount owing under this Note, or institute any proceedings to enforce payment of any indebtedness evidenced by this Note or institute any bankruptcy proceedings in respect thereof. (v) Upon any payment or Distribution of Assets referred to in Section 6(b)(i) hereof, the Holder shall be entitled to rely upon any order or decree of a court of competent jurisdiction in which such dissolution, winding up, liquidation or reorganization proceedings are pending, and upon a certificate of the receiver, trustee in bankruptcy, liquidating trustee, agent or other Person making any such payment or Distribution of Assets, delivered to the Holder for the purpose of ascertaining the Persons entitled to participate in such Distribution of Assets, the holders of Senior Obligations or other indebtedness of the Company, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Section 6. (c) Amendments. This Section 6 may not be amended without the written consent of each holder of the Senior Obligations, the Company and of the Holders of more than 50% of the outstanding aggregate principal amount of the Debentures, and 6 any purported amendment without such consent shall be void. No holder of Senior Obligations shall be prejudiced in such holder's right to enforce the subordination and other terms and conditions of this Debenture by any act or failure to act by any such holder or by any act or failure to act by the Company or anyone in custody of its assets or property. (d) Subrogation. The Holder agrees that no payment or distribution to the holders of the Senior Obligations pursuant to the provisions of this Section 6 shall entitle the Holder to exercise any rights of subrogation in respect thereof until payment in full of the Senior Obligations. (e) Obligations of the Company Unconditional. Nothing contained in this Debenture is intended to or shall impair as between the Company and the Holder the obligation of the Company, which is absolute and unconditional, to pay to the Holder all Amounts Payable, as and when the same shall become due and payable in accordance with their terms, or to affect the relative rights of the Holder and other creditors of the Company (other than the holders of Senior Obligations), nor, subject to Section 6(b)(iii), shall anything herein prevent the Holder from exercising any rights it may have (i) in a bankruptcy or similar proceeding affecting the Company or its property or (ii) under Section 6(b)(iv) hereof, upon the occurrence and continuance of an Event of Default under this Debenture, subject to the rights under this Section 6 of the holders of Senior Obligations in respect of cash, property or securities of the Company otherwise payable or delivered to such Holder upon the exercise of any such remedy. (f) No Fiduciary Duty. The Holder shall not be deemed to owe any fiduciary duty to the holders of Senior Obligations by virtue of the provisions of this Section 6. (g) Purchase of Stock; Contribution and Cancellation. Nothing contained in this Section 6 shall prohibit the Holder hereof to purchase stock of the Company by surrendering the Debenture to the Company for cancellation of any or all of the principal amount of and interest accrued on the Debenture or to contribute and cancel any or all of the principal amount of and interest accrued on the Debenture as equity of the Company. (h) Miscellaneous. (i) To the extent permitted by applicable law, the holders of the Debentures and the Company hereby waive (1) notice of acceptance hereof by the holders of the Senior Obligations and (2) all diligence in the collection or protection of or realization upon the Senior Obligations. (ii) The Company and the Holder hereby expressly agree that the holders of Senior Obligations may enforce any and all rights derived herein by suit, either in equity or law, for specific performance of any agreement contained in this 7 Section 6 or for judgment at law and any other relief whatsoever appropriate to such action or procedure. (iii) The Holder acknowledges and agrees that the foregoing subordination provisions are, and are intended to be, an inducement and a consideration to each holder of Senior Obligations, whether such Senior Obligations was created or acquired before or after the issuance of this Agreement, and each holder of Senior Obligations shall be deemed conclusively to have relied upon such subordination provisions in acquiring and continuing to hold such Senior Obligations. (i) Definitions. As used in this Section 6, the following terms shall have the following meanings: "Amounts Payable" shall have the meaning set forth in Section 6(a)(i). "Blockage Period" shall have the meaning set forth in Section 6(b)(ii). "Default Notice" shall have the meaning set forth in Section 6(b)(ii). "Default on Senior Obligations" means any default of the Senior Obligations (regardless of any applicable notice and cure period) if the effect thereof is to cause, or permit the holder or holders thereof (or a trustee or trustees on behalf of such holder or holders) to cause, the Senior Obligations to become due and payable. "Distribution of Assets" means, with respect to any Person, any distribution of assets of such Person of any kind or character, whether in cash, property or securities. "Senior Obligations" shall mean (i) the principal of and interest on (including, without limitation, any interest that accrues after the commencement of any case, proceeding or other legal action relating to the bankruptcy, insolvency or reorganization of the Company whether or not such interest constitutes an allowed claim) any indebtedness for borrowed money of the Company (other than the Debentures), whether outstanding on the date hereof or thereafter created, incurred or assumed, and any renewal, refunding, refinancing, replacement or extension thereof, unless, in the case of any particular indebtedness, the instrument creating or evidencing the same or pursuant to which the same is outstanding expressly provides that such indebtedness shall not be senior in right of payment to the Debentures, (ii) any obligations of the Company for the reimbursement of any obligor on any letter of credit, banker's acceptance or similar credit transaction and (iii) any obligations of the Company as guarantor or surety for the obligations of others of the type referred to [in] clause (i) or (ii) above. "Triggering Event" shall mean the earlier to occur of (a) the Maturity Date or (b) a Change of Control. 8 7. Suits for Enforcement. Subject to Section 6, upon the occurrence of any one or more Events of Default, the holders of a majority in principal amount of the outstanding Debentures may proceed to protect and enforce the rights of all holders of the Debentures by suit in equity, action at law or by other appropriate proceeding, or may proceed to enforce the payment of the Debentures, or to enforce any other legal or equitable right of the holders of the Debentures. 8. Remedies Cumulative. No remedy herein conferred upon the Holder is intended to be exclusive of any other remedy and each and every such remedy shall be cumulative and shall be in addition to every other remedy given hereunder or now or hereafter existing at law or in equity or by statute or otherwise. To the extent permitted by applicable law, the Company and the holders of the Debentures severally waive presentment for payment, demand, protest and notice of dishonor. 9. Remedies Not Waived. No course of dealing between the Company and the Holder or any delay on the part of the Holder in exercising any rights hereunder shall operate as a waiver of any right. 10. Holder; Transfer. (a) The term "Holder" as used herein shall also include any Permitted Transferee of this Debenture whose name has been recorded by the Company in the register referred to in Section 10(b). Each Permitted Transferee of this Debenture acknowledges that this Debenture has not been registered under the Securities Act, and may be transferred only upon receipt by the Company of an opinion of counsel, which opinion shall be satisfactory in form and substance to the Company, stating that this Debenture may be transferred without registration under the Securities Act in reliance on an exemption therefrom. (b) The Company shall maintain a register in its office for the purpose of registering the Debentures and any transfer thereof, which register shall reflect and identify, at all times, the ownership of any interest in the Debentures. Upon the issuance of this Debenture, the Company shall record the name of the initial purchaser of this Debenture in such register as the first Holder. Thereafter, the Company shall duly record the name of a transferee on such register promptly after receipt of notice of a transfer and of the opinion referred to in Section 10(a) above. (c) Any Holder of this Debenture shall be deemed to be a party to, and subject to the terms of, the Stockholders' Agreement. 11. Defined Terms. For purposes of this Debenture, the following terms shall have the meanings indicated: "Affiliate" shall have the meaning ascribed to such term in Rule 12B-2 of the General Rules and Regulations under the Securities Exchange Act of 1934, as amended. 9 "Business Day" shall mean any day other than a Saturday, Sunday or other day on which commercial banks in the City of New York are authorized or required by law or executive order to close. "Change of Control" shall mean (i) the sale or transfer of all or substantially all of the Company's assets to any person that is not an Affiliate of the Company or (ii) the sale or transfer (whether by merger, consolidation or otherwise) of the majority (i.e., greater than 50%) of the Common Stock, in the aggregate, to persons who are: (a) not purchasers of capital stock of the Company pursuant to the Offering described in the Company's Confidential Investment Memorandum, dated August 19, 1995, (b) not an employee of the Company, or (c) not a member of the immediate family of or a trust or partnership for the benefit of any person described in the clauses (a) or (b) or an immediate family member of any such person or any affiliate of the foregoing, or (iii) the termination of employment for any reason by the Company (including resignation) of Michael Levin. "Common Stock" shall mean the common stock, par value, $.10 per share, of the Company. "Permitted Transferee" shall have the meaning set forth in the Stockholder's Agreement. "Person" shall mean any individual, firm, corporation, partnership, trust, incorporated or unincorporated association, joint venture, joint stock company, limited liability company, government (or any agency or political subdivision thereof) or other entity of any kind, and shall include any successor (by merger or otherwise) of such entity. "Stockholders' Agreement" shall mean the Stockholder's Agreement, dated as of September __, 1995, among the stockholders of the Company as such agreement may be amended from time to time. "Subsidiary" of any Person shall mean any corporation or Person entity of which a majority of the voting equity securities or equity interest (or rights to profits), is owned, directly or indirectly, by such Person. 12. Payments. All payments and prepayments of principal of and interest on this Debenture shall be made in lawful money of the United States of America. 13. Covenants Bind Successors and Assigns. All the covenants, stipulations, promises and agreements in this Debenture contained by or on behalf of the Company shall bind its successors and assigns, whether so expressed or not. 14. Governing Law. This Debenture shall be governed by and construed in accordance with the laws of the State of Georgia without regard to the principles of conflicts of law of such State. 10 15. Variation in Pronouns. All pronouns and any variations thereof refer to the masculine, feminine or neuter, singular or plural, as the context may require. 16. Headings. The headings in this Debenture are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. U.S. FRANCHISE SYSTEMS, INC. By: _____________________________ Name: Title: 11 EX-3.2 3 BY-LAWS AMENDED AND RESTATED BY-LAWS of U.S. FRANCHISE SYSTEMS, INC. (A Delaware Corporation) ------------------------ ARTICLE 1 DEFINITIONS As used in these By-laws, unless the context otherwise requires, the term: 1.1 "Assistant Secretary" means an Assistant Secretary of the Corporation. 1.2 "Assistant Treasurer" means an Assistant Treasurer of the Corporation. 1.3 "Board" means the Board of Directors of the Corporation. 1.4 "By-laws" means the initial by-laws of the Corporation, as amended from time to time. 1.5 "Certificate of Incorporation" means the initial certificate of incorporation of the Corporation, as amended, supplemented or restated from time to time. 1.6 "CFO" means the Chief Financial Officer of the Corporation. 1.7 "Chairman" means the Chairman of the Board of Directors of the Corporation. 2 1.8 "Chief Executive Officer" means the Chief Executive Officer of the Corporation. 1.9 "Corporation" means U.S. Franchise Systems, Inc. 1.10 "Directors" means directors of the Corporation. 1.11 "Entire Board" means all directors of the Corporation in office, whether or not present at a meeting of the Board, but disregarding vacancies. 1.12 "General Corporation Law" means the General Corporation Law of the State of Delaware, as amended from time to time. 1.13 "Office of the Corporation" means the executive office of the Corporation, anything in Article 131 of the General Corporation Law to the contrary notwithstanding. 1.14 "Officer" means the Chairman, the President, the Chief Executive Officer, the Chief Financial Officer, any Vice President, any Secretary or Assistant Secretary, any Treasurer or Assistant Treasurer and any other officer of the Corporation. 1.15 "President" means the President of the Corporation. 1.16 "Secretary" means the Secretary of the Corporation. 1.17 "Stockholders" means Stockholders of the Corporation. 1.18 "Treasurer" means the Treasurer of the Corporation. 1.19 "Vice President" means a Vice President of the Corporation. 3 ARTICLE 2 STOCKHOLDERS 2.1 Place of Meetings. Every meeting of Stockholders shall be held at the office of the Corporation or at such other place within or without the State of Delaware as shall be specified or fixed in the notice of such meeting or in the waiver of notice thereof. 2.2 Annual Meeting. A meeting of Stockholders shall be held annually for the election of Directors and the transaction of other business at such hour and on such business day in April or May or as may be determined by the Board and designated in the notice of meeting. 2.3 Deferred Meeting for Election of Directors, Etc. If the annual meeting of Stockholders for the election of Directors and the transaction of other business is not held within the months specified in Article 2.2 hereof, the Board shall call a meeting of Stockholders for the election of Directors and the transaction of other business as soon thereafter as convenient. 2.4 Other Special Meetings. A special meeting of Stockholders (other than a special meeting for the election of Directors), unless otherwise prescribed by statute, may be called at any time by the Board or by the Chairman or the Chief Executive Officer. At any special meeting of Stockholders, only such business may be transacted as is related to the purpose or purposes of such meeting set forth in the notice thereof given pursuant to Article 2.6 hereof or in any waiver of notice thereof given pursuant to Article 2.7 hereof. 4 2.5 Fixing Record Date. For the purpose of (a) determining the Stockholders entitled (i) to notice of or to vote at any meeting of Stockholders or any adjournment thereof or (ii) to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock; or (b) any other lawful action, the Board may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date was adopted by the Board and which record date shall not be (x) in the case of clause (a)(i) above, more than 60 nor less than 10 days before the date of such meeting and (y) in the case of clause (a)(iii) or (b) above, more than 60 days prior to such action. If no such record date is fixed: 2.5.1 the record date for determining Stockholders entitled to notice of or to vote at a meeting of Stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held; and 2.5.2 the record date for determining Stockholders for any purpose other than those specified in Article 2.5.1 shall be at the close of business on the day on which the Board adopts the resolution relating thereto. When a determination of Stockholders entitled to notice of or to vote at any meeting of Stockholders has been made as provided in this Article 2.5, such determination shall apply to any adjournment thereof unless the Board fixes a new record date for the adjourned 5 meeting. Delivery made to the Corporation's registered office in accordance with Article 2.5.2 shall be by hand or by certified or registered mail, return receipt requested. 2.6 Notice of Meetings of Stockholders. Except as otherwise provided in Articles 2.5 and 2.7 hereof, whenever under the provisions of any statute, the Certificate of Incorporation or these By-laws, Stockholders are required or permitted to take any action at a meeting, written notice shall be given stating the place, date and hour of the meeting and, in the case of a special meeting, the purpose or purposes for which the meeting is called. Unless otherwise provided by any statute, the Certificate of Incorporation or these By-laws, a copy of the notice of any meeting shall be given, personally or by mail, not less than ten nor more than sixty days before the date of the meeting, to each Stockholder entitled to notice of or to vote at such meeting. If mailed, such notice shall be deemed to be given when deposited in the United States mail, with postage prepaid, directed to the Stockholder at his or her address as it appears on the records of the Corporation. An affidavit of the Secretary or an Assistant Secretary or of the transfer agent of the Corporation that the notice required by this Article 2.6 has been given shall, in the absence of fraud, be prima facie evidence of the facts stated therein. When a meeting is adjourned to another time or place, notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken, and at the adjourned meeting any business may be transacted that might have been transacted at the meeting as originally called. If, however, the adjournment is for more than thirty days, or if after the adjournment a new record date is fixed for 6 the adjourned meeting, a notice of the adjourned meeting shall be given to each Stockholder of record entitled to vote at the meeting. 2.7 Waivers of Notice. Whenever the giving of any notice is required by statute, the Certificate of Incorporation or these By-laws, a waiver thereof, in writing, signed by the Stockholder or Stockholders entitled to said notice, whether before or after the event as to which such notice is required, shall be deemed equivalent to notice. Attendance by a Stockholder at a meeting shall constitute a waiver of notice of such meeting except when the Stockholder attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business on the ground that the meeting has not been lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the Stockholders need be specified in any written waiver of notice unless so required by statute, the Certificate of Incorporation or these By-laws. 2.8 List of Stockholders. The Secretary shall prepare and make, or cause to be prepared and made, at least ten days before every meeting of Stockholders, a complete list of the Stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each Stockholder and the number of shares registered in the name of each Stockholder. Such list shall be open to the examination of any Stockholder, the Stockholder's agent, or attorney, at the Stockholder's expense, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at 7 the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any Stockholder who is present. The Corporation shall maintain the Stockholder list in written form or in another form capable of conversion into written form within a reasonable time. Upon the willful neglect or refusal of the Directors to produce such a list at any meeting for the election of Directors, they shall be ineligible for election to any office at such meeting. The stock ledger shall be the only evidence as to who are the Stockholders entitled to examine the stock ledger, the list of Stockholders or the books of the Corporation, or to vote in person or by proxy at any meeting of Stockholders. 2.9 Notice of Stockholder Business and Nominations. 2.9.1 Annual Meetings of Stockholders. (a) Nominations of persons for election to the Board of Directors of the Corporation and proposals of business to be considered by the stockholders at an annual meeting of stockholders may be made (i) pursuant to the Corporation's notice of meeting delivered pursuant to Section 2.6 of these By-laws, (ii) by or at the direction of the Chairman of the Board of Directors or (iii) by any stockholder of the Corporation who is entitled to vote at the meeting, who complied with the notice procedures set forth in clauses (b) and (c) of this Section 2.9.1(a) and who was a stockholder of record at the time such notice is delivered to the Secretary of the Corporation. (b) For nominations or other business to be properly brought before an annual meeting by a stockholder pursuant to clause (iii) of Section 8 2.9.1(a), the stockholder must have given timely notice thereof in writing to the Secretary of the Corporation. To be timely, a stockholder's notice shall be delivered to the Secretary at the principal executive offices of the Corporation not less than seventy days nor more than ninety days prior to the first anniversary of the preceding year's annual meeting; provided, however, that in the event that the date of the annual meeting is advanced by more than twenty days, or delayed by more than seventy days, from such anniversary date, notice by the stockholder to be timely must be so delivered not earlier than the ninetieth day prior to such annual meeting and not later than the close of business on the later of the seventieth day prior to such annual meeting or the tenth day following the day on which public announcement of the date of such meeting is first made. Such stockholder's notice shall set forth (i) as to each person whom the stockholder proposes to nominate for election or re-election as a director, all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), including such person's written consent to being named in the proxy statement as a nominee and to serve as a director if elected; (ii) as to any other business desired to be brought before the meeting, the reasons for conducting such business at the meeting and any material interest in such business of such stockholder and the beneficial owner, if any, on whose behalf the proposal is made; and (iii) as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made (1) the name and address of such stockholder, as they appear on the Corporation's books, and of such beneficial owner and (2) the class 9 and number of shares of the Corporation which are owned beneficially and of record by such stockholder and such beneficial owner. (c) Notwithstanding anything in the second sentence of Section 2.9.1(b) to the contrary, in the event that the number of directors to be elected to the Board of Directors of the Corporation is increased and there is no public announcement naming all of the nominees for director or specifying the size of the increased Board of Directors made by the Corporation at least eighty days prior to the first anniversary of the preceding year's annual meeting, a stockholder's notice required by the By-law shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to the Secretary at the principal executive offices of the Corporation not later than the close of business on the tenth day following the day on which such public announcement is first made by the Corporation. 2.9.2 Special Meetings of Stockholders. Only such business shall be conducted at a special meeting of stockholders as shall have been brought before the meeting pursuant to the Corporation's notice of meeting pursuant to 2.6 of these By-laws. Nominations of persons for election to the Board of Directors may be made at a special meeting of stockholders at which directors are to be elected pursuant to the Corporation's notice of meeting (a) by or at the direction of the Board of Directors or (b) by any stockholder of the Corporation who is entitled to vote at the meeting, who complies with the notice procedures set forth in this By-law and who is a stockholder of record at the time such notice is delivered to the Secretary of the Corporation. Nominations by stockholders of persons for election to the Board of Directors may be made at such special 10 meeting of stockholders if the stockholder's notice as required by paragraph 2.9.1(b) of this By-law shall be delivered to the Secretary at the principal executive offices of the Corporation not earlier than the ninetieth day prior to such special meeting and not later than the close of business on the later of the seventieth day prior to such special meeting or the tenth day following the day on which public announcement is first made of the date of the special meeting and of the nominees proposed by the Board of Directors to be elected at such meeting. In no event shall the public announcement of an adjournment of a special meeting commence a new time period for the giving of a stockholder's notice as described above. 2.9.3 General. (a) Only persons who are nominated in accordance with the procedure set forth in this By-law shall be eligible to serve as a director, and only such business shall be conducted at a meeting of stockholders as shall have been brought before the meeting in accordance with the procedures set forth in this By-law. Except as otherwise provided by law, the Certificate of Incorporation or these Bylaws, the chairman of the meeting shall have the power and duty to determine whether a nomination or any business proposed to be brought before the meeting was made in accordance with the procedures set forth in this By-law and, if any proposed nomination or business is not in compliance with this By-law, to declare that such defective proposal or nomination shall be disregarded. (b) For purposes of this By-law, "public announcement" shall mean disclosure in a press release reported by the Dow Jones New Service, 11 Associated Press or comparable national news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act. (c) Notwithstanding the foregoing provisions of this By-law, a stockholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in this By-law. Nothing in this By-law shall be deemed to affect any rights of stockholders to request inclusion of proposals in the Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act. 2.10 Quorum of Stockholders; Adjournment. Except as otherwise provided by any statute, the Certificate of Incorporation or these By-laws, the holders of one-third of all outstanding shares of stock entitled to vote at any meeting of Stockholders, present in person or represented by proxy, shall constitute a quorum for the transaction of any business at such meeting. When a quorum is once present to organize a meeting of Stockholders, it is not broken by the subsequent withdrawal of any Stockholders. The holders of a majority of the shares of stock present in person or represented by proxy at any meeting of Stockholders, including an adjourned meeting, whether or not a quorum is present, may adjourn such meeting to another time and place. Shares of its own stock belonging to the Corporation or to another corporation, if a majority of the shares entitled to vote in the election of directors of such other corporation is held, directly or indirectly, by the Corporation, shall neither be entitled to vote nor be counted for quorum purposes; provided, however, that the foregoing shall not limit the right of the 12 Corporation to vote stock, including but not limited to its own stock, held by it in a fiduciary capacity. 2.11 Voting; Proxies. Unless otherwise provided in the Certificate of Incorporation, every Stockholder of record shall be entitled at every meeting of Stockholders to one vote for each share of capital stock standing in his or her name on the record of Stockholders determined in accordance with Article 2.5 hereof. If the Certificate of Incorporation provides for more or less than one vote for any share on any matter, each reference in the By-laws or the General Corporation Law to a majority or other proportion of stock shall refer to such majority or other proportion of the votes of such stock. The provisions of Articles 212 and 217 of the General Corporation Law shall apply in determining whether any shares of capital stock may be voted and the persons, if any, entitled to vote such shares; but the Corporation shall be protected in assuming that the persons in whose names shares of capital stock stand on the stock ledger of the Corporation are entitled to vote such shares. Holders of redeemable shares of stock are not entitled to vote after the notice of redemption is mailed to such holders and a sum sufficient to redeem the stocks has been deposited with a bank, trust company, or other financial institution under an irrevocable obligation to pay the holders the redemption price on surrender of the shares of stock. At any meeting of Stockholders (at which a quorum was present to organize the meeting), all matters, except as otherwise provided by statute or by the Certificate of Incorporation or by these By-laws, shall be decided by a majority of the votes cast at such meeting by the holders of shares present in person or represented by proxy and entitled to vote thereon, whether or not a quorum is present when the vote is 13 taken. All elections of Directors shall be by written ballot unless otherwise provided in the Certificate of Incorporation. In voting on any other question on which a vote by ballot is required by law or is demanded by any Stockholder entitled to vote, the voting shall be by ballot. Each ballot shall be signed by the Stockholder voting or the Stockholder's proxy and shall state the number of shares voted. On all other questions, the voting may be viva voce. Each Stockholder entitled to vote at a meeting of Stockholders or to express consent or dissent to corporate action in writing without a meeting may authorize another person or persons to act for such Stockholder by proxy. The validity and enforceability of any proxy shall be determined in accordance with Article 212 of the General Corporation Law. A Stockholder may revoke any proxy that is not irrevocable by attending the meeting and voting in person or by filing an instrument in writing revoking the proxy or by delivering a proxy in accordance with applicable law bearing a later date to the Secretary. 2.12 Voting Procedures and Inspectors of Election at Meetings of Stockholders. The Board, in advance of any meeting of Stockholders, may appoint one or more inspectors to act at the meeting and make a written report thereof. The Board may designate one or more persons as alternate inspectors to replace any inspector who fails to act. If no inspector or alternate is able to act at a meeting, the person presiding at the meeting may appoint, and on the request of any Stockholder entitled to vote thereat shall appoint, one or more inspectors to act at the meeting. Each inspector, before entering upon the discharge of his or her duties, shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of his or her ability. The inspectors shall (a) ascertain the number of shares outstanding and the voting power 14 of each, (b) determine the shares represented at the meeting and the validity of proxies and ballots, (c) count all votes and ballots, (d) determine and retain for a reasonable period a record of the disposition of any challenges made to any determination by the inspectors, and (e) certify their determination of the number of shares represented at the meeting and their count of all votes and ballots. The inspectors may appoint or retain other persons or entities to assist the inspectors in the performance of their duties. Unless otherwise provided by the Board, the date and time of the opening and the closing of the polls for each matter upon which the Stockholders will vote at a meeting shall be determined by the person presiding at the meeting and shall be announced at the meeting. No ballot, proxies or votes, or any revocation thereof or change thereto, shall be accepted by the inspectors after the closing of the polls unless the Court of Chancery of the State of Delaware upon application by a Stockholder shall determine otherwise. 2.13 Organization. At each meeting of Stockholders, the President, or in the absence of the President, the Chairman, or if there is no Chairman or if there be one and the Chairman is absent, a Vice President, and in case more than one Vice President shall be present, that Vice President designated by the Board (or in the absence of any such designation, the most senior Vice President, based on age, present), shall act as chairman of the meeting. The Secretary, or in his or her absence one of the Assistant Secretaries, shall act as secretary of the meeting. In case none of the officers above designated to act as chairman or secretary of the meeting, respectively, shall be present, a chairman or a secretary of the meeting, as the case may be, shall be chosen by a majority 15 of the votes cast at such meeting by the holders of shares of capital stock present in person or represented by proxy and entitled to vote at the meeting. 2.14 Order of Business. The order of business at all meetings of Stockholders shall be as determined by the chairman of the meeting, but the order of business to be followed at any meeting at which a quorum is present may be changed by a majority of the votes cast at such meeting by the holders of shares of capital stock present in person or represented by proxy and entitled to vote at the meeting. ARTICLE 3 Directors 3.1 General Powers. Except as otherwise provided in the Certificate of Incorporation, the business and affairs of the Corporation shall be managed by or under the direction of the Board. The Board may adopt such rules and regulations, not inconsistent with the Certificate of Incorporation or these By-laws or applicable laws, as it may deem proper for the conduct of its meetings and the management of the Corporation. In addition to the powers expressly conferred by these By-laws, the Board may exercise all powers and perform all acts that are not required, by these By-laws or the Certificate of Incorporation or by statute, to be exercised and performed by the Stockholders. 3.2 Number; Qualification; Term of Office. The Board shall consist of seven (7) members or such other number as may be fixed from time to time by action of the Board. Directors need not be Stockholders. Each Director shall hold office until a successor is elected and qualified or until the Director's death, resignation or removal. 16 3.3 Election. Directors shall, except as otherwise required by statute or by the Certificate of Incorporation, be elected by a plurality of the votes cast at a meeting of Stockholders by the holders of shares entitled to vote in the election. 3.4 Newly Created Directorships and Vacancies. Unless otherwise provided in the Certificate of Incorporation, newly created Directorships resulting from an increase in the number of Directors and vacancies occurring in the Board for any other reason, including the removal of Directors without cause, may be filled by the affirmative votes of a majority of the entire Board, although less than a quorum, or by a sole remaining Director, or may be elected by a plurality of the votes cast by the holders of shares of capital stock entitled to vote in the election at a special meeting of Stockholders called for that purpose. A Director elected to fill a vacancy shall be elected to hold office until a successor is elected and qualified, or until the Director's earlier death, resignation or removal. 3.5 Resignation. Any Director may resign at any time by written notice to the Corporation. Such resignation shall take effect at the time therein specified, and, unless otherwise specified in such resignation, the acceptance of such resignation shall not be necessary to make it effective. 3.6 Removal. Subject to the provisions of Article 141(k) of the General Corporation Law, any or all of the Directors may be removed with or without cause by vote of the holders of a majority of the shares then entitled to vote at an election of Directors. 17 3.7 Compensation. Each Director, in consideration of his or her service as such, shall be entitled to receive from the Corporation such amount per annum or such fees for attendance at Directors' meetings, or both, as the Board may from time to time determine, together with reimbursement for the reasonable out-of-pocket expenses, if any, incurred by such Director in connection with the performance of his or her duties. Each Director who shall serve as a member of any committee of Directors in consideration of serving as such shall be entitled to such additional amount per annum or such fees for attendance at committee meetings, or both, as the Board may from time to time determine, together with reimbursement for the reasonable out-of-pocket expenses, if any, incurred by such Director in the performance of his or her duties. Nothing contained in this Article 3.7 shall preclude any Director from serving the Corporation or its subsidiaries in any other capacity and receiving proper compensation therefor. 3.8 Times and Places of Meetings. The Board may hold meetings, both regular and special, either within or without the State of Delaware. The times and places for holding meetings of the Board may be fixed from time to time by resolution of the Board or (unless contrary to a resolution of the Board) in the notice of the meeting. 3.9 Annual Meetings. On the day when and at the place where the annual meeting of Stockholders for the election of Directors is held, and as soon as practicable thereafter, the Board may hold its annual meeting, without notice of such meeting, for the purposes of organization, the election of officers and the transaction of other business. The annual meeting of the Board may be held at any other time and place 18 specified in a notice given as provided in Article 3.11 hereof for special meetings of the Board or in a waiver of notice thereof. 3.10 Regular Meetings. Regular meetings of the Board may be held without notice at such times and at such places as shall from time to time be determined by the Board. 3.11 Special Meetings. Special meetings of the Board may be called by the Chairman, the President or the Secretary or by any two or more Directors then serving on at least one day's notice to each Director given by one of the means specified in Article 3.14 hereof other than by mail, or on at least three days' notice if given by mail. Special meetings shall be called by the Chairman, President or Secretary in like manner and on like notice on the written request of any two or more of the Directors then serving. 3.12 Telephone Meetings. Directors or members of any committee designated by the Board may participate in a meeting of the Board or of such committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this Article 3.12 shall constitute presence in person at such meeting. 3.13 Adjourned Meetings. A majority of the Directors present at any meeting of the Board, including an adjourned meeting, whether or not a quorum is present, may adjourn such meeting to another time and place. At least one day's notice of any adjourned meeting of the Board shall be given to each Director whether or not present at the time of the adjournment, if such notice shall be given by one of the means specified in Article 3.14 hereof other than by mail, or at least three days' notice if by mail. Any 19 business may be transacted at an adjourned meeting that might have been transacted at the meeting as originally called. 3.14 Notice Procedure. Subject to Articles 3.11 and 3.17 hereof, whenever, under the provisions of any statute, the Certificate of Incorporation or these By-laws, notice is required to be given to any Director, such notice shall be deemed given effectively if given in person or by telephone, by mail addressed to such Director at such Director's address as it appears on the records of the Corporation, with postage thereon prepaid, or by telegram, telex, telecopy or similar means addressed as aforesaid. 3.15 Waiver of Notice. Whenever the giving of any notice is required by statute, the Certificate of Incorporation or these By-laws, a waiver thereof, in writing, signed by the person or persons entitled to said notice, whether before or after the event as to which such notice is required, shall be deemed equivalent to notice. Attendance by a person at a meeting shall constitute a waiver of notice of such meeting except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business on the ground that the meeting has not been lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the Directors or a committee of Directors need be specified in any written waiver of notice unless so required by statute, the Certificate of Incorporation or these By-laws. 3.16 Organization. At each meeting of the Board, the Chairman, or, in the absence of the Chairman, the President, or, in the absence of the President, a chairman chosen by a majority of the Directors present, shall preside. The Secretary shall act as 20 secretary at each meeting of the Board. In case the Secretary shall be absent from any meeting of the Board, an Assistant Secretary shall perform the duties of secretary at such meeting; and in the absence from any such meeting of the Secretary and all Assistant Secretaries, the person presiding at the meeting may appoint any person to act as secretary of the meeting. 3.17 Quorum of Directors. The presence in person of a majority of the entire Board shall be necessary and sufficient to constitute a quorum for the transaction of business at any meeting of the Board, but a majority of a smaller number may adjourn any such meeting to a later date. 3.18 Action by Majority Vote. Except as otherwise expressly required by statute, the Certificate of Incorporation or these By-laws, the act of a majority of the Directors present at a meeting at which a quorum is present shall be the act of the Board. 3.19 Action Without Meeting. Unless otherwise restricted by the Certificate of Incorporation or these By-laws, any action required or permitted to be taken at any meeting of the Board or of any committee thereof may be taken without a meeting if all Directors or members of such committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board or committee. 3.20 Initial Director. To facilitate the organization of the Corporation, acceptance of original subscriptions, the preparation and execution of certain employment agreements with the Officers and otherwise, the Incorporator of the Corporation may appoint himself as the sole initial director of the Corporation with full authority; provided, 21 the initial sole director shall not have authority to bind the Corporation to any employment agreement with Executive Officers, which authority shall be vested in the full Board of Directors of the Corporation. Notwithstanding the foregoing, the initial sole director shall have the authority to prepare and adopt a stockholders' agreement among the Stockholders and the Corporation, negotiate a joint venture agreement between Microtel Franchising Development Corporation and the Corporation and to undertake the transactions set forth in the Memorandum on behalf of the Corporation. ARTICLE 4 COMMITTEES OF THE BOARD 4.1 Generally. The Board may, by resolution passed by a vote of the entire Board, designate one or more committees, each committee to consist of one or more of the Directors of the Corporation. The Board may designate one or more Directors as alternate members of any committee, who may replace any absent or disqualified members at any meeting of such committee. If a member of a committee shall be absent from any meeting, or disqualified from voting thereat, the remaining member or members present and not disqualified from voting, whether or not such member or members constitute a quorum, may, by a unanimous vote, appoint another member of the Board to act at the meeting in the place of any such absent or dis qualified member. Any such committee, to the extent provided in a resolution of the Board passed as aforesaid, shall have and may exercise all the powers and authority of the Board in the management of the business and affairs of the Corporation, and may authorize the seal of the 22 Corporation to be impressed on all papers that may require it, but no such committee shall have the power or authority of the Board in reference to amending the Certificate of Incorporation, adopting an agreement of merger or consolidation under Article 251 or Article 252 of the General Corporation Law, recommending to the Stockholders (a) the sale, lease or exchange of all or substantially all of the Corporation's property and assets, or (b) a dissolution of the Corporation or a revocation of a dissolution, or amending the By-laws of the Corporation; and, unless the resolution designating it expressly so provides, no such committee shall have the power and authority to declare a dividend, to authorize the issuance of stock or to adopt a certificate of ownership and merger pursuant to Article 253 of the General Corporation Law. Unless otherwise specified in the resolution of the Board designating a committee, at all meetings of such committee a majority of the total number of members of the committee shall constitute a quorum for the transaction of business, and the vote of a majority of the members of the committee present at any meeting at which there is a quorum shall be the act of the committee. Each committee shall keep regular minutes of its meetings. Unless the Board otherwise provides, each committee designated by the Board may make, alter and repeal rules for the conduct of its business. In the absence of such rules each committee shall conduct its business in the same manner as the Board conducts its business pursuant to Article 3 of these By-laws. 4.2 Stock Reallocation Committee. To the extent required under any agreement to which the Corporation is a party, the Board of Directors shall appoint a Stock Reallocation Committee, with full authority to undertake the transactions set forth 23 in any agreement to which the Corporation is a party, or any other transactions as may be added by the Board of Directors. The Stock Reallocation Committee shall have full authority to monitor, oversee and authorize transactions with respect to stock held by Officers or held by the Corporation for the benefit of Officers. The Stock Reallocation Committee shall have such other authority and duties as may be delegated by the Board of Directors from time to time. ARTICLE 5 OFFICERS 5.1 Positions. The officers of the Corporation shall be a Chief Executive Officer, a President, a Chief Financial Officer, a Secretary, a Treasurer and such other officers as the Board may appoint, including a Chairman, one or more Vice Presidents and one or more Assistant Secretaries and Assistant Treasurers, who shall exercise such powers and perform such duties as shall be determined from time to time by the Board. The Board may designate one or more Vice Presidents as Executive Vice Presidents and may use descriptive words or phrases to designate the standing, seniority or areas of special competence of the Vice Presidents elected or appointed by it. Any number of offices may be held by the same person unless the Certificate of Incorporation or these By-laws otherwise provide. 5.2 Appointment. The officers of the Corporation shall be chosen by the Board at its annual meeting or at such other time or times as the Board shall determine. 24 5.3 Compensation. The compensation of all officers of the Corporation shall be fixed by the Board. No officer shall be prevented from receiving a salary or other compensation by reason of the fact that the officer is also a Director. 5.4 Term of Office. Each officer of the Corporation shall hold office for the term for which he or she is elected and until such officer's successor is chosen and qualifies or until such officer's earlier death, resignation or removal. Any officer may resign at any time upon written notice to the Corporation. Such resignation shall take effect at the date of receipt of such notice or at such later time as is therein specified, and, unless otherwise specified, the acceptance of such resignation shall not be necessary to make it effective. The resignation of an officer shall be without prejudice to the contract rights of the Corporation, if any. Any officer elected or appointed by the Board may be removed at any time, with or without cause, by vote of a majority of the entire Board; provided, however, that no employment agreement in effect as of September 30, 1996 may be terminated without the approval of 75% of the full Board of Directors, it being understood that the officer whose continued employment is at issue (if such officer is also a director) may not vote on the termination of his own employment agreement. Any vacancy occurring in any office of the Corporation shall be filled by the Board. The removal of an officer without cause shall be without prejudice to the officer's contract rights, if any. The election or appointment of an officer shall not of itself create contract rights. 5.5 Fidelity Bonds. The Corporation may secure the fidelity of any or all of its officers or agents by bond or otherwise. 25 5.6 Chairman. The Chairman, if one shall have been appointed, shall preside at all meetings of the Board and shall exercise such powers and perform such other duties as shall be determined from time to time by the Board. 5.7 Chief Executive Officer. The Chief Executive Officer shall be the chief executive officer of the Corporation and shall have general supervision over the business of the Corporation, subject, however, to the control of the Board and of any duly authorized committee of Directors. The Chief Executive Officer shall preside at all meetings of the Stockholders and at all meetings of the Board at which the Chairman (if there be one) is not present. The Chief Executive Officer may sign and execute in the name of the Corporation deeds, mortgages, bonds, contracts and other instruments except in cases in which the signing and execution thereof shall be expressly delegated by the Board or by these By-laws to some other officer or agent of the Corporation or shall be required by statute otherwise to be signed or executed and, in general, the Chief Executive Officer shall perform all duties incident to the office of Chief Executive Officer of a corporation and such other duties as may from time to time be assigned to the Chief Executive Officer by the Board. 5.8 President. The President shall be the chief operational officer of the Corporation and shall have general supervision over the day-to-day affairs of the Corporation, subject, however, to the control of the Chief Executive Officer, the Board and of any duly authorized committee of Directors. In the absence of the Chief Executive Officer, the President shall preside at all meetings of the Stockholders and at all meetings of the Board at which the Chairman (if there be one) is not present. The President may 26 sign and execute in the name of the Corporation deeds, mortgages, bonds, contracts and other instruments except in cases in which the signing and execution thereof shall be expressly delegated by the Board or by these By-laws to some other officer or agent of the Corporation or shall be required by statute otherwise to be signed or executed and, in general, the President shall perform all duties incident to the office of President of a corporation and such other duties as may from time to time be assigned to the President by the Board. 5.9 Chief Financial Officer. The Chief Financial Officer shall be the chief financial officer of the Corporation and shall have general supervision over the finances of the Corporation, subject, however, to the control of the Chief Executive Officer, the President, the Board and of any duly authorized committee of Directors. The Chief Financial Officer may sign and execute in the name of the Corporation deeds, mortgages, bonds, contracts and other instruments except in cases in which the signing and execution thereof shall be expressly delegated by the Board or by these By-laws to some other officer or agent of the Corporation or shall be required by statute otherwise to be signed or executed and, in general, the Chief Financial Officer shall perform all duties incident to the office of Chief Financial Officer of a corporation and such other duties as may from time to time be assigned to the Chief Financial Officer by the Board. 5.10 Vice Presidents. At the request of the Chief Executive Officer or President, or, in the Chief Executive Officer's or the President's absence, at the request of the Board, the Vice Presidents shall (in such order as may be designated by the Board or, in the absence of any such designation, in order of seniority based on age) perform all of 27 the duties of the Chief Executive Officer and President and, in so performing, shall have all the powers of, and be subject to all restrictions upon, the Chief Executive Officer and President. Any Vice President may sign and execute in the name of the Corporation deeds, mortgages, bonds, contracts or other instruments, except in cases in which the signing and execution thereof shall be expressly delegated by the Board or by these By-laws to some other officer or agent of the Corporation, or shall be required by statute otherwise to be signed or executed, and each Vice President shall perform such other duties as from time to time may be assigned to such Vice President by the Board or by the Chief Executive Officer or the President. 5.11 Secretary. The Secretary shall attend all meetings of the Board and of the Stockholders and shall record all the proceedings of the meetings of the Board and of the Stockholders in a book to be kept for that purpose, and shall perform like duties for committees of the Board, when required. The Secretary shall give, or cause to be given, notice of all special meetings of the Board and of the Stockholders and shall perform such other duties as may be prescribed by the Board or by the Chief Executive Officer or the President, under whose supervision the Secretary shall be. The Secretary shall have custody of the corporate seal of the Corporation, and the Secretary, or an Assistant Secretary, shall have authority to impress the same on any instrument requiring it, and when so impressed the seal may be attested by the signature of the Secretary or by the signature of such Assistant Secretary. The Board may give general authority to any other officer to impress the seal of the Corporation and to attest the same by such officer's signature. The Secretary or an Assistant Secretary may also attest all instruments signed 28 by the Chief Executive Officer, the President, the Chief Financial Officer or any Vice President. The Secretary shall have charge of all the books, records and papers of the Corporation relating to its organization and management, shall see that the reports, statements and other documents required by statute are properly kept and filed and, in general, shall perform all duties incident to the office of Secretary of a corporation and such other duties as may from time to time be assigned to the Secretary by the Board or by the Chief Executive Officer or the President. 5.12 Treasurer. Subject to the discretion of the Chief Financial Officer, the Treasurer shall have charge and custody of, and be responsible for, all funds, securities and notes of the Corporation; receive and give receipts for moneys due and payable to the Corporation from any sources whatsoever; deposit all such moneys and valuable effects in the name and to the credit of the Corporation in such depositaries as may be designated by the Board; against proper vouchers, cause such funds to be disbursed by checks or drafts on the authorized depositaries of the Corporation signed in such manner as shall be determined by the Board and be responsible for the accuracy of the amounts of all moneys so disbursed; regularly enter or cause to be entered in books or other records maintained for the purpose full and adequate account of all moneys received or paid for the account of the Corporation; have the right to require from time to time reports or statements giving such information as the Treasurer may desire with respect to any and all financial transactions of the Corporation from the officers or agents transacting the same; render to the Chief Executive Officer, President, Chief Financial Officer or the Board, whenever such Officer(s) or the Board shall require the Treasurer so to do, an account of the 29 financial condition of the Corporation and of all financial transactions of the Corporation; exhibit at all reasonable times the records and books of account to any of the Directors upon application at the office of the Corporation where such records and books are kept; disburse the funds of the Corporation as ordered by the Board; and, in general, perform all duties incident to the office of Treasurer of a corporation and such other duties as may from time to time be assigned to the Treasurer by the Board or the President. 5.13 Assistant Secretaries and Assistant Treasurers. Assistant Secretaries and Assistant Treasurers shall perform such duties as shall be assigned to them by the Secretary or by the Treasurer, respectively, or by the Board or by the Chief Executive Officer or the President. ARTICLE 6 CONTRACTS, CHECKS, DRAFTS, BANK ACCOUNTS, ETC. 6.1 Execution of Contracts. The Board, except as otherwise provided in these By-laws, may prospectively or retroactively authorize any officer or officers, employee or employees or agent or agents, in the name and on behalf of the Corporation, to enter into any contract or execute and deliver any instrument, and any such authority may be general or confined to specific instances, or otherwise limited. 6.2 Loans. The Board may prospectively or retroactively authorize the Chief Executive Officer or the President or any other officer, employee or agent of the Corporation to effect loans and advances at any time for the Corporation from any bank, trust company or other institution, or from any firm, corporation or individual, and for 30 such loans and advances the person so authorized may make, execute and deliver promissory notes, bonds or other certificates or evidences of indebtedness of the Corporation, and, when authorized by the Board so to do, may pledge and hypothecate or transfer any securities or other property of the Corporation as security for any such loans or advances. Such authority conferred by the Board may be general or confined to specific instances, or otherwise limited. 6.3 Checks, Drafts, Etc. All checks, drafts and other orders for the payment of money out of the funds of the Corporation and all evidences of indebtedness of the Corporation shall be signed on behalf of the Corporation in such manner as shall from time to time be determined by resolution of the Board. 6.4 Deposits. The funds of the Corporation not otherwise employed shall be deposited from time to time to the order of the Corporation with such banks, trust companies, investment banking firms, financial institutions or other depositaries as the Board may select or as may be selected by an officer, employee or agent of the Corporation to whom such power to select may from time to time be delegated by the Board. ARTICLE 7 STOCK AND DIVIDENDS 7.1 Certificates Representing Shares. The shares of capital stock of the Corporation shall be represented by certificates in such form (consistent with the provisions of Article 158 of the General Corporation Law) as shall be approved by the 31 Board. Such certificates shall be signed by the Chairman, the Chief Executive Officer, the President, the Chief Financial Officer or a Vice President and by the Secretary or an Assistant Secretary or the Treasurer or an Assistant Treasurer, and may be impressed with the seal of the Corporation or a facsimile thereof. The signatures of the officers upon a certificate may be facsimiles, if the certificate is countersigned by a transfer agent or registrar other than the Corporation itself or its employee. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon any certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, such certificate may, unless otherwise ordered by the Board, be issued by the Corporation with the same effect as if such person were such officer, transfer agent or registrar at the date of issue. 7.2 Transfer of Shares. Transfers of shares of capital stock of the Corporation shall be made only on the books of the Corporation by the holder thereof or by the holder's duly authorized attorney appointed by a power of attorney duly executed and filed with the Secretary or a transfer agent of the Corporation, and on surrender of the certificate or certificates representing such shares of capital stock properly endorsed for transfer and upon payment of all necessary transfer taxes. Every certificate exchanged, returned or surrendered to the Corporation shall be marked "Cancelled," with the date of cancellation, by the Secretary or an Assistant Secretary or the transfer agent of the Corporation. A person in whose name shares of capital stock shall stand on the books of the Corporation shall be deemed the owner thereof to receive dividends, to vote as such owner and for all other purposes as respects the Corporation. No transfer of shares of 32 capital stock shall be valid as against the Corporation, its Stockholders and creditors for any purpose, except to render the transferee liable for the debts of the Corporation to the extent provided by law, until such transfer shall have been entered on the books of the Corporation by an entry showing from and to whom transferred. 7.3 Transfer and Registry Agents. The Corporation may from time to time maintain one or more transfer offices or agents and registry offices or agents at such place or places as may be determined from time to time by the Board. 7.4 Lost, Destroyed, Stolen and Mutilated Certificates. The holder of any shares of capital stock of the Corporation shall immediately notify the Corporation of any loss, destruction, theft or mutilation of the certificate representing such shares, and the Corporation may issue a new certificate to replace the certificate alleged to have been lost, destroyed, stolen or mutilated. The Board may, in its discretion, as a condition to the issue of any such new certificate, require the owner of the lost, destroyed, stolen or mutilated certificate, or his or her legal representatives, to make proof satisfactory to the Board of such loss, destruction, theft or mutilation and to advertise such fact in such manner as the Board may require, and to give the Corporation and its transfer agents and registrars, or such of them as the Board may require, a bond in such form, in such sums and with such surety or sureties as the Board may direct, to indemnify the Corporation and its transfer agents and registrars against any claim that may be made against any of them on account of the continued existence of any such certificate so alleged to have been lost, destroyed, stolen or mutilated and against any expense in connection with such claim. 33 7.5 Rules and Regulations. The Board may make such rules and regulations as it may deem expedient, not inconsistent with these By-laws or with the Certificate of Incorporation, concerning the issue, transfer and registration of certif icates representing shares of its capital stock. 7.6 Restriction on Transfer of Stock. A written restriction on the transfer or registration of transfer of capital stock of the Corporation, if permitted by Article 202 of the General Corporation Law and noted conspicuously on the certificate representing such capital stock, may be enforced against the holder of the restricted capital stock or any successor or transferee of the holder, including an executor, administrator, trustee, guardian or other fiduciary entrusted with like responsibility for the person or estate of the holder. Unless noted conspicuously on the certificate representing such capital stock, a restriction, even though permitted by Article 202 of the General Corporation Law, shall be ineffective except against a person with actual knowledge of the restriction. A restriction on the transfer or registration of transfer of capital stock of the Corporation may be imposed either by the Certificate of Incorporation or by an agreement among any number of Stockholders or among such Stockholders and the Corporation. No restriction so imposed shall be binding with respect to capital stock issued prior to the adoption of the restriction unless the holders of such capital stock are parties to an agreement or voted in favor of the restriction. 7.7 Dividends, Surplus, Etc. Subject to the provisions of the Certificate of Incorporation and of law, the Board: 34 7.7.1 may declare and pay dividends or make other distributions on the outstanding shares of capital stock in such amounts and at such time or times as it, in its discretion, shall deem advisable giving due consideration to the condition of the affairs of the Corporation; 7.7.2 may use and apply, in its discretion, any of the surplus of the Corporation in purchasing or acquiring any shares of capital stock of the Corporation, or purchase warrants therefor, in accordance with law, or any of its bonds, debentures, notes, scrip or other securities or evidences of indebtedness; and 7.7.3 may set aside from time to time out of such surplus or net profits such sum or sums as, in its discretion, it may think proper, as a reserve fund to meet contingencies, or for equalizing dividends or for the purpose of maintaining or increasing the property or business of the Corporation, or for any purpose it may think conducive to the best interests of the Corporation. ARTICLE 8 INDEMNIFICATION 8.1 Indemnity Undertaking. To the extent not prohibited by law, the Corporation shall indemnify any person who is or was made, or threatened to be made, a party to any threatened, pending or completed action, suit or proceeding (a "Proceeding"), whether civil, criminal, administrative or investigative, including, without limitation, an action by or in the right of the Corporation to procure a judgment in its favor, by reason of the fact that such person, or a person of whom such person is the legal representative, is 35 or was a Director or officer of the Corporation, or, at the request of the Corporation, is or was serving as a director or officer of any other corporation or in a capacity with comparable authority or responsibilities for any partnership, limited liability company, joint venture, trust, employee benefit plan or other enterprise (an "Other Entity"), against judgments, fines, penalties, excise taxes, amounts paid in settlement and costs, charges and expenses (including attorneys' fees, disbursements and other charges). Persons who are not Directors or officers of the Corporation (or otherwise entitled to indemnification pursuant to the preceding sentence) may be similarly indemnified in respect of service to the Corporation or to an Other Entity at the request of the Corporation to the extent the Board at any time specifies that such persons are entitled to the benefits of this Article 8. 8.2 Advancement of Expenses. The Corporation shall, from time to time, reimburse or advance to any Director or officer or other person entitled to indemnification hereunder the funds necessary for payment of expenses, including attorneys' fees and disbursements, incurred in connection with any Proceeding, in advance of the final disposition of such Proceeding; provided, however, that, if required by the General Corporation Law, such expenses incurred by or on behalf of any Director or officer or other person may be paid in advance of the final disposition of a Proceeding only upon receipt by the Corporation of an undertaking, by or on behalf of such Director or officer (or other person indemnified hereunder), to repay any such amount so advanced if it shall ultimately be determined by final judicial decision from which there is no further right of appeal that such Director, officer or other person is not entitled to be indemnified for such expenses. 36 8.3 Rights Not Exclusive. The rights to indemnification and reimbursement or advancement of expenses provided by, or granted pursuant to, this Article 8 shall not be deemed exclusive of any other rights to which a person seeking indemnification or reimbursement or advancement of expenses may have or hereafter be entitled under any statute, the Certificate of Incorporation, these By-laws, any agreement, any vote of Stockholders or disinterested Directors or otherwise, both as to action in his or her official capacity and as to action in another capacity while holding such office. 8.4 Continuation of Benefits. The rights to indemnification and reimbursement or advancement of expenses provided by, or granted pursuant to, this Article 8 shall continue as to a person who has ceased to be a Director or officer (or other person indemnified hereunder) and shall inure to the benefit of the executors, administrators, legatees and distributees of such person. 8.5 Insurance. The Corporation shall have power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of an Other Entity, against any liability asserted against such person and incurred by such person in any such capacity, or arising out of such person's status as such, whether or not the Corporation would have the power to indemnify such person against such liability under the provisions of this Article 8, the Certificate of Incorporation or under Article 145 of the General Corporation Law or any other provision of law. 37 8.6 Binding Effect. The provisions of this Article 8 shall be a contract between the Corporation, on the one hand, and each Director and officer who serves in such capacity at any time while this Article 8 is in effect and any other person entitled to indemnification hereunder, on the other hand, pursuant to which the Corporation and each such Director, officer or other person intend to be, and shall be, legally bound. No repeal or modification of this Article 8 shall affect any rights or obligations with respect to any state of facts then or theretofore existing or there after arising or any proceeding theretofore or thereafter brought or threatened based in whole or in part upon any such state of facts. 8.7 Procedural Rights. The rights to indemnification and reimbursement or advancement of expenses provided by, or granted pursuant to, this Article 8 shall be enforceable by any person entitled to such indemnification or reimbursement or advancement of expenses in any court of competent jurisdiction. The burden of proving that such indemnification or reimbursement or advancement of expenses is not appropriate shall be on the Corporation. Neither the failure of the Corporation (including its Board of Directors, its independent legal counsel and its Stockholders) to have made a determination prior to the commencement of such action that such indemnification or reimbursement or advancement of expenses is proper in the circumstances nor an actual determination by the Corporation (including its Board of Directors, its independent legal counsel and its Stockholders) that such person is not entitled to such indemnification or reimbursement or advancement of expenses shall constitute a defense to the action or create a presumption that such person is not so 38 entitled. Such a person shall also be indemnified for any expenses incurred in connection with successfully establishing his or her right to such indemnification or reimbursement or advancement of expenses, in whole or in part, in any such proceeding. 8.8 Service Deemed at Corporation's Request. Any Director or officer of the Corporation serving in any capacity (a) another corporation of which a majority of the shares entitled to vote in the election of its directors is held, directly or indirectly, by the Corporation or (b) any employee benefit plan of the Corporation or any corporation referred to in clause (a) shall be deemed to be doing so at the request of the Corporation. 8.9 Election of Applicable Law. Any person entitled to be indemni fied or to reimbursement or advancement of expenses as a matter of right pursuant to this Article 8 may elect to have the right to indemnification or reimbursement or advancement of expenses interpreted on the basis of the applicable law in effect at the time of the occurrence of the event or events giving rise to the applicable Proceeding, to the extent permitted by law, or on the basis of the applicable law in effect at the time such indemnification or reimbursement or advancement of expenses is sought. Such election shall be made, by a notice in writing to the Corporation, at the time indemnification or reimbursement or advancement of expenses is sought; provided, however, that if no such notice is given, the right to indemnification or reimbursement or advancement of expenses shall be determined by the law in effect at the time indemnification or reimbursement or advancement of expenses is sought. 39 ARTICLE 9 BOOKS AND RECORDS 9.1 Books and Records. There shall be kept at the principal office of the Corporation correct and complete records and books of account recording the financial transactions of the Corporation and minutes of the proceedings of the Stockholders, the Board and any committee of the Board. The Corporation shall keep at its principal office, or at the office of the transfer agent or registrar of the Corporation, a record containing the names and addresses of all Stockholders, the number and class of shares held by each and the dates when they respectively became the owners of record thereof. 9.2 Form of Records. Any records maintained by the Corporation in the regular course of its business, including its stock ledger, books of account, and minute books, may be kept on, or be in the form of, punch cards, magnetic tape, photographs, microphotographs, or any other information storage device, provided that the records so kept can be converted into clearly legible written form within a reasonable time. The Corporation shall so convert any records so kept upon the request of any person entitled to inspect the same. 9.3 Inspection of Books and Records. Except as otherwise provided by law, the Board shall determine from time to time whether, and, if allowed, when and under what conditions and regulations, the accounts, books, minutes and other records of the Corporation, or any of them, shall be open to the Stockholders for inspection. 40 ARTICLE 10 SEAL The corporate seal shall have inscribed thereon the name of the Corporation, the year of its organization and the words "Corporate Seal, Delaware." The seal may be used by causing it or a facsimile thereof to be impressed or affixed or otherwise reproduced. ARTICLE 11 FISCAL YEAR The fiscal year of the Corporation shall be fixed, and may be changed, by resolution of the Board. ARTICLE 12 PROXIES AND CONSENTS Unless otherwise directed by the Board, the Chairman, the Chief Executive Officer, the President, the Chief Financial Officer, any Vice President, the Secretary or the Treasurer, or any one of them, may execute and deliver on behalf of the Corporation proxies respecting any and all shares or other ownership interests of any Other Entity owned by the Corporation appointing such person or persons as the officer executing the same shall deem proper to represent and vote the shares or other ownership interests so owned at any and all meetings of holders of shares or other ownership interests, whether general or special, and/or to execute and deliver consents respecting such shares or other ownership interests; or any of the aforesaid officers may attend any meeting of the holders 41 of shares or other ownership interests of such Other Entity and thereat vote or exercise any or all other powers of the Corporation as the holder of such shares or other ownership interests. ARTICLE 13 EMERGENCY BY-LAWS Unless the Certificate of Incorporation provides otherwise, the following provisions of this Article 13 shall be effective during an emergency, which is defined as when a quorum of the Corporation's Directors cannot be readily assembled because of some catastrophic event. During such emergency: 13.1 Notice to Board Members. Any one member of the Board or any one of the following officers: Chairman, the Chief Executive Officer, President, the Chief Financial Officer, any Vice President, Secretary, or Treasurer, may call a meeting of the Board. Notice of such meeting need be given only to those Directors whom it is practicable to reach, and may be given in any practical manner, including by publication and radio. Such notice shall be given at least six hours prior to commencement of the meeting. 13.2 Temporary Directors and Quorum. One or more officers of the Corporation present at the emergency Board meeting, as is necessary to achieve a quorum, shall be considered to be Directors for the meeting, and shall so serve in order of rank, and within the same rank, in order of seniority. In the event that less than a quorum of the Directors are present (including any officers who are to serve as Directors for the 42 meeting), those Directors present (including the officers serving as Directors) shall constitute a quorum. 13.3 Actions Permitted To Be Taken. The Board as constituted in Article 13.2, and after notice as set forth in Article 13.1 may: 13.3.1 prescribe emergency powers to any officer of the Corporation; 13.3.2 delegate to any officer or Director, any of the powers of the Board; 13.3.3 designate lines of succession of officers and agents, in the event that any of them are unable to discharge their duties; 13.3.4 relocate the principal place of business, or designate successive or simultaneous principal places of business; and 13.3.5 take any other convenient, helpful or necessary action to carry on the business of the Corporation. ARTICLE 14 AMENDMENTS These By-laws may be amended or repealed and new By-laws may be adopted by a vote of the holders of shares entitled to vote in the election of Directors or by the Board. Any By-laws adopted or amended by the Board may be amended or repealed by the Stockholders entitled to vote thereon. Notwithstanding anything to the contrary herein, Section 2.9 of these By-laws may not be amended or repealed by the 43 Stockholders without the affirmative vote of holders of not less than 75% of the voting power of the outstanding shares of the Corporation entitled to vote thereon, voting together as a single class. EX-4.1 4 CERTIFICATE COMMON STOCK COMMON STOCK NUMBER SHARES USFS U.S. FRANCHISE SYSTEMS, INC. INCORPORATED UNDER THE LAWS SEE REVERSE FOR OF THE STATE OF DELAWARE CERTAIN DEFINITIONS THIS IS TO CERTIFY THAT CUSIP 902956 10 1 is the owner of FULLY PAID AND NON-ASSESSABLE SHARES OF CLASS A COMMON STOCK OF THE PAR VALUE OF $0.01 PER SHARE OF U.S. FRANCHISE SYSTEMS, INC. transferable upon the books of the Corporation by the holder hereof in person or by duly authorized attorney upon surrender of this Certificate properly endorsed. This Certificate is not valid unless countersigned and registered by the Transfer Agent and Registrar. Witness the facsimile seal of the Corporation and the facsimile signatures of its duly authorized officers. Dated: [Signature of Neal Aronson] [Signature of Michael A. Leven] EXECUTIVE VICE PRESIDENT AND SECRETARY PRESIDENT AND CHIEF EXECUTIVE OFFICER U.S. FRANCHISE SYSTEMS, INC. CORPORATE SEAL 1995 DELAWARE * COUNTERSIGNED AND REGISTERED: WACHOVIA BANK OF NORTH CAROLINA, N.A. (WINSTON-SALEM, NC) TRANSFER AGENT AND REGISTRAR BY: AUTHORIZED SIGNATURE The Corporation will furnish without charge to each stockholder who so requests a statement of the powers, designations, preferences and relative, participating, optional or other special rights of each lcass of stock or series thereof and the qualificatiaons, limitations or restrictions of such preferences and/or rights. Such request may be addressed to the Secretary of the Corporation or to the Transfer Agent and Registrar named on the face of this Certificate. The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM--as tenants in common TEN ENT--as tenants by the entireties JT TEN --as joint tenants with right of survivorship and not as tenants in common UNIF GIFT MIN ACT--________ Custodian ________ (Cust) (Minor) under Uniform Gifts to Minors Act _______________________ (State) Additional abbreviations may also be used though not in the above list. For Value Received, _________________________________________ hereby sell, assign and transfer unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE ______________________________________ ______________________________________ _______________________________________________________________________________ (PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE) _______________________________________________________________________________ _______________________________________________________________________________ ________________________________________________________________________ Shares of the capital stock represented by the within Certificate, and do hereby irrevocably constitute and appoint_____________________________________________ ______________________________________________________________________ Attorney to transfer the said stock on the books of the within named Corporation with full power of substitution in the premises. Dated __________________________________ Signature(s) Guaranteed: ______________________________ Signature _________________________________________ ____________________________________ THE SIGNATURE(S) SHOULD BE GUARANTEED BY NOTICE: THE SIGNATURE(S) TO THIS AN ELIGIBLE GUARANTOR INSTITUTION, AS ASSIGNMENT MUST CORRESPOND WITH THE AS DEFINED IN RULE 17Ad-15 UNDER THE NAME(S) AS WRITTEN UPON THE FACE OF SECURITIES AND EXCHANGE ACT OF 1934, AS THE CERTIFICATE IN EVERY PARTICULAR, AMENDED. WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER. EX-10.5 5 RESTATED STOCKHOLDERS' AGREEMENT U. S. FRANCHISE SYSTEMS, INC. RESTATED STOCKHOLDERS' AGREEMENT TABLE OF CONTENTS Page 1. DEFINITIONS..............................................................1 2. THE TRANSFER OF STOCK....................................................4 3. STOCK REGISTRATION RIGHTS................................................5 4. INSURANCE...............................................................14 5. EFFECTIVENESS, TERMINATION AND AMENDMENT................................15 6. NOTICE..................................................................16 7. REMEDIES................................................................16 8. ATTORNEY-IN-FACT........................................................16 9. RATIFICATION AND ADOPTION OF CERTAIN ACTS AND TRANSACTIONS............................................................17 10. INTERPRETATION; COORDINATION WITH MEMORANDUM AND EMPLOYEE STOCK PURCHASE AGREEMENT...................................18 11. INDEMNIFICATION OF OFFICERS AND DIRECTORS...............................18 12. MISCELLANEOUS...........................................................19 13. ENTIRE AGREEMENT........................................................20 14. FAILURE TO EXERCISE RIGHTS..............................................20 i U.S. FRANCHISE SYSTEMS, INC. RESTATED STOCKHOLDERS' AGREEMENT Dated October 11, 1996 This Restated Stockholders' Agreement has been made as of October 11, 1996, by and among U.S. FRANCHISE SYSTEMS, INC., a Delaware corporation, as the "Corporation" hereunder, and those stockholders of the Corporation listed on Exhibit A hereto (hereinafter, "Stockholder" or "Stockholders"). W I T N E S S E T H : WHEREAS, on September 29, 1995, the Corporation and the Stockholders entered into a Stockholders Agreement (the "Old Stockholders' Agreement"); WHEREAS, in connection with the proposed initial public offering of the Corporation's common stock, the Corporation and the Stockholders, by a vote of holders of at least 2/3 of the outstanding common stock, par value $.10 per share, amended the Old Agreement, as permitted by Sections 9.3 and 17 thereof (the "1996 Amendment"); WHEREAS, the following sets forth the Old Agreement, as restated to include the amendments made by the 1996 Amendment; NOW, THEREFORE, for and in consideration of the premises and the mutual obligations contained in this Agreement and other good and valuable consideration, the receipt, adequacy, and sufficiency of which are hereby conclusively acknowledged, the parties hereto agree to amend and restate the Old Agreement as follows: 1. DEFINITIONS. In addition to any capitalized terms that are elsewhere defined in this Agreement, whenever used in this Agreement, the following capitalized terms shall have the meanings set forth below: 1.1 "Affiliate" or "Affiliated" shall mean that a person is an "Affiliate" of another Person if (i) such other Person directly or indirectly controls, is controlled by or is under common control with such Person; (ii) such other Person owns voting securities of such Person constituting a controlling interest; (iii) such other Person is an executive officer or director of such Person; (iv) such other Person is the spouse, descendant, ancestor, or sibling of such Person or any other such Person described in clauses (i), (ii) or (iii) above; or (v) if such person is an "Affiliate" as defined in the Memorandum. For purposes of this Section 1.1, a Person shall be deemed to be in control of another Person when such Person, either alone or with one or more persons acting collectively as a group, possesses, directly or indirectly, the power to direct or cause the direction of the management or policies of such other Person, whether through the ownership of voting securities, by contract or otherwise. 1.2 "Agreement" shall mean this Restated Stockholders' Agreement, together with any amendments hereto made in the manner described in this Agreement. 1.3 "Commission" shall mean the United States Securities and Exchange Commission and any successor federal agency having similar authority and powers. 1.4 "Corporation" shall mean U.S. Franchise Systems, Inc., a Delaware corporation. 1.5 "Disposition" shall mean any sale, gift, pledge, alienation or other transfer, whether outright or as security, inter vivos or at death, with or without consideration, voluntary or involuntary, of all or any part of any right, title, or interest (including but not limited to voting rights) in or to any Stock. "Dispose" shall have the related meaning. 1.6 "Executive Officer" shall mean any of the Chairman, President, Chief Executive Officer or Chief Financial Officer of the Corporation. 1.7 "Immediate Family Member" shall mean, with respect to any person, such person's spouse, parents, children and grandchildren and the spouse of such persons' parents, children and grandchildren. 1.8 "Management Stockholder" shall mean, at any time, any Stockholder who is then employed by the Corporation on a full time basis as an Executive Officer or other management employees as designated by the Stock Allocation Committee from time to time. 1.9 "Memorandum" shall mean that certain Confidential Investment Memorandum dated August 19, 1995 relating to the offer and sale of Units of interests in the Corporation. 1.10 "Person" or "person" shall mean any individual, partnership, joint venture, association, corporation, limited liability company, trust or any other legal entity or organization. 1.11 "Piggyback Shares" shall mean the shares of Class A Common Stock, par value $.01 per share (the "Class A Common Stock"), of the Company beneficially owned by any Stockholder immediately following the initial public offering of the 2 Company's Class A Common Stock, and any voting common shares hereinafter issued or distributed with respect to, or in exchange for, such Class A Common Stock, by way of stock split or stock dividend or pursuant to a merger, consolidation, reorganization, recapitalization, reclassification, conversion right or otherwise, including without limitation, shares of Class A Common Stock issued or issuable upon conversion of shares of Class B Common Stock, par value $.10 per share, of the Company, and which in each case, have not been offered or sold to the public. Piggyback Shares shall cease to be such when (i) a registration statement with respect to the sale of such shares shall have become effective under the Securities Act and such shares may be disposed of in accordance with such registration statement or (ii) such shares are immediately eligible for sale and may be, in the opinion of counsel to the Corporation, sold pursuant to Rule 144 (or any successor provision) under the Securities Act, and the free transferability of such shares is not otherwise limited, restricted or prohibited under Rule 144 (or any successor provision) by reason of volume limitations or otherwise. 1.12 "Register," "Registered" and "Registration" shall refer to a registration of common shares of the Corporation effected by preparing and filing a registration statement in compliance with the Securities Act (and applicable State law), and the declaration or ordering of the effectiveness of such registration statement. 1.13 "Registration Expenses" shall mean all expenses incurred by the Corporation in complying with Section 4 hereof, including, without limitation, all registration and filing fees, printing expenses, fees and disbursements of counsel for the Corporation, blue sky fees and expenses, fees of the National Association of Securities Dealers, Inc. and accountants' expenses, including without limitation, any special audits, "opinions" or "comfort" letters incident to or required by any such registration, and any fees and disbursements of underwriters customarily paid by issuers or sellers of securities, but excluding underwriting discounts and commissions and transfer taxes, if any, attributable to Piggyback Shares and the reasonable fees and disbursements of special or other counsel retained by the holders of the Piggyback Shares being registered. 1.14 "Securities Act" shall mean the Securities Act of 1933, as amended. 1.15 "Stock" or "stock" shall mean all shares of the (i) Class A Common Stock, (ii) Class B Common Stock and (iii) preferred stock of the Corporation authorized in its Amended and Restated Certificate of Incorporation, as the same may be amended from time to time, and the debentures issuable in exchange for any preferred stock, which from time to time are issued and outstanding. 1.16 Capitalized terms not defined in this Agreement shall have the meaning and intent ascribed to them in the Memorandum. 3 2. THE TRANSFER OF STOCK. 2.1 General Restrictions Upon Transfer. No Stockholder shall make any Disposition of Stock (or interest therein) beneficially owned by such Stockholder on the date hereof if such action would constitute a violation of any federal or state securities or "blue sky" laws and unless the Corporation has been furnished with an opinion of counsel for the Stockholder (which opinion and counsel shall be reasonably satisfactory to the Corporation and its counsel) to the effect that such transfer is exempt from the registration provisions of Section 5 of the Securities Act and the rules and regulations in effect thereunder and that such Disposition can be effected without registration under applicable "blue sky" laws. 2.2 Legend. Each certificate or instrument representing Stock beneficially owned by any Stockholder on the date hereof shall bear the following (or substantially similar) legend, in addition to any legends required under applicable state securities or "blue sky" laws: THE SECURITIES REPRESENTED BY THIS CERTIFICATE (AND ANY INTEREST THEREIN) MAY NOT BE TRANSFERRED, OFFERED, SOLD, ASSIGNED, PLEDGED, HYPOTHECATED, ENCUMBERED OR OTHERWISE DISPOSED OF UNLESS SUCH TRANSFER, SALE, OFFER, ASSIGNMENT, PLEDGE, HYPOTHECATION, ENCUMBERED OR OTHER DISPOSITION COMPLIES WITH THE PROVISIONS OF THE RESTATED STOCKHOLDERS' AGREEMENT DATED AS OF OCTOBER 11, 1996 (A COPY OF WHICH IS ON FILE WITH THE SECRETARY OF THE CORPORATION AND WILL BE MAILED WITHOUT CHARGE 15 DAYS AFTER RECEIPT BY THE CORPORATION OF A WRITTEN REQUEST THEREFOR). NO TRANSFER, OFFER, ASSIGNMENT, PLEDGE, HYPOTHECATION, ENCUMBRANCE OR OTHER DISPOSITION OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE (OR INTEREST THEREIN) MAY BE MADE EXCEPT AS OTHERWISE PROVIDED IN SUCH STOCKHOLDERS' AGREEMENT AND (A) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 (THE "ACT") AND ANY APPLICABLE STATE SECURITIES AND "BLUE SKY" LAWS, OR (B) IF THE CORPORATION HAS BEEN FURNISHED WITH AN OPINION OF COUNSEL FOR THE STOCKHOLDER, WHICH OPINION AND COUNSEL SHALL BE REASONABLY SATISFACTORY TO THE CORPORATION AND ITS COUNSEL TO THE EFFECT THAT SUCH TRANSFER, SALE, OFFER, ASSIGNMENT, PLEDGE, HYPOTHECATION, ENCUMBRANCE OR OTHER DISPOSITION IS EXEMPT FROM THE REGISTRATION PROVISIONS OF SECTION 5 OF THE ACT AND THE RULES AND REGULATIONS IN EFFECT THEREUNDER AND ANY SIMILAR REGISTRATION REQUIREMENT UNDER SUCH STATE SECURITIES OR "BLUE SKY" LAWS. 4 2.3 The parties to this Agreement intend that the legend conform to the applicable provisions of the Uniform Commercial Code as adopted in the State of Delaware. This legend may be modified from time to time by the Board of Directors to conform to any amendments to this Agreement or to the Uniform Commercial Code as adopted in the Corporation's state of incorporation. 3. STOCK REGISTRATION RIGHTS. 3.1 Piggyback Registration. At such time that greater than twenty percent (20%) of the outstanding common shares of the Corporation are Registered for public sale (the "IPO Date"), the provisions of this Section 3.1 shall be applicable. If, at any time and from time to time thereafter, the Corporation proposes a public Registration, whether or not for sale for its own account, of any of its common shares under the Securities Act, on a form and in a manner which would permit registration of common shares for sale to the public under the Securities Act, it will each such time give prompt written notice to all holders of Piggyback Shares of its intention to do so, describing such securities and specifying the form and manner and the other relevant facts involved in such proposed registration. The maximum amount of Piggyback Shares held by each Stockholder to be registered (the "Registrable Piggyback Shares") and included in the subsequent public offering shall be determined and calculated by multiplying the (A) number of Piggyback Shares held by the Stockholder, by (B) the fraction having (i) the number of common shares being offered in such subsequent public offering as its numerator and (ii) the number of all common shares to be outstanding after completion of such subsequent public offering (excluding the Registrable Piggyback Shares) as its denominator. 3.1.1 Upon the written request of any holder of Registrable Piggyback Shares delivered to the Corporation within fifteen (15) business days after the giving of any such notice by the Corporation, the Corporation will commence to use its best efforts to effect the registration under the Securities Act of all Registrable Piggyback Shares (as requested by the respective holders thereof). The Corporation will undertake its obligations hereunder in good faith, provided that: (i) if, at any time after giving such written notice of its intention to register any of its securities under the Securities Act and prior to the effective date of the registration statement filed in connection with such registration, the Corporation shall determine for any reason not to finalize the registration of such securities, the Corporation may, at its election, give written notice of such determination to each holder of Registrable Piggyback Shares and thereupon shall be relieved of its obligation to register any Registrable Piggyback Shares in connection with such registration (but not from its obligation with respect to any subsequent registrations); (ii) if (A) the registration so proposed by the Corporation involves an underwritten offering of the securities so being registered, whether 5 or not for sale for the account of the Corporation, to be distributed by or through one or more underwriters of recognized standing under underwriting terms appropriate for such a transaction, (B) the Corporation proposes that the securities to be registered in such underwritten offering will include all of the Registrable Piggyback Shares requested to be so included, and (C) the managing underwriter of such underwritten offering shall advise the Corporation in writing that, in its judgment, the distribution of all or a specified portion of such Registrable Piggyback Shares concurrently with the securities being distributed by such underwriters will materially adversely affect the distribution of such securities by such underwriters (such written advice to state the reasons therefor), then the Corporation will promptly furnish each such holder of Registrable Piggyback Shares with a copy of such written advice and may require, by written notice to each such holder accompanying such written advice, that all or a specified portion of such Registrable Piggyback Shares be excluded from such distribution (in case of an exclusion of a portion of such Registrable Piggyback Shares, such portion to be allocated among such holders in proportion to the respective numbers of shares of Registrable Piggyback Shares owned by such holders); (iii) the Corporation shall not be obligated to effect any registration of Piggyback Shares under this Section 3.1 incidental to the registration of any of its securities in connection with mergers, acquisitions, exchange offers, dividend reinvestment plans or stock option or other employee benefit plans or incidental to the registration of any non-voting securities or rights not convertible into voting common shares; and (iv) All terms, conditions, limitations and otherwise with respect to any such subsequent public offering shall be as determined by the Board of Directors of the Corporation at that time and from time to time, and in compliance with all applicable federal and state statutes, rules and regulations relating to the public registration and sale of securities, generally. Any and all such piggyback rights shall be applied on a nondiscriminatory basis and shall be uniform among all eligible holders of Registrable Piggyback Shares, subject to applicable statutes, rules and regulations. 3.1.2 Except as otherwise prohibited by applicable law, the Corporation will pay all Registration Expenses in connection with each registration of Piggyback Shares requested pursuant to this Section 3.1. 3.2 Registration Procedures. If and whenever the Corporation is required to use its best efforts to effect the registration of any Registrable Piggyback Shares under the Securities Act as provided in Section 3.1, the Corporation will promptly: (i) cooperate with any underwriters and the holders of such Registrable Piggyback Shares, and will enter into a usual and customary 6 underwriting agreement with respect thereto and take all such other reasonable actions as are necessary or advisable to permit, expedite and facilitate the disposition of such Registrable Piggyback Shares in the manner contemplated by the related registration statement, and the Corporation will provide to the holders of such Registrable Piggyback Shares, any underwriter participating in any distribution thereof pursuant to a registration statement, and any attorney, accountant or other agent retained by any holder of Registrable Piggyback Shares or underwriter, reasonable access to appropriate Corporation officers and employees to answer questions and to supply information reasonably requested by any such holders of Registrable Piggyback Shares, underwriter, attorney, accountant or agent in connection with such registration statement; (ii) prepare and file with the Commission a registration statement with respect to such Registrable Piggyback Shares and use its best efforts to cause such registration statement to become effective; (iii) prepare and file with the Commission such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective and to comply with the provisions of the Securities Act with respect to the disposition of all Registrable Piggyback Shares and other securities covered by such registration statement until the earlier of such time as all of such Registrable Piggyback Shares and securities have been disposed of in accordance with the intended methods of disposition by the seller or sellers thereof set forth in such registration statement or the expiration of 180 days after such registration statement become effective; and will furnish, upon request, to each such seller and each holder of an interest in such Registrable Piggyback Shares who so requests ("Requesting Holder") prior to the filing thereof of a copy of any amendment or supplement to such registration statement or prospectus and shall not file any such amendment or supplement to which any such seller or holder shall have reasonably objected on the grounds that such amendment or supplement does not comply in all material respects with the requirements of the Securities Act or of the rules or regulations thereunder; (iv) furnish to each seller of such Registrable Piggyback Shares and each underwriter (if any) such number of conformed copies of such registration statement and of each such amendment and supplement thereto (in each case including all exhibits), such number of copies of the prospectus included in such registration statement (including each preliminary prospectus and any summary prospectus), in conformity with the requirements of the Securities Act, such documents, if any, incorporated by reference in such registration statement or prospectus, and such other documents, as such seller or underwriter may reasonably request; 7 (v) use its best efforts to register or qualify all Registrable Piggyback Shares and other securities covered by such registration statement under such securities or blue sky laws of the states of the United States as any seller representing more than 15% of the total number of Registrable Piggyback Shares or the managing Underwriter shall reasonably request, to keep such registration or qualification in effect for so long as such registration statement remains in effect, and do any and all other acts and things which may be necessary or advisable to enable such seller to consummate the disposition in such jurisdictions of its Registrable Piggyback Shares covered by such registration statement, except that the Corporation shall not for any such purpose be required to qualify generally to do business as a foreign corporation in any jurisdiction wherein it would not but for the requirements of this subdivision be obligated to be so qualified, or to subject itself to taxation in any such jurisdiction, or to consent to general service of process in any such jurisdiction; (vi) immediately notify each seller of Registrable Piggyback Shares, at any time when a prospectus relating thereto is required to be delivered under the Securities Act, upon discovery that, or upon the happening of any event as a result of which, the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing, which untrue statement or omission requires amendment of the registration statement or supplementation of the prospectus, and at the request of any such seller, prepare and furnish to such seller a reasonable number of copies of a supplement to or an amendment of such prospectus as may be necessary so that, as thereafter delivered to the purchasers of such Registrable Piggyback Shares, such prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing; provided, however, that each holder of Registrable Piggyback Shares registered pursuant to such registration statement agrees that he or it will not sell any Registrable Piggyback Shares pursuant to such registration statement during the time that the Corporation is preparing and filing with the Commission a supplement to or an amendment of such prospectus or registration statement; (vii) in the event of the issuance of any stop order suspending the effectiveness of any registration statement or of any order suspending or preventing the use of any prospectus or suspending the qualification of any Registrable Piggyback Shares for sale in any jurisdiction, use its best efforts to obtain its withdrawal; 8 (viii) otherwise use its best efforts to comply with all applicable rules and regulations of the Commission, and make available to its securities holders, as soon as reasonably practicable, an earnings statement covering the period of at least twelve (12) months, but not more than eighteen (18) months, beginning with the first month of the first fiscal quarter after the effective date of such registration statement, which earnings statement shall satisfy the provisions of Section 11(a) of the Securities Act; (ix) provide and cause to be maintained a transfer agent and registrar for all Registrable Piggyback Shares covered by such registration statement from and after a date not later than the effective date of such registration statement; and (x) use its best efforts to list all shares of Class A Common Stock (including such shares into which the shares of Class B Common Stock covered by such registration statement are convertible) on each securities exchange or automated quotation system on which the Corporation Class A Common Stock is then listed or quoted or, if the Corporation's Class A Common Stock is not then quoted on NASDAQ or listed on any national securities exchange, use its best efforts to have such Class A Common Stock quoted on NASDAQ or, at the option of the Corporation, listed on a national securities exchange. The Corporation may require each seller of Registrable Piggyback Shares as to which any registration is being effected to the Corporation such information regarding such seller and the distribution of such securities as the Corporation may from time to time reasonably request in writing and as shall be required by law or by the Commission in connection therewith. 3.3 Underwritten Offerings. 3.3.1 If the Corporation at any time proposes to register any of its securities under the Securities Act as contemplated by Section 3.1 and such securities are to be distributed by or through one or more underwriters, the Corporation will use its best efforts, if requested by any holder of Registrable Piggyback Shares who requests incidental registration of Registrable Piggyback Shares in connection therewith pursuant to Section 3.1, to arrange for such underwriters to include the Registrable Piggyback Shares to be offered and sold by such holder among the securities to be distributed by or through such underwriters, provided that, for purposes of this sentence, best efforts shall not require the Corporation to reduce the amount or sale price of such securities proposed to be distributed by or through such underwriters. The holders of Registrable Piggyback Shares to be distributed by such underwriters shall be parties to the underwriting agreement between the Corporation and such underwriters and the representations and warranties by, and the other agreements on the part of, the Corporation to and for the benefit of such 9 underwriters, shall also be made to and for the benefit of such holders of Registrable Piggyback Shares, and the Corporation will cooperate with such holders of Registrable Piggyback Shares under such underwriting agreement, which shall not include conditions that are not customary in underwriting agreements with respect to combined primary and secondary distributions and shall be otherwise reasonably satisfactory to such holders. Such holders of Registrable Piggyback Shares shall not be required by the Corporation to make any representations or warranties to or agreements with the Corporation or the underwriters other than reasonable representations, warranties or agreements (including indemnity agreements customary in secondary offerings) regarding such holder, such holder's Registrable Piggyback Shares and such holder's intended method or methods of distribution and any other representation required by law. 3.3.2 (i) If any registration pursuant to Section 3.1 shall be in connection with an underwritten public offering, each holder of Registrable Piggyback Shares agrees, if so required by the managing underwriter, not to effect any public sale or distribution of Registrable Piggyback Shares or other Stock (other than as part of such underwritten public offering) within twenty (20) days prior to the effective date of such registration statement or ninety (90) days (or such longer period, up to one hundred eighty (180) days, as the managing underwriter may require) after the effective date of such registration statement. (ii) The Corporation agrees not to effect any private or public sale or distribution of any of its equity securities or securities convertible into or exchangeable or exercisable for any of such securities during the seven (7) days prior to and during the ninety (90) day period beginning on the date on which any underwritten registration has become effective, except as part of such underwritten registration and except pursuant to registrations on Form S-8 or Form S-4 or any successor thereto or pursuant to the exercise of already outstanding options. 3.4 Preparation: Reasonable Investigation. In connection with the preparation and filing of each registration statement registering Registrable Piggyback Shares under the Securities Act, the Corporation will give the holders of Registrable Piggyback Shares on whose behalf such Registrable Piggyback Shares are to be so registered, the opportunity to review such registration statement, each prospectus included therein or filed with the Commission and each amendment thereof or supplement thereto, and, in the event such offering of Registrable Piggyback Shares is underwritten, will give each of them and the underwriters and their counsel such access to its books and records and such opportunities to discuss the business of the Corporation with its officers and the independent public accountants who have certified its financial statements as shall be reasonably necessary in the opinion of such holders and such underwriters or their respective counsel, to conduct a reasonable investigation within the meaning of the Securities Act. To minimize 10 disruption and expense to the Corporation during the course of the registration process, sellers of Registrable Piggyback Shares to be covered by any such registration statement shall coordinate their investigation and due diligence efforts hereunder and, to the extent practicable, will act through a single set of counsel and a single set of accountants. 3.5 Indemnification. 3.5.1 In the event of any registration under the Securities Act, the Corporation will, and hereby does, indemnify and hold harmless in the case of any registration statement filed pursuant to Section 3.1, the seller of any Registrable Piggyback Shares covered by such registration statement, its directors, partners, members, trustees and officers, each other person who participates as an underwriter in the offering or sale of such securities and each other person, if any, who controls such seller or any such underwriter within the meaning of the Securities Act against any losses, claims, damages, liabilities or expenses, joint or several, arising out of or based upon (i) any untrue statement or alleged untrue statement of any material fact contained in any registration statement under which such securities were registered under the Securities Act, any preliminary prospectus, final prospectus or summary prospectus contained therein or (ii) any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading and the Corporation will reimburse such seller and each such director, partner, member, trustee, officer, participating person and controlling person for any legal or any other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, liability, action or proceeding, provided that the Corporation shall not be liable in any such case to the extent that any such loss, claim, damage, liability or expense (or action or proceeding in respect thereof) arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in such registration statement, any such preliminary prospectus, final prospectus, summary prospectus, amendment or supplement in reliance upon and in conformity with information furnished in writing to the Corporation by such seller or any such director, partner, member, trustee, officer, participating person or controlling person specifically for use in the preparation thereof. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of such seller or any such director, partner, member, trustee, officer, participating person or controlling person and shall survive the transfer of such securities by such seller. Notwithstanding the foregoing, the indemnification with respect to any preliminary prospectus shall not inure to the benefit of the seller or any other indemnified person if a copy of the final prospectus was not delivered on, prior to or concurrently with the sale giving rise to such liability and the untrue statement or alleged untrue statement or omission or alleged omission of a material fact contained in the preliminary prospectus was corrected in the final prospectus. 11 3.5.2 The Corporation may require, as a condition to including any Registrable Piggyback Shares in any registration statement filed pursuant to Section 3.1 that each holder of any Registrable Piggyback Shares shall, by acceptance thereof, severally and not jointly, indemnify and hold harmless the Corporation, its directors officers, agents and each other person, if any, who controls the Corporation, against any losses, claims, damages, costs, expenses or liabilities, joint or several, to which the Corporation or any such director or officer or any such person may become subject under the Securities Act or any other statute or at common law, insofar as such losses, claims, damages, costs, expenses or liabilities (or actions in respect thereof) arise out of or are based upon (i) any alleged untrue statement of any material fact contained, on the effective date thereof, in any registration statement under which Registrable Piggyback Shares were registered under the Securities Act, or in any preliminary prospectus or final prospectus contained therein, or any amendment or supplement thereto or (ii) any alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which made, not misleading, in each case to the extent, but only to the extent that such alleged untrue statement or alleged omission was contained in written information furnished to the Corporation by such holder specifically for use therein, and shall reimburse the Corporation or such director, officer or other person for any legal or any other expenses reasonably incurred in connection with investigating or defending any such loss, claim, damage, liability or action. Notwithstanding the foregoing, the obligations of any holder shall be limited to an amount equal to the proceeds received by such holder from the Registrable Piggyback Shares sold pursuant to the registration statement to which the losses, claims, liabilities or damages relate. 3.5.3 Promptly after receipt by an indemnified party of notice of the commencement of any action or proceeding involving a claim referred to in the preceding subdivisions of this Section 3.5, such indemnified party will, if a claim in respect thereof is to be made against an indemnifying party, give written notice to the latter of the commencement of such action, provided that the failure of any indemnified party to give notice as provided herein shall not relieve the indemnifying party of its obligations under the preceding subdivisions of this Section 3.5 except to the extent the indemnifying party is actually prejudiced by such failure. In case any such action is brought against an indemnified party, unless in such indemnified party's reasonable judgment a conflict of interest between such indemnified and indemnifying parties may exist in respect of such claim, the indemnifying party shall be entitled to assume the defense thereof, jointly with any other indemnifying party similarly notified, to the extent that it may wish, with counsel reasonably satisfactory to such indemnified party. The indemnifying party shall be responsible for any legal or other expenses subsequently incurred by the indemnified party in connection with the defense thereof other than reasonable costs of investigation. No indemnifying party shall, without the consent of the indemnified party (not to be unreasonably withheld), consent to entry of any judgment or enter into any settlement which does not include 12 as an unconditional term thereof the giving by the claimant or plaintiff to such indemnified party of a release from all liability in respect to such claim or litigation. 3.6 Rule 144. For so long as the Corporation shall have any class of its equity securities registered under Section 12(b) or Section 12(g) of the Securities Exchange Act of 1934 (the "Exchange Act"), the Corporation shall take such action as any holder of Stock subject to Rule 144 (or similar Rule) ("Rule 144 Stock") may reasonably request, all to the extent required from time to time to enable such holder to sell shares of Stock without registration under the Securities Act within the limitation of the exemptions provided by (a) Rule 144 under the Securities Act, as such Rule may be amended from time to time, or (b) any similar rule or regulation hereafter adopted by the Commission. Upon the request of any holder of 144 Stock, the Corporation will deliver such holder a written statement as to whether it has complied with such requirements. 3.7 Demand Registration. At any time after September 29, 2000, any holder or holders of a majority of the Piggyback Shares outstanding may make one written request to the Corporation for registration of their Piggyback Shares under the Securities Act, and the securities or blue sky laws of any jurisdiction designated by such holder or holders (a "Demand Registration"). The Corporation shall, subject to the terms and conditions hereof, use its best efforts to effect a Demand Registration for such Piggyback Shares pursuant to this Agreement. The request for Demand Registration shall specify the number of Piggyback Shares proposed to be sold and shall also specify the intended method of disposition thereof. Upon a request for a Demand Registration, the Corporation shall (a) promptly take such steps as are necessary or appropriate to prepare for the registration of the Piggyback Shares to be registered, and (b) within ten (10) days from the receipt of such request for a Demand Registration, give written notice of such Demand Registration request to all holders of Piggyback Shares so that the Corporation may include in such registration all Piggyback Shares with respect to which the Corporation receives written requests for inclusion therein in accordance with Section 3 hereof. Each such written request for inclusion shall also specify the number of Piggyback Shares to be registered, the intended method of disposition thereof and the jurisdictions in which registration is desired. 3.7.1 A registration shall not constitute a Demand Registration until it has become effective. In any registration initiated as a Demand Registration, the Corporation shall pay all Registration Expenses in connection therewith, whether or not such Demand Registration becomes effective, unless such Demand Registration fails to become effective as a result of the fault of the holders of the Piggyback Shares for which a request for a Demand Registration has been made. 3.7.2 If the holders of a majority of the Piggyback Shares to be registered in a Demand Registration so elect, the offering of such Piggyback Shares pursuant to such Demand Registration shall be in the form of an underwritten offering 13 and the managing underwriter or underwriters selected for such offering shall be the Approved Underwriter (as defined below). In such event, if the Approved Underwriter advises the holders of such Piggyback Shares in writing that in their opinion the aggregate amount of such Piggyback Shares requested to be included in such offering is sufficiently large to materially and adversely affect the success of such offering, the Corporation shall include in such registration only the aggregate amounts of such Piggyback Shares that in the opinion of the Approved Underwriter may be sold without any such material adverse effect, and such securities shall be allocated pro rata among the holders of such Piggyback Shares in the proportion that the amount of such Piggyback Shares initially requested to be included in such registration by their holders bears to the aggregate number of such Piggyback Shares to be included in such registration. 3.7.3 If any Demand Registration is in the form of an underwritten offering, the holders of a majority of the Piggyback Shares to be registered shall select and obtain the investment banker or investment bankers and manager or managers that will administer the offering (the "Approved Underwriter"); provided that the Approved Underwriter shall be reasonably acceptable to the Corporation. 3.7.4 The provision of Sections 3.2 through 3.5 are incorporated herein by this reference. Wherever required in the meaning and context, "Section 3.7" shall be substituted for "Section 3.1" and "Piggyback Shares" to be included in the Demand Registration shall be substituted for "Registrable Piggyback Shares"; provided, nothing in this Section 3.7.4 is intended to expand the rights of holders of Stock or Piggyback Shares beyond those rights expressly provided in this Section 3.7. 3.7.5 Subject to Section 3.7.1, the Demand Registration set forth in this Section 3.7 may be exercised once, and only once, during the term of this Agreement. 4. INSURANCE. 4.1 Funding by Life Insurance. In order to assist the Corporation in maintaining the continuity of effective management, the Corporation shall purchase life insurance policies for the benefit of the Corporation covering the life of Michael Leven in such amounts as the Board of Directors may determine; however, this Agreement shall not impose any obligation on the Corporation to purchase any such life insurance if such insurance cannot be purchased on commercially reasonable terms. Upon the Corporation's request, Mr. Leven shall make himself available for physical or other related examinations. Nothing herein shall be construed to limit, alter, prohibit or restrict the right, obligation and authority of the Corporation to obtain insurance covering the life of Mr. Leven for his benefit where required or permitted under the provision of a separate agreement and where available on commercially reasonable terms. 14 4.2 Other Insurance. The Corporation may elect to purchase disability insurance policies covering the Management Stockholders in such amounts as the Board of Directors may determine, if such insurance can be purchased on commercially reasonable terms. 5. EFFECTIVENESS, TERMINATION AND AMENDMENT. 5.1 Effectiveness of 1996 Amendment. The 1996 Amendment and this Restated Stockholders' Agreement, which includes the 1996 Amendment, shall not become effective unless and until the closing of the initial public offering of the Corporation's Class A Common Stock pursuant to the Corporation's Registration Statement on Form S-1, which was filed with the Securities and Exchange Commission (the "Commission") on September 5, 1996. Until such time, the Old Agreement shall remain in full force and effect. 5.2 Termination. This Agreement shall terminate: (i) on the date that all the Stock is owned by only one Stockholder; (ii) on the date that the Corporation is adjudicated as bankrupt, the Corporation executes an assignment for benefit of creditors, a receiver is appointed for the Corporation, or the Corporation voluntarily or involuntarily dissolves; and (iii) on the date the holders of all the Stockholders agree to terminate this Agreement. In the event of termination, the Corporation and each Stockholder (or former Stockholder) agree to abide by the provisions hereof which, by their terms, contemplate survival. 5.3 Amendment. The Old Stockholders' Agreement was amended as of October 11, 1996 by a vote of holders of at least 2/3 of the then outstanding common stock, par value $.10 per share, in accordance with Sections 9.3 and 17 of the Old Stockholders' Agreement. This Agreement may not be amended or terminated orally, and no amendment, termination, or attempted waiver shall be valid unless in writing, unless adopted by the vote of two-thirds (2/3rds) in number (and not in voting power) of the issued and outstanding Stock held by the Stockholders. Such amendment, termination or waiver, where duly adopted shall be binding on and inure to the benefit of all Stockholders and the Corporation. Provided, notwithstanding the preceding sentence, no amendment, termination or waiver which adversely effects the rights of a Management Stockholder shall be binding or effective as to such Management Stockholder unless also approved by the CEO and the CFO, respectively. Moreover, notwithstanding anything to the contrary in this Section 5.3, no amendment, termination or waiver which acts to or purports to single out or discriminate against 15 any specific Stockholder shall be binding or effective unless approved by that Stockholder. 6. NOTICE. Any and all notices, offers, demands, or elections required or permitted to be made under this Agreement shall be in writing, signed by the party giving such notice, and shall be deemed to have been given only if and when (i) personally delivered, or (ii) three (3) business days after mailing, postage prepaid, by registered or certified mail, or (iii) when delivered (and receipted for) by a major recognized overnight or express courier service, or (iv) when first sent by telex, telecopier or other means of instantaneous communication provided such communication is promptly confirmed by personal delivery, mail or a major recognized overnight or express courier service as provided above, appropriately addressed to the party to receive such notice utilizing the address set forth below such party's signature to this Agreement, or at such address as such party may hereafter designate in writing by written notice to the other parties to this Agreement in conformity with the foregoing. Any and all notices to the Corporation shall be conspicuously marked on the fact thereof: "Attention: Secretary of the Corporation." 7. REMEDIES. The parties acknowledge that they will be irreparably damaged if this Agreement is not specifically enforced. The parties declare that it is impossible to measure in money the damages that will accrue to a person having rights under this Agreement because of a failure of another to perform any obligation under this Agreement. Therefore, this Agreement shall be enforceable by specific performance or other equitable remedy cumulative with and not exclusive of any other remedy. If any person shall institute any action or proceeding to enforce this Agreement, any person subject to this Agreement against whom such action or proceeding is brought hereby waives the claim or defense that the person instituting the action or proceeding has an adequate remedy at law, and no person shall in any action or proceeding put forward the claim or defense that an adequate remedy at law exists. Should any dispute concerning the transfer of Stock arise under this Agreement, an injunction may be issued restraining the transfer of such Stock until such dispute has been resolved. No party need post bond or other surety as a condition or requirement for obtaining any such equitable relief. 8. ATTORNEY-IN-FACT. Each Stockholder irrevocably constitutes and appoints the Corporation, or any present or future officer of the Corporation, its lawful attorney-in-fact, with full power of substitution and revocation, to do all other acts and things necessary to carry out such Stockholder's obligations under this Agreement. All acts of said attorney-in-fact or designee are hereby authorized and ratified, and said attorney-in-fact or 16 designee shall not be liable for any acts of omission or commission, nor for any error of judgment or a mistake of fact or law, unless resulting from the Corporation's gross negligence or intentional misconduct. 9. RATIFICATION AND ADOPTION OF CERTAIN ACTS AND TRANSACTIONS. 9.1 Approval of Golden Parachute Payments. The Stockholders expressly agree to and approve the "Golden Parachute Payments" which may be included (as defined below) and made in and pursuant to (i) the Employee Stock Purchase Agreement between the Corporation and Mr. Leven, (ii) the Employee Stock Purchase Agreement between the Corporation and Mr. Aronson, (iii) the Employment Agreement between the Corporation and Mr. Leven, and (iv) the Employment Agreement between the Corporation and Mr. Aronson, as such agreements may be amended from time to time. As used herein, "Golden Parachute Payments" means any payment as that term is defined in Section 280G of the Internal Revenue Code of 1986, as amended (the "IRC") or any similar provisions. 9.1.1 The agreement, consent and approval of the Stockholders hereunder shall be continuing, such that said approval by the Stockholders shall be deemed to be made immediately before the control or asset change which gives rise to the Golden Parachute Payments (the "Golden Parachute Event"). Mr. Leven or Mr. Aronson, as the case may be, may request a specific vote of Stockholders immediately prior to the Golden Parachute Event in order to comply with the provisions of Section 280G of the Internal Revenue Code. 9.1.2 The Stockholders acknowledge and agree that they have received a full, fair and adequate disclosure of all material facts and have granted their approval and consent to the Golden Parachute Payments pursuant thereto, and shall grant their approval upon the request of Mr. Leven and Mr. Aronson, respectively. The Corporation shall cooperate and provide the stockholders with "adequate disclosure" (as defined with respect to Section 280G) prior to any requested Stockholder approval or vote for approval with respect to the Golden Parachute Payments. 9.1.3 The intent of this Section 9.1 is to comply with the requirements of IRC Section 280G such that the recipient of the Golden Parachute Payments, if any, shall not be subject to an excise tax on such payments and that the Corporation or an Affiliate(s) may take a deduction for federal income purposes for such Golden Parachute Payments. Provided, in the event the approval and consent of the Stockholders under this Section 9.1 is not a qualifying approval under Section 280G, then, in that event, the provisions of this Section 9.1 shall not be applicable and the Stockholders shall vote to approve or not to approve the Golden Parachute Payments after "adequate disclosure" under Section 280G of the IRC. 17 10. INTERPRETATION; COORDINATION WITH MEMORANDUM AND EMPLOYEE STOCK PURCHASE AGREEMENT. 10.1 Interpretation. Within this Agreement, the singular shall include the plural and the plural shall include the singular, and any gender shall include the other gender, all as the meaning in the context of this Agreement shall require. 10.2 Coordination with Employee Stock Purchase Agreement. From time to time, certain Management Stockholders, as employees of the Corporation, may be a party to an agreement or agreements with the Corporation which provide for the rights, benefits, options, obligations and otherwise of the parties relating to the purchase, sale, call, repurchase, resale and otherwise of Stock (hereinafter referred to as, and which agreement(s) may be actually titled as, the "Employee Stock Purchase Agreement" or "ESPA"). It is the intent and understanding of the parties that an ESPA shall be construed and applied in a consistent, complimentary and supplementary manner with this Agreement; however, in the event of any inconsistency or ambiguity where the terms of the ESPA may not be construed to supplement the terms of this Agreement, the terms of this Agreement shall supersede and control. 10.2.1 Without limiting the generality of Section 10.2, by way of clarification but not limitation, nothing in this Agreement shall be construed to impose, modify or alter a designation of Stock under the ESPA. Accordingly, Stock which is subject to a restriction, call option, resale option or other similar limitation under an ESPA may not be disposed under this Agreement unless also permitted (or not prohibited) under the terms of the ESPA. By way of further clarification but not limitation, (i) Management Stockholders may transfer under Section 5.2 hereof Restricted, Earned, Unrestricted and/or Reallocable Shares as also permitted under the ESPA, (ii) only Unrestricted Shares which are not Reallocable under an ESPA are available for treatment under this Agreement as Registrable Piggyback Shares under Section 3.1 hereof, or as Rule 144 Stock under Section 3.6 hereof, and (iii) the terms and provisions of an ESPA are subject to such other reasonable interpretations as may be necessary or desirable to coordinate this Agreement with such an ESPA. 11. INDEMNIFICATION OF OFFICERS AND DIRECTORS. The Stockholders hereby agree that the Corporation shall indemnify and hold harmless the officers and Directors of the Corporation from and against any and all claims, demands, actions, causes of action, costs and expenses, including reasonable attorneys' fees, expenses of litigation, court costs and damages, which may be incurred by them as may be provided in the Certificate of Incorporation and/or Bylaws of the Corporation, the respective employment agreements, if any, and the fullest extent permitted by applicable law. 18 12. MISCELLANEOUS. 12.1 Governing Law. This Agreement shall be construed and enforced in accordance with the laws of the State of Delaware. 12.2 Captions. Titles or captions of sections contained in this Agreement are inserted only as a matter of convenience and for reference, and in no way define, limit, extend, or prescribe the scope of this Agreement or the intent of any provision. 12.3 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same Agreement. 12.4 Further Acts. Each party agrees to perform any further acts and to execute and deliver any instruments or documents that may be necessary or reasonably deemed advisable to carry out the purposes of this Agreement. 12.5 Gender. Masculine, feminine, and neuter terms shall be interchangeable (and shall include a corporation, a trust, or another entity), as shall be singular and plural, where the context makes a change of gender or number appropriate. 12.6 Severability. If any part of this Agreement shall be held void, voidable, or otherwise unenforceable by any court of law or equity, nothing contained in this Agreement shall limit the enforceability of any other part. This Agreement and each provision hereof is severable and each shall be "blue-penciled," judicially modified, and enforced to the fullest extent under law and equity. The Corporation's rights and obligations to purchase its Stock contained in this Agreement are subject to the restrictions contained in the business corporation code adopted in the Corporation's state of incorporation, and such other pertinent lawful restrictions are as now or may hereafter become effective. If for any reason the Corporation should be prohibited from exercising such rights, the Corporation shall be not deemed in breach of or default under this Agreement and the remaining provisions of this Agreement shall remain in full force and effect. 12.7 Successors and Assigns. This Agreement shall be binding upon and shall inure to the benefit of the Stockholders and their respective heirs, successors, and legal representatives. No party shall have the right to assign this Agreement, or any interest under this Agreement, without the prior written consent of the other parties and unless and until the acquirer thereof such agrees in writing to accept and be bound by all the terms and conditions of this Agreement, in which case all such terms and conditions shall inure to the benefit of and be binding upon such acquirer and his heirs, successors and legal representatives, to the same extent as if such acquirer had originally been a party to this Agreement. 19 13. ENTIRE AGREEMENT. This Agreement and any amendments or exhibits attached hereto comprise all the agreements, understandings, representations, conditions and warranties by and between the parties. This Agreement may not be modified or amended except in writing signed by the parties to this Agreement as set forth in Section 5.3 above. 14. FAILURE TO EXERCISE RIGHTS. Failure on the part of the Corporation to exercise any rights or privileges granted to it or to insist upon the full performance of all obligations hereunder shall not be construed as waiving any such rights, privileges, obligations or duties, or as creating any custom contrary thereto. A waiver by a party of a breach of any provision of this Agreement must be in writing signed by the party to be charged with such waiver and any such waiver shall not be construed as a waiver of any subsequent breach thereof. 20 Exhibit A U.S. FRANCHISE SYSTEMS, INC. LIST OF STOCKHOLDERS (As of October 11, 1996) ADELSON, MR. SHELDON G. The Sands Hotel 3355 Las Vegas Boulevard South Las Vegas, NV 89109 - -------------------------------------------------------------------------------- ALPINE MICROTEL, L.L.C., a New Jersey limited liability company G2 Investment Partners, a New Jersey general partnership, Member 1285 6th Avenue 21st Floor New York, NY 10019 - -------------------------------------------------------------------------------- ARONSON, MR. NEAL K. c/o U.S. Franchise Systems, Inc. 13 Corporate Square Suite 250 Atlanta, GA 30329 - -------------------------------------------------------------------------------- BECK, MR. RONALD N. 830 Park Avenue Apartment 2-A New York, NY 10021 - -------------------------------------------------------------------------------- BRAVMAN, MR. LUDWIG 3333 Henry Hudson Parkway Apt. 6E Riverdale, NY 10463 - -------------------------------------------------------------------------------- CAMPBELL, MS. DEBBIE 1181 Village Cove Atlanta, GA 30319 - -------------------------------------------------------------------------------- CHAFETZ, MR. HOWARD The Interface Group 300 First Avenue Needham, MA 02194 - -------------------------------------------------------------------------------- CHAFETZ, MR. IRWIN The Interface Group 300 First Avenue Needham, MA 02194 - -------------------------------------------------------------------------------- CHAFETZ, MR. LAURENCE The Interface Group 300 First Avenue Needham, MA 02194 - -------------------------------------------------------------------------------- CRANOR, MR. JOHN M., III 534 Barberry Lane Louisville, KY 40206 - -------------------------------------------------------------------------------- EILIAN, H. PIERRE, M.D. 945 Stonegate Drive Highland Park, IL 60035 - -------------------------------------------------------------------------------- EILIAN, MR. JONATHAN D. c/o Starwood Capital Group, L.P. Three Pickwick Plaza Suite 250 Greenwich, CT 06830 - -------------------------------------------------------------------------------- F3 PARTNERS, a New York general partnership c/o Mr. Jonathan F. Foster, General Partner Lazard Freres & Co., LLC 30 Rockefeller Plaza New York, NY 10020 - -------------------------------------------------------------------------------- FEINGLASS,NANCY B. AND HOWARD 161 West 61st Street Apt. 25-C New York, NY 10023-7461 - -------------------------------------------------------------------------------- FLYNN, MS. JULIA G. 335 Madison Avenue 26th Floor New York, NY 10017 - -------------------------------------------------------------------------------- 2 G2 INVESTMENT PARTNERS a New Jersey Partnership c/o Richard D. Goldstein, General Partner 1285 Avenue of the Americas, 21st Floor New York, NY 10019 - -------------------------------------------------------------------------------- GARDNER, MS. SONIA E. 335 Madison Avenue 26th Floor New York, NY 10017 - -------------------------------------------------------------------------------- GLENBROOK PARTNERS, L.P., a Nevada limited partnership ATTENTION: Mr. Peter R. Knapp 308 Dorla Court P.O. Box 12219 Zephyr Cove, NV 89448 - -------------------------------------------------------------------------------- GOOLOCK ASSOCIATES, a New York general partnership c/o Oppenheimer & Co., Inc. ATTENTION: Mr. William Finneran, G.P. Mr. Nathan Gantcher, G.P. One World Financial Center 200 Liberty Street New York, NY 10281 - -------------------------------------------------------------------------------- INDENTURE OF TRUST F/B/O ALYSSA MICHELLE BERL N Lotte Bravmann and Carol Bravmann Berlin, Trustees 3333 Henry Hudson Parkway Apt. 6E Riverdale, NY 10463 - -------------------------------------------------------------------------------- INDENTURE OF TRUST F/B/O ELANA DANIELLE BERLIN Lotte Bravmann and Carol Bravmann Berlin, Trustees 3333 Henry Hudson Parkway Apt. 6E Riverdale, NY 10463 - -------------------------------------------------------------------------------- 3 INDENTURE OF TRUST F/B/O NICOLE AMY BERLIN Lotte Bravmann and Carol Bravmann Berlin, Trustees 3333 Henry Hudson Parkway Apt. 6E Riverdale, NY 10463 - -------------------------------------------------------------------------------- INDENTURE OF TRUST F/B/O JEREMY J. KAUFTHAL Lotte Bravmann and Judith Kaufthal, Trustees 3333 Henry Hudson Parkway Apt. 6E Riverdale, NY 10463 - -------------------------------------------------------------------------------- INDENTURE OF TRUST F/B/O JONATHAN S. KAUFTHAL Lotte Bravmann and Judith Kaufthal, Trustees 3333 Henry Hudson Parkway Apt. 6E Riverdale, NY 10463 - -------------------------------------------------------------------------------- INDENTURE OF TRUST F/B/O JOSHUA M. KAUFTHAL Lotte Bravmann and Judith Kaufthal, Trustees 3333 Henry Hudson Parkway Apt. 6E Riverdale, NY 10463 - -------------------------------------------------------------------------------- KEENAN, MR. JEFFREY J. 11 The High Road Bronxville, NY 10708 - -------------------------------------------------------------------------------- KWAIT, MR. BRIAN 211 E. 70th Street Apt. 164 New York, NY 10021 - -------------------------------------------------------------------------------- LASRY, MR. MARC 335 Madison Avenue 26th Floor New York, NY 10017 - -------------------------------------------------------------------------------- 4 LEBLANC, MR. BRAD 295 Nesbit Entry Drive Roswell, GA 30076 - -------------------------------------------------------------------------------- LEVEN, MR. ADAM P.O. Box 2012 Jackson Hole, WY 83001 - -------------------------------------------------------------------------------- LEVEN, ANDREA 5 West Welsey Ridge Atlanta, Georgia 30327 - -------------------------------------------------------------------------------- LEVEN, MR. JONATHAN 1051 Shady Valley Place Atlanta, GA 30324 - -------------------------------------------------------------------------------- LEVEN, MR. MICHAEL A. 5 West Wesley Ridge Atlanta, Georgia 30327 - -------------------------------------------------------------------------------- LEVEN, MR. ROBERT 1152 Oakbrook Way Atlanta, GA 30319 - -------------------------------------------------------------------------------- LEVY, MR. LEON c/o Odyssey Partners 31 West 52nd Street 17th Floor New York, NY 10019 - -------------------------------------------------------------------------------- MGP INVESTMENT PARTNERS c/o Mr. Alan J. Gold, General Partner 8115 Preston Road Suite 240 Dallas, Texas 75225 - -------------------------------------------------------------------------------- MATHIS, MR. DON 4609 Westhampton Circle Tucker, GA 30084 - -------------------------------------------------------------------------------- MICROTEL INVESTORS, L.P. c/o Mr. James D. Halper, Managing Member, HIH Partners, L.L.C., General Partner 301 East 69th Street New York, NY 10021 - -------------------------------------------------------------------------------- 5 MICROTOPP ASSOCIATES, a New York general partnership ATTENTION: Matthew J. Maryles, Esq., General Partner c/o Oppenheimer & Co., Inc. One World Financial Center 200 Liberty Street New York, NY 10281 - -------------------------------------------------------------------------------- MINTZ, MR. DAVID A. 21 Goodhart Drive Livingston, NJ 07039 - -------------------------------------------------------------------------------- MUIR, MR. MICHAEL 5711 Preston Oaks Suite 1638 Dallas, TX 75240 - -------------------------------------------------------------------------------- MUIR, MR. TIMOTHY c/o U.S. Franchise Systems, Inc. 13 Corporate Square, Suite 250 Atlanta, GA 30329 - -------------------------------------------------------------------------------- NASH, MR. JACK c/o Odyssey Partners, L.P. 31 West 52nd Street New York, NY 10019 - -------------------------------------------------------------------------------- NASH GRANDCHILDREN 1986 TRUST (5) 9/29/95 31,000 Mr. Leon Levy, Trustee c/o Odyssey Partners, L.P. 31 West 52nd Street New York, NY 10019 - -------------------------------------------------------------------------------- NASH FAMILY PARTNERSHIP ATTENTION: Mr. Joshua Nash, General Partner c/o Odyssey Partners, L.P. 31 West 52nd Street New York, NY 10019 - -------------------------------------------------------------------------------- ODED ABOODI; 1989 TRUST c/o Esther Aboodi, Trustee 1285 Avenue of the Americas 21st Floor New York, NY 10019 6 POOLE, MS. FRAN 270 Sheringham Drive Roswell, GA 30076 - -------------------------------------------------------------------------------- RECHLER, MR. DONALD Reckson Associates Realty Corp. 225 Broadhollow Road, CS5341 Melville, NY 11747 - -------------------------------------------------------------------------------- RECHLER, MR. GREGG Reckson Associates Realty Corp. 225 Broadhollow Road, CS5341 Melville, NY 11747 - -------------------------------------------------------------------------------- RECHLER, MR. ROGER Reckson Associates Realty Corp. 225 Broadhollow Road, CS5341 Melville, NY 11747 - -------------------------------------------------------------------------------- RECHLER, MR. SCOTT Reckson Associates Realty Corp. 225 Broadhollow Road, CS5341 Melville, NY 11747 - -------------------------------------------------------------------------------- ROMANIELLO, MR. STEVEN 785 Springside Court Atlanta, GA 30342 - -------------------------------------------------------------------------------- SCHWARTZ MICROTEL INVESTORS, L.L.C. 660 Madison Avenue, 20th Floor New York, NY 10021 - -------------------------------------------------------------------------------- SCOTTO, MR. ANTHONY P. 91-08 Colonial Road Apt. #E-5 Brooklyn, NY 11209 - -------------------------------------------------------------------------------- SHAW, MR. DAVID E. 8710 Willowbrae Lane Roswell, GA 30076 - -------------------------------------------------------------------------------- 7 SMITH BARNEY WORLDWIDE SPECIAL FUND, N.V. ATTN: Mr. Scott E. Kalb, Managing Director Smith Barney International Asset Management 388 Greenwich Street 25th Floor New York, NY 10013 - -------------------------------------------------------------------------------- SMITH BARNEY WORLDWIDE SECURITIES LIMITED ATTN: Scott E. Kalb, Managing Director Smith Barney International Asset Management 388 Greenwich Street 25th Floor New York, New York 10013 - -------------------------------------------------------------------------------- STARWOOD OPPORTUNITY FUND II, L.P. ATTENTION: Mr. Jonathan Eilian, SVP Three Pickwick Plaza Suite 250 Greenwich, CT 06830 - -------------------------------------------------------------------------------- STERN, STEVEN E. AND BONNIE B. (JTWROS) 760 Park Avenue New York, NY 10021 - -------------------------------------------------------------------------------- TARTER, MR. FRED B. 210 East 39th Street New York, NY 10016 - -------------------------------------------------------------------------------- WELCH, MR. GENO 70 Bentridge Court Lawrenceville, GA 30243 - -------------------------------------------------------------------------------- 8 EX-10.6 6 EMPLOYEE STOCK PURCHASE AGREEMENT U.S. FRANCHISE SYSTEMS, INC. A Delaware Corporation AMENDED AND RESTATED EMPLOYER STOCK PURCHASE AGREEMENT --------------------------------- Michael A. Leven TABLE OF CONTENTS Page 1. Definitions............................................................3 2. Management Equity Participation........................................9 3. Representations of Employee...........................................14 4. Representations and Warranties of the Corporation.....................15 5. Limitations on Restricted Shares......................................16 6. Earned Shares.........................................................17 7. Redemption of Restricted Shares Not Earned............................17 8. Termination Forfeiture................................................18 9. Termination of Employment Without Cause or by Employee for Good Reason.......................................................19 10. Death or Total Disability of Employee.................................19 11. Reissue of Forfeit Shares.............................................20 12. Performance Criteria..................................................20 13. Successors and Assigns................................................23 14. Sale of All or Substantially All Stock or Assets, or Merger...........23 15. Legends...............................................................24 16. Additional Covenants..................................................24 17. Withholding Taxes; Section 83(b) Election.............................25 18. Notices...............................................................26 19. Miscellaneous.........................................................27 20. Multiple Counterparts.................................................29 21. Record Owner..........................................................29 i THIS AMENDED AND RESTATED EMPLOYEE STOCK PURCHASE AGREEMENT AND THE SECURITIES ISSUED UPON THE TERMS HEREOF, HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES LAWS, AND NEITHER THIS AGREEMENT NOR THE UNDERLYING SECURITIES MAY BE ASSIGNED, HYPOTHECATED, ENCUMBERED, PLEDGED, SOLD OR OTHERWISE TRANSFERRED EXCEPT AS PROVIDED BY THE TERMS HEREOF, IN ACCORDANCE WITH THE TERMS OF A SEPARATE STOCKHOLDERS' AGREEMENT DATED ON OR ABOUT THE DATE HEREOF, AS THE SAME MAY BE AMENDED FROM TIME TO TIME, AND PURSUANT TO EITHER AN EFFECTIVE REGISTRATION STATEMENT OR IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER APPLICABLE FEDERAL AND STATE SECURITIES LAWS. STATE OF GEORGIA COUNTY OF FULTON U.S. FRANCHISE SYSTEMS, INC., a Delaware corporation AMENDED AND RESTATED EMPLOYEE STOCK PURCHASE AGREEMENT This Amended and Restated Employee Stock Purchase Agreement (as amended, the "Agreement") is entered into as of the ___ day of _____________ 1996, by and between U.S. FRANCHISE SYSTEMS, INC., a Delaware corporation (the "Corporation"), and MICHAEL A. LEVEN, an individual resident of the State of Georgia (the "Employee"). WHEREAS, on September 29, 1995, the Employee and the Corporation executed an Employee Stock Purchase Agreement (the "Old Agreement"), pursuant to which the Corporation issued to the Employee and to Neal K. Aronson (together, the "Initial Management") a total of 567,245 shares of common stock, par value $.10 per share (the "Old Common Stock"), of the Corporation, constituting 51% of the then issued and outstanding common shares of the Corporation; 2 WHEREAS, as set forth in greater detail on Exhibit A hereto, 278,061 of such shares, or 25% of the then outstanding common shares of the Corporation, were acquired outright by Initial Management as Unrestricted Shares (as defined in the Old Agreement) and 289,184 of such shares, or 26% of the then outstanding common shares, were acquired by Initial Management as Restricted Shares (as defined in the Old Agreement), subject to the terms and conditions and provisions as set forth in the Old Agreement; WHEREAS, with respect to the 26% of the then outstanding common shares that were held by Initial Management as Restricted Shares (as defined in the Old Agreement), the Old Agreement (i) limited the rights of Initial Management to vote and to receive dividends with respect to such shares, (ii) imposed substantial restrictions on the transferability of such shares until such shares were "earned" by Initial Management by reason of the Corporation's satisfaction of certain performance criteria set forth therein and (iii) provided that such shares were subject to forfeiture in the event the employment of the Management holder thereof was terminated in certain circumstances; WHEREAS, the Corporation is considering an IPO (as defined below) with respect to its common shares, as adjusted for the Reclassification (as defined below); WHEREAS, in connection with the IPO, the Corporation and the Employee have agreed to eliminate some of the restrictions that were imposed on Restricted Shares pursuant to the Old Agreement and to deem that certain shares designated as Restricted Shares pursuant to the Old Agreement be redesignated as Unrestricted Shares; 3 NOW THEREFORE, FOR AND IN CONSIDERATION of the mutual covenants set forth herein, and other good and valuable consideration, the receipt, adequacy and sufficiency of which is hereby acknowledged, the parties do hereby agree to amend and restate the Old Agreement, as so amended, as follows: 1. Definitions. For purposes hereof, the following terms shall be defined as follows: (a) "Adjusted EBITDA" for any fiscal year of the Corporation means (i) consolidated earnings of the Corporation and its subsidiaries before consolidated interest, taxes, depreciation, amortization, and other non-cash charges, adjusted to exclude one-time or non-recurring expenses or credits (such exclusions to include but not be limited to the payments to Hudson Hotels Corporation (formerly known as Microtel Franchising and Development Corporation) in the total amount of $4 million dollars pursuant to the terms of that certain Joint Venture Agreement dated September 7, 1995) for such fiscal year, as determined by the Corporation in good faith in accordance with generally accepted accounting principles consistently applied, minus (ii) 10% of the Transaction Consideration (as defined below) actually paid by the Corporation and/or its subsidiaries in connection with a Transaction (as defined below) closed after the closing of the IPO (provided that such consideration has not been deducted in determining the amount referred to in clause (i) above). In the event of any dispute or disagreement regarding the determination of the amount of Adjusted EBITDA, then such dispute or disagreement shall be resolved by the accounting firm regularly engaged to and providing auditing services to the Corporation. 4 (b) "Earned Shares" means those Shares that are designated herein as Restricted Shares and are subsequently redesignated as Earned Shares in accordance with the terms hereof due to the attainment by the Corporation of certain performance standards as provided for herein. (c) "Employee Shares" means the Restricted Shares and Unrestricted Shares held by Employee under this Agreement. (d) "Employment Agreement" means that certain agreement relating to the employment of Employee with the Corporation dated October 1, 1995, as the same may be amended from time to time. (e) "Initial Management" means Employee and Neal K. Aronson. (f) "IPO" shall mean the initial public offering of Shares pursuant to the Securities Act of 1933, as amended. (g) "Management" means the group of individuals (including Initial Management) who are employees of the Corporation and who have been issued shares of Class A Common Stock pursuant to the terms of the Old Agreement or a stock purchase agreement substantially similar to the Old Agreement, as the same may be amended from time to time (with such changes thereto as are authorized by the Stock Reallocation Committee). (h) "Management Shares" means Shares issued to and acquired by Management (or their permitted designees and successors), including Unrestricted Shares, Restricted Shares, Earned Shares, Reallocable Shares, shares acquired through preemptive (or similar) rights or otherwise from or through the Corporation and such shares that are transferred to other Management. 5 (i) "Original Stockholders" or "Original Investors" means those persons who are not employees of the Corporation and who were issued shares of Old Common Stock pursuant to the offering described in the Confidential Investment Memorandum of the Corporation, dated August 19, 1995, and their Permitted Transferees (as such term is used in that certain Stockholders' Agreement among the Corporation and the Original Investors, dated as of September 29, 1995). (j) "Reallocable Shares" means those Restricted Shares and/or Unrestricted Shares owned or held by Initial Management that were specifically designated at the time of their original issue as Reallocable Shares and that, prior to the date hereof, have been reallocated to other Management pursuant to the Old Agreement. Such shares shall retain such designation regardless of whether they are converted from Restricted Shares to Earned Shares (in the case of Reallocable Restricted Shares), unless and until such shares become Forfeit Shares and are redeemed or otherwise repurchased by the Corporation from the Management holder (other than Initial Management) thereof. (k) "Reclassification" means the conversion of each share of Old Common Stock into 9.67 shares of Class A Common Stock, par value $.01 per share ("Class A Common Stock"), of the Corporation pursuant to the Corporation's Amended and Restated Certification of Incorporation, which is to be filed with the State of Delaware prior to the consummation of the IPO. (l) "Restricted Shares" means 144,592 Shares (prior to the Reclassification), constituting 13% of the outstanding common stock of the Corporation as of October 2, 1995), that were issued to Initial Management pursuant to the Old Agreement and that were specifically designated at the time of issue as Restricted Shares, 6 as the same are reclassified pursuant to the Reclassification. Restricted Shares are subject to repurchase (even if they have been converted to Earned Shares) pursuant to a Termination Forfeiture. Restricted Shares are eligible for conversion to Earned Shares upon attainment by the Corporation of certain performance criteria as set forth herein. Restricted Shares that have not been converted to Earned Shares by September 29, 2005 are subject to redemption by the Corporation (and reissue to the Original Investors). If such shares are then reissued to Original Investors, such shares shall automatically be converted to and shall thereafter be deemed to be Unrestricted Shares. (m) "Shares" means the shares of the Old Common Stock that were authorized immediately prior to the Reclassification, as reclassified by the Reclassification into Class A Common Stock and, to the extent set forth in Section 2(b)(iv) hereof, exchanged for Class B Common Stock, par value $.01 per share ("Class B Common Stock"), of the Corporation, all as the same may be further reclassified from time to time. (n) "Stock Reallocation Committee" means the committee appointed by the Board of Directors of the Corporation from among its members to administer the reallocation of Reallocable Shares hereunder. (o) "Stockholders' Agreement" means that certain Stockholders' Agreement dated as of September 29, 1995 by and between the Corporation and the Stockholders named therein, as such agreement may be amended from time to time. Employee acknowledges that all of the Shares held by Employee hereunder shall be issued and held in accordance with the terms of the Stockholders' Agreement, in addition to the terms and conditions hereof. 7 (p) "Termination Forfeiture" means the redemption by the Corporation from the Employee of Restricted Shares (whether or not converted to Earned Shares) upon the occurrence of a Termination Forfeiture Event. (q) "Termination Forfeiture Event" means the occurrence or happening of one of the following during the period ending on September 29, 2005: (i) voluntary resignation for other than Good Reason (as defined in the Employment Agreement) of Employee; or (ii) termination of Employee by the Corporation for Cause (as defined in the Employment Agreement). (r) "Transaction Consideration" means the total consideration paid or to be paid in connection with a Transaction, including, without limitation: (i) cash; (ii) notes, securities and other property; (iii) indebtedness for borrowed money assumed, refinanced or extinguished; (iv) amounts payable under consulting agreements, agreements not to compete or similar arrangements; and (v) contingent payments (whether or not related to future earnings or operations); provided, that in the event debt financing is utilized to effect a Transaction, proceeds from such debt financing shall no longer be considered as Transaction Consideration as and to the extent such proceeds have been repaid to the lender thereof. For purposes of determining the amount of consideration paid, non-cash consideration shall be valued as follows: (x) publicly traded securities, including capital stock of the Corporation, shall be valued at the average of their closing prices (as reported in The Wall Street Journal) for the five trading days prior to the closing of the Transaction and (y) any other non-cash consideration shall be valued at the fair market value thereof as determined in good faith by the Board of Directors of the Corporation. 8 (s) "Transaction" means an acquisition by the Corporation and/or its subsidiaries of another corporation or other entity, a business or a brand, including, but not limited to, through a merger, consolidation, tender or exchange offer, acquisition of securities or assets, or through a licensing agreement, but excluding any investment in another corporation, joint venture or other entity (an "entity") that represents less than 25% of the equity of such entity. (t) "Unrestricted Shares" means all Shares owned or held by the Initial Management (or by other Management, in the case of Reallocable Shares, or by the Permitted Transferees of Initial Management (as such term is defined in the Stockholders' Agreement, prior to any amendment thereof)) that have not been specifically designated herein as Restricted Shares, including but not limited to Shares acquired for value from the Corporation pursuant to a voluntary exchange (including the exchange referred to in Section 2(b)(iv) hereof) or through preemptive (or similar) rights, stock splits or dividends with respect to Unrestricted Shares and the like or other subsequently acquired shares. Unrestricted Shares are held outright and subject to the terms and conditions set forth in the Amended and Restated Certificate of Incorporation of the Corporation, as the same may be amended from time to time, and in the Stockholders' Agreement. (u) Capitalized terms not defined in this Agreement shall have the meaning and intent ascribed to them in the Stockholders' Agreement. 9 2. Management Equity Participation. (a) Stock Reallocation Committee. (i) Pursuant to the Old Agreement, the Management Shares were initially issued, allocated, offered and divided among Employee and Neal K. Aronson in the amounts and designations set forth in Exhibit "A" attached hereto. Following the Reclassification, the IPO and effectiveness of this amendment in accordance with Section 19 hereof, Management (including Initial Management) will own Shares in the amounts and designations set forth in Exhibit "B" attached hereto. Thereafter, subsequent offers, call options, redemptions, and the like, in each case to the extent permitted hereunder, shall be subject to the exclusive control and authority of the Stock Reallocation Committee of the Corporation. The Stock Reallocation Committee shall also have the authority to cause the Corporation to act with respect to Management Shares that are forfeited by Management to the Corporation, subject to the rights of Initial Management to have Forfeit Shares reoffered to them under this Agreement. (b) Unrestricted Shares. (i) Thirty-eight percent (38%) of the total 51% of Shares acquired by Initial Management pursuant to the Old Agreement are hereby designated as Unrestricted Shares. 62,911 of such shares, or approximately 5.656% of the 38% constituting Unrestricted Shares were designated as Reallocable Shares pursuant to the Old Agreement and have heretofore been called and repurchased from time to time at the direction of the Stock Reallocation Committee from Initial Management (or their Permitted Transferees) and sold to other members of Management. The Stock Reallocation Committee has had and shall continue to have the authority to impose such 10 terms, conditions, limitations and otherwise as it deems reasonable, desirable or necessary with respect to Reallocable Shares held by Management other than Initial Management; provided, however, that following the effectiveness of this Agreement, no other Shares (including Shares that have been forfeited to the Corporation and reissued to Initial Management, as contemplated by Section 2(a)(ii) hereof) shall be subject to call and repurchase from Initial Management (or their Permitted Transferees) for offer, sale and/or transfer to other Management; and provided further, the Stock Reallocation Committee may not permit such Reallocable Shares to be held by other Management under terms, conditions, limitations and otherwise which are more favorable, desirable or beneficial than as imposed on Initial Management, other than the provisions with respect to the duration of service after which the risk of Termination Forfeiture may lapse. The remaining approximately 32.34% of the 38% constituting Unrestricted Shares shall be held outright, free and clear by Initial Management (or their Permitted Transferees), are not subject to call, purchase or reallocation by the Stock Reallocation Committee or otherwise, shall not be subject to the risk of Termination Forfeiture, and the holders thereof shall enjoy all incidents of ownership to such shares (subject to any restrictions or limitations set forth in the Stockholders' Agreement). (ii) Notwithstanding anything to the contrary in this Agreement, while the Employee is still employed by the Corporation, the Stock Reallocation Committee shall offer to Employee the opportunity to repurchase any Reallocable Shares (Restricted, Earned and/or Unrestricted) that have heretofore been called, repurchased, reallocated from the Employee and sold by the Corporation at the direction of the Stock Reallocation Committee to other Management, where, thereafter, such Reallocable Shares 11 are forfeited to the Corporation or repurchased or held by the Corporation for any reason ("Forfeit Shares"). Such Forfeit Shares shall be reoffered to the Employee at the original purchase price of $1.00 per share, as such price is adjusted for the Reclassification (the "Adjusted Original Price"), and the right to purchase such shares may be exercisable by Employee at any time. Forfeit Shares reacquired by Employee shall not regain their status as Reallocable Shares and therefore shall not be subject to call and redemption by the Stock Reallocation Committee for purpose of reallocation to other Management. (iii) Unless otherwise specifically set forth in this Agreement or in a separate written agreement between the Corporation and the Employee, any and all shares acquired by the Employee from the Corporation for value (other than Restricted Shares), including through a voluntary exchange (including the exchange referred to in Section 2(b)(iv) hereof (the "Exchange")) or pursuant to the exercise of preemptive (or similar) rights, or from stock splits or stock dividends as to Unrestricted Shares (but not acquired shares which are attributable to Restricted Shares), shall be deemed Unrestricted Shares. (iv) Immediately following the effectiveness of this Amendment, the Corporation shall issue to Initial Management and Initial Management shall purchase from the Corporation 2,706,557 shares of the Corporation's Class B Common Stock (which shares shall be Unrestricted Shares) in exchange for the same number of shares of the Corporation's Class A Common Stock. (c) Restricted Shares. (i) Shares designated herein as Restricted Shares are limited as to their incidents of ownership and other rights as herein specifically set forth (but shall 12 retain all other rights including, without limitation, the right to vote and to receive dividends with respect to such shares) until such time as the Restricted Shares are deemed "Earned" and converted to Earned Shares in accordance with the terms hereof. (ii) Thirteen percent (13%), or 144,592 (pre-Reclassification), of the 51% of Shares acquired by Initial Management pursuant to the Old Agreement are hereby designated as Restricted Shares. Restricted Shares are subject to the substantial restrictions on transferability and the substantial risks of forfeiture as set forth under this Agreement. 22,593 shares (pre-Reclassification) or 2.0315% of the 13% constituting Restricted Shares were designated as Reallocable Shares pursuant to the Old Agreement and have heretofore called and repurchased from Initial Management (or their Permitted Transferees) and sold by the Corporation to other Management in the same manner as the Reallocable Shares referred to in Section 2(b) hereof. While such Reallocable Shares are held by Management other than Initial Management, such Shares shall cease to be Reallocable (but shall remain Restricted (subject to being "Earned")). The Stock Reallocation Committee has had and shall continue to have the authority to impose such terms, conditions, limitations and otherwise as it deems reasonable, desirable or necessary with respect to such Reallocable Shares held by Management other than Initial Management; provided, however, that following the effectiveness of this Agreement, no other Shares (including Forfeit Shares) shall be subject to call and repurchase from Initial Management (or their Permitted Transferees) for offer, sale and/or transfer to other Management; and provided further, the Stock Reallocation Committee may not permit such Reallocable Shares to be held by other Management under terms, conditions, limitations and otherwise which are more favorable, desirable or beneficial than as 13 imposed on Initial Management, other than the provisions with respect to the duration of service after which the risk of Termination Forfeiture may lapse. (iii) Where certain performance criteria are attained by the Corporation, Restricted Shares shall become Earned Shares such that the substantial limitations on the holder's enjoyment of incidents of ownership in the Restricted Shares will lapse and be suspended and the holder thereof will become entitled to all incidents of ownership in the Earned Shares, subject only to Termination Forfeiture and the restrictions on transfer hereinafter set forth. The specific performance criteria and the related terms and conditions whereby Restricted Shares may become Earned Shares are set forth in Sections 7 and 13 of this Agreement. (d) Interpretation of "Percentage." Whenever this Agreement refers to a "percentage" as to Shares, the percentage shall refer to a percentage based on 100%, and not based on the percentage of the stated percentage of such Shares. By way of example and not limitation, a "percentage" of the 51%, 38% and/or 25%, respectively, refers to said 51%, 38% and/or 25% being viewed as a total of 51, 38 and/or 25 increments of 1% each (and not to 100 increments of .51%, .38% and/or .25%), respectively. By way of further example and not limitation, if the total of 51% of issued and outstanding Management Shares (including all Unrestricted, Restricted and Earned Shares) is represented by 510,000 Shares, then 38% of the 51% shall refer to 380,000 Shares, 5% of the 38% shall refer to 50,000 Shares, and so forth. 14 3. Representations of Employee. Employee hereby represents and warrants to the Corporation that: (a) Investment Intent. The Employee Shares (including those to be acquired pursuant to the Exchange) were or will be acquired for Employee's own account and not with a view to, or intention of, distribution thereof in violation of the Securities Act of 1933, as amended (the "Securities Act"), or any applicable state securities laws, and the Employee Shares shall not be disposed of in contravention of the Securities Act or any applicable state securities laws. (b) Accredited Investor. Employee is an executive officer of the Corporation and (i) is an "accredited investor" as defined in Rule 501(a) under the Securities Act or (ii) by reason of Employee's business and financial experience, and the business and financial experience of those retained by Employee to advise Employee with respect to Employee's investment in the Employee Shares purchased pursuant to the Old Agreement or the Exchange, Employee, together with such advisors, has such knowledge, sophistication and experience in business and financial matters so as to be capable of evaluating the risks and benefits of the investment in the Employee Shares. (c) Risk of Investment. Employee is able to bear the economic risk of the investment in the Employee Shares, including the complete loss of such investment in the Employee Shares, for an indefinite period of time because the Employee Shares have not been registered under the Securities Act and, therefore, cannot be sold unless subsequently registered under the Securities Act or an exemption from such registration is available. 15 (d) Adequate Information. Employee has had an opportunity to ask questions and receive answers concerning the terms and conditions of the offering of Employee Shares and has had full access to such other information concerning the Corporation as Employee has requested. (e) Binding Agreement. This Agreement constitutes the legal, valid and binding obligation of Employee, enforceable against Employee in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium and other similar laws relating to or affecting creditors' rights generally, by general equitable principles (regardless of whether such enforceability is considered in a proceeding in equity or at law) or by an implied covenant of good faith and fair dealing. The execution, delivery and performance of this Agreement does not conflict with, violate or cause a breach of any agreement, contract or instrument to which Employee is a party or any judgment, order or decree to which Employee is subject. 4. Representations and Warranties of the Corporation. The Corporation hereby represents and warrants to Employee that: (a) Corporate Entity. The Corporation is a corporation duly organized, validly existing and in good standing under the laws of Delaware. (b) Binding Agreement. The execution, delivery and performance of this Agreement has been duly authorized by the Corporation. This Agreement constitutes a valid and binding obligation of the Corporation enforceable against it in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium and other similar laws relating to or affecting creditors' 16 rights generally, by general equitable principles (regardless of whether such enforceability is considered in a proceeding in equity or at law) or by an implied covenant of good faith and fair dealing. (c) Fully Paid and Non-Assessable Shares. All Shares acquired by the Employee pursuant to the Old Agreement have been validly issued, and Shares acquired upon the Reclassification and the Exchange will be validly issued, and all such Shares are or will be, as the case may be, fully paid and nonassessable when issued. 5. Limitations on Restricted Shares. Employee will be entitled to enjoy all incidents of ownership of the Restricted Shares, except that (i) such shares shall be subject to the risk of Termination Forfeiture and (ii) may not be sold, transferred, pledged or otherwise disposed of until September 29, 2005 other than to an immediate family member of such holder or any trust or partnership of which all of the beneficiaries or partners, as the case may be, are such holder and/or immediate family members of such holder, so long as the transferee agrees in writing to be bound by the restrictions set forth in this Agreement. All Restricted Shares that have become Earned Shares subsequent to the date hereof (i.e., not including the 13% deemed Unrestricted Shares by virtue of amendments to the Old Agreement) shall become permanently vested with Employee or his Permitted Transferees as Unrestricted Shares and shall no longer be subject to any Termination Forfeiture on September 29, 2005. Restricted Shares not yet earned and redesignated as Earned Shares by September 29, 2005 shall be called and repurchased by the Corporation as set forth in Section 7 hereof. 17 6. Earned Shares. (a) Repurchase Upon Termination Forfeiture Event. Restricted Shares will be deemed and become Earned Shares upon the Corporation's attaining the Performance Criteria set forth in Section 13 hereof. (b) Incidents of Ownership. Subject to the restrictions on transfer contained herein and the risk of Termination Forfeiture, the holder of Earned Shares will enjoy all incidents of ownership to such shares, including the right to receive all dividends and to vote such shares. 7. Redemption of Restricted Shares Not Earned. (a) Call and Repurchase by Corporation. Shares that remain Restricted Shares on September 29, 2005 (i.e., which have not previously been converted to Earned Shares) (the "Unearned Restricted Shares") shall be called and redeemed by the Corporation at the Adjusted Original Price. The Board of Directors of the Corporation may establish reasonable notice provisions, time frames, procedures and otherwise as it deems reasonable or necessary to facilitate and effect the transaction contemplated by this Section 7(a). Subject to Section 8(b), the Corporation must call and purchase such shares from Employee within sixty (60) days of September 29, 2005. (b) Reoffer of Restricted Shares Not Earned. Subject to applicable federal and state securities laws, Unearned Restricted Shares so acquired by the Corporation shall be offered by the Corporation at the Adjusted Original Price to the Original Investors pro rata with their holdings of shares of common stock, par value $.10 per share, prior to the IPO. 18 8. Termination Forfeiture. (a) Termination for Cause; Resignation. If a Termination Forfeiture Event occurs, then all Restricted Shares issued to Employee (whether or not then converted to the status of Earned Shares) shall be called and repurchased by the Corporation at the Adjusted Original Price, subject to Section 8(b) hereof. (b) Deferral of Purchase by Corporation. In the event that any payment by the Corporation under Section 7(a) or 8(a) for such shares would constitute a default or an event of default or result in a mandatory prepayment requirement under the terms of any agreement for indebtedness or other agreement to which the Corporation or any of its subsidiaries is a party as of the date for such purchase, the Corporation shall have the right, by delivery of written notice to the Employee, to defer exercise of its call and purchase right until such payment by the Corporation would no longer have such an effect; provided that the Corporation's exercise of its purchase right may not be deferred for more than six (6) months. The Corporation shall give Employee prompt written notice of when it is no longer restricted from making such purchase, and the procedures set forth in Section 7(a) or 8(a) hereof, as the case may be, shall apply as though the date giving rise to the purchase right occurred on the date such notice is given. (c) Procedures. The Board of Directors of the Corporation may establish reasonable notice provisions, time frames, procedures and otherwise as it deems reasonable or necessary to facilitate and effect the transaction contemplated by this Section; provided, the Corporation may not exercise its option and call the Shares subject 19 to the Termination Forfeiture later than ninety (90) days after the Corporation receives written notice of the Termination Forfeiture Event. 9. Termination of Employment Without Cause or by Employee for Good Reason. Upon termination of employment of Employee under the Employment Agreement by the Corporation without Cause (as defined in the Employment Agreement) or by the Employee for Good Reason (as defined in the Employment Agreement), all limitations, restrictions, risks of forfeiture and conditions which relate to Restricted Shares (as unearned Restricted Shares or Earned Restricted Shares) held by Employee, including but not limited to risk of Termination Forfeiture, limitations on transfer or risk of call by the Board for non-conversion to Earned Shares, will automatically and permanently lapse and all Restricted Shares and Earned Shares will permanently become Unrestricted Shares held by Employee. The restrictions, terms and conditions of the Stockholders' Agreement (or any other applicable agreement) then in effect shall remain in full force and effect. 10. Death or Total Disability of Employee. Where termination of Employee is due to Disability (as that term is defined in the Employee's Employment Agreement) or death, (i) all risks of Termination Forfeiture shall immediately lapse and terminate and (ii) as to any Restricted Shares held by Employee as of the date of such event, the Disabled or deceased Employee (or his duly authorized successors) will receive the benefit of the Corporation's performance over the two (2) fiscal year ends immediately following such termination as to the Corporation attaining the Performance Criteria such that Restricted Shares may become Earned Shares and Unrestricted Shares. By way of clarification, restrictions and risks of forfeiture as to Restricted Shares held by the 20 Disabled or deceased Employee (or his successors) shall permanently lapse and Restricted Shares shall become Earned (and therefore Unrestricted Shares) to the extent that the Corporation attains the Adjusted EBITDA Performance Criteria set forth herein at such two (2) fiscal year ends. 11. Reissue of Forfeit Shares. Forfeit Shares shall be reoffered by the Corporation to Initial Management, pro rata based on their relative percentage ownership of shares of common stock, par value $.10 per share, immediately following the initial capitalization of the Company, at the Adjusted Original Price per share, as the same may be further readjusted from time to time. 12. Performance Criteria. Restricted Shares may be earned and become Earned Shares upon attainment by the Corporation of the following performance criteria (the "Performance Criteria"): (a) Adjusted EBITDA Threshold. One thirteenth (1/13) of the Restricted Shares (allocated pro rata among Restricted Shares also designated Reallocable and other Restricted Shares) will be redesignated as (and deemed to be earned as) "Earned Shares" for every one million dollars ($1,000,000) of annual Adjusted EBITDA earned by the Corporation, subject to the limitations set forth in Section 12(b) hereof. Any incremental portion of Adjusted EBITDA less than $1,000,000 will be disregarded for such calculation. (b) Determination of Attained Thresholds and Earned Shares. The number of Restricted Shares with respect to which restrictions and risk of forfeiture will lapse shall be based on the highest annual Adjusted EBITDA of the Corporation attained at any time and from time to time; provided, however, Restricted Shares shall not be 21 redesignated as Earned Shares until the Corporation's annual Adjusted EBITDA for a fiscal year reaches or exceeds fourteen million dollars ($14,000,000). By way of example and not limitation, where Adjusted EBITDA in a given year is $13,300,000, then no restrictions or risk of forfeiture shall lapse and no Restricted Shares shall become Earned Shares. If Adjusted EBITDA in a given year is $14,000,000 (to $14,999,999.99), then Management shall be deemed to have earned rights to 1/13 of the Restricted Shares, and such Restricted Shares automatically shall become Earned Shares. Thereafter, if Adjusted EBITDA in a given year is $20,000,000, then Management shall be deemed to have earned rights to a total of 7/13 (i.e., an additional 6/13) of the Restricted Shares, and so forth. Accordingly, Management's rights to have all Restricted Shares become Earned Shares will not occur until such time as the Corporation realizes Adjusted EBITDA of twenty-six million dollars ($26,000,000) or more in a given fiscal year. (c) Reduction in Adjusted EBITDA; Averaging. Once Restricted Shares are earned, based upon the Corporation's annual Adjusted EBITDA for a given fiscal year, and such Shares are redesignated as Earned Shares, such Earned Shares shall not be affected by the fact that the Corporation's annual Adjusted EBITDA may decline for any subsequent fiscal year. However, once Adjusted EBITDA of $14,000,000 or more has been attained, if the Corporation's annual Adjusted EBITDA declines in a subsequent fiscal year from the highest level at which additional Restricted Shares become Earned Shares, additional Restricted Shares will not become Earned Shares until the Corporation's average annual Adjusted EBITDA for the fiscal years including and following the year of such decline in annual Adjusted EBITDA is greater than the level 22 of annual Adjusted EBITDA at which Restricted Shares were last earned. For example, no additional Restricted Shares would be earned if annual Adjusted EBITDA in the most recent year in which Restricted Shares were earned had been $16,000,000, such annual Adjusted EBITDA declined to $14,000,000 in the following year and thereafter increased to $17,000,000 in the subsequent year (the average of $14,000,000 and $17,000,000 is $15,500,000, which does not exceed $16,000,000, the level of annual Adjusted EBITDA for the most recent year in which Restricted Shares were earned). Additional Restricted Shares would not be earned in this example until such average annual Adjusted EBITDA was at least $17,000,000. As is always the case, additional Restricted Shares are not earned as Earned Shares until annual Adjusted EBITDA increases from the prior year to the next $1,000,000 threshold of Adjusted EBITDA (and thereafter additional Restricted Shares are earned for each $1,000,000 threshold). (d) Resumption of Thresholds. After the average Adjusted EBITDA has exceeded the Adjusted EBITDA for the year of Adjusted EBITDA at which Restricted Shares were last earned, then no averaging shall be applicable for so long as Adjusted EBITDA does not decrease from a prior year's. (e) Pro Rata Conversion. Upon the Corporation's attaining the Performance Criteria from time to time, Restricted Shares held by all Management (and their Permitted Transferees) shall be converted pro rata into Earned Shares, based on the number of all Restricted Shares then held by all Management (and their Permitted Transferees). Provided, nothing herein shall be construed to limit the authority or ability of the Stock Reallocation Committee to require or impose additional, more strict or other conditions, restrictions, requirements or limitations as to Restricted Shares held by other 23 than Initial Management, such that vesting of and/or lapse of restrictions on such Restricted Shares may be delayed, prohibited, limited or otherwise with respect to Management other than Initial Management. 13. Successors and Assigns. The duly authorized Permitted Transferees (as such term is defined in the Stockholders' Agreement prior to any amendment thereof) and holders of Restricted Shares and Reallocable Shares originally held from or through Management, including any transferee obtaining Restricted Shares in accordance with Section 5 hereof, shall be subject to the same restrictions, obligations, call rights, purchase options, benefits, put options, terms and otherwise as would be applicable if such shares were held directly by Management. All restrictions, forfeiture and repurchase provisions and other terms and conditions relating to Restricted Shares and Reallocable Shares shall be binding on and inure to the benefit of the transferees, successors and assignees of those shares. 14. Sale of All or Substantially All Stock or Assets, or Merger. In the event that all or substantially all of the Corporation's stock or all or substantially all assets of the Corporation are transferred or sold, or upon a merger or other business combination, then all Restricted Shares will become Unrestricted Shares to the extent that value for the entire Corporation indicated by the gross sale price as determined in good faith by the Board of Directors in such transaction results in an internal rate of return to those Original Investors who, at the time of such transaction, continue to be stockholders of the Corporation, of at least 40% on a compounded annual basis based upon such persons' original holdings in the Corporation (after taking into account the amount and timing of all distributions and payments received by those Original Investors from the Corporation, 24 after considering Unrestricted and Earned Shares then held by Management, and after giving effect to Restricted Shares that become Unrestricted Shares as result of such sale, transfer or merger). Restricted Shares that do not become Unrestricted Shares as a result of such sale, transfer or merger shall retain their characteristics and potential benefits as Restricted Shares under this Agreement, unless such issue is expressly addressed in the documentation with respect to such sale, transfer or merger. The Corporation may, without the consent of Employee, modify or eliminate the Restricted Share rights and designation as to Restricted Shares not converted to Unrestricted Shares in the documentation with respect to such sale, transfer or merger where the Corporation agrees in writing to such matters as part of such sale, transfer or merger. 15. Legends. Employees agrees that all share certificates representing Shares issued to Employee under the Agreement shall have the legend required by the Stockholders' Agreement or as otherwise may be reasonably be imposed by the Corporation. 16. Additional Covenants. (a) Stockholders' Agreement. Employee hereby acknowledges that the Shares shall be subject to the terms and conditions of the Stockholders' Agreement. Employee has received a copy of such Stockholders' Agreement and Employee further acknowledges that such Stockholders' Agreement contains provisions restricting the transferability of the Shares in addition to those set forth herein. (b) Dilution. All Shares held by Management (including Restricted Shares) will be diluted under the same circumstances as and pro rata with any Shares held by an Original Investor and all other stockholders of the Corporation. 25 (c) Not an Employment Agreement. This Agreement is not an employment contract, the terms and conditions of which shall exclusively be controlled by the provisions of the Employment Agreement. (d) Stock Dividends, Stock Splits and Recapitalizations. If dividends are declared and payable in kind, and in the event of a stock split, recapitalization or other transaction which causes shares to be issued or exchanged, the additional, issued, successor, substituted, and/or replacement shares shall bear the same characteristics, restrictions, rights, obligations, options and otherwise as the shares with respect to which such additional issued, successor, substituted and/or replacement shares arose, for all purposes and the Adjusted Original Price shall be further adjusted on a proportional basis to reflect such change. (e) Preemptive Shares. If shares are acquired pursuant to pre-emptive (or substantially similar) rights by Employee, said acquired shares shall possess and be subject to the same characteristics, restrictions, rights obligations, options and otherwise as the shares giving rise to the acquisition of such additional shares. 17. Withholding Taxes; Section 83(b) Election. (a) Withholding Taxes. Employee shall be solely responsible for paying the Corporation an amount necessary to satisfy the withholding and payment of all applicable federal and state income tax withholdings, if any, including but not limited to social security (FICA) and Medicare tax, at the applicable rates in existence as of September 29, 1995. Employee hereby authorizes the Corporation to withhold from any amounts otherwise payable to Employee such taxes as may be required by law in connection with the issue to Employee of the Shares. Employee agrees that if such 26 amounts are insufficient Employee will pay or make arrangements satisfactory to the Corporation for payment of such taxes. (b) Section 83(b) Election. Employee has filed an election under I.R.C. Section 83(b) and the parties hereto acknowledge and agree that withholding taxes shall be computed as an amount equal to (1) the fair market value of the Shares issued to the Employee pursuant to the Old Agreement as of September 29, 1995 less (2) any amount paid therefor. The Corporation shall assist Employee at his request in the filing and perfecting of such I.R.C. Section 83(b) election. 18. Notices. All notices permitted or required hereunder shall be in writing and shall be deemed to have been duly and properly given as of the earlier of the date and time of actual delivery or three (3) days following the date the same are deposited with the United States Postal Service, postage prepaid, to be sent certified mail with return receipt requested, and addressed to the Corporation, as follows: U.S. Franchise Systems, Inc. Attention: Neal Aronson 13 Corporate Square Suite 250 Atlanta, Georgia 30329 and addressed to Employee, as follows: Mr. Michael A. Leven 5 West Wesley Ridge Atlanta, Georgia 30327 or at such other address as the Corporation or Employee may at any time and from time to time specify to the other by notice as herein provided. 27 19. Miscellaneous. (a) This Amended and Restated Employee Stock Purchase Agreement shall not be effective unless and until the closing of the IPO. (b) Binding Effect. This Agreement shall be binding upon and inure to the benefit of the parties and their respective agents, representatives, successors and permitted assigns. (c) Cooperation. The parties shall cooperate fully with each other and their respective counsel and representatives in connection with all steps to be taken as part of their obligations under this Agreement. (d) Governing Law. This Agreement and the rights and duties of the parties attendant hereto shall be construed and governed in accordance with the internal laws (and not the conflict of laws) of the State of Georgia. (e) No Waiver. The failure of either party to insist, in one or more instances, on the performance by the other in strict compliance with the terms and conditions of this Agreement, shall not be deemed a waiver or relinquishment of any right granted hereunder or of any terms and conditions of this Agreement unless such waiver is contained in a writing signed by the parties. (f) Entire Agreement. This Agreement and any amendments or exhibits attached hereto or related documents referenced herein comprise all the agreement, understandings, representations, conditions and warranties by and between the parties. This Agreement may not be modified or amended except in a writing signed by the parties to this Agreement. 28 (g) Survival. All representations, warranties and covenants contained in this Agreement shall survive the execution and delivery of this Agreement and all documents executed in performance of this Agreement. (h) Interpretation. Within this Agreement, the singular shall include the plural and the plural shall include the singular, and any gender shall include the other gender, as the meaning in the context of this Agreement shall require. Should any provision of this Agreement require judicial interpretation, it is agreed that the court interpreting or construing the same shall not imply a presumption that the terms hereof shall be more strictly construed against one party by reason of the rule of construction that a document is to be construed more strictly against the party who itself or through its agent prepared this Agreement, it being agreed that all parties have had the opportunity to review and understand this Agreement. (i) Injunctive Relief. In the event of a breach or threatened breach by a party of any of his obligations hereunder, the parties hereby acknowledge and agree that the parties will not have an adequate remedy at law and shall be entitled to such equitable and injunctive relief as may be available to restrain a threatened or actual violation. Nothing herein shall be construed as prohibiting a party from pursuing any other remedies available for such breach or threatened breach, including without limitation the recovery of damages. All remedies shall be cumulative. No party shall be required to post a bond or other surety as a condition to obtaining such injunctive relief. 29 20. Multiple Counterparts. This Agreement may be simultaneously executed in several counterparts, each of which shall be an original and all of which shall constitute but one and the same instrument. 21. Record Owner. The Corporation shall not be required (i) to transfer on its books any shares that shall have been sold or otherwise transferred in violation of any of the provisions set forth in this Agreement or the Stockholders' Agreement or (ii) to treat the improper transferee as owner of such shares or to accord to such improper transferee the right to vote, if any, as such owner. IN WITNESS WHEREOF, the parties have executed this Amended and Restated Stock Purchase Agreement on the date first above written. CORPORATION: U.S. FRANCHISE SYSTEMS, INC. By:______________________________ Neal K. Aronson Executive Vice President and Chief Financial Officer ATTEST: By:_____________________________ ____________ Secretary EMPLOYEE: --------------------------- MICHAEL A. LEVEN EXHIBIT "A" EMPLOYEE SHARES (as of September 29, 1995) TOTAL Michael A. Neal K. Leven Aronson (a) Restricted Shares (i) Reallocable 66,735 33,367 33,368 ii) Non-Reallocable 222,449 111,225 111,224 Total Restricted Shares 289,184 144,592 144,592 (b) Unrestricted Shares (i) Reallocable 55,612 33,367 22,245 (ii) Non-Reallocable 222,449 133,470 88,979 Total Unrestricted 278,061 166,837 111,224 Shares Total Shares Issued 567,245 311,429 255,816 Hereunder: EXHIBIT "B" EMPLOYEE SHARES (as of ____________ __, 1996) EX-10.7 7 EMPLOYEE STOCK PURCHASE AGREEMENT U.S. FRANCHISE SYSTEMS, INC., a Delaware corporation AMENDED AND RESTATED EMPLOYEE STOCK PURCHASE AGREEMENT --------------------------------- Neal K. Aronson --------------- TABLE OF CONTENTS Page 1. Definitions.......................................................... 3 2. Management Equity Participation...................................... 9 3. Representations of Employee.......................................... 14 4. Representations and Warranties of the Corporation.................... 15 5. Limitations on Restricted Shares..................................... 16 6. Earned Shares........................................................ 17 7. Redemption of Restricted Shares Not Earned........................... 17 8. Termination Forfeiture............................................... 18 9. Termination of Employment Without Cause or by Employee for Good Reason............................................................... 19 10. Death or Total Disability of Employee................................ 19 11. Reissue of Forfeit Shares............................................ 20 12. Performance Criteria................................................. 20 13. Successors and Assigns............................................... 23 14. Sale of All or Substantially All Stock or Assets, or Merger.......... 23 15. Legends.............................................................. 24 16. Additional Covenants................................................. 24 17. Withholding Taxes; Section 83(b) Election............................ 25 18. Notices.............................................................. 26 19. Miscellaneous........................................................ 27 20. Multiple Counterparts................................................ 29 21. Record Owner......................................................... 29 i THIS AMENDED AND RESTATED EMPLOYEE STOCK PURCHASE AGREEMENT AND THE SECURITIES ISSUED UPON THE TERMS HEREOF, HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES LAWS, AND NEITHER THIS AGREEMENT NOR THE UNDERLYING SECURITIES MAY BE ASSIGNED, HYPOTHECATED, ENCUMBERED, PLEDGED, SOLD OR OTHERWISE TRANSFERRED EXCEPT AS PROVIDED BY THE TERMS HEREOF, IN ACCORDANCE WITH THE TERMS OF A SEPARATE STOCKHOLDERS' AGREEMENT DATED ON OR ABOUT THE DATE HEREOF, AS THE SAME MAY BE AMENDED FROM TIME TO TIME, AND PURSUANT TO EITHER AN EFFECTIVE REGISTRATION STATEMENT OR IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER APPLICABLE FEDERAL AND STATE SECURITIES LAWS. STATE OF GEORGIA COUNTY OF FULTON U.S. FRANCHISE SYSTEMS, INC., a Delaware corporation AMENDED AND RESTATED EMPLOYEE STOCK PURCHASE AGREEMENT This Amended and Restated Employee Stock Purchase Agreement (as amended, the "Agreement") is entered into as of the ___ day of _____________ 1996, by and between U.S. FRANCHISE SYSTEMS, INC., a Delaware corporation (the "Corporation"), and NEAL K. ARONSON, an individual resident of the State of Georgia (the "Employee"). WHEREAS, on September 29, 1995, the Employee and the Corporation executed an Employee Stock Purchase Agreement (the "Old Agreement"), pursuant to which the Corporation issued to the Employee and to Michael A. Leven (together, the "Initial Management") a total of 567,245 shares of common stock, par value $.10 per share (the "Old Common Stock"), of the Corporation, constituting 51% of the then issued and outstanding common shares of the Corporation; 2 WHEREAS, as set forth in greater detail on Exhibit A hereto, 278,061 of such shares, or 25% of the then outstanding common shares of the Corporation, were acquired outright by Initial Management as Unrestricted Shares (as defined in the Old Agreement) and 289,184 of such shares, or 26% of the then outstanding common shares, were acquired by Initial Management as Restricted Shares (as defined in the Old Agreement), subject to the terms and conditions and provisions as set forth in the Old Agreement; WHEREAS, with respect to the 26% of the then outstanding common shares that were held by Initial Management as Restricted Shares (as defined in the Old Agreement), the Old Agreement (i) limited the rights of Initial Management to vote and to receive dividends with respect to such shares, (ii) imposed substantial restrictions on the transferability of such shares until such shares were "earned" by Initial Management by reason of the Corporation's satisfaction of certain performance criteria set forth therein and (iii) provided that such shares were subject to forfeiture in the event the employment of the Management holder thereof was terminated in certain circumstances; WHEREAS, the Corporation is considering an IPO (as defined below) with respect to its common shares, as adjusted for the Reclassification (as defined below); WHEREAS, in connection with the IPO, the Corporation and the Employee have agreed to eliminate some of the restrictions that were imposed on Restricted Shares pursuant to the Old Agreement and to deem that certain shares designated as Restricted Shares pursuant to the Old Agreement be redesignated as Unrestricted Shares; NOW THEREFORE, FOR AND IN CONSIDERATION of the mutual covenants set forth herein, and other good and valuable consideration, the receipt, 3 adequacy and sufficiency of which is hereby acknowledged, the parties do hereby agree to amend and restate the Old Agreement, as so amended, as follows: 1. Definitions. For purposes hereof, the following terms shall be defined as follows: (a) "Adjusted EBITDA" for any fiscal year of the Corporation means (i) consolidated earnings of the Corporation and its subsidiaries before consolidated interest, taxes, depreciation, amortization, and other non-cash charges, adjusted to exclude one-time or non-recurring expenses or credits (such exclusions to include but not be limited to the payments to Hudson Hotels Corporation (formerly known as Microtel Franchising and Development Corporation) in the total amount of $4 million dollars pursuant to the terms of that certain Joint Venture Agreement dated September 7, 1995) for such fiscal year, as determined by the Corporation in good faith in accordance with generally accepted accounting principles consistently applied, minus (ii) 10% of the Transaction Consideration (as defined below) actually paid by the Corporation and/or its subsidiaries in connection with a Transaction (as defined below) closed after the closing of the IPO (provided that such consideration has not been deducted in determining the amount referred to in clause (i) above). In the event of any dispute or disagreement regarding the determination of the amount of Adjusted EBITDA, then such dispute or disagreement shall be resolved by the accounting firm regularly engaged to and providing auditing services to the Corporation. (b) "Earned Shares" means those Shares that are designated herein as Restricted Shares and are subsequently redesignated as Earned Shares in accordance with 4 the terms hereof due to the attainment by the Corporation of certain performance standards as provided for herein. (c) "Employee Shares" means the Restricted Shares and Unrestricted Shares held by Employee under this Agreement. (d) "Employment Agreement" means that certain agreement relating to the employment of Employee with the Corporation dated October 1, 1995, as the same may be amended from time to time. (e) "Initial Management" means Employee and Michael A. Leven. (f) "IPO" shall mean the initial public offering of Shares pursuant to the Securities Act of 1933, as amended. (g) "Management" means the group of individuals (including Initial Management) who are employees of the Corporation and who have been issued shares of Class A Common Stock pursuant to the terms of the Old Agreement or a stock purchase agreement substantially similar to the Old Agreement, as the same may be amended from time to time (with such changes thereto as are authorized by the Stock Reallocation Committee). (h) "Management Shares" means Shares issued to and acquired by Management (or their permitted designees and successors), including Unrestricted Shares, Restricted Shares, Earned Shares, Reallocable Shares, shares acquired through preemptive (or similar) rights or otherwise from or through the Corporation and such shares that are transferred to other Management. (i) "Original Stockholders" or "Original Investors" means those persons who are not employees of the Corporation and who were issued shares of Old Common 5 Stock pursuant to the offering described in the Confidential Investment Memorandum of the Corporation, dated August 19, 1995, and their Permitted Transferees (as such term is used in that certain Stockholders' Agreement among the Corporation and the Original Investors, dated as of September 29, 1995). (j) "Reallocable Shares" means those Restricted Shares and/or Unrestricted Shares owned or held by Initial Management that were specifically designated at the time of their original issue as Reallocable Shares and that, prior to the date hereof, have been reallocated to other Management pursuant to the Old Agreement. Such shares shall retain such designation regardless of whether they are converted from Restricted Shares to Earned Shares (in the case of Reallocable Restricted Shares), unless and until such shares become Forfeit Shares and are redeemed or otherwise repurchased by the Corporation from the Management holder (other than Initial Management) thereof. (k) "Reclassification" means the conversion of each share of Old Common Stock into 9.67 shares of Class A Common Stock, par value $.01 per share ("Class A Common Stock"), of the Corporation pursuant to the Corporation's Amended and Restated Certification of Incorporation, which is to be filed with the State of Delaware prior to the consummation of the IPO. (l) "Restricted Shares" means 144,592 Shares (prior to the Reclassification), constituting 13% of the outstanding common stock of the Corporation as of October 2, 1995), that were issued to Initial Management pursuant to the Old Agreement and that were specifically designated at the time of issue as Restricted Shares, as the same are reclassified pursuant to the Reclassification. Restricted Shares are subject to repurchase (even if they have been converted to Earned Shares) pursuant to a 6 Termination Forfeiture. Restricted Shares are eligible for conversion to Earned Shares upon attainment by the Corporation of certain performance criteria as set forth herein. Restricted Shares that have not been converted to Earned Shares by September 29, 2005 are subject to redemption by the Corporation (and reissue to the Original Investors). If such shares are then reissued to Original Investors, such shares shall automatically be converted to and shall thereafter be deemed to be Unrestricted Shares. (m) "Shares" means the shares of the Old Common Stock that were authorized immediately prior to the Reclassification, as reclassified by the Reclassification into Class A Common Stock and, to the extent set forth in Section 2(b)(iv) hereof, exchanged for Class B Common Stock, par value $.01 per share ("Class B Common Stock"), of the Corporation, all as the same may be further reclassified from time to time. (n) "Stock Reallocation Committee" means the committee appointed by the Board of Directors of the Corporation from among its members to administer the reallocation of Reallocable Shares hereunder. (o) "Stockholders' Agreement" means that certain Stockholders' Agreement dated as of September 29, 1995 by and between the Corporation and the Stockholders named therein, as such agreement may be amended from time to time. Employee acknowledges that all of the Shares held by Employee hereunder shall be issued and held in accordance with the terms of the Stockholders' Agreement, in addition to the terms and conditions hereof. (p) "Termination Forfeiture" means the redemption by the Corporation from the Employee of Restricted Shares (whether or not converted to Earned Shares) upon the occurrence of a Termination Forfeiture Event. 7 (q) "Termination Forfeiture Event" means the occurrence or happening of one of the following during the period ending on September 29, 2005: (i) voluntary resignation for other than Good Reason (as defined in the Employment Agreement) of Employee; or (ii) termination of Employee by the Corporation for Cause (as defined in the Employment Agreement). (r) "Transaction Consideration" means the total consideration paid or to be paid in connection with a Transaction, including, without limitation: (i) cash; (ii) notes, securities and other property; (iii) indebtedness for borrowed money assumed, refinanced or extinguished; (iv) amounts payable under consulting agreements, agreements not to compete or similar arrangements; and (v) contingent payments (whether or not related to future earnings or operations); provided, that in the event debt financing is utilized to effect a Transaction, proceeds from such debt financing shall no longer be considered as Transaction Consideration as and to the extent such proceeds have been repaid to the lender thereof. For purposes of determining the amount of consideration paid, non-cash consideration shall be valued as follows: (x) publicly traded securities, including capital stock of the Corporation, shall be valued at the average of their closing prices (as reported in The Wall Street Journal) for the five trading days prior to the closing of the Transaction and (y) any other non-cash consideration shall be valued at the fair market value thereof as determined in good faith by the Board of Directors of the Corporation. (s) "Transaction" means an acquisition by the Corporation and/or its subsidiaries of another corporation or other entity, a business or a brand, including, but not limited to, through a merger, consolidation, tender or exchange offer, acquisition of 8 securities or assets, or through a licensing agreement, but excluding any investment in another corporation, joint venture or other entity (an "entity") that represents less than 25% of the equity of such entity. (t) "Unrestricted Shares" means all Shares owned or held by the Initial Management (or by other Management, in the case of Reallocable Shares, or by the Permitted Transferees of Initial Management (as such term is defined in the Stockholders' Agreement, prior to any amendment thereof)) that have not been specifically designated herein as Restricted Shares, including but not limited to Shares acquired for value from the Corporation pursuant to a voluntary exchange (including the exchange referred to in Section 2(b)(iv) hereof) or through preemptive (or similar) rights, stock splits or dividends with respect to Unrestricted Shares and the like or other subsequently acquired shares. Unrestricted Shares are held outright and subject to the terms and conditions set forth in the Amended and Restated Certificate of Incorporation of the Corporation, as the same may be amended from time to time, and in the Stockholders' Agreement. (u) Capitalized terms not defined in this Agreement shall have the meaning and intent ascribed to them in the Stockholders' Agreement. 2. Management Equity Participation. (a) Stock Reallocation Committee. ----------------------------- (i) Pursuant to the Old Agreement, the Management Shares were initially issued, allocated, offered and divided among Employee and Michael A. Leven in the amounts and designations set forth in Exhibit "A" attached hereto. Following the Reclassification, the IPO and effectiveness of this amendment in accordance with Section 19 hereof, Management (including Initial Management) will own Shares in the amounts and designations set forth in Exhibit "B" 9 attached hereto. Thereafter, subsequent offers, call options, redemptions, and the like, in each case to the extent permitted hereunder, shall be subject to the exclusive control and authority of the Stock Reallocation Committee of the Corporation. The Stock Reallocation Committee shall also have the authority to cause the Corporation to act with respect to Management Shares that are forfeited by Management to the Corporation, subject to the rights of Initial Management to have Forfeit Shares reoffered to them under this Agreement. (b) Unrestricted Shares. -------------------- (i) Thirty-eight percent (38%) of the total 51% of Shares acquired by Initial Management pursuant to the Old Agreement are hereby designated as Unrestricted Shares. 62,911 of such shares, or approximately 5.656% of the 38% constituting Unrestricted Shares were designated as Reallocable Shares pursuant to the Old Agreement and have heretofore been called and repurchased from time to time at the direction of the Stock Reallocation Committee from Initial Management (or their Permitted Transferees) and sold to other members of Management. The Stock Reallocation Committee has had and shall continue to have the authority to impose such terms, conditions, limitations and otherwise as it deems reasonable, desirable or necessary with respect to Reallocable Shares held by Management other than Initial Management; provided, however, that following the effectiveness of this Agreement, no other Shares (including Shares that have been forfeited to the Corporation and reissued to Initial Management, as contemplated by Section 2(a)(ii) hereof) shall be subject to call and repurchase from Initial Management (or their Permitted Transferees) for offer, sale and/or transfer to other Management; and provided further, the Stock Reallocation Committee 10 may not permit such Reallocable Shares to be held by other Management under terms, conditions, limitations and otherwise which are more favorable, desirable or beneficial than as imposed on Initial Management, other than the provisions with respect to the duration of service after which the risk of Termination Forfeiture may lapse. The remaining approximately 32.34% of the 38% constituting Unrestricted Shares shall be held outright, free and clear by Initial Management (or their Permitted Transferees), are not subject to call, purchase or reallocation by the Stock Reallocation Committee or otherwise, shall not be subject to the risk of Termination Forfeiture, and the holders thereof shall enjoy all incidents of ownership to such shares (subject to any restrictions or limitations set forth in the Stockholders' Agreement). (ii) Notwithstanding anything to the contrary in this Agreement, while the Employee is still employed by the Corporation, the Stock Reallocation Committee shall offer to Employee the opportunity to repurchase any Reallocable Shares (Restricted, Earned and/or Unrestricted) that have heretofore been called, repurchased, reallocated from the Employee and sold by the Corporation at the direction of the Stock Reallocation Committee to other Management, where, thereafter, such Reallocable Shares are forfeited to the Corporation or repurchased or held by the Corporation for any reason ("Forfeit Shares"). Such Forfeit Shares shall be reoffered to the Employee at the original purchase price of $1.00 per share, as such price is adjusted for the Reclassification (the "Adjusted Original Price"), and the right to purchase such shares may be exercisable by Employee at any time. Forfeit Shares reacquired by Employee shall not regain their status as Reallocable Shares and therefore shall not be subject to call and redemption by the Stock Reallocation Committee for purpose of reallocation to other Management. 11 (iii) Unless otherwise specifically set forth in this Agreement or in a separate written agreement between the Corporation and the Employee, any and all shares acquired by the Employee from the Corporation for value (other than Restricted Shares), including through a voluntary exchange (including the exchange referred to in Section 2(b)(iv) hereof (the "Exchange")) or pursuant to the exercise of preemptive (or similar) rights, or from stock splits or stock dividends as to Unrestricted Shares (but not acquired shares which are attributable to Restricted Shares), shall be deemed Unrestricted Shares. (iv) Immediately following the effectiveness of this Amendment, the Corporation shall issue to Initial Management and Initial Management shall purchase from the Corporation 2,706,557 shares of the Corporation's Class B Common Stock (which shares shall be Unrestricted Shares) in exchange for the same number of shares of the Corporation's Class A Common Stock. (c) Restricted Shares. ------------------ (i) Shares designated herein as Restricted Shares are limited as to their incidents of ownership and other rights as herein specifically set forth (but shall retain all other rights including, without limitation, the right to vote and to receive dividends with respect to such shares) until such time as the Restricted Shares are deemed "Earned" and converted to Earned Shares in accordance with the terms hereof. (ii) Thirteen percent (13%), or 144,592 (pre-Reclassification), of the 51% of Shares acquired by Initial Management pursuant to the Old Agreement are hereby designated as Restricted Shares. Restricted Shares are subject to the substantial restrictions on transferability and the substantial risks of forfeiture as set forth under this 12 Agreement. 22,593 shares (pre-Reclassification) or 2.0315% of the 13% constituting Restricted Shares were designated as Reallocable Shares pursuant to the Old Agreement and have heretofore called and repurchased from Initial Management (or their Permitted Transferees) and sold by the Corporation to other Management in the same manner as the Reallocable Shares referred to in Section 2(b) hereof. While such Reallocable Shares are held by Management other than Initial Management, such Shares shall cease to be Reallocable (but shall remain Restricted (subject to being "Earned")). The Stock Reallocation Committee has had and shall continue to have the authority to impose such terms, conditions, limitations and otherwise as it deems reasonable, desirable or necessary with respect to such Reallocable Shares held by Management other than Initial Management; provided, however, that following the effectiveness of this Agreement, no other Shares (including Forfeit Shares) shall be subject to call and repurchase from Initial Management (or their Permitted Transferees) for offer, sale and/or transfer to other Management; and provided further, the Stock Reallocation Committee may not permit such Reallocable Shares to be held by other Management under terms, conditions, limitations and otherwise which are more favorable, desirable or beneficial than as imposed on Initial Management, other than the provisions with respect to the duration of service after which the risk of Termination Forfeiture may lapse. (iii) Where certain performance criteria are attained by the Corporation, Restricted Shares shall become Earned Shares such that the substantial limitations on the holder's enjoyment of incidents of ownership in the Restricted Shares will lapse and be suspended and the holder thereof will become entitled to all incidents of ownership in the Earned Shares, subject only to Termination Forfeiture and the restrictions 13 on transfer hereinafter set forth. The specific performance criteria and the related terms and conditions whereby Restricted Shares may become Earned Shares are set forth in Sections 7 and 13 of this Agreement. (d) Interpretation of "Percentage." Whenever this Agreement refers to a "percentage" as to Shares, the percentage shall refer to a percentage based on 100%, and not based on the percentage of the stated percentage of such Shares. By way of example and not limitation, a "percentage" of the 51%, 38% and/or 25%, respectively, refers to said 51%, 38% and/or 25% being viewed as a total of 51, 38 and/or 25 increments of 1% each (and not to 100 increments of .51%, .38% and/or .25%), respectively. By way of further example and not limitation, if the total of 51% of issued and outstanding Management Shares (including all Unrestricted, Restricted and Earned Shares) is represented by 510,000 Shares, then 38% of the 51% shall refer to 380,000 Shares, 5% of the 38% shall refer to 50,000 Shares, and so forth. 3. Representations of Employee. Employee hereby represents and warrants to the Corporation that: (a) Investment Intent. The Employee Shares (including those to be acquired pursuant to the Exchange) were or will be acquired for Employee's own account and not with a view to, or intention of, distribution thereof in violation of the Securities Act of 1933, as amended (the "Securities Act"), or any applicable state securities laws, and the Employee Shares shall not be disposed of in contravention of the Securities Act or any applicable state securities laws. (b) Accredited Investor. Employee is an executive officer of the Corporation and (i) is an "accredited investor" as defined in Rule 501(a) under the 14 Securities Act or (ii) by reason of Employee's business and financial experience, and the business and financial experience of those retained by Employee to advise Employee with respect to Employee's investment in the Employee Shares purchased pursuant to the Old Agreement or the Exchange, Employee, together with such advisors, has such knowledge, sophistication and experience in business and financial matters so as to be capable of evaluating the risks and benefits of the investment in the Employee Shares. (c) Risk of Investment. Employee is able to bear the economic risk of the investment in the Employee Shares, including the complete loss of such investment in the Employee Shares, for an indefinite period of time because the Employee Shares have not been registered under the Securities Act and, therefore, cannot be sold unless subsequently registered under the Securities Act or an exemption from such registration is available. (d) Adequate Information. Employee has had an opportunity to ask questions and receive answers concerning the terms and conditions of the offering of Employee Shares and has had full access to such other information concerning the Corporation as Employee has requested. (e) Binding Agreement. This Agreement constitutes the legal, valid and binding obligation of Employee, enforceable against Employee in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium and other similar laws relating to or affecting creditors' rights generally, by general equitable principles (regardless of whether such enforceability is considered in a proceeding in equity or at law) or by an implied covenant of good faith and fair dealing. The execution, delivery and performance of this Agreement does not conflict with, violate 15 or cause a breach of any agreement, contract or instrument to which Employee is a party or any judgment, order or decree to which Employee is subject. 4. Representations and Warranties of the Corporation. The Corporation hereby represents and warrants to Employee that: (a) Corporate Entity. The Corporation is a corporation duly organized, validly existing and in good standing under the laws of Delaware. (b) Binding Agreement. The execution, delivery and performance of this Agreement has been duly authorized by the Corporation. This Agreement constitutes a valid and binding obligation of the Corporation enforceable against it in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium and other similar laws relating to or affecting creditors' rights generally, by general equitable principles (regardless of whether such enforceability is considered in a proceeding in equity or at law) or by an implied covenant of good faith and fair dealing. (c) Fully Paid and Non-Assessable Shares. All Shares acquired by the Employee pursuant to the Old Agreement have been validly issued, and Shares acquired upon the Reclassification and the Exchange will be validly issued, and all such Shares are or will be, as the case may be, fully paid and nonassessable when issued. 5. Limitations on Restricted Shares. Employee will be entitled to enjoy all incidents of ownership of the Restricted Shares, except that (i) such shares shall be subject to the risk of Termination Forfeiture and (ii) may not be sold, transferred, pledged or otherwise disposed of until September 29, 2005 other than to an immediate family member of such holder or any trust or partnership of which all of the beneficiaries or partners, as 16 the case may be, are such holder and/or immediate family members of such holder, so long as the transferee agrees in writing to be bound by the restrictions set forth in this Agreement. All Restricted Shares that have become Earned Shares subsequent to the date hereof (i.e., not including the 13% deemed Unrestricted Shares by virtue of amendments to the Old Agreement) shall become permanently vested with Employee or his Permitted Transferees as Unrestricted Shares and shall no longer be subject to any Termination Forfeiture on September 29, 2005. Restricted Shares not yet earned and redesignated as Earned Shares by September 29, 2005 shall be called and repurchased by the Corporation as set forth in Section 7 hereof. 6. Earned Shares. -------------- (a) Repurchase Upon Termination Forfeiture Event. Restricted Shares will be deemed and become Earned Shares upon the Corporation's attaining the Performance Criteria set forth in Section 13 hereof. (b) Incidents of Ownership. Subject to the restrictions on transfer contained herein and the risk of Termination Forfeiture, the holder of Earned Shares will enjoy all incidents of ownership to such shares, including the right to receive all dividends and to vote such shares. 7. Redemption of Restricted Shares Not Earned. ------------------------------------------- (a) Call and Repurchase by Corporation. Shares that remain Restricted Shares on September 29, 2005 (i.e., which have not previously been converted to Earned Shares) (the "Unearned Restricted Shares") shall be called and redeemed by the Corporation at the Adjusted Original Price. The Board of Directors of the Corporation may establish reasonable notice provisions, time frames, procedures and otherwise as it 17 deems reasonable or necessary to facilitate and effect the transaction contemplated by this Section 7(a). Subject to Section 8(b), the Corporation must call and purchase such shares from Employee within sixty (60) days of September 29, 2005. (b) Reoffer of Restricted Shares Not Earned. Subject to applicable federal and state securities laws, Unearned Restricted Shares so acquired by the Corporation shall be offered by the Corporation at the Adjusted Original Price to the Original Investors pro rata with their holdings of shares of common stock, par value $.10 per share, prior to the IPO. 8. Termination Forfeiture. ----------------------- (a) Termination for Cause; Resignation. If a Termination Forfeiture Event occurs, then all Restricted Shares issued to Employee (whether or not then converted to the status of Earned Shares) shall be called and repurchased by the Corporation at the Adjusted Original Price, subject to Section 8(b) hereof. (b) Deferral of Purchase by Corporation. In the event that any payment by the Corporation under Section 7(a) or 8(a) for such shares would constitute a default or an event of default or result in a mandatory prepayment requirement under the terms of any agreement for indebtedness or other agreement to which the Corporation or any of its subsidiaries is a party as of the date for such purchase, the Corporation shall have the right, by delivery of written notice to the Employee, to defer exercise of its call and purchase right until such payment by the Corporation would no longer have such an effect; provided that the Corporation's exercise of its purchase right may not be deferred for more than six (6) months. The Corporation shall give Employee prompt written notice of when it is no longer restricted from making such purchase, and the procedures set forth 18 in Section 7(a) or 8(a) hereof, as the case may be, shall apply as though the date giving rise to the purchase right occurred on the date such notice is given. (c) Procedures. The Board of Directors of the Corporation may establish reasonable notice provisions, time frames, procedures and otherwise as it deems reasonable or necessary to facilitate and effect the transaction contemplated by this Section; provided, the Corporation may not exercise its option and call the Shares subject to the Termination Forfeiture later than ninety (90) days after the Corporation receives written notice of the Termination Forfeiture Event. 9. Termination of Employment Without Cause or by Employee for Good Reason. Upon termination of employment of Employee under the Employment Agreement by the Corporation without Cause (as defined in the Employment Agreement) or by the Employee for Good Reason (as defined in the Employment Agreement), all limitations, restrictions, risks of forfeiture and conditions which relate to Restricted Shares (as unearned Restricted Shares or Earned Restricted Shares) held by Employee, including but not limited to risk of Termination Forfeiture, limitations on transfer or risk of call by the Board for non-conversion to Earned Shares, will automatically and permanently lapse and all Restricted Shares and Earned Shares will permanently become Unrestricted Shares held by Employee. The restrictions, terms and conditions of the Stockholders' Agreement (or any other applicable agreement) then in effect shall remain in full force and effect. 10. Death or Total Disability of Employee. Where termination of Employee is due to Disability (as that term is defined in the Employee's Employment Agreement) or death, (i) all risks of Termination Forfeiture shall immediately lapse and terminate and (ii) as to any Restricted Shares held by Employee as of the date of such event, the Disabled 19 or deceased Employee (or his duly authorized successors) will receive the benefit of the Corporation's performance over the two (2) fiscal year ends immediately following such termination as to the Corporation attaining the Performance Criteria such that Restricted Shares may become Earned Shares and Unrestricted Shares. By way of clarification, restrictions and risks of forfeiture as to Restricted Shares held by the Disabled or deceased Employee (or his successors) shall permanently lapse and Restricted Shares shall become Earned (and therefore Unrestricted Shares) to the extent that the Corporation attains the Adjusted EBITDA Performance Criteria set forth herein at such two (2) fiscal year ends. 11. Reissue of Forfeit Shares. Forfeit Shares shall be reoffered by the Corporation to Initial Management, pro rata based on their relative percentage ownership of shares of common stock, par value $.10 per share, immediately following the initial capitalization of the Company, at the Adjusted Original Price per share, as the same may be further readjusted from time to time. 12. Performance Criteria. Restricted Shares may be earned and become Earned Shares upon attainment by the Corporation of the following performance criteria (the "Performance Criteria"): (a) Adjusted EBITDA Threshold. One thirteenth (1/13) of the Restricted Shares (allocated pro rata among Restricted Shares also designated Reallocable and other Restricted Shares) will be redesignated as (and deemed to be earned as) "Earned Shares" for every one million dollars ($1,000,000) of annual Adjusted EBITDA earned by the Corporation, subject to the limitations set forth in Section 12(b) hereof. Any incremental portion of Adjusted EBITDA less than $1,000,000 will be disregarded for such calculation. 20 (b) Determination of Attained Thresholds and Earned Shares. The number of Restricted Shares with respect to which restrictions and risk of forfeiture will lapse shall be based on the highest annual Adjusted EBITDA of the Corporation attained at any time and from time to time; provided, however, Restricted Shares shall not be redesignated as Earned Shares until the Corporation's annual Adjusted EBITDA for a fiscal year reaches or exceeds fourteen million dollars ($14,000,000). By way of example and not limitation, where Adjusted EBITDA in a given year is $13,300,000, then no restrictions or risk of forfeiture shall lapse and no Restricted Shares shall become Earned Shares. If Adjusted EBITDA in a given year is $14,000,000 (to $14,999,999.99), then Management shall be deemed to have earned rights to 1/13 of the Restricted Shares, and such Restricted Shares automatically shall become Earned Shares. Thereafter, if Adjusted EBITDA in a given year is $20,000,000, then Management shall be deemed to have earned rights to a total of 7/13 (i.e., an additional 6/13) of the Restricted Shares, and so forth. Accordingly, Management's rights to have all Restricted Shares become Earned Shares will not occur until such time as the Corporation realizes Adjusted EBITDA of twenty-six million dollars ($26,000,000) or more in a given fiscal year. (c) Reduction in Adjusted EBITDA; Averaging. Once Restricted Shares are earned, based upon the Corporation's annual Adjusted EBITDA for a given fiscal year, and such Shares are redesignated as Earned Shares, such Earned Shares shall not be affected by the fact that the Corporation's annual Adjusted EBITDA may decline for any subsequent fiscal year. However, once Adjusted EBITDA of $14,000,000 or more has been attained, if the Corporation's annual Adjusted EBITDA declines in a subsequent fiscal year from the highest level at which additional Restricted Shares become Earned Shares, 21 additional Restricted Shares will not become Earned Shares until the Corporation's average annual Adjusted EBITDA for the fiscal years including and following the year of such decline in annual Adjusted EBITDA is greater than the level of annual Adjusted EBITDA at which Restricted Shares were last earned. For example, no additional Restricted Shares would be earned if annual Adjusted EBITDA in the most recent year in which Restricted Shares were earned had been $16,000,000, such annual Adjusted EBITDA declined to $14,000,000 in the following year and thereafter increased to $17,000,000 in the subsequent year (the average of $14,000,000 and $17,000,000 is $15,500,000, which does not exceed $16,000,000, the level of annual Adjusted EBITDA for the most recent year in which Restricted Shares were earned). Additional Restricted Shares would not be earned in this example until such average annual Adjusted EBITDA was at least $17,000,000. As is always the case, additional Restricted Shares are not earned as Earned Shares until annual Adjusted EBITDA increases from the prior year to the next $1,000,000 threshold of Adjusted EBITDA (and thereafter additional Restricted Shares are earned for each $1,000,000 threshold). (d) Resumption of Thresholds. After the average Adjusted EBITDA has exceeded the Adjusted EBITDA for the year of Adjusted EBITDA at which Restricted Shares were last earned, then no averaging shall be applicable for so long as Adjusted EBITDA does not decrease from a prior year's. (e) Pro Rata Conversion. Upon the Corporation's attaining the Performance Criteria from time to time, Restricted Shares held by all Management (and their Permitted Transferees) shall be converted pro rata into Earned Shares, based on the number of all Restricted Shares then held by all Management (and their Permitted 22 Transferees). Provided, nothing herein shall be construed to limit the authority or ability of the Stock Reallocation Committee to require or impose additional, more strict or other conditions, restrictions, requirements or limitations as to Restricted Shares held by other than Initial Management, such that vesting of and/or lapse of restrictions on such Restricted Shares may be delayed, prohibited, limited or otherwise with respect to Management other than Initial Management. 13. Successors and Assigns. The duly authorized Permitted Transferees (as such term is defined in the Stockholders' Agreement prior to any amendment thereof) and holders of Restricted Shares and Reallocable Shares originally held from or through Management, including any transferee obtaining Restricted Shares in accordance with Section 5 hereof, shall be subject to the same restrictions, obligations, call rights, purchase options, benefits, put options, terms and otherwise as would be applicable if such shares were held directly by Management. All restrictions, forfeiture and repurchase provisions and other terms and conditions relating to Restricted Shares and Reallocable Shares shall be binding on and inure to the benefit of the transferees, successors and assignees of those shares. 14. Sale of All or Substantially All Stock or Assets, or Merger. In the event that all or substantially all of the Corporation's stock or all or substantially all assets of the Corporation are transferred or sold, or upon a merger or other business combination, then all Restricted Shares will become Unrestricted Shares to the extent that value for the entire Corporation indicated by the gross sale price as determined in good faith by the Board of Directors in such transaction results in an internal rate of return to those Original Investors who, at the time of such transaction, continue to be stockholders of the Corporation, of at 23 least 40% on a compounded annual basis based upon such persons' original holdings in the Corporation (after taking into account the amount and timing of all distributions and payments received by those Original Investors from the Corporation, after considering Unrestricted and Earned Shares then held by Management, and after giving effect to Restricted Shares that become Unrestricted Shares as result of such sale, transfer or merger). Restricted Shares that do not become Unrestricted Shares as a result of such sale, transfer or merger shall retain their characteristics and potential benefits as Restricted Shares under this Agreement, unless such issue is expressly addressed in the documentation with respect to such sale, transfer or merger. The Corporation may, without the consent of Employee, modify or eliminate the Restricted Share rights and designation as to Restricted Shares not converted to Unrestricted Shares in the documentation with respect to such sale, transfer or merger where the Corporation agrees in writing to such matters as part of such sale, transfer or merger. 15. Legends. Employees agrees that all share certificates representing Shares issued to Employee under the Agreement shall have the legend required by the Stockholders' Agreement or as otherwise may be reasonably be imposed by the Corporation. 16. Additional Covenants. --------------------- (a) Stockholders' Agreement. Employee hereby acknowledges that the Shares shall be subject to the terms and conditions of the Stockholders' Agreement. Employee has received a copy of such Stockholders' Agreement and Employee further acknowledges that such Stockholders' Agreement contains provisions restricting the transferability of the Shares in addition to those set forth herein. 24 (b) Dilution. All Shares held by Management (including Restricted Shares) will be diluted under the same circumstances as and pro rata with any Shares held by an Original Investor and all other stockholders of the Corporation. (c) Not an Employment Agreement. This Agreement is not an employment contract, the terms and conditions of which shall exclusively be controlled by the provisions of the Employment Agreement. (d) Stock Dividends, Stock Splits and Recapitalizations. If dividends are declared and payable in kind, and in the event of a stock split, recapitalization or other transaction which causes shares to be issued or exchanged, the additional, issued, successor, substituted, and/or replacement shares shall bear the same characteristics, restrictions, rights, obligations, options and otherwise as the shares with respect to which such additional issued, successor, substituted and/or replacement shares arose, for all purposes and the Adjusted Original Price shall be further adjusted on a proportional basis to reflect such change. (e) Preemptive Shares. If shares are acquired pursuant to pre-emptive (or substantially similar) rights by Employee, said acquired shares shall possess and be subject to the same characteristics, restrictions, rights obligations, options and otherwise as the shares giving rise to the acquisition of such additional shares. 17. Withholding Taxes; Section 83(b) Election. ------------------------------------------ (a) Withholding Taxes. Employee shall be solely responsible for paying the Corporation an amount necessary to satisfy the withholding and payment of all applicable federal and state income tax withholdings, if any, including but not limited to social security (FICA) and Medicare tax, at the applicable rates in existence as of 25 September 29, 1995. Employee hereby authorizes the Corporation to withhold from any amounts otherwise payable to Employee such taxes as may be required by law in connection with the issue to Employee of the Shares. Employee agrees that if such amounts are insufficient Employee will pay or make arrangements satisfactory to the Corporation for payment of such taxes. (b) Section 83(b) Election. Employee has filed an election under I.R.C. Section 83(b) and the parties hereto acknowledge and agree that withholding taxes shall be computed as an amount equal to (1) the fair market value of the Shares issued to the Employee pursuant to the Old Agreement as of September 29, 1995 less (2) any amount paid therefor. The Corporation shall assist Employee at his request in the filing and perfecting of such I.R.C. Section 83(b) election. 18. Notices. All notices permitted or required hereunder shall be in writing and shall be deemed to have been duly and properly given as of the earlier of the date and time of actual delivery or three (3) days following the date the same are deposited with the United States Postal Service, postage prepaid, to be sent certified mail with return receipt requested, and addressed to the Corporation, as follows: U.S. Franchise Systems, Inc. Attention: Michael A. Leven 13 Corporate Square Suite 250 Atlanta, Georgia 30329 and addressed to Employee, as follows: Mr. Neal K. Aronson c/o U.S. Franchise Systems, Inc. 13 Corporate Square Suite 250 Atlanta, Georgia 30329 26 or at such other address as the Corporation or Employee may at any time and from time to time specify to the other by notice as herein provided. 19. Miscellaneous. -------------- (a) This Amended and Restated Employee Stock Purchase Agreement shall not be effective unless and until the closing of the IPO. (b) Binding Effect. This Agreement shall be binding upon and inure to the benefit of the parties and their respective agents, representatives, successors and permitted assigns. (c) Cooperation. The parties shall cooperate fully with each other and their respective counsel and representatives in connection with all steps to be taken as part of their obligations under this Agreement. (d) Governing Law. This Agreement and the rights and duties of the parties attendant hereto shall be construed and governed in accordance with the internal laws (and not the conflict of laws) of the State of Georgia. (e) No Waiver. The failure of either party to insist, in one or more instances, on the performance by the other in strict compliance with the terms and conditions of this Agreement, shall not be deemed a waiver or relinquishment of any right granted hereunder or of any terms and conditions of this Agreement unless such waiver is contained in a writing signed by the parties. (f) Entire Agreement. This Agreement and any amendments or exhibits attached hereto or related documents referenced herein comprise all the agreement, understandings, representations, conditions and warranties by and between the parties. 27 This Agreement may not be modified or amended except in a writing signed by the parties to this Agreement. (g) Survival. All representations, warranties and covenants contained in this Agreement shall survive the execution and delivery of this Agreement and all documents executed in performance of this Agreement. (h) Interpretation. Within this Agreement, the singular shall include the plural and the plural shall include the singular, and any gender shall include the other gender, as the meaning in the context of this Agreement shall require. Should any provision of this Agreement require judicial interpretation, it is agreed that the court interpreting or construing the same shall not imply a presumption that the terms hereof shall be more strictly construed against one party by reason of the rule of construction that a document is to be construed more strictly against the party who itself or through its agent prepared this Agreement, it being agreed that all parties have had the opportunity to review and understand this Agreement. (i) Injunctive Relief. In the event of a breach or threatened breach by a party of any of his obligations hereunder, the parties hereby acknowledge and agree that the parties will not have an adequate remedy at law and shall be entitled to such equitable and injunctive relief as may be available to restrain a threatened or actual violation. Nothing herein shall be construed as prohibiting a party from pursuing any other remedies available for such breach or threatened breach, including without limitation the recovery of damages. All remedies shall be cumulative. No party shall be required to post a bond or other surety as a condition to obtaining such injunctive relief. 28 20. Multiple Counterparts. This Agreement may be simultaneously executed in several counterparts, each of which shall be an original and all of which shall constitute but one and the same instrument. 21. Record Owner. The Corporation shall not be required (i) to transfer on its books any shares that shall have been sold or otherwise transferred in violation of any of the provisions set forth in this Agreement or the Stockholders' Agreement or (ii) to treat the improper transferee as owner of such shares or to accord to such improper transferee the right to vote, if any, as such owner. IN WITNESS WHEREOF, the parties have executed this Amended and Restated Stock Purchase Agreement on the date first above written. CORPORATION: U.S. FRANCHISE SYSTEMS, INC. By:______________________________ Michael A. Leven Chairman, President and Chief Executive Officer ATTEST: By:_____________________________ ____________ Secretary EMPLOYEE: --------------------------- NEAL K. ARONSON EXHIBIT "A" EMPLOYEE SHARES (as of September 29, 1995) Michael A. Neal K. ---------- ------- TOTAL Leven Aronson ----- ----- ------- (a) Restricted Shares ----------------- (i) Reallocable 66,735 33,367 33,368 (ii) Non-Reallocable 222,449 111,225 111,224 Total Restricted Shares: 289,184 144,592 144,592 (b) Unrestricted Shares ------------------- (i) Reallocable 55,612 33,367 22,245 (ii) Non-Reallocable 222,449 133,470 88,979 Total Unrestricted Shares: 278,061 166,837 111,224 Total Shares Issued Hereunder: 567,245 311,429 255,816 EX-10.11 8 VOTING AGREEMENT VOTING AGREEMENT VOTING AGREEMENT, dated as of _____________ __, 1996 (this "Agreement"), between MICHAEL A. LEVEN ("Leven") and NEAL K. ARONSON ("Aronson"). WHEREAS, as of the date hereof, Aronson owns 942,440 shares of Class A Common Stock, par value $0.01 per share (the "Class A Common Stock"), and 1,509,453 Class B Common Stock, par value $0.01 per share, of U.S. Franchise Systems, Inc. (the "Company"). WHEREAS, in connection with the Company's proposed initial public offering, and at the request of the Underwriters of such offering, Aronson has agreed to enter into this Agreement with respect to 111,347 shares of Class A Common Stock and 311,007 shares of Class B Common Stock now owned by Aronson (the "Shares"). NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and agreements contained herein, and intending to be legally bound hereby, the parties hereto hereby agree as follows: ARTICLE I VOTING AND PROXY Section 1.1 Voting Agreement. Aronson hereby agrees that during the time this Agreement is in effect, at any meeting of the stockholders of the Company, however called, and in any action by consent of the stockholders of the Company, Aronson shall vote the Shares as directed by Leven, and, to effectuate such agreement, to grant to Leven an irrevocable proxy to vote the Shares ("Proxy"). Section 1.2 Proxy. Attached hereto as Exhibit A is an irrevocable proxy, which is coupled with an interest, granted by Aronson to Leven to carry out Section 1.1. ARTICLE II REPRESENTATIONS AND WARRANTIES OF ARONSON AND LEVEN Aronson hereby represents and warrants to Leven as follows: Section 2.1 Authority Relative to This Agreement. Aronson has all necessary power and authority to execute and deliver this Agreement and to perform his obligations hereunder. This Agreement has been duly executed and delivered by 2 Aronson and, assuming the due authorization, execution and delivery by Leven, constitutes a legal, valid and binding obligation of Aronson, enforceable against Aronson in accordance with its terms except to the extent enforceability may be limited by bankruptcy, insolvency, moratorium or other similar laws affecting creditors' rights generally or by general principles governing the availability of equitable remedies. Section 2.2 No Conflict. (a) The execution and delivery of this Agreement by Aronson does not, and the performance of this Agreement by Aronson shall not, (i) conflict with or violate any law, rule, regulation, order, judgment or decree applicable to Aronson or by which the Shares are bound or affected or (ii) result in any breach of or constitute a default (or an event that with notice or lapse or time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, or result in the creation of a lien or encumbrance on any of the Shares pursuant to, any note, bond, mortgage, indenture, contract, agreement, lease, license, permit, franchise or other instrument or obligation to which Aronson is a party or by which Aronson or the Shares are bound or affected. (b) The execution and delivery of this Agreement by Aronson does not, and the performance of this Agreement by Aronson shall not, require any consent, approval, authorization or permit of, or filing with or notification to, any governmental entity except for applicable requirements, if any, under the federal securities laws. Section 2.3 Title to the Shares. As of the date hereof, Aronson is the record and beneficial owner of the Shares. The Shares are owned free and clear of all security interests, liens, claims, pledges, options, rights of first refusal, agreement, limitations on Aronson's voting rights, charges and other encumbrances of any nature whatsoever, except as contemplated by that certain Amended and Restated Employee Stock Purchase Agreement, originally dated as of September 29, 1995, between Aronson and the Company. Except with respect to the Proxy, the Stockholder has not appointed or granted any proxy, which appointment or grant is still effective, with respect to the Shares. ARTICLE III COVENANTS OF ARONSON Section 3.1 No Inconsistent Agreement. Aronson hereby agrees that, except as contemplated by this Agreement, Aronson shall not enter into any voting agreement or grant a proxy or power of attorney with respect to the Shares that is inconsistent with this Agreement. 3 ARTICLE IV MISCELLANEOUS Section 4.1 Termination. This Agreement shall terminate on the earlier of (a) the fifth anniversary hereof or (b) the transfer of the Shares to a person that is not an "affiliate" of Aronson (as determined under the Securities Exchange Act of 1934 and the rules promulgated thereunder), unless earlier terminated in writing by the parties hereto. Section 4.2 Specific Performance. The parties hereto agree that irreparable damage would occur in the event any provision of this Agreement was not performed in accordance with the terms hereof and that the parties shall be entitled to specific performance of the terms hereof, in addition to any other remedy at law or in equity. Section 4.3 Entire Agreement. This Agreement and the Proxy constitute the entire agreement between Aronson and Leven with respect to the subject matter hereof and thereof and supersedes all prior agreements and understandings, both written and oral, between Aronson and Leven with respect to the subject matter hereof and thereof. Section 4.4 Amendment. This Agreement may not be amended except by an instrument in writing signed by the parties hereto. Section 4.5 Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Delaware regardless of the laws that might otherwise govern under applicable principles of conflicts of law. Section 4.6 Assignability. This Agreement may not be assigned by either party without the prior written consent of the other party. 4 IN WITNESS WHEREOF, Leven and Aronson have executed this Agreement on the date hereof. -------------------------------- Michael A. Leven -------------------------------- Neal K. Aronson EXHIBIT A IRREVOCABLE PROXY The undersigned hereby irrevocably appoints MICHAEL A. LEVEN or any nominee of MR. LEVEN, with full power of substitution (the "Proxy Holder"), as proxy for the undersigned, to vote 111,347 shares of Class A Common Stock, par value $0.01 per share, and 311,007 shares of Class B Common Stock, par value $0.01 per share, of U.S. Franchise Systems, Inc., a Delaware corporation (the "Corporation") of the undersigned (such number of shares to be automatically reduced by the number of any such shares sold by the undersigned after the date hereof) (the "Shares"), for and in the name, place and stead of the undersigned at any annual or special meeting of stockholders of the Corporation, and any adjournment(s) thereof in any manner as such Proxy Holder sees fit, and to execute written consents in lieu of any such meeting, until the earlier of (a) the fifth anniversary hereof, (b) the transfer of the Shares to a person who is not an "Affiliate" of the undersigned (within the meaning of the Securities Exchange Act of 1934, as amended) (but only with respect to the number of Shares so transferred) and (iii) the earlier termination hereof by Aronson. This proxy is being granted in connection with the execution of a Voting Agreement, dated the date hereof, between the undersigned and Mr. Leven. Consequently, the undersigned acknowledges that this proxy is coupled with an interest, is not revocable by the undersigned and is perpetual. Dated: ______________ __, 1996 -------------------------------- Neal K. Aronson EX-10.16 9 MATERIAL CONTRACT LOAN PROGRAM MEMORANDUM To: Neal Aronson From: Dan Abrams Date: May 14, 1996 Subject: U.S. Franchise Systems ("USFS") -- Franchise Loan Program -- Revised The following are the general terms upon which Nomura Asset Capital Corporation ("NACC") would provide a comprehensive construction and permanent loan program for eligible USFS franchisees, including both the Microtel and Hawthorne Suites brands. Additional brand financing will be considered by NACC as and when acquired by USFS.
GENERAL - ------- Commitment Term: 2 years Facility Size: $200 million -- consideration will be given to expanding facility based on experience and attainment of benchmarks to be discussed Lender: NACC -- all loans would be made directly by NACC to the Borrowers; USFS would conduct Construction Loan/Permanent Loan commitment due diligence and underwriting based upon NACC standards: upon USFS's delivery to NACC of complete underwriting package, NACC will have 5 business days to approve/disapprove Borrower for Construction Loan/Permanent Loan commitment; NACC will be responsible for closing the transaction; closings will generally occur within 30 days of NACC's approval of Borrower Closings: Provided that there are no regulatory or other legal impediments, loans will be closed in Atlanta, GA, and will be originated through an entity bearing a "USFS" designation CONSTRUCTION LOAN PARAMETERS - ---------------------------- Borrower: Special purpose entity Loan to Cost: 70% 1 Equity: 30% of Cost -- Borrower must demonstrate availability of equity moneys, which may require posting of full amount in cash, letter of credit or other adequate security, in NACC's discretion: equity moneys must be expended prior to initial draw on Construction Loan Draws: Monthly, upon presentation of evidence of work completed in accordance with approved plans and specifications, and architect's certificate as to work completed and of adequate funds to complete construction Collateral: First mortgage lien on the land and improvements as built; completion bond; Construction Loan will be recourse to the principal economic entity or persons behind the SPE Borrower until certificate of occupancy Term: Construction draws must be completed within 9 months of first draw. Entire Construction Loan term will not exceed 27 months for Microtels and 30 months for Hawthorne Suites (inclusive of draw period) Interest Rate: Floating at Prime plus 1.0% per annum; any additional spread obtained by USFS will be shared 50/50 between NACC and USFS; if NACC syndicates the entire Construction Loan, and such syndication is at an effective yield of less than Prime plus 1.0%, NACC and USFS will share 50/50 in the differential in interest between the syndication rate and Prime plus 1.0% Amortization: None Construction Loan Commitment Fee: 0.50% of committed Construction Loan amount Condition to Construction Loan Commitment: Execution by Borrower and NACC of Permanent Loan commitment letter and payment by Borrower of minimum permanent loan commitment fee of 0.50% Repayment: Construction Loan will automatically convert to Permanent Loan at maturity (or earlier at Borrower's option once there are 12 full months of operation) PERMANENT LOAN PARAMETERS - ------------------------- Borrower: Special purpose entity 2 Amount: Maximum amount based on DSCR of 1.4:1 using NACC underwritten NOI and debt service constant equal to the greater of the actual constant and 10.48%; provided, that the maximum amount will in no event exceed 90% of the cost to build. For this purpose, "cost" may include all third-party hard and soft costs, including financing fees, paid by the Borrower relating to construction of the property. In addition, where NACC has advanced the Construction Loan, NACC will commit to fund proceeds at least sufficient to satisfy the entire Construction Loan, such proceeds to take the form of the Permanent Loan plus. If the proceeds of such loan are insufficient, Mezzanine Financing, as described below Mezzanine Financing: Mezzanine Financing will take the form of a preferred equity interest in the Borrower entity; the term of the Mezzanine Financing will be between 3-5 years; interest will accrue and be payable at LIBOR plus (i) 450 bps for three-year term, (ii) 550 bps for four-year term or (iii) 650 bps for five-year term; fully amortizing on a straight-line basis over term; Borrower will be required to apply between 50% and 75% (as determined by NACC in its discretion) of excess cash flow to amortization Funding: Borrower can request funding of the Permanent Loan at any time following 12 full months of operation and no later than 27 or 30 months, as the case may be, following issuance of the Permanent Loan commitment Collateral: First mortgage lien on property: Borrower with more than one funded property will be required to either (i) cross-default and cross-collateralize all such properties (see below for reduction in interest rates resulting from certain crossed situations) or if loans to one borrower aggregate to greater than $15 million, (ii) hold each property in a separate bankruptcy remote entity and provide acceptable opinions of counsel relating to substantive non-consolidation; Permanent Loan will be non- recourse Term/Amortization: 10-year term/20-year fully amortizing schedule or 11-year term/22-year fully amortizing schedule Interest Rate: 10-year US Treasury rate or 11-year interpolated US Treasury rate (depending on selected term) plus indicated spread DSCR Spread Crossed Spread 1.4:1 370 bps 355 bps 1.6:1 325 bps 310 bps 1.8:1 280 bps 270 bps 2.0:1 235 bps 225 bps 3 Crossed spreads available for any pool of 4 or more geographically diversified crossed properties Underwritten NOI: Trailing 12-month actual cash flow adjusted, if necessary, to reflect FF&E expenditures of 5% of gross revenues and 4% management fee, NACC reserves the right to set forth other pro forma adjustments to cash flow as it deems reasonably necessary, such as to reflect the impact of future competitive properties, and consistent with its hotel underwriting procedures and practices at the time of the execution of the Permanent Loan commitment FF&E Reserves: The Borrower will be required to fund reserves on a monthly basis equal to 2.5% in Year 1, 3.25% in Year 2 and 4.0% in Year 3 and thereafter. Properties that are not new (Hawthorne conversions) will require reserves of 4% of gross revenues Debt Service Reserve/ Lockbox: 2 months debt service reserve will be required in lieu of a lockbox for initial 9 or 10 years (depending on term selected); lockbox will be instituted commencing in year 10 or 11 (depending on term selected); NACC will have the option to initiate a lockbox in the event of a default under the loan; Lockbox will be required if NACC funds Mezzanine Financing (and until Mezzanine Financing is paid off) Prepayment: Locked out for 2 years following securitization by NACC; thereafter Treasury equivalent yield maintenance -- specific procedure for prepayment to be discussed Sale of Property: Loan may be assumed by qualified purchaser Permanent Loan Commitment Fee: If NACC is construction lender -- 0.5% If NACC is not construction lender -- 1.0% In each case payable to NACC at time of commitment, based on amount of Construction Loan Permanent Loan Funding Fee: If NACC is construction lender -- 1.0% If NACC is not construction lender -- 0.5% In each case payable to NACC at time of funding, based on amount of Permanent Loan actually funded (including make- up if prior Permanent Loan commitment fee is based on a lower projected amount for the Permanent Loan than actually funded) 4 Fee Arrangement: NACC and USFS will share on a 50/50 basis in the aggregate Construction Loan/Permanent Loan commitment funding fees in excess of either 1.25% or 1.00% (depending on whether the NACC construction loan is issued), on a per Borrower basis, at the time that the Borrower pays such fees -- with the initial 1.25% or 1.00%, as the case may be, being retained by NACC and any excess over such amounts being shared as on when paid by the Borrower. Following is a summary of the loan fee structure and sharing arrangements: NACC No NACC Const. Loan Const. Loan Const. Loan Com. Fee 0.50% 0.00% Perm. Loan Com. Fee 0.50% 1.0% Perm. Loan Fund Fee 1.00% 0.50% --------- --------- 2.00% 1.50% Fees shared over 1.25% 1.00% Firm Commitment: The Permanent Loan commitment would be binding on NACC and the Borrower, including the principal economic entity or persons behind the SPE
1 EX-23.2 10 AUDITOR'S CONSENT EXHIBIT 23.2 INDEPENDENT AUDITORS' CONSENT We consent to the use in this Amendment No. 1 to Registration Statement No. 333-11427 of U.S. Franchise Systems, Inc. of our report dated August 9, 1996 (October 11, 1996 as to Note 11) appearing in the Prospectus, which is a part of such Registration Statement, and to the reference to us under the headings "Selected Financial Data" and "Experts" in such Prospectus. DELOITTE & TOUCHE LLP October 11, 1996 -----END PRIVACY-ENHANCED MESSAGE-----