-----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, U/yexlbmjhZEZ/AgHPyMM6Zt4R6WTLmLhpNQyE0O1MBpQoebZUiN3PJ1qfU52Pmq RRYdc6C/Z5dl/J8VU27BGQ== 0000950146-96-001596.txt : 19960906 0000950146-96-001596.hdr.sgml : 19960906 ACCESSION NUMBER: 0000950146-96-001596 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 13 FILED AS OF DATE: 19960905 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: US FRANCHISE SYSTEMS INC CENTRAL INDEX KEY: 0001020350 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 582190911 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1 SEC ACT: 1933 Act SEC FILE NUMBER: 333-11427 FILM NUMBER: 96626155 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 1 FORM S-1 As filed with the Securities and Exchange Commission on September 5, 1996 Registration No. 333- =============================================================================== SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------- 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 7011 58-2190911 (State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer incorporation or 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
======================================================================================== Proposed Maximum Title of Each Class Aggregate Amount of of Securities to be Registered Offering Price (1) (2) Registration Fee (3) - ------------------------------- ----------------------- -------------------- Class A Common Stock $24,750,000 $8,534.48 ========================================================================================
(1) Includes shares which may be purchased by the Underwriters solely to cover over-allotments, if any. (2) Estimated solely for purposes of calculating the registration fee. (3) Calculated pursuant to Rule 457(o). ------------------------------------------------- The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine. ============================================================================== Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securitiesmay not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This Prospectus shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any State in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such State. SUBJECT TO COMPLETION, DATED SEPTEMBER 5, 1996 Shares U.S. Franchise Systems, Inc. Class A Common Stock ($ par value) All of the shares of Class A Common Stock offered hereby are being sold by the Company. 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 $ and $ . 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 rights of holders of Class A Common Stock and holders of Class B Common Stock are substantially identical, except that holders of Class A Common Stock are entitled to one vote per share and holders of Class B Common Stock are entitled to ten votes per share, and 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". Upon completion of the Offering, certain members of management will control the voting of all of the outstanding shares of Class B Common Stock, which will represent approximately % of the combined voting power of the Class A Common Stock and the Class B Common 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 Price to Discounts and Proceeds to Public Commissions (1) Company (2) -------- ---------------- ----------- Per Share $ $ $ Total (3) $ $ $
=============================================================================== (1) See "Underwriting" for indemnification arrangements. (2) Before deducting estimated expenses of $ payable by the Company. (3) The Company has granted to the Underwriters a 30-day option to purchase up to an additional shares of Class A Common Stock solely to cover over-allotments. If this option is exercised in full, total Price to Public, Underwriting Discounts and Commissions and Proceeds to Company 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. [Pictures/Map of Locations - to come] 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 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 $ 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 shares of Class A Common Stock, and to the exchange of 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 $ 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 Inns Worldwide (1990-95) and President of Days Inn of America, Inc. (1985-90), the two largest lodging brand franchisors in the world. The Company has hired and trained a staff of 60 employees, including a 25-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 2,000 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 105 franchise agreements and accepted applications for an additional 65 hotels as of August 28, 1996, expanding the number of states in which Microtels are or may be located from 10 to 39. 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 one franchise agreement for a 284-room hotel and accepted applications for 13 additional hotel sites as of August 28, 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 brand names. In addition, the Company has executed one franchise agreement for a hotel to be operated under the Microtel Suites(R) 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 over three times, significantly higher than comparable ratios for any other segment in the lodging industry during this 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 the Microtel system is the only brand 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 the safest, most consistent and highest quality brand 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 over competing brands. 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 relative to hotels in other chains in the limited-service segment. 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, in the United States in 1995 the market for extended-stay rooms accounted for over 30% of all hotel room nights sold. 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 per room 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". 4 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 (as defined herein)). 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 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 shares of Class A Common Stock Common Stock to be outstanding after shares of Class A Common Stock the Offering shares of Class B Common Stock 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 Microtel Acquisition Agreement (as defined herein), (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 1.48 3.63 Average number of common shares (1) 1,112,245 1,112,245 Pro forma net loss per share (2) Pro forma average number of common shares (2) 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) Includes 329,503 shares of Old Common Stock that 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) Based upon shares of Class A Common Stock and Class B Common Stock assumed to be outstanding after the Reclassification but before the Offering of shares of Class A Common Stock. 7 Franchised Hotels
Microtel (1) Hawthorn Suites (2) ------------------------------------- -------------------------------------- As of As of As of As of December 31, 1995 June 30, 1996 December 31, 1995 June 30, 1996 ----------------- ------------- ----------------- ------------- Properties Open 23 26 17 18 Properties Under Construction 0 1 0 0 Executed Franchise Agreements 3 93 0 0 Franchise Applications Accepted (3) 10 63 0 1
- ------------- (1) The Company will not receive royalties from the 23 Microtels open as of December 31, 1995 and the 26 Microtels open as of June 30, 1996, but does receive reservation and 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 June 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*
Microtel Hawthorn Suites ------------------------------------------------- ------------------------------------------------- For the Six Months Ended For the Six Months Ended For the Year Ended ----------------------------- For the Year ended ----------------------------- December 31, 1995 June 30, 1995 June 30, 1996 December 31, 1995 June 30, 1995 June 30, 1996 ------------------ -------------- ------------- ------------------ ------------- ------------- Average Daily Room Rate ("ADR") $35.75 $34.32 $35.40 $78.27 $77.50 $82.02 Average Occupancy 69.3% 66.1% 66.6% 78.1% 77.8% 80.6% Average Revenue Per Available Room $24.77 $22.68 $23.57 $61.13 $60.29 $66.11 Number of Hotels 15 15 15 15 15 15
- ------------- * 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 In addition to the other information in this Prospectus, the following factors should be carefully considered in evaluating the Company and its business before purchasing the Class A Common Stock offered by this Prospectus. The following is not intended as, and should not be considered, an exhaustive list of relevant factors. 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. 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 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 Michael A. Leven, Chairman, President and Chief Executive Officer, Neal K. Aronson, 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. See "Management". The terms of the Company's Redeemable Preferred Stock (as defined herein) 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 9 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". Risks Relating to Microtel Acquisition Agreement The agreement pursuant to which the Company acquired the Microtel brand (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 agreement pursuant to which the Company acquired the exclusive rights to franchise the Hawthorn Suites brand of hotels (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. 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 Hawthorn Brand Saturation (as defined herein) has been achieved. 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 there are 175 new Hawthorn Suites with a minimum aggregate total of 11,375 rooms ("Hawthorn Brand Saturation") 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". 10 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 Suites(SM), MainStay(SM), Candlewood(SM), Wingate Inn(SM), Towne Place(SM) and Courtyard by Marriott(R), among others. Many of the Company's competitors are affiliated with larger chains with substantially more properties, greater marketing budgets and greater brand identity than the Company. There 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 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 11 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 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 (as defined herein). 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 defined herein), 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 10% Cumulative Redeemable Exchangeable Preferred Stock ("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 (i) the sale of all or substantially all of the Company's assets, (ii) 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 (iii) the termination of the employment of Mr. Leven for any reason by the Company (including 12 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". Control by Management and Anti-Takeover Effect of Dual Classes of Stock 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 % 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. See "Description of Capital Stock" and "Principal Stockholders". 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 $ 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 $ 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". 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 13 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 and (iv) 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. 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 shares of Class A Common Stock outstanding and shares of Class B Common Stock outstanding. Of these shares, the 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, shares of Class A Common Stock 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 shares of Class A Common Stock and shares of Class B Common Stock) will have "piggyback" registration rights permitting such holders to include 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. 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 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 current stockholders have agreed with the Underwriters not to sell or otherwise dispose of any of their shares of 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 $ million ($ million if the Underwriters' over-allotment option is exercised in full), based on an initial public offering price of $ 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, the 1996 Amendment (as defined in "Principal Stockholders-- Management's Shares of Common Stock") and the Offering (including the application of the proceeds therefrom), assuming an initial public offering price per share of $ (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" and "Management's Discussion and Analysis of Financial Condition and Results of Operations".
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 Old Common Stock, par value $.10 per share; 329,503 shares issued and outstanding as of June 30, 1996 (1) 330,000 Redeemable shares of Class A Common Stock, par value $ per share; shares issued and outstanding after the Reclassification, the 1996 Amendment and the Offering (2) Stockholders' Equity (Deficit) Old Common Stock, par value $.10 per share; 782,742 shares of Old Common Stock issued and outstanding as of June 30, 1996 78,000 Common Stock, par value $ per share; shares of Class A Common Stock and shares of Class B Common Stock authorized; shares of Class A Common Stock and shares of Class B Common Stock issued and outstanding after the Reclassification, the 1996 Amendment and the Offering (3) Capital in excess of par Accumulated Deficit (4,970,000) ----------- ----------- Total Stockholders' Equity (Deficit) (4,892,000) ----------- ----------- Total Capitalization $13,766,000 $ =========== ===========
- ------------- (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) Includes shares of Class A Common Stock that 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". (3) Excludes shares of Class A Common Stock reserved for issuance under the Option Plan (as defined herein) and shares of Class A Common Stock reserved for issuance under the Directors Plan (as defined herein). 16 DILUTION At June 30, 1996, the net tangible book value of the Company was a deficit of $9,569,000 or $ per share of outstanding Common Stock (taking into account the Reclassification). After giving effect to the Reclassification and to the sale of the shares of Class A Common Stock being offered by the Company hereby at an assumed initial offering price of $ 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 $ , or $ per share, representing an immediate increase in net tangible book value of $ per share to existing stockholders and an immediate dilution of $ 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) $ Net tangible book value per share of Common Stock at June 30, 1996 (adjusted for the Reclassification but excluding the Offering) Increase in net tangible book value per share of Common Stock attributable to new investors in the Offering Pro forma net tangible book value per share of Common Stock after the Offering Dilution per share to purchasers of Class A Common Stock in the Offering - ------------- (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 $ 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 % $ % $ New Investors $ ------ ------- ------ ------- --------- % $ % ====== ======= ====== =======
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 1.48 3.63 Average number of common shares (1) 1,112,245 1,112,245 Pro forma net loss per share (2) Pro forma average number of common shares (2) 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) Includes 329,503 shares of Old Common Stock that 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) Based upon shares of Class A Common Stock and Class B Common Stock assumed to be outstanding after the Reclassification but before the Offering of shares of Class A 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 growth through the sale of franchises to third-party owners and 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 60 employees, including a franchise sales force of 25, 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 the Microtel Acquisition (as defined herein) 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 the Hawthorn Acquisition (as defined herein) 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. 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 Hawthorn Suites --------------- June 30, 1996 0 1 0
- ------------- (1) Represents franchise applications as to which the Company has approved the proposed site and prospective franchisees but 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. The Company 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. 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. 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. 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 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 . 20 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(R) budget hotel brand ("Microtel") and the Hawthorn Suites(R) 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 Inns Worldwide (1990-95) and President of Days Inn of America, Inc. (1985-90), the two largest lodging brand franchisors in the world. The Company has hired and trained a staff of 60 employees, including a 25-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 2,000 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 105 franchise agreements and accepted applications for an additional 65 hotels as of August 28, 1996, expanding the number of states in which Microtels are or may be located from 10 to 39. 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 one franchise agreement for a 284-room hotel and accepted applications for 13 additional hotel sites as of August 28, 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 25-person sales force (which the Company believes is the third largest in the lodging industry) whose members have sold 106 franchises and secured an additional 78 franchise applications on behalf of the Company since its inception. The Company also benefits from the extensive experience of Michael Leven, who has served as President of two of the lodging industry's largest franchisors. The sales force targets a broad pool of potential franchisees, 22 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 th 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 105 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 August 28, 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 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 Segment 1994 1995 (through 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 Segment 1994 1995 (through 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 per room 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 the only brand 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 the safest, most consistent and highest quality brand in the budget segment. The Company believes that Microtels offer franchisees financial advantages over competing brands. 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 relative to hotels in other chains in the limited-service segment. 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 June 30, 1996 ------------------ -------------- Microtel Franchise Data* Properties Open 23 26 Properties Under Construction 0 1 Executed Franchise Agreements 3 93 Franchise Applications Accepted 10 63
- ------------- * The Company will not receive royalties from the 23 Microtels open as of December 31, 1995 and the 26 Microtels open as of June 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), approximately 25% to 75% lower than the new construction costs for hotels of certain other limited-service brands. 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 Company believes that the result is a shorter construction period (estimated at a total of 120 to 151 days) compared to other hotels in the limited-service segment, 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 compared to other hotels. 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 than other hotel reservations systems. 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, compared to the reservation systems maintained by many other hotel chains, 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 room rate competitive within the limited-service segment, 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 the only 100% interior corridor, new construction brand 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 the most consistent chain 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 that fees paid by Hawthorn Suites for use of the Spirit system under the agreement with Regency, which in 1995 were 0.9% of total revenue, are below the cost of competitors' reservation systems. 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 25 people who, collectively with Mr. Leven, have sold over 2,000 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 of $35,000 (or $350 per room, if greater) for a Microtel and $40,000 (or $400 per room, if greater) for a Hawthorn Suites hotel. Franchise application fees are non-refundable and are generally collected from potential franchisees by the time the franchise agreement is executed. In some cases, the franchise application fee is less than the stated fee and in some cases, application fees are accepted, either in whole or in part, in the form of short-term promissory notes. 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 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%
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 growth of the Microtel system by permitting those who otherwise could not afford to build a Microtel an opportunity to become a hotel owner. The Company has reached an understanding in principle with , pursuant to which one of its affiliates will be the exclusive developer, franchisee and owner-lessor of properties for the American Dream Program. 29 owns and operates more than 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 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, 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". 30 Acquisition of the Microtel and Hawthorn Suites Systems Microtel Acquisition. On September 7, 1995, the Company entered into an agreement (the "Microtel Acquisition Agreement") with Hudson, a public company then called Microtel Franchise and Development Corporation, to acquire the exclusive worldwide franchising rights and operating assets of the Microtel hotel system (the "Microtel Acquisition"). The purchase price for these franchise rights and operating assets was $3,037,000, of which the Company paid $1,600,000 at the closing on October 5, 1995 and agreed to pay a total of $1,437,000 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 27 Microtels, of which 21 were then operating, three were under construction and three were in the development stage. 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 Year Microtel Properties* - ---- -------------------- 1996 0 1997 50 1998 100 1999 175 2000 250
- -------------- * 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 (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. See "Summary Financial and Other Data". 31 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* 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%
- ------------- * 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 * 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
* Not applicable 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 Suites(SM), MainStay(SM), Candlewood(SM), Wingate Inn(SM), Towne Place(SM) and Courtyard(R) by Marriott, 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 August 1, 1996, the Company had 60 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 August 15, 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 have been elected to the Board of Directors, 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 Inns 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, Chief Financial Officer and a Director 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 Inns 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 Inns 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, Kloster Cruise Limited, 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 has 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. 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 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 Other Annual Stock Options/ LTIP All Other Principal Position Salary Bonus Compensation Awards SARs Payouts Compensation ------------------ -------- ----------------- ------------ ----------- -------- ------- ------------ Michael A. Leven Chairman, President and Chief Executive Officer $93,750 $153,000(1)(2) 0 0 0 0 Neal K. Aronson Executive Vice President and Chief Financial Officer $50,000 $151,500(1)(2) 0 0 0 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. 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. 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 , 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 , 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. The Option Plan authorizes the grant of awards to participants of a maximum of 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 39 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 . 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 , 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 , 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 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 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 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 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. 40 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. Prior to the Offering, the Company intends to effect the Reclassification. Pursuant to the Reclassification, each share of Old Common Stock will be converted into 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 all shares of Class A Common Stock held directly by them (other than 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. Immediately following the Offering, Messrs. Leven and Aronson will have the right to vote a total of shares of Class A Common Stock and shares of Class B Common Stock, which will represent approximately % 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--Control by Management and Anti-Takeover Effect of Dual Classes of Stock" 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. 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. 42 PRINCIPAL STOCKHOLDERS The following table sets forth (i) as of August 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 Beneficial Ownership Subsequent to the Offering and 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% (2) (3) % % Neal K. Aronson 13 Corporate Square Suite 250 Atlanta, Georgia 30329 233,223 (4) 21.0% (5) (6) % % 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% 0 % * Richard D. Goldstein (8) c/o Alpine Microtel LLC 1285 Avenue of the Americas New York, NY 10019 16,500 1.5% 0 % * Jeffrey A. Sonnenfeld 1602 Mizell Drive Room 310 Atlanta, Georgia 30322 0 * 0 0 * * Barry Sternlicht (9) c/o Starwood Capital Group 3 Pickwick Plaza Greenwich, CT 06830 31,000 2.8% 0 % * All officers and directors as a group (9 persons)** 526,340 47.3%
- ------------------ * Represents less than 1% of the outstanding Common Stock, both in number and in terms of voting power. ** Duplications eliminated. (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 43 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) 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) shares held by Mr. Leven's wife, with respect to which Mr. Leven shares voting power, (iii) 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) 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) Restricted Shares owned by Mr. Aronson, which are voted by Mr. Leven. (3) Consists of (i) Unrestricted Shares, as to which Mr. Leven has sole voting power (ii) shares held by Mr. Leven's wife as Unrestricted Shares, as to which Mr. Leven shares voting power and (iii) 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) 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) 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) 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. (6) Consists of shares designated as Unrestricted Shares, of which Mr. Aronson has sole voting power as to shares and has transferred voting power to Mr. Leven as to 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 G2 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, 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. (9) 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 44 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 $. 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 , 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 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, the holders of such shares are required to vote all of such shares (including Restricted Shares), on a one vote per share basis, in the same manner as Unrestricted Shares held by Mr. Leven are voted (although such members of management were required, prior to the 1996 Amendment, to vote those reallocated shares that are 45 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). 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. (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 46 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 Earned 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 Earned 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 Earned 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 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. 47 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. 48 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 shares of Common Stock, par value $ per share, of which shares have been designated as Class A Common Stock and 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, shares of Class A Common Stock will be outstanding and shares of Class B Common Stock will be outstanding. In addition, shares of Class A Common Stock will be reserved for issuance under the Option Plans and 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. 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, (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 or (iii) certain affiliates of such holder.] 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. 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 49 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 ( shares of Class A Common Stock, including Class A Common Stock into which their Class B Common Stock is convertible (the "piggyback shares")) 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. 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 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 50 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. 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. 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 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. 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 51 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. 52 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 an aggregate of 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 ===========
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 that no sales of Class A Common Stock will be confirmed to discretionary accounts. The Company has 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 has granted to the Underwriters an option exercisable for 30 days after the date of this Prospectus to purchase up to an aggregate of 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 stockholders who will beneficially own an aggregate of shares of the Common Stock outstanding after the Offering 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 Common Stock or any rights to purchase shares of Common Stock (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 has 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 between the Company 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. 53 SHARES ELIGIBLE FOR FUTURE SALE Upon completion of the Offering, shares of Class A Common Stock will be outstanding and shares of Class B Common Stock will be outstanding. Of these shares, the 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. shares of Class A Common Stock and 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, shares of Class A Common Stock and shares of Class B Common Stock 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 shares of Class A Common Stock and 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 in this Prospectus as to the contents of any contract or other document are not necessarily complete, and in each 54 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. 55 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 The accompanying financial statements reflect footnote disclosure of proposed changes to the type and number of common shares authorized and a conversion of previously outstanding common stock into newly created classes of common stock, all of which is to be effected prior to or simultaneously with the effective date of the Registration Statement. The following opinion is in the form which will be signed by Deloitte & Touche LLP upon consummation of the above events, which are described in Note 11 of Notes to Consolidated Financial Statements and assuming that from August 9, 1996 to the date of such events, no other events have occurred which would affect the accompanying financial statements and notes thereto. By: /s/ Deloitte & Touche LLP ------------------------- Deloitte & Touche LLP Atlanta, Georgia September 5, 1996 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. August 9, 1996 ( , 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 $0.10 per share; issued and outstanding 329,503 shares 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 $0.10 per share; authorized 2,000,000 shares; issued and outstanding 782,742 shares 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 1,112,245 1,112,245 ========== ========== NET LOSS APPLICABLE TO COMMON STOCKHOLDERS PER SHARE $ 1.48 $ 3.63 ========== ==========
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 Capital in Total -------------------------- Excess of Accumulated Stockholders' Shares Amount Par Deficit Deficit ------------- ---------- ------------- --------------- ------------------ BALANCE--August 28, 1995 -- $ -- $ -- $ -- $ -- Issuance of capital stock 782,742 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 782,742 78,000 228,000 (1,168,000) (862,000) Redemption of capital stock (33,368) (3,000) (33,000) (36,000) Issuance of capital stock 33,368 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 782,742 $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. 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. 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. 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--Cash and temporary cash investments include short-term interest- bearing securities with maturities of less than three months. 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. 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. 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. 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 4. EQUIPMENT Equipment 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 ========
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 ==========
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 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. 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). 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 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% 34% Statutory state rate less federal effect 4% 4% Other --% (1)% Change in valuation allowance (38)% (37)% ---- --- 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
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. 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) 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 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: 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)
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 Prior to or simultaneously with the completion of a proposed public offering by the Company, the Company will create two classes of common stock: Class A Common Stock and Class B Common Stock. The Company will then reclassify its common stock (the "Reclassification") by effecting a split of its existing common stock, par value $.10 per share (the "Old Common Stock"), at a ratio of to 1 into shares of Class A Common Stock, par value $. per share. In connection with the Reclassification, certain members of management holding 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 shares of Class A Common Stock and shares of Class B Common Stock authorized for issuance. No effect has been given to the Reclassification in the historical financial statements. However, on a pro forma basis, the effect of the proposed stock split on the calculation of historical earnings per share is to reduce the net loss applicable to Common Stockholders per share for the period ended December 31, 1995 to $. and to a net loss applicable to Common Stockholders per share of $. for the period ended June 30, 1996. 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. F-13 =============================================================================== 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 43 Description of Capital Stock 49 Underwriting 53 Shares Eligible for Future Sale 54 Validity of Class A Common Stock 54 Experts 54 Available Information 54 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. =============================================================================== =============================================================================== Shares [LOGO] U.S. Franchise Systems, Inc. Class A Common Stock ($ 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 $ 8,534.48 NASD filing fee 2,975.00 Nasdaq National Market listing fee $50,000.00 Printing and engraving expenses * Legal fees and expenses * Accounting fees and expenses * Blue Sky fees and expenses (including counsel fees and expenses) * 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 , 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 on , 1996. 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 on , 1996. 10.8 Employment Agreement by and between U.S. Franchise Systems, Inc. and Michael A. Leven, dated as of October 1, 1995. 10.9* Amendment No. 1 to Employment Agreement by and between U.S. Franchise Systems, Inc. and Michael A. Leven, dated as of , 1996. 10.10 Employment Agreement by and between U.S. Franchise Systems, Inc. and Neal K. Aronson, dated as of October 1, 1995. 10.11* Amendment No. 1 to Employment Agreement by and between U.S. Franchise Systems, Inc. and Neal K. Aronson, dated as of , 1996. 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. 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. (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 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. II-3 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 September 5, 1996. By: /s/ Michael A. Leven ----------------------------- Michael A. Leven Chairman, President and Chief Executive Officer KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature appears below hereby constitutes and appoints Michael A. Leven and Neal K. Aronson, and each of them, his or her true and lawful agent, proxy and attorney-in-fact, each acting alone, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to (i) act on, sign and file with the Securities and Exchange Commission any and all amendments (including post-effective amendments) to this registration statement together with all schedules and exhibits thereto and any subsequent registration statement filed pursuant to Rule 462(b) under the Securities Act of 1933, as amended, together with all schedules and exhibits thereto, (ii) act on, sign and file such certificates, instruments, agreements and other documents as may be necessary or appropriate in connection therewith, (iii) act on and file any supplement to any prospectus included in this registration statement or any such amendment or any subsequent registration statement filed pursuant to Rule 462(b) under the Securities Act of 1933, as amended, and (iv) take any and all actions which may be necessary or appropriate in connection therewith, granting unto such agents, proxies and attorneys-in-fact, and each of them, full power and authority to do and perform each and every act and thing necessary or appropriate to be done, as fully for all intents and purposes as he or she might or could do in person, hereby approving, ratifying and confirming all that such agents, proxies and attorneys-in-fact, any of them or any of his or her or their substitutes may lawfully do or cause to be done by virtue thereof. II-5 Pursuant to the requirements of the Securities Act of 1933, as amended, this registration statement has been signed by the following persons in the capacities and on the dates indicated.
Signatures Title or Capacities Date ----------- ------------------- ----- /s/ Michael A. Leven Chairman, President, Chief -------------------------- Executive Officer and Michael A. Leven Director (Principal Executive Officer) September 5, 1996 /s/ Neal K. Aronson Executive Vice President, -------------------------- Chief Financial Officer and Neal K. Aronson Director (Principal Financial and Accounting Officer) September 5, 1996 /s/ Irwin Chafetz -------------------------- Irwin Chafetz Director September 5, 1996 /s/ Richard D. Goldstein -------------------------- Richard D. Goldstein Director September 5, 1996 /s/ Barry Sternlicht -------------------------- Barry Sternlicht Director September 5, 1996
II-6 INDEX TO 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. 80 10.2 Form of License Agreement for Hawthorn Suites hotels. 105 10.3 Joint Venture Agreement between Microtel Franchise and Development Corporation and U.S. Franchise Systems, Inc., dated as of September 7, 130 1995. 10.4 Master Franchise Agreement between HSA Properties, L.L.C. and U.S. Franchise Systems, Inc., dated as of March 27, 1996. 211 10.5* Amended and Restated Stockholders' Agreement, dated as of September 29, 1995, as amended on _______________ __, 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 on _____________ __, 1996. 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 on ________________ __, 1996. 10.8 Employment Agreement by and between U.S. Franchise Systems, Inc. and Michael A. Leven, dated as of October 1, 1995. 307 10.9* Amendment No. 1 to Employment Agreement by and between U.S. Franchise Systems, Inc. and Michael A. Leven, dated as of ____________ __, 1996. 10.10 Employment Agreement by and between U.S. Franchise Systems, Inc. and Neal K. Aronson, dated as of October 1, 1995. 317 10.11* Amendment No. 1 to Employment Agreement by and between U.S. Franchise Systems, Inc. and Neal K. Aronson, dated as of ___________ __, 1996. 10.12 Office Lease Agreement between Hallwood Real Estate Investors Fund XV and U.S. Franchise Systems, Inc., dated September 25, 1995. 327 10.13 First Amendment to Office Lease between Hallwood 95, L.P. and U.S. Franchise Systems, Inc., dated May 20, 1996. 359 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. 21.1 List of Subsidiaries of U.S. Franchise Systems, Inc. 364 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. 365 23.4 Consent of Jeffrey A. Sonnenfeld. 366 24.1 Power of Attorney from officers and directors (contained on signature page). 27.1 Financial Data Schedule. 367 - ---------------- * To be filed by amendment.
EX-10.1 2 EXHIBIT 10.1 Location: {{HOTELADDRESS1}} {{HOTELADDRESS2}} ID Number: {{IDNUMBER}} Date: MICROTEL INN LICENSE AGREEMENT BETWEEN MICROTEL INNS AND SUITES FRANCHISING, INC. AND {{ENTITYNAMECAPS}} TABLE OF CONTENTS PAGE 1. THE LICENSE .......................................................... 1 2. GRANT OF LICENSE ..................................................... 2 3. LICENSEE'S RESPONSIBILITIES .......................................... 2 4. LICENSOR'S RESPONSIBILITIES .......................................... 5 5. PROPRIETARY RIGHTS ................................................... 6 6. RECORDS AND AUDITS ................................................... 7 7. INDEMNITY AND INSURANCE .............................................. 8 8. TRANSFER ............................................................. 9 9. CONDEMNATION AND CASUALTY ............................................ 12 10. TERMINATION .......................................................... 12 11. AGREEMENT IS NON-RENEWABLE ........................................... 15 12. RELATIONSHIP OF PARTIES .............................................. 15 13. MISCELLANEOUS ......................................................... 15 GUARANTY ATTACHMENT A ATTACHMENT B ATTACHMENT C LICENSE AGREEMENT License Agreement dated , ("Agreement") between Microtel Inns & Suites Franchising, Inc., a Georgia corporation ("Licensor") and {{ENTITYNAMECAPS}}, a {{ENTITYTYPE}} ("you or Licensee"), whose address is {{ENTITYADDRESS}}. PARTIES AGREE AS FOLLOWS: 1. The License. Licensor has been licensed the exclusive right to license a unique concept and system (hereinafter "Hotel System") relating to the establishment and operation of economy-budget hotels offering minimal amenities, that are intended to compete directly with the hotels in each target market, that are considered "super economy" or "hard budget" hotels within the lodging industry, and that operate under the name "MICROTEL", "MICROTEL INN", "MICROTEL INN & SUITES", OR "MICROTEL SUITES" (collectively referred to herein as "Microtel Hotels"). Microtel Hotels feature modern up-scale accommodations, and down-sized standard guest rooms or one (1) room suites. You have independently investigated the risks of the business to be operated hereunder, including current and potential market conditions, competitive factors and risks, have read Licensor's "Offering Circular for Prospective Franchisees", and have made an independent evaluation of all such facts. Aware of the relevant facts, you desire to enter into this Agreement in order to obtain a license to use the Hotel System in the operation of a {{BRAND}} hotel located at {{HOTELADDRESS1}}, {{HOTELADDRESS2}} (the "Hotel"). A. The Hotel. The Hotel comprises all structures, facilities, appurtenances, furniture, fixtures, equipment, and entry, exit, parking and other areas from time to time located on the land identified on the plot plan most recently submitted to and acknowledged by Licensor in anticipation of the execution of this Agreement, or located on any land from time to time approved by Licensor for additions, signs or other facilities. The Hotel currently includes the facilities listed on Attachment A hereto. No change in the number of approved standard guest rooms or suites (which are hereinafter referred to collectively as "Guest Rooms") and no other significant change in the Hotel shall be made without Licensor's approval. Redecoration and minor structural changes that comply with Licensor's standards and specifications shall not be considered significant. You represent that you are entitled to possession of the Hotel during the entire License Term, as defined in Paragraph 10 hereof, without restrictions that would interfere with any of your obligations under this Agreement. B. The Hotel System. The Hotel System is composed of elements, as designated from time to time by Licensor, designed to identify Microtel Hotels to the consuming public and/or to contribute to such identification and its association with quality standards. The Hotel System at present includes, without limitation, the tradenames, trademarks, and service marks, "MICROTEL", "MICROTEL INN", "MICROTEL INN & SUITES", "MICROTEL SUITES" and such other tradenames, trademarks, and service marks as are now designated (and may hereafter be designated by Licensor in writing) as part of the Hotel System (hereinafter the "Proprietary Marks"); prototypical architectural plans, designs, and layouts, including, without limitation, site plan, floor plan, roof plan, plumbing plan, lobby plan, electrical plan, and landscape plan; a national "800" number system for reservation referrals (the "MRS"); a national Microtel directory (the "National Directory"); management and personnel training, and training programs and materials; management and operational procedures and techniques as prescribed in the Confidential Manual (hereinafter the "Manual"); standards and specifications for construction, equipment, and furnishings, as described in the Manual; advertising, marketing, and promotional programs; and such other improvements that Licensor may make from time to time. 2. Grant of License. Licensor hereby grants to you a license (the "License") to use the Hotel System only at the Hotel, only in connection with the operation of the Hotel, and only in accordance with this Agreement, beginning with the date hereof and terminating as provided in Paragraph 10 hereof (the "License Term"). During the License Term, neither Licensor nor any affiliate of Licensor nor any franchisee, shall develop or license any Microtel Hotel within the territorial boundaries as defined in Attachment B hereto (the "Exclusive Territory"). Your rights to the Exclusive Territory shall automatically terminate if the Hotel's Quality Assurance Score (defined in Paragraph 4.C. hereof) falls below 425, or its then-current equivalent, and you are unable to increase the score to 425 within thirty (30) days of the inspection, or if this Agreement is otherwise terminated in accordance with Section 10 hereof. This Agreement does not limit Licensor's right, or the rights of any parent, subsidiary, division or affiliate of Licensor, to use or license to others the Hotel System or any part thereof at any location outside of the Exclusive Territory. Further, Licensor, or its parent, subsidiary, division or affiliate may conduct any business activity or license other hospitality concepts under brands other than the Proprietary Marks outside and within the Exclusive Territory. You acknowledge that Licensor, its parent, subsidiaries, divisions and affiliates are and may in the future be engaged in other business activities including activities related to transient lodging, which may be or may be deemed to be competitive with the Hotel System; that facilities, programs, services and/or personnel used in connection with the Hotel System may also be used in connection with such other business activities of Licensor, its parent, subsidiaries, divisions or affiliates; and that you are acquiring no rights hereunder other than the right to use the Hotel System in connection with the Hotel as specifically defined herein in accordance with the terms of this Agreement. 3. Licensee's Responsibilities. A. Operational and Other Requirements. During the License Term, you shall: (1) maintain a high moral and ethical standard and atmosphere at the Hotel; (2) maintain the Hotel in a clean, safe and orderly manner and in first class condition; (3) provide efficient, courteous, and high-quality service to the public; (4) operate the Hotel twenty four (24) hours a day, every day; (5) strictly comply in all respects with the Hotel System and the Manual and with all other policies, procedures and requirements of Licensor which may be from time to time communicated to you; (6) strictly comply with Licensor's reasonable requirements to use only reliable sources of supplies for the Hotel including any suppliers approved by Licensor; (7) strictly comply with Licensor's requirements as to: (a) the types of services, products, and amenities that may be used, promoted or offered at the Hotel; (b) use of the Proprietary Marks, and display, style and type of signage; (c) directory and reservation service listings of the Hotel, including any computerization thereof; (d) training of persons to be involved in the operation of the Hotel, including all expenses incurred by you associated therewith; (e) participation in all marketing, reservation service, advertising, training and operating programs designated by Licensor as System-wide (or area-wide) programs in the best interests of hotels using the Hotel System; (f) maintenance, appearance and condition of the Hotel; and (g) quality and type of service offered to customers at the Hotel. (8) use such automated equipment as may be necessary to connect to the MRS; 2 (9) participate in and use the MRS, including any additions, enhancements, supplements or variants thereof which may be developed during the term hereof; (10) adopt improvements or standard changes to the Hotel System as may be from time to time designated by Licensor, which improvements are not intended to cause undue hardship; (11) strictly comply with all governmental requirements including the filing and maintenance of any required trade name or fictitious name registrations, pay all taxes, and maintain all governmental licenses and permits necessary to operate the Hotel in accordance with the Hotel System; (12) permit inspection of the Hotel by Licensor's representatives at any time and give them free lodging for such time as may be reasonably necessary to complete their inspections; (13) insure that no part of the Hotel or the Hotel System is used to further or promote a competing business or other lodging facility, except as Licensor may approve for those competing businesses or lodging facilities owned, licensed, operated or otherwise approved by Licensor or its parent, divisions, subsidiaries and/or affiliates; (14) in all respects use your best efforts to reflect credit upon and create favorable public response to the name "Microtel"; (15) promptly pay to Licensor all amounts due Licensor, its parent, divisions, subsidiaries and/or affiliates as royalties or fees or for goods or services purchased by you; (16) comply with Licensor's requirements concerning confidentiality of information, and, specifically: treat the Manual and all supplements and revisions as confidential; use all reasonable efforts to keep the information confidential; not copy the Manual in any way, nor make it available to any unauthorized person; disclose information contained in the Manual only to persons who must have access to it in connection with their employment with you; and obtain each such person's agreement in writing to keep such information confidential; and (17) conduct your advertising in a dignified manner and conform to the standards and requirements as Licensor may specify from time to time in writing; submit samples of all advertising and promotional materials to Licensor for approval; and discontinue use of any disapproved material upon receipt of such written notice. B. Performance of the Work. You agree to perform the construction and renovation work including, without limitation, the purchase of furniture, fixtures, and equipment set forth on Attachment C hereto and incorporated herein by reference (the "Work"). You acknowledge that your agreement to perform the Work is an essential element of the consideration relied upon by Licensor in entering into this Agreement. Your failure to perform the Work in accordance with Licensor's requirements and specifications (including the progress, milestone, completion and other dates specified in Attachment "C") shall constitute a material breach of your obligations under this License. C. Upgrading of the Hotel. Licensor shall review the Quality Assurance Scores of the Hotel upon each five (5) year anniversary of the opening of the Hotel. If over the previous five (5) year period, the Hotel has failed to maintain an average score of four hundred fifty (450) or greater out of a possible five hundred (500) (or its then-current equivalent), Licensor may require modernization of the Hotel, softgood rehabilitation (including but not limited to carpet, drapes, bedspreads) or other upgrading of the Hotel. If the upgrading requirements contained in this Paragraph 3.C. cause you undue hardship, you may terminate this Agreement by paying a fee computed according to Paragraph l0.E. D. Fees. (1) For each month (or part of a month) during the License Term, you shall pay to Licensor 3 by the tenth (10th) of the following month: (a) a royalty fee equal to four percent (4%) of the Gross Room Revenues of the Hotel during the first twelve (12) month period following the Opening Date ("Year 1"); five percent (5%) of Gross Room Revenues during the twelve (12) months period thereafter ("Year 2"); and six percent (6%) of Gross Room Revenues thereafter until the expiration or termination of this License ("Years 3-20"); (b) a "Marketing/Reservation Contribution" of three percent (3%) of the Gross Revenues during Year 1; two and one half percent (2.5%) during Year 2; and two percent (2%) in Years 3-20. Beginning in Year 3, Licensor may, in its sole discretion and at any time, increase the Marketing or Reservation Contribution amount above by no more than ten percent (10%) per year; provided that your Marketing & Reservation Contributions shall not exceed a maximum of two and one half percent (2.5%). You hereby acknowledge that each such increase, if any, shall not be imposed unless Licensor imposes a similar increase on all licensees operating under the Hotel System according to license agreements that contain provisions similar to this Paragraph 3(D)(1)(b) that provides for such increased contributions by licensees; and (c) an amount equal to any sales, gross receipts, or similar tax imposed on Licensor and calculated solely on payment required hereunder, unless the tax is an optional alternative to an income tax otherwise payable by Licensor. (2) "Gross Room Revenues" shall mean the gross receipts attributable to or payable for the rental of guest rooms at the Hotel, including, without limitation, the net proceeds (after deduction of the expenses of adjustment and collection) of use and occupancy, or for business interruption, rent loss, or similar insurance with respect to the Hotel (provided that insurance proceeds shall be included in Gross Room Revenues only to the extent actually received). Gross Room Revenues shall not include gratuities to employees or service charges levied in lieu of such gratuities, which, in either case, are payable to employees, or federal, state, and local taxes or fees collected by you for transmittal to the appropriate taxing authorities. (3) All monthly payments required by this Agreement shall be submitted to Licensor together with all reports required under this Agreement. Licensor may require that all monthly payments required under this Agreement shall be made by telegraphic transfer, automatic debit arrangement, or other means as Licensor may specify from time to time, to a bank account designated by Licensor. In the event such arrangements are made, Licensor shall be responsible for the cost of connection to such service and you shall maintain sufficient funds in your bank account to pay all such debited obligations. Any payment or report not actually received by Licensor on or before such date shall be deemed overdue, or, if an automatic debit or similar arrangement is utilized and funds are insufficient to cover your payment obligation, any amounts unpaid on or before such date shall be deemed overdue. If any payment is overdue, you shall pay to Licensor, in addition to the amount overdue, interest on such amount from the day it was due until paid at one and a half percent (1.5%) per month or the maximum rate permitted by law, whichever is less. Entitlement to such interest shall be in addition to any of the remedies Licensor may have. 4 (4) A standard initial fee for additional guest rooms equal to the higher of a) Three Hundred and Fifty Dollars ($350) per room or b) the then-current per room charge for the Application Fee per additional room shall be paid by you to Licensor on your submission of an application to add any Guest Rooms to the Hotel. As a condition to Licensor granting its approval of such application, Licensor may require you to upgrade the Hotel, subject to Paragraph 3.C. (5) Local and regional marketing programs and related activities may be conducted by you, but only at your expense and subject to Licensor's requirements. Reasonable charges may be made by Licensor for optional advertising materials ordered or used by you for such programs and activities. (6) Presently Licensor is not connected to any global distribution systems (e.g, Sabre or Apollo, or other on-line distribution system), and has no central commission payment program to travel agents. However, in the event such systems and programs are implemented, you shall pay all commissions and fees for reservations you accept through these and any other source, whether processed through Licensor, Licensor's MRS, third party reservation systems, or directly to you. You shall also be responsible for any telephone line charges and the cost of equipment related to the MRS. 4. Licensor's Responsibilities. A. Training. During the License Term, Licensor shall continue to specify and provide required and optional training programs at various locations that Licensor shall designate. Reasonable charges may be made for required training materials. Travel, lodging and other expenses incurred by you and your employees shall be borne by you. If such training is held at your Hotel, you must provide Licensor's representatives lodging at the Hotel at no cost to Licensor. B. Reservation Services. During the License Term, so long as you are in full compliance with your material obligations hereunder, Licensor shall afford you access to the MRS. C. Consultation on Operations, Facilities and Marketing. Licensor shall provide you with a set of confidential prototypical plans and specifications, which must be adapted by your architects and engineers. We will review your site layout and working drawings prepared by your architects, and any other related plans and specifications. In addition Licensor shall, from time to time at Licensor's sole discretion, make available to you consultation and advice in connection with operations, facilities and marketing, including lists of suppliers for Hotel fixtures, furnishings, signs, and other equipment. Licensor shall also periodically evaluate the performance of the Hotel, but in any case at least once each year, by assessing the quality of the Hotel's facility and services according to certain criteria developed by Licensor (the "Quality Assurance Score"). D. Use of Marketing/Reservation Contribution. The Marketing/Reservation Contribution shall be used by Licensor for costs associated with advertising, promotion, publicity, market research and other marketing programs and related activities, cost of maintaining and producing a National Directory, as well as the MRS, services and overhead for individuals directly related to national and local marketing and reservations. For the purpose of this Paragraph 4.D., overhead shall be limited to individuals directly related to the Reservation or Marketing departments such as the Vice President of Marketing and costs related to the financial management of the fund. Licensor shall not use any of the funds in the Marketing and Reservation Contributions to pay for marketing directly related to the sale of franchises. Licensor is not obligated to expend funds for marketing or reservation services in excess of the amounts received from licensees using the Hotel System. In the event excess amounts remain at the end of any taxable year, all expenditures in the following taxable year(s) shall be made first out of accumulated earnings from previous years, next out of earnings in the current year, and finally 5 from contributions. Marketing and Reservation Contributions shall not be an asset of Licensor, and an audit of the operation of the Marketing and Reservation Contributions shall be prepared annually by an independent certified public accountant selected by Licensor and shall be made available to you on request. Licensor shall maintain the National Directory, listing the address and telephone number of all Microtel Hotels. E. Application of Manual. Licensor shall provide you, on loan, one (1) copy of the Manual. All hotels operated within the Hotel System shall be subject to the Manual, as it may from time to time be modified or revised by Licensor, including limited exceptions which may be made by Licensor based on local conditions or special circumstances. Each change in the Manual must be explained in writing to you at least thirty (30) days before it goes into effect. F. Other Arrangements for Marketing Etc. Licensor may enter into arrangements for development, marketing, operations, administrative, technical and support functions, facilities, programs, services and/or personnel with any other entity and may use any facilities, programs, services and/or personnel used in connection with the Hotel System in connection with any business activities of its parent, subsidiaries, divisions or affiliates. G. Inspections/Compliance Assistance. Licensor has the right to inspect the Hotel at any time, with or without notice to you, to determine if the Hotel is in compliance with the standards and rules of operation set forth in the Manual. If the Hotel fails to comply with such standards and rules of operation, Licensor may, at its option and at your cost, require an action plan to correct the deficiencies. You shall then take all steps necessary to correct any deficiencies within the times established by Licensor. Licensor's approval of an action plan does not waive any rights it has or may have under this Agreement, nor does it relieve you of any obligations under this Agreement. 5. Proprietary Rights. A. Ownership of the Hotel System and Proprietary Marks. You acknowledge and shall not contest, either directly or indirectly, Licensor's exclusive license to use the Hotel System and any element(s) or component(s) thereof, and you acknowledge it is Licensor's right to grant licenses to use all or any element(s) or component(s) of the Hotel System. You specifically agree and acknowledge that Licensor is the exclusive licensee of all right, title and interest in and to the Proprietary Marks together with the goodwill symbolized thereby. You shall not contest directly or indirectly the validity or ownership of the marks either during the term of this Agreement or at any time thereafter. All improvements and additions whenever made to or associated with the Hotel System by the parties to this Agreement or anyone else, and all Proprietary Marks, and all goodwill arising from your use of the Proprietary Marks shall inure to the benefit of and become the property of Licensor. Upon expiration or termination of this Agreement, no monetary amount shall be assigned as attributable to any goodwill associated with your use of the Hotel System or any element(s) or component(s) of the Hotel System including the name or marks. B. Trademark Disputes. Licensor shall have the sole right and responsibility to handle disputes with third parties concerning use of all or any part of the Hotel System, and you shall, at your reasonable expense, extend your full cooperation to Licensor in all such matters. All recoveries made as a result of disputes with third parties regarding use of the Hotel System or any part thereof shall be for the account of Licensor. Licensor need not initiate suit against alleged imitators or infringers and may settle any dispute by grant of a license or otherwise. You shall not initiate any suit or proceeding against alleged imitators or infringers or any other suit or proceeding to enforce or protect the Hotel System. 6 C. Protection of Name and Marks. Both parties shall make every effort consistent with the foregoing to protect and maintain the Proprietary Marks and their distinguishing characteristics. You agree to execute any documents deemed necessary by Licensor or its counsel to obtain protection for the Proprietary Marks or to maintain their continued validity and enforceability. You agree to use the Proprietary Marks only in connection with the operation of the Hotel and in the manner authorized by Licensor and you acknowledge that any unauthorized use thereof shall constitute infringement of Licensor's rights. You must notify Licensor immediately, in writing, of any infringement or challenge to your use of the Proprietary Marks or of any unauthorized use or possible misuse of Proprietary Marks or Licensor's proprietary information. 6. Records and Audits. A. Monthly Reports. At least monthly, you shall prepare a statement which shall include all information concerning Gross Rooms Revenue, other revenues generated at the Hotel, room occupancy rates, reservation data and other information required by Licensor that may be useful in connection with marketing and other functions of Licensor, its parent, subsidiaries, divisions or affiliates (the "Data"). The Data shall be the property of Licensor. By the tenth (10th) day of each month, you shall submit to Licensor a statement setting forth the Data for the previous month and reflecting the computation of the amounts then due under Paragraph 3.D hereof. The statement shall be in such form and detail as Licensor may reasonably request from time to time, and may be used by Licensor for its reasonable purposes. Licensor shall not willingly or knowingly provide Data on your property as an inducement to develop other hotel brands in your market area. B. Preparation and Maintenance of Records. You shall, in a manner and form satisfactory to, Licensor and utilizing accounting and reporting standards as reasonably required by Licensor, prepare on a current basis (and preserve for no less than four (4) years), complete and accurate records concerning Gross Rooms Revenue and all financial, operating, marketing and other aspects of the Hotel, and maintain an accounting system which fully and accurately reflects all financial aspects of the Hotel and its business. Such records shall include but not be limited to books of account, tax returns, governmental reports, register tapes, daily reports, and complete quarterly and annual financial statements (profit and loss statements, balance sheets and cash flow statements). C. Audit. Licensor or its designated agents shall have the right at any time to examine and copy, at its expense, all books, records, and your tax returns related to the Hotel and, at its option, to have an independent audit made. If an inspection or audit should reveal that payments have been understated in any report to Licensor, then you shall immediately pay to Licensor the amount understated upon demand, in addition to interest from the date such amount was due until paid, at one and one half percent (1.5%) per month or the maximum rate permitted by law, whichever is less. In such event, Licensor shall also have the right to require that all your future financial statements related to the Hotel be audited at your expense for each fiscal year by an independent certified public accounting firm selected by you and approved by Licensor. If an inspection discloses an underpayment to Licensor of five percent (5%) or more of the total amount that should have been paid to Licensor during any six (6) month period, you shall, in addition to repayment of such understated amount, with interest, reimburse Licensor for any and all costs and expenses incurred in connection with the inspection or audit (including, without limitation, reasonable accounting and attorneys' fees). The foregoing remedies shall be in addition to any other remedies Licensor may have, including, without limitation the remedies for default. D. Annual Financial Statements. At Licensor's request, you shall submit to Licensor as soon as available but not later than ninety (90) days after the end of your fiscal year, complete financial statements for such year. You shall certify them to be true and correct and to have been prepared in accordance with generally accepted accounting principles consistently applied, and any false certification shall be a breach of this 7 Agreement. Licensor may also request, from time to time, gross operating profits percentages and certain operating statistics (i.e. energy and repairs costs) which you must provide. 7. Indemnity and Insurance. A. Indemnity. It is understood and agreed that nothing in this Agreement authorizes either party to make any contract, agreement, warranty or representation on the other's behalf, or to incur any debt or other obligation in the other's name, and that neither party shall in any event assume liability for, or be deemed liable hereunder as a result of, any such action, or by reason of any act or omission of the other party or any claim or judgement arising therefrom. You shall indemnify and hold Licensor and its parent, affiliates, subsidiaries, officers, directors, agents, and employees harmless against any and all claims arising directly or indirectly from, as a result of, or in connection with, your operation of the Hotel, including claims of intentional or negligent conduct by you, and any claims of acts or omissions by Licensor relating to the operation of the Hotel System (even though Licensor is not actively involved in the operation or supervision of the Hotels), as well as the costs, including reasonable attorneys' fees, of defending against them. You agree that all of the obligations of Licensor under this Agreement are to you, and no other party is entitled to rely on, enforce, or obtain relief for breach of such obligations either directly or indirectly or by subrogation. Licensor shall not indemnify or hold you harmless against any action or claim by any third party based upon Licensor's exercise of any of its rights in accordance with the terms of this Agreement. B. Insurance. During the License Term, you shall comply with all insurance requirements of any lease or mortgage covering the Hotel, and Licensor's specifications for insurance as to amount and type of coverage as may be reasonably specified by Licensor from time to time in writing, and shall in any event maintain as a minimum the following insurance underwritten by an insurer approved by Licensor: (1) employer's liability and workers' compensation insurance as prescribed by applicable law; and (2) comprehensive general liability insurance (with products, completed operations and independent contractors coverage) and comprehensive automobile liability insurance, all on an occurrence basis naming Licensor and its then current parent, subsidiaries, divisions, affiliates and their successors and assigns as additional insureds and underwritten by an insurer approved by Licensor, with single-limit coverage for personal and bodily injury and property damage of at least Five Million Dollars ($5,000,000) for each occurrence. In connection with all significant construction at the Hotel during the License Term, you shall cause the general contractor to maintain with an insurer approved by Licensor comprehensive general liability insurance (with products, completed operations and independent contractors coverage) in at least the amount of Five Million Dollars ($5,000,000) for each occurrence with Licensor and its then current parent, subsidiaries, divisions, affiliates and their successors and assigns named as additional insureds. C. Changes in Insurance. Simultaneously herewith, annually hereafter, and each time a change is made in any insurance or insurance carrier, you shall furnish to Licensor certificates of insurance including the term and coverage of the insurance in force, the persons insured, and the fact that the coverage may not be cancelled, altered or permitted to lapse or expire without thirty (30) days' advance written notice to Licensor. 8. Transfer. 8 A. Transfer by Licensor. Licensor shall have the right to transfer or assign all or any part of its rights or obligations in this Agreement to any person or legal entity, and you hereby consent to such transfer. B. Transfer by Licensee. (1) You understand and acknowledge that the rights and duties set forth in this Agreement are personal to you, and that Licensor has granted this license in reliance on your business skill, financial capacity, and character, and that of your partners or shareholders. Accordingly, neither you nor any immediate or remote successor to any part of your interest in this license, nor any individual, partnership, corporation, or other legal entity which directly or indirectly owns any interest in this license or in you shall sell, assign, transfer, convey, give away, or otherwise encumber any direct or indirect interest in this License (including any ownership interest in you), the Hotel, or a substantial portion of the assets (including building and real estate) of the Hotel without the prior written consent of Licensor. Licensor's written consent shall not be required to mortgage the Hotel premises to a bank or other financial institution, provided that you remain the mortgagor of the Hotel. (2) If the transfer is equal to less than a fifty percent (50%) equity interest in you and does not have the affect of transferring control (as described in Paragraphs (3) and (4) below), the transfer shall not require the prior approval of Licensor, provided that you notify Licensor in writing of such transfer within thirty (30) days following such transfer. (3) If a transfer, alone or together with other previous, simultaneous, or proposed transfers, would have the affect of transferring a controlling interest in the License, you, the Hotel, or greater than fifty percent (50%) of the assets (including building and real estate) of the Hotel, such transfer shall require Licensor's prior approval, and Licensor may, in its sole discretion, require any or all of the following as conditions of its approval, which approval shall not be unreasonably withheld: (a) all of your accrued monetary obligations to Licensor and its subsidiaries and affiliates and all other outstanding obligations related to the Hotel shall have been satisfied and you are not otherwise in default of such obligations; (b) the transferee, and all shareholders in the transferee, shall demonstrate to Licensor's satisfaction that the transferee and its shareholders or general partners, as appropriate, meet Licensor's then-current qualifications being applied to new applicants including, business standards, ability to conduct the Hotel (as may be evidenced by prior related business experience or otherwise), and have adequate financial resources and capital to operate the Hotel; (c) transferee and the shareholders or general partners in the transferee shall execute the standard form license agreement then being offered to new Hotel System licensees (provided, however, that the royalty fee and the Marketing/Reservation Contribution shall be the greater of (i) the then-current fees or (ii) the same as the amount being paid by the transferee on the date of the transfer, which amount shall thereafter be adjusted in accordance with the terms of the license agreement executed) and such other ancillary agreements as Licensor may require for the Hotel, and the general manager shall complete the initial training program then in effect for new licensees; (d) the Hotel shall be upgraded to conform to the then-current standards and specifications for hotels operating under the Hotel System if the most recent 9 (e) Quality Assurance Score was below four hundred and fifty (450). In any event, all deficiencies noted on the most recent inspection must be remedied by the transferee within ninety (90) days of such transfer. You shall complete any upgrade required under this Paragraph 8.B(3)(d) within the time specified by Licensor; (e) you shall pay a transfer fee equal to Two Thousand Five Hundred Dollars ($2,500.00), for a term equal to the balance of the original term of this Agreement. No fee shall be required for transfers to the spouse, issue, parent, or sibling of a partner or shareholder in you, or from one partner or shareholder to another. If the transferee requests approval of a term greater than the remaining term of this Agreement, the then-current standard minimum application fee, prorated according to the period of time requested which exceeds the original term of this Agreement, shall be paid to Licensor; (f) the transferor shall have executed a general release, in a form satisfactory to Licensor, of any and all claims against Licensor and its officers, directors, shareholders, and employees, in their corporate and individual capacities, including, without limitation, claims arising under federal, state, and local laws, rules, and ordinances; (g) the transferee, and all shareholders or general partners in the transferee, shall enter into a written assignment, in a form satisfactory to Licensor, assuming and agreeing to discharge all of your obligations under this Agreement; (h) you shall remain liable for all obligations to Licensor and its subsidiaries and affiliates in connection with the Hotel prior to the effective date of the transfer and shall execute any and all instruments reasonably requested by Licensor to evidence such liability. (4) For the purposes of this Agreement, "control" shall mean the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, corporation or other business entity, whether through the ownership of voting securities, by contract, or otherwise. (5) Any purported assignment or transfer, by operation of law or otherwise, not having the prior written consent of Licensor shall be null and void and shall constitute a material breach of this Agreement, for which Licensor may then terminate without opportunity to cure pursuant to Paragraph 10.C. of this Agreement, and seek injunctive relief as well as monetary damages. C. Transfers of the License or Equity Interest in Licensee Upon Death. Upon the death or mental incompetency of you or a person owning all or any interest in you, the executor, administrator, or personal representative of such person shall transfer within three (3) months after such death or mental incompetency his interest to a third party approved by Licensor. Such transfers, including, without limitation, transfers by devise or inheritance, shall be subject to the same conditions as any inter vivos transfer. However, in the case of transfer by devise or inheritance, if the heirs or beneficiaries of any such person are unable to meet the conditions in this Paragraph 8, the personal representative of the deceased shareholder shall have reasonable time to dispose of the deceased's interest in you, which disposition shall be subject to all the terms and conditions for transfers contained in this Agreement. If the interest is not disposed of within nine (9) months, Licensor may terminate this Agreement. D. Registration of a Proposed Transfer of Equity Interests. Securities in you may be offered to the public only with the prior written consent of Licensor, which consent shall not be unreasonably withheld. All materials required by federal or state law for the sale of any interest in you shall be submitted to Licensor for 10 review prior to filing with any government agency; and any materials to be used and any exempt offering shall be submitted to Licensor for review prior to their use. No offering by you shall imply (by use of the Proprietary Marks or otherwise) that Licensor is participating as an underwriter, issuer, or offcer of you or Licensor's securities; and Licensor's review of any offering shall be limited solely to the subject of the relationship between you and Licensor. You and other participants in the offering must fully indemnify Licensor in connection with the offering. For each proposed offering, you shall pay to Licensor a non-refundable fee of Five Thousand Dollars ($5,000.00), or such greater amount as is necessary to reimburse Licensor for its reasonable cost and expenses associated with reviewing the proposed offering, including, without limitation, legal and accounting fees. E. Non-Waiver of Claims. Licensor's consent to a transfer of any interest in the license granted herein shall not constitute a waiver of any claims it may have against the transferring party, nor shall it be deemed a waiver of Licensor's right to demand exact compliance with any of the terms of this Agreement by the transferee. F. Licensor's Right of First Refusal. If in the event, any party holding any direct or indirect interest in this Agreement, in you, or in all or substantially all of the assets of the Hotel desires to accept any bona fide offer from a third party to purchase such interest, you shall notify Licensor as provided in Paragraph 13.F. hereof, and shall provide such information and documentation relating to the offer as Licensor may require. Licensor shall have the right and option, provided the third party wishes to remove the Hotel from the Hotel System, exercisable within thirty (30) days after receipt of such written notification, to send written notice to the seller that Licensor intends to purchase the seller's interest on the same terms and conditions offered by the third party. If Licensor elects to purchase the seller's interest, closing on such purchase shall occur within ninety (90) days from the date of notice to the seller of the election to purchase by Franchisor. If Licensor elects not to purchase the seller's interest, any material change thereafter in the terms of the offer from a third party shall constitute a new offer subject to the same rights of first refusal by Licensor as in the case of the third party's initial offer (minor changes to the offer shall not constitute a new offer and shall be subject to the notice period of the initial offer). Failure of Licensor to exercise the option afforded by this Paragraph 8.F. shall not constitute a waiver of any other provision of this Agreement, including all of the requirements of this Paragraph 8.F., with respect to a proposed transfer. In the event the consideration, terms, and/or conditions offered by a third party are such that Licensor may not reasonably be required to furnish the same consideration, terms, and/or conditions, then Licensor may purchase the interest proposed to be sold for the reasonable equivalent in cash. If the parties cannot agree within thirty (30) days on the reasonable equivalent in cash of the consideration, terms, and/or conditions offered by the third party, an independent appraiser shall be designated by Licensor at Licensor's expense, and the appraiser's determination shall be binding. G. No Right of First Refusal. In the event that you receive an offer from a third party to purchase the Hotel and the third party wishes to keep the Hotel in the Hotel System, Licensor shall have no right of first refusal provided the third party meets the qualifications set forth in Paragraph 8. 11 9. Condemnation and Casualty. A. Condemnation. You shall, at the earliest possible time, give Licensor full notice of any proposed taking of the Hotel by eminent domain. In the event the Hotel is taken by eminent domain, Licensor shall give due and prompt consideration, without any obligation, to transferring this Agreement to a nearby location selected by you and approved by Licensor as promptly as reasonably possible, and in any event within four (4) months of the taking. If the new location is approved by Licensor and the transfer authorized by Licensor, and if you open a new hotel at the new location in accordance with Licensor's specifications within two (2) years of the closing of the Hotel, the new hotel shall thenceforth be deemed to be the Hotel licensed under this Agreement. If a condemnation takes place and a new hotel does not, for whatever reason, become the Hotel under this Agreement in strict accordance with this Paragraph 9.A. (or if it is reasonably evident to Licensor that such shall be the case), this Agreement will terminate forthwith upon notice thereof by Licensor to you, without the payment of liquidated damages hereunder. B. Casualty. If the Hotel is damaged by fire or other casualty, you shall expeditiously repair the damage. If the damage or repair requires closing the Hotel, you shall immediately notify Licensor, shall repair or rebuild the Hotel in accordance with Licensor's standards, shall commence reconstruction within four (4) months after closing, and shall reopen the Hotel for continuous business operations as soon as practicable (but in any event within twenty four (24) months after closing of the Hotel), giving Licensor ample advance notice of the date of reopening. If the Hotel is not reopened in accordance with this Paragraph 9.B., this Agreement shall forthwith terminate upon notice thereof by Licensor to you, with the payment of liquidated damages calculated in the manner set forth in Paragraph 10.E. C. No Extensions of Term. Nothing in this Paragraph 9 shall extend the License Term, but you shall not be required to make any payments pursuant to Paragraphs 3.D. for periods during which the Hotel is closed by reason of condemnation or casualty. 10. Termination. A. Expiration of Term. This Agreement shall expire without notice effective 20 years from the authorized opening date, subject to earlier termination as set forth herein. The parties recognize the difficulty of ascertaining damages to Licensor resulting from premature termination of this Agreement, and have provided for liquidated damages in Paragraph 10.E. below, which liquidated damages represent the parties' best estimate as to the damages arising from the circumstances in which they are provided. B. Default with Opportunity to Cure. (1) Except as provided in Paragraphs 10.C. hereof, you shall have thirty (30) days (unless otherwise specified herein or in the notice by Licensor) from receipt of written notice of a default within which to remedy such default. If any such default is not cured within that time, or such longer period as applicable law may require (or such longer period as may be reasonably required by you to cure any non-monetary default if you immediately commence, diligently and in good faith pursues, and cures such default), this Agreement shall terminate without further notice to you effective immediately upon the expiration of the thirty (30) day period, expiration of any extended period as described above, or such longer period as applicable law may require. Alternatively, Licensor may, at its option, suspend your access to the MRS until such default has been cured to Licensor's satisfaction. You shall be in default hereunder for any failure to comply with any of the requirements imposed by this Agreement, as it may from time to 12 time reasonably be supplemented by the Manual, or to carry out the terms of this Agreement in good faith. (2) If during the twelve (12) months preceding a notice of default in (1) above you shall have engaged in a violation of this Agreement for which a notice of default was given and such default was remedied, the period given to remedy defaults thereafter shall, if and to the extent permitted by law, be ten (10) days instead of thirty (30). (3) In any judicial proceeding in which the validity of termination is at issue, Licensor shall not be limited to the reasons set forth in any notice sent under this Paragraph l0.B. (4) Licensor's notice of termination or suspension of services as described in Section l0.B(1) shall not relieve you of your obligations hereunder. C. Immediate Termination by Licensor. This Agreement shall immediately terminate without notice to you if: (1)(a) you, or any guarantor of your obligations hereunder (a "Guarantor"), shall generally not pay its debts as they become due or shall admit in writing its inability to pay its debts, or shall make a general assignment for the benefit of creditors; or (b) you, or any Guarantor, shall commence or consent to any case, proceeding or other action seeking reorganization, arrangement, adjustment, liquidation, dissolution or composition of you or your debts under any law relating to bankruptcy, insolvency, reorganization or relief of debtors, or seeking appointment of a receiver, trustee, custodian or other similar official for it or for all or any substantial part of its property; or (c) you, or any Guarantor, shall take any corporate or other action to authorize any of the actions set forth above in Paragraphs (a) or (b); or (d) any case, proceeding, or other action against you or any such guarantor shall be commenced seeking to have an order for relief entered against it as debtor, or seeking reorganization, arrangement, adjustment, liquidation, dissolution or composition of it or its debts under any law relating to bankruptcy, insolvency, reorganization or relief of debtors, or seeking appointment of a receiver, trustee, custodian or other similar official for it or for all or any substantial part of its property, and such case, proceeding or other action (i) results in the entry of an order for relief against it which is not fully stayed within seven (7) business days after the entry thereof, or (ii) remains undismissed for a period of forty- five (45) days; or (e) an attachment remaining on all or a substantial part of the Hotel or of your or any Guarantor's assets for thirty (30) days; or (f) you or any Guarantor fails, within sixty (60) days of the entry of a final judgment against you in any amount exceeding Fifty Thousand Dollars ($50,000), to discharge, vacate or reverse the judgment, or to stay execution of it, or if appealed, to discharge the judgment within thirty (30) days after a final adverse decision in the appeal; or (2) you cease to operate the Hotel at the Location or under the Proprietary Marks, or lose possession or the right to possession of all or a significant part of the Hotel, except as otherwise provided in Paragraph 9 hereof; or (3) you contest in any court or proceeding Licensor's ownership of the Hotel System or any part of it, or the validity of any of the Proprietary Marks; or (4) a breach of Paragraph 8 hereof occurs; or 13 (5) you fail to continue to identify the Hotel to the public as a Microtel Hotel; or (6) any action is taken toward dissolving or liquidating you or any Guarantor, if it is a corporation or partnership, except for death of a partner; or (7) you or any of your principals is, or is discovered to have been, convicted of a felony (or any other offense if it is likely to adversely reflect upon or affect the Hotel, the Hotel System, the Proprietary Marks and the goodwill associated therewith, the Licensor, the Licensor's parent or your affiliates or subsidiaries in any way); or (8) you knowingly maintain false books and records of account or knowingly submit false reports or information to Licensor; or (9) you intentionally disclose or divulge the contents of the Manual or other trade secrets or confidential information provided to you by Licensor to any unauthorized person or fail to exercise reasonable care to prevent such disclosure; or (10) you intentionally or negligently make any material false statements or omissions to Licensor in connection with your Application. D. De-identification of Hotel Upon Termination. You shall take whatever action is necessary to assure that no use is made of any part of the Hotel System at or in connection with the Hotel or otherwise after the License Term ends. This shall involve, among other things, returning to Licensor the Manual and all other materials proprietary to Licensor, removal of all distinctive signs, changing the telephone listing and removal of all items bearing the Proprietary Marks. Further, until all modifications required by this Paragraph l0.D. are completed, you shall (i) maintain a conspicuous sign at the registration desk in a form specified by Licensor stating that the Hotel is no longer associated with the Hotel System, and (ii) advise all customers or prospective customers telephoning the Hotel that it is no longer associated with the Hotel System. Anything not done by you within thirty (30) days after the License Term ends, may be done at your expense by Licensor or its agents, who may enter upon the premises of the Hotel for that purpose. E. Payment of Liquidated Damages. If this Agreement terminates pursuant to Paragraphs 3.C., 9.B., 10.B. or l0.C. above at any time after the first twenty four (24) months of operation, you shall promptly pay Licensor (in addition to any amounts then due to Licensor, and only as liquidated damages for the premature termination of this Agreement, and not as a penalty or as damages for breaching this Agreement or in lieu of any other payment) a lump sum based on the average occupancy rate for the twelve (12) months preceding the termination as follows: (1) if the occupancy rate was less than fifty percent (50%) then you shall pay no liquidated damages; (2) if the occupancy rate was fifty percent (50%) to fifty nine and nine tenths percent (59.9%) then you shall pay an amount equal to twelve (12) months of fees required under Paragraph 3.D(l)(a)-(b); (3) if the occupancy rate was sixty percent (60%) to sixty nine and nine tenths percent (69.9%) then you shall pay an amount equal to twenty four (24) months of fees required under Paragraph 3.D(l)(a)-(b); (4) if the occupancy rate was seventy percent (70%) or greater then you shall pay an amount equal to thirty six (36) months of fees required under Paragraph 3.D(l)(a)-(b); If this Agreement terminates at any time during the first twenty four (24) months of operation, you shall promptly pay to Licensor liquidated damages equal to thirty six (36) times the average monthly fees paid under Paragraph 3.D(l)(a)-(b). 11. Agreement is Non-Renewable. This Agreement is non-renewable. 14 12. Relationship of Parties. A. No Agency Relationship. You are an independent contractor. Neither party is the legal representative or agent of, or has the power to obligate (or has the right to direct or supervise the daily affairs of) the other for any purpose whatsoever. Licensor and you expressly acknowledge that the relationship intended by them is a business relationship based entirely on, and defined by, the express provisions of this Agreement and that no partnership, joint venture, affiliate, agency, fiduciary or employment relationship is intended or created by reason of this Agreement. B. Licensee's Notices to Public Concerning Independent Status. You shall take such steps as are necessary and such steps as Licensor may from time to time reasonably request to minimize the chance of a claim being made against Licensor for anything that occurs at the Hotel, or for acts, omissions or obligations of you or anyone associated or affliated with you or the Hotel. Such steps may, for example, include giving notice in private rooms, public rooms and advertisements, on business forms and stationery, and any other materials, making clear to the public that Licensor is not the owner or operator of the Hotel and is not accountable for what happens at the Hotel. Unless required by law, you shall not use the word "Microtel" or any similar words in your corporate, partnership, or trade name, nor authorize or permit such use by anyone else. You shall not use the word "Microtel" or any other name or mark associated with the Hotel System to incur any obligation or indebtedness on behalf of Licensor. 13. Miscellaneous. A. Severability and Interpretation. The remedies provided in this Agreement are not exclusive. In the event any provision of this Agreement is held to be unenforceable, void or voidable as being contrary to the law or public policy of the United States or any other jurisdiction entitled to exercise authority hereunder, all remaining provisions shall nevertheless continue in full force and effect unless deletion of the provision(s) deemed unenforceable, void or voidable impairs the consideration for this Agreement in a manner which frustrates the purpose of the parties or makes performance commercially impracticable. In the event any provision of this Agreement requires interpretation, such interpretation shall be based on the reasonable intention of the parties in the context of this transaction without interpreting any provision in favor of or against any party hereto by reason of the drafting of the party or its position relative to the other party. Any covenant, term or provision of this Agreement which, in order to effect the intent of the parties, must survive the termination of this Agreement, shall survive any such termination. B. Binding Effect. This Agreement shall become valid when executed and accepted by Licensor at Atlanta, Georgia. It shall be deemed made and entered into in the state of Georgia and shall be governed and construed under and in accordance with the laws of the state of Georgia. In entering into this Agreement, you acknowledge that you have sought, voluntarily accepted, and become associated with Licensor who is headquartered in Atlanta, Georgia and that this Agreement contemplates and shall result in business relationships with Licensor's headquarter's personnel. The choice of law designation permits, but does not require that all suits concerning this Agreement be filed in the state of Georgia. C. Exclusive Benefit. This Agreement is exclusively for the benefit of the parties hereto and it shall not give rise to liability to a third party, except as otherwise specifically set forth herein. No agreement between Licensor and anyone else is for the benefit of you. D. Entire Agreement. This is the entire Agreement (and supersedes all previous agreements including without limitation, any commitment agreement between the parties concerning the Hotel) between the parties 15 relating to the Hotel. Neither Licensor nor any other person on Licensor's behalf has made any representation to you concerning this Agreement or relating to the Hotel System, which representation is not fully set forth herein or in Licensor's "Offering Circular for Prospective Franchisees." No change in this Agreement shall be valid unless in writing signed by both parties. No failure to require strict performance or to exercise any right or remedy hereunder shall preclude requiring strict performance or exercising any right or remedy in the future. E. Licensor's Withholding of Consent. Licensor's consent, wherever required, may be withheld if any default by you exists under this Agreement. Approvals and consents by Licensor shall not be effective unless evidenced by a writing duly executed on behalf of Licensor. F. Notices. Any and all notices required or permitted under this Agreement shall be in writing and shall be delivered by any means which shall provide evidence of the date received, to the respective parties at the following addresses unless and until a different address has been designated by written notice to the other party: Notices to LICENSOR: Microtel Inns & Suites Franchising, Inc., 13 Corporate Square, Suite 250 Atlanta, Georgia 30329 (404) 321-4045 Notices to you: {{ENTITYNAMECAPS}} {{PCADDRESS1}} {{PCADDRESS2}} Attn: {{PCNAME}} Any notice shall be deemed to have been given at the date and time it is evidenced to have been received. G. Descriptive Headings. The descriptive headings in this Agreement are for convenience only and shall not control or affect the meaning or construction of any provision in this Agreement. H. Management of the Hotel. You must at all times retain and exercise direct management control over the Hotel's business. You shall not enter into any lease, management agreement or other similar arrangement for the operation of the Hotel or any part thereof (including without limitation, food and/or beverage service facilities), with any independent entity without the prior consent of Licensor. I. Conversion of other Properties. Due to the unique nature of both the interior and exterior of Microtel Hotels, it is Licensor's intent not to accept conversion of other properties in the Hotel System. In the event that Licensor violates this clause, you may at your option terminate this Agreement upon notice to Licensor, and in such case you shall not be required to pay liquidated damages required under Section 10.E hereof if all fees owing to Licensor and its affiliates are paid in full upon termination and you perform all post termination obligations specified in Paragraph 10. Alternatively, in the event that Licensor violates this clause, you may at your option remain in the Hotel System and cease to pay royalties required under Section 3.D(l)(a) hereof; however, you shall still pay the Marketing/Reservation Contribution required under Section 3.D(l)(b) hereof. J. Guest Room Rates. You acknowledge that the Hotel System is designed to emphasize a value oriented concept and to compete directly in the true value lodging segment. However it is your responsibility to establish room rates for the Hotel. Rates must be submitted to Licensor prior to the deadline for the upcoming National Directory and you may not charge a rate in excess of the rate published in the National Directory for a particular time period. 16 (signatures on the following page) 17 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first stated above. LICENSEE: {{ENTITYNAMECAPS}} By: By: {{SIGNEENAME}} By: {{SIGNEETITLE}} Attest: Attest: Secretary LICENSOR: MICROTEL INNS & SUITES FRANCHISING, INC., By: By: Jon Leven Vice President Franchise Administration and Reservations Attest: Asst. Secretary 18 GUARANTY As an inducement to Microtel Inns & Suites Franchising, Inc., ("Licensor") to execute the above License Agreement, the undersigned, jointly and severally, hereby unconditionally warrant to Licensor and its successors and assigns that all of licensee's representations in the License Agreement and the application submitted by the licensee to obtain the License Agreement are true and guarantee that all of the licensee's obligations under the above License Agreement, including any amendments thereto whenever made (the "Agreement"), shall be punctually paid and performed. Upon default by the licensee or notice from Licensor, the undersigned shall immediately make each payment and perform each obligation required of the licensee under the Agreement. Without affecting the obligations of the undersigned under this Guaranty, Licensor may without notice to the undersigned extend, modify or release any indebtedness or obligation of the licensee, or settle, adjust or compromise any claims against the licensee. The undersigned waive notice of amendment of the Agreement and notice of demand for payment or performance by the licensee. Upon the death of an individual guarantor, the estate of such guarantor shall be bound by this Guaranty but only for defaults and obligations hereunder existing at the time of death, and the obligations of the other guarantors shall continue in full force and effect. The Guaranty constitutes a guaranty of payment and performance and not of collection, and each of the guarantors specifically waives any obligation of Licensor to proceed against the licensee on any money or property held by the licensee or by any other person or entity as collateral security, by way of set off or otherwise. The undersigned further agree that this Guaranty shall continue to be effective or be reinstated as the case may be, if at any time payment or any of the guaranteed obligations is rescinded or must otherwise be restored or returned by Licensor upon the insolvency, bankruptcy or reorganization of the licensee or any of the undersigned, all as though such payment has not been made. IN WITNESS WHEREOF, each of the undersigned has signed this Guaranty as of the date of the above Agreement. Witnesses: Guarantors: {{GUARANTOR1}}, Legal Signature {{GUARANTOR2}}, Legal Signature 19 ATTACHMENT A THE HOTEL Facilities (Paragraph 1): Site--Area and general description: A {{BRAND\w hotel to be located at {{HOTELADDRESS1}}, {{HOTELADDRESS2}} Number of approved Guest Rooms: {{ROOMS}} Number of Suites included: None Ownership of Licensee (Paragraph 8): {{ENTITYNAMECAPS}} 100% 20 ATTACHMENT B EXCLUSIVE TERRITORY The Exclusive Territory is defined as that area bordered by: 21 ATTACHMENT C THE WORK You acknowledge that every detail of the Hotel System is important to Licensor and other licensees operating under the Hotel System in order to develop and maintain the standards and public image of the Hotel System. You agree to comply with the details of the Hotel System as specified by Licensor in the Manual, or otherwise in writing, and not to deviate therefrom. Specifically, you acknowledge that the Hotel is intended to offer minimal amenities and to compete directly with hotels offering the lowest average room rate in each target market. You therefore agree that it shall offer or install only those amenities that are approved in advance by Licensor. The dates below set forth the development schedule for the Hotel. 1) You shall submit preliminary plans, including site layout and outline specifications adapting Licensor's then-prototypical plans on or before a date 3 months from the date of this License. 2) You shall submit complete working drawings and specifications for the Hotel and Hotel premises, including its proposed equipment, furnishings, facilities and signs with such detail and containing such information as Licensor may request on or before a date 5 months from the date of this License. The Plans as submitted to Licensor shall conform to then prevailing Hotel System standards, including the construction standards set forth in the Manual. Construction shall not begin unless and until Licensor has approved the Plans. Thereafter, no change shall be made to the Plans without the advance consent of Licensor. Notwithstanding the foregoing, after the Plans have been approved, if in the course of actual construction any change in the Plans occurs, you shall notify Licensor promptly. Licensor shall determine whether construction has been completed in accordance with the Plans. 3) Construction of the Hotel shall commence on or before on or before a date 7 months from the date of this License. Commencement of construction shall mean excavation and poured footings with a finished building slab. Once the construction has commenced, it shall continue uninterrupted (except for interruption by reason of events constituting force majeure) until construction is completed. You shall, within five (5) days of the commencement of construction, provide written notice to Licensor that construction has begun. As used in this License, "force majeure" means an act of God, war, civil disturbance, government action, fire, flood, accident, hurricane, earthquake or other calamity, strike or other labor dispute, or other action beyond the control of you. 4) The Hotel shall be furnished, equipped and shall otherwise be made ready to open for business in accordance with the License on or before a date 13 months from the date of this License ("Completion Date"). You shall, within ten (10) days of the Completion Date, submit a written request to Licensor for Licensor to conduct a final inspection. Upon receipt of such request, Licensor shall promptly conduct such final inspection. You shall open for business within ten (10) days after receipt of Licensor's authorization to do so. The date upon which you receive authorization to open for business shall be the "Opening Date". You shall not open for business until Licensor provides final approval and authorization in writing. The Hotel shall not be opened for business as a Microtel Inn, Microtel Suites or a Microtel Inn & Suites unless and until: 22 (i) Licensor has approved and accepted, in advance, in writing the construction of the Hotel in accordance with the Plans; the installation of all items of equipment, furniture, signs, computer terminals and related supplies; and the hiring and training of staff necessary to operate the Hotel in accordance with Licensor's requirements; (ii) no accounts are past due to Licensor, its parent, divisions, subsidiaries or affiliated companies by you; (iii) you are in full compliance with all of the terms of this License Notwithstanding anything else herein to the contrary, Licensor may authorize License to open and operate the Hotel even though you have not fully complied with the terms of this License, provided that you agree to fulfill all remaining terms of this License on or before the dates designated by Licensor. 23 EX-10.2 3 EXHIBIT 10.2 Location: {{HOTELADDRESS1}} {{HOTELADDRESS2}} ID Number: {{IDNUMBER}} Date: ___________________________ HAWTHORNE SUITES LICENSE AGREEMENT BETWEEN HAWTHORN SUITES FRANCHISING, INC. AND {{ENTITYNAMECAPS}} TABLE OF CONTENTS RECITALS PAGE 1. THE LICENSE ..................................................1 2. GRANT OF LICENSE ..............................................2 3. LICENSEE'S RESPONSIBILITIES ...................................2 4. LICENSOR'S RESPONSIBILITIES ...................................5 5. PROPRIETARY RIGHTS ............................................7 6. RECORDS AND AUDITS ............................................7 7. INDEMNITY AND INSURANCE ......................................8 8. TRANSFER .....................................................9 9. CONDEMNATION AND CASUALTY ....................................12 10. TERMINATION .................................................13 11. AGREEMENT IS RENEWABLE .......................................16 12. RELATIONSHIP OF PARTIES .....................................16 13. MISCELLANEOUS ................................................17 GUARANTY ATTACHMENT A ATTACHMENT B ATTACHMENT C i LICENSE AGREEMENT Dated , between Hawthorn Suites Franchising, Inc. ("Licensor" or "HFI") and {{ENTITYNAMECAPS}}, a {{ENTITYTYPE}} ("Licensee"), whose address is {{ENTITYADDRESS}}. PARTIES AGREE AS FOLLOWS: 1. The License. Licensor has been licensed by Hawthorn Suites Associates ("HSA"), under the terms of an agreement dated March 26, 1996 (the "HSA Agreement"), the right to use and license others to use a unique concept and system relating to the establishment and operation of certain hotels that operate under the name "HAWTHORN SUITES" ("Hawthorn Hotels" or the "Hotel System"). Hawthorn Hotels are all-suites hotels in which the lodging units each contain sleeping quarters, bath, living room, and kitchen. You have independently investigated the risks of the business to be operated hereunder, including current and potential market conditions, competitive factors and risks, and have read Licensor's "Offering Circular for Prospective Franchisees", and have made an independent evaluation of all such facts. Aware of the relevant facts, you desire to enter into this agreement ("Agreement") in order to obtain a license to use the Hotel System in the operation of a Hawthorn Suites hotel located at {{HOTELADDRESS1}}, {{HOTELADDRESS2}} (the "Hotel"). A. The Hotel. The Hotel comprises all structures, facilities, appurtenances, furniture, fixtures, equipment, and entry, exit, parking and other areas from time to time located on the land identified on the plot plan most recently submitted to and acknowledged by Licensor in anticipation of the execution of this Agreement, or located on any land from time to time approved by Licensor for additions, signs or other facilities. The Hotel currently includes the facilities listed on Attachment A hereto. No change in the number of approved standard suites or guest rooms (which are hereinafter referred to collectively as "Suites") and no other significant change in the Hotel shall be made without Licensor's approval. Redecoration and minor structural changes that comply with Licensor's standards and specifications shall not be considered significant. You represent that you are entitled to possession of the Hotel during the entire License Term, as defined in Paragraph 2 hereof, without restrictions that would interfere with any of your obligations under this Agreement. B. The Hotel System. The Hotel System is composed of elements, as designated from time to time by Licensor, designed to identify Hawthorn Suites hotels to the consuming public and/or to contribute to such identification and its association with quality standards. The Hotel System at present includes, without limitation, the trade names, trademarks, and service marks, "HAWTHORN SUITES" and such other trade names, trademarks, and service marks as are now designated (and may hereafter be designated by Licensor in writing) as part of the Hotel System (hereinafter "Proprietary Marks"); prototypical architectural plans, designs, and layouts, including, without limitation, site plan, floor plan, and lobby plan; access to a centralized reservation system; a national Hawthorn Suites directory (the "National Directory"); management and personnel training, and training programs and materials; management and operational procedures and techniques as prescribed in the Confidential Manual (hereinafter the "Manual"); standards and specifications for construction, equipment, and furnishings, as described in the Manual; advertising, marketing, and promotional programs; and such other improvements that Licensor may make from time to time. 1 2. Grant of License. Licensor hereby grants to you a license (the "License") to use the Hotel System only at the Hotel, only in connection with the operation of the Hotel and, only in accordance with this Agreement, beginning with the date hereof and terminating as provided in Paragraph 10 hereof (the "License Term"). During the License Term, neither Licensor nor any affliate of Licensor nor any franchisee, shall develop, license, or permit any authorized Hawthorn Hotel within the territorial boundaries as defined in Attachment B hereto (the "Territory"). Your rights to the Territory shall automatically terminate if the Hotel's Quality Assurance Score (defined in Paragraph 4.C. hereof) falls below 425, or its then-current equivalent, and you are unable to increase the score to 425 within sixty (60) days of the inspection, or if this Agreement is otherwise terminated in accordance with Section 10 hereof. This Agreement does not limit Licensor's right, or the rights of any parent, subsidiary, division or affiliate of Licensor, to use or license to others the Hotel System or any part thereof at any location outside of the Territory. Further, Licensor, or its parent, subsidiary, division or affiliate may conduct any business activity or license other hospitality concepts under brands other than the Proprietary Marks outside and within the Territory. You acknowledge that Licensor, its parent, subsidiaries, divisions and affiliates are and may in the future be engaged in other business activities including activities related to transient lodging, which may be or may be deemed to be competitive with the Hotel System; that facilities, programs, services and/or personnel used in connection with the Hotel System may also be used in connection with such other business activities of Licensor, its parent, subsidiaries, divisions or affiliates; and that you are acquiring no rights hereunder other than the right to use the Hotel System in connection with a Hawthorn Suites Hotel as specifically defined herein in accordance with the terms of this Agreement. 3. Licensee's Responsibilities. A. Operational and Other Requirements. During the License Term, you shall: (1) maintain a high moral and ethical standard and atmosphere at the Hotel; (2) maintain the Hotel in a clean, safe and orderly manner and in first class condition; (3) provide efficient, courteous, and high-quality service to the public; (4) operate the Hotel twenty four (24) hours a day, every day; (5) strictly comply in all respects of the Hotel System and the Manual and with all other policies, procedures and requirements of Licensor which may be from time to time communicated to you; (6) strictly comply with Licensor's reasonable requirements to use only reliable sources of supplies for the Hotel including any suppliers approved by Licensor; (7) strictly comply with Licensor's requirements as to: (a) the types of services, products, and amenities that may be used, promoted or offered at the Hotel; (b) use, display, style and type of signage; (c) directory and reservation service listings of the Hotel; (d) training of persons to be involved in the operation of the Hotel, including all expenses incurred by you associated therewith; (e) participation in all marketing, reservation service, advertising, training and operating programs designated by Licensor as System-wide (or area-wide) programs in the best interests of hotels using the Hotel System; (f) maintenance, appearance and condition of the Hotel; and (g) quality and type of service offered to customers at the Hotel. 2 (8) use such automated guest service and/or hotel management and/or telephone system(s) as Licensor shall specify, including any additions, enhancements, supplements or variants developed during the term hereof; (9) participate in and use the those reservation services as Licensor shall specify, including any additions, enhancements, supplements or variants thereof which may be developed during the term hereof; (10) adopt improvements or standard changes to the Hotel System as may be from time to time designated by Licensor, which improvements are not intended to cause undue hardship; (11) strictly comply with all governmental requirements including the filing and maintenance of any required trade name or fictitious name registrations, pay all taxes, and maintain all governmental licenses and permits necessary to operate the Hotel in accordance with the Hotel System; (12) permit inspection of the Hotel by Licensor's representatives at any time and give them free lodging for such time as may be reasonably necessary to complete their inspections; (13) insure that no part of the Hotel or the Hotel System is used to further or promote a competing business or other lodging facility, except as Licensor may approve for those competing businesses or lodging facilities owned, licensed, operated or otherwise approved by Licensor or its parent, divisions, subsidiaries and/or affiliates; (14) in all respects use your best efforts to reflect credit upon and create favorable public response to the Proprietary Marks; (15) promptly pay to Licensor all amounts due Licensor, its parent, divisions, subsidiaries and/or affiliates as royalties or fees or for goods or services purchased by you; (16) comply with Licensor's requirements concerning confidentiality of information, and, specifically: treat the Manual and all supplements and revisions as confidential; use all reasonable efforts to keep the information confidential; not copy the Manual in any way, nor make it available to any unauthorized person; disclose information contained in the Manual only to persons who must have access to it in connection with their employment with you; and obtain each such person's agreement to keep such information confidential; and (17) conduct your advertising in a dignified manner and conform to the standards and requirements as Licensor may specify from time to time in writing; submit samples of all advertising and promotional materials to Licensor for approval; and discontinue use of any disapproved material upon receipt of such written notice. B. Performance of the Work. You agree to perform the construction and renovation and/or conversion work on the property including, without limitation, the purchase of furniture, fixtures, and equipment set forth on Attachment C hereto and incorporated herein by reference (the "Work"). You acknowledge that your agreement to perform the Work is an essential element of the consideration relied upon by Licensor in entering into the Agreement. Your failure to perform the Work in accordance with Licensor's requirements and specifications (including the progress, milestone completion and other dates specified in Attachment "C") shall constitute a material breach of your obligations under this License. Licensee may not commence operation of the Hotel as a Hawthorn Hotel without Licensor's written authorization. Notwithstanding any consent by Licensor to the authorized conditional opening of the Hotel, all upgrading shall be completed and the Hotel shall otherwise be in compliance with the Agreement no later than the date contained in Attachment C. C. Upgrading of the Hotel. Licensor shall review the Quality Assurance Scores (as defined in Paragraph 4.C. hereof) of the Hotel upon each five (5) year anniversary of the opening of the Hotel. If over the previous five (5) year period, the Hotel has failed to maintain an average score of four hundred fifty 3 (450) or greater out of a possible five hundred (500) (or its then-current equivalent), Licensor may require modernization of the Hotel, softgood rehabilitation (including but not limited to carpet, drapes, bedspreads) or other upgrading of the Hotel. If the upgrading requirements contained in this Paragraph 3.C. cause you undue hardship, you may terminate this Agreement by paying a fee computed according to Paragraph l0.E D. Fees. (1) For each month (or part of a month) during the License Term, you shall pay to Licensor by the tenth (10th) of the following month: (a) a royalty fee equal to five percent (5%) of the Gross Room Revenues of the Hotel, with deductions for sales and room taxes only ("Gross Room Revenues"); (b) an "Advertising Fund Contribution" of 2.5 percent of Gross Rooms Revenue. The Advertising Fund Contribution payments do not include the cost, installation or maintenance of reservation services equipment or training. Licensor may, in its sole discretion and at any time, increase the Advertising Fund Contribution amount above by no more than ten percent (10%) per year provided that Licensee's Advertising Fund Contributions shall not exceed a maximum of three percent (3.0%). Licensee hereby acknowledges any such increase shall not be imposed unless a similar increase is imposed on all licensees operating under the Hotel System according to license agreements that contain provisions similar to this Paragraph 3(D)(l)(b) providing for such increased contributions by licensees; and (c) an amount equal to any sales, gross receipts, or similar tax imposed on Licensor and calculated solely on payment required hereunder, unless the tax is an optional alternative to an income tax otherwise payable by Licensor. (2) "Gross Room Revenues" shall mean the gross receipts attributable to or payable for the rental of Suites at the Hotel, including, without limitation, the net proceeds (after deduction of the expenses of adjustment and collection) of use and occupancy, or for business interruption, rent loss, or similar insurance with respect to the Hotel (provided that insurance proceeds shall be included in Gross Room Revenues only when and to the extent actually received). Gross Room Revenues shall not include gratuities to employees or service charges levied in lieu of such gratuities, which, in either case, are payable to employees, or federal, state, and local taxes or fees collected by you for transmittal to the appropriate taxing authorities. (3) All monthly payments required by this Agreement shall be submitted to Licensor together with all reports required under this Agreement. Licensor may require that all monthly payments required under this Agreement shall be made by telegraphic transfer, automatic debit arrangement, or other means as Licensor may specify from time to time, to a bank account designated by Licensor. In the event such arrangements are made, Licensor shall be responsible for the cost of connection to such service and you shall maintain sufficient funds in your bank account to pay all such debited obligations. Any payment or report not actually received by Licensor on or before such date shall be deemed overdue, or, if an automatic debit or similar arrangement is utilized and funds are insufficient to cover your payment obligation, any amounts unpaid on or before such date shall be deemed overdue. If any payment is overdue, you shall pay to Licensor, in addition to the amount overdue, interest on such amount from the day it was due until paid at one and a half percent (1.5%) per month or the maximum rate permitted by law, whichever is less. Entitlement to such interest shall be in addition to any of the remedies Licensor may have. 4 (4) A standard initial fee for additional Suites equal to the higher of (a) Four Hundred Dollars ($400) per room; or (b) the then-current per room charge for the Application Fee per room, shall be paid by you to Licensor on your submission of an application to add any Suites to the Hotel. As a condition to Licensor granting its approval of such application, Licensor may require you to upgrade the Hotel, subject to Paragraph 3.C. (5) Local and regional marketing programs and related activities may be conducted by you, but only at your expense and subject to Licensor's requirements. Reasonable charges may be made by Licensor for optional advertising materials ordered or used by you for such programs and activities. (6) Licensee shall pay all fees for travel agent commissions and global distribution systems (e.g., Sabre, Apollo, or other online distribution system, whether processed through Licensor, Licensor's reservation system, third party reservation systems, or directly to Licensee). 4. Licensor's Responsibilities. A. Training. During the License Term, Licensor shall continue to specify and provide required and optional training programs at various locations that Licensor shall designate. Reasonable charges may be made for required training materials. Travel, lodging and other expenses of you and your employees shall be borne by you. If such training is held at your Hotel, you must provide Licensor's representatives lodging at the Hotel at no cost to Licensor. B. Reservation Services. Provided that Licensee is in full compliance with its material obligations under this Agreement, Licensor will afford Licensee access to reservation services for the Hotel. C. Consultation on Operations, Facilities and Marketing. If a new development, Licensor shall provide you with a set a confidential prototypical plans and specifications, which must be adapted by your architects and engineers. Licensor will review your site layout and working drawings prepared by your architects, and any other related plans and specifications. In addition Licensor shall, from time to time at Licensor's sole discretion, make available to you consultation and advice in connection with operations, facilities and marketing, including lists of suppliers for Hotel fixtures, furnishings, signs, and other equipment. Licensor shall also periodically evaluate the performance of the Hotel, but in any case at least once each year, by assessing the quality of the Hotel's facility and services according to certain criteria developed by Licensor (the "Quality Assurance Score"). D. Use of Advertising Fund Contribution. The Advertising Fund Contribution shall be used by Licensor for costs associated with advertising, promotion, publicity, market research and other marketing programs and related activities, cost of maintaining and producing a National Directory, as well as reservations programs, services and overhead for individuals directly related to national and local marketing and reservations. For the purpose of this Paragraph, overhead shall be limited to individuals directly related to the Reservation or Marketing departments such as the Vice President of Marketing and costs related to the financial management of the fund. Licensor shall not use any of the funds in the Advertising Fund Contribution to pay for marketing directly related to the sale of franchises. Licensor is not obligated to expend funds for marketing or reservation services in excess of the amounts received from licensees using the Hotel System. In the event excess amounts remain at the end of any taxable year, all expenditures in the following taxable year(s) shall be made first out of accumulated earnings from previous years, next out of earnings in the current year, and finally from contributions. Advertising Fund Contribution shall not be an asset of Licensor, and an audit of the operation of the Advertising Fund Contribution shall be prepared 5 annually by an independent certified public accountant selected by Licensor and shall be made available to you on request. Licensor shall maintain the National Directory, listing the address and telephone number of all Hawthorn Suites operating under the Hotel System. E. Application of Manual. Licensor shall provide you, on loan, one (1) copy of the Manual. All hotels operated within the Hotel System shall be subject to the Manual, as it may from time to time be modified or revised by Licensor, including limited exceptions which may be made by Licensor based on local conditions or special circumstances. Each change in the Manual must be explained in writing to you at least thirty (30) days before it goes into effect. F. Other Arrangements for Marketing Etc. Licensor may enter into arrangements for development, marketing, operations, administrative, technical and support functions, facilities, programs, services and/or personnel with any other entity and may use any facilities, programs, services and/or personnel used in connection with the Hotel System in connection with any business activities of its parent, subsidiaries, divisions or affiliates. G. Inspections/Compliance Assistance. Licensor has the right to inspect the Hotel at any time, with or without notice to you, to determine if the Hotel is in compliance with the standards and rules of operation set forth in the Manual. If the Hotel fails to comply with such standards and rules of operation, Licensor may, at its option and at your cost, require an action plan to correct the deficiencies. You must then take all steps necessary to correct any deficiencies within the times established by Licensor. Licensor's approval of an action plan does not waive any rights it has or may have under this Agreement nor does it relieve you of any obligations under this Agreement. 5. Proprietary Rights. A. Ownership of the Hotel System and Proprietary Marks. You acknowledge and shall not contest, either directly or indirectly, Licensor's unrestricted and exclusive right to license the Hotel System and any element(s) or component(s) thereof, and acknowledge that Licensor has the sole right to grant licenses to use all or any element(s) or component(s) of the Hotel System. You specifically agree and acknowledge that HSA is the owner of all right, title and interest in and to the Proprietary Marks together with the goodwill symbolized thereby and that you shall not contest directly or indirectly the validity or ownership of the marks either during the term of this Agreement or at any time thereafter. All improvements and additions whenever made to or associated with the Hotel System by the parties to this Agreement or anyone else, and all Proprietary Marks, and all goodwill arising from your use of Licensor's marks shall inure to the benefit of and become the property of HSA. Upon expiration or termination of this Agreement, no monetary amount shall be assigned as attributable to any goodwill associated with your use of the Hotel System or any element(s) or component(s) of the Hotel System including the name or marks. B. Trademark Disputes. Licensor and/or HSA shall have the sole right and responsibility to handle disputes with third parties concerning use of all or any part of the Hotel System, and you shall, at your reasonable expense, extend your full cooperation to Licensor and/or HSA in all such matters. All recoveries made as a result of disputes with third parties regarding use of the Hotel System or any part thereof shall be for the account of Licensor and/or HSA. Neither Licensor nor HSA need initiate suit against alleged imitators or infringers and may settle any dispute by grant of a license or otherwise. You shall not initiate any suit or proceeding against alleged imitators or infringers or any other suit or proceeding to enforce or protect the Hotel System. 6 C. Protection of Name and Marks. Both parties shall make every effort consistent with the foregoing to protect and maintain the Proprietary Marks and their distinguishing characteristics. You agree to execute any documents deemed necessary by Licensor, HSA or their respective counsel to obtain protection for Licensor's marks or to maintain their continued validity and enforceability. You agree to use the names and marks associated with the Hotel System only in connection with the operation of a Hawthorn Hotel and in the manner authorized by Licensor and you acknowledge that any unauthorized use thereof shall constitute infringement of Licensor's and HSA's rights. You must notify Licensor immediately, in writing, of any infringement or challenge to your use of Licensor's marks or of any unauthorized use or possible misuse of Licensor's marks or Licensor's proprietary information. 6. Records and Audits. A. Monthly Reports. At least monthly, you shall prepare a statement which shall include all information concerning Gross Rooms Revenue, other revenues generated at the Hotel, room occupancy rates, reservation data and other information required by Licensor that may be useful in connection with marketing and other functions of Licensor, its parent, subsidiaries, divisions or affiliates (the "Data"). The Data shall be the property of Licensor. By the tenth (10th) of each month, you shall submit to Licensor a statement setting forth the Data for the previous month and reflecting the computation of the amounts then due under Paragraph 3.D hereof. The statement shall be in such form and detail as Licensor may reasonably request from time to time, and may be used by Licensor for its reasonable purposes. Licensor shall not willingly or knowingly provide Data on your property as an inducement to develop other hotel brands in your market area. B. Preparation and Maintenance of Records. You shall, in a manner and form satisfactory to Licensor and utilizing accounting and reporting standards as reasonably required by Licensor, prepare on a current basis (and preserve for no less than four (4) years), complete and accurate records concerning Gross Rooms Revenue and all financial, operating, marketing and other aspects of the Hotel, and maintain an accounting system which fully and accurately reflects all financial aspects of the Hotel and its business. Such records shall include but not be limited to books of account, tax returns, governmental reports, register tapes, daily reports, and complete quarterly and annual financial statements (profit and loss statements, balance sheets and cash flow statements). C. Audit. Licensor or its designated agents shall have the right at any time to examine and copy, at its expense, all books, records, and your tax returns related to the Hotel and, at its option, to have an independent audit made. If an inspection or audit should reveal that payments have been understated in any report to Licensor, then you shall immediately pay to Licensor the amount understated upon demand, in addition to interest from the date such amount was due until paid, at one and one half percent (1.5%) per month or the maximum rate permitted by law, whichever is less. In such event, Licensor shall also have the right to require that all your future financial statements related to the Hotel be audited at your expense for each fiscal year by an independent certified public accounting firm selected by you and approved by Licensor. If an inspection discloses an underpayment to Licensor of five percent (5%) or more of the total amount that should have been paid to Licensor during any six (6) month period, you shall, in addition to repayment of such understated amount, with interest, reimburse Licensor for any and all costs and expenses incurred in connection with the inspection or audit (including, without limitation, reasonable accounting and attorneys' fees). The foregoing remedies shall be in addition to any other remedies Licensor may have, including, without limitation the remedies for default. D. Annual Financial Statements. At Licensor's request, you shall submit to Licensor as soon as available but not later than ninety (90) days after the end of your fiscal year, complete financial 7 statements for such year. You shall certify them to be true and correct and to have been prepared in accordance with generally accepted accounting principles consistently applied, and any false certification shall be a breach of this Agreement. Licensor may also request, from time to time, gross operating profits percentages and certain operating statistics (i.e. energy and repairs costs) which you must provide. 7. Indemnity and Insurance. A. Indemnity. It is understood and agreed that nothing in this Agreement authorizes either party to make any contract, agreement, warranty or representation on the other's behalf, or to incur any debt or other obligation in the other's name, and that neither party shall in any event assume liability for, or be deemed liable hereunder as a result of, any such action, or by reason of any act or omission of the other party or any claim or judgement arising therefrom. You shall indemnify and hold Licensor and HSA, their parents, affiliates, subsidiaries, officers, directors, agents, and employees, harmless against any and all claims arising directly or indirectly from, as a result of, or in connection with, your operation of the Hotel, including claims of intentional or negligent conduct by you, and any claims of acts or omissions by Licensor or HSA relating to the operation of the Hotel System (even though Neither HSA nor Licensor is actively involved in the operation or supervision of the Hotels), as well as the costs, including reasonable attorneys' fees, of defending against them. You agree that all of the obligations of Licensor under this Agreement are to you, and no other party is entitled to rely on, enforce, or obtain relief for breach of such obligations either directly or indirectly or by subrogation. Licensor shall not indemnify or hold you harmless against any action or claim by any third party based upon Licensor's exercise of any of its rights in accordance with the terms of this Agreement. B. Insurance. During the License Term, you shall comply with all insurance requirements of any lease or mortgage covering the Hotel, and Licensor's specifications for insurance as to amount and type of coverage as may be reasonably specified by Licensor from time to time in writing, and shall in any event maintain as a minimum the following insurance underwritten by an insurer approved by Licensor: (1) employer's liability and workers' compensation insurance as prescribed by applicable law; and (2) comprehensive general liability insurance (with products, completed operations and independent contractors coverage) and comprehensive automobile liability insurance, all on an occurrence basis naming Licensor and its then current parent, subsidiaries, divisions, affiliates and their successors and assigns as additional insureds and underwritten by an insurer approved by Licensor, with single-limit coverage for personal and bodily injury and property damage of at least Ten Million Dollars ($10,000,000) for each occurrence. In addition, Dram Shop/Liquor Liability insurance shall also be provided for the same named insureds and under the same limits and coverage amounts. In connection with all significant construction at the Hotel during the License Term, you shall cause the general contractor to maintain with an insurer approved by Licensor comprehensive general liability insurance (with products, completed operations and independent contractors coverage) in at least the amount of Ten Million Dollars ($10,000,000) for each occurrence with Licensor and its then current parent, subsidiaries, divisions, affiliates and their successors and assigns named as additional insureds. C. Changes in Insurance. Simultaneously herewith, annually hereafter and each time a change is made in any insurance or insurance carrier, you shall furnish to Licensor certificates of insurance including the term and coverage of the insurance in force, the persons insured, and the fact that the coverage 8 may not be cancelled, altered or permitted to lapse or expire without thirty (30) days' advance written notice to Licensor. 8. Transfer. A. Transfer by Licensor. Licensor shall have the right to transfer or assign all or any part of its rights or obligations in this Agreement to any person or legal entity, and you hereby consent to such transfer. B. Transfer by Licensee. (1) You understand and acknowledge that the rights and duties set forth in this Agreement are personal to you, and that Licensor has entered into this Agreement in reliance on your business skill, financial capacity, and character, and that of your partners or shareholders. Accordingly, neither you nor any immediate or remote successor to any part of your interest in this Agreement, nor any individual, partnership, corporation, or other legal entity which directly or indirectly owns any interest in this Agreement or in you shall sell, sign, transfer, convey, give away, mortgage, or otherwise encumber any direct or indirect interest in this Agreement (including any ownership interest in you), the Hotel, or a substantial portion of the assets (including building and real estate) of the Hotel without the prior written consent of Licensor. Licensor's written consent shall not be required to mortgage the building and real estate on the site of the Hotel premises to a bank or other financial institution, provided that you remain the mortgagor. (2) If the transfer is equal to less than a fifty percent (50%) equity interest in you and does not have the effect of transferring control (as described in Paragraphs (3) and (4) below), the transfer shall not require the prior approval of Licensor, provided that you notify Licensor in writing of such transfer within thirty (30) days following such transfer. (3) If a transfer, alone or together with other previous, simultaneous, or proposed transfers, would have the effect of transferring a controlling interest in this Agreement, you, the Hotel, or greater than fifty percent (50%) of the assets (including building and real estate) of the Hotel, such transfer shall require Licensor's prior approval, and Licensor may, in its sole discretion, require any or all of the following as conditions of its approval, which approval shall not be unreasonably withheld: (a) all of your accrued monetary obligations to Licensor and its subsidiaries and affiliates and all other outstanding obligations related to the Hotel shall have been satisfied and you are not otherwise in default; (b) the transferee, and all shareholders in the transferee, shall demonstrate to Licensor's satisfaction that the transferee and its shareholders or general partners, as appropriate, meet Licensor's then current qualifications being applied to new applicants including, business standards, ability to conduct the Hotel (as may be evidenced by prior related business experience or otherwise), and have adequate financial resources and capital to operate the Hotel; (c) transferee and the shareholders or general partners in the transferee shall execute the standard form license agreement then being offered to new Hotel System licensees and such other ancillary agreements as Licensor may require for the Hotel and the general manager shall complete the initial training program then in effect for new licensees; 9 (d) the Hotel shall be upgraded to conform to the then-current standards and specifications for hotels operating under the Hotel System if the most recent Quality Assurance Score was below four hundred and fifty (450). In any event, all deficiencies noted on the most recent inspection must be remedied by the transferee within ninety (90) days of such transfer. You shall complete any upgrade required under this Paragraph within the time specified by Licensor; (e) You shall pay a transfer fee equal to Two Thousand Five Hundred Dollars ($2,500.00), for a term equal to the balance of the original term of this License. No fee shall be required for transfers to the spouse, issue, parent, or sibling of a partner or shareholder in you, or from one partner or shareholder to another. If the transferee requests approval of a term greater than the remaining term of this License, the then-current standard minimum application fee, prorated according to the period of time requested which exceeds the original term of this License, shall be paid to Licensor; (f) the transferor shall have executed a general release, in a form satisfactory to Licensor, of any and all claims against Licensor and its officers, directors, shareholders, and employees, in their corporate and individual capacities, including, without limitation, claims arising under federal, state, and local laws, rules, and ordinances; (g) the transferee, and all shareholders or general partners in the transferee, shall enter into a written assignment, in a form satisfactory to Licensor, assuming and agreeing to discharge all of your obligations under this Agreement; (h) you shall remain liable for all obligations to Licensor and its subsidiaries and affiliates in connection with the Hotel prior to the effective date of the transfer and shall execute any and all instruments reasonably requested by Licensor to evidence such liability. (4) For the purposes of this Agreement, "control" shall mean the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, corporation or other business entity, whether through the ownership of voting securities, by contract, or otherwise. (5) Any purported assignment or transfer, by operation of law or otherwise, not having the prior written consent of Licensor shall be null and void and shall constitute a material breach of this Agreement, for which Licensor may then terminate without opportunity to cure pursuant to Paragraph 10.C. of this Agreement, and seek injunctive relief as well as monetary damages. C. Transfers of the License or Equity Interest in Licensee Upon Death. Upon your death or mental incompetency or of a person owning all or any interest in you, the executor, administrator, or personal representative of such person shall transfer within three (3) months after such death or mental incompetency his interest to a third party approved by Licensor. Such transfers, including, without limitation, transfers by devise or inheritance, shall be subject to the same conditions as any inter vivos transfer. However, in the case of transfer by devise or inheritance, if the heirs or beneficiaries of any such person are unable to meet the conditions in this Paragraph 8, the personal representative of the deceased shareholder shall have reasonable time to dispose of the deceased's interest in you, which disposition shall be subject to all the terms and conditions for transfers contained in this Agreement. If the interest is not disposed of within nine (9) months, Licensor may terminate this Agreement. D. Registration of a Proposed Transfer of Equity Interests. Securities in you may be offered to the public only with the prior written consent of Licensor, which consent shall not be unreasonably 10 withheld. All materials required by federal or state law for the sale of any interest in you shall be submitted to Licensor for review prior to filing with any government agency; and any materials to be used and any exempt offering shall be submitted to Licensor for review prior to their use. No offering by you shall imply (by use of the Proprietary Marks or otherwise) that Licensor is participating as an underwriter, issuer, or officer of you or Licensor's securities; and Licensor's review of any offering shall be limited solely to the subject of the relationship between you and Licensor. You and other participants in the offering must fully indemnify Licensor in connection with the offering. For each proposed offering, you shall pay to Licensor a non-refundable fee of Five Thousand Dollars ($5,000.00), or such greater amount as is necessary to reimburse Licensor for its reasonable cost and expenses associated with reviewing the proposed offering, including, without limitation, legal and accounting fees. E. Non-Waiver of Claims. Licensor's consent to a transfer of any interest in the license granted herein shall not constitute a waiver of any claims it may have against the transferring party, nor shall it be deemed a waiver of Licensor's right to demand exact compliance with any of the terms of this Agreement by the transferee. F. Licensor's Right of First Refusal. If in the event that any party holding any direct or indirect interest in this License, in you, or in all or substantially all of the assets of the Hotel desires to accept any bonafide offer from a third party to purchase such interest, you shall notify Licensor as provided in Paragraph 13.F. hereof, and shall provide such information and documentation relating to the offer as Licensor may require. Licensor shall have the right and option, provided the third party wishes to remove the Hotel from the Hotel System, exercisable within thirty (30) days after receipt of such written notification, to send written notice to the seller that Licensor intends to purchase the seller's interest on the same terms and conditions offered by the third party. If Licensor elects to purchase the seller's interest, closing on such purchase shall occur within ninety (90) days from the date of notice to the seller of the election to purchase by Franchisor. If Licensor elects not to purchase the seller's interest, any material change thereafter in the terms of the offer from a third party shall constitute a new offer subject to the same rights of first refusal by Licensor as in the case of the third party's initial offer (minor changes to the offer shall not constitute a new offer and shall be subject to the notice period of the initial offer). Failure of Licensor to exercise the option afforded by this Paragraph 8.F. shall not constitute a waiver of any other provision of this Agreement, including all of the requirements of this Paragraph 8.F., with respect to a proposed transfer. In the event the consideration, terms, and/or conditions offered by a third party are such that Licensor may not reasonably be required to furnish the same consideration, terms, and/or conditions, then Licensor may purchase the interest proposed to be sold for the reasonable equivalent in cash. If the parties cannot agree within thirty (30) days on the reasonable equivalent in cash of the consideration, terms, and/or conditions offered by the third party, an independent appraiser shall be designated by Licensor at Licensor's expense, and the appraiser's determination shall be binding. G. No Right of First Refusal. In the event that you receive an offer from a third party to purchase the Hotel and the third party wishes to keep the Hotel in the Hotel System, Licensor shall have no right of first refusal provided the third party meets the qualifications set forth in Paragraph 8. 9. Condemnation and Casualty. A. Condemnation. You shall, at the earliest possible time, give Licensor full notice of any proposed taking of the Hotel by eminent domain. In the event the Hotel is taken by eminent domain, Licensor shall give due and prompt consideration, without any obligation, to transferring this Agreement to a nearby location selected by you and approved by Licensor as promptly as reasonably possible, and in any event within four (4) months of the taking. If the new location is approved by Licensor and the transfer 11 authorized by Licensor and if you open a new hotel at the new location in accordance with Licensor's specifications within two (2) years of the closing of the Hotel, the new hotel shall thenceforth be deemed to be the Hotel licensed under this Agreement. If a condemnation takes place and a new hotel does not, for whatever reason, become the Hotel under this Agreement in strict accordance with this Paragraph (or if it is reasonably evident to Licensor that such shall be the case), this Agreement will terminate forthwith upon notice thereof by Licensor to you, without the payment of liquidated damages hereunder. B. Casualty. If the Hotel is damaged by fire or other casualty, you shall expeditiously repair the damage. If the damage or repair requires closing the Hotel, you shall immediately notify Licensor, shall repair or rebuild the Hotel in accordance with Licensor's standards, shall commence reconstruction within four (4) months after closing, and shall reopen the Hotel for continuous business operations as soon as practicable (but in any event within twenty four (24) months after closing of the Hotel), giving Licensor ample advance notice of the date of reopening. If the Hotel is not reopened in accordance with this Paragraph 9.B., this Agreement shall forthwith terminate upon notice thereof by Licensor to you, with the payment of liquidated damages calculated in the manner set forth in Paragraph 10.E. C. No Extensions of Term. Nothing in this Paragraph 9 shall extend the License Term but you shall not be required to make any payments pursuant to Paragraphs 3.D. (1), (2) or (3) for periods during which the Hotel is closed by reason of condemnation or casualty. 10. Termination. A. Expiration of Term. (1) If this Agreement is for a new Development, rather than a Conversion from another type of existing lodging facility, then the term of this Agreement shall expire without notice effective 20 years from the authorized opening date, subject to earlier termination as set forth herein. The parties shall initial the agreement here is the Agreement is for a new Development: [if a New Development: initial here] ______. (2) If this Agreement is for a Hotel to be converted to a Hawthorn Suites Hotel from another type of existing lodging facility, then the term of this Agreement shall expire without notice effective 10 years from the authorized opening date, subject to earlier termination as set forth herein. The parties shall initial the agreement here is the Agreement is for a Conversion: [if a Conversion: initial here] ________. (3) Liquidated Damages. The parties recognize the difficulty of ascertaining damages to Licensor resulting from premature termination of this Agreement, and have provided for liquidated damages in Paragraph 10.E. below, which liquidated damages represent the parties' best estimate as to the damages arising from the circumstances in which they are provided. B. Default with Opportunity to Cure. (1) Except as provided in Paragraphs 10.C. hereof, you shall have thirty (30) days (unless otherwise specified herein or in the notice by Licensor) from receipt of written notice of a default within which to remedy such default. If any such default is not cured within that time, or such longer period as applicable law may require (or such longer period as may be reasonably required by you to cure any non-monetary default if you immediately commence, diligently and in good faith pursue, and cure such default), this Agreement shall terminate without further notice to you effective immediately upon the expiration of 12 the thirty (30) day period, expiration of any extended period as described above, or such longer period as applicable law may require. Alternatively, Licensor may, at its option, suspend your access to the reservation system until such default has been cured to Licensor's satisfaction. You shall be in default hereunder for any failure to comply with any of the requirements imposed by this Agreement, as it may from time to time reasonably be supplemented by the Manual, or to carry out the terms of this Agreement in good faith. (2) If during the twelve (12) months preceding a notice of default in (1) above you shall have engaged in a violation of this Agreement for which a notice of default was given and such default was remedied, the period given to remedy defaults thereafter shall, if and to the extent permitted by law, be ten (10) days instead of thirty (30). (3) In any judicial proceeding in which the validity of termination is at issue, Licensor shall not be limited to the reasons set forth in any notice sent under this Paragraph. (4) Licensor's notice of termination or suspension of services as described in Section 10(B)(1) shall not relieve you of your obligations hereunder. C. Immediate Termination by Licensor. This Agreement shall immediately terminate without notice to you if: (1) (a) you, or any Guarantor of your obligations hereunder (a "Guarantor"), shall generally not pay your debts as they become due or shall admit in writing an inability to pay your debts, or shall make a general assignment for the benefit of creditors; or (b) you, or any Guarantor, shall commence or consent to any case, proceeding or other action seeking reorganization, arrangement, adjustment, liquidation, dissolution or composition of you or your debts under any law relating to bankruptcy, insolvency, reorganization or relief of debtors, or seeking appointment of a receiver, trustee, custodian or other similar official for it or for all or any substantial part of its property; or (c) you, or any Guarantor, shall take any corporate or other action to authorize any of the actions set forth above in Paragraphs (a) or (b); or (d) any case, proceeding or other action against you or any such guarantor shall be commenced seeking to have an order for relief entered against it as debtor, or seeking reorganization, arrangement, adjustment, liquidation, dissolution or composition of it or its debts under any law relating to bankruptcy, insolvency, reorganization or relief of debtors, or seeking appointment of a receiver, trustee, custodian or other similar official for it or for all or any substantial part of its property, and such case, proceeding or other action (i) results in the entry of an order for relief against it which is not fully stayed within seven (7) business days after the entry thereof or (ii) remains undismissed for a period of forty-five (45) days; or (e) an attachment remaining on all or a substantial part of the Hotel or of your or any Guarantor's assets for thirty (30) days; or (f) you or any Guarantor fails, within sixty (60) days of the entry of a final judgment against you in any amount exceeding Fifty Thousand Dollars ($50,000), to discharge, vacate or reverse the judgment, or to stay execution of it, or if appealed, to discharge the judgment within thirty (30) days after a final adverse decision in the appeal; or 13 (2) you cease to operate the Hotel at the Location or under the Proprietary Marks, or loses possession or the right to possession of all or a significant part of the Hotel, except as otherwise provided in Paragraph 9 hereof; or (3) you contest in any court or proceeding Licensor's ownership of the Hotel System or any part of it, or the validity of any of the Proprietary Marks; or (4) a breach of Paragraph 8 hereof occurs; or (5) you fail to continue to identify the Hotel to the public as a Hawthorn Hotel; or (6) any action is taken toward dissolving or liquidating you or any Guarantor, if it is a corporation or partnership, except for death of a partner; or (7) you or any of your principals is, or is discovered to have been, convicted of a felony (or any other offense if it is likely to adversely reflect upon or affect the Hotel, the Hotel System, the Proprietary Marks and the goodwill associated therewith, the Licensor, the Licensor's parent or your affiliates or subsidiaries in any way); or (8) you knowingly maintain false books and records of account or knowingly submits false reports or information to Licensor; or (9) if you intentionally disclose or divulge the contents of the Manual or other trade secrets or confidential information provided to you by Licensor to any unauthorized person or fail to exercise reasonable care to prevent such disclosure; or (10) if you intentionally or negligently make any material false statements or omissions to Licensor in connection with your Application. D. De-identification of Hotel Upon Termination. You shall take whatever action is necessary to assure that no use is made of any part of the Hotel system at or in connection with the Hotel or otherwise after the license term ends. This shall involve, among other things, returning to Licensor the Manual and all other materials proprietary to Licensor, removal of all distinctive signs, changing the telephone listing and removal of all items bearing the Hawthorn Hotel logo, name, trademarks and/or service marks. Further, until all modifications required by this Paragraph 10.D. are completed, you shall (i) maintain a conspicuous sign at the registration desk in a form specified by Licensor stating that the Hotel is no longer associated with the Hotel System, and (ii) advise all customers or prospective customers telephoning the Hotel that it is no longer associated with the Hotel System. Anything not done by you within thirty (30) days after the license term ends, may be done at your expense by Licensor or its agents, who may enter upon the premises of the Hotel for that purpose. E. Payment of Liquidated Damages. If this Agreement terminates pursuant to Paragraphs 3.B., 9.B., 10.C. or 10.D. above at any time after the first twenty four (24) months of operation, you shall promptly pay Licensor (in addition to any amounts then due to Licensor, and only as liquidated damages for the premature termination of this Agreement, and not as a penalty or as damages for breaching this Agreement or in lieu of any other payment) a lump sum based on the average occupancy rate for the twelve (12) months preceding the termination as follows: 1. if the occupancy rate was less than fifty percent (50%) then you shall pay no liquidated damages; 2. if the occupancy rate was fifty percent (50%) to fifty nine and nine tenths percent (59.9%) then you shall pay an amount equal to twelve (12) months of fees required under Paragraph 3.D.1; 3. if the occupancy rate was sixty percent (60%) to sixty nine and nine tenths percent (69.9%) then you shall pay an amount equal to twenty four (24) months of fees required under Paragraph 3.D.1; 14 4. if the occupancy rate was seventy percent (70%) or greater then you shall pay an amount equal to thirty six (36) months of fees required under Paragraph 3.D.1; 5. if this Agreement terminates at any time during the first twenty four (24) months of operation, you shall promptly pay to Licensor liquidated damages equal to thirty six (36) times the average monthly payment under Paragraph 3.D.1. 11. Renewal. Licensee may apply to renew this Agreement for a term of ten years. Licensor will require submission of a completed application on Licensor's then current form, submission of an application fee in the amount equal to the then current fee charged to new licensees, and Licensor's approval of the application. Licensor's approval of the application will be granted or denied in Licensor's sole discretion, and may be conditionally granted based upon satisfaction of certain conditions such as Licensee's renovation and/or upgrading of the Hotel to then-applicable Hotel System standards. 12. Relationship of Parties. A. No Agency Relationship. You are an independent contractor. Neither party is the legal representative or agent of, or has the power to obligate (or has the right to direct or supervise the daily affairs of) the other for any purpose whatsoever. Licensor and you expressly acknowledge that the relationship intended by them is a business relationship based entirely on, and defined by, the express provisions of this Agreement and that no partnership, joint venture, agency, fiduciary or employment relationship is intended or created by reason of this Agreement. B. Licensee's Notices to Public Concerning Independent Status. You shall take such steps as are necessary and such steps as Licensor may from time to time reasonably request to minimize the chance of a claim being made against Licensor for anything that occurs at the Hotel, or for acts, omissions or obligations of you or anyone associated or affiliated with you or the Hotel. Such steps may, for example, include giving notice in private rooms, public rooms and advertisements, on business forms and stationery, and any other materials, making clear to the public that Licensor is not the owner or operator of the Hotel and is not accountable for what happens at the Hotel. Unless required by law, you shall not use the word "Hawthorn" or any similar words in your corporate, partnership, or trade name, nor authorize or permit such use by anyone else. You shall not use the word "Hawthorn" or any other name or mark associated with the Hotel System to incur any obligation or indebtedness on behalf of Licensor. C. Third Party Beneficiary. You hereby acknowledge that HSA is a third party beneficiary under this Agreement, with the independent right to enforce your obligations hereunder and to obtain such remedies for any failure on your part to perform your obligations to the full extent permitted by this Agreement and in the place of the Licensor. 13. Miscellaneous. A. Severability and Interpretation. The remedies provided in this Agreement are not exclusive. In the event any provision of this Agreement is held to be unenforceable, void or voidable as being contrary to the law or public policy of the United States or any other jurisdiction entitled to exercise authority hereunder, all remaining provisions shall nevertheless continue in full force and effect unless deletion of the provision(s) deemed unenforceable, void or voidable impairs the consideration for this Agreement in a manner which frustrates the purpose of the parties or makes performance commercially impracticable. In the event any provision of this Agreement requires interpretation, such interpretation shall be based on the reasonable intention of the parties in the context of this transaction without interpreting any provision in favor of or against any party hereto by reason of the drafting of the party or its position relative 15 to the other party. Any covenant, term or provision of this Agreement which, in order to effect the intent of the parties, must survive the termination of this Agreement, shall survive any such termination. B. Binding Effect. This Agreement shall become valid when executed and accepted by Licensor at Atlanta, Georgia. It shall be deemed made and entered into in the state of Georgia and shall be governed and construed under and in accordance with the laws of the state of Georgia. In entering into this Agreement, you acknowledge that it has been sought, voluntarily accepted and become associated with Licensor who is headquartered in Atlanta, Georgia, and that this Agreement contemplates and shall result in business relationships with Licensor's headquarter's personnel. The choice of law designation permits, but does not require that all suits concerning this Agreement be filed in the state of Georgia. C. Exclusive Benefit. This Agreement is exclusively for the benefit of the parties hereto and it shall not give rise to liability to a third party, except as otherwise specifically set forth herein. No agreement between Licensor and anyone else is for the benefit of you. D. Entire Agreement. This is the entire Agreement (and supersedes all previous agreements including without limitation, any commitment agreement between the parties concerning the Hotel) between the parties relating to the Hotel. Neither Licensor nor any other person on Licensor's behalf has made any representation to you concerning this Agreement or relating to the Hotel System, which representation is not fully set forth herein or in Licensor's "Offering Circular for Prospective Franchisees." No change in this Agreement shall be valid unless in writing signed by both parties. No failure to require strict performance or to exercise any right or remedy hereunder shall preclude requiring strict performance or exercising any right or remedy in the future. E. Licensor's Withholding of Consent. Licensor's consent, wherever required, may be withheld if any default by you exists under this Agreement. Approvals and consents by Licensor shall not be effective unless evidenced by a writing duly executed on behalf of Licensor. F. Notices. Any and all notices required or permitted under this Agreement shall be in writing and shall be delivered by any means which shall provide evidence of the date received, to the respective parties at the following addresses unless and until a different address has been designated by written notice to the other party: Notices to LICENSOR: Hawthorn Suites Franchising, Inc. 13 Corporate Square, Suite 250 Atlanta, Georgia 30329 (404) 321-4045 Notices to you: {{ENTITYNAMECAPS}} {{PCADDRESS1}} {{PCADDRESS2}} Atten: {{PCNAME}} Any notice shall be deemed to have been given at the date and time it is evidenced to have been received. G. Descriptive Headings. The descriptive headings in this Agreement are for convenience only and shall not control or affect the meaning or construction of any provision in this Agreement. 16 H. Management of the Hotel. You must at all times retain and exercise direct management control over the Hotel's business. You shall not enter into any lease, management agreement or other similar arrangement for the operation of the Hotel or any part thereof (including without limitation, food and/or beverage service facilities), with any independent entity without the prior consent of Licensor. 17 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first stated above. LICENSEE: {{ENTITYNAMECAPS}} By: {{SIGNEENAME}} {{SIGNEETITLE}} Attest: Secretary LICENSOR: HAWTHORN SUITES FRANCHISING, INC. By: Jon Leven Vice President Franchise Sales and Development Attest: Asst. Secretary 18 GUARANTY As an inducement to Hawthorn Suites Franchising, Inc. ("Licensor") to execute the above License Agreement, the undersigned, jointly and severally, hereby unconditionally warrant to Licensor and its successors and assigns that all of Licensee's representations in the License Agreement and the application submitted by Licensee to obtain the License Agreement are true and guarantee that all of Licensee's obligations under the above License Agreement, including any amendments thereto whenever made (the "Agreement"), shall be punctually paid and performed. Upon default by Licensee or notice from Licensor, the undersigned shall immediately make each payment and perform each obligation required of Licensee under the Agreement. Without affecting the obligations of the undersigned under this Guaranty, Licensor may without notice to the undersigned extend, modify or release any indebtedness or obligation of Licensee, or settle, adjust or compromise any claims against Licensee. The undersigned waive notice of amendment of the Agreement and notice of demand for payment or performance by Licensee. Upon the death of an individual guarantor, the estate of such guarantor will be bound by this Guaranty but only for defaults and obligations hereunder existing at the time of death, and the obligations of the other guarantors shall continue in full force and effect. The Guaranty constitutes a guaranty of payment and performance and not of collection, and each of the guarantors specifically waives any obligation of Licensor to proceed against Licensee on any money or property held by Licensee or by any other person or entity as collateral security, by way of set off or otherwise. The undersigned further agree that this Guaranty shall continue to be effective or be reinstated as the case may be, if at any time payment or any of the guaranteed obligations is rescinded or must otherwise be restored or returned by Licensor upon the insolvency, bankruptcy or reorganization of Licensee or any of the undersigned, all as though such payment has not been made. IN WITNESS WHEREOF, each of the undersigned has signed this Guaranty as of the date of the above Agreement. Witnesses: Guarantors: {{GUARANTOR1}}, Legal Signature {{GUARANTOR2}}, Legal Signature 19 ATTACHMENT A Facilities (Paragraph 1): Site-Area and general description: A Hawthorn Suites hotel located at {{HOTELADDRESS1}}, {{HOTELADDRESS2}} Number of approved Suites: {{ROOMS}} Ownership of Licensee (Paragraph 8): {{ENTITYNAMECAPS}} 100% 20 ATTACHMENT B TERRITORY The Territory is defined as that area bordered by: 21 ATTACHMENT C You acknowledge that every detail of the Hotel System is important to Licensor and other licensees operating under the Hotel System in order to develop and maintain the standards and public image of the Hotel System. You agree to comply with the details of the Hotel System as specified by Licensor in the Manual, or otherwise in writing, and not to deviate therefrom. The dates below set forth the development schedule for the Hotel, whether new development or upgrading an existing facility. 1) You shall submit preliminary plans, including site layout and outline specifications adapting Licensor's then-prototypical plans on or before a date 3 months from the date of this License Agreement. 2) You shall submit complete working drawings and specifications for the Hotel and Hotel premises, including its proposed equipment, furnishings, facilities and signs with such detail and containing such information as Licensor may request on or before a date 6 months from the date of this License Agreement. The Plans as submitted to Licensor shall conform to then prevailing Hotel System standards, including the construction standards set forth in the Manual. Construction shall not begin unless and until Licensor has approved the Plans. Thereafter, no change shall be made to the Plans without the advance consent of Licensor. Notwithstanding the foregoing, after the Plans have been approved, if in the course of actual construction any change in the Plans occurs, you shall notify Licensor promptly. Licensor shall determine whether construction has been completed in accordance with the Plans. 3) Construction of the Hotel shall commence on or before a date 9 months from the date of this License Agreement. Commencement of construction shall mean excavation and poured footings with a finished building slab. Once the construction has commenced, it shall continue uninterrupted (except for interruption by reason of events constituting force majeure) until construction is completed. You shall, within five (5) days of the commencement of construction, provide written notice to Licensor that construction has begun. As used in this License, "force majeure" means an act of God, war, civil disturbance, government action, fire, flood, accident, hurricane, earthquake or other calamity, strike or other labor dispute, or other action beyond the control of you. 4) The Hotel shall be furnished, equipped and shall otherwise be made ready to open for business in accordance with the License not later than a date 15 months from the date of this License Agreement ("Completion Date"). 5) If the Hotel shall be a Conversion from an existing lodging facility to a Hawthorn Suites hotel, following is a required timetable for certain required changes/upgrades. All Work shall be completed no later than 9 months from the date of this License. Requirements By (date): 22 You shall, within ten (10) days of the Completion Date, submit a written request to Licensor for Licensor to conduct a final inspection. Upon receipt of such request, Licensor shall promptly conduct such final inspection. You shall open for business within ten (10) days after receipt of Licensor's authorization to do so. The date upon which you receive authorization to open for business shall be the "Opening Date". You shall not open for business until Licensor provides final approval and authorization in writing. The Hotel shall not be opened for business as a Hawthorn Hotel unless and until: (i) Licensor has approved and accepted, in advance, in writing the construction of the Hotel in accordance with the Plans; the installation of all items of equipment, furniture, signs, computer terminals and related supplies; and the hiring and training of staff necessary to operate the Hotel in accordance with Licensor's requirements; (ii) no accounts are past due to Licensor, its parent, divisions, subsidiaries or affiliated companies by you; (iii) you are in full compliance with all of the terms of this License Notwithstanding anything else herein to the contrary, Licensor may authorize License to open and operate the Hotel even though you have not fully complied with the terms of this License, provided that you agree to fulfill all remaining terms of this License on or before the dates designated by Licensor. 23 EX-10.3 4 EXHIBIT 10.3 9/5/95 7:00 pm JOINT VENTURE AGREEMENT between MICROTEL FRANCHISE AND DEVELOPMENT CORPORATION (as The Company) and U.S. FRANCHISE SYSTEMS, INC. (as Newco) RELATING TO THE WORLD-WIDE FRANCHISING OF THE MICROTEL SYSTEM TABLE OF CONTENTS PAGE RECITALS 1. TRANSFER OF ASSETS ................................................. 2 2. TERM ............................................................... 4 3. POST CLOSING OBLIGATIONS OF NEWCO .................................. 5 4. THE COMPANY'S RETAINED PROPERTIES .................................. 5 5. CONSULTING BY THE COMPANY .......................................... 8 6. FEES ............................................................... 9 7. CLOSING ............................................................ 10 8. RIGHTS AND OBLIGATIONS PENDING THE CLOSING ......................... 14 9. DEFAULT PENDING CLOSING ............................................ 16 10. REPRESENTATIONS AND WARRANTIES ..................................... 17 11. CONFIDENTIAL INFORMATION ........................................... 24 12. ACCOUNTING AND RECORDS ............................................. 25 13. INSURANCE .......................................................... 25 14. TRANSFERABILITY OF INTEREST ........................................ 26 15. DEFAULT BY NEWCO AFTER CLOSING ..................................... 27 16. OBLIGATIONS DUE TO POST CLOSING DEFAULT BY NEWCO ................... 28 17. DEFAULT BY THE COMPANY AFTER CLOSING ............................... 29 18. OBLIGATIONS DUE TO POST CLOSING DEFAULT BY THE COMPANY ............. 30 19. POST CLOSING COVENANTS OF THE COMPANY .............................. 30 20. NOTICES ............................................................ 31 21. SURVIVAL OF REPRESENTATIONS AND WARRANTIES ......................... 32 22. INDEMNIFICATION .................................................... 32 i 23. RIGHT TO SET-OFF ................................................... 35 24. SEVERABILITY AND CONSTRUCTION ...................................... 35 25. APPLICABLE LAW ..................................................... 36 26. ENTIRE AGREEMENT ................................................... 36 27. MISCELLANEOUS BUSINESS TERMS ....................................... 36 28. MISCELLANEOUS ...................................................... 37 ii DEFINED TERMS "Company" ...................................................... 1 "Newco" ........................................................ 1 "Suites" ....................................................... 1 "Suites Hotel" ................................................. 1 "Business", the "System" ....................................... 1 "Microtel System" .............................................. 1 "Proprietary Marks" ............................................ 1 "Manual" ....................................................... 1 "Assets" ....................................................... 2 "Existing Franchise Agreements" ................................ 2 "Existing Franchisees" ......................................... 2 "Existing Franchises" .......................................... 2 "New Microtel Franchises" ...................................... 3 "New Microtel Franchisees" ..................................... 3 "Microtel Hotels" .............................................. 3 "New Franchise Agreement" ...................................... 3 "Current Agreement Form" ....................................... 3 "Development Schedule" ......................................... 3 "Scheduled Microtels" .......................................... 3 "under development" ............................................ 3 "Commencement Date" ............................................ 3 "Cure Payment" ................................................. 4 "Retained Properties" .......................................... 5 "Franchise Royalties" .......................................... 6 "Additional Hotel Franchises" .................................. 6 "Additional Suite Hotel Franchises" ............................ 6 "Supplemental Hotel Franchises" ................................ 6 "Substitute Hotel Franchise" ................................... 7 "Supplemental Suites Franchises" ............................... 7 "Impact Issues" ................................................ 8 "Encroachment Issues" .......................................... 8 "Trademark Royalty" ............................................ 9 "Operating Properties" ......................................... 9 "Revenues Subject to Royalties" ................................ 9 "Closing" ...................................................... 10 "EMILI Agreement" .............................................. 11 "UFOC" ......................................................... 17 "FTC" .......................................................... 17 "Company's Employees" .......................................... 22 "knowledge" or "awareness" .................................... 24 "control" ...................................................... 26 "Reversion of Microtel Rights" ................................. 29 "Indemnified Party" ............................................ 34 iii "Asserted Liability" ........................................... 34 "Claims Notice" ................................................ 34 "Indemnifying Party" ........................................... 34 "Contest Notice" ............................................... 34 "Loss" ......................................................... 35 "Expiration Time and Date" ..................................... 37 iv STATE OF GEORGIA COUNTY OF FULTON JOINT VENTURE AGREEMENT THIS AGREEMENT is made and entered into as of September 7, 1995, by and between MICROTEL FRANCHISE AND DEVELOPMENT CORPORATION, a New York corporation, with its principal place of business at One Airport Way, Suite 200, Rochester International Airport, Rochester, New York, 14624, U.S.A. (the "Company"); and U.S. FRANCHISE SYSTEMS, INC., a Delaware corporation, with its principal place of business at 1800 Peachtree Street, Suite 615, Atlanta, Georgia 30309 ("Newco"). WITNESSETH: WHEREAS, the Company, as a result of the expenditure of time, skill, effort, and money has developed a distinctive concept, system and business relating to the establishment, operation and franchising of super budget or hard budget hotels (including without limitation, an all-suites hotel product, hereinafter referred to as "Suites" or "Suites Hotel") which operate under the name "Microtel" (hereinafter referred to as the "Business", the "System" or the "Microtel System"), as is more particularly described in Exhibit "A" attached hereto; WHEREAS, the components of the System and Business include, without limitation: A. Any and all trade names, trademarks, service marks or other types or items of intellectual property used in the operation of or developed in connection with the Business, including, without limitation, "MICROTEL" and the other service marks listed on Exhibit "A-1" attached hereto (hereinafter "Proprietary Marks"); B. All of the prototypical architectural plans, designs, and layouts used in the operation of or developed in connection with the Business, including, without limitation, all site plans, floor plans, roof plans, plumbing plans, lobby plans, electrical plans, landscape plans and any copyrights in connection therewith; C. All reservation referral systems used in the operation of or developed in connection with the Business; D. All directories of Microtel hotels; E. All management and personnel training programs and materials used in the operation of or developed in connection with the Business; F. All management and operational procedures and techniques used in the operation of or developed in connection with the Business including without limitation as prescribed in confidential manuals (hereinafter the "Manual"); G. All standards and specifications for construction, equipment, and furnishings used in the operation of or developed in connection with the Business, including without limitation as described in the Manual; H. All advertising, marketing, and promotional programs, layouts and materials used in the operation of or developed in connection with the Business; I. Any and all related intellectual property which may be necessary for full and complete operation of the System or Business; J. All rights to develop any and all hotel products based upon or derived in whole or in part from the Microtel System (whether or not utilizing the name "Microtel"), including without limitation, Suites Hotels. K. Any and all business records used by the Company or necessary to operate the Business; and L. Any and all other assets related to an necessary for the Company's operation of the System (all of the foregoing, including without limitation, the items set forth on Exhibit "A", being sometimes hereinafter collectively referred to as the "Assets"). WHEREAS, the Company has previously entered into or has committed to enter into franchise agreements (the "Existing Franchise Agreements"), with various parties (some of which may be affiliates of the Company) ("Existing Franchisees") relating to a total of twenty-seven (27) Microtel properties, of which twenty-one (21) are currently open and under operation, three (3) are currently under construction, and three (3) are under development (the "Existing Franchises"); WHEREAS, the Company desires to transfer all rights and interest in and to the System and the Assets to a party who will utilize its best efforts to provide the resources necessary to exploit the System on a world-wide basis; WHEREAS, Newco has proposed to raise capital, establish an organization consisting of key executive and management personnel, and enter into an agreement with the Company, to the end that Newco shall exclusively undertake the world-wide sale and maintenance of franchises under the System; and WHEREAS, Newco understands the importance of and fully intends to continue the sales and maintenance of franchises under the Microtel System; NOW, THEREFORE, the parties, in consideration of the undertakings and commitments of each party to the other party set forth herein, hereby agree as follows: 1. TRANSFER OF ASSETS. 1.1 Subject to terms, covenants and conditions of this Agreement, Newco agrees to undertake the world-wide franchising of properties using the System based upon the Microtel concept. It is agreed that Newco shall be the sole entity with the authority, right and power to act as franchisor for the System. The respective rights and obligations of the parties hereto shall be as established in this Agreement, which shall survive and shall govern the ongoing rights of the parties inter se. 1.2 To permit Newco to fulfill its obligations hereunder, the Company shall transfer to Newco at Closing (as defined herein) any and all right, title and interest in and to: (i) all of the Assets; and (ii) the Existing Franchise Agreements. 1.3 At Closing, Newco shall assume the obligations of the Company as franchisor under the Existing Franchise Agreements. Except as specifically set forth herein, Newco shall not assume any other liability or obligation of the Company whatsoever. 2 1.4 To further enable Newco to fully exploit the sale of franchises under the System, and to avoid confusion, the Company shall, no later than one year after the Closing Date, change its corporate name to a name which does not contain the words "Microtel," or "U.S. Franchise Systems," or any words confusingly similar, and will require any and all of its affiliated companies, subsidiaries, or other related entities under common control or management to similarly change their legal names, or to execute a name license agreement acceptable to Newco in is sole discretion, and will use its best efforts to have any other entity not under control of the Company to take similar steps. Following Closing, Microtel agrees that Microtel will operate its business under the name "Hudson Hotels" or some other assumed name which does not contain the words "Microtel" or "U.S. Franchise Systems" or any words confusingly similar. 1.5 The Company further shall transfer, assign and convey to Newco any and all of its rights to the Suites Hotel concept and all future franchise rights thereto. 1.6 Without limitation Newco shall have the right to and will undertake the following as determined by Newco in its sole discretion: (i) to undertake on an exclusive world-wide basis, the offering and sale of franchises or licenses under the Microtel System utilizing the Proprietary Marks ("New Microtel Franchises") to individuals or entities ("New Microtel Franchisees"), which may or may not be affiliated with Newco and which may include Newco, (ii) to establish and operate Microtel hotels and Microtel Suites using the Microtel System and the Proprietary Marks ("Microtel Hotels") throughout the world; (iii) to fulfill the obligations of franchisor under all New Microtel Franchises which may be sold by Newco; and (iv) to fulfill the obligation of franchisor under the Existing Franchises. 1.6.1 The term "New Microtel Franchises" shall mean and shall include: (i) any franchise issued by Newco using any of the Proprietary Marks; and (ii) any franchise issued by Newco in the Hard Budget or Super Budget category, whether or not using the Proprietary Marks, other than franchises issued pursuant to registered trademarks or other proprietary marks acquired by Newco from another entity. For purposes hereof, the terms "Hard Budget" or "Super Budget" shall mean an economy based hotel or motel facility with minimal amenities, intended to be, or compete directly with, the lowest average daily room rate in each target market. 1.7 Newco shall have all right, title and interest in and to the Assets, the Business and the System. Accordingly, Newco shall have the right in its sole discretion to use the Assets and the System, including, without limitation, operating Microtel Hotels, changing, modifying or improving the System, approving hotel sites, determining, modifying or amending any and all terms and conditions of agreements with franchisees, including Existing Franchisees (to the extent permitted pursuant to the Existing Franchise Agreements), determining any and all fees to be paid by franchisees, and accepting New Microtel Franchisees. 1.8 Each new Microtel Hotel shall be established and operated pursuant to a standard form of franchise agreement to be developed by Newco and revised or amended from time to time (the "New Franchise Agreement") and entered into between Newco and such New Franchisee. Without limitation, Newco shall have the right to establish the various fees and terms and conditions under each New Franchise Agreement. The current form of standard franchise agreement utilized by the Company throughout the United States is attached hereto as Exhibit "B" (the "Current Agreement Form"). 1.9 Newco and the Company hereby agree on a schedule for the future development of Microtel Hotels or Suites by Newco or through its New Microtel Franchisees (the "Development Schedule"). The Development Schedule is attached as Exhibit "C" to this Agreement and requires Newco, subject to the 3 provisions of Section 1.10 below, to execute New Franchise Agreements for, and have open or under development, the number of Microtel Hotels by the date set forth on the Development Schedule ("Scheduled Microtels"). For purposes of this Agreement, the term "under development" shall mean that: (i) a site for the Microtel Hotel has been acquired by purchase or otherwise by the New Franchisee; (ii) the New Franchisee has executed a New Franchise Agreement; and (iii) the New Franchisee has commenced construction of the hotel by breaking ground. For purposes of this Section 1.9, the term New Franchisee may include Newco or an affiliate of Newco. For the purposes of this Agreement, "Commencement Date" shall mean the earlier of: (i) the date on which Newco shall be able to offer franchises to prospective franchisees in all fifty (50) states within the United States of America, or (ii) ninety (90) days following Closing. Newco shall comply in all material respects with the Development Schedule. 1.10 The Company and Newco agree that the failure by Newco to satisfy the Development Schedule for two consecutive periods, excluding delays caused by events beyond Newco's control, including, without limitation, strikes, civil, or political unrest, labor and/or material shortages, acts of God, and war, shall constitute a default under this Agreement. Notwithstanding the language of Section 1.9 and Section 15 hereof, if, at the date which is the end of such second consecutive period Newco shall have open, or under development, in the aggregate, at least seventy-five percent (75%) of the Scheduled Microtels required at the date which is the end of any such second consecutive period, Newco may cure such default and be deemed to have opened, or have under development, the number of Scheduled Microtels then required at the end of such second consecutive period (for purposes of determining compliance with the Development Schedule at the end of such second consecutive period and in all subsequent periods during the term of this Agreement) by paying to the Company the amount of One Million Dollars ($1,000,000) (such payment being hereinafter referred to as the "Cure Payment"), within thirty (30) days of written notice by the Company to Newco of such default. By the way of example and not limitation, if at the end of Period Number 3 (three years after Commencement Date) if Newco shall have open or under development 80 Microtel Hotels and shall pay the Cure Payment, Newco will be deemed to have open or under development 100 Microtel Hotels. Therefore, in order to meet the subsequent Development Schedule, Newco would have to open or have under development during Periods 4 and 5 the number of Microtel Hotels required pursuant to the Development Schedule assuming the actual number of Microtel Hotels open or under development at the end of Period Number 3 was 100 (instead of 80). Further, under this example, Newco could not be in default pursuant to Section 1.9 (subject to cure) for the purposes of this Agreement before the end of Period Number 5, if at all. Further, under this example, assuming Newco has paid the cure payment at the end of Period Number 3, and if (i) during Periods 4 and 5, Newco opens or has under development at least eighty-eight (88) additional Microtel Hotels; and (ii) Newco shall pay an additional cure payment at the end of Period 5, Newco shall be deemed to have satisfied forever the Development Schedule. 1.11 Once Newco has under Development within the term of the Development Schedule at any time a cumulative number of Microtel Hotels equal to the number of Microtel Hotels required by the Development Schedule, then Newco will be deemed to have complied in full with the requirement of the Development Schedule and no further obligations or conditions for sale or placement of franchises shall apply. 1.12 Except for payment of the royalties and other fees provided for herein, the Warrants, and other specific obligations of the parties hereto, neither party shall have any rights or interest in the assets or the business of the other. No joint venture or partnership shall be created hereby, and neither party shall have any authority to speak for or bind the assets or property of the other. 4 2. TERM. This Agreement shall commence on the date of execution hereof. The term of this Agreement shall continue unless terminated as provided herein. 3. POST CLOSING OBLIGATIONS OF NEWCO. Following Closing: 3.1 Newco will use its best efforts to register or take other appropriate action as soon as practicable after Closing to be able to offer franchises of Microtel Hotels in all fifty (50) states within the United States of America. Newco shall register as a franchisor in all jurisdictions, which now require or from time to time during the term hereof may require such registration, in which Newco shall be actively pursuing the sale of franchises and shall otherwise conduct its Business and deal with Franchisees and prospective franchisees so as to materially comply in all respects with all applicable federal, state and local laws, rules and regulations, now in effect or hereafter enacted, affecting or governing the advertising or sale of franchises, or the relationship and dealings between franchisors and franchisees. 3.2 Newco (either directly or through an operating subsidiary or affiliate) shall execute a New Franchise Agreement as franchisor or licensor for each New Franchisee and each new Microtel Hotel (subject to approval of each New Microtel Franchisee and New Microtel Franchise location, and satisfaction of all other regular conditions). Newco (either directly or through an operating subsidiary or affiliate) shall assume, undertake and discharge the obligations of the Company as franchisor under the Existing Franchise Agreements. 3.3 Recognizing the value of advertising and the importance of the standardization of advertising programs to the furtherance of the goodwill and public image of the System, Newco may develop or cause to be developed a national advertising program designed to promote the knowledge of the System and the advantages of Microtel Hotels in the minds of the consuming public. 3.4 Newco will during the term of this Agreement develop and implement a reservation system, in which all Microtel Hotels (including New Franchises and Existing Franchises) who pay to Newco the appropriate fee established by Newco and who install the appropriate equipment and software as determined by Newco shall be eligible to participate. 3.5 Newco shall use its best efforts and consistent with sound business practices, to vigorously enforce its rights under all franchise agreements with Franchisees and to promptly and vigorously pursue its rights with respect to any alleged infringement or unlawful or improper use of any Proprietary Mark(s) or of the "trade dress" associated with Microtel. 4. THE COMPANY'S RETAINED PROPERTIES. Following Closing, the Company shall have or retain the following rights as to the Existing Franchises, as well as to certain Additional Hotel Franchises (including, if and when developed, Additional Suite Hotel Franchises), as well as to certain Supplemental Franchises, if and when opened or developed by the Company (hereinafter collectively referred to as the "Retained Properties"): 5 4.1 Existing Franchises. The Company shall assign and transfer to Newco at Closing any and all rights, and Newco shall accept and agree to perform and shall have the sole authority to perform the obligations of Company, as franchisor, related to the Existing Franchise Agreements. To the extent that the prospective Franchisees for any of the Existing Franchises have not executed Franchise Agreements at the time of Closing (specifically, the three franchise locations identified as under development), the Company shall use its best efforts to cause such Franchisees to execute, when available, the New Franchise Agreement. However, with respect to each such Existing Franchise, the Company shall retain all rights to receive from the fees generated from such Existing Franchise Agreements, an amount equal to: (i) all Franchise Royalties (as hereinafter defined), plus (ii) any renewal franchise fees paid by the Existing Franchisee pursuant to the applicable Existing Franchise Agreement. The Company will use best efforts to persuade all of the Existing Franchisees with whom the Company has an ongoing contractual relationship to comply with the franchisee standards as may hereafter be established or required pursuant to the New Franchise Agreement as may be developed by Newco. 4.1.1 For purposes hereof, the term "Franchise Royalties" shall mean all amounts payable by each respective Franchisee to the Franchisor under the terms of the respective Franchise Agreement then in effect, based on or calculated as a percentage of the gross receipts collected by such Franchisee for the rental of guest rooms or otherwise, provided, however, the term Franchise Royalties shall specifically exclude for purposes hereof any amounts designated as reservation, advertising, or marketing fees and shall also exclude any other amounts payable which are designated or described as one time or non-recurring fees or charges other than regular monthly royalty fees, such as fees for renewal, placement, substitution, amendment, organization, initial placement, termination, or transfer. 4.2 The Company's Additional Hotel Franchises. Subject to Newco's authority as Franchisor with respect to operation of the System, the Company shall have the right to acquire from Newco after Closing, an additional number of franchises (the "Additional Hotel Franchises") for the purposes of developing and operating additional Microtel Hotels (not including any Suites) such that the total number of Existing Franchises plus Additional Hotel Franchises shall equal fifty (50). Each of the Additional Hotel Franchises shall be entered into upon the New Franchise Agreement as may be developed by Newco. With respect to each such Additional Hotel Franchise, the Company shall retain the right to collect or receive from such New Franchisee (i) the initial franchise placement fee paid or payable by such New Franchisee; and (ii) all Franchise Royalties. Franchisees or potential Franchisees eligible for consideration as an Additional Franchisee can include only (i) an entity in which the Company has a material ownership and management interest; or (ii) an entity in which one of the individuals or entities set forth in Schedule 19.1.3 shall have a material ownership and management interest. 4.3 The Company's Suites. Subject to Newco's authority as Franchisor with respect to operation of the System, the Company shall have the additional right to acquire franchises from Newco for the purposes of developing and operating ten (10) Suites Hotels ("Additional Suite Hotel Franchises"), so long as the Company shall have such Additional Suite Hotel Franchises open or under development within five (5) years following the date Newco first registers (in any state) an offering of a franchise of Suites. Each such New Franchise shall be entered into using a New Franchise Agreement for Microtel Suites Hotels as may be developed by Newco and used as its standard form of franchise agreement for Suites Hotels. With respect to each such Additional Suites Hotel Franchise, the Company shall retain the right to collect or receive from such New Franchisee (i) the initial franchise placement fees and (ii) all Franchise Royalties. 4.4 Supplemental Franchises. 6 4.4.1 At any time the sum of the number of Existing Franchises plus the number of Additional Hotel Franchises actually open and operational equals fifty (50), subject to Newco's authority as Franchisor with respect to the operation of the System, the Company shall have the right to acquire additional hotel franchises ("Supplemental Hotel Franchises") from Newco for the purposes of developing and operating additional Microtel Hotels (but not including Suites), on the terms hereinafter set forth. In order for the Company to obtain a Supplemental Hotel Franchise, the Company shall transfer to Newco and Newco shall accept one (1) of the following: (i) an Existing Franchise or (ii) an Additional Hotel Franchise (the Existing Franchise or the Additional Hotel Franchise being transferred, as applicable, being designated as a "Substitute Hotel Franchise") (but not including Suites) from the retained rights set forth above for each such additional property franchised. In order to be eligible for consideration as a Substitute Hotel Franchise such franchisee must agree to execute a New Franchise Agreement with Newco, must be current on payment of all fees and royalties payable, and must otherwise meet then applicable franchise standards. In addition thereto, the Company (or the franchisee) shall pay to Newco a fee ("Substitution Fee") equivalent in amount to the fee payable to Newco pursuant to the terms of the New Franchise Agreement upon any transfer of the franchise. 4.4.2 The Company shall also have the right to acquire additional franchises from Newco for the purposes of developing and operating Suites ("Supplemental Suites Franchises"), so long as the Company shall transfer to Newco and Newco shall accept one (1) of the Additional Suites Franchises (the Additional Suites Franchise being transferred being designated as a "Substitute Suites Franchise") from the retained rights set forth above for each such additional Suites property franchise. In order to be eligible for consideration as a Substitute Suite Franchise, such franchisee must agree to execute a New Franchise Agreement with Newco, must be current on payment of all fees and royalties payable, and must otherwise meet then applicable franchise standards. In addition thereto, the Company (or the franchisee) shall pay to Newco the Substitution Fee. 4.4.3 Subject to Newco's rights hereunder, each Supplemental Hotel Franchise and each Supplemental Suites Franchise shall thereafter be deemed a Retained Property, and the Company shall be entitled to collect or receive from such franchisee (i) an amount equal to fifty percent (50%) of the initial franchise placement fee as provided for in the New Franchise Agreement and (ii) all Franchise Royalties payable under the New Franchise Agreement. 4.4.4 For each Substitute Hotel Franchise and each Substitute Suites Franchise transferred to Newco hereunder, Newco shall be entitled to receive all of the Franchise Royalties plus any other fees, expenses, or other compensation or remuneration payable thereunder (including, without limitation the Substitution Fee), and the Company shall relinquish and transfer to Newco all of such rights. 4.5 The Company and Newco hereby agree that the Company may accept payment of any amounts due to the Company pursuant to this Section 4 hereunder (but only such amounts) directly from the franchisees of Retained Properties, and Newco shall cooperate with such direct payment, however, Newco shall have no liability to the Company for failure of the franchisees of the Retained Properties to remit payments due. However, the Company shall be required to account to Newco (in such form, manner, and time as determined by Newco from time to time) for any such amounts paid to the Company. To the extent 7 any of such fees, payments or other amounts are remitted to Newco, Newco shall promptly transfer, assign, or pay over such amounts to the Company. 4.6 Notwithstanding any other provision to the contrary contained herein with respect to Retained Properties, the Company agrees that Newco shall not be required to pay to the Company any fees or compensation paid to or payable to Newco by Franchisees relating to reservation, advertising, or marketing fees with respect to Retained Properties, the Supplemental Hotel Franchises, the Supplemental Suites Franchises, the Additional Hotel Franchises or the Additional Suites Hotel Franchises. The Company shall also immediately pay to Newco any such fees relating to reservation or marketing which the Company receives from the franchisees of any Retained Property, Supplemental Hotel Franchises, the Supplemental Suites Hotel Franchises, or Additional Hotel Franchises or the Additional Suites Hotel Franchises. The Company agrees to take those actions requested by Newco to assist, implement, maintain and collect such fees. 4.7 With respect to the Company's retained rights pursuant to this Section 4, the judgment of the Company as to the viability of a site for the development of a Microtel Hotel shall be conclusive, provided, however, Newco shall have the right, in its sole discretion, to reject such proposed site as a Microtel location if Newco should determine upon review of all Encroachment Issues or Impact Issues (as hereinafter defined) that development of the potential site would have a material negative impact upon the gross room revenue generated or anticipated to be generated by an Existing Microtel Franchise facility. 4.7.1 For purposes hereof, "Impact Issues" or "Encroachment Issues" shall refer to all issues or matters which in the sole discretion of Newco, as Franchisor, should be considered in evaluating the impact which the development of a new Microtel Franchise on a prospective site would have upon the gross guest room revenues generated or anticipated to be generated by an existing Microtel franchise facility, including but not limited to any specific geographic or territorial restriction contained in the franchise agreement for the existing Microtel franchise facility, traffic patterns and volume, anticipated growth patterns, development patterns in the same geographic area, and general business conditions. 4.8 Newco agrees that any agreement it may enter into after Closing for any future development of unspecified franchise locations on an exclusive territorial basis will reflect and will be subject to the rights of the Company hereunder for development of additional franchise locations and such exclusive territorial rights will not affect the Company as to any of the Retained Properties Additional Hotel Franchises, Additional Suites Hotel Franchises, or any Supplemental Franchises. The foregoing notwithstanding, Newco and the Company agree that, without limitation, the New Franchise Agreements or similar franchise agreements entered into with New Microtel Franchisees for specified franchise locations may contain exclusive franchise territory agreements related to hotel market Impact Issues, and that the Company shall not have the right to develop a property or obtain a franchise within any such restricted geographic area. Newco represents and warrants to the Company that Newco has not entered into and is not now negotiating any such agreement with any party. 5. CONSULTING BY THE COMPANY. 5.1 To ensure the ultimate successful operation of the System, the Company shall, for a period of three (3) years following the Closing Date of this Agreement, consult with and assist Newco as may be required or as reasonably requested by Newco, to establish Newco as an operating entity in the business of selling and administering franchises utilizing the System, which consulting and assistance may be expected to include, without limitation, some or all of the following: 8 5.1.1 Consulting and advice regarding the general outlines, parameters and philosophy of the System and the Microtel concept; 5.1.2 Assistance in the preparation of Newco's UFOC and compliance with applicable federal and state franchising laws; 5.1.3 Identification of and contacts with franchising prospects known to the Company; 5.1.4 Consulting regarding prototypical plans and specifications; 5.1.5 Review of existing manuals, training programs and other elements of the System; 5.1.6 Consultation regarding the desirability or feasibility of proposed sites for franchise development; and 5.1.7 Ongoing compliance with regulatory requirements, including federal, state and international franchising laws. 5.2 After the date which is one (1) year after the Closing Date, any required consultation and assistance shall be provided as reasonably requested by Newco and shall be scheduled subject to the workloads of the personnel of the Company. 6. FEES. 6.1 The Company shall retain the rights to collect fees and royalties from the Existing Franchisees designated as Retained Properties, as provided for in Section 4 hereinabove. Newco shall assist the Company with direct collection of such amounts and shall, to the extent such funds are transmitted or paid to Newco, promptly remit such funds to the Company, provided, however, Newco shall have no liability to the Company for failure of the franchisees of the Retained Properties to remit payment due. 6.2 In consideration for the transfer of the Proprietary Marks to Newco pursuant to Section 1 hereof, Newco shall pay or cause to be paid to the Company from the Franchise Royalties collected from each New Microtel Franchisee after Closing, as royalties with respect to each New Microtel Franchise (excluding any franchises designated as Retained Properties), a continuing monthly royalty fee (the "Trademark Royalty") in an amount equal to the sum of: (i) one percent (1%) of the Revenues Subject To Royalties (as hereinafter defined), for the applicable month for each New Microtel Franchise on the first 100 operating properties (other than Retained Properties) opened by Newco ("Operating Properties"); plus (ii) seventy-five hundredths of one percent (0.75%) of the Revenues Subject to Royalties for the applicable month for each New Microtel Franchise on the next 150 Operating Properties; plus (iii) one half of one percent (0.5%) of the Revenues Subject to Royalties for each New Microtel Franchise after the first 250 Operating Properties. Payment of the Trademark Royalty shall be deferred until the month in which Newco actually receives its Franchise Royalties from each respective Franchisee and shall be paid to the Company not later than the twentieth (20th) day of the month following such receipt by Newco. 6.2.1 For purposes hereof, "Revenues Subject to Royalties" shall mean the gross receipts collected by Franchisees for the rental of guest rooms at a Microtel Hotel or Microtel Suite, whichever is applicable, as well as any other revenues which are subject to royalty payments by Franchisee to Newco as set forth in the applicable franchise agreement. 9 6.2.2 In addition to Trademark Royalty payable hereunder, Newco shall pay to the Company a portion of any termination fee received by Newco upon termination of any New Microtel Franchise, such portion to be calculated as (i) the total amount of the termination fee actually received by Newco, (ii) less any direct expenses incurred by Newco in connection with collecting and receiving such fee and terminating such franchise (including but not limited to attorney's fees) with the remainder (iii) multiplied by a fraction, (aa) the numerator of which shall be the lowest marginal percentage rate then applicable for purposes of calculating the Trademark Royalty set forth herein, and (bb) the denominator of which shall be the percentage rate set forth in the applicable Franchise Agreement which is used for calculation of the Franchise Royalties payable by such franchisee to Newco. 6.2.3 The parties acknowledge and agree that Newco, as franchisor, may waive the requirement for a specific Franchisee to pay Franchise Royalties for a specified period of time (not to exceed 120 days) from the date when a New Franchise Agreement is effective and the Franchise facility is operational, and that no Trademark Royalty shall accrue or be due or payable by Newco for such period during which the obligation to pay Franchise Royalty is actually waived. 6.3 In consideration of the performance by the Company of its consulting obligations set forth in Section 5 hereof, the transfer of the Assets (other than the Proprietary Marks) and rights under the Existing Franchise Agreements, and all of the Company's other obligations hereunder, Newco shall pay to the Company the amount of Three Million Seven Hundred Thirty-Seven Thousand Six Hundred Forty-One and NO/100ths Dollars U.S. (U.S. $3,737,641.00), plus simple interest at the rate of ten percent (10%) per annum as reflected on Exhibit "F" attached hereto, due and payable as follows: Two Million Dollars U.S. (U.S. $2,000,000) upon Closing; One Million Dollars U.S. (U.S. $1,000,000) on the date one (1) year from the Closing Date hereof; Five Hundred Thousand Dollars U.S. (U.S. $500,000) on the date two (2) years from the Closing Date hereof; and Five Hundred Thousand Dollars U.S. (U.S. $500,000) on the date three (3) years from the Closing Date hereof. 6.4 The Company shall be responsible for any and all taxes or similar charges relating to payments by Newco (or on Newco's behalf) to the Company, including but not limited to value-added taxes, goods and services taxes, consumption taxes, gross receipts taxes and sales taxes, (but excluding taxes based upon Newco's income), which may be imposed now or in the future, and the Company shall transmit such taxes to the appropriate fiscal authorities. 6.5 If any payment owed by Newco to the Company under this Agreement or under any other agreement with the Company is finally determined to be overdue pursuant to Sections 15 and 16 below, Newco shall pay the Company, in addition to the overdue amount, interest on such amount from the date it was due until paid, at a rate which is one percent (1%) above the interest rate the Company pays on its operational line of credit from its principal bank, or if the Company has no line of credit, two percent (2%) above the prime rate of interest as reported in The Wall Street Journal on the day such amount was due, or the maximum rate permitted by law, whichever is less. In the event any amount is finally determined to be overdue and intentionally unpaid by Newco pursuant to Sections 15 and 16 below for more than ninety (90) days, then the interest payable by Newco under this section shall be computed at a rate of eighteen percent (18%) per annum, computed on a daily basis, or the maximum amount permitted by law, whichever is less. Entitlement to such interest shall be in addition to any other remedies the Company may have. 10 6.6 Except for the amounts specifically payable to the Company as set forth in this Section, all revenues generated by the conduct of the Business or otherwise by Newco after Closing shall belong to Newco. 7. CLOSING. 7.1 Time and Place. Closing shall take place at the offices of Boylan, Brown, Code, Fowler, Vigdor & Wilson, L.L.P., 900 Midtown Tower, Rochester, New York 14604, at 9:00 a.m. or at such other mutually determined location and time within two (2) business days following the date of the last to be satisfied of the conditions below, but in no event later than Monday, October 9, 1995, or such other date and place as the parties hereto shall mutually agree upon ("Closing"). 7.2 Conditions of Closing. 7.2.1 Closing of the transactions contemplated hereunder shall be conditioned upon, at Newco's option: 7.2.1.1 All of the covenants to be performed or complied with by the Company and all required deliveries by the Company or on the Company's behalf contained in this Agreement will have been performed, complied with, or delivered on or before Closing. 7.2.1.2 All of the representations and warranties made by the Company to Newco shall be and remain true, accurate and complete as of the Closing Date. 7.2.1.3 The approvals of the transactions contemplated hereby and of this Agreement by the Board of Directors and, if required, the Stockholders of the Company shall have been obtained. 7.2.1.4 The approvals of the transactions contemplated hereby and of this Agreement by the Board of Directors and, if required, the Stockholders of Newco shall have been obtained. 7.2.1.5 The Company shall have obtained all third party consents or approvals as shall be necessary or appropriate to the completion of the transaction in all respects or as may be required by law or regulation. 7.2.1.6 The Company shall have executed any and all assignments required to transfer to Newco any and all rights in the Proprietary Marks and any other intellectual property. Such assignments shall be in a form acceptable to Newco for recording with the U.S. Patent and Trademark Office and any other state, county or local governmental department agency, domestic or foreign. 7.2.1.7 The Company shall have effected the termination of the Master Franchise Agreement by and between the Company and Essex Microtel International Lodging, Inc. (the "EMILI Agreement"). 11 7.2.1.8 The Company shall obtain final execution of Franchise Agreements from all of the Existing Franchisees using either the Current Agreement Form or the New Franchise Agreement. 7.2.1.9 Michael A. Levin ("CEO Candidate") shall have resigned from his current position and agreed to become Chief Executive Officer of Newco. 7.2.1.10 At the Closing Date: (a) there shall be no effective injunction, restraining order, or order of any nature issued by any court of competent jurisdiction which directs or has the effect of directing that this Agreement or any material transactions contemplated hereby shall not be consummated as herein provided; (b) there shall be no investigation, action, or other proceeding pending before any court or governmental authority or threatened against the Company or Newco or any of the directors or officers of the Company or Newco in connection with this Agreement or the consummation of the transactions contemplated by this Agreement which is likely, in the opinion of Newco's counsel (after consideration of any defense), to result in such substantial damages or other substantial relief being obtained, as to materially and adversely affect the Business on or after the Closing Date; and (c) none of the parties hereto shall have received from any governmental authority any notice (oral or written) of any potential litigation, civil, criminal, or administrative, against the Company or Newco for a violation alleged to arise out of the consummation of the transactions contemplated hereby. 7.2.2.11 Newco shall have secured the minimum offering of $12,400,000 as provided for in Newco's initial private placement dated August 19, 1995; 7.2.2 Closing of the transactions contemplated hereunder shall be conditioned upon, at the Company's option: 7.2.2.1 All of the covenants to be performed or complied with by Newco and all required deliveries by Newco or on Newco's behalf contained in this Agreement will have been performed, complied with, or delivered on or before Closing. 7.2.2.2 All of the representations and warranties made by Newco to the Company shall be and remain true, accurate and complete as of the Closing Date. 7.2.2.3 The individual who has been identified as the CEO Candidate of Newco shall have resigned from his current position and agreed to become Chief Executive Officer of Newco. 7.2.2.4 Newco shall have secured the minimum offering of $12,400,000 as provided for in Newco's initial private placement dated August 19, 1995; 7.2.2.5 The approvals of the transactions contemplated hereby and of this Agreement by the Board of Directors and, if required, the Stockholders of Newco shall have been obtained. 12 7.2.2.6 The Company shall have received the documents or information described in Exhibit "D" hereof. 7.2.2.7 At the Closing Date: (a) there shall be no effective injunction, restraining order, or order of any nature issued by any court of competent jurisdiction which directs or has the effect of directing that this Agreement or any material transactions contemplated hereby shall not be consummated as herein provided; (b) there shall be no investigation, action, or other proceeding pending before any court or governmental authority or threatened against the Company or Newco or any of the directors or officers of the Company or Newco in connection with this Agreement or the consummation of the transactions contemplated by this Agreement which is likely, in the opinion of the Company's counsel (after consideration of any defense), to result in such substantial damages or other substantial relief being obtained, as to materially and adversely affect the Business on or after the Closing Date; and (c) none of the parties hereto shall have received from any governmental authority any notice (oral or written) of any potential litigation, civil, criminal, or administrative, against Company or Newco for a violation alleged to arise out of the consummation of the transactions contemplated hereby. 7.2.2.8 Newco shall have prepared and available for distribution to potential offerees a current UFOC disclosure document. 7.3 Deliveries at Closing. 7.3.1 The Company shall deliver to Newco at Closing: 7.3.1.1 An executed Secretarial Certificate of the Company satisfactory to Newco; 7.3.1.2 All of the appropriate assignments or other transfer documents of all of the Assets, Proprietary Marks and other intellectual property as described herein satisfactory to Newco; 7.3.1.3 The Warrant relating to the purchase of shares of the Company, fully executed in the form attached hereto as Exhibit "E"; 7.3.1.4 An opinion of Boylan, Brown, Code, Fowler, Vigdor & Wilson, L.L.P., corporate and intellectual property counsel to the Company, in a form satisfactory to Newco; 7.3.1.5 All assignments or other transfer documents required to transfer to Newco any and all rights in the Proprietary Marks and any other intellectual property. Such assignments shall be in a form acceptable to Newco for recording with the U.S. Patent and Trademark Office and any other state, county or local governmental department or agency, domestic or foreign. 7.3.2 Newco shall deliver to the Company at Closing: 7.3.2.1 An executed Secretarial Certificate of Newco satisfactory to the Company; 13 7.3.2.2 $2,000,000 in cash, certified check or wire transfer at Newco's option; 7.3.2.3 An instrument or instruments reflecting Newco's assumption of the obligations of franchisor under the Existing Franchise Agreements; and 7.3.2.4 An opinion of Bodker, Ramsey & Andrews, a Professional Corporation, counsel to Newco, in a form satisfactory to the Company. 7.4 Allocation of Consideration. 7.4.1 At the Closing, the Company and Newco shall execute an allocation of all payments hereunder pursuant to Section 1060 of the Internal Revenue Code of 1986, as amended, substantially in the form of Exhibit "F" hereto. The Company and Newco hereby agree to prepare their respective tax and other returns and to take and pursue any and all other actions (including without limitation, in connection with tax examinations) to reflect and retain such allocation. 7.4.2 The Company and Newco hereby acknowledge and agree that (i) the Company intends to treat the payments received by the Company pursuant to Section 6.2 hereof as amounts received on account of a transfer, sale or other disposition of a franchise, trademark or trade name which are contingent on the productivity, use or disposition of the franchise, trademark or trade name transferred and thus as amounts received from the sale or other disposition of property which is not a capital asset pursuant to Internal Revenue Code Section 1253(c), as amended, and (ii) Newco intends to treat the payments made by the Company pursuant to Section 6.2 hereof as amounts paid on account of a transfer, sale or other disposition of a franchise, trademark or trade name which are contingent on the productivity, use or disposition of the franchise, trademark or trade name which are paid as a part of a series of payments which are payable not less frequently than annually and which are substantially equal in amount (or payable under a fixed formula) and thus allowed as a deduction as paid or accrued under Internal Revenue Code Section 162(a), all pursuant to Internal Revenue Code Section 1253(d)(1) as amended, or other similar tax principles which provide for such payments to be deductible as paid or accrued. The Company and Newco acknowledge the importance of such intended treatment by the Company and Newco and accordingly agree to prepare their respective tax and other returns and to take and pursue any and all other actions (including without limitation, in connection with audit examinations) to retain and reflect such intended tax treatment. 8. RIGHTS AND OBLIGATIONS PENDING THE CLOSING. During the period commencing on the date hereof and ending on the Closing Date: 8.1 In order to allow Newco to perform its due diligence investigation, the Company will or will cause its agents to give to Newco its representatives, auditors, and attorneys, access, during normal business hours, to the facilities of the Company and to the books, records, contracts, and documents of the Company and to furnish to Newco such information as Newco may reasonably request from time to time. 8.2 The Business and Assets and properties of the Company will continue to be operated, used, and employed by the Company in the ordinary course of business. Specifically without limiting the 14 foregoing, the Company will continue to pursue and support new business; faithfully perform in all material respects all the obligations required to be performed under existing contracts, Existing Franchise Agreements, and commitments; and use its best efforts and take all reasonable steps to retain the patronage of all customers and Franchisees (whether existing business or business obtained after the date hereof). The foregoing notwithstanding, the parties acknowledge and agree that the Company will not enter into new franchise agreements from the date of the agreement through Closing but with the prior written consent of Newco. 8.3 Not in limitation of Section 8.2, the Company will not take the following actions, without the written consent of Newco: 8.3.1 make any material change in the Current Agreement Form, any Existing Franchise Agreements, or the UFOC, or to any existing contracts or commitments pertaining to the Business, except as such changes occur in the ordinary course of business; 8.3.2 enter into any new contract pertaining to the Business. 8.4 The Company will promptly supply counsel for Newco with copies of all litigation or legal proceedings against the Company which may arise after the date of this Agreement and will also notify counsel for Newco of any litigation or other legal proceeding which to the actual knowledge of the officers or directors of the Company is threatened against Newco or the Company. 8.5 Newco will promptly supply counsel for the Company with copies of all litigation or legal proceedings against Newco which arise after the date hereof and will also notify counsel for Company of any litigation or other legal proceeding which to the actual knowledge of the officers or directors of Newco is threatened against Newco or the Company. 8.6 The Company will promptly notify Newco of any matters with respect to Franchisees or other parties which could materially adversely affect any Existing Franchise Agreement, the Business, the System, results of operations or financial condition of the Company or its Franchisees or adversely affect the ability of the Company to perform its obligations hereunder. 8.7 Newco will keep the provisions of this Agreement strictly confidential and will not without the prior consent of the Company, which shall not be unreasonably withheld, disclose such provisions to any third party, except for (a) disclosure to employees, directors, potential investors, offerees, stockholders, officers, lawyers, and financial advisors of Newco on a "need-to-know" basis; (b) such disclosures as may reasonably be required pursuant to applicable state and federal laws, for securities, franchise and business opportunity law purposes; (c) such other disclosures as may reasonably be required for Newco to comply with its pre-closing obligations hereunder; and (c) such other disclosures as may be required by law, without the prior consent of the Company, which shall not be unreasonably withheld. 8.8 The Company will keep the provisions of this Agreement strictly confidential and will not, without the prior consent of Newco, which shall not be unreasonably withheld, disclose such provisions to any third party, except for (a) disclosure to employees, directors, officers, lawyers, and financial advisors of the Company on a "need-to-know" basis; (b) such other disclosures as may reasonably be required for the Company to comply with its pre-closing obligations hereunder; and (c) disclosures as may be required by law. 15 8.9 Upon final acceptance of this Agreement, Newco and the Company will issue in writing a mutually agreeable public announcement as to the transaction contemplated herein. 8.10 Until the Closing, or the date of termination of this Agreement pursuant to the terms hereof, whichever first occurs, the Company will not solicit, encourage, or conduct, directly or indirectly, any discussions or negotiations with, or provide any information to, any entity or person other than Newco with respect to the sale of the rights to the System and its component parts or the transactions contemplated herein or any transactions similar to any of those contemplated herein. The Company shall immediately notify Newco of any solicitation or offer by a third party with respect to the sale or transfer of the rights to the System or its component parts. 8.11 The Company will obtain any and all required consents of third parties prior to the Closing. 8.12 The Company and Newco will fully cooperate with each other and their respective counsel and accountants in connection with all steps to be taken as part of their respective obligations under this Agreement. The Company and Newco will use their best efforts to cause the conditions to the other party's obligation to close to be fulfilled on or prior to the Closing Date. 8.13 The Company shall take all necessary and appropriate steps including changing its assumed name as provided for in this Agreement to assure that all rights to the "Microtel" name will inure to Newco. 8.14 Notwithstanding any provision in this Agreement to the contrary, and in addition to (and without waiving) any other rights Newco may have pursuant to this Agreement or otherwise, regardless of whether the transactions contemplated by this Agreement are consummated, each party shall be responsible for and bear all of its own expenses and fees, including attorney and accountant fees, incurred by it in connection with the transactions contemplated herein; provided, however, if the transactions contemplated herein are not consummated for any reason except due to Newco's default under this Agreement, the Company agrees to pay Newco's legal fees and related expenses incurred in the drafting of this Agreement in an amount not to exceed $15,000.00 8.15 Newco shall utilize its best efforts to prepare a uniform franchise offering circular to be used for filing or registration at or near the Closing Date. 8.16 Prior to Closing, the Company shall in accordance with the limitations set forth herein, continue to conduct its business in the ordinary course (except that the Company will not enter into new franchise agreements with potential new franchisees, but with the prior written Consent of Newco), preserving its rights to franchise the System and taking reasonable steps to protect the Proprietary Marks and other intellectual property which constitutes the System. 9. DEFAULT PENDING CLOSING. 9.1 Default by Company: In the event of any default by Company in any of its closing obligations hereunder or agreements to be performed prior to Closing, or in the event any of the representations and warranties of Company shall be discovered prior to Closing to be untrue or false in any material respect, Newco shall provide written notice to Company and, should such default, untruthfulness, or falsity not immediately be cured, Newco, at the sole option of Newco, shall have the right to either: (i) waive compliance with such obligation or lack of performance and proceed with Closing; (ii) proceed to Closing and reserving to Newco all rights and remedies provided for hereunder or otherwise available at law or in 16 equity, including but not limited to the right to seek specific performance, or the right to indemnification pursuant to Section 22 and to setoff amounts payable to Company all costs and expenses incurred in connection therewith in accordance with the provisions of Section 23 hereof; (iii) postpone Closing upon written notice to Company for a reasonable period of time and take such remedial action as may reasonably be necessary or appropriate to cure such default or to make the representation and warranty not untrue or false, and to deduct the reasonable costs, expenses, and attorney's fees thereof from the consideration to be paid to Company at Closing; (iv) terminate this Agreement upon written notice to the Company, whereupon Company shall immediately pay or reimburse to Newco all fees, costs, expenses, or other costs or claims of any kind or nature whatsoever incurred by Newco, the CEO Candidate, or its principals (including but not limited to reasonable attorney's fees, any consequential damages or damages for loss of economic opportunity or profits) arising out of or related to the negotiation and entering into of this Agreement and related activities in connection with preparation for Closing. 9.2 Default by Newco: In the event of any default by Newco in any of its closing obligations hereunder, or in the event any of the representations are warranties of Newco shall be discovered prior to Closing to be untrue or false in any material respect, the Company shall provide written notice of such default, untruthfulness or falsity and the Company, at the sole option of the Company, shall have the right to either: (i) waive compliance with such obligation or lack of performance and proceed with Closing; (ii) proceed to Closing and reserving to the Company all rights or remedies provided for hereunder or otherwise available at law or in equity, including but not limited to the right to seek specific performance, or the right to seek indemnification pursuant to Section 22 hereof; or (iii) terminate this Agreement upon written notice to Newco, whereupon Newco shall immediately pay or reimburse to the Company all fees, costs, expenses, or other costs or claims of any kind or nature whatsoever incurred by the Company (including but not limited to reasonable attorney's fees, any consequential damages or damages for loss of economic opportunity or profits) arising out of or related to the negotiation and entering into of this Agreement and related activities in connection with preparation for Closing. 10. REPRESENTATIONS AND WARRANTIES 10.1 The Company represents, warrants and agrees to and with Newco as of the date hereof and through the date of Closing as follows: 10.1.1 The Company (a) is a corporation duly organized, validly existing and in good standing under the laws of the State of New York; (b) is qualified to licensed to do business and is in good standing in all jurisdictions in which the nature of its business or its properties makes such qualification or licensing necessary, except as set forth on Schedule 10.1.1; and (c) has all requisite legal and corporate power and authority to own, operate or lease its properties and assets and to carry on its business as now conducted. 10.1.2 (a) The Company has registered the Uniform Franchise Offering Circular ("UFOC") in every jurisdiction in which the UFOC is required to be registered including any federal, state, county, municipal or other governmental agency, department, commission, board, bureau or instrumentality, both domestic and foreign. Schedule 10.1.2(a) is a list of all such agencies with which the UFOC has been registered, the date of such registration, and the renewal date, if any, for such registration. The most recent UFOC registered is dated June 27, 1995, and the UFOC has not been updated or modified since June 27, 1995, except as provided in Schedule 10.1.2(b). Except as provided in Schedule 10.1.2(c), the Company is not aware of, nor received any notice of any proceedings, revocation, 17 termination or other action or threat of action against or with respect to any registration or its UFOC or otherwise which would affect the Company's ability to transact or conduct its business or operations in any jurisdiction. (b) The most recent UFOC dated June 27, 1995, and all prior UFOC's issued, used and/or relied upon by the Company were prepared, maintained and distributed in compliance with all applicable statutes, rules and regulations, including but not limited to the United States Federal Trade Commission ("FTC") and applicable status regulatory authorities. 10.1.3 This Agreement has been duly and validly executed and delivered by the Company. The execution and delivery by the Company of this Agreement, and the consummation of the transactions contemplated hereby, have been duly and validly authorized and approved by all necessary and proper action on the part of the Board of Directors. No shareholder action or approval, or consents of any third parties or of any governmental agencies are required for Closing except as set forth on Schedule 10.1.3 attached (which consents the Company is required to obtain prior to Closing), and no further action is required to be taken or obtained by the Company in connection with authorization and approval of the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby. The Company has all requisite legal and corporate power and authority to enter into, perform and carry out this Agreement. The representatives of the Company who have executed this Agreement have been duly authorized to do so by the Company, and no law, ordinance, judicial decree, order or regulation prohibits the Company from executing this Agreement or performing any of its obligations hereunder. 10.1.4 Neither the execution and delivery of this Agreement not the consummation of the transactions contemplated hereby will constitute or, with the giving of notice or the passage of time or both, would constitute a violation of or a default under or conflict with any term or provision of the Certificate of Incorporation or By-Laws of the Company, or any of the terms, conditions or provisions of any agreement, contract, lease, instrument, indenture, license or franchise to which the Company is a party, or by which it or any of its properties or assets is of may be bound, or result in the creation or imposition of any lien, claim, charge or encumbrance of any nature whatsoever upon any of its properties or assets, or constitute a violation of any statute, law or ordinance or any rule, regulation, order of any governmental authority, including, without limitation, any franchise law, rule, regulation or order, and any securities law, rule, regulation or order, or any judicial decree, or require the consent or approval of any governmental authority, lending institution or other third party. 10.1.5 Schedule 10.1.5(a) is a list of all actions, suits, investigations, claims or proceedings pending or threatened in the last five (5) years against the Company (or to the knowledge of the Company, against any of the Existing Franchisees) at law or in equity or before or by any federal, state, municipal or other governmental court, department, commission board, bureau, agency or instrumentality, domestic or foreign, whether or not any such claims have been litigated, settled, or otherwise decided. Except as provided in Schedule 10.1.5(b) there is no action, suit, investigation, claim or proceeding pending or threatened against the Company (or, to the knowledge of the Company against any of the Existing Franchisees) at law or in equity or before or by any federal, state, county, municipal or 18 other governmental court, department, commission, board, bureau, agency or instrumentality, domestic or foreign, or any arbitrator or panel of arbitrators which individually or in the aggregate either (a) questions the validity of this Agreement or of any action taken or to be taken in connection herewith, or (b) if determined adversely to the Company or any Existing Franchisee might have a material adverse effect upon the Business, the Assets, the System, results of operations or financial condition of the Existing Franchisees or adversely affect the ability of the Company to perform its obligations hereunder. The Company is not in violation, in any material respect, of any laws, statutes, ordinances, regulations, orders, writs, injunctions, decisions, awards or decrees or any court or federal, state, county, municipal or other governmental department, commission, board, bureau, agency, or instrumentality, domestic or foreign, or any arbitrator or panel of arbitrators, relating to the Business, the Assets, or the System and the Company has no knowledge or any basis for any claim for compensation or damage or otherwise from any violation of the foregoing. 10.1.6 Schedule 10.1.6 sets forth a list of all defaults, actions, suits, or claims pending or threatened by the Company against any Existing Franchisee, or other third party as relates to the Business, the Assets, or the System, at law or in equity or before any arbitrator or federal, state, county, municipal or other governmental court, domestic or foreign. 10.1.7 This Agreement constitutes a legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its terms. 10.1.8 Except for such liens shown on Schedule 10.1.8 which will be released prior to or at Closing, the Company shall have good, marketable, and indefeasible title to all of the Assets, free and clear of all liabilities, mortgages, conditional sales agreements, security interests, liens, pledges, encumbrances, restrictions, charges, claims, tax liens, or any other imperfections of title whatsoever. 10.1.9 Except as set forth on Schedule 10.1.9(a), the Company (a) has all right, title and interest in and to the Proprietary Marks; (b) all such Proprietary Marks are valid and enforceable; (c) the Company's ownership of such Proprietary Marks has been duly recorded in the U.S. Patent and Trademark Office; (d) all such Proprietary Marks have been maintained and all fees have been paid to maintain their validity, enforceability, and to ensure the issuance of any necessary registrations or certificates; (e) the Company is unaware of any infringement or misappropriation of any proprietary property rights of others by the Company; (f) there is no action, suit, claim or proceeding pending or threatened against the Company alleging or involving any state of facts that the Company has infringed or misappropriated any proprietary property rights of others; (g) there has been no infringement or misappropriation of any of the Proprietary Marks; (h) the Company has no knowledge of any current infringement or misappropriation of the Proprietary Marks, or any actions, suits or proceedings pending or threatened against any party for actual or alleged infringement or misappropriation of the Proprietary Marks; and (i) the Company has no knowledge of any potential or future infringement or misappropriation of (1) the Proprietary Marks by any party, or (2) any proprietary property rights by the Company, which would affect the ability to use the Proprietary Marks or to develop and franchise the Microtel concept and System. Exhibit "A-1" is a complete and accurate list of the 19 Proprietary Marks showing with whom each mark is registered, the registration number and the date registered. 10.1.10 The Company is the owner of and has authority to assign and transfer to Newco the Assets, the exclusive rights, Proprietary Marks and System which are the subject of this Agreement. Each of the Proprietary Marks, the System and all of Microtel's rights therein are valid and are in good standing and uncontested. The Company has not received any notice and has no knowledge with respect to any alleged infringement or unlawful or improper use of any Proprietary Mark or the System. The Company has not granted any licenses or other rights to use any of the Proprietary Marks or to develop, build, establish or operate the Business except as expressly set forth on Schedule 10.1.10 hereto. 10.1.11 Schedule 10.1.11(a) identifies all confidential and proprietary property, other than the Proprietary Marks, with respect to the franchising and operation of the Business and the System which the Company has maintained as confidential in nature. Except as provided in Schedule 10.1.11(b), the Company is unaware of any infringement, misappropriation or public disclosure of any of the property included in Schedule 10.1.11(a), and has no knowledge of any current infringement, misappropriation or public disclosure or any actions, suits or proceedings pending or threatened against any party for actual or alleged infringement, misappropriation or public disclosure of such property. 10.1.12 Schedule 10.1.12 is a list of all franchise agreements which the Company has executed and is true and complete list indicating for each such franchise agreement (a) the location of such Franchise; (b) whether the Company has a management agreement with the Franchisee; (c) if the Franchisee is a related party, the nature of such relationship to the Company. Except as provided on Schedule 10.1.12, all franchise agreements (a) are in full force and effect; (b) have not been amended; (c) are not in default; and (d) may be transferred or assigned without the consent of the Franchisee or any other party other than the Company. There are no such franchise agreements other than the Existing Franchise Agreements for the Existing Franchises. Except as provided on Schedule 10.1.12, there has not been any waiver, amendment, or other reduction of any royalties, management fees, or other payments of any kind with respect to the franchise agreements, below the level of such fees as set forth in the respective disclosure documents for such Franchise. A true, correct and complete copy of each of the Existing Franchise Agreements set forth on Schedule 10.1.12 has been provided to Newco. 10.1.13 Except as provided on Schedule 10.1.13, since March 31, 1995 (a) the operations of the Business have been carried on only in the ordinary course consistent with past practice, and (b) there has been no material adverse change, and there has been no event or circumstance which is reasonably anticipated to result in a material adverse change with respect to the Business, the Existing Franchises, or the System or its component parts. 10.1.14 Except as provided on Schedule 10.1.14, the Company has timely filed or otherwise timely secured extensions for filing with the appropriate federal, state, local and foreign governmental authorities all tax returns and information returns required by it to be filed, and there will remain on the date of Closing no unpaid taxes, assessments or public charges of any type or nature whatsoever due and payable to any governmental agency or authority, whether federal, state, local or foreign, including, without limitation, any 20 income, intangible property, social security, unemployment insurance, Worker's Compensation premiums, other employment sales, use and other taxes, assessments or charges and any deposits required to be made with respect thereto, which are or could become a lien or charge against or otherwise affect any of the assets of the Company or the System or its component parts of the Assets transferred hereunder. The Company has not been delinquent in the payment of any taxes, assessment, deposit, or other charge by any governmental authority and no liability, obligation, deficiency, or other claim is pending or has been assessed, asserted or threatened against the Company, the Assets, or the System or its component parts in connection with any tax and, to the Company's knowledge, there is no basis for any such liability. The Company has not received any notice of assessment or proposed assessment in connection with any tax returns and there are no pending tax examinations of or tax claims asserted against the Company, the Assets, or the System or any of its component parts, including without limitation, any claim by any governmental authority in any jurisdiction where the Company did not file tax returns, that the Company is or may be subject to or liable for taxes imposed by that governmental authority or jurisdiction. There are no liens, security interests, pledges, or other encumbrances for any taxes (other than any lien for current real property or ad valorem taxes not yet due and payable) on the Assets, or System or any of its component parts. No tax is required to be withheld pursuant to Section 1445 of the Internal Revenue Code of 1986, as amended, as a result of any of the transfers contemplated by this Agreement and the Company will provide any certificate required by Newco as Closing with respect thereto. The Company has provided to Newco true, correct and complete copies of the Company's corporate income tax return for the fiscal year ended March 31, 1994 filed with the Internal Revenue Service and most recent franchise/net worth tax returns filed with each state or jurisdiction in which such returns are required to be filed. 10.1.15 Schedule 10.1.15 is a true and complete list of all oral or written contracts which the Company has executed which relate to the development and operation of the System, indicating for each such contract whether such contract is with a related party, the nature of such relationship to the Company and the principal terms of such contracts. Except as provided on Schedule 10.1.15, all such contracts (a) are in full force and effect; (b) have not been amended; (c) are not in default; and (d) may be transferred or assigned without the consent of the other parties to the Contract or any other third parties. 10.1.16 The Company has not employed any finder, agent, broker or other person to act for it with respect to the transactions contemplated by this Agreement, and the Company agrees to indemnify, defend and save Newco harmless from and against any claims of the finder, agent, broker or other person resulting from its actions with respect to the transactions contemplated hereby. 10.1.17 All of the assets and the operations of the Business of an insurable nature and of a character usually insured by companies of similar size and in similar businesses are insured by the Company in such amounts and against such losses, casualties or risks as is (a) usual in such companies and for such assets, operations and businesses, (b) required by law, ordinance, regulation, rule or other statute applicable to the Company or its operations, or (c) required by any contract, agreement, lease, commitment or other arrangement of the Company relating to the System or its component parts and the Company's franchising operations. Schedule 10.1.7 contains a complete and accurate list 21 of all insurance policies held or owned by the Company relating to the Assets, the System and its component parts and the Company's franchising operations and now in force. All such policies are in full force and effect and enforceable in accordance with their terms. The Company is not now in default regarding the provisions of any such policy, including, without limitation, failure to make timely payment of all premiums due thereon, and has not failed to give any notice or present any claim thereunder in due and timely fashion. Except as set forth in Schedule 10.1.7, the Company has not been refused, or denied renewal of, any insurance coverage in connection with the ownership or use of its assets or operations. In addition to the deductibles set forth on Schedule 10.1.7, such Schedule discloses all risks that are self-insured by the Company that in the ordinary course of business could be insured. 10.1.18 Termination of the EMILI Agreement will not constitute or, with the giving of notice or the passage of time or both, would not constitute a violation of or a default under or a conflict with any term or provision of the Certificate of Incorporation or By-Laws of the Company, or any of the terms, conditions or provisions of any agreement, contract, lease, instrument, indenture, license, or franchise to which the Company is a party, or by which it or any of its properties or assets is or may be bound, or result in the creation of imposition of any lien, claim, charge or encumbrance of any nature whatsoever upon any of its properties or assets, or constitute a violation of any statute, law or ordinance or any rule, regulation, order of any governmental authority, including, without limitation, any franchise law, rule, regulation, or order, and any securities law, rule, regulation or order, or any judicial decree, or require the consent or approval of any governmental authority, lending institution or other third party. Upon termination of the EMILI Agreement the Company will have no further obligations or liabilities thereunder (except obligations arising under the warrants to purchase common stock of the Company issued in connection with the original execution of the EMILI Agreements). The Company has heretofore provided to Newco a true, correct and complete copy of such EMILI Agreement. Such termination will not in any manner prohibit or materially adversely affect Newco's prospective operations or development of the franchise business in Canada or elsewhere. 10.1.19 Except as provided in Schedule 10.1.19, the Company has not executed nor is it actively negotiating or considering negotiating a master franchise development, area development, multiple franchise or similar agreement with any other entity other than the EMILI Franchise Agreement covering any jurisdiction, city, state, country or other geographical area. 10.1.20 The Company is not, and will not be, on the date of Closing, a party to any union, collective bargaining or similar agreement relating to the Business. 10.1.21 The Company has not used any business names, trade names and other names to conduct or carry out the Business in the last five (5) years. 10.1.22 No representation or warranty made by the Company or any statement, certificate or instrument furnished or to be furnished to Newco pursuant to this Agreement or any other document, agreement or instrument referred to herein or therein contains or will contain any untrue material statement of fact or omit or will omit to state a material fact necessary to make the statements contained therein not misleading. 22 10.1.23 Except as provided in Schedule 10.1.23, the consummation of the transactions contemplated by this Agreement will not give rise to any liability for any employee benefits, including, without limitation, liability for severance pay, unemployment compensation, termination pay or withdrawal liability, or accelerate the time of payment or vesting or increase the amount of compensation or benefits due to any of the Company's Employees. As used in this Agreement, the term the "Company's Employees" means (i) all active or former employees or directors of the Company, (ii) all employees of the Company who, as of the Closing, are on workers' compensation, military leave, other approved leaves of absences, long-term or short-term disability, non-occupational disability and employees on layoff with recall rights, (iii) all individuals who are covered under any employee benefit plan as a result of previously being described in (i) or (ii) above, and (iv) beneficiaries or dependents under any employee benefit plan or anyone described in (i) through (iii) above. 10.1.24 that the Company has not issued or given any written consent permission or authorization to any of the Existing Franchisees to use the term "Microtel" or any other of the Proprietary Marks as part of the corporate or other legal name of such Franchisee. 10.1.25 No provision of the Existing Franchise Agreements restricts or prohibits the right of Newco, as franchisor, to collect and administer in its sole discretion (but in accordance with applicable law) any amounts designated as reservation, advertising, or marketing fees. 10.2 Newco represents and warrants to the Company as follows: 10.2.1 Newco (a) is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware; (b) is qualified and licensed to do business and is in good standing in all jurisdictions in which the nature of its business or its properties makes such qualification or licensing necessary, except as set forth on Schedule 10.2.1 and (c) has all requisite legal power and authority to own or lease its properties and assets and to carry on its business as now conducted. 10.2.2 This Agreement has been duly and validly executed and delivered by Newco. The execution and delivery by Newco of this Agreement, and the consummation of the transactions contemplated hereby, shall be duly and validly authorized and approved at the time of Closing by all necessary and proper action on the part of the board of directors of Newco. Newco has all requisite legal and corporate power and authority to enter into, perform and carry out this Agreement. No consent of any third parties or governmental agencies is required to be taken or obtained by Newco in connection with the authorization and approval of the execution and delivery of this Agreement. The representatives of Newco who have executed this Agreement have been duly authorized to do so by Newco, and no law, ordinance, judicial decree, order or regulation prohibits Newco from executing this Agreement or performing any of its obligations hereunder. 10.2.3 Neither the execution and delivery of this Agreement nor the consummation of the transactions contemplated hereby will constitute or, with the giving of notice or the passage of time or both, would constitute a violation of or a default under or conflict with any term or provision of the Certificate of Incorporation or By-Laws of Newco, or any 23 of the terms, conditions or provisions of any agreement, contract, lease, instrument, indenture, license or franchise to which Newco is a party, or by which it or any of its properties or assets is or may be bound, or result in the creation or imposition of any lien, claim, charge or encumbrance of any nature whatsoever upon the properties or assets of Newco, or constitute a violation on the part of Newco of any statute, law or ordinance or any rule, regulation, order of any governmental authority or any judicial decree, or require Newco to obtain the consent or approval of any governmental authority, lending institution or other third party. 10.2.4 This Agreement constitutes a legal, valid and binding obligation of Newco, enforceable against Newco in accordance with its terms. 10.2.5 Except as provided on Schedule 10.2.5, there are no actions, suits or proceedings pending or, to the knowledge of Newco, threatened against Newco before or by any court or federal, state, county, municipal or other governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, or any arbitrator or panel of arbitrators. Newco is not in violation of any laws, statutes, ordinances, regulations, orders, writs, injunctions, decisions, awards or decrees of any court or federal, state, county, municipal or other governmental department, commission, board, bureau, agency, court or instrumentality, domestic or foreign, or any arbitrator or panel of arbitrators, relating to Newco or its business and Newco has no knowledge of any basis for any claim for compensation or damage or otherwise from any violation of the foregoing. 10.2.6 Newco has not taken any action or failed to take any action for purposes of compliance with applicable state or federal securities laws which would materially limit the ability of Newco to carry out its obligations hereunder. 10.2.7 Except as provided on Schedule 10.2.7, there are no material restrictions in the existing employment contract of the individual identified as the Chief Executive Officer candidate of Newco such that such individual could not be employed by Newco. 10.2.8 No representation or warranty made by Newco or any statement, certificate or instrument furnished or to be furnished to the Company pursuant to this Agreement or any other document, agreement or instrument referred to herein or therein contains or will contain any untrue material statement of fact or omit or will omit to state a material fact necessary to make the statements contained therein not misleading. 10.3 For purposes of this Section 10 the terms "knowledge" or "awareness" or words of similar comport mean facts, circumstances or conditions known to or, which by reason of job function, responsibility or circumstances, and after such inquiry as such person or entity should have reasonably conducted under the circumstances, should have been known by, any person or entity or, if such person or entity is a corporation, any officer or director of such corporation. 11. CONFIDENTIAL INFORMATION. 11.1 The Company shall not, during the term of this Agreement and prior to a Reversion of Microtel Rights (as defined hereinafter) communicate, divulge, or use for the benefit of any other person, partnership, association, corporation or other entity other than Newco any confidential information, knowledge, or know- 24 how concerning the methods of operation of the System and the Microtel Hotels or Suites; and further the Company shall not, during the term of this Agreement or following any Reversion of Microtel Rights communicate, divulge, or use any confidential information, knowledge or know-how relating to Newco (including for purposes of this section the affiliates and subsidiaries of Newco), or the business of Newco which may be known or communicated in writing, verbally or otherwise to the Company, or which the Company may be apprised by virtue of Newco's operation hereunder. The Company shall divulge such confidential information only to such employees of the Company as must have access to it in order to exercise the Company's rights or perform the Company's obligations hereunder. Without limitation, any and all information, knowledge, know-how, and techniques which Newco reasonably designates as confidential shall be deemed confidential for purposes of this Agreement. 11.2 "Confidential information, knowledge, or know-how relating to Newco or the business of Newco" shall not include any information, knowledge or know-how disclosed or made known to the Company provided that: (i) the source of such information is not known by the Company to be subject to a confidentiality agreement; (ii) such information has been or is independently acquired or developed by the Company without reference to any other confidential information; or (iii) such information was or becomes generally available to the public on a non-confidential basis. 11.3 Subject to and not in limitation of any and all of Newco's rights hereunder (including without limitation those relating to the representations and warranties given by the Company hereunder and relating to the terms, covenants and conditions contained herein), Newco acknowledges that all information furnished under this Agreement is provided without a specific representation, warranty, or guarantee by the Company as to its successful and profitable use, and acknowledges in that specific respect that the Company does not guarantee the success or profitability of Newco's business in any manner whatsoever. 12. ACCOUNTING AND RECORDS. 12.1 During the term of this Agreement from and after Closing, Newco shall maintain, and preserve for the purposes of accounting for payments to be made to the Company hereunder for a period of five (5) years from the dates of their preparation, full, complete, and accurate books, records, and accounts pertaining to the royalties and other fees paid by Franchisees to Newco in accordance with the Uniform System of Hotel Accounts (8th Rev.Ed. 1986), as it may be amended or supplemented from time to time, or such other system of accounting as may be designated by the Company and agreed to by Newco, and in the form and manner reasonably prescribed by the Company and agreed to by Newco from time to time in writing. The Company or its designated agents shall have the right, upon seven (7) days notice and without material interruption to Newco's business, to examine, copy, and inspect, at Newco's place of business, at the Company's expense, such books, records, and accounts. The Company shall also have the right, upon reasonable notice agreed to by Newco and without material interruption to Newco's business, to have an independent audit made of such books, records, and accounts of Newco, at the Company's expense. Subject to the notice and cure provisions of Sections 15 and 16 hereof, if such an inspection or audit of Newco discloses an intentional underpayment by Newco to the Company of five percent (5%) or more of the total amount that should have been paid to the Company during any six (6) month period, Newco shall, in addition to repayment of such understated amount with such interest at the rate calculated pursuant to Section 6.5 hereof, reimburse the Company for any and all reasonable costs and expenses incurred in connection with the inspection or audit (including, without limitation, reasonable accounting and attorneys' fees). In addition to any rights Newco may have pursuant to this Agreement, Newco shall have the right to review all records and documents related to any such independent audit by the Company. 25 12.2 During the term of this Agreement from and after Closing, Newco shall, at its expense, submit to the Company no later than (i) the twentieth day of each month; (ii) within forty-five (45) days after the end of each fiscal quarter of Newco; and (iii) within one hundred twenty (120) days after the end of each fiscal year of Newco, periodic reports accurately reflecting occupancy data and Revenues Subject to Royalties for each Microtel Hotel during the applicable prior period, and all continuing monthly royalty fees and all other fees paid by Franchisees to Newco during such periods. The Company reserves the right to require submission as received by Newco of audited annual financial statements, prepared at Newco's expense, by an independent certified public accountant regularly selected by Newco. All audited annual financial statements shall be prepared according to generally accepted accounting principles. 13. INSURANCE 13.1 During the term of this Agreement, Newco shall procure as soon as is reasonably practicable after Closing, and, following Closing, Newco and the Company shall maintain in full force and effect at all times during the term of this Agreement, at each party's respective expense, an insurance policy or policies determined by each respective party in its reasonable business judgment to be necessary to protect Newco and the Company, and their respective officers, directors, partners, employees, agents, and shareholders, against those certain demands, claims, losses, liabilities, or expenses determined by each respective party in its reasonable business judgment to be necessary in an amount reasonably determined by each party to be necessary. Such insurance policy or policies shall be consistent with industry standards. Newco shall have the right to use self insurance upon completion of the Development Schedule. 13.2 Each party's obligation to obtain and maintain the foregoing policy or policies shall not be limited in any way by reason of any insurance which may be maintained by the other party, nor shall each party's performance of such obligation relieve it of liability under the indemnity provisions set forth in this Agreement. 13.3 Prior to the commencement of any operations by Newco under this Agreement, and thereafter at least thirty (30) days prior to the expiration of any policy, each party shall deliver to the other party certificates or other evidence of insurance demonstrating the proper coverage as required hereunder. 14. TRANSFERABILITY OF INTEREST 14.1 Subject to the prior written consent of Newco (and subject to any applicable restrictions on transfer set forth in the applicable franchise agreement), the Company shall have the right to transfer, sell, assign, or otherwise encumber all or any part of its rights or obligations under this Agreement to any person or legal entity. Newco's prior written consent shall be required to such transfer, sale, assignment or other encumbrance, but Newco's discretion shall be limited to considerations based on whether the party (or future party) to whom such rights or obligations are transferred, sold, assigned or otherwise encumbered would qualify as a franchisee of Newco. Any permitted transfer and assignment of such rights or obligations pursuant to this Agreement by the Company shall not constitute a novation of this Agreement. 14.2 In the event that the Company shall propose to sell, transfer or assign either directly or indirectly, through a transfer of control or otherwise, any or all of its rights hereunder to any third party or entity or any third party shall propose to purchase or acquire such rights, the Company shall give notice of such intention to Newco, and the Company shall in good faith give Newco the opportunity to bid and negotiate to purchase or acquire such rights. For the purposes of this Agreement, "control" shall mean the possession, direct or indirect, of the power to direct or cause the direction of the management and policies 26 of a person, corporation or other business entity, whether through the ownership of voting securities, by contract, or otherwise. 14.3 Subject to the provision of Section 14.6 hereof, in the event that Newco shall propose to sell transfer or assign, either directly or indirectly, through a transfer of control or otherwise, all or substantially all the Assets acquired hereunder to any unrelated third party or entity pursuant to a bona fide offer to purchase or acquire such Assets, Newco shall give notice of such intention to the Company, setting forth the terms of the offer. The Company shall have the right of first refusal, to be exercised by written notice to Newco within twenty (20) days, to purchase such Assets on terms and conditions that are economically equivalent in all material respects, including relative economic strength of the Purchaser and all future economic consideration to be received. Should the Company not agree with the decision of Newco as to whether such terms and conditions are economically equivalent, then the Company shall have the right within ten (10) days of notice of such decision to demand that such issue be arbitrated within ten (10) days by an independent and nationally recognized investment banking firm to be mutually agreed upon (with neither party unreasonably withholding its consent as to choice of such investment banking firm), provided, however, any such demand or arbitration must be final and concluded within thirty (30) days of the date of notice of the decision of Newco. In the event that the Company shall fail or decline to exercise its right of first refusal, Newco may proceed with the sale upon the proposed terms; provided, that any amounts not yet paid under Section 6.3 hereof shall be due and payable upon transfer. If Newco shall subsequently fail to close or transfer in accordance with the terms disclosed to the Company, then the right of first refusal shall apply to any future proposal. 14.4 Notwithstanding any other contrary provision contained herein, Newco may sell, transfer or assign any part or all of the Assets or any of its rights or obligations acquired hereunder without notice to or consent of Company, to any related or affiliated party where such entity has a net book value of at least $5.0 million dollars. In addition, prior to Closing, Newco may assign all or any portion of its rights to a wholly owned operating subsidiary or to a separate legal entity (including but not limited to a limited liability company) having similar management, ownership and capitalization as Newco which subsidiary or other legal entity satisfies the conditions to Closing, and Newco may sell shares (or other interests) to its subscribers. 14.5 Notwithstanding any other provision of this Agreement, the Company's right of first refusal shall not apply to the assignment, transfer, pledge, or hypothecation by Newco of this Agreement, or any of the Assets acquired in this Agreement, or all and any part of Newco, to a creditor as collateral security for loans made directly to or for the benefit of Newco's business hereunder; provided however, that Newco shall use its best efforts to have such creditor agree that if such creditor exercises its rights under its agreement(s) with Newco, and intends to sell, assign, transfer, or otherwise dispose of the pledged collateral, the secured creditor will give the Company not less than thirty (30) days notice of any public sale or proposed disposition, and the secured creditor shall first offer to the Company the right to acquire such pledged collateral on the same terms and conditions under which the secured creditor intends to dispose of it. 14.6 All limitations (either expressly set forth or implied herein) on the ability of Newco to freely sell, transfer, or assign all or any part of the Assets, stock, ownership, interests, or any of its rights hereunder, and all other rights of the Company under this Section 14, including but not limited to the Company's right of first refusal pursuant to Sections 14.3 or 14.5, shall terminate upon the occurrence of the earlier of (i) the execution by Newco and its underwriters of a firm (and not a best efforts) underwriting agreement underwriting an offering of Newco securities; or (ii) the completion by Newco of the Development Schedule. 27 14.7 The consent of the Company or of Newco to a transfer of any interest in the rights granted herein shall not constitute a waiver of any claims such party may have against the transferring party, nor shall it be deemed a waiver of the right of the Company or Newco, as applicable, to demand exact compliance with any of the terms of this Agreement by the transferee. 15. DEFAULT BY NEWCO AFTER CLOSING. 15.1 An Event of Default shall have occurred if from or after the date of Closing, (i) Newco fails to maintain its registrations which materially affects Newco's ability to sell or maintain franchises; (ii) subject to the cure provisions of Section 1.10 hereof, Newco fails to open or have under construction the minimum number of Microtel Hotels pursuant to Section 1.9 hereof; (iii) Newco fails to pay to the Company any amounts determined to be due hereunder; or (iv) Newco otherwise fails to fulfill its material obligations hereunder. 15.2 The foregoing notwithstanding, Newco shall not be deemed to be in default and there shall be no Event of Default hereunder unless or until Newco shall have received written notice of the alleged default and shall have had thirty (30) days to cure such alleged default or to take such actions to initiate a cure of such default pursuant to reasonable efforts by Newco to be substantially completed or performed within a reasonable time. Upon cure, substantial completion or performance by Newco, this Agreement shall remain in full force and effect as if no such breach or default or alleged breach or default shall have existed. 16. OBLIGATIONS DUE TO POST CLOSING DEFAULT BY NEWCO. 16.1 Until the time of occurrence of either of the events set forth in Section 14.6, upon the occurrence of an Event of Default pursuant to Section 15 from and after the date of Closing and failure by Newco to cure within the applicable notice and cure period therein: 16.1.1 Newco shall immediately cease to operate the Microtel Business operated pursuant to this Agreement and shall not thereafter, directly or indirectly, represent to the public or hold itself out as a present franchisor of Microtel Hotels, and shall have no right or obligation to franchise or license any other party to establish or operate any Microtel Hotel for which a franchise agreement has not been executed by Newco at the time of termination. 16.1.2 Newco shall immediately execute and deliver to the Company assignments and transfers of the Proprietary Marks and such other assignments as may be required to vest in the Company all rights in and to the intellectual property then constituting the Microtel System. 16.1.3 Subject to the provisions of Section 16.2 hereof, Newco shall immediately transfer and assign all Newco's rights and obligations in all of the Microtel franchise agreements to the Company, and the Company shall assume such rights and obligations; and Newco shall immediately provide to the Company all records in Newco's possession prepared or retained in connection with Newco's obligations under Section 12 hereof, and all records relating to the Microtel Hotels operating under this Agreement. 16.1.4 Newco shall immediately and permanently cease to use the Proprietary Marks and distinctive logos, slogans, signs, symbols, and forms associated with the System. 28 16.1.5 Newco shall immediately execute and deliver to the appropriate state and international authorities documents evidencing the termination of its registration to sell Microtel Hotel franchises. 16.1.6 To the extent Newco continues or subsequently begins to operate any other business, Newco shall not use any reproduction, counterfeit, copy, or colorable imitation of the Proprietary Marks, either in connection with such other business or the promotion thereof, which is likely to cause confusion, mistake, or deception, and shall not utilize any designation of origin or description or presentation which falsely suggests or represents an association or connection with the Company. 16.1.7 Newco shall immediately pay all sums owing to the Company and its affiliates pursuant to this Agreement including all damages, costs, and expenses, including but not limited to reasonable attorney's fees and expenses incurred by the Company as a result of the default and the enforcement of the Company's rights hereunder. 16.1.8 Newco shall not have the right to claim any indemnity, reimbursement, or compensation for alleged loss of clientele or goodwill, loss of profits or anticipated sales, or any other reimbursement for losses or damages resulting from such expiration or termination. 16.1.9 Notwithstanding any other contrary provision contained herein, Newco or its affiliates shall continue to operate any Microtel Hotel pursuant to a franchise agreement. 16.2 Following the reversion to the Company of certain rights to the System and Assets as specifically set forth in Section 16.1 hereof (the "Reversion of Microtel Rights"), the Company shall pay to Newco (less the amount to be paid to the Company pursuant to Section 6.2 hereof), on a monthly basis, all Franchise Royalties received from each New Franchisee so long as such New Franchisee (or its successor assign) remains a Franchisee, including, without limitation, by renewal, amendment, execution or a new Franchise Agreement, or otherwise, less the following: (i) a servicing fee equal to seventy-five one hundredths of one percent (0.75%) of all Revenues Subject To Royalties; and less, (ii) any reservation or marketing fees collected by the Company (but only if the Company continues to operate a central reservation system). Newco shall have and retain the right to collect directly for its own account any amounts owing to Newco hereunder following any such Reversion of Microtel Rights. The Company shall also provide to Newco accounting and records similar to those provided to the Company pursuant to Section 12 hereof, as well as all other rights or remedies otherwise available to the Company in connection with collection of any amounts owing hereunder. 16.3 Notwithstanding any other provision to the contrary contained in this Agreement, no Reversion of Microtel Rights shall result from the occurrence of an Event of Default by Newco after the occurrence of the earlier of the events described in Section 14.6 herein. 16.4 Notwithstanding any other provision to the contrary contained herein, no Reversion of Microtel Rights shall be effective until a court of competent jurisdiction shall have finally determined that an Event of Default which could result in a Reversion of Microtel Rights shall have occurred and until Newco shall have had the opportunity to cure such default following such final determination by payment of any amounts so finally determined to be owed by Newco to the Company or by taking such actions necessary to cure such default and unless Newco shall not so cure within thirty (30) days of such final determination such default or take such actions to initiate a cure of such default pursuant to reasonable efforts by Newco to be 29 substantially completed or performed within a reasonable time. Upon cure, substantial completion or performance by Newco, this Agreement shall remain in full force and effect as if no such breach or default or alleged breach or default shall have existed as provided for in this Section 16.4. 16.5 Notwithstanding any other provision to the contrary contained herein, if a Reversion of Microtel Rights shall occur, any and all of Newco's other rights under and interest in this Agreement including but not limited to Newco's right of indemnification under Section 22 shall survive such termination. 17. DEFAULT BY THE COMPANY AFTER CLOSING. 17.1 Following Closing, an Event of Default shall have occurred if from or after the date of Closing, (i) the Company shall fail to pay to Newco any amounts determined to be due hereunder after written notice; or (ii) the Company shall otherwise fail to fulfill its material obligations hereunder. 17.2 Provided, however, the Company shall not be deemed to be in default and there shall be no Event of Default hereunder unless or until the Company shall have received written notice of the alleged default and shall have had thirty (30) days to cure such alleged default pursuant to reasonable efforts by the Company to be substantially completed or performed within a reasonable time. Upon cure, substantial completion or performance by the Company, this Agreement shall remain in full force and effect as if no such breach or default or alleged breach or default shall have existed. 18. OBLIGATIONS DUE TO POST CLOSING DEFAULT BY THE COMPANY. 18.1 Upon occurrence of an Event of Default pursuant to Section 17 from and after the date of Closing and failure by the Company to cure within the applicable notice and cure period therein, Newco, at the sole option of Newco, shall have the right to exercise any one or more of the following rights and remedies: (i) exercise its rights to indemnification pursuant to the provision of Section 22 hereof and to set off from amounts payable to the Company all losses, costs and expenses incurred in connection therewith in accordance with the provisions of Section 23 hereof; (ii) to cease the entering into of any agreements with the Company as franchisee, or to accept the tender or offer by the Company of any of the Existing Retained Properties or Substitute Retained Properties; (iii) to declare the right of the Company to acquire any Additional Franchises (including by not limited to franchises for Suites) terminated and of no further force and effect; (iv) to seek injunctive relief where applicable; or (v) to take such other action or seek such other remedy as may otherwise be available to Newco under the terms hereof or otherwise available at law or in equity. 19. POST CLOSING COVENANTS OF THE COMPANY. 19.1 The Company hereby covenants and agrees with Newco: 19.1.1 Immediately after the Closing, the Company shall terminate all registrations or filings relating to the offering and sale of franchises under the System. 19.1.2 During the term of this Agreement, following Closing and until the occurrence of a Reversion of Microtel Rights, the Company, its directors, its officers or any of its affiliates (directly or indirectly) shall not enter into or operate any business which develops or offers or sells franchises for a hospitality or hotel product (including a Suites Hotel type concept) in the super budget or hard budget category. This provision shall not be 30 construed to restrict the Company from developing, owning or managing individual properties of any other category, brand or type. 19.1.3 During the term of this Agreement, following Closing and until the occurrence of a Reversion of Microtel Rights, the Company shall not solicit as a potential venture partner, investor, co-developer, owner, or other participant in any new hotel development or property utilizing the Microtel concept, or as a customer of the Company, any Existing Franchisee, or any new Franchisee, or any party who Newco is actively pursuing as a prospective franchisee for a Microtel Hotel other than for those parties set forth on Schedule 19.1.3 attached hereto. 19.1.4 During the term of this Agreement, following Closing and until the occurrence of a Reversion of Microtel Rights, the Company as part of its ongoing Hotel development activities: (i) shall comply at all times with the limitations and restrictions of applicable law regarding the solicitation of any potential venture partner, investor, co-developer, owner, or other participant in any new hotel development or property utilizing the Microtel concept; (ii) shall not act as a franchise salesperson or broker on behalf of or in the name of Newco, or hold itself out as a salesperson, broker, or representative of Newco; (iii) shall make no representations or warranties regarding a potential Microtel franchise to any potential venture partner, investor, co-developer, or other participant in any new Microtel hotel development; (iv) shall promptly report to Newco any such potential venture partner, investor, co-developer, owner, or other participant who could be classified as a potential offeree or franchisee, so that Newco may properly register each person or entity and provide to such person or entity a current UFOC disclosure package; and (v) shall promptly refer to Newco all leads for potential franchisees made known to the Company or other inquiries regarding acquiring a franchise. 20. NOTICES. All notices to either of the parties hereto desired or required to be given hereunder shall be in writing, addressed to recipient as specified below, and shall be deemed delivered upon the earlier of: (i) the time and date of actual delivery by hand, mail, or express delivery; or (ii) three (3) days following deposit thereof in the United States Mail, postage prepaid, certified, returned receipt requested. All such notices shall be addressed as follows: To the Company: Microtel Franchise and Development Corporation One Airport Way, Suite 200 Rochester, New York 14624 Attn: Bruce A. Sahs Telephone: 716-436-6000 Facsimile: 716-436-1865 31 and the Company's counsel: Boylan, Brown, Code, Fowler, Vigdor & Wilson, L.L.P. 900 Midtown Tower Rochester, New York 14604 Attn: Alan S. Lockwood, Esq. Telephone: 716-232-5300 Facsimile: 716-232-3528 To Newco: U.S. Franchise Systems, Inc. 196 East 75th Street Apt. 19-C New York, New York 10021 Attn: Neal K. Aronson Telephone: 212-772-6741 Facsimile: 212-772-0574 and Newco's counsel: Bodker, Ramsey & Andrews A Professional Corporation 1800 Peachtree Street, N.W. Suite 615 Atlanta, Georgia 30309 Attn: Brian D. Bodker Telephone: 404-351-1615 Facsimile: 404-352-1285 The address specified for notice to any party may be changed pursuant to written notice by such party delivered in accordance herewith. Specifically for purposes of Section 29 hereof, written notice may be given by facsimile and shall be deemed delivered at the time of transmission. 21. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. 21.1 All representations, warranties, agreements and covenants made or undertaken by the parties in this Agreement are material, have been relied upon by each party hereto, shall survive the Closing hereunder and the termination of this Agreement, unless specifically provided to the contrary herein, and shall not merge in the performance of any obligation by any party hereto. 21.2 The representations and warranties made by the Company and contained in Section 10.1 of this Agreement and the representations and warranties made by Newco and contained in Section 10.2 of this Agreement are deemed by the parties hereto to have been made by the Company and Newco, as the case may be, on and as of both the date hereof and the Closing Date with the same force and effect as if this Agreement were executed by the Company and Newco on each of the date hereof and the Closing Date. The Company acknowledges and agrees that prior to the Closing Date, Newco intends to perform such investigation of the Company, its business operations and assets as it may deem necessary or appropriate; however, no such investigation by Newco will diminish or obviate any of the representations, warranties, covenants or agreements made or to be performed by the Company pursuant to this Agreement or Newco's right to fully rely upon such representations, warranties, covenants and agreements. 32 INDEMNIFICATION. 22.1 Obligation of the Company to Indemnify. The Company hereby covenants and agrees to indemnify, defend and hold Newco (for purposes of this section, Newco to be deemed to include the officers, directors, stockholders, employees, agents, attorneys, and affiliates of Newco) harmless from and against all Losses (as hereinafter defined) asserted against, imposed upon or incurred by Newco by reason of, resulting from, arising out of, based upon or otherwise in respect of the following: 22.1.1 any action or inaction of the Company or any other matter, thing or occurrence related to the subject of this Agreement that accrued, occurred, or arose prior the Closing Date; 22.1.2 any breach or inaccuracy in any representation or warranty made by the Company pursuant to this Agreement; 22.1.3 any breach of any covenant or agreement made or to be performed by the Company pursuant to this Agreement; 22.1.4 any and all liabilities, indebtedness or other obligations not expressly assumed by Newco pursuant to this Agreement; 22.1.5 any claim by any broker, finder, agent or other person employed or allegedly employed by the Company in connection with the transactions contemplated by this Agreement; 22.1.6 the conduct by the Company of the Business or System, or ownership of the Assets prior to the Closing Date; 22.1.7 the conduct by the Company of any business or activity other than the Business, either before or after Closing. 22.1.8 the operation of the Company's ongoing business subsequent to the Closing Date, including without limitation with respect to any Loss related to the operation or ownership by the Company of Retained Properties (but not including any Loss solely caused by Newco's breach of those obligations as franchisor under the Existing Franchise Agreements which are specifically to be assumed by Newco hereunder). 22.2 Obligation of Newco to Indemnify. Newco agrees to indemnify, defend and hold the Company (for purposes of this Section, Company to be deemed to include the officers, directors, stockholders, employees, agents, attorneys, and affiliates of Company) harmless from and against all Losses asserted against, imposed upon or incurred by the Company by reason of, resulting from, arising out of, based upon or otherwise in respect of the following: 22.2.1 any breach or inaccuracy in any representation or warranty made by Newco pursuant to this Agreement; 22.2.2 any breach of any covenant or agreement made or to be performed by Newco pursuant to this Agreement; 33 22.2.3 any claim by any broker, finder, agent or other person employed or allegedly employed by Newco in connection with the transactions contemplated by this Agreement; and 22.2.4 any claim, demand, damage or cause or chose in action of any kind or nature incurred by or asserted against the Company as a result of or arising out of the operation of the Business by Newco that accrues, occurs or arises for or with respect to any period subsequent to the Closing Date, except for any claim, demand, damage or cause or chose in action of any kind or nature incurred by or asserted against the Company as a result of or arising out of the operation of the Business by Newco for which Newco shall be entitled to indemnification or the right of set-off under any other provision of this Agreement. 22.2.5 the conduct by Newco of any other business or activity other than the Business, either before or after the Closing. 22.2.6 the private offering conducted by Newco, provided, however, that said Loss is not caused by any default or breach by the Company of this Agreement. 22.3 Notice of Loss or Asserted Liability. Promptly after (a) becoming aware of circumstances that have resulted or might result in a Loss for which any person or persons entitled to indemnification pursuant to Section 22.1 or Section 22.2 hereof intends to seek indemnification under such Section (the "Indemnified Party") or (b) receipt by the Indemnified Party of written notice of any demand, claim or circumstances which, with the lapse of time, the giving of notice or both, would give rise to a claim or the commencement (or threatened commencement) of any lawsuit, arbitration, proceeding or other action that may result in a Loss (an "Asserted Liability"), the Indemnified Party shall give notice thereof (the "Claims Notice") to any party obligated to provide indemnification pursuant to Section 22.1 or Section 22.2 hereof (the "Indemnifying Party"). The Claims Notice shall describe the Loss or the Asserted Liability in reasonable detail, and shall indicate the amount (estimated, if necessary) of the Loss that has been or may be suffered by the Indemnified Party. The Claims Notice may be amended on one or more occasions with respect to the amount of the Asserted Liability or the Loss at any time prior to final resolution of the obligation to indemnify relating to the Asserted Liability or the Loss. If a Claims Notice is not provided promptly as required by this Section 22.3, the Indemnified Party nonetheless shall be entitled to indemnification by the Indemnifying Party to the extent that the Indemnifying Party has not established that it has been prejudiced by such late receipt of the Claims Notice. Notwithstanding the foregoing sentence, however, if the Claims Notice is not provided prior to compromise or payment of any Asserted Liability by the Indemnified Party, the Indemnified Party shall only be entitled to indemnification by the Indemnifying Party to the extent that the Indemnified Party has established that the Indemnifying Party has not been prejudiced by either such late receipt of the Claims Notice or by the making of such compromise or payment prior to the making of the Claims Notice. 22.4 Opportunity to Contest. Subject to the provisions of Section 22.5 hereof, the Indemnifying Party may elect to compromise or contest, at its own expense and with counsel reasonably acceptable to the Indemnified Party, any Asserted Liability. If the Indemnifying Party elects to compromise or contest such Asserted Liability, it shall, within twenty (20) days (or sooner, if the nature of the Asserted Liability so requires), notify the Indemnified Party of its intent to do so by sending a notice to the Indemnified Party (the "Contest Notice"), and the Indemnified Party shall cooperate, at the expense of the Indemnifying Party, in the compromise or contest of such Asserted Liability. If the Indemnifying Party either (i) elects not to compromise or contest the Asserted Liability, (ii) fails to notify the Indemnified Party of its election as herein provided, or (iii) contests its obligation to indemnify under this Agreement, then in any such case the 34 Indemnified Party shall have the right to pay, compromise or contest such Asserted Liability on behalf of and for the account and risk of the Indemnifying Party. Anything in this Section 22.4 to the contrary notwithstanding, the Indemnified Party shall (i) have the right, at its own cost and for its own account (except as provided in Section 22.5) hereof, to compromise or contest any Asserted Liability, and (ii) not, without the Indemnified Party's written consent, settle or compromise any Asserted Liability or consent to entry of any judgment which does not include an unconditional term releasing the Indemnified Party from all Liability in respect of such Asserted Liability. In any event, the Indemnified Party and the Indemnifying Party may participate, at their own expense, in the contest of such Asserted Liability. Each of the Company and Newco shall cooperate fully with the other as to all Asserted Liabilities, shall make available to the other as reasonably requested all information, records, and documents relating to all Asserted Liabilities and shall preserve all such information, records, and documents until the termination of any Asserted Liability. Each of the Company and Newco also shall make available to the other, as reasonably requested, its personnel, agents and other representatives who are responsible for preparing or maintaining information, records, or other documents, or who may have particular knowledge with respect to any Asserted Liability. 22.5 Subrogation Rights. In the event that the Indemnifying Party shall be obligated to indemnify the Indemnified Party pursuant to this Section 22, the Indemnifying Party shall, upon payment of such indemnity in full, be subrogated to all rights of the Indemnified Party with respect to the Loss to which such indemnification relates; provided, however, that the Indemnifying Party shall only be subrogated to the extent of any amount paid by it pursuant to this Section 22 in connection with such Loss. 22.6 Indemnification Payments. Unless a Loss is contested pursuant to Section 22.4 hereof or otherwise subject to insurance reimbursement from any insurer, an Indemnifying Party shall pay to the Indemnified Party the full amount of any such Loss within ten (10) days after the receipt by the Indemnifying Party of notice of such Loss. With respect to any Asserted Liability that has been contested, the Indemnifying Party shall pay the full amount of any Loss resulting therefrom within ten (10) days of the date the contest has been settled, compromised or terminated or the date a final judgment or award is rendered and no appeal is taken, and thereafter the amount of such Loss shall bear interest at a rate equal to the lesser of two percent (2%) per month or the maximum amount permitted by law. Newco shall be entitled to offset from any payments due to the Company for any reason whatsoever any amount due and owing to Newco by way of indemnification pursuant to Section 22.1 hereof, or any other provision herein, and Newco shall not be liable for any amounts so offset. Likewise, the Company is entitled to offset from any payments due to Newco for any reason whatsoever any amount due and owing to the Company by way of indemnification pursuant to Section 22.2 hereof, and the Company shall not be liable for any amounts so offset. 22.7 For purposes of this Section 22 the term "Loss" means any and all direct or indirect demands, claims, payments, obligations, recoveries, deficiencies, fines, penalties, interest, assessments, actions, causes of action, suits, losses, damages, liabilities, costs, expenses (including without limitation (i) interest, penalties and reasonable attorneys' fees and expenses, (ii) attorneys' fees and expenses necessary to enforce rights to indemnification hereunder, and (iii) consultant's fees and other costs of defense or investigation), and interest on any amount payable to a third party as a result of the foregoing, whether accrued, absolute, contingent, known, unknown, or otherwise as of the Closing Date or thereafter. 23. RIGHT TO SET-OFF. If (i) a Claims Notice is given by Newco to the Company, pursuant to Section 22, or (ii) Newco reasonably believes Newco is owed any sum under any provision of this Agreement or otherwise by the 35 Company and the Company shall fail to pay any such sum within thirty (30) days after demand therefor has been made by Newco, Newco may (without in any way limiting or compromising any rights to which it may be entitled at law for additional damages or compensation) prior to expiration of the applicable notice and cure provision of Section 17.2 set-off against or withhold from any sums which Newco may then owe or which Newco may later owe to the Company up to the amount (estimated, if necessary) (i) of Loss indicated in the Claims Notice as having been or may be suffered by Newco, or (ii) which the Company has failed to pay Newco, and, upon demand of the Company, pay such funds into an applicable registry of court or to any third party commercial escrow agent to be held pending expiration of such cure period. 24. SEVERABILITY AND CONSTRUCTION. 24.1 Except as expressly provided to the contrary herein, each portion, section, part, term, and provision of this Agreement shall be considered severable. If, for any reason, any term or provision herein is determined to be invalid and contrary to, or in conflict with, any existing or future law or regulation by a court or agency having valid jurisdiction, such shall not impair the operation, or have any other effect upon, such other portions, sections, parts, terms, and provisions of this Agreement as may remain otherwise intelligible, and the latter shall continue to be given full force and effect to bind the parties, and said invalid terms or provisions shall be deemed not to be part of this Agreement. 24.2 Except as has been expressly provided to the contrary herein, nothing in this Agreement is intended, nor shall be deemed to confer any rights or remedies created or granted by this Agreement upon any person or legal entity other than Newco, the Company, the officers, directors, and employees of Newco and the Company, and such respective successors and assigns of Newco and of the Company as may be contemplated by Section 14 hereof. 24.3 Any provision or covenant of this Agreement which expressly or by its nature imposes obligations beyond the expiration or termination of this Agreement shall survive such expiration or termination. 25. APPLICABLE LAW. 25.1 This Agreement shall be interpreted and construed under the laws of the State of Georgia and shall be treated in all respects as a Georgia contract. In the event of any conflict of law, the laws of the State of Georgia shall prevail, without regard to the application of conflict-of-law rules. 25.2 No right or remedy conferred upon or reserved to the Company or Newco by this Agreement is intended to be, nor shall be deemed, exclusive of any other right or remedy herein or by law or equity provided or permitted, but each shall be cumulative of every other right or remedy. 25.3 Nothing herein contained shall bar the Company's or Newco's right to seek and obtain injunctive relief in any court of competent jurisdiction against threatened conduct that will cause the Company or Newco loss or damages, under the applicable rules for obtaining specific performance, restraining orders, preliminary injunctions, and any other injunctive relief. The non-prevailing party shall pay all court costs and reasonable attorneys' fees and expenses incurred by the prevailing party in obtaining such relief. 26. ENTIRE AGREEMENT. This Agreement, the documents referred to herein or related to this Agreement, and the Schedules and Exhibits hereto, constitute the entire, full, and complete agreement between the Company and Newco 36 concerning the subject matter hereof and supersede any and all prior agreements. No amendment, change, or variance from this Agreement shall be binding on either party unless mutually agreed to by the parties and executed by their authorized officers or agents in writing. 27. MISCELLANEOUS BUSINESS TERMS. 27.1 At Closing the Company will issue to Newco warrants to purchase 100,000 shares of the Company's common stock at an exercise price equal to the closing price on July 16, 1995. The form of warrant is attached hereto as Exhibit "E". 27.2 Subject to the Company providing complete Directors and Officers liability insurance satisfactory to Newco and subject to the Company providing satisfactory contractual indemnification, Newco shall use its best efforts to have, during the term of this Agreement from and after the date of Closing, the Chief Executive Officer candidate of Newco agree to serve on the Board of Directors of the Company. 27.3 During the term of this Agreement from and after the date of Closing, E. Anthony Wilson, or a Company designee, will be offered a permanent seat on Newco's Franchisee Advisory Board. 27.4 During the term of this Agreement from and after the date of Closing, the Company shall have the right to purchase key man insurance upon the life of the Chief Executive Officer of Newco in an amount mutually determined by Newco and the Company, and Newco shall cooperate in all respects to enable the Company to obtain such insurance. 28. MISCELLANEOUS. 28.1 Cooperation of Parties. Newco and the Company will fully cooperate with each other and their respective counsel and accountants in connection with all steps to be taken as part of their obligations under this Agreement. Newco and the Company will use their best efforts to cause the conditions to the other party's obligation to close to be fulfilled on or prior to the Closing Date. 28.2 Transfer Documents. The parties hereto will at the Closing or at any time thereafter deliver and/or execute such further instruments as may reasonably be requested by the other party which are necessary to or appropriate with respect to the consummation of the transactions described herein. None of the documents or instruments requested hereunder shall be required to contain an undertaking or representation not contained in this Agreement or be required if inconsistent with the understandings and representations contained in this Agreement. 28.3 Headings. The headings of the articles and sections of this Agreement are inserted for convenience only and shall not constitute a part hereof. 28.4 Waiver. There can be no waiver of any term, provision, or condition of this Agreement which is not in writing signed by both parties hereto. 28.5 Counterparts. This Agreement may be executed simultaneously in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 28.6 Time. Time is and shall be of the essence of this Agreement. 37 29. OFFER TO ACCEPT. 29.1 This Agreement has been executed by the Company as a continuing and irrevocable offer to Newco to remain open for acceptance by Newco no later than 5:00 p.m. Eastern Daylight Time on Monday, September 11, 1995 (the "Expiration Time and Date"). The Company acknowledges and agrees that Newco, the officers, directors and stockholders of Newco, and the Chief Executive Officer candidate of Newco, intend to undertake material and significant actions based upon and in reliance on such offer and accordingly, that such offer shall be irrevocable by the Company until the Expiration Time and Date shall have passed. Newco may accept this offer by delivery of written notice of acceptance to the Company as provided for herein prior to passing of the Expiration Time and Date. Should the Expiration Time and Date pass without the delivery of such acceptance, such offer shall be deemed withdrawn and this Agreement of no further force and effect. Should such offer be accepted by Newco, the parties shall cooperate to fully execute multiple counterparts of this Agreement as soon as is reasonably practicable and provide a fully executed counterpart to each party, and shall jointly issue a mutually agreed upon public announcement of the entering into of this Agreement. WHEREOF, the parties hereto have duly executed and delivered this Agreement on the date first above-written. COMPANY: MICROTEL FRANCHISE AND DEVELOPMENT CORPORATION, a New York corporation /s/ E. Anthony Wilson By:_________________________ E. Anthony Wilson, Chairman NEWCO: U.S. FRANCHISE SYSTEMS, INC., a Delaware corporation /s/ Neal K. Aronson By: ____________________ Neal K. Aronson, Initial Director jv-egt.901/4270 38 Exhibit "A" The Microtel "System" The Microtel system includes the following: I. Architectural and design A. Prototypical plans 1. two-story 2. three-story (in varying footprints as available from master architect based on existing constructed "Microtels" to fit site location and circumstances) B. Specification manual. C. Design standards manual. D. List of fixture and equipment requirements. E. Listing of potential vendors with negotiated prices. II. Trademarks and service marks A. MICROTEL (word mark) B. MICROTEL (stylized logo) C. "Don't sleep with Amenity Creep" (word mark) D. "First the Hotel, Then the Motel, Now Microtel." (word mark) E. "Savings you can Sleep on." (word mark) F. Microtel Suites (word mark) G. Microtel & Suites (word mark) III. Reservation Referral System A. "800" national referral telephone number (800-365-MTEL) (800-365-6835) B. Existing National directories of operating Microtel units C. Rights and obligations of "800" referral system, directory design and distribution IV. Operational Property & Philosophy A. Manager/owner training-orientation program B. Operations manual C. Advertising, promotional material and layouts D. Philosophy 1. Provide consistent clean, safe, contemporary guest rooms without unnecessary amenities (including upscale decor and furnishings with strong curb appeal). 2. Provide excellent price value to the customer at rates competitive with other nationally franchised brands. 3. Provide a product with low turnkey construction costs and operating costs lower than the competition. 4. Orient the franchiser to realize that quality accommodations and pleasant, efficient service will provide a satisfied Microtel guest. V. Other A. Microtel investment analysis B. Microtel newsletter C. Prospective Franchisee sales packages MICROTEL FRANCHISE AND DEVELOPMENT CORPORATION FRANCHISE AGREEMENT THIS AGREEMENT, made and entered into , 19, by and between Microtel Franchise & Development Corporation, a New York Corporation, (the "Franchisor"), and , (the "Franchisee"). WITNESSETH: WHEREAS, Franchisor, as the result of the expenditure of time, skill, effort, and money has developed and owns a unique concept and system (hereinafter "System") relating to the establishment and operation of hotels which operate under the name "MICROTEL", "MICROTEL & SUITES", OR "MICROTEL SUITES", and which feature modern up-scale accommodations, down-sized standard guest rooms or two-room suites, and economy room rates; WHEREAS, the distinguishing characteristics of the System, all of which may be changed, improved, or further developed by Franchisor from time to time, include, without limitation: A. Tradenames, trademarks, and service marks, including, without limitation, "MICROTEL", "MICROTEL & SUITES", "MICROTEL SUITES", "SAVINGS YOU CAN SLEEP ON", and such other tradenames, trademarks, and service marks as are now designated (and may hereafter be designated by Franchisor in writing) as part of the System (hereinafter "Proprietary Marks"); B. Prototypical architectural plans, designs, and layouts, including, without limitation, site plan, floor plan, roof plan, plumbing plan, lobby plan, electrical plan, and landscape plan; C. A national "800" number for reservation referrals; D. A national Microtel directory; E. Management and personnel training, and training programs and materials; F. Management and operational procedures and techniques as prescribed in the Confidential Manuals (hereinafter the "Manuals"); G. Standards and specifications for construction, equipment, and furnishings, as described in the Manuals; and H. Advertising, marketing, and promotional programs WHEREAS, Franchisee desires to establish and operate a Microtel hotel, Microtel & Suites hotel, or Microtel Suites hotel, as defined in Attachment A, under the System, at the location specified herein, and wishes to obtain a Franchise from the Franchisor for that purpose, as well as to receive the training and other assistance provided by Franchisor in connection therewith; and WHEREAS, Franchisee understands and acknowledges the importance of the standards of quality and service developed by Franchisor and the necessity of operating the Microtel hotel, Microtel & Suites hotel, or Microtel Suites hotel franchised hereunder in conformity with them. EXHIBIT A-1 REGISTERED SERVICEMARKS Principal Register of the U.S. Patent and Trademark Office:
Mark Registration Date Registration Number Class MICROTEL (word mark) December 31, 1991 1,670,688 35 & 42 MICROTEL (stylized) February 25, 1992 1,677,179 35 & 42 "Don't Sleep With Amenity Creep" August 22, 1989 1,553,217 35 "First the Hotel. Then the Motel. Now Microtel." December 31, 1991 1,670,687 42 "Savings You Can Sleep On" March 3, 1992 1,678,009 42 Microtel Suites Application filed 12/22/94 35 Microtel & Suites Application filed 12/22/94 35 Florida Microtel and Design T10310 January 5, 1989 Georgia Microtel and Design S-8721 October 28, 1988 Microtel S-8722 October 28, 1988 Louisiana Microtel and Design October 17, 1988 Microtel October 17, 1988 Maine Microtel and Design 19890086M October 14, 1988 South Carolina Microtel and Design October 24, 1988 Utah Microtel and Design 29,480 October 17, 1988 Microtel 29,481 October 17, 1988 Mark Registration Date Registration Number Class Canada Applications for Proposed Use filed with the Canadian Trademark Office: Microtel (word mark) 2/11/91 675,754 42 (Extension filed 5/23/95) Microtel and Design 3/8/91 381,158 35 Microtel and Design 2/11/91 675,853 42 (Extension filed 5/15/95) "First the Hotel . . ." 2/8/91 676,203 42 (Extension filed 7/28/95) "Savings You Can Sleep On" 2/8/91 675,205 42 (Extension filed 5/8/95) United Kingdom Microtel (word mark) 3/27/90 1423166 35 Microtel and Design 6/4/93-withdrawn 1423167 42 Logo only 5/26/93 1536884 42 Logo only 5/26/93 1536883 35 Mexico Microtel and Design 2/3/95 478,447 42 Microtel** ) "Don't Sleep With Amenity Creep"**) Renewal applications pending "Savings You Can Sleep On"** )
Note: International Class 35-Franchise Services International Class 42-Hotel/Motel Services EXHIBIT "B" Current standard form of Franchise Agreement utilized by the Company throughout the United States. EXHIBIT C MICROTEL FRANCHISE AND DEVELOPMENT CORPORATION FRANCHISE AGREEMENT MICROTEL FRANCHISE AND DEVELOPMENT CORPORATION FRANCHISE AGREEMENT TABLE OF CONTENTS RECITALS PAGE 1. GRANT ................................................................... 2 2. TERM AND RENEWAL ........................................................ 2 3. DUTIES OF FRANCHISOR .................................................... 2 4. FEES .................................................................... 3 5. DUTIES OF FRANCHISEE .................................................... 4 6. PROPRIETARY MARKS ....................................................... 7 7. CONFIDENTIAL MANUALS .................................................... 8 8. CONFIDENTIAL INFORMATION ................................................ 9 9. ACCOUNTING AND RECORDS .................................................. 9 10. ADVERTISING ............................................................ 10 11. INSURANCE .............................................................. 11 12. TRANSFER OF INTEREST ................................................... 13 13. DEFAULT AND TERMINATION ................................................ 15 14. OBLIGATIONS UPON TERMINATION ........................................... 17 15. COVENANTS .............................................................. 19 16. CORPORATE OR PARTNERSHIP FRANCHISEE .................................... 19 17. TAXES, PERMITS, AND INDEBTEDNESS ....................................... 20 18. INDEPENDENT CONTRACTOR AND INDEMNIFICATION ............................. 20 MICROTEL FRANCHISE AND DEVELOPMENT CORPORATION FRANCHISE AGREEMENT TABLE OF CONTENTS (Continued) 19. APPROVALS AND WAIVERS ................................................ 21 20. NOTICES .............................................................. 21 21. ENTIRE AGREEMENT ...................................................... 22 22. SEVERABILITY AND CONSTRUCTION ......................................... 22 23. APPLICABLE LAW ........................................................ 22 24. ACKNOWLEDGEMENTS ...................................................... 23 GUARANTEE ............................................................. 24 ATTACHMENT A ......................................................... 25 ATTACHMENT B ......................................................... 26 MICROTEL FRANCHISE AND DEVELOPMENT CORPORATION FRANCHISE AGREEMENT THIS AGREEMENT, made and entered into , 19, by and between Microtel Franchise & Development Corporation, a New York Corporation, (The "Franchisor"), and, (the "Franchisee"). WITNESSETH: WHEREAS, Franchisor, as the result of the expenditure of time, skill, effort, and money has developed and owns a unique concept and system (hereinafter "System") relating to the establishment and operation of hotels which operate under the name "MICROTEL", "MICROTEL & SUITES", OR "MICROTEL SUITES", and which feature modern up-scale accommodations, down-sized standard guest rooms or two-room suites, and economy room rates; WHEREAS, the distinguishing characteristics of the System, all of which may be changed, improved, or further developed by Franchisor from time to time; include, without limitation: A. Tradenames, trademarks, and service marks, including, without limitation, "MICROTEL", "MICROTEL & SUITES", "MICROTEL SUITES", "SAVINGS YOU CAN SLEEP ON", and such other tradenames, trademarks, and service marks as are now designated (and may hereafter be designated by Franchisor in writing) as part of the System (hereinafter "Proprietary Marks"); B. Prototypical architectural plans, designs, and layouts, including, without limitation, site plan, floor plan, roof plan, plumbing plan, lobby plan, electrical plan, and landscape plan; C. A national "800" number for reservation referrals; D. A national Microtel directory; E. Management and personnel training, and training programs and materials; F. Management and operational procedures and techniques as prescribed in the Confidential Manuals (hereinafter the "Manuals"); G. Standards and specifications for construction, equipment, and furnishings, as described in the Manuals; and H. Advertising, marketing, and promotional programs WHEREAS, Franchisee desires to establish and operate a Microtel hotel, Microtel & Suites hotel, or Microtel Suites Hotel, as defined in Attachment A, under the System, at the location specified herein, and wishes to obtain a Franchise from the Franchisor for that purpose, as well as to receive the training and other assistance provided by Franchisor in connection therewith; and WHEREAS, Franchisee understands and acknowledges the importance of the standards of quality and service developed by Franchisor and the necessity of operating the Microtel hotel, Microtel & Suites hotel, or Microtel Suites hotel franchised hereunder in conformity with them. NOW THEREFORE, the parties, in consideration of the undertakings and commitments of each party to the other party set forth herein, hereby mutually agree as follows: 1. GRANT Franchisor hereby grants to Franchisee, upon the terms and conditions herein contained, the right and franchise, and Franchisee undertakes the obligation, to develop, construct, and operate a Microtel hotel, Microtel & Suites hotel, or Microtel Suites hotel (the "Franchised Business"), as defined in Attachment A, and to use solely in connection therewith, Franchisor's System, as it may be changed, improved, and further developed from time to time, at and only at the location specified in Attachment A hereto (hereinafter "Approved Location"). By approving the location and configuration of a Microtel hotel, Microtel & Suites hotel, or Microtel Suites hotel, the Franchisor does not explicitly or implicitly represent or warrant that the Franchisee's location will be successful. 2. TERM AND RENEWAL 2.1 Except as otherwise provided in this Agreement, the term of this franchise shall commence on the date of this Agreemnt, and unless sooner terminated in accordance with the provisions hereof, shall expire ten years from the "Opening Date", as specified in Section 5.6. 2.2 Franchisee may, at Franchisee's opton, renew this Franchise for one additional period of ten years, upon compliance with the following terms and conditions: 2.2.1 Franchisee shall not be in default of any provision of this Agreement, or any other agreement between the parties, and shall have substantially complied with all the terms and conditions of all such agreemnts during the terms thereof; 2.2.2 Franchisee shall present satisfactory evidence that Franchisee has the right to remain in possession of the Approved Location during the entire renewal term; 2.2.3 Franchisee shall have satisfied all monetary obligations owed by Franchisee to Franchisor and its subsidiaries and affiliates, and shall have timely met these obligations throughout the term of this Agreement; 2.2.4 Franchisee shall submit a renewal application to Franchisor not less than six months nor more than twelve months prior to the end of the initial term, and shall pay with its renewal application a renewal fee in an amount equal to twenty-five perent of the then-current franchisee fee being charged by Franchisor, computed on a per-room basis; 2.2.5 Franchisee's managers and other employees shall comply with Franchisor's then-current training requirements, and Franchisee shall, at Franchisee's expense, upgrade the Franchised Business to conform to the then-current standards standards and specifications of Franchisor as may be specified in the Manuals or otherwise in writing; and 2.2.6 Franchisee and Franchisor shall execute mutual general releases, in a form prescribed by Franchisor, of any and all claims of each party against the other, and their respective subsidiaries, affiliates, officers, directors, agents and employees. 3. DUTIES OF FRANCHISOR 3.1 Franchisor shall provide continuing consultation and advisory assistance to Franchisee, in the manner at at such times as Franchisor deems advisable, concerning the management, construction, development, operation, and marketing of the Franchised Business. 2 3.2 Franchisor shall make available a set of prototypical plans and specifications (not for construction) for the Franchised Business, which shall be adapted for use by Franchisee's architects and engineers. 3.3 Franchisor shall make available to Franchisee and Franchisee's employees an initial training program. Franchisor shall make available to Franchisee and Franchisee's employees such continuing training programs, conferences, and seminars as Franchisor deems appropriate. All training programs shall be conducted at such locations as Franchisor may designate and shall be subject to the terms and conditions as set forth in Section 5.8 of this Agreement. 3.4 Franchisor shall provide Franchisee one (1) copy of the Manuals, as more fully described in Section 7 hereof. 3.5 Franchisor shall maintain a national directory (the "Directory"), listing the address and telephone number of all Microtel hotels, Microtel & Suites hotels, and Microtel Suites hotels operating under the System. 3.6 Franchisor shall maintain, and make available to Franchisee, a national "800" number reservation referral system. 3.7 Franchisor shall have the right to establish, maintain, and administer an advertising fund for the System, subject to the provisions of Section 10.2 hereof. 4. FEES 4.1 Franchisor acknowledges having received from Franchisee an initial franchise fee in an amount equal to the greater ofthousand dollars ($), ordollars ($) per room, as determined by the number of guest rooms or suites specified on Attachment A hereto. The initial franchise fee is deemed fully earned and non-refundable upon the execution of this Agreement, in consideration for the administrative and other expenses incurred by Franchisor in furnishing services and assistance to Franchisee, and for the Franchisor's lost or deferred opportunities to franchise others. 4.2 In consideration of the franchise granted herein, Franchisee shall pay Franchisor as a continuing monthly royalty fee during the term of this Agreement a percentage of Franchisee's Gross Room Revenues from the operation of the Franchised Business, computed as follows: Microtel Microtel & Suites (Applicable when 50% or more total guest rooms are of standard Microtel configuration): a. two and one-half percent during the period when fewer than fifty Microtel hotels, Microtel & Suites hotels, or Microtel Suites hotels are open for business and receivng Gross Room Revenues; b. three percent during the period commencing on the first day of the month following the month when at least fifty but fewer than one hundred Franchised Businesses are open for business and receiving Gross Room Revenues; and c. three and one-half percent during the period commencing on the first day of the month following the month when at least one hundred Franchised Businesses are open for business and receiving Gross Room Revenues. 3 Microtel & Suites Microtel Suites (Applicable when 51% or more total guest rooms are of Suite configuration): three and a half percent of gross room revenues 4.3 "Gross Room Revenues" shall mean the gross receipts attributable to or payable for the rental of guest rooms at the Franchised Business, including, without limitation, the net proceeds (after deduction of the expenses of adjustment and collection) of use and occupancy, or for business interruption, rent loss, or similar insurance with respect to the Franchised Business (provided that insurance proceeds shall be included in Gross Room Revenues only when and to the extent actually received). Gross Room Revenues shall not include gratuities to employees or service charges levied in lieu of such gratuities, which, in Either case, are payable to employees, or federal, state, and local taxes or fees collected by Franchisee for transmittal to the appropriate taxing authorities. 4.4 All monthly payments required by this Agreement shall be paid to Franchisor on or before the tenth day of each month, shall be based on the Gross Room Revenues for the preceding calendar month, and shall be submitted to Franchisor together with all reports required under this Agreement. Any payment or report not actually received by Franchisor on or before such date shall be deemed overdue. If any payment is overdue, Franchisee shall pay to Franchisor, in addition to the amount overdue, interest on such amount from the day it was due until paid at one and a half percent per month or the maximum rate permitted by law, whichever is less. Entitlement to such interest shall be in addition to any of the remedies Franchisor may have. 5. DUTIES OF FRANCHISEE 5.1 Franchisee acknowledges that every detail of the System is important to Franchisor and other franchisees operating under the System in order to develop and maintain the standards and public image of the System. Franchisee agrees to comply with the details of the System as specified by Franchisor in the Manuals, or otherwise in writing. 5.2 Within ninety days following the date of this Agreement, Franchisee shall submit to Franchisor for Franchisor's written approval a site layout, preliminary plans, and outline specifications adapting Franchisor's then-prototypical plans and specifications to the Approved Location, which shall comply with all local and state laws, regulations, and ordinances. Within sixty days of Franchisee's receipt of Franchisor's written approval, Franchisee shall submit to Franchisor for Franchisor's approval, complete working drawings and specifications for the hotel and the hotel premises. When approved by Franchisor, such drawings and specifications shall not thereafter be changed or modified without the prior written consent of Franchisor, which consent shall not be unreasonably withheld. 5.3 Franchisee shall commence construction within sixty days after Franchisor has approved the complete working drawings and specifications, which date shall be designated the "Commencement Date". Franchisee shall, within five days after the Commencement Date, provide written notice to Franchisor that construction has begun. Commencement of construction shall mean the excavation for footings. Franchisee shall maintain continuous consruction (except for any interruption of by reason of events constituting force majeure) until construction is completed in accordance with the approved site layout and plan. As used in this Agreement, "force majeure" means an act of God, war, civil disturbance, government action, fire flood, accident, hurricane, earthquake or other calamity, strike or other labor dispute, or other action beyond the control of Franchisee. Franchisee and Franchisor agree that time is of the essence in the construction and opening of the Franchised Business. 5.4 Franchisee shall notify Franchisor as soon as the interior walls have been completed so that Franchisor and/or its designees may inspect the site and the construction in order to determine (solely for its own benefit) whether construction is proceeding in accordance with the Franchisor's standards and specifications and approved plans. Franchisee shall cooperate and cause its architects, engineers, contractors, and subcontractors to cooperate fully with Franchisor's inspection. 4 5.5 Subject to any permitted extensions for force majeure interruptions, Franchisee shall, within two hundred seventy days after the Commencement Date, complete all required construction and site work, purchase and install all fixtures, equipment, furnishings, furniture, signs, supplies, and other items necessary for the completion and operation of the Franchised Business, as specified in the approved plans and in the Manual, and be ready to open for business (the "Completion Date"). 5.6 Franchisee shall, within tens days of the Completion Date, submit a written request to Franchisor for Franchisor to conduct a final inspection. Upon receipt of such request, Franchisor shall promptly conduct such final inspection. Franchisee shall open for business within ten days after receipt of Franchisor's authorization to do so. The date upon which Franchisee receives authorization to open for business shall be the "Opening Date". Franchisee shall not open for business until Franchisor provides final approval and authorization in writing. 5.7 Franchisee may request approval by Franchisor to commence operation of a completed portion of the Franchised Business for an interim period prior to the Completion Date. Such request shall be in writing and shall demonstrate to the Franchisor's satisfaction that Franchisee has complied with Franchisor's standards and specifications with respect to contruction, training, and pre-opening operations of the Franchised Business, has obtained all governmental licenses and permits necessary to operate the Franchised Business under the System, and that a minimum of seventy-five percent of the scheduled total number of guest rooms or suites have been fully designed, built, and equipped, and are ready to be opened for occupancy in accordance with this Agreement. If Franchisor approves Franchisee's request, Franchisee shall conduct business during the interim period in accordance with all terms and conditions of this Agreement (including, without limitation, payment of all fees), as well as any additional conditions which Franchisor may reasonbly impose for the interim period. 5.8 Prior to the Opening Date, Franchisee's General Manager shall atend and successfully complete Franchisor's initial training program unless, in the sole judgement of Franchisor, the General Manager has sufficient prior experience to make training unnecessary. At Franchisor's discretion, other employees of Franchisee also may attend the initial training session. All training shall be provided at such locations as Franchisor may designate. Franchisee shall be responsible for all expenses associated with attendance at training, including, but not limited to, transportation, room, board, and wages of each of its employees. Franchisor may periodically make available other required or optional training courses to Franchisee's employees, as well as other programs, conferences, and seminars; and Franchisee shall ensure that all employees, as Franchisor may direct, satisfactorily complete any required training within the time specified. All training shall be provided at such location as Franchisor may designate, and Franchisee shall be responsible for all expenses associated with attendance at training of its employees. 5.9 Franchisee shall not expand the number of guest rooms or suites in the Franchised Business without the prior written consent of Franchisor, which consent shall not be unreasonably withheld; provided, however, that Franchisor may impose reasonable conditions on its consent, including, without limitation, the following: 5.9.1 Franchisee shall demonstrate to the satisfaction of Franchisor that Franchisee is able to satisfy all such reasonble construction and operations deadlines and obligations imposed by Franchisor; and 5.9.2 Franchisee shall pay to Franchisor a non-refundable expansion fee in an amount equal to the then-current per room or suite charge made to new franchisees multiplied by the number of additional guest rooms or suites which Franchisee proposes to construct. The expansion fee shall be due and payable at the time of Franchisor's approval of the proposed expansion, and is non-refundable. 5.10 Franchisee shall use the premises solely for the operation of the Franchised Business, and shall refrain from using or permitting the use of the premises for any other purpose or activity at any time without first obtaining Franchisor's prior written consent. Franchisee shall operate the Franchised Business in conformity with such standards, policies, methods, and techniques as Franchisor may, from time to time, prescribe in the Manuals. Franchisee shall refrain from deviating from the Manuals, or otherwise operating the Franchised Business in any manner which adversely reflects on the System, the Proprietary Marks, the goodwill associated therewith, Franchisor, or Franchisor's rights therein. 5 5.11 Franchisee shall maintain the Franchised Business in a high degree of sanitation, repair, and condition and consistent with the System's image, and in connection therewith, shall make such additions, alterations, repairs and replacements thereto as may be required for that purpose (but no others without Franchisor's prior written consent), including, without limitation, such periodic repainting, repairs, and replacement of signs and equipment, furnishings, and furniture as Franchisor may reasonably direct. 5.12 At Franchisor's request, which shall not be more often than once every five years, Franchisee shall upgrade the Franchised Businss at Franchisee's expense to conform with the building decor, trade dress, and presentation of trademarks and service marks consistent with Franchisor's then-current public image, including, without limitation, such remodeling, redecoration, and such other modification to existing improvements as may be necessary and specified by Franchisor. 5.13 Franchisee shall purchase or lease, and install, at Franchisee's expense, all fixtures, furnishings, furniture, signs, equipment, and supplies, meeting Franchisor's standards, specifications, and requirements as provided in the approved plans and as Franchisor may reasonably direct from time to time in the Manuals or otherwise in writing. Franchisee shall refrain from installing in, on, or about the Franchised Business, or permitting to be installed, without Franchisor's prior written consent, any fixtures, furnishings, furniture, signs, equipment, electronic or video games, vending machines, gambling devices, or any other items or supplies not previously approved as meeting Franchisor's then-current standards and specifications as set forth in the Manuals. 5.14 Franchisee shall comply with all federal, state, local laws, rules and regulations, and shall timely obtain any and all permits, certificates, and licenses necessary for the full and proper development and operation of the business franchised hereunder, including, without limitation, licenses to do business, fictitious name registrations, building permits, sales tax permits, health and sanitation permits and ratings, and fire clearances. 5.15 Franchisee shall prominently display in and upon the premises of the Franchised Business such signs using Franchisor's Proprietary Marks, and other advertising signs of a nature, form, color, number, location, size and content as are required by the Franchisor in the Manuals or otherwise in writing, or as the Franchisor may direct from time to time, or approve in writing. Franchisee shall comply with the requirements of the System concerning the types of services and products that may be promoted or advertised at the Franchised Business, including the display of promotional materials. 5.16 Franchisee hereby grants to Franchisor and its agents the right to enter upon the premises of the Franchised Business at any reasonable time for the purpose of conducting inspections. Franchisee shall take such steps as may be necessary to correct any deficiencies detected during such inspection, upon the written request of Franchisor or its agent, within such time as may be specified therein. 5.17 Franchisee acknowledges and agrees that offering the public a single, efficient, reservation referral service is essential to the goodwill, reputation, and success of the System. Franchisee agrees to obtain and utilize an "800" telephone number and agrees to participate during the term of this Agreement in a national reservation referral system utilizing both Franchisor's and Franchisee's "800" numbers, which participation shall include, without limitation, installing and maintaining at the premises of the Franchised Business, at Franchisee's expense, such equipment as Franchisor may prescribe from time to time for use in connection with such reservation referral system. Franchisee shall also be responsible for telephone line charges for connecting Franchisee's reservation equipment to the system, and for the cost of software and supplies used in the operation of the equipment, and for other related expenses. Franchisee shall execute the Collateral Assignment of Telephone Numbers and Listings ("Telephone Listing Agreement") attached hereto as Attachment B, prior to commencement of operations of the Franchised Business. 5.18 Franchisee shall list the Franchised Business in Franchisor's Directory, and shall furnish to Franchisor in writing such information as Franchisor may request for that purpose. Franchisee understands and acknowledges that the success and utility of the Directory may require that Franchisee provide information concerning rates for lodging accommodations; that Franchisee shall have sole discretion for determining the room rates which appear in each Directory; and that Franchisor assumes no liability for, not shall be deemed liable by reason of, any failure by Franchisor or Franchisor's other franchisees to honor any rates for any period for which each Directory is in effect. 6 5.19 Franchisee shall comply with all other requirements set forth in this Agreement. 6. PROPRIETARY MARKS 6.1 Franchisor represents with respect to the Proprietary Marks that: 6.1.1 Franchisor is the owner of all right, title, and interest in and to the Proprietary Marks. 6.1.2 Franchisor will take all steps reasonably necessary to preserve and protect the ownership and validity in and to the Proprietary Marks. 6.2 With respect to Franchisee's licensed use of the Proprietary Marks pursuant to this Agreement, Franchisee agrees that: 6.2.1 Franchisee shall use only the Proprietary Marks designated by Franchisor and shall use them only in the manner authorized and permitted by the Franchisor. 6.2.2 Franchisee shall use the Proprietary Marks only for the operation of the Franchised Business at the Approved Location. 6.2.3 During the term of this Agreement, Franchisee shall identify itself as the owner of the Franchised Business in conjunction with any use of the Proprietary Marks, including, but not limited to, on invoices, order forms, receipts, business cards, and contracts, and at such conspicuous locations of the Franchised Business' premises (such as behind the front desk or in the lobby) as Franchisor shall designate in writing. The identification shall be in the form which specified Franchisee's name, followed by the term "Franchised Owner" or such other identification as shall be approved by Franchisor. 6.2.4 Franchisee's right to use the Proprietary Marks is limited to such uses as are authorized under this Agreement, and any unauthorized use thereof shall constitute an infringement of Franchisor's rights. 6.2.5 Franchisee shall not use the Proprietary Marks to incur any obligation or indebtedness on behalf of Franchisor. 6.2.6 Franchisee shall not use the Proprietary Marks as part of its corporate or other legal name, without the prior written consent of Franchisor. 6.2.7 Franchisee shall comply with Franchisor's instructions in filing and maintaining the requisite trade name or fictitious name registrations, and shall execute any documents deemed necessary by Franchisor or to its counsel to obtain protection for the Proprietary Marks or to maintain their continued validity and enforceability. 6.3 Franchisee expressly understands and acknowledges that: 6.3.1 As between the parties hereto, Franchisor is the owner of all right, title, and interest in and to the Proprietary Marks and the goodwill associated with and symbolized by them. 6.3.2 The Proprietary Marks are valid and serve to identify the System and those who are franchised under the System. 6.3.3 Franchisee shall not directly or indirectly contest the validity or the ownership of the Proprietary Marks. 7 6.3.4 Franchisee's use of the Proprietary Marks pursuant to this Agreement does not give Franchisee any ownership interest or other interest in or to the Proprietary Marks, except the nonexclusive franchise granted herein. 6.3.5 Any and all goodwill arising from Franchisee's use of the Proprietary Marks in its Franchised Business under the System shall insure solely and exclusively to the benefit of Franchisor, and upon expiration or termination of this Agreement and the franchise herein granted, no monetary amount shall be assigned as attributable to any goodwill associated with Franchisee's use of the System or the Proprietary Marks. 6.3.6 The right and license of the Proprietary Marks granted hereunder to Franchisee is nonexclusive, and Franchisor thus may: 6.3.6.1 Itself use, and grant franchises to others to use, the Proprietary Marks. 6.3.6.2 Establish, develop, and franchise other systems, different from the System franchised herein, without offering or providing Franchisee any rights in, to, or under such other systems. 6.3.7 Franchisor reserves the right to substitute different Proprietary Marks for use in identifying the System and the businesses operating thereunder, and Franchisee agrees to comply with Franchisor's requirements relating thereto. 6.4 Franchisee shall promptly notify Franchisor of any unauthorized use of the Proprietary Marks or marks confusingly similar thereto, any challenge to the validity of the Proprietary Marks, or any challenge to Franchisor's ownership of, or Franchisee's right to use, the Proprietary Marks. Franchisee acknowledges that Franchisor has the sole right to direct and control any administrative proceeding or litigation involving the Proprietary Marks, including any settlement thereof. Franchisor has the right, but not the obligation, to take action against uses by others that may constitute infringement of the Proprietary Marks. 6.5 Provided Franchisee has used the Proprietary Marks in accordance with this Franchise Agreement, Franchisor will defend at Franchisor's expense against any third party claim, suit, or demand involving the Proprietary Marks and arising out of Franchisee's use thereof. In the event that Franchisee has not used the Proprietary Marks in accordance with this Agreement, Franchisor shall defend Franchisee, at Franchisee's expense, against such third party claims, suits, or demands. 6.6 In the event of any litigation or administrative proceeding relating to the Proprietary Marks, Franchisee shall execute any and all documents and do all acts as may, in the opinion of Franchisor, be necessary to carry out such defense or prosecution, including, but not limited to, becoming a nominal party to any legal action. Except to the extent that such litigation is the result of Franchisee's use of the Proprietary Marks in a manner inconsistent with the terms of this Agreement, Franchisor agrees to reimburse Franchisee for its out of pocket costs in performing such acts, except that Franchisee shall bear the salary costs of its employees, and Franchisor shall bear the cost of any judgement or settlement. 7. CONFIDENTIAL MANUALS 7.1 Franchisee shall at all times treat the Manuals, all supplements and revisions thereto, any other manuals created for or approved for use in the operation of the Franchised Business and the information contained therein as confidential, and shall use all reasonable efforts to maintain the confidentiality of such information. Franchisee shall not at any time, without Franchisor's prior written consent, copy, duplicate, record, or otherwise reproduce the foregoing materials, in whole or in part, nor otherwise make the same available to any unauthorized person. Franchisee may disclose such information and materials only to such of Franchisee's contractors, architects, lenders, investors, employees, agents, or others who must have access to it in connection with their employment or the performance of this Agreement, in which event Franchisee shall obtain the agreement of such persons and entities to maintain the confidentiality thereof. The Manuals shall remain at all times in the sole property of Franchisor. 8 7.2 Franchisor may from time to time revise the contents of the Manuals, and Franchisee expressly agrees to comply with each new or changed standard. Franchisee shall at all times ensure that Franchisee's copy of the Manuals is kept current and up-to-date; in the event of any dispute as to the content of the Manuals, the terms of the master copy of the Manuals maintained by Franchisor at Franchisor's home office shall be controlling. 8. CONFIDENTIAL INFORMATION 8.1 Franchisee shall not, during the term of this Agreement or thereafter, communicate, divulge, or use for the benefit of any other person, persons, partnership, association, or corporation any confidential information, knowledge, or know-how concerning the System or the operation of the Franchised Business which may be communicated to Franchisee, or of which Franchisee may be apprised, by virtue of Franchisee's operation under the terms of this Agreement. Franchisee shall divulge such confidential information only to such of Franchisee's employees or agents as must have access to it in order to operate the Franchised Business. Any and all information, trade secrets, knowledge, know-how, or other data which Franchisor designates as confidential shall be deemed confidential for purposes of this Agreement, except information which Franchisee can demonstrate came to Franchisee's attention prior to disclosure thereof by Franchisor, or which, at or after the time of disclosure by Franchisor to Franchisee, had become or later becomes a part of the public domain, through publication or communication by others. 8.2 Franchisee acknowledges that the provisions in this Section 8 are and have been a primary inducement to Franchisor to enter into this Agreement, and that any failure to comply with the requirements of Section 8.1 will cause Franchisor irreparable injury without an adequate remedy at law; and Franchisee agrees to pay all court costs and reasonable attorneys' fees incurred by Franchisor in obtaining specific performance of, or an injunction against any violation of, the requirements of Section 8.1. 9. ACCOUNTING AND RECORDS 9.1 During the term of this Agreement, Franchisee shall maintain and preserve, for at least five years from the date of their preparation, full, complete, and accurate, books, records, and accounts in accordance with the most current version of a Uniform System of Accounts for Hotels and in the form and manner prescribed by Franchisor from time to time in the Manuals or otherwise in writing. 9.2 Franchisee shall, at Franchisee's expense, submit to Franchisor, by the tenth day of each month, a monthly statement on forms prescribed by Franchisor accurately reflecting all Gross Room Revenues, and all other revenues generated at the Franchised Business, for the preceding calendar month, and such other data and other information as Franchisor may require, including, without limitation, room occupancy rates, occupancy percentage, average daily room rate, reservation data, and the sources and amount of all expenses and revenues. Each statement shall be signed by Franchisee attesting that it is true and correct. 9.3 Franchisee shall, at Franchisee's expense, submit to Franchisor an unaudited semi-annual profit and loss statement (in the form prescribed by Franchisor), and a balance sheet within sixty days of the end of each semi-annual fiscal period during the term hereof with respect to the operations of the Franchised Business. Each statement shall be signed by Franchisee attesting that it is true and correct. 9.4 Franchisee shall submit to Franchisor, for review and auditing, such other forms, periodic and other reports, records, information, and data, as Franchisor may reasonably designate, in the form at the times and places reasonably required by Franchisor, upon request and as specified from time to time in the Manuals or otherwise in writing. 9.5 Franchisor or its designated agents shall have the right at all reasonable times to examine and copy, at its expense, all books, records, and tax returns of Franchisee related to the Franchised Business and, at its option, to have an independent audit made. If an inspection or audit should reveal that payments have been understated in any report to Franchisor, then Franchisee shall immediately pay to Franchisor the amount understated upon demand, in addition to interest from the date such amount was due until paid, at one and 9 one half percent per month or the maximum rate permitted by law, whichever is less. In such event, Franchisor shall also have the right to require that all future financial statements of Franchisee related to the Franchised Business be audited at Franchisee's expense for each fiscal year by an independent certified public accounting firm selected by Franchisee and approved by Franchisor. If an inspection discloses an underpayment to Franchisor of five percent or more of the total amount that should have been paid to Franchisor during any six month period, Franchisee shall, in addition to repayment of such understated amount, with interest, reimburse Franchisor for any and all costs and expenses incurred in connection with the inspection or audit (including, without limitation, reasonable accounting and attorney's fees). The foregoing remedies shall be in addition to any other remedies Franchisor may have, including, without limitation the remedies for default. 10. ADVERTISING 10.1 Recognizing the value of advertising and the importance of the standardization of advertising programs to the furtherance of the goodwill and public image of the System, the parties agree that all advertising by Franchisee in any medium shall be conducted in a dignified manner and shall conform to such standards and requirements as Franchisor may specify from time to time in writing. Franchisor reserves the right to disapprove upon written notice to Franchisee any advertising, or promotional materials used by Franchisee, if in Franchisor's judgement, such materials appear to have a substantial adverse effect upon the Proprietary Marks or Franchisor's goodwill therein or to infringe upon the proprietary rights of others. Franchisee shall discontinue use of any disapproved material upon receipt of such written notice. 10.2 Recognizing the value to all Franchised Businesses in the System of marketing and advertising, Franchisor reserves the right to establish, maintain, and administer an Advertising Fund (the "Fund") for the System. If the Fund is established, Franchisee agrees to contribute one percent of its Gross Room Revenues to the Fund, on a monthly basis and in accordance with the procedures set forth in Section 4.4. Franchisee further agrees that Franchisor shall maintain and administer the Fund for the System as follows: 10.2.1 The Fund shall be used on behalf of the System for advertising and marketing including, without limitation, for any and all costs associated with developing, preparing, producing, directing, administering, conducting, maintaining, and disseminating advertising, marketing, telemarketing, promotional, and public relations materials, programs and campaigns, conducting market research, and publishing the Directory. All sums paid by Franchisee, other franchisees in the System, and Franchisor to the Fund, plus any interest or other income earned from such contributions, shall be maintained in a separate account from the other funds of Franchisor and shall not be used to defray any of Franchisor's general operating expenses, except for the reasonable administration costs and overhead Franchisor incurs in directing and administering the Fund including, without limitation, the cost of collecting and accounting for assessments for the Fund. 10.2.2 Franchisee agrees and acknowledges that the Fund is intended to maximize general public recognition, acceptance, and use of the System, and that Franchisor undertakes no obligation in administering the Fund to make expenditures for Franchisee which are equivalent or proportionate to Franchisee's contribution or to ensure that any particular franchisee benefits directly or pro rata from expenditures for the Fund. 10.2.3 Franchisee shall contribute to the Fund by check made payable to the Fund. If Franchisor owns and operates any Microtel hotel, Microtel & Suites hotel, or Microtel Suites hotel under the System, Franchisor shall make contributions to the Fund on the same basis as the assessments required of comparable Franchised businesses within the System. 10.2.4 It is anticipated that all contributions to the Fund shall be expended during the taxable year within which the contributions are made. If, however, excess amounts remain in the Fund at the end of such taxable year, all expenditures in the following taxable year(s) shall be made first out of accumulated earnings from previous years, next out of earnings in the current year, and finally from contributions. 10 10.2.5 The Fund is not and shall not be an asset of Franchisor and an audit of the operation of the Fund shall be prepared annually by an independent certified public accountant selected by Franchisor and shall be made available to Franchisee. 10.2.6 Although Franchisor intends the Fund to be of perpetual duration, Franchisor maintains the right to terminate the Fund at any time. The Fund shall not be terminated, however, until all monies in the Fund have been expended for the purposes described in this Section. 11. INSURANCE 11.1 Prior to the commencement of any activities or operations pursuant to this Agreement, Franchisee shall procure and maintain in full force and effect during the term of this Agreement, at Franchisee's expense, those insurance policies (set forth in this Section) protecting Franchisee and Franchisor, and their officers, directors, partners, joint venturers and employees against any loss or liability resulting in bodily injury, personal injury, death, property damage or other related expenses arising or occurring upon, as a result of, or in connection with the Franchised Business, or by reason of the construction, operation or occupancy of the Franchised Business. 11.2 Such policy or policies shall be written by an insurance company or companies satisfactory to Franchisor in accordance with standards and specifications set forth in the Manuals or otherwise in writing, and shall include, at a minimum (except as additional coverages and higher policy limits may reasonably be specified for all franchisees from time to time by Franchisor in the Manuals or otherwise in writing), the following: 11.2.1 Comprehensive general liability insurance, including bodily injury, property damage, personal injury coverage, independent contractors coverage, broad form contractual liability, broad form property damage endorsement, including products liability and completed operations coverage. No insurance policy shall contain any exclusion for explosion, collapse, or underground hazard. Coverage amount will be not less than five million dollars per occurrence or aggregate. Such policy shall contain a waiver of subrogation endorsement in favor of Franchisor. 11.2.2 Comprehensive automobile liability insurance, including bodily injury and property damage for all owned, non-owned and hired vehicles, with limits of liability not less than five million dollars combined single limit. Such policy shall have the contractual exclusion removed, or Franchisee shall provide separate evidence that contractual liability for automobile exposure is otherwise insured. Such policy shall contain a waiver of subrogation endorsement in favor of Franchisor. 11.2.3 Worker's compensation and employer's liability insurance as well as other insurance as may be required by statute or rule of the state in which the Franchised Business is located. Such policy shall contain a waiver of subrogation endorsement in favor of Franchisor. 11.2.4 Commercial umbrella liability insurance with limits which bring the total of all primary underlying coverages to not less than five million dollars total limit of liability. Such umbrella liability will provide at minimum those coverages and endorsements required in the underlying policies. 11.2.5 Property insurance providing for all risk of direct physical loss or damage including the perils of flood and earthquake. Appropriate coverage shall also be provided for boiler and machinery exposures and business interruption/extra expense exposures. Property insurance shall provide replacement cost coverage, and shall be written to include values not less than ninety percent of the full replacement value of the premises of the Franchised Business, its furniture, fixtures, equipment and stock (real and personal property). Any 11 deductibles contained in such policy shall be subject to review and approval by Franchisor. Property insurance policy(ies) shall contain a waiver of subrogation in favor of Franchisor. 11.3 In connection with all significant construction of, on or about the Microtel hotel, Microtel & Suites hotel, or Microtel Suites hotel premises during the term hereof Franchisee shall cause the general contractor to effect and maintain at the general contractor's own expense, insurance policies and bonds set forth below. All such policies must name the Franchisor and Franchisee as co-insured, contain waiver of subrogation endorsements in favor of Franchisor and Franchisee, be written by insurance or bonding companies satisfactory to Franchisor, and shall insure the following: 11.3.1 Comprehensive general liability insurance providing those coverages and limits specified in Section 11.2.1. 11.3.2 Comprehensive automobile liability providing those coverages and limits specified in Section 11.2.2. 11.3.3 Worker's compensation and employer's liability insurance or other insurance as is specified in Section 11.2.3. 11.3.4 Commercial umbrella liability insurance as specified in Section 11.2.4. 11.3.5 Owners contracts protective policy in the name of Franchisor and Franchisee with a combined single limit of liability of five million dollars. 11.3.6 General contractor shall assure compliance by all independent or subcontractors and maintain evidence that all such independent or sub-contractors have insurance written to comply with limits and coverages together with appropriate endorsements as specified in Sections 11.3.1, 11.3.2, and 11.3.3. Commercial umbrella liability insurance shall be provided with limits of liability not less than five million dollars. 11.3.7 General contractor shall provide a builder's risk insurance policy providing for all risk of direct physical loss or damage in an amount equal to the full estimated completed value of the Franchised Business. Such policy shall include Franchisor and Franchisee as additional named insured and also provide a waiver of subrogation in favor of both Franchisor and Franchisee. 11.4 Upon execution of this Agreement, on each policy renewal date thereafter, and each time a change is made in any insurance or insurance carrier, Franchisee shall submit evidence of satisfactory insurance and proof of payment therefor to Franchisor, together with, upon request, original or duplicate copies of all policies and policy amendments. The evidence of insurance shall include a statement by the insurer that the policy or policies will not be cancelled or materially altered without at least thirty (30) days' prior written notice to Franchisor. 11.5 Franchisee's obligation to obtain and maintain the foregoing policy or policies in the amounts specified shall not be limited in any way by reason of any insurance which may be maintained by Franchisor, not shall Franchisee's performance of that obligation relieve Franchisee of liability under the indemnity provisions set forth in Section 18.3 of this Agreement. 11.6 Should Franchisee, for any reason, fail to procure or maintain the insurance required by this Agreement, as revised from time to time for all franchisees by Franchisor in the Manuals or otherwise in writing, Franchisor shall have the right and authority (without, however any obligation to do so) immediately to procure such insurance and to charge same to Franchisee, which charges, together with a reasonable fee for Franchisor's expenses in so acting, shall be payable by Franchisee immediately upon notice. 12 12. TRANSFER OF INTEREST 12.1 Transfer by Franchisor Franchisor shall have the right to transfer or assign all or any part of its rights or obligations in this Agreement to any person or legal entity. 12.2 Transfer by Franchisee 12.2.1 Franchisee understands and acknowledges that the rights and duties set forth in this Agreement are personal to Franchisee, and that Franchisor has granted this franchise in reliance on the business skill, financial capacity, and character of Franchisee and its partners or shareholders. Accordingly, neither Franchisee nor any immediate or remote successor to any part of Franchisee's interest in this franchise, nor any individual, partnership, corporation, or other legal entity which directly or indirectly owns any interest in this franchise or in Franchisee shall sell, sign, transfer, convey, give away, mortgage, or otherwise encumber any direct or indirect interest in this franchise (including any ownership interest in Franchisee), this Agreement, the Franchised Business, or a substantial portion of the assets (including building and real estate) of the Franchised Business without the prior written consent of Franchisor; provided, however, that the transfer of less than a ten percent (10%) equity interest in Franchisee in a single transaction, which does not have the affect of transferring control (as described in Sections 12.2.2 and 12.2.5 hereof), shall not require the prior approval of Franchisor, provided that Franchisee notifies Franchisor in writing of such transfer within thirty (30) days following such transfer. Any purported assignment or transfer, by operation of law or otherwise, not having the prior written consent of Franchisor shall be null and void and shall constitute a material breach of this Agreement, for which Franchisor may then terminate without opportunity to cure pursuant to Section 13.2.6 of this Agreement and seek injunctive relief as well as monetary damages. 12.2.2 Franchisor shall not unreasonably withhold its consent to a transfer of any interest in this franchise, in Franchisee, in this Agreement, in the Franchised Business, or in a substantial portion of the assets (including building and real estate) of the Franchised Business; provided, however, that if a transfer, alone or together with other previous, simultaneous, or proposed transfers, would have the affect of transferring a controlling interest in the franchise, Franchisee, this Agreement, the Franchised Business, or substantially all of the assets (including building and real estate) of the Franchise Business. Franchisor may, in its sole discretion, require any or all of the following a conditions of its approval: 12.2.2.1 All of Franchisee's accrued monetary obligations to Franchisor and its subsidiaries and affiliates and all other outstanding obligations related to the Franchised Business shall have been satisfied; 12.2.2.2 Franchisee is not in default of any provision of this Agreement, any amendment hereof or successor hereto, or any other agreement between Franchisee and Franchisor, or its affiliates; 12.2.2.3 The transferor shall have executed a general release under seal, in a form satisfactory to Franchisor, of any and all claims against Franchisor and its officers, directors, shareholders, and employees, in their corporate and individual capacities, including, without limitation, claims arising under federal, state, and local laws, rules, and ordinances; 12.2.2.4 The transferee, and all shareholders or general partners in the transferee, shall enter into a written assignment, under seal and in a form satisfactory to Franchisor, assuming and agreeing to discharge all of Franchisee's obligations under this Agreement. 13 12.2.2.5 The transferee, and all shareholders in the transferee, shall demonstrate to Franchisor's satisfaction that the transferee and its shareholders or general partners, as appropriate, meet Franchisor's education, managerial, and business standards; possess good moral character, business reputation, and credit rating; have the aptitute and ability to conduct the Franchised Business (as may be evidenced by prior related business experience or otherwise); and have adequate financial resources and capital to oeprate the Franchised Business; 12.2.2.6 At the Franchisor's option, the transferee and the shareholders or general partners in the transferee shall execute for a term ending on the expiration date of this Agreement and with such renewal term as may be provided by this Agreement, the standard from franchise agreement then being offered to new System franchisees and such other anciallary agreements as Franchisor may require for the Franchised Businesses, provided, however, that the transferee shall not be required to pay any innitial franchise fee. 12.2.2.7 The transferee shall, at the transferee's expense and upon the reasonable requrest of Franchisor, upgrade the Franchised Business to conform to the then-current standards and specifications for hotels operating under the System, and shall complete the upgrading and other requirements within the reasonable time specified by Franchisor. 12.2.2.8 Franchisee shall remain liabile for all obligations to Franchisor and its subsidiaries and affiliates in connection with the Franchised Busines prior to the effective date of the transfer and shall execute any and all instruments reasonably requested by Franchisor to evidence such liabilty; 12.2.2.9 At the transferee's expense, an officer of the transferee and the transferee's general manager shall complete the intial training program then in effect for new licensees upon such terms and conditions as Franchisor may reasonable require; 12.2.2.10 Franchisee shall pay a transfer fee of Seven Thousand Five Hundred Dollars ($7,500), except that no fee shall be required for transfers to the spouse, issue, parent, or sibling of a partner or shareholder in Franchisee, or from one partner or shareholder to another. 12.2.3 Notwithstanding any other provision of this Agreement, Franchisor shall not require approval of the assignment, transfer, pledge, or hypothecation of all or any part of the assets of the Franchised Business, excluding this franchise and this Agreement, (and, if Franchisee is a corporation all and any part of the stock of the said corporation) to banks or other lending institutions as collateral security for loans made directly to or for the benefit of the Franchised Business. 12.2.4 Franchisee acknowledges and agrees that each condition which must be met by the transferee is necessary to assure such transferee's full performance of the obligations hereunder. 12.2.5 For the purposes of this Agreement, "control" shall mean the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, corporation or other busines entity, whether through the ownership of voting securities, by contract, or otherwise. 12.3 Transfer Upon Death or Mental Incompetence Upon the death or mental incompetency of Franchisee or a person owning all or any interest in Franchisee, the executor, administrator, or personal representative of such person shall transfer within three (3) months after 14 such death or mental incompetency his interest to a third party approved by Franchisor. Such transfers, including, without limitation, transfers by devise or inheritance, shall be subject to the same conditions as any inter vivos transfer. However, in the case of transfer by devise or inheritance, if the heirs or beneficiaries of any such person are unable to meet the conditions in this Section 12, the personal representative of the deceased shareholder shall have reasonable time to dispose of the deceased's interest in the Franchisee, which disposition shall be subject to all the terms and conditions for transfers contained in this Agreement. If the interest is not disposed of within nine months, Franchisor may terminate this Agreement. 12.4 Offerings by Franchisee Securities in Franchisee may be offered to the public only with the prior written consent of Franchisor, which consent shall not be unreasonably withheld. All materials required by federal or state law for the sale of any interest in Franchisee shall be submitted to Franchisor for review prior to filing with any government agency; and any materials to be used and any exempt offering shall be submitted to Franchisor for review prior to their use. No Franchisee offering shall imply (by use of the Proprietary Marks or otherwise) that Franchisor is participating as an underwriter, issuer, or officer of Franchisee's or Franchisor's securities; and Franchisor's review of any offering shall be limited solely to the subject of the relationship between Franchisee and Franchisor. Franchisee and other participants in the offering must fully indemnify Franchisor in connection with the offering. For each proposed offering, Franchisee shall pay to Franchisor a non-refundable fee of Five Thousand Dollars, or such greater amount as is necessary to reimburse Franchisor for its reasonable cost and expenses associated with reviewing the proposed offering, including, without limitation, legal and accounting fees. 12.5 Non-Waiver of Claims Franchisor's consent to a transfer of any interest in the franchise granted herein shall not constitute a waiver of any claims it may have against the transferring party, nor shall it be deemed a waiver of Franchisor's right to demand exact compliance with any of the terms of this Agreement by the transferee. 13. DEFAULT AND TERMINATION 13.1 Franchisee shall be deemed to be in default under this Agreement, and all rights granted herein shall automatically terminate without notice to Franchisee, if Franchisee shall become insolvent or makes a general assignment for the benefit of creditors; or if a petition in bankruptcy is filed by Franchisee or such a petition is filed against and consented to by Franchisee; or if Franchisee is adjudicated a bankrupt; or if a bill in equity or other proceeding for the appointment of a receiver of Franchisee or other custodian for Franchisee's business or assets is filed and consented to by Franchisee; or if a receiver or other custodian (permanent or temporary) of Franchisee's assets or property, or any part thereof, is appointed by any court of competent jurisdiction; of if proceedings for a composition with creditors under any state or federal law is instituted by or against Franchisee; or if a final judgement against Franchisee remains unsatisfied or of record for ninety days or longer (unless a supersedeas bond is filed); or if Franchisee is dissolved; or if execution is levied against any asset of the Franchised Business, or suit to foreclose any lien or mortgage against any asset of the Franchised Business is instituted against Franchisee and not dismissed within ninety days; or if any asset of the Franchised Business is sold after levy. 13.2 Franchisee shall be deemed to be in default and Franchisor may, at its option, terminate this Agreement and all rights granted hereunder, without affording Franchisee any opportunity to cure the defaults, effective immediately upon receipt of notice by Franchisee, upon the occurrence of any of the following: 13.2.1 If Franchisee ceases to do business at the Approved Location, or ceases to operate the Franchised Business under the Proprietary Marks and System, or loses the right to possession of the Franchised Business, or otherwise forfeits the right to conduct the Franchised Business at the Approved Location; provided, however, that if the cessation of business or loss of possession results from the governmental exercise of the power of eminent domain, or a fire or other casualty, through no fault of Franchisee, then, in such event, this Agreement shall not be terminated for that reason for six months thereafter, provided that within that time Franchisee applies for a receives Franchisor's approval to reconstruct or relocate the Franchised Business, which approval shall not unreasonably be withheld; 13.2.2 If Franchisee fails to commence construction within the time frame and in accordance with all of the terms and conditions of this Agreement; 13.2.3 If Franchisee fails to meet its Completion Date within the time frame and in accordance with all of the terms and conditions of this Agreement; 13.2.4 If a threat or danger to public health or safety results form the construction, maintenance, or operation of the Franchised Business and an immediate shutdown thereof is reasonably determined by Franchisor to be essential to avoid a substantial liability or loss of goodwill; provided, however, Franchisor shall reinstate this Agreement within six months after termination under this Section 13.2.4, if, within that period, the threat or danger to public health or safety is eliminated and Franchisor, in its sole discretion, reasonably determines that reopening the Franchised Business would not cause a substantial loss of goodwill; 13.2.5 If Franchisee or any guarantor of this Agreement is convicted of a felony or any other crime or offense that is reasonably likely, in the sole opinion of Franchisor, to adversely affect the System, the Proprietary Marks, the goodwill associated therewith or Franchisor's interest therein; 13.2.6 If Franchisee or any partner or shareholder in Franchisee purports to transfer any rights or obligations under this Agreement or any interest in Franchisee or in the Franchised Business or in the substantial portion of the assets of the Franchised Business to any third party without the Franchisor's prior written consent, or in a manner violative of this Agreement; 13.2.7 If Franchisee intentionally discloses or divulges the contents of the Manuals or other trade secrets or confidential information provided to Franchisee by Franchisor to any unauthorized person or fails to exercise reasonable care to prevent such disclosure; 13.2.8 If, following Franchisee's death or mental incompetency, an approved transfer is not effected within the time frame and in accordance with the provisions of Section 12.3 hereof; 13.2.9 If Franchisee intentionally or negligently makes any material false statements or omissions to Franchisor in connection with Franchisee's application for the franchise granted herein, or in connection with any information submitted to Franchisor; or 13.2.10 If Franchisee misuses or makes any unauthorized use of the Proprietary Marks or otherwise impairs the goodwill associated therewith or Franchisor's rights therein. 13.3 Except as provided in Sections 13.1 and 13.2 of this Agreement, Franchisee shall have thirty days (or such longer period as Franchisor may specify) from receipt of a written Notice of Termination (citing the reason(s) therefor) within which to remedy any default hereunder and provide evidence thereof to Franchisor. If any such default is not cured within that time, or such longer period as applicable law may require (or such longer period as may be reasonably required by Franchisee to cure any non-monetary default if Franchisee immediately commences, diligently and in good faith pursues, and cures such default), this Agreement shall terminate without further notice to Franchisee effective immediately upon the expiration of the thirty day period, expiration of any extended period as described above, or such longer period as applicable law may require. Franchisee shall be in default hereunder for any failure to comply with any of the requirements imposed by this Agreement, as it may from time to time reasonably be supplemented by the Manuals, or to carry out the terms of this Agreement in good faith. Such defaults shall include, for example, without limitation, the occurrence of any of the following: 16 13.3.1 If Franchisee fails, refuses, or neglects to pay promptly any monies owing to Franchisor or its subsidiaries or affiliates when due, or to submit the financial information or other reports required by Franchisor under this Agreement; 13.3.2 If Franchisee fails to pay all its financial obligations to third parties in the ordinary course of business; 13.3.3 If Franchisee, by act or omission, allows a continued violation in connection with the operation of the Franchised Business, of any law, ordinance, rule or regulation of a governmental agency, in the absence of a good faith dispute over its application or legality and without having promptly resorted to an appropriate administrative or judicial forum for relief therefrom; 13.3.4 If Franchisee misuses or makes any unauthorized use of the Proprietary Marks or otherwise impairs the goodwill associated therewith or Franchisor's rights therein; or 13.3.5 If Franchisee is in default of or terminated any management agreement under which the Franchised Business is operated if, as a result of such default or termination, Franchisee fails to operate the Franchised Business in compliance with the terms and conditions of this Agreement. 13.4 Franchisee may terminate this Agreement on the anniversary date of the fifth year of its execution by giving written notice no more than fifteen months but no less than twelve months prior to such anniversary date to Franchisor. The notice shall be accompanied by a lump sum payment equal to the total of all amounts required under Section 4 hereof for the thirty-six calendar months of operation preceding the notice. 14. OBLIGATIONS UPON TERMINATION Upon termination or expiration of this Agreement, this Agreement and all rights granted hereunder to Franchisee shall forthwith terminate, and: 14.1 Franchisee shall immediately cease to operate the Franchised Business as a System hotel and shall not thereafter, directly or indirectly, represent to the public or hold itself out as a present or former franchisee of Franchisor. 14.2 Franchisee shall immediately and permanently cease to use, by advertising or in any other manner whatsoever, the names "MICROTEL", "MICROTEL & SUITES", "MICROTEL SUITES", and "SAVINGS YOU CAN SLEEP ON" and other Proprietary Marks of Franchisor, any other identifying characteristics of the System, and all confidential methods, procedures and techniques associated with the System. Franchisee shall promptly remove from its place of business, and discontinue using for any purpose, any and all signs, fixtures, furniture, furnishings, equipment, advertising materials, stationery, supplies, forms or other articles which display the Proprietary Marks or any distinctive features or designs associated with the System. Any signs containing the Proprietary Marks which Franchisee is unable to remove within one day of expiration or termination of this Agreement shall be completely covered by Franchisee until the time of their removal. 14.3 Franchisee shall, at its expense, immediately make such modifications or alterations as may be necessary to distinguish the Franchised Business so clearly from its former appearance and from other Microtel hotels, Microtel & Suites hotels, or Microtel Suites hotels operated under the System as to prevent any possibility of confusion therewith by the public, and to prevent the operation of any business at the Approved Location by Franchisee or others in derogation of this Paragraph 14.3 (including, without limitation, removal or changing of the triple gabled roof line, the semi-circular window in the front lobby wall, the floor-to-ceiling mirrors behind the bed, the built-in furnishings in the guest rooms (e.g. the night-stands and desks), and the removal of all distinctive physical and structural features identifying Microtel hotels, Microtel & Suites hotels, or Microtel Suites hotels in the System, removal of all distinctive signs and emblems, and removal or changing of any design or decor features that Franchisor, in its discretion, determines to be indicative of hotels operating under the System. Further, until all modifications and alterations required by this Paragraph 14.3 are 17 completed, Franchisee shall (i) maintain a conspicuous sign at the registration desk in a form specified by Franchisor stating that the Franchised Business is no longer associated with the Microtel System, and (ii) advise all customers or prospective customers telephoning the Franchised Business that it is no longer associated with the Microtel System. If Franchisee fails to initiate immediately and complete such alterations when required by this Paragraph 14.3, Franchisee agrees that Franchisor or its designated agents may enter the premises and adjacent areas at any time and make such alterations, at Franchisee's sole risk and expense, without responsibility for any actual or consequential damages to the property of Franchisee or others, and without liability for trespass or other tort or criminal act. Franchisee expressly acknowledges that its failure to make such alterations will cause irreparable injury to Franchisor. 14.4 Franchisee shall take such action as may be necessary to cancel any assumed name or equivalent registration which contains the name "MICROTEL", "MICROTEL & SUITES", "MICROTEL SUITES", or any variation thereof or any other service mark or trademark of Franchisor, and Franchisee shall furnish Franchisor with evidence satisfactory to Franchisor of compliance with this obligation within thirty days after termination or expiration of this Agreement. 14.5 Franchisee shall promptly pay all sums owing to Franchisor and its subsidiaries and affiliates, including all damages, costs and expenses, including reasonable attorneys' fees, incurred by Franchisor as a result of the default. Franchisor shall have the right within sixty days following termination or expiration of this Agreement, to inspect Franchisee's hotel premises and offices, and conduct a review and/or an audit of Franchisee's books and records, for the purpose, among other things, of assuring Franchisee's compliance with the provisions of this Section 14. 14.6 In the event of termination as a result of Franchisee's default under Sections 13.1, 13.2, or 13.3, of this Agreement, Franchisee agrees to pay Franchisor a lump sum payment (for premature termination only, and not as a penalty or in lieu of any other payments required under this Agreement), equal to the total of all amounts required under Section 4 hereof for the thirty-six calendar months of operation preceding Franchisee's default, or in the event the Franchisee has not been operating for thirty-six months, an amount equal to the average of the monthly amounts required under Section 4 hereof during the months that Franchisee was operating pursuant to this Agreement, multiplied by thirty-six. Franchisor shall not be limited to the provisions of this Section 14.6 with respect to its rights or remedies arising out of Franchisee's default under Section 13, but shall be entitled to pursue all available remedies at law or in equity including, without limitation, recovery of damages and lost future profits. 14.7 Franchisee shall pay to Franchisor all damages, costs and expenses, including reasonable attorneys' fees, incurred by Franchisor subsequent to the termination or expiration of the franchise herein granted in obtaining injunctive or other relief for the enforcement of any provisions of this Section 14. 14.8 Franchisee shall immediately turn over to Franchisor all manuals, including the Manuals, records, files, instructions, correspondence, and all other materials provided by Franchisor related to the operation of the Franchised business, and all copies thereof (all of which are acknowledged to be Franchisor's property), and shall retain no copy or record of any of the foregoing, excepting only Franchisee's copy of this Agreement and of any correspondence between the parties, and any other documents which Franchisee reasonably needs for compliance with any provision of law. 14.9 Franchisee hereby assigns to Franchisor all right, title, and interest in any telephone numbers and business listings used by Franchisee in connection with its conduct of the Franchised Business, and agrees that any such right, title or interest may be assumed by Franchisor, at Franchisor's option, upon termination or expiration of this Agreement. If the Telephone Listing Agreement is not in a form acceptable to the telephone company servicing the Franchised Business, Franchisee shall execute such other similar telephone number assignment agreement provided by Franchisor. Franchisee also hereby appoints Franchisor as its attorney-in-fact with full power and authority to execute on Franchisee's behalf any documents that are necessary to effectuate such an assignment. 14.10 Franchisor shall have the right, but not the duty, to be exercised by notice of intent to do so within thirty days after termination of expiration, to purchase any and all signs, advertising materials, supplies and inventory and any other items bearing Franchisor's Proprietary Marks, at Franchisee's cost, or, in the case of 18 capital equipment, at Franchisee's net book value. With respect to any purchase by Franchisor as provided herein, Franchisor shall have the right to set off all amounts due from Franchisee under this Agreement. 15. COVENANTS 15.1 Franchisee specifically acknowledges that, pursuant to this Agreement, Franchisee will receive valuable specialized training and confidential information, including, without limitation, information regarding the operational, sales, promotional, and marketing methods and techniques of Franchisor and the System. Franchisee covenants that it will at all times retain and exercise management control over the Franchised Business. Franchisee's General Manager shall devote full time, energy and best efforts to the management and operation of the Franchised Business. Franchisee's General Manager shall not, except as otherwise approved in writing by Franchisor (which approval shall not be unreasonably withheld), assist, promote, or engage in any competing business and shall use every reasonable means to encourage use by the public of Microtel hotels, Microtel & Suites hotels, and Microtel Suites hotels owned by other franchisees. The General Manager shall not engage in any other business or activity, directly or indirectly which requires substantial managerial responsibility and which may conflict with Franchisee's or General Manager's obligations herein. 15.2 Franchisee covenants that during the term of this Agreement, except as otherwise approved in writing by Franchisor, Franchisee shall not, either directly or indirectly, for itself, or through, on behalf of, or in conjunction with any person, persons, partnership or corporation, divert or attempt to divert any business or customer of the Franchised Business or other franchisee, to any competitor, or competing business, by direct or indirect inducement or otherwise, or do or perform, directly or indirectly, any other act injurious or prejudicial to the goodwill associated with Franchisor's Proprietary Marks and the System. 15.3 Franchisee represents and warrants that Franchisee has no direct or indirect financial or management interest in any non-Microtel transient lodging facility, except as disclosed by Franchisee in Exhibit A hereto. Franchisee agrees to advise Franchisor of any change or modification of such interest, or the acquisition of any new interest as soon as it occurs, and in no event later than thirty (30) days thereafter. 15.4 Franchisee and Franchisor covenant and agree that neither party will seek to employ any person who is at that time employed by the other party or otherwise directly or indirectly induce such person to leave his or her employment. 16. CORPORATE OR PARTNERSHIP FRANCHISEE 16.1 Franchisee, if a corporation, shall comply with the following requirements: 16.1.1 Franchisee shall be newly organized and its charter shall at all times provide that its activities are confined exclusively to operating the Franchised Business, and other businesses operated pursuant to franchises granted to Franchisee by Franchisor; 16.1.2 Copies of Franchisee's Articles of Incorporation, Bylaws, and other governing documents, and any amendments thereto, including the resolutions of the Board of Directors authorizing entry into this Agreement shall be promptly furnished to Franchisor; 16.1.3 Franchisee shall maintain stop transfer instructions against the transfer on its records of any equity securities, and each stock certificate of Franchisee shall have conspicuously endorsed on its face the following printed legend: The transfer of the stock represented by this certificate is subject to the terms and conditions of a Franchise Agreement with Microtel Franchise & Development Corporation dated , 19 . Reference is made to the provisions of the said Franchise Agreement and to the Articles and Bylaws of this Corporation, provided, however, that this Section 16.1.3 shall not apply if Franchisee is a publicly-held corporation. 19 16.1.4 Franchisee shall maintain a current list of all owners of record and all beneficial owners of any class of voting stock of Franchisee and shall furnish the list to Franchisor upon request; and 16.1.5 Such shareholders of Franchisee as specified by Franchisor shall jointly and severally guarantee Franchisee's performance hereunder and shall bind themselves to the terms of this Agreement. 16.2 Franchisee, if a partnership, shall comply with the following requirements throughout the term of this Agreement: 16.2.1 Franchisee shall furnish Franchisor with its partnership agreement as well as such other documents as Franchisor may reasonably request, and any amendments thereto; and 16.2.2 Franchisee shall prepare and furnish to Franchisor, at any time, upon request, a list of all general and limited partners in Franchisee. 17. TAXES, PERMITS, AND INDEBTEDNESS 17.1 Franchisee shall promptly pay when due all taxes levied or assessed by any federal, state, or local tax authority, and any and all other indebtedness incurred by Franchisee in the conduct of the Franchised Business. Franchisee shall pay to Franchisor an amount equal to any sales tax, gross receipts tax, or similar tax imposed on Franchisor with respect to any payments to Franchisor required under this Agreement, unless the tax is credited against income tax otherwise payable by Franchisor. 17.2 In the event of any bona fide dispute as to liability for taxes assessed or other indebtedness, Franchisee may contest the validity of the amount of the tax or indebtedness in accordance with the procedures of the taxing authority or applicable law; however, in no event shall Franchisee permit a tax sale or seizure by levy of execution or similar writ or warrant, or attachment by a creditor, to occur against the Franchised Business or any of its assets. 17.3 Franchisee shall maintain compliance with all federal, state, and local laws, rules, and regulations and shall timely obtain any and all permits, certificates or licenses necessary for the full and proper conduct of the business franchised under this Agreement, including, without limitation, licenses to do business, fictitious name registration, sales tax permits, health and sanitation permits and ratings, and fire clearances. Copies of all inspection reports, warnings, certificates, and ratings issued by any governmental entity during the term of this Agreement in connection with the conduct of the Franchised Business which indicate Franchisee's failure to meet or maintain Franchisor's standards or less than full compliance with any applicable law, rule, or regulation shall be forwarded to Franchisor by Franchisee within five days after Franchisee's receipt thereof. 17.4 Franchisee shall notify Franchisor in writing within five days after the commencement of any action, suit, or proceeding and of the issuance of any order, writ, injunction, award, or decree of any court, agency, or other governmental instrumentality which may adversely affect the operation or financial condition of the Franchised Business. 18. INDEPENDENT CONTRACTOR AND INDEMNIFICATION 18.1 It is understood and agreed by the parties hereto that this Agreement does not create a fiduciary relationship between them, and Franchisee shall be an independent contractor and that nothing in this Agreement is intended to constitute either party an agent, legal representative, subsidiary, joint venturer, partner, employee or servant of the other for any purpose whatsoever. 18.2 During the term of this Agreement and any extensions hereof, Franchisee shall hold itself out to the public as an independent contractor operating the business pursuant to a franchise from Franchisor and as an authorized user of the Proprietary Marks which are owned by Franchisor. Franchisee agrees to take such 20 affirmative action as may be necessary to do so, including, without limitation, exhibiting a notice of that fact in a place on the premises of the Franchised Business as required under Section 6.2.3 hereof. 18.3 It is understood and agreed that nothing in this Agreement authorizes either party to make any contract, agreement, warranty or representation on the other's behalf, or to incur any debt or other obligation in the other's name, and that neither party shall in any event assume liability for, or be deemed liable hereunder as a result of, any such action, or by reason of any act or omission of the other party or any claim or judgement arising therefrom. Franchisee shall indemnify and hold Franchisor harmless against any and all claims arising directly or indirectly from, as a result of, or in connection with, Franchisee's operation of the Franchised Business, as well as the costs, including reasonable attorneys' fees, of defending against them. Franchisor shall indemnify and hold Franchisee harmless against any and all claims arising directly or indirectly from, as a result of, or in connection with Franchisor's acts (except as set forth in this Section 18.3 and Section 19.2) as well as the costs, including reasonable attorneys' fees, of defending against them. Franchisee agrees that all of the obligations of Franchisor under this Agreement are to Franchisee, and no other party is entitled to rely on, enforce, or obtain relief for breach of such obligations either directly or indirectly or by subrogation. Franchisor shall not indemnify or hold Franchisee harmless against any action or claim by any third party based upon Franchisor's exercise of any of its rights in accordance with the terms of this Agreement. 19. APPROVALS AND WAIVERS 19.1 Whenever this Agreement requires the prior approval or consent of Franchisor, Franchisee shall make a timely written request to Franchisor therefor, and such approval or consent shall be obtained in writing. 19.2 Except as otherwise provided in this Agreement or any other written agreement between Franchisor and Franchisee, Franchisor makes no warranties or guarantees upon which Franchisee may rely. Franchisor assumes no liability or obligation to Franchisee, by providing any waiver, approval, consent, or suggestion to Franchisee in connection with this Agreement or by reason of any delay or denial of any request made therefor. 19.3 No failure of a party to exercise any power reserved to it by this Agreement, or to insist upon strict compliance by the other party with any obligation or condition hereunder, and no custom or practice of the parties at variance with the terms hereof, shall constitute a waiver of such party's right thereafter to demand exact compliance with any of the terms herein. Waiver by a party of any particular default by the other party shall not affect or impair such party's rights with respect to any subsequent default of the same, similar, or different nature; nor shall any delay, forbearance, or omission of a party to exercise any power or right arising out of any breach or default by the other party of any of the terms, provisions, or covenants hereof, affect or impair such party's right to exercise the same. 20. NOTICES Any and all notices required or permitted under this Agreement shall be in writing and shall be delivered by any means which will provide evidence of the date received, to the respective parties at the following addresses unless and until a different address has been designated by written notice to the other party: Notices to FRANCHISOR: Microtel Franchise & Development Corporation One Airport Way Suite 200 Rochester, New York 14624 Notices to FRANCHISEE: _____________________ _____________________ _____________________ _____________________ Any notice shall be deemed to have been given at the date and time it is received. 22 Agreement and Warrant to Purchase 100,000 Common Shares to U.S. FRANCHISE SYSTEMS, INC. This certifies that, for value received, U.S. Franchise Systems, Inc., the registered holder hereof or its assign (the "Warrantholder") is entitled to purchase from Microtel Franchise and Development Corporation, a New York corporation with its principal office at One Airport Way, Suite 200, Rochester, New York (the "Company") one hundred thousand (100,000) shares of common stock of the Company (the "Shares") at or before 5:00 p.m. Eastern Standard Time on September 1, 2000 at the purchase price per share of $ (the "Warrant Price"), subject to the following terms and conditions. The number of Shares purchasable upon exercise of this Warrant and the Warrant Price per Share shall be subject to adjustment from time to time as set forth herein. 1. Consideration. This Warrant is granted as part of the consideration for the Joint Venture Agreement between the parties hereto dated September 1, 1995. 2. Exercise. This Warrant may be exercised in whole or in part by presentation of this Warrant with the Purchase Form as attached hereto duly completed and executed, together with payment of the Warrant Price at the principal office of the Company. Payment of the Warrant Price may be made in cash, by wire transfer or by check. Upon surrender of the Warrant and payment of such Warrant Price as aforesaid, the Company shall issue and cause to be delivered with all reasonable dispatch to or upon the written order of the Warrantholder and in such name or names as the Warrantholder may designate a certificate or certificates for the number of full Shares so purchased upon the exercise of the Warrant, together with Fractional Warrants, as provided in Section 8 hereof, in respect of any fractional Shares otherwise issuable upon such surrender. Such certificate or certificates shall be deemed to have been issued and any person so designated to be named therein shall be deemed to have become a holder of record of such Shares as of the date of the surrender of the Warrant and the payment of the Warrant Price, as aforesaid, notwithstanding that the certificates representing the Shares shall not actually have been delivered or that the stock transfer books of the Company shall then be closed. The Warrant shall be exercisable, at the election of the Warrantholder, either in full or from time to time in part and, in the event that a certificate evidencing the Warrant is exercised in respect of less than all of the Shares specified therein at any time prior to the Termination Date, a new certificate evidencing the remaining Warrant will be issued by the Company. 3. Reservation of Shares. There has been reserved, and the Company shall at all times keep reserved so long as the Warrant remains outstanding, out of its authorized Common Shares, such number of Shares as shall be subject to purchase under the Warrant. Every transfer agent for the Common Shares and other securities of the Company issuable upon the exercise of the Warrant will be irrevocably authorized and directed at all times to reserve such number of authorized Shares and other securities as shall be requisite for such purpose. The Company will keep a copy of this Warrant on file with every transfer agent for the Common Shares and other securities of the Company issuable upon the exercise of 1 the Warrant. The Company will supply such transfer agent with duly executed stock and other certificates for such purpose. 4. Further Obligations of Company. The Company covenants and agrees that all Shares which may be delivered upon exercise of this Warrant shall, upon delivery, be fully paid and non-assessable, and be free from all taxes, liens and charges with respect to the purchase thereof hereunder, and without limiting the generality of the foregoing, the Company covenants and agrees that it shall from time to time take all such action as may be necessary to assure that the par value per share of the Common Shares is at all times equal to or less than the then current Warrant Price per share of the Common Shares issuable pursuant to this Warrant. 5. Registration and Transfer. The Warrant shall be registered on the books of the Company when issued and shall be transferable only on the books of the Company maintained at its principal office in Rochester, New York, or wherever its principal executive offices may then be located, upon delivery thereof duly endorsed by the Warrantholder or its duly authorized attorney or representative, or accompanied by proper evidence of succession, assignment or authority to transfer. Upon any registration or transfer, the Company shall execute and deliver a new Warrant to the person entitled thereto. Notwithstanding any other provision hereof, this Warrant may not be transferred to any person other than an affiliate of Warrantholder without the express written consent of the Company. 6. Exchange of Warrant Certificate. This Warrant certificate may be exchanged for another certificate or certificates entitling the Warrantholder to purchase a like aggregate number of Shares as the certificate or certificates surrendered then entitled the Warrantholder to purchase. The Warrantholder desiring to exchange a Warrant certificate shall make such request in writing delivered to the Company, and shall surrender, properly endorsed, the certificate evidencing the Warrant to be so exchanged. Thereupon, the Company shall execute and deliver to the person entitled thereto a new Warrant certificate as so requested. 7. Adjustment of Warrant Price and Number of Shares. 7.1 General. The number of Shares purchasable upon the exercise of the Warrant and the Warrant Price shall be subject to adjustment from time to time upon the happening of certain events, as follows: 7.1.1. In case the Company shall, with regard to its Common Shares (or securities convertible into or exchangeable for Common Shares) (A) pay a dividend in Common Shares or make a distribution in Common Shares, (B) subdivide its outstanding Common Shares into a greater number of Shares, (C) combine its outstanding Common Shares into a smaller number of Common Shares, or (D) issue by reclassification of its Common Shares other securities of the Company, the number of Shares purchasable upon exercise of the Warrant immediately prior 2 thereto shall be adjusted so that the Warrantholder shall be entitled to receive the kind and number of Shares or other securities of the Company which it would have owned or would have been entitled to receive after the happening of any of the events described above, had the Warrant been exercised immediately prior to the happening of such event or any record date with respect thereto. Any adjustment made pursuant to this subsection shall become effective immediately after the effective date of such event retroactive to the record date, if any, for such event. 7.1.2. In case the Company shall fix a record date for the issuance of rights or warrants to all holders of Common Shares entitling them for a period expiring within forty-five (45) calendar days (after such record date) to subscribe for or purchase Common Shares at a price per share of Common Shares less than the Closing Price per share of Common Shares on such record date, the Warrant Price to be in effect after such record date shall be determined by multiplying the Warrant Price in effect immediately prior to such record date by a fraction, of which the numerator shall be the number of shares of Common Shares outstanding on such record date plus the number of shares of Common Shares which the aggregate offering price of the total number of shares of Common Shares so to be offered would purchase at such Closing Price and of which the denominator shall be the number of shares of Common Shares outstanding on such record date plus the number of additional shares of Common Shares to be offered for subscription or purchase. Shares of Common Shares owned by or held for the account of the Company shall not be deemed outstanding for the purpose of any such computation. Such adjustments shall be made successively whenever such record date is fixed; and in the event that such rights or warrants are not so issued, the Warrant Price shall again be adjusted to be the Warrant Price which would then be in effect if such record date had not been fixed. 7.1.3. In case the Company shall fix a record date for the making of a distribution to all holders of Common Shares (including any distribution made in connection with a consolidation or merger in which the Company is the continuing corporation) of evidence of indebtedness or assets (other than cash dividends or cash distributions payable out of consolidated earnings or earned surplus or dividends payable in Common Shares) or subscription rights or warrants (excluding those referred to in Section 7.1.2), the Warrant Price to be in effect after such record date shall be determined by multiplying the Warrant Price in effect immediately prior to such record date by a fraction of which the numerator shall be the Closing Price per shares of Common Shares on such record date, less the fair market value (as determined by the Board of Directors of the Company, whose determination shall be conclusive absent manifest error) of the portion of the assets or evidences of indebtedness so to be distributed or of such subscription rights or warrants applicable to one share of 3 Common Shares and of which the denominator shall be the Closing Price per share of Common Shares. Such adjustments shall be made successively whenever such a record date is fixed; and in the event that such distribution is not so made, the Warrant Price shall again be adjusted to be the Warrant Price which would then be in effect if such record date had not been fixed. 7.1.4. No adjustment in the number of Shares purchasable hereunder shall be required unless such adjustment would require an increase or decrease of at least one percent in the aggregate number of Shares then purchasable upon the exercise of the Warrant; provided however, that any adjustments which by reason of this Section 7.14 are not required to be made immediately shall be carried forward and taken into account in any subsequent adjustment. 7.1.5. Whenever the number of Shares purchasable upon the exercise of the Warrant is adjusted as herein provided, the Warrant Price payable upon exercise of the Warrant shall be adjusted by multiplying such Warrant Price immediately prior to such adjustment by a fraction, of which the numerator shall be the number of Shares purchasable upon the exercise of the Warrant immediately prior to such adjustment, and of which the denominator shall be the number of shares so purchasable immediately thereafter. Whenever the Warrant Price is adjusted as herein provided, the number of Shares purchasable upon the exercise of the Warrant shall be adjusted so that thereafter the Warrant shall evidence the right to purchase, at the adjusted Warrant Price, that number of Shares obtained by multiplying the number of Shares converted by the Warrant Price in effect immediately prior to such adjustment and dividing the product so obtained by the Warrant Price in effect immediately after such adjustment. 7.1.6. Whenever the number of Shares purchasable upon the exercise of this Warrant or the Warrant Price is adjusted as herein provided, the Company shall cause to be promptly mailed to the Warrantholder in accordance with the provisions of Section 10 hereof, notice of such adjustment or adjustments and a certificate of a firm of independent public accountants selected by the Board of Directors of the Company (who may be the regular accountants employed by the Company) setting forth the number of Shares purchasable upon the exercise of the Warrant and the Warrant Price after such adjustment, a brief statement of the facts requiring such adjustment, and the computation by which such adjustment was made. 7.1.7. For the purpose of this Section 7.1., the term "Common Shares" shall mean (A) the class of shares designated as (or convertible or exercisable for) the Common Shares of the Company at the date of this Agreement, or (B) any other class of shares resulting from successive changes or reclassifications of such Common Shares including changes in par value, or from par value to no par value, or 4 from no par value to par value. In the event that at any time, as a result of an adjustment made pursuant to this Section 7, the Warrantholder shall become entitled to purchase any shares of the Company other than Common Shares, thereafter the number of such other shares so purchasable upon exercise of the Warrant and the Warrant Price of such shares shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Shares contained in this Section 7. 7.2. No Adjustment of Dividends. Except as provided in Section 7.1, no adjustment in respect of regular cash dividends shall be made during the term of the Warrant or upon the exercise of the Warrant. 7.3. Preservation of Purchase Rights upon Reorganization, Reclassification, Consolidation, Merger, etc. In case of any capital reorganization or reclassification of the Common Shares of the Company, or in case of any consolidation of the Company with or merger of the Company into another corporation or in case of any sale or conveyance to another person of the property, assets or business of the Company as an entirety or substantially as an entirety, the Company or such successor or purchaser, as the case may be, shall execute with the Warrantholder an agreement that the Warrantholder shall have the right thereafter upon payment of the Warrant Price in effect immediately prior to such action to purchase upon exercise of the Warrant the kind and amount of shares and other securities and property which it would have owned or have been entitled to receive after the happening of such reorganization or reclassification, consolidation, merger, sale or conveyance had the Warrant been exercised immediately prior to such action. In the event of a merger described in Section 368(a)(2)(E) of the Internal Revenue Code of 1986, as amended, in which the Company is the surviving corporation, the right to purchase Shares under the Warrant shall terminate on the date of such merger and thereupon the Warrant shall become null and void but only if the controlling corporation shall agree to substitute for the Warrant its warrant which entitles the holder thereof to purchase upon its exercise the kind and amount of shares and other securities and property which it would have owned or had been entitled to receive had the Warrant been exercised immediately prior to such merger. The adjustments required by this Section 7.3 shall be effected in a manner which shall be as nearly equivalent as may be practicable to the adjustments provided for elsewhere in this Section 7. The provisions of this Section 7.3 shall similarly apply to successive consolidations mergers, sales or conveyances. 7.4. Statement on Warrants. Irrespective of any adjustments in the Warrant Price or the number or kind of Shares purchasable upon the exercise of the Warrant, the Warrant certificate or certificates theretofore or thereafter issued may continue to express the same price and number and kind of Shares as are stated in this initially issued Warrant. 5 8. Fractional Shares. The Company shall not be required to issue fractional Shares on the exercise of the Warrant. If any fraction of a Share would, except for the provisions of this Section 8, be issuable on the exercise of the Warrant (or specified portion thereof), the Company shall issue to the Warrantholder a fractional Warrant entitling Warrantholder, upon surrender with other fractional Warrants aggregating one or more full Shares, to purchase such full Shares. If fractional Warrants do not aggregate a full Share, their value (over and above their exercise price) shall be paid in full in cash upon exercise to the exercising Warrantholder. 9. No Rights as Shareholder; Notices to Warrantholder. Nothing contained in this Agreement or in any of the Warrants shall be construed as conferring upon the Warrantholder or its transferees any rights as a shareholder of the Company, including the right to vote, receive dividends, or consent as a shareholder in respect of any meeting of shareholders for the election of directors of the Company or any other matter. However, the Company shall be required to give notice in writing to the Warrantholder of any meeting of shareholders of the Company or any proposed consent of the shareholders as provided in Section 10 hereof at least twenty (20) days prior to the date fixed as a record date or the date of closing the transfer books for the determination of the shareholders entitled to any relevant dividend, distribution, subscription rights or other rights or for the determination of shareholders entitled to vote at any such meeting or as to which any consent is requested. Such notice shall specify such record date or the date of closing the transfer books, as the case may be. 10. Notices. Any notice pursuant to this Agreement by the Company or by the Warrantholder shall be in writing and shall be deemed to have been duly given if delivered by hand or if mailed by certified mail, return receipt requested, postage prepaid, addressed as follows: 10.1. If to the Warrantholder-addressed to U.S. Franchise Systems, Inc. at . . . 10.2 If to the Company-addressed to Microtel Franchise and Development Corporation, One Airport Way, Suite 200, Rochester International Airport, Rochester, New York 14624, Attention: Bruce A. Sahs, Vice President or to such other address as any such party may designate by notice to the other party. Notices shall be deemed given at the time they are delivered personally or three days after they are mailed in the manner set forth above. 11. Successors. All the covenants and provisions of this Agreement by or for the benefit of the Company or the Warrantholder shall bind and inure to the benefit of their respective successors and assigns hereunder. 12. Merger or Consolidation of the Company. The Company will not merge or consolidate with or into any other corporation or sell all or substantially all of its property to another person, unless the provisions of Section 7.3 are complied with. 6 13. Applicable Law. This Agreement shall be deemed to be a contract made under the laws of the State of New York and for all purposes shall be construed in accordance with the laws of said State applicable to contracts made and to be performed entirely within such State. 14. Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 15. Headings. The headings in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its duly authorized officers and the corporate seal hereunto fixed. MICROTEL FRANCHISE AND DEVELOPMENT CORPORATION (corporate seal) By: Attest: E. Anthony Wilson Chairman Alan S. Lockwood, Secretary 7 EXHIBIT Y
Interest Paid at 10% Per Annum Consulting Principal Total Payment Payment at Closing $400,000.00 $1,600,000.00 $2,000,000.00 Payment 1 yr. after Closing $143,764.00 150,000.00 706,236.00 1,000,000.00 Payment 2 yrs. after Closing 73,141.00 150,000.00 276,860.00 500,000.00 Payment 3 yrs. after closing 45,455.00 454,545.00 500,000.00 $4,000,000.00 Purchase Price Allocation Consulting Services (Section 5) $700,000.00 Category III Assets (Except trademarks and trade names) and Warrant (Allocation to Warrant to be mutually agreed upon by Company and Newco prior to Closing) $3,037,641.00 Total Purchase Price $3,737,641.00
8 EX-10.4 5 EXHIBIT 10.4 MASTER FRANCHISE AGREEMENT between HSA PROPERTIES, L.L.C., a Delaware limited liability company and U.S. FRANCHISE SYSTEMS, INC., a Delaware corporation DATED: As of March 27, 1996 TABLE OF CONTENTS Page PRELIMINARY STATEMENT ...................................................... 1 ARTICLE I Definitions ................................................ 2 1.1 Definitions ................................................. 2 1.2 References ................................................... 9 1.3 Gender and Number............................................. 9 ARTICLE II Grant of License ........................................... 9 2.1 Master License................................................ 9 2.2 Assignment of Existing Licenses, Reservation Agreement and Contracts ....................................................10 2.3 Future Hawthorn Licenses......................................11 2.4 Relationship to Hyatt Hotels..................................11 ARTICLE III Royalty Fees................................................13 3.1 HSA Royalties.................................................13 3.2 HSA Royalty Fees with Respect to Out of System Hawthorn Licenses......................................................18 3.3 Other Fees Property of USFS...................................18 3.4 Time and Manner of Payment ...................................18 3.5 Books and Records; Audit......................................19 ARTICLE IV Operating Covenants.........................................20 4.1 Grant of Licenses.............................................20 4.2 Promotion and Enhancement of Hawthorn Brand ..................21 4.3 Compliance with Law...........................................22 4.4 Restrictive Covenants.........................................23 4.5 Managed Hotels................................................25 4.6 Reservations .................................................26 4.7 Foreign Rights................................................26 4.8 Additional HSA Covenants......................................27 4.9 Additional USFS Covenants.....................................27 4.10 Independent Contractors ......................................29 4.11 Hawthorn Personnel ...........................................30 4.12 Regarding the Ad Fund.........................................30 ARTICLE V Transfers...................................................31 5.1 Transfers by HSA..............................................31 5.2 Restrictions on Transfer by USFS .............................31 5.3 Permitted Transfers...........................................32 5.4 "Change of Control"...........................................33 5.5 Assumption by Transferee......................................34 ARTICLE VI Default and Termination.....................................34 6.1 Termination Standard .........................................34 6.2 Royalty Reduction Standard ...................................35 6.3 Default.......................................................36 6.4 Remedies......................................................37 6.5 Termination...................................................38 6.6 Continuing USFS Administration................................43 i ARTICLE VII Miscellaneous ..............................................44 7.1 Arbitration...................................................44 7.2 Representations and Warranties of HSA.........................45 7.3 Representations and Warranties of USFS .......................51 7.4 HSA and Rockwood Indemnity ...................................52 7.5 USFS Indemnities..............................................52 7.6 Provisions Relating to Intellectual Property, Infringement and Restrictive Agreements.......................53 7.7 Indemnification Procedures ...................................55 7.8 Governing Law.................................................56 7.9 Successors and Assigns........................................56 7.10 Entire Agreement..............................................57 7.11 Confidentiality ..............................................57 7.12 Notices.......................................................57 7.13 Joint Drafting................................................58 7.14 Brokers.......................................................58 7.15 Severability .................................................58 7.16 Waiver of Obligations.........................................59 7.17 Rights of Parties Are Cumulative .............................59 ii MASTER FRANCHISE AGREEMENT THIS AGREEMENT is dated as of March 27, 1996 and is by and between: HSA PROPERTIES, L.L.C., ("HSA"), a Delaware limited liability company 200 West Madison Street 39th Floor Chicago, Illinois 60606 Attention: Michael C. Shindler Telecopy No.: (312) 750-8084 - and - U.S. FRANCHISE SYSTEMS, INC. ("USFS"), a Delaware corporation 13 Corporate Square Suite 250 Atlanta, Georgia 30329 Attention: Michael Leven Telecopy No.: (404) 321-4482 PRELIMINARY STATEMENT HSA, together with its Affiliates, is the owner of a brand of all-suites hotels known as "Hawthorn Suites", has licensed the use of the Hawthorn Brand in the operation of 17 currently existing hotels in the United States, and is currently the direct owner of the Intellectual Property, the Existing Licenses and the Contracts. USFS, directly and through its subsidiaries, is in the business of franchising and licensing others to use certain proprietary names, marks and other intellectual property in connection with the operation of hotels and has a particular expertise in such business. HSA, desiring to take advantage of the expertise of USFS in the hotel licensing and franchising business, and in order to exploit further the commercial value of the Hawthorn Brand, has agreed to enter into a master franchise agreement with USFS, and USFS, desiring to take advantage of the commercial potential in the Hawthorn Brand, has agreed to license the same from HSA, all in accordance with the terms and provisions set forth in this Agreement. NOW, THEREFORE, it is hereby agreed, by and between the parties hereto, as follows: ARTICLE I Definitions 1.1 Definitions. Except as otherwise herein expressly provided, and in addition to any other definitions which may be herein contained, the following terms, when used in this Agreement and in the foregoing Preliminary Statement, shall have meanings set forth below: "Ad Fund" shall mean the segregated fund required to be maintained by the licensor under provisions of the Existing Licenses from which are to be paid or reimbursed costs incurred by the Licensor in connection with the Hawthorn reservation system, and in connection with certain advertising, promotion and marketing expenses. "Additional Hawthorn" shall mean any Hotel operated under the Hawthorn Brand as part of the Hawthorn System which is other than an All-Suite Hotel. "Affiliate" shall mean, as to any Person, any other Person controlled by, under common control with, or which controls, directly or indirectly, the Person in question. The term "Control" for these purposes means the ability, whether by direct or indirect ownership of shares or other equity interest, by contract or otherwise, to elect a majority of the directors of a corporation, to select the managing partner or member of a partnership or limited liability company, or otherwise to select, or have the power to remove and then select, a majority of those persons exercising governing authority over an entity, and, in the case of a limited partnership or limited liability company, shall mean the sole general partner thereof, all of the general partners thereof, to the extent each has equal management control or authority, or the managing general partner or member or managing general partners or members thereof, as appropriate (and in any event shall mean the ownership and control [that is, the right to vote] of fifty percent (50%) or more of the residual equity interest in an entity). The term "Affiliate" shall also mean and include: (i) a trust of which the Person, or a direct or indirect shareholder of such Person, is a trustee, or which has as its principal income or residuary beneficiaries such Person, or any direct or indirect shareholder of such Person, or members of the immediate family of such Person, or direct or indirect shareholder; and (ii) any members of such Person's immediate family, or the member of the immediate family of any direct or indirect shareholder of such Person. For purposes hereof, shares or other ownership interests held by a trust shall be deemed to be owned pro rata by the income and residuary beneficiaries of such trust. Further, the members of the immediate family of any Person shall include all 2 collateral relatives of such Person having a common linear ancestor with such Person, and the spouse or any former spouse of such Person or any of such collateral relatives. "Agreement" shall mean this Master Franchise Agreement, together with any amendments or supplements hereto which may hereafter be entered into by the parties. "All-Suite Hotel" shall mean a hotel (i) at least 50% of whose guest accommodations consist of Suites, or (ii) whose name includes the word "suites", or both of the foregoing. "Change of Control" shall have the meaning set forth in Section 5.4. "Contracts" shall have the meaning set forth in Section 7.2(j). "CPI Adjustment" shall mean an adjustment resulting from multiplying the figure or number to be adjusted by a fraction (which in no event shall be less than 1/1) the numerator of which shall be the CPI Index as of the most recent date required under the provisions of this Agreement, the denominator of which shall be the CPI Index in effect as of the comparison year specified under the provisions of this Agreement. "CPI Index" shall mean the Consumer Price Index, United States City Average, All Items, All Urban Consumers (1982-84 = 100) as published from time to time from by the United States Bureau of Labor Statistics. If the foregoing Consumer Price Index shall, for any reason, be discontinued, or shall otherwise no longer be available, the CPI Index shall be an index of the purchasing power of the United States dollar as published by a recognized government or private source agreeable to both HSA and USFS. "Deemed Approval" shall have the meaning set forth in Section 2.4(b). "Development Area" shall mean the entire world. "Effective Date" shall mean the first to occur of (i) ninety (9O) days after the date hereof; and (ii) the date on which USFS shall be legally entitled to grant licenses for the use of the Hawthorn Brand in all fifty (50) states of the United States. "Existing Hotels" shall mean those hotels, or hotel prospects, listed and described in Exhibit A hereto, all of which (i) are currently operated, or under license to be included, under the Hawthorn System, and (ii) meet the conditions and standards 3 described in clauses (ii) and (iii) of the defined term "Qualified License Agreement". In the case of an Existing Hotel which is to be constructed, or, if completed, is to be converted to the Hawthorn System, the same shall cease to be an Existing Hotel unless (i) in the case of a hotel to be constructed, such hotel shall be completed and shall open for operation as part of the Hawthorn System not later than fifteen (15) months after grant of the Existing License; or (ii) in the case of a hotel in existence as of the date of execution of the Existing License and fully completed and constructed, such hotel shall be converted and become part of the Hawthorn System not later than nine (9) months after grant of the Existing License, it being understood and agreed that unless the conditions of this sentence shall be complied with, any Existing Hotel shall cease to constitute an Existing Hotel, and the corresponding Hawthorn License shall cease to constitute an Existing License. The term "Existing Hotels" shall also mean, (i) any Shaner Hotel, except to the extent provided in Section 3.1(a), and (ii) any hotel at any time on or after the Effective Date constructed by HSA or any Affiliate of HSA on property currently owned by an Affiliate of HSA in the city limits of Rosemont, Illinois and operated as part of the Hawthorn System provided that construction thereof shall commence within twelve (12) months of the Effective Date. "Existing License(s)" shall mean the Hawthorn Licenses, together with all related documentation (other than management contracts), relating to Existing Hotels. "Franchise Royalty Fee" shall have the meaning set forth in Section 3.1(c). "Gross Rooms Revenues" shall have the meaning set forth in Section 3.1(c). "Hawthorn Brand" shall mean the trade names "Hawthorn", "Hawthorn Suites" and any other trade names, trademarks, copyrights and other Intellectual Property now used, or which may hereafter be developed for use, in connection with the operation of hotels under the "Hawthorn" brand. "Hawthorn Brand Saturation" shall be deemed to occur as of the date on which both of the following conditions shall have been satisfied: (i) there shall be not less than one hundred seventy five (175) Hawthorn Brand All-Suite Hotels subject to then valid and subsisting Hawthorn Licenses (excluding, as of the date of determination, "Suspended Hotels" [as defined in Section 3.1(d)], Additional Hawthorns and Existing Hotels), and (ii) the total number of guestroom keys in all hotels included in the number of hotels included for purposes of clause (i) shall be not less than 11,375. 4 "Hawthorn License" shall mean any license or franchise agreement granted by USFS pursuant to the provisions of the Agreement (or, with respect to Existing Hotels, by HSA or its Affiliate) for the use of the Hawthorn Brand and for the participation by the licensee in the Hawthorn System. "Hawthorn System" shall mean the Hawthorn Brand, together with the system of operation now existing or hereafter developed with respect thereto, including, without limitation, the system of licensing, reservations, training, marketing and advertising, prototype plans, specifications and working drawings, and operations, used or associated with the use and operation of hotels operated under the Hawthorn Brand, and together with the rights and interests of HSA under the Reservation Agreement and the Contracts. "Hotel Brand" shall mean any series of trademarks, trade names, copyrights and other intellectual property used by USFS, or any of its Affiliates, in connection with the use or operation of hotels operated under one or more of the trade names or trademarks in question, excluding, however, the Hawthorn Brand and the Microtel Brand. "HSA Royalty Fee" shall have the meaning set forth in Section 3.1. "Intellectual Property" shall have the meaning set forth in Section 7.2(d). "Knowledge of HSA" shall mean the actual (as opposed to imputed or constructive) knowledge of any of Nicholas J. Pritzker, Douglas G. Geoga, Michael C. Shindler, Glen Miller, John Lyons, Paul White or Sara Hays. "Limited Service Brand" shall mean a Hotel Brand wherein (i) the average daily rate for all hotels of such Hotel Brand which, as of the date of determination thereof, are opened and operating, is $49 or less, and (ii) the hotels operated under such Hotel Brand have no Suites and no food or beverage outlets. The figure of $49 appearing in the preceding sentence shall be subject to CPI Adjustment based upon the difference between the CPI Index as of the date of determination in comparison with the CPI Index as of December 31, 1995. Average daily rate of a Limited Service Brand shall mean the total Gross Rooms Revenues for the rental or occupancy of rooms in all hotels bearing the Limited Service Brand divided by the number of available rooms in the hotel or hotels in question, then further divided by 365 and multiplied by the decimal equivalent of the percentage of occupancy for such Brand on a chain-wide basis. 5 "Managed Hotels" shall mean those of the Existing Hotels which, as of the Effective Date, in addition to being operated as part of the Hawthorn System, are actively managed by one or more Affiliates of HSA under management contracts between said Affiliate, on the one hand, and the owner of the hotel in question, on the other hand. The Managed Hotels, as of the date hereof, are those of the Existing Hotels indicated with an asterisk next to their names on Exhibit A hereto. "Microtel" shall mean Microtel Inns and Suites Franchising, Inc., a Georgia corporation, and currently a wholly owned subsidiary of USFS. "Microtel Brand" shall mean the trade name "Microtel" and any other trade names, trademarks, copyrights and other intellectual property now used, or which may hereafter be developed for use, in connection with the operation of hotels under the "Microtel" Brand. "Microtel Suite Hotels" shall mean any Microtel Brand hotel constituting an All-Suite Hotel and having construction costs of $40,000 per hotel room or less, subject to CPI Adjustment (the calculation of the costs of construction of a Microtel Suite Hotel to be in accordance with the provisions set forth in the definition of Mid-Priced Brand). "Microtel System" shall mean the Microtel Brand, together with the system of operation now existing or hereafter developed with respect thereto, including, without limitation, the system of licensing, reservations, training and operations, used or associated with the use and operation of hotels under the Microtel Brand. "Mid-Priced Brand" shall mean a Hotel Brand relating to hotels which (i) in the case of any hotel either under construction at the time of the determination of its status or which had been newly constructed within the preceding two years, had a construction cost of $50,000 per room or less; or (ii) in the case of any hotel which, as of the date of determination of its status, has been constructed for more than two years prior thereto, had an estimated replacement cost of $50,000 per room or less. The number $50,000 appearing above shall be subject to CPI Adjustment for the difference in the CPI Index between the date of the determination of the costs of construction or replacement cost as the case may be, of any hotel in question, and December 31, 1996. In computing the cost of construction or replacement cost there shall be included all so-called "hard" and "soft" costs (meaning actual costs of construction, labor and materials, costs of acquisition and installation of furnishings, fixtures and equipment, initial quantities of inventory and working capital, pre-opening marketing, staff hiring and training costs, utility installations, construction 6 period interest and other financing charges such as appraisal, legal and title insurance, and design costs and fees), excluding, however, the cost of land acquisition or leasing. If any portion of any particular hotel is financed, in whole or in part, by means of personal property leases, the cost of the leased components shall be included in hard costs based on the purchase price of such items if purchased. "Person" shall mean any natural person, or any corporation, partnership, joint venture, limited liability company, business association, trust, governmental agency or other entity. "Primary Development Area" shall mean the United States and Canada. "Qualified License Agreement" shall mean a Hawthorn License (other than an Existing License) meeting the following conditions and standards: (i) the licensed hotel shall be either an All-Suites Hotel having more than 40 Suites, or an Additional Hawthorn having a minimum number of rooms to be agreed to between HSA and USFS; (ii) all application fees required by USFS to have been paid prior to such date shall have been paid by the licensee thereunder; (iii) the licensee shall have acquired and shall own or control 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 all hotels covered by Hawthorn Licenses which, except for the provisions of this clause (iv) would constitute Qualified License Agreements, shall be equal to or greater than fifty (50). If the average number of Suites in hotels covered by Hawthorn Licenses which, except for the provisions of clause (iv) of the preceding sentence would constitute Qualified Licenses, is less than fifty (50), USFS shall have the right to specify which of said Hawthorn Licenses shall constitute Qualified License Agreements, it being the understanding that USFS shall have the right to select such of the then existing Qualified License Agreements in its discretion which would, in the aggregate, meet the requirements of the preceding sentence. In the case of a Qualified License Agreement relating to a hotel to be constructed, or, with respect to a completed hotel which is to be converted to the Hawthorn System, such Hawthorn License shall cease to be a Qualified License Agreement unless (i) in the case of a hotel to be constructed, such hotel shall be completed and shall open for operation as part of the Hawthorn System not later than fifteen (15) months after grant of the Hawthorn License; or (ii) in the case of hotel in existence as of the date of execution of the license and fully completed and constructed, such hotel shall be converted and become part of the Hawthorn System not later than nine (9) months after grant of the Hawthorn License, it being understood and agreed that unless 7 the conditions of this sentence shall be complied with, any Hawthorn License formerly constituting a Qualified License Agreement shall cease to constitute a Qualified License Agreement. "Qualified Licensee" shall mean the licensee under a Qualified License. "Required Consents" shall have the meaning set forth in Section 7.2(f). "Reservation Agreement" shall mean that certain Reservation Agreement, of even date herewith, between Regency Systems Solutions, Inc. and HSA. "Restrictive Agreement(s)" shall have the meaning set forth in Section 2.4(b). "Royalty Reduction Standard" shall have the meaning set forth in Section 6.2. "Shaner Agreement" shall mean the Amended and Restated Agreement of Limited Partnership of Shaner Hotel Group Limited Partnership, dated as of December 19, 1995. "Shaner Hotels" shall mean those hotels which, under the provisions of Section 3.3 of the Shaner Agreement, require the Shaner Partnership to convert or cause an affiliated partnership to convert certain hotels, thereafter acquired by the Shaner Partnership, to Hawthorn Brand hotels, all in accordance with the provisions of the Shaner Agreement. The term "Shaner Hotel" shall not include any hotel, whether or not owned or controlled by the Shaner Partnership, or any Affiliate of the Shaner Partnership, unless such hotel shall have been included as part of the Hawthorn System in satisfaction or in partial satisfaction of the obligations of the Shaner Partnership under Section 3.3 of the Shaner Agreement. "Shaner Partnership" shall mean Shaner Hotel Group Limited Partnership, the partnership organized and existing under the Shaner Agreement. "Suite" shall mean a hotel guest accommodation consisting of at least two distinct areas, separated from each other by a partition (which may include, without limitation, a door, folding partition, partitioning wall or other structure), one of which areas shall be intended primarily as a sleeping area, and the other intended primarily as a sitting room which, however, may include a convertible sofa or day-bed which may be used as a sleeping accommodation. A Suite, for purposes of this Agreement, shall constitute a single unit notwithstanding 8 that the same may be partitioned and one or more of its component parts sold or rented as a separate guest accommodation. In any count of Suites in a hotel, a single sitting area may be considered with only one sleeping area notwithstanding that, in the hotel configuration in question, it may be combined with two or more sleeping areas to make more than one Suite configuration. "Termination Standard" shall have the meaning set forth in Section 6.1. "UFOC" shall mean the Uniform Franchise Offering Circular, or such other or additional written material required under applicable provisions of law to be delivered to prospective licensees of the Hawthorn Brand in connection with the granting of a Hawthorn License, together with the form thereof actually delivered from time to time by USFS, and all attachments and exhibits thereto. 1.2 References. All references in this Agreement to particular sections or articles shall, unless otherwise expressly provided or unless the context otherwise requires, be deemed to refer to the specific sections or articles in this Agreement. In addition, the words "hereof", "herein", "hereunder", and words of similar import, refer to this Agreement as a whole and not to any particular section or article. 1.3 Gender and Number. All pronouns or variations used herein shall, regardless of the pronouns actually used, be deemed to refer to the masculine, feminine, neuter, singular or plural as the identity of the person or persons may, in the context in which such pronoun is used, require. ARTICLE II Grant of License 2.1 Master License. Subject to the terms and conditions of this Agreement, HSA does hereby grant to USFS the exclusive right and license in the Development Area to (i) act as the franchisor of the Hawthorn System, including the right to make changes in the Hawthorn System; (ii) grant franchises and licenses for the development and operation of Hawthorn Brand hotels; (iii) use the Hawthorn System in connection therewith; and (iv) control the franchising, licensing, operations and development of Hawthorn Brand hotels, all in accordance with the terms and conditions of this Agreement, effective immediately and continuing until the earlier to occur of (x) ninety-nine (99) years after the date hereof, and (y) the earlier termination of this Agreement in accordance with the provisions hereof. Licensees, including Affiliates of USFS, shall execute separate Hawthorn Licenses for 9 each Hawthorn Brand hotel. In addition to the foregoing, and subject to the terms and conditions of this Agreement, HSA hereby further grants to USFS the exclusive right to be franchisor of the Hawthorn Brand in connection with any Additional Hawthorns, the specifications for which, if any, shall be prepared by USFS; provided, however, that before licensing any party to utilize the Additional Hawthorn, USFS shall have obtained the approval of HSA to (a) the name of the Additional Hawthorn, and (b) the specifications for the lodging product and the use of said name. Upon expiration of the ninety-nine (99) year term hereof, and provided this Agreement shall not have been sooner terminated in accordance with Section 6.5, HSA shall sell, assign, transfer, convey, remise, release and transfer to USFS the entire Hawthorn System, and all estate, right, title and interest of HSA therein, without further consideration, with usual and customary warranties and representations relating to HSA acts, in return for which USFS shall assume any liabilities or obligations with respect thereto that relate to the period on and after the date of such transfer (including, without limitation, liabilities arising on or after said date under contracts existing as of such date). 2.2 Assignment of Existing Licenses, Reservation Agreement and Contracts. HSA does hereby, effective on and as of the date hereof, and without further consideration, sell, assign, transfer, set over and convey unto USFS (without representation or warranty of any kind other than as herein expressly set forth) all of the estate, right, title and interest of HSA in and to the Reservation Agreement, the Contracts and all then Existing Licenses, the foregoing to include, without limitation, the right to receive all royalties, license fees, reservation and marketing fees and charges, and assessments which may become due and owing, and which relate to hotel operations, on or after the date hereof, subject only to the express provisions of this Agreement. USFS shall, and does hereby, agree to assume and pay, perform and discharge all of the liabilities and obligations of HSA under and with respect to the Existing Licenses, the Reservation Agreement and the Contracts that accrue and relate to events occurring, on or after the date hereof. Notwithstanding the foregoing, HSA, for itself and its Affiliates, hereby expressly reserves all of its rights and interests under and with respect to (i) all management contracts relating to any Managed Hotels and all fees or other amounts required to be paid thereunder; (ii) any direct or indirect ownership or mortgage interests in any hotel now or at any time hereafter operated as part of the Hawthorn System (such interests to include, without limitation, direct ownership of such hotel or hotel mortgage, or the ownership of stock, partnership or joint venture interests, interests in limited liability companies and the like, in entities owning or controlling any such hotels or such hotel mortgages); and (iii) any ownership interest of HSA or any Affiliate of HSA in Hawthorn Suites Management Corp., or any other Person engaged primarily in the business of hotel management, as opposed to licensing or franchising. 10 2.3 Future Hawthorn Licenses. Pursuant to the right, power and authority granted to USFS hereunder, during the term of this Agreement all future licenses of Hawthorn Brand hotels anywhere in the Development Area shall be granted (if at all) solely and exclusively by USFS in accordance with the provisions of this Agreement, and HSA, for itself and its Affiliates, agrees that it shall not at any time, on or after the date hereof (and for so long as this Agreement shall remain in effect), grant, or permit any other Person to grant, any further or additional licenses of Hawthorn Brand hotels anywhere in the world. 2.4 Relationship to Hyatt Hotels. Hyatt Corporation ("Hyatt"), is a corporation which, directly and through its subsidiaries and other Affiliated entities, owns, operates and manages a chain of hotels under the "Hyatt" name and provides to such Hyatt hotels and others related services such as purchasing, computer services, technical assistance services, reservation services, special events planning and other such services. Hyatt and HSA, through contract and other direct and indirect means, are related entities, both engaged in the lodging industry. Accordingly, the parties hereto have agreed as follows with respect to Hyatt: (a) Neither Hyatt, nor any Affiliates of Hyatt, shall be limited or restricted (i) in its ownership, financing, operation, licensing, franchising or management of the "Hyatt" chain of hotels, or any other hotels (excluding only those operated under the "Hawthorn Brand") in which Hyatt, HSA or their respective Affiliates may have an interest, or for whom services are performed whether or not any such hotels may compete with any Hawthorn Brand hotel, or (ii) in any of its other business activities whether or not related to the lodging or hospitality industries. Nothing in this Agreement (except the provisions of this Section 2.4) shall be deemed in any way to relate to Hyatt, the conduct of its business or its ownership or operation. (b) Hyatt has heretofore entered into management contracts, leases and the like containing covenants restricting the right of Hyatt, and its Affiliates, to own or operate hotels within a restricted area (and, usually, for a restricted period of time) defined in the governing documents, some of which provisions, by their terms, restrict or may be interpreted to restrict, the right or authority of HSA, or any licensee of HSA, to own, manage, license or operate hotels within the aforesaid restricted area (the "Restrictive Agreements"). HSA hereby represents, warrants and covenants that (i) Schedule I hereto contains a complete and accurate list of all Restrictive Agreements, describing in reasonable detail the duration, geographic scope and nature of such 11 restrictions, (ii) other than the Restrictive Agreements set forth in Schedule I, there are no other Restrictive Agreements, and (iii) neither HSA, nor Hyatt, nor any of their Affiliates shall enter into any further Restrictive Agreements or agree to any amendments, modifications, extensions or renewals of any existing Restrictive Agreements which affect the Hawthorn System, without the prior written consent of USFS, which may be withheld in its sole discretion. Notwithstanding the previous sentence, neither HSA, nor Hyatt, nor any of its Affiliates shall be liable or responsible to USFS, or any Affiliate of USFS, or any licensee of USFS or its Affiliates, in the event it shall be determined that any of the Restrictive Agreements listed on Schedule I adversely affects the ability of USFS or its Affiliates or licensees to own, manage, operate or license any Hawthorn Brand hotel in the geographic areas identified on Schedule I. Prior to entering into any Hawthorn License that could reasonably be expected to violate any of the Restrictive Agreements listed on Schedule I, USFS agrees that it shall provide written notice of its intention to do so to HSA and HSA shall promptly (and in no event later than five (5) days following receipt of such notice from USFS) advise USFS whether or not the proposed Hawthorn License would violate any of the Restrictive Agreements listed on Schedule I. If HSA advises USFS that the proposed Hawthorn License would be in violation of a Restrictive Agreement, USFS agrees that it shall not grant the Hawthorn License until after expiration (if applicable) of the Restrictive Agreement in question. If, however, HSA either advises USFS in writing that no such Restrictive Agreement will be violated by the proposed Hawthorn License, or fails to respond, either affirmatively or negatively, to a notice from USFS as herein contemplated within the aforesaid period of five (5) days, the same shall be deemed a representation and warranty (the "Deemed Approval") by HSA that no such proposed Hawthorn License will be in violation of any Restrictive Agreement. (c) Hyatt and each franchisee and licensee of USFS are intended and shall be third party beneficiaries of the provisions of this Section 2.4. 12 ARTICLE III Royalty Fees 3.1 HSA Royalties. In consideration of the agreements herein contained, and subject to the provisions of Section 6.4(c) below, USFS shall, throughout the term of this Agreement, pay royalties ("HSA Royalty Fees") to HSA as follows: (a) Existing Hotels. One hundred percent (100%) of Franchise Royalty Fees, plus one hundred percent (100%) of termination fees (if any are actually received by USFS), paid to the licensor under all Existing Licenses, or any extensions or renewals thereof. USFS shall have the sole right in its discretion to determine whether any Existing License shall be extended or renewed. For purposes hereof, an Existing License shall be deemed to have been renewed or extended if, in addition to any amendment of the Existing License extending its term, a new Hawthorn License relating to the hotel in question shall be entered into with the licensee under the Existing License, or any Affiliate of the said licensee, or any Person (or Affiliate of any Person) who shall have acquired the existing hotel subject to the then Existing License. Solely for purposes of determining the amount of HSA Royalty Fees, the Shaner Hotels shall not constitute Existing Hotels, but shall be included in the rooms count of Hawthorn Brand hotels and HSA Royalty Fees shall be determined in accordance with Section 3.1(b) below, it being understood and agreed, however, that for all other purposes of this Agreement, all Shaner Hotels shall be deemed Existing Hotels. (b) Hawthorn Brand Hotels. With respect to all Hawthorn Brand Hotels, other than Existing Hotels, the amounts to be paid to HSA shall be one hundred one and one-one hundredth percent (101.01%) of the following amounts (all remaining amounts to be retained by USFS as its sole property): (1) Two-thirds (2/3rds) of Franchise Royalty Fees actually paid by each Hawthorn Brand hotel which in the aggregate contain the first three thousand six hundred (3,600) rooms; provided that if the Franchise Royalty Fee (expressed as a percentage of Gross Rooms Revenues) required to be paid under the applicable Hawthorn License is less than four percent (4%), then the amount to be paid to HSA with respect to such hotel (and only such hotel) shall be a portion of the Franchise Royalty Fees actually paid by such hotel that is equal to a fraction the numerator of which is two and two- 13 thirds percent (2.67%) and the denominator of which is the stated Franchise Royalty Fee (expressed as a percentage of Gross Rooms Revenues) payable under the applicable Hawthorn License; plus (2) One-half (1/2) of Franchise Royalty Fees actually paid by each Hawthorn Brand hotel which in the aggregate contain the next three thousand one hundred fifty (3,150) rooms; provided that if the Franchise Royalty Fee (expressed as a percentage of Gross Rooms Revenues) required to be paid under the applicable Hawthorn License is less than four percent (4%), then the amount to be paid to HSA with respect to such hotel (and only such hotel) shall be a portion of the Franchise Royalty Fees actually paid by such hotel that is equal to a fraction the numerator of which is two percent (2%) and the denominator of which is the stated Franchise Royalty Fee (expressed as a percentage of Gross Rooms Revenues) payable under the applicable Hawthorn License; plus (3) Three-eighths (3/8ths) of Franchise Royalty Fees actually paid by each Hawthorn Brand hotel which in the aggregate contain the next two thousand one hundred sixty (2,160) rooms; provided that if the Franchise Royalty Fee (expressed as a percentage of Gross Rooms Revenues) required to be paid under the applicable Hawthorn License is less than four percent (4%), then the amount to be paid to HSA with respect to such hotel (and only such hotel) shall be a portion of the Franchise Royalty Fees actually paid by such hotel that is equal to a fraction the numerator of which is one and one-half percent (1.50%) and the denominator of which is the stated Franchise Royalty Fee (expressed as a percentage of Gross Rooms Revenues) payable under the applicable Hawthorn License; plus (4) One-third (1/3rd) of Franchise Royalty Fees actually paid by each Hawthorn Brand hotel which in the aggregate contain the next four thousand four hundred ten (4,410) rooms; provided that if the Franchise Royalty Fee (expressed as a percentage of Gross Rooms Revenues) required to be paid under the applicable Hawthorn License is less than four percent (4%), then the amount to be paid to HSA with respect to such hotel (and only such hotel) shall be a portion of the Franchise Royalty Fees actually paid by such hotel that is equal to a fraction the numerator of which is one and one-third percent (1.33%) and the denominator of which 14 is the stated Franchise Royalty Fee (expressed as a percentage of Gross Rooms Revenues) payable under the applicable Hawthorn License; plus (5) One-fourth (1/4th) of Franchise Royalty Fees actually paid by each Hawthorn Brand hotel which in the aggregate contain all other hotel rooms; provided that if the Franchise Royalty Fee (expressed as a percentage of Gross Rooms Revenues) required to be paid under the applicable Hawthorn License is less than four percent (4%), then the amount to be paid to HSA with respect to such hotel (and only such hotel) shall be a portion of the Franchise Royalty Fees actually paid by such hotel that is equal to a fraction the numerator of which is one percent (1%) and the denominator of which is the stated Franchise Royalty Fee (expressed as a percentage of Gross Rooms Revenues) payable under the applicable Hawthorn License. Notwithstanding the foregoing, (i) if the application of the proviso contained in clauses (1) through (5) applicable to any particular Hawthorn License is greater than one hundred percent (100%), that percentage, applied to the amount actually received from the licensee under the Hawthorn License in question shall be paid to HSA and USFS shall be responsible for the difference between the amount actually paid by the said licensee and the amount required to be paid in accordance with the formula above set forth; and (ii) USFS shall have the right to provide to licensees or franchisees under Hawthorn Licenses allowances or royalty-free periods of not more than six (6) months during the initial term of such Hawthorn License and during each extension or renewal of the term thereof. HSA acknowledges and agrees that the provision of allowances or royalty-free periods by USFS will result in a reduction of the amount of Franchise Royalty Fees and HSA Royalty Fees and that the provision of such allowances or royalty-free periods shall not be deemed to be a reduction of the stated percentage royalty payable under the applicable Hawthorn License for purposes of this Section 3.1 or any other section of this Agreement. (c) "Gross Rooms Revenues" and "Franchise Royalty Fees" Defined. For purposes of this Section 3.1, and wherever else reference is made to these terms, (1) the term "Gross Rooms Revenues shall be as defined in the applicable Hawthorn License and, to the extent not inconsistent therewith, generally shall mean all amounts paid by or on behalf of hotel guests for the rental or occupancy of hotel rooms excluding (i) charges for other hotel services or other forms of hotel revenues including, without limitation, telephone charges, valet 15 services, in-room entertainment, vending machines and store or merchandise sales or rentals; and (ii) sales, use or occupancy taxes relating solely to revenues for the use or occupancy of hotel rooms charged to and collected directly from hotel guests; and (2) the term "Franchise Royalty Fees" shall mean the franchise royalty fees actually received by USFS from licensees under Hawthorn Licenses (or any amounts actually received by USFS from licensees in lieu thereof), less out-of-pocket collection costs, gross receipts taxes payable by USFS thereon, and, with respect to Hawthorn Licenses relating to hotels in any jurisdiction in which USFS incurred expenses under Section 4.7 to protect its rights in the Intellectual Property in that jurisdiction, amounts necessary to reimburse USFS for such expenses, excluding, however, reservation, sales, marketing and advertising fees and expenses, initial license fees or other origination charges, franchisee assessments, termination fees and charges for specific services such as training, use of prototype plans and the like. (d) Rooms Count Determination. In determining whether Franchise Royalty Fees are attributable to the first 3,600 rooms or to some subsequent tranche of hotel rooms, the rooms count shall be arranged in chronological order beginning with the Hawthorn License which, as of the date of determination, represents the Hawthorn Brand hotel having then been opened and operating as part of the Hawthorn System for the longest time, and proceeding then in descending chronological order to the hotel which, as of the date of determination, has most recently been added to the Hawthorn System. The chronological order shall be recomputed as of the end of each calendar quarter to reflect new or additional Hawthorn Brand hotels added to the Hawthorn System since the end of the preceding quarter, or the deletion of a former member of the Hawthorn System either because of the expiration or earlier termination of the applicable Hawthorn License. Any Hawthorn Brand hotel (herein a "Suspended Hotel") whose operation, as of the date of determination, has ceased (either by reason of casualty, temporary condemnation, or construction or refurbishing activities) shall, so long as the applicable Hawthorn License shall remain in effect, be deemed part of the Hawthorn System, but shall not be included in the rooms count until such time (if ever) as its operations as part of the Hawthorn System are resumed. During the period of time that a hotel constitutes a Suspended Hotel, it shall be disregarded for purposes of determining room count or the chronological ordering of Hawthorn Licenses. Operations of a Hawthorn Brand hotel shall be deemed to have ceased 16 (and the same shall constitute a Suspended Hotel) if, and for so long as, two-thirds (2/3rds) or more of its rooms formerly available for occupancy are not so available. The parties acknowledge that it is unlikely that arranging Hawthorn Licenses in chronological order will provide a cut off precisely at the rooms count contemplated above. Accordingly, the dividing line for a particular tranche shall be increased to that number of rooms corresponding to the last Hawthorn License necessary to be included in order to reach the required rooms count. For example, in determining the Hawthorn Licenses relating to the first 3,600 rooms, if the total rooms count for the chronologically oldest Hawthorn Licenses totals 3,500 hotel rooms, and if the next oldest Hawthorn License relates to a hotel containing 150 rooms, the first tranche shall be deemed to have been increased from 3,600 rooms to 3,650 rooms, the immediately succeeding tranche shall be reduced accordingly, and similar increases shall be made in each of the other tranches to the extent necessary in order that the dividing line can correspond to a particular Hawthorn License. All calculations and determinations of rooms count shall be as of the last day of the calendar quarter for which HSA Royalty Fees are being calculated. With respect to any Hawthorn License granted a royalty free period, the hotel with respect thereto shall be included in the rooms count only as of the date when such royalty free period shall expire. (e) Defaulted Licenses. For purposes hereof, a "Defaulted License" shall mean any Hawthorn License under which, as of the date of determination of the amount of HSA Royalty Fees payable hereunder, the licensee has failed to pay the full amount of Franchise Royalty Fees required to be paid under such Hawthorn License for three (3) months (whether or not consecutive) in any period of six (6) consecutive months, for reasons other than the allowance or royalty-free period which may have been granted to the licensee as contemplated by Section 3.1(b) above. Any hotel operating under a Defaulted License shall, until such time as the applicable Hawthorn License shall have been terminated, be deemed part of the Hawthorn System, but shall not be included in the rooms count until such time (if ever) as the licensee thereunder shall have cured all previous payment defaults in full. So long as a Hawthorn License constitutes a Defaulted License, it shall be disregarded for purposes of determining rooms count or the chronological ordering of Hawthorn Licenses. If the default is cured, in whole or in part, by an 17 amendment to the applicable Hawthorn License changing the structure of the Franchise Royalty Fees payable thereunder, or by waiver, in whole or in part, of Franchise Royalty Fees required to be paid (as opposed to settlement of a dispute as to the required amount), the said Hawthorn License shall, for all purposes of this Article III, be deemed a new Hawthorn License with an effective date as of the date of any such amendment, modification or waiver. (f) Terminated Licenses. Any Hawthorn License which, as of the date of determination of rooms count, has been terminated, whether by USFS or by the licensee thereunder, and regardless of whether the termination is being contested, shall, for rooms count purposes, be deemed a terminated Hawthorn License until the same shall have been reinstituted, if at all, by court order or agreement of the parties, and the provisions of Section 3.2 below shall govern the payments to HSA with respect thereto. The foregoing shall apply to any Hawthorn License that the hotel in question continues to operate as part of the Hawthorn System during the pendency of any termination dispute. 3.2 HSA Royalty Fees with Respect to Out of System Hawthorn Licenses. For purposes hereof, the term "Out of System Payments" shall mean any collections of Royalty Fee Payments by USFS pursuant to a Hawthorn License which, as of the date of determination, relates to a hotel or hotels not included, as of such date, in the rooms count of Hawthorn Brand hotels, less out-of-pocket collection costs and gross receipts taxes payable by USFS therefrom. With respect to Out of System Payments, the amount of the HSA Royalty Fee shall be equal to that amount which would have been payable to HSA hereunder had the hotels to which the Out of System Payments relate been chronologically the hotels most recently added to the Hawthorn System. 3.3 Other Fees Property of USFS. Except as expressly provided herein, all fees, charges, payments, assessments or other amounts payable under any Hawthorn License shall be payable to USFS and may be retained by USFS as its sole property, including, without limitation, reservation or marketing fees, joint advertising charges, training charges and the like, it being understood and agreed that the provisions of this Article III shall relate solely to Franchise Royalty Fees. 3.4 Time and Manner of Payment. Payment of HSA Royalty Fees shall be made, in lawful money of the United States, not later than twenty (20) days following the end of each calendar quarter and shall relate to Gross Rooms Revenues and Franchise Royalty Fees for Hawthorn Brand hotels actually realized by the licensee or collected by USFS, as the case may be, during the preceding 18 calendar quarter. All payments of HSA Royalty Fees shall be accompanied by a report (the "Quarterly Report") setting forth, in reasonable detail, and with respect to each separate Hawthorn License, (i) the amount of Gross Rooms Revenue received by each such Hawthorn Brand hotel; (ii) the amount of Franchise Royalty Fees received by USFS with respect to each Hawthorn License; (iii) the number of hotel rooms in each Hawthorn Brand hotel as of the end of the preceding quarter; (iv) the identity of each Suspended Hotel; (v) the amount of collections by USFS of Out of System Payments during the preceding quarter; and (vi) a chronological listing of all Hawthorn Licenses in existence as of the last day of such calendar quarter. Each Quarterly Report submitted to HSA in accordance with the provisions of this Section 3.3 shall be certified on behalf of USFS by its Chief Financial Officer as being true and correct in all material respects. For all purposes hereunder, the rooms count, the chronological ordering of Hawthorn Licenses, and the number of available guest rooms, shall be made as of the last day of the calendar quarter as to which each Quarterly Report shall relate. 3.5 Books and Records; Audit. (a) USFS agrees that it shall maintain accurate books and records sufficient, for all purposes, for the preparation of Quarterly Reports, and to verify the information contained therein, and otherwise to calculate the HSA Royalty Fees required to be paid by USFS to HSA pursuant hereto. USFS agrees that it shall grant to HSA, and each of its agents, accountants, employees and other authorized representatives executing a customary confidentiality agreement in form and substance reasonably satisfactory to USFS, full and complete access to all books and records of USFS relating to the Hawthorn Brand, and the revenues and income received therefrom by USFS. To the extent such information is contained in electronic storage media, USFS agrees to provide, upon request of HSA and at the sole cost and expense of USFS, hard copies of all such data. All such materials shall be maintained by HSA strictly in accordance with the provisions of Section 7.11 and shall be returned to USFS promptly upon written demand therefor. Any investigation conducted by HSA or its Affiliates, employees or agents shall be upon reasonable prior written notice and during normal business hours and shall be conducted in a manner so as to minimize disruption of the operations of USFS and its employees and agents. (b) HSA shall have the right once during each twelve (12) month period, directly and through representatives appointed by it executing a customary confidentiality agreement in form and substance reasonably satisfactory to USFS, to audit the books and records of USFS for any period or periods during the three (3) full fiscal years next preceding the date of such audit that have not previously been so audited to the extent the same relate to Hawthorn Licenses or other activities of USFS under or pursuant to 19 this Agreement, all at the sole cost and expense of HSA except as otherwise hereinafter expressly provided. If, as a result of any such audit, it shall be determined that the amount of HSA Royalty Fees theretofore paid to HSA pursuant hereto is less than the amount required to have been paid, USFS shall promptly remit the deficiency to HSA together with interest thereon at the rate of Prime (as reported by The Wall Street Journal) plus two percent (2%) per annum from the date on which payment was otherwise due to the actual date of payment thereof. If, however, it shall be determined that the amounts actually paid by USFS to HSA were greater than the amounts otherwise required to be paid hereunder, the overpayment shall be credited against the next payment of HSA Royalty Fees coming due by USFS to HSA without, however, any interest thereon. In addition, if any such audit discloses an underpayment to HSA for any one of the calendar quarters being audited of five percent (5%) or more, USFS shall promptly reimburse HSA for all reasonable costs and expenses incurred by HSA in conducting such audit for all quarters then being audited. ARTICLE IV Operating Covenants 4.1 Grant of Licenses. USFS shall have sole, exclusive and complete control and authority over all aspects of the commercial development of the Hawthorn Brand and the franchising, licensing and operation of the Hawthorn System, subject, however, to the express terms and provisions of this Agreement. Without limiting the generality of the preceding sentence, USFS shall have full control, authority and discretion (subject in all cases to compliance with the express provisions of this Agreement) to (i) grant Hawthorn Licenses, except that with respect to the Shaner Hotels, USFS shall issue the same in accordance with, and subject to the terms and provisions of, Section 4.9(g); (ii) make any election not to grant a Hawthorn License; (iii) establish the terms and conditions of all Hawthorn Licenses granted by USFS, including, without limitation, the amount of Franchise Royalty Fees, initial license fees, assessments and other fees and charges required to be paid by licensees, together with additional charges for specialized services such as marketing and reservations which may not, however, be intended as charges in lieu (in whole or in part) of Franchise Royalty Fees or exceed in amount the reasonably estimated costs to USFS of providing such services; provided, however, HSA shall have the right to approve any Franchise Royalty Fee in excess of five percent (5%) of Gross Rooms Revenues or any application fee in excess of the lesser of Seven Hundred Fifty Dollars ($750) per room or Seventy-Five Thousand Dollars ($75,000); (iv) establish performance and operating standards required to be met by licensees under Hawthorn Licenses; (v) make any elections with respect to enforcement of Hawthorn Licenses including elections to institute proceedings against licensees, terminate or cancel licenses, or to 20 waive or grant consents with respect to any Hawthorn License; (vi) develop and implement standards of operations, construction and furnishing for Hawthorn Brand hotels, except that such standards with respect to Existing Hotels shall not be varied by USFS from those required under Existing Licenses; (vii) establish the direction and strategy for development, operations and design of the Hawthorn Brand; and (viii) make any elections to advertise and promote the Hawthorn Brand. Notwithstanding the foregoing, in the event HSA or any of its Affiliates shall at any time on or after the Effective Date construct any hotel which it proposes to operate as part of the Hawthorn System, USFS agrees to grant to HSA or its said Affiliate a Hawthorn License on terms and conditions (including royalty, license and other fees and charges) not less favorable to HSA or its said Affiliate than those then being offered to other licensees, subject however to the following: (x) the hotel being constructed shall meet all quality, construction and operating standards then applicable to Hawthorn Brand hotels; (y) the issuance of the Hawthorn License shall not violate any restrictive agreements to which USFS shall then be a party or general "impact" policy of USFS at the time; and (z) USFS shall not then have received, or is not reasonably expecting to receive within ten (10) days, an application for a Hawthorn License which would, if issued, be violated by the issuance to HSA. 4.2 Promotion and Enhancement of Hawthorn Brand. USFS agrees to use all reasonable efforts to promote the Hawthorn Brand and to maximize Franchise Royalty Fees. In promoting the Hawthorn Brand, and in the development and operation of the Hawthorn System, USFS agrees that it will use commercially reasonable efforts to preserve the good will of the Hawthorn Brand and the Hawthorn System. Accordingly, USFS agrees that it shall at all times faithfully, honestly and diligently perform its obligations hereunder and continuously exert its reasonable efforts to promote and enhance the development and operation of Hawthorn Brand hotels and the Hawthorn System within the Development Area and use reasonable efforts to seek out and recruit high quality licensees. At all times, USFS will use reasonable efforts to seek to maintain a high quality standard applicable to the Hawthorn Brand and that it will not change the standards relating to operations, construction and furnishing required by Existing Hotels beyond what is currently required under Existing Licenses. Upon written request from time to time from HSA (not to exceed once per year), USFS agrees to disclose to HSA all ideas, concepts, methods, techniques, products and services relating to the development and operation of Hawthorn Brand hotels conceived or developed by USFS or its Affiliates, or by any licensees of Hawthorn Brand hotels during the Term, all of which shall be and become part of the Hawthorn System, shall be covered by the license granted hereunder, shall be held confidential by HSA throughout the term hereof, and shall not be used for any other purpose. 21 Neither HSA nor any of its Affiliates shall have any liability or obligation to incur any costs or expenses in connection with promotion of the Hawthorn Brand. USFS shall, at all times, have not less than fifteen (15) full time sales persons (including corporate and regional supervisory personnel) seeking to sell Hawthorn Licenses and licenses for Microtel Brand Hotels. If USFS engages in franchising or licensing of either or both of a Limited Service Brand, or licensing or other activities in non-lodging industries, it shall engage in such businesses only with sales persons and corporate and regional supervisory personnel who are not involved in the sales or promotion of the Hawthorn System or the Microtel System, or, if such personnel are involved with the Hawthorn Brand or the Microtel Brand, USFS shall increase the number of personnel engaged in the selling of franchises or licenses to a sufficient number so that there shall, on a full time basis, at all times be the equivalent of 15 persons devoted to the sales and promotion of licenses relating to the Hawthorn Brand and the Microtel Brand. In determining the full time equivalence of personnel, HSA and USFS shall meet from time to time to assess the number of persons and their deployment to determine compliance with the requirements of this Section. Any decision by USFS regarding the number of personnel constituting fifteen full time equivalents shall be subject to approval of HSA, not to be unreasonably withheld, until such time as Hawthorn Brand Saturation shall have been achieved, after which the decisions regarding full time equivalents shall be within the discretion of USFS. If any required sales or supervisory positions shall become vacant, USFS shall have not more than ninety (90) days in which to fill such position. Without in any way limiting the generality of any of the provisions of this Section 4.2, USFS agrees that it shall spend not less than One Hundred Thousand Dollars ($100,000) in each of 1996 and 1997 for hotel marketing expenditures (other than payroll and payroll related expenses) to promote the Hawthorn Brand. For purposes of the preceding sentence, marketing expenditures shall include only direct expenses incurred in connection with marketing activities, such as advertising, sales brochures and the like, but shall not include any general or corporate overhead (or allocations thereof) or costs attributable to specific Hawthorn Licenses or proposed or prospective Hawthorn Licenses such as the cost of negotiating Hawthorn Licenses, preparation of any UFOC, required franchise filing, registration or reporting fees, or sales or other commissions paid in connection with the execution of delivery of any Hawthorn License. 4.3 Compliance with Law. In all of its activities under or pursuant to this Agreement, USFS shall, at its sole cost and expense, comply in all material respects with applicable provisions of law; provided, however, the foregoing shall not apply unless the failure to comply with law has a material adverse effect on the financial condition of the Hawthorn System, or unless the failure 22 to comply by USFS constitutes a material violation of law. Without in any way limiting the generality of the foregoing, USFS shall (i) prepare and deliver, on a timely basis, all required UFOCs and related materials required to be delivered to prospective franchisees or licensees, and any required supplements or amendments thereto (subject to prior written approval of HSA which shall not be unreasonably withheld, conditioned or delayed); (ii) with respect to any Existing Licenses, where required by law in the reasonable opinion of HSA, prepare and deliver to the franchisees and licensees thereunder (subject to prior written approval of HSA which shall not be unreasonably withheld, conditioned or delayed) supplements or amendments to the UFOCs and other required materials theretofore delivered to said licensees or franchisees describing the transfer of the Existing License in question to USFS, making additional disclosures as required by law; and (iii) make all reports and filings required under applicable law except where the failure to comply with any of the foregoing would not have a material adverse effect on HSA or the Hawthorn System; provided, however, HSA shall have no such approval right at such time as Hawthorn Brand Saturation has been reached. 4.4 Restrictive Covenants. (a) Subject to the limitations and conditions hereinafter set forth, USFS, for itself, and on behalf of any present or future Affiliate of USFS, hereby agrees that neither USFS nor any such Affiliate shall (A) for a period of two (2) years from the Effective Date, engage in any licensing or franchising business of any kind or manner whatsoever excepting only the licensing or franchising of (i) Microtel Brand hotels (including, without limitation, Microtel Suite/Hotels); (ii) Hawthorn Brand hotels in accordance with the provisions hereof; (iii) Limited Service Brand hotels; and (iv) commencing one (1) year after the Effective Date (and not prior thereto) licensing or franchising of business operations which do not include hotel or lodging facilities; and (B) without complying with Section 4.4(d), license or franchise a Hotel Brand relating to All Suites Hotels during the term of this Agreement and for a period of six (6) months thereafter. With respect to Mid-Priced Brand hotels, the restriction above provided shall restrict any announcements with respect to the proposed licensing activity, preparation (or commencement of preparation) of any UFOC with respect thereto or negotiation with prospective licensees with respect to licenses or franchises to be issued, until after the occurrence of the second anniversary of the Effective Date. The provisions of clause (B) above shall survive the termination of this Agreement. (b) The parties hereto acknowledge that the restrictions set forth in Section 4.4(a) above are reasonable in scope and time and are necessary in order that HSA can be reasonably assured of achieving the benefits it intends to achieve by entering into this Agreement. The parties further acknowledge that any breach of the 23 foregoing restrictions by USFS shall be material, and will result in material damage to HSA which cannot reasonably be remedied solely by the payment of money damages. Accordingly, USFS, for itself and on behalf of any Person now or at any time hereafter constituting or becoming an Affiliate of USFS, that HSA shall be entitled to appropriate equitable relief in connection with any breach or threatened breach of provisions of Section 4.4(a) above, USFS, for itself and on behalf of any of its aforesaid Affiliates, hereby waiving the requirement of the posting of any bond or other surety in connection with any such proceedings. (c) Nothing herein contained shall limit or restrict the right of USFS or any Affiliate of USFS to license or franchise the Microtel Brand in connection with Microtel Brand hotels (including, without limitation, Microtel Suite Hotels). (d) Notwithstanding the foregoing provisions of this Section 4.4, but subject to the provisions of this subsection (d), USFS shall be relieved of all of its obligations under Section 4.4(a) at such time as Hawthorn Brand Saturation shall have been achieved. If at any time during the term of this Agreement USFS intends to license or franchise a Hotel Brand relating to an All Suites Hotel in violation of the provisions of Section 4.4(a) but in the reliance on provisions of the preceding sentence, it shall so notify HSA thereof in writing not less than fifteen (15) days prior to the execution of any franchise or license setting forth (i) the name of the Hotel Brand to be licensed, (ii) the location of the initial licensed hotel or hotels, (iii) a description in reasonable detail of the Hotel Brand in question including its intended marketing niche (such as, the anticipated average daily rate, the anticipated costs of construction of hotels of the Hotel Brand in question, the facilities expected to be included in hotels of the Hotel Brand, such as food and beverage outlets, meeting space, recreational and banquet facilities, and the like); and (iv) the assessment of USFS of the competitive impact of the Hotel Brand in question on the Hawthorn Brand. Such information shall be maintained strictly in accordance with Section 7.11 and shall be used by HSA solely for purposes of evaluating whether to exercise its rights under this Section 4.4(d) and for no other purpose. Upon receipt of any such written notice from USFS, HSA shall have the right, by written notice (the "Sale Notice") to USFS delivered at any time within thirty (30) days after receipt of the aforesaid notice from USFS, and subject to the provisions of this Section 4.4(d), to cause USFS to purchase the "Hawthorn Assets" for the "Selling Price" (both of the above-quoted terms being as defined in subsection (e) below). If HSA fails to deliver the Sale Notice within the aforesaid period of thirty (30) days, its right to cause the sale of the Hawthorn Assets to USFS pursuant to the provisions of this Section 4.4(d) shall terminate. If, however, HSA shall deliver the Sale Notice on a timely basis as herein contemplated, the delivery thereof shall constitute a binding 24 agreement between HSA and USFS for the purchase and sale of the Hawthorn Assets at the Selling Price and upon the terms and conditions set forth below, provided that, within fifteen (15) days after delivery of the Sale Notice, USFS may, by written notice to HSA, withdraw its intention to license or franchise a Hotel Brand relating to All-Suites Hotels, in which case it shall not be obligated to purchase the Hawthorn Assets as provided in this Section 4.4(d). If USFS shall subsequently intend to license or franchise a Hotel Brand of All-Suites Hotels, it shall do so only after once again complying with this Section 4.4(d). Any sale of the Hawthorn Assets made pursuant hereto shall be upon the following terms and conditions: (i) closing shall take place sixty (60) days after delivery of the Sale Notice; (ii) the sale shall be with customary representations and warranties by HSA which, where appropriate, will be to the Knowledge of HSA, including, without limitation, a warranty by HSA that the Hawthorn Assets being transferred to USFS are free and clear of any liens, claims, charges or encumbrances of any kind or nature; (iii) any required disclosures to licensees, amendments to UFOCs, or other reports, notices, filings or registrations required in connection with the sale of the Hawthorn Assets shall be the sole responsibility, and the sole cost, of USFS; (iv) HSA Royalty Fees, and any other amounts required to be paid pursuant to the provisions of this Agreement, shall be prorated as of the closing date and paid promptly after collected; (v) this Agreement shall, concurrently with the closing, terminate, except that all indemnities shall continue with respect to events occurring or matters arising prior to the closing date; and (vi) USFS shall indemnify, defend (with counsel selected by HSA) and hold HSA and its Affiliates completely free and harmless of and from any and all manner of all claim, loss, damage, liability or expense (other than transfer taxes) in any way relating to the Hawthorn System arising, accruing and relating to events occurring from and after the closing date of such sale. (e) For purposes hereof, the term "Hawthorn Assets" shall mean and include any and all right, title and interest of HSA and its Affiliates in and to the assets relating to the Hawthorn Brand and the Hawthorn System (including the Intellectual Property), but shall exclude any direct or indirect interest of HSA, or any of its Affiliates, in any of the hotels which are operated as part of the Hawthorn System, or in, to or under any management agreements relating to any such Hawthorn Brand hotels. For purposes hereof, the term "Selling Price" shall mean ten times the amount of HSA Royalty Fees earned or accrued by HSA hereunder during the twelve full calendar months next preceding the date of the delivery by HSA of the Sale Notice. 4.5 Managed Hotels. HSA and its Affiliates shall continue to have the right to manage and operate any hotels, including 25 specifically but without limitation, Hawthorn Brand hotels, and any other hotels now or at any time hereafter managed or operated by HSA or its Affiliates. HSA and its Affiliates shall have no obligation or liability to include any hotels hereafter managed by HSA or its Affiliates in the Hawthorn System, and USFS shall have no liability or obligation to grant any Hawthorn License to any hotels managed or operated by HSA or its Affiliates. Management fees payable under any management agreements with HSA or its Affiliates shall be the sole property of HSA, and neither the management agreements nor the income therefrom, shall be included as part of the Hawthorn System. 4.6 Reservations. (a) The Hawthorn System includes the right of all Hawthorn System hotels to participate in the reservation system under Reservation Agreement. The assignment of the Hawthorn System to USFS as hereinabove provided includes all right, title and interest of HSA under the Reservation Agreement, and the assumption by USFS of the obligations and liabilities of HSA thereunder arising, accruing and relating to events occurring on and after the date hereof, it being the understanding and agreement of the parties hereto that any consent of third parties to the transfer and assignment of the Reservation Agreement shall have been obtained prior to the date hereof. Charges for reservation services shall be paid by licensees in accordance with the Hawthorn License to be entered into between USFS and the proposed licensee, except that charges for Existing Hotels shall be made in accordance with the Existing Licenses. (b) Subject to the provisions of the Reservation Agreement to be assumed by USFS, and subject to the provisions of the various Hawthorn Licenses, USFS shall have the right, at its discretion, to change the provisions applicable to the reservation system, the reservation provider, or any other aspects of the reservation system in its discretion. 4.7 Foreign Rights. HSA has heretofore advised USFS, and USFS does hereby acknowledge, that trademark, trade name and copyright registrations have been filed and obtained by HSA only in the jurisdictions referred to in Schedule 7.2(d)(3). In the event USFS elects to license Hawthorn Brand hotels in any jurisdiction within the Development Area in which Intellectual Property registration has not been obtained, USFS shall have the right, at its expense, to make or cause HSA to make such filings or registrations as it deems necessary in order to protect the rights of USFS and HSA in the Intellectual Property in the jurisdiction in which Hawthorn Licenses are to be granted, it being understood and agreed that any such registrations or filings shall be for the benefit of, and shall, upon the effectiveness thereof, constitute part of, the Hawthorn System. Throughout the term of this Agreement HSA agrees that it shall not, and shall not license or 26 authorize any other Person to, grant licenses either within or outside the Development Area relating to Hawthorn Brand hotels, and USFS agrees that it shall not license or franchise the Hawthorn Brand in any such other jurisdictions except as part of the Hawthorn System and in accordance with the provisions of this Agreement. 4.8 Additional HSA Covenants. In addition to each of its other covenants, agreements and obligations herein set forth, HSA, for itself and its present and future Affiliates, hereby covenants and agrees as follows: (a) At the request of USFS during the term of this Agreement HSA shall share with USFS the management and other expertise and tactics specific to the Hawthorn Brand which it has accumulated in licensing and operating the Hawthorn System. (b) For as long as this Agreement is in effect, HSA shall, and shall cause its Affiliates to, cooperate with USFS, its Affiliates and their representatives and counsel, in the preparation of any documents or other materials in connection with the Hawthorn System that may be reasonably required by any governmental authority, including, without limitation, any filings with federal or state franchise authorities. All reasonable out-of-pocket costs or expenses incurred by HSA in complying with the provisions of this Section 4.8 shall be paid or reimbursed to HSA by USFS upon presentation of proper documentation therefor. (c) For as long as this Agreement is in effect, HSA will promptly notify USFS in writing upon becoming aware of any investigations, lawsuits, claims or proceedings relating to the Hawthorn System that, after the date hereof, are commenced or threatened against HSA or the Hawthorn System. 4.9 Additional USFS Covenants. In addition to each of its other covenants, agreements and obligations herein set forth, USFS, for itself and its present and future Affiliates, hereby covenants and agrees as follows: (a) For so long as this Agreement is in effect, USFS shall promptly notify HSA in writing upon becoming aware of any investigations, lawsuits, claims or proceedings relating to the Hawthorn System that, after the date hereof, are commenced or threatened against or with respect to the Hawthorn System. (b) Attached hereto as Exhibit B is a form of license agreement substantially in the form which USFS proposes 27 to use in connection with its franchising activities hereunder and which shall constitute future Hawthorn Licenses. HSA hereby approves the form of License Agreement substantially in the form attached hereto as Exhibit B. All ancillary agreements and documents, including operating and other relevant standards relating to the Hawthorn Brand, shall be subject to the approval of HSA, which approval shall not be unreasonably withheld or delayed. The form of license agreement shall not be altered in any material respect by USFS without the approval of HSA, which approvals shall not be unreasonably withheld or delayed. The provisions of this Section 4.9(b) shall terminate and be of no further force or effect, on and after Hawthorn Brand Saturation. (c) USFS or its Affiliates shall diligently and continuously monitor, and strictly enforce, compliance by licensees with the provisions of Sections 3(A), 3(B), 5(C) and 1O(D) of the form of the Hawthorn License attached hereto as Exhibit B. (d) USFS, by itself or through its Affiliates, or as part of the provisions of Hawthorn Licenses, agrees to maintain insurance necessary to comply with all legal requirements concerning insurance and to maintain general liability insurance against claims for bodily and personal injury, death and property damage caused by or occurring in connection with the conduct of USFS's business pursuant to this Agreement. Such insurance shall be maintained under one or more policies of insurance containing minimum liability and types of coverages appropriate in the Development Area. Each policy of general liability insurance shall name HSA, and such of the Affiliates of HSA as shall be designated in writing by HSA, as additional insureds, such coverage to contain a waiver of all subrogation against HSA, its Affiliates, and their successors and assigns. To the extent of any extra costs incurred by USFS by reason of adding HSA as an additional insured, the amount of such extra costs shall be borne and paid for by HSA. USFS shall furnish to HSA annually a copy of the certificate of insurance or other evidence requested by HSA confirming that such insurance coverage is in force. HSA shall have no right or obligation to prescribe types or amounts of insurance coverage and shall have no liability or obligation to USFS, or any third party, for failure to do so. (e) USFS or its Affiliates shall maintain and preserve at its principal office full, complete and accurate records and reports pertaining to the development and operation of the Hawthorn System and the performance by USFS of its obligations hereunder. 28 (f) USFS shall not use the Intellectual Property as part of any corporate name or with any prefix, suffix, or other modifying words, terms, designs or symbols, or in any modified form, nor may USFS use any of the Intellectual Property in connection with the performance or sale of any other services or products or in any other manner not expressly authorized hereunder or otherwise in writing by HSA. HSA hereby approves of the corporate name "Hawthorn Suites Franchising Inc." by USFS or any subsidiary of USFS. (g) USFS agrees that it shall grant Hawthorn licenses as required from time to time under the terms of the Shaner Agreement. All such licenses granted in satisfaction or partial satisfaction of the obligations of the Shaner Partnership under the Shaner Agreement shall constitute Existing Licenses (except as otherwise provided by Section 3.1 above). Notwithstanding the foregoing, in the event the Shaner Partnership shall apply for or request the issuance of a Hawthorn License for a hotel which does not, for any reason, comply with the requirements of the Shaner Agreement, USFS shall have the sole and exclusive right to determine whether or not to grant the Hawthorn License being requested. If a Hawthorn License is issued by USFS in accordance with the provisions of the preceding sentence, the same shall constitute a Shaner Hotel only if HSA, in its discretion, determines that the same constitutes a Shaner Hotel and that, accordingly, the Shaner Partnership has fulfilled, to that extent, its obligation under the Shaner Agreement. If it is determined by HSA that a Hawthorn License granted to the Shaner Partnership constitutes a Shaner Hotel, said Hawthorn License shall constitute an Existing License for purposes hereof, except as otherwise provided in Section 3.1 above. If, however, the hotel subject to the Hawthorn License is not considered a Shaner Hotel then the Hawthorn License so granted shall in no event, and for no purpose, be deemed an Existing License but simply a Hawthorn License issued in accordance with the provisions of this Agreement. 4.10 Independent Contractors. It is understood and agreed by the parties hereto that this Agreement does not create a fiduciary relationship between HSA and USFS, that HSA and USFS are and shall be independent contractors, and that nothing in this Agreement is intended to make either party a general or special agent, joint venturer, partner or employee of the other for any purpose. Except as expressly authorized hereunder or in writing, neither HSA nor USFS shall make any express or implied agreements, warranties, guarantees or representations, or incur any debt, in the name of or on behalf of the other, or represent that their relationship is other than franchisor and sub-franchisor, and neither HSA nor USFS 29 shall be obligated by or have any liability under any agreements or representations made by the other that are not expressly authorized in writing. 4.11 Hawthorn Personnel. It is hereby understood and agreed that USFS shall have the right, at its option (but in no event shall be obligated) at any time on, prior to or after the Effective Date, to solicit any HSA employees for employment by USFS and no such solicitation or employment by USFS shall violate any rights of HSA or its Affiliates, and shall be without liability to USFS or its Affiliates. 4.12 Regarding the Ad Fund. (a) Concurrently with the execution and delivery hereof, or as soon thereafter as reasonably practicable, HSA shall deliver, or cause to be delivered, to USFS, or as USFS shall direct, the entire remaining cash balance in the Ad Fund. USFS shall, or shall cause its Affiliate, to accept such deposit and to hold, operate and administer the Ad Fund, receive deposits thereto, and make expenditures therefrom, all in accordance with the provisions of the Existing Licenses. USFS also agrees that it shall, or shall cause its Affiliate, in all future Hawthorn Licenses granted by USFS or its Affiliates, to include appropriate provisions regarding the Ad Fund consistent with, and in accordance with, the provisions of the Existing Licenses. Any approval herein contained with respect to the form of the Hawthorn License to be used by USFS or its Affiliates in connection with licensing and franchising Hawthorn Brand hotels is conditioned upon, and on the express understanding of the parties that, all such Hawthorn Licenses shall contain appropriate provisions regarding Ad Fund as currently required under the Existing Licenses. (b) As soon as reasonably practicable after the date hereof, HSA shall deliver, or cause to be delivered to USFS, copies of all annual reports heretofore prepared with respect to the Ad Fund as required by the Existing Licenses. HSA agrees that it shall provide such other information as may be reasonably requested by USFS to enable it to prepare the annual reports for 1996. USFS agrees that it shall, out of funds available in the Ad Fund, pay all accrued liabilities as disclosed on the Accounting (as defined below) as and when requested by HSA. Any request for payment by HSA shall constitute a certification by HSA that the amounts being requested are due and payable, and that payment thereof from the Ad Fund represents an appropriate use of such funds in accordance with the provisions of the Existing Licenses. (c) HSA hereby represents and warrants to USFS and its Affiliates that all amounts received and expended from the Ad Fund with respect to matters arising or events occurring prior to the date hereof have been properly received and expended or accrued in accordance with the provisions of the Existing Licenses, that all 30 information contained in the accounting of the Ad Fund's receipts, expenditures and liabilities heretofore delivered to USFS (the "Accounting") is true and correct in all material respects for all periods shown except that amounts for March 1996 are HSA's good faith estimate of actual amounts, and that all information in any annual report furnished by HSA to USFS hereunder is true and correct in all material respects, that HSA or its Affiliates, as appropriate, have administered the Ad Fund in all respects in compliance with the provisions of the Existing Licenses, and that there are no unreimbursed loans or advances to the Ad Fund by HSA or any of its Affiliates other than as set forth in the Accounting and that there are no commitments relating to the Ad Fund for any period after the date hereof. (d) USFS covenants and agrees that it shall pay or reimburse HSA, and each of the Affiliates of HSA, any loss, cost, damage, liability or expense which HSA or any of its said Affiliates may suffer and incur by reason of the administration of the Ad Fund after the date hereof and during the term of this Agreement (except with respect to matters for which USFS may be entitled to indemnity hereunder). (e) The parties hereto do hereby acknowledge that as of the date hereof there remains an outstanding and unreimbursed advance due from the Ad Fund to HSA, or an Affiliate of HSA, in the amount of approximately $169,000, subject to adjustment with respect to estimated amounts for the month of March 1996 but in no event to exceed $179,000. USFS agrees that it shall pay or reimburse HSA for the outstanding balance of such advance less the amount of any receivables reflected as assets on the Accounting ($154,489 in the aggregate) that have not been collected by December 31, 1996 without resort to litigation or extraordinary collection activity, without interest (such interest being hereby expressly waived and released by HSA for itself and on behalf of each of its Affiliates) out of funds available from time to time in the Ad Fund and in any event shall repay the full amount of the advance, if not sooner paid, not later than December 31, 1996. ARTICLE V Transfers 5.1 Transfers by HSA. HSA shall not, without the prior written consent or approval of USFS, sell, transfer, assign, pledge, encumber, hypothecate, set over or convey any of its rights, obligations or interests hereunder or in the Intellectual Property or any part thereof or interest therein. 5.2 Restrictions on Transfer by USFS. Except as otherwise herein expressly provided, USFS shall have no right, power or authority to sell, assign, transfer, pledge, encumber, hypothecate, set over or convey (any of the foregoing being herein collectively referred to as a "Transfer") all or any part of its right, title or interest in, to or under this Agreement, or in or to the Hawthorn Brand or the Hawthorn System, or any part or interest therein, either directly or indirectly, without the express written approval 31 of HSA (which approval may be granted or withheld in the sole discretion of HSA). It is the intention of the parties that there shall be no indirect Transfer of this Agreement by USFS as a result of a "Change of Control" (as hereinafter defined) of USFS under any circumstances in which a direct Transfer of this Agreement would be prohibited or restricted. Accordingly, the provisions of this Article V with respect to any Transfer by USFS shall be equally applicable to a Change of Control, and all references herein to Transfers of this Agreement shall apply equally to any such Change of Control. Any Transfer made in violation of any of the provisions of this Section 5.2, or any other provisions of this Article V, shall be void, except as otherwise hereinafter provided. 5.3 Permitted Transfers. Notwithstanding the foregoing, the following shall constitute "Permitted Transfers" which may be made by USFS without the prior written consent of HSA and free of any restrictions on Transfer set forth in Section 5.2 (but subject to any restrictions, conditions or limitations hereinafter set forth): (a) Any Transfer made by USFS to any wholly-owned subsidiary of USFS, it being understood and agreed, however, that no such Transfer to a wholly-owned subsidiary shall, anything herein contained to the contrary notwithstanding, relieve USFS of any of its liabilities, obligations, duties or responsibilities hereunder; or (b) The granting of any sub-license by USFS to any wholly-owned subsidiary of USFS so long as the term of such sub-license shall not extend beyond the date on which any such subsidiary shall cease to be a wholly-owned subsidiary of USFS, it being understood and agreed, however, that in the event USFS shall grant a sub-license to any such subsidiary, such sub-license shall, for all purposes of this Agreement, be disregarded and shall not constitute a Hawthorn License; only licenses granted by said wholly-owned subsidiary pursuant to its authority under any sub-license shall be deemed to constitute a Hawthorn License for purposes hereof; or (c) Any grant of, and exercise of rights under, a security interest in this Agreement or any of the Hawthorn Licenses given as security for any indebtedness of USFS or any of its subsidiaries for money borrowed by USFS or any of its subsidiaries from the Person secured by such security interest; or (d) Any Transfer made by USFS at such time as the Royalty Reduction Standard shall be in effect and shall have been satisfied by USFS; or (e) Any transfer made at such time as any class of "equity securities" of USFS shall be registered under the United 32 States Securities Exchange Act of 1934, as amended (the term "equity securities" to have the same meaning as set forth in the said Act); or (f) Any transfer made at such time as the number of Qualified License Agreements then in effect shall be sufficient to constitute Hawthorn Brand Saturation; provided, however, no Transfer by USFS pursuant to subsections (c) through (f), both inclusive, of this Section 5.3 shall be made to a Person who is not, as of the date of such Transfer, a "Qualified Transferee", and, provided further, no such Transfer (other than a Change of Control) shall be made unless the provisions of Section 5.5 below shall have been complied with. For purposes hereof, a "Qualified Transferee" shall mean a Person who (i) has a net worth (that is, stockholder's equity), exclusive of its interest in the Hawthorn System, equal to or greater than the net worth (stockholder's equity) of USFS as of the date of Transfer; (ii) has a generally good business reputation; and (iii) has not, and any Person or Persons in control of said Transferee has not been convicted of or indicted for, any criminal act or activity; provided, however, in the case of any Change of Control, the net worth test shall be deemed to have been met, notwithstanding the net worth of the Person acquiring controlling interest in USFS, so long as the transaction giving rise to the Change of Control, and any related transaction or transactions, shall not cause any reduction in the net worth of USFS to an amount less than the lesser of (i) the net worth of USFS as of the effective date of any such Change of Control, and (ii) Twenty-Five Million Dollars ($25,000,000). "Net worth" for purposes hereof shall include any redeemable preferred stock, including mandatorily redeemable preferred stock. In the case of any Person acquiring an interest in this Agreement from USFS as security for the payment of money or the performance of obligations, such Person need be a Qualified Transferee only at the time of said Person's acquisition of the security interest and not necessarily at the time of its acquisition of full rights of HSA hereunder whether upon foreclosure, transfer in lieu of foreclosure or otherwise. 5.4 "Change of Control". As used in this Article V, and anywhere else in this Agreement where such term is referred to, the term "Change of Control" shall mean any transaction or series of related transactions whereby actual control of USFS shall be transferred to a Person or group of related Persons other than a Person who is, or is part of a group of related, Affiliated or associated Persons who are, currently shareholders of USFS, or to members of their immediate family (or trusts for their benefit, or the benefit of members of their immediate family, or both) (any such Person being herein referred to as a "Current Shareholder"). The immediate family of any person shall mean the spouse or any lineal ancestor or descendent of such person. For purposes hereof, "control" of USFS shall mean control in fact and may arise by 33 virtue of the ownership or control of a majority of the voting rights in HSA (whether by ownership of equity interests, through a voting trust, by proxy or other means) or by contract or other arrangement in which control over the business and affairs of USFS is governed. Any change of equity ownership in USFS, or transfer of voting rights, to a Person or group of Affiliated, associated or related Persons (other than Current Shareholders) not then holding voting or other control interests in USFS, shall constitute a Change of Control if the transfer, regardless of the amount of voting or controlling interests so transferred, together with any other voting or controlling interests then held by the transferee Person or group of Persons, shall result in a Change of Control in fact. 5.5 Assumption by Transferee. Upon any Transfer (other than a Change of Control or grant of a security interest), whether in violation of or compliance with the provisions of this Article V, the Transferee shall, by written instrument reasonably satisfactory in form and substance to HSA, assume, for the benefit of HSA, all of the duties, liabilities, obligations and responsibilities of USFS under this Agreement relating to any events occurring or matters arising on or after the effective date of any such Transfer. A fully executed copy of the aforesaid written instrument shall promptly be delivered to HSA in accordance with the provisions of this Agreement. Upon any Transfer made in strict compliance with all of the terms, covenants and conditions of this Article V, including, without limitation, delivery of the written instrument referred to in the preceding sentence, the Transferor shall be relieved of any further liability or obligation hereunder except with respect to matters arising or events occurring prior to the effective date of any such Transfer, as to which the Transferee shall remain fully liable for so long as any such covenants or obligations shall remain in effect in accordance with the terms of this Agreement. ARTICLE VI Default and Termination 6.1 Termination Standard. The following represents the "Termination Standard" to be adhered to by USFS: (a) not later than the first anniversary of the occurrence of the Effective Date, there shall be not less than ten (10) hotels subject to Qualified License Agreements which are in effect and in good standing on the said date; and (b) not later than the second anniversary of the occurrence of the Effective Date, there shall be not less than twenty (20) hotels subject to Qualified License 34 Agreements, which are in effect and in good standing on the said date; (c) not later than the third anniversary of the occurrence of the Effective Date, there shall be not less than forty (40) hotels subject to Qualified License Agreements which are in effect and in good standing on the said date; (d) not later than the fourth anniversary of the occurrence of the Effective Date, there shall be not less than sixty (60) hotels subject to Qualified License Agreements which are in effect and in good standing on the said date; (e) not later than the fifth anniversary of the occurrence of the Effective Date, there shall be not less than eighty (80) hotels subject to Qualified License Agreements which are in effect and in good standing on the said date; and (f) not later than the sixth anniversary of the occurrence of the Effective Date, there shall be not less than one hundred (100) hotels subject to Qualified License Agreements which are in effect and in good standing on the said date. 6.2 Royalty Reduction Standard. The following shall comprise the Royalty Reduction Standard for purposes of this Agreement: (a) not later than the first anniversary of the occurrence of the Effective Date, there shall be not less than twenty (20) hotels subject to Qualified License Agreements which are in effect and in good standing on the said date; and (b) not later than eighteen (18) months following the occurrence of the Effective Date, there shall be not less than thirty (30) hotels subject to Qualified License Agreements which are in effect and in good standing on the said date; (c) not later than the second anniversary of the occurrence of the Effective Date, there shall be not less than forty (40) hotels subject to Qualified License Agreements which are in effect and in good standing on the said date; (d) not later than the third anniversary of the occurrence of the Effective Date, there shall be not less than sixty-five (65) hotels subject to Qualified License Agreements which are in effect and in good standing on the said date; (e) not later than the fourth anniversary of the occurrence of the Effective Date, there shall be not less than ninety (90) hotels subject to Qualified License 35 Agreements which are in effect and in good standing on the said date; (f) not later than the fifth anniversary of the occurrence of the Effective Date, there shall be not less than one hundred fifteen (115) hotels subject to Qualified License Agreements which are in effect and in good standing on the said date; and (g) not later than the sixth anniversary of the occurrence of the Effective Date, there shall be not less than one hundred forty (140) hotels subject to Qualified License Agreements which are in effect and in good standing on the said date. 6.3 Default. USFS shall be deemed to be in default under the provisions of this Agreement upon the occurrence of any one or more of the following events and for so long as the same shall remain in effect: (a) As of any anniversary of the Effective Date, the Termination Standard shall not have been complied with, and such condition shall continue to and including the date of termination (if any) of this Agreement in accordance with the provisions of this Agreement. If, prior to (but not after) the delivery of a "Default Notice" (as defined below), the number of hotels in the Hawthorn System operating under Qualified License Agreements shall equal or exceed the number required to have been in effect on the immediately preceding anniversary date of the Effective Date, the same shall constitute a cure of the default and compliance with the applicable Termination Standard. (b) USFS shall have failed to fully satisfy, perform or discharge any one or more of its covenants or obligations under this Agreement (other than the Termination Standard or the Royalty Reduction Standard), and such failure shall continue for not less than thirty (30) days after written notice thereof from HSA to USFS setting forth specifically the manner in which USFS is in default hereunder. (c) As of any relevant date after the occurrence of the Effective Date, the Royalty Reduction Standard shall not have been complied with, such default to continue until such time as the number of hotels subject to Qualified License Agreements shall equal or exceed the number required in order to satisfy the Royalty Reduction Standard as of the immediately preceding relevant date after occurrence of the Effective Date. 36 6.4 Remedies. In the event of the occurrence of any one or more defaults hereunder, HSA shall have the following rights and remedies: (a) In connection with any default under the provisions of Section 6.3(a), HSA shall have the right, in its discretion, to deem such default either a default under Section 6.3(a) or under Section 6.3(c), such election to be set forth in a written notice from HSA to USFS (the "Default Notice"). Until such time as a Default Notice shall have been delivered by HSA to USFS, and for so long as such default shall continue in effect, any such default shall be deemed a default under Section 6.3(c) and the rights and remedies of HSA shall be as provided in Section 6.4(c) below. The delivery of a Default Notice from HSA to USFS (during the continuance of any default under Section 6.3(a)) to the effect that HSA elects to treat such default as a default under Section 6.3(a) shall constitute an election by HSA to terminate this Agreement, and all of the rights and remedies of the parties hereto, such termination to become effective thirty (30) days after the delivery of the Default Notice from HSA to USFS notwithstanding that after the delivery of the Default Notice additional Qualified License Agreements shall have been entered into which, had they been in effect prior thereto, would have constituted a cure of the default. (b) Upon the occurrence of any event of default under Section 6.3(b) and expiration of the grace period applicable thereto, HSA shall have and may exercise all rights and remedies provided herein or at law or in equity, except that HSA shall have no right to terminate this Agreement by reason of any event of default under Section 6.3(b) unless specifically provided in Section 6.5. (c) Upon the occurrence of any event of default under Section 6.3(c) (including, without limitation, any event of default under Section 6.3(a) prior to the time that HSA delivers a Default Notice with respect thereto as hereinabove provided), the amount of the HSA Royalty Fees payable to HSA by USFS during the continuance of such event of default shall be increased by an amount determined by multiplying the "USFS Share" by a fraction the numerator of which shall be the number of additional Qualified License Agreements that would be required on the date of determination in order for USFS to comply with the applicable Royalty Reduction Standard (but in no event shall the numerator be greater than the denominator), and the denominator of which shall be the minimum number of Qualified License Agreements required to be in effect as of the date of determination in order 37 that the Royalty Reduction Standard shall have been complied with. For purposes hereof the "USFS Share" shall mean the difference between: (i) the total Franchise Royalty Fees paid for the calendar quarter in question under all Hawthorn Licenses in effect as of the date on which the event of default shall have occurred, less (ii) the amount of HSA Royalty Fees required to be paid with respect to each such Hawthorn License. The increase herein provided for shall be in addition to the amount of HSA Royalty Fees otherwise required to be paid under Section 3.1. The remedies forth above shall be the sole and exclusive remedies of HSA with respect to the occurrence of any default hereunder, subject however to the provisions of Section 4.4(b) and Section 6.5. 6.5 Termination. (a) This Agreement may be terminated, by written notice delivered in accordance with the provisions hereof, at any time prior to the expiration of the Term by reason of the occurrence of any one or more of the following events: (i) Immediately, by mutual action of HSA and USFS set forth in a written instrument; (ii) At the election of HSA, exercisable by written notice delivered to USFS within thirty (30) days after receipt of written notice of, or, if no such written notice shall have been delivered, after receipt of actual knowledge of, the death, disability, retirement, resignation or inability to function (for any reason including termination of employment) of Michael Leven as Chief Executive Officer of USFS at any time prior to the occurrence of a Permitted Transfer under Section 5.3, or, if earlier, prior to the time that a Permitted Transfer may be made under Section S.3(d) or Section 5.3(f); (iii) At the election of HSA, exercisable by written notice delivered to USFS within thirty (30) days after receipt of written notice of, or, if no such written notice shall have been delivered, after receipt of actual knowledge of, a Transfer made in violation of the provisions of Article V; (iv) At the election of HSA in accordance with the provisions of Section 6.4(a); or (v) At the election of HSA, exercisable by written notice delivered to USFS, in the event of any breach or default by USFS in any material respect in the performance of its covenants, duties and obligations under Section 4.3 and 38 Section 4.4 hereof which continues uncured for more than the period of grace applicable thereto and remains uncured on and as of the date of exercise by HSA of its right of termination as herein provided; provided that any such termination shall become effective (A) immediately in the case of a termination under clause (a)(i), and (B) on the thirtieth (30th) day after delivery of the notice of termination in the case of any other termination. (b) Upon termination of this Agreement for any reason (other than expiration of the term hereof), all of the rights, duties, liabilities, obligations, remedies and authority of the respective parties hereto under this Agreement shall terminate and expire, except with respect to those matters which, under the express provisions hereof, survive the expiration or earlier termination of this Agreement. Without in any way limiting the generality of the foregoing, upon any such termination of this Agreement, all right and interest of USFS in and to the Hawthorn Brand and the Hawthorn System shall, except as otherwise herein expressly provided, terminate and HSA shall have and may exercise the full use and enjoyment of all rights and interests in and to the Hawthorn Brand and the commercial exploitation thereof, and in and to the Hawthorn System. (c) Upon any such termination of this Agreement: (i) Subject to the provisions of subsections (d) and (e) of this Section 6.5, USFS shall sell, transfer, assign and convey to HSA (subject to usual and customary representations and warranties which, where appropriate, will be to the knowledge of USFS) all right, title and interest of USFS in, to and under, any then existing Hawthorn Licenses and HSA shall expressly assume in writing all of the liabilities and obligations of the licensor thereunder. In connection with the foregoing, appropriate disclosures, filings, registrations, amendments or supplements, in form required by applicable law, shall be made and delivered in accordance with applicable law, by HSA at its sole cost and expense. (ii) If, on such date of termination, USFS shall be subject to any contract or agreement with respect to the reservation system, marketing or promotional agreements or the like (but excluding contracts or agreements with employees or consultants or which related to Hotel Brands other than or in addition to the Hawthorn Brand) all such contracts or agreements which, by their terms, permit the assignment thereof shall likewise be transferred and assigned by USFS to HSA, without payment of any kind to USFS or any third party, 39 and HSA shall, in connection therewith, expressly assume in writing all of the liabilities and obligations of USFS with respect thereto. (iii) Any books or records pertaining to the operation of the Hawthorn System, including, without limitation, original document files, accounting books and records and the like shall be delivered to HSA, or its then successor in interest, although USFS shall be entitled to retain copies thereof. With respect to any books or records stored on electronic storage media, both hard copies thereof and convertible forms of electronic storage shall be delivered to HSA. (iv) Any funds remaining unexpended in the Ad Fund shall be delivered to or at the direction of HSA. USFS shall, as soon as reasonably practicable, but in no event later than 45 days following the effective date of any such termination, provide HSA with an accounting of all accrued and unpaid liabilities of the Ad Fund as of such date which shall be true and correct in all material respects. HSA agrees that it shall, out of funds available in the Ad Fund, pay all such accrued liabilities to USFS as and when requested by USFS. Any request for payment by USFS shall constitute a certification by USFS that the amounts being requested are due and payable and that the payment thereof from the Ad Fund represents an appropriate use of such funds in accordance with the provisions of the Hawthorn Licenses. HSA shall be fully liable and responsible for the satisfaction, payment and performance of all liabilities and obligations of the Ad Fund thereafter. In addition, at the request and expense of HSA, USFS shall prepare the necessary accounting and annual reports, to the extent it has not previously done so, sufficient to comply with the provisions of all Hawthorn licenses and to permit compliance by HSA for the year in which such termination shall occur. (d) Upon any termination of this Agreement pursuant to Section 6.5(a)(iv), and subject to the following provisions of this Section 6.5(d), any amounts required to be paid by licensees under Hawthorn Licenses shall thereafter (to the extent the same relate to operations by such licensees after the effective date of termination and subject to the provisions of Section 6.4(a) above) be the sole property of HSA, although any payments received shall be applied first to amounts owing with respect to operations on or prior to the effective date of termination and promptly remitted to USFS (less the amounts which would otherwise be required to be paid to HSA as HSA Royalty Fees in accordance with the provisions of this Agreement). Notwithstanding the foregoing, in the event of any termination pursuant to Section 6.5(a)(iv), in addition to any amounts required to be paid to USFS by HSA pursuant to the provisions of Section 6.6 (in the event HSA elects to cause USFS to 40 continue to administer the Hawthorn Licenses then in effect), USFS shall also be entitled to receive (and HSA agrees to pay or to permit USFS to withhold from amounts otherwise required to be paid to HSA) a portion of the Franchise Royalty Fees required to be paid by licensees under any Hawthorn Licenses in existence on the effective date of any termination in accordance with the following schedule: (i) If, on the date of termination, the number of then existing Hawthorn Licenses shall be equal to or greater than ninety percent (90%) of the required Termination Standard, but less than one hundred percent (100%) thereof, HSA shall be entitled to receive all Franchise Royalty Fees and other fees and charges thereunder less forty percent (40%) of an amount equal to the difference between: (i) the Franchise Royalty Fees under then existing Hawthorn Licenses as of the end of each calendar quarter, less (ii) the amount which would, absent any such termination, otherwise be required to be paid to HSA with respect thereto as HSA Royalty Fees, such percentage of the difference to be remitted to USFS. (ii) If, on the date of termination, the number of then existing Hawthorn Licenses shall be equal to or greater than seventy-five percent (75%) of the required Termination Standard, but less than ninety percent (90%) thereof, HSA shall be entitled to receive all Franchise Royalty Fees and other fees and charges thereunder less twenty-five percent (25%) of an amount equal to the difference between: (i) the Franchise Royalty Fees under then existing Hawthorn Licenses as of the end of each calendar quarter, less (ii) the amount which would, absent any such termination, otherwise be required to be paid to HSA with respect thereto as HSA Royalty Fees, such percentage of the difference to be remitted to USFS. (iii) If, on the date of termination, the number of then existing Hawthorn Licenses shall be less than seventy-five percent (75%) of the required Termination Standard, HSA shall be entitled to receive all Franchise Royalty Fees and other fees and charges thereunder less fifteen percent (15%) of an amount equal to the difference between: (i) the Franchise Royalty Fees under then existing Hawthorn Licenses as of the end of each calendar quarter, less (ii) the amount which would, absent any such termination, otherwise be required to be paid to HSA with respect thereto as HSA Royalty Fees, such percentage of the difference to be remitted to USFS. (e) Upon any termination of this Agreement pursuant to Section 6.5(a)(ii), (iii) or (v), HSA shall be entitled to receive all Franchise Royalty Fees and other fees and charges actually paid by licensees under any Hawthorn Licenses existing as of the date of any such termination less eighty-two and one-half percent (82.5%) 41 of an amount equal to the difference between: (x) the Franchise Royalty Fees under the said then existing Hawthorn Licenses as of the end of each calendar quarter, less (y) the amount which would, absent any such termination, otherwise be required to be paid to HSA with respect thereto as HSA Royalty Fees, such percentage of the difference to be promptly remitted to or retained by USFS. If at the date of termination HSA shall be entitled to terminate this Agreement pursuant to Section 6.5(a)(iv) and one or more of the other provisions of Section 6.5(a), the subsection pursuant to which this Agreement is being terminated shall be any one of the applicable subsections selected by, and at the election of, HSA as set forth in its notice of termination, and if no such subsection shall be set forth, shall be deemed to be a termination pursuant to Section 6.5(a)(iv). (f) Payments required to be made to USFS as above provided shall continue to be made so long as any Hawthorn Licenses, or any extensions or renewals thereof, in existence as of the effective date of any termination hereof (including, without limitation, those referred to in the last sentence of Section 6.5(g) below) shall continue in effect, it being understood and agreed, however, that HSA shall have the sole right, in its discretion, to determine which of the Hawthorn Licenses shall be extended or renewed, or which shall be cancelled or terminated either by agreement of the parties or for any other reason permitted in accordance with the Hawthorn License in question. For purposes hereof, a Hawthorn License shall be deemed to have been renewed or extended if, in addition to any amendment of such Hawthorn License, extending its term, a new Hawthorn License relating to the hotel in question shall be entered into with the licensee under any such Hawthorn License, or any affiliate of said licensee, or any Person (or affiliate of any Person) who shall have acquired the Existing Hotel subject to the then existing Hawthorn License. (g) If, on the effective date of termination, there shall be any applications for Hawthorn Licenses pending, such pending applications, and the files with respect thereto, shall be assigned and transferred to HSA, but any decisions with respect to granting a Hawthorn License with respect to any such pending applications shall be in the reasonable discretion of HSA. With respect to any applications for Hawthorn License which have been accepted, but as to which no Hawthorn License shall have been issued as of the effective date of any such termination, HSA agrees that it shall grant a Hawthorn License in accordance with the agreement contained in the accepted application unless conditions applicable to the issuance thereof shall not have been satisfied or performed by the Licensee thereunder, or unless, under the provisions of the approved application, the Licensee shall otherwise be excused from the obligation to grant, execute or deliver a Hawthorn License. Any Hawthorn Licenses that are so granted by HSA shall be deemed to be Hawthorn Licenses that were in effect as of the effective date of termination of this Agreement. 42 (h) Any and all other aspects of the Hawthorn System then in effect, including, without limitation, licensee operating standards, prototype plans and specifications, marketing brochures, interior design standards, samples and specimens, training manuals and the like shall likewise be delivered and conveyed by USFS to HSA. (i) The provisions of this Section 6.5 shall survive the termination of this Agreement. 6.6 Continuing USFS Administration. In connection with any termination of the Agreement pursuant to any of the provisions of this Article VI, HSA shall have the right (exercisable by notice contained in the Default Notice delivered as above provided), to cause USFS to continue to administer Hawthorn Licenses in effect as of the effective date of any termination of this Agreement, as agent for HSA, for a period of not more than one (1) year after the effective date of any such termination and for a fee equal to one- half of one percent (0.5%) of Gross Rooms Revenues from the Hawthorn Brand hotels then subject to Hawthorn Licenses in effect as of the effective date of any termination. Administration of the Hawthorn Licenses, for this purpose, shall mean collection of Franchise Royalty Fees and other amounts required to be paid by licensees, remitting the same, less any amounts to which USFS may be entitled therefrom, to HSA, maintaining communication with licensees, at HSA's direction monitoring performance and adherence to operating standards by licensees, at HSA's direction enforcing the provisions of Hawthorn Licenses, maintaining books and records necessary in connection with the administration of Hawthorn Licenses, preparing for filing by HSA all necessary filings and reports with governmental agencies required in order to comply with applicable provisions of law, and notifying HSA promptly of the occurrence of any breach or default by any licensee under the provisions of any then existing Hawthorn License; provided, however, in no event shall USFS thereafter have the right to grant, withhold, or terminate any Hawthorn License, to waive compliance by a Hawthorn licensee with the provisions of any Hawthorn License, or to modify or amend any Hawthorn License then in existence; provided, further, that USFS will have no liability to HSA or its Affiliates relating to the manner in which USFS so administers the Hawthorn Licenses other than as a result of its gross negligence or willful misconduct. In addition to the fee (if any) required to be paid to USFS pursuant to the preceding sentence in connection with the administration of Hawthorn Licenses following termination of this Agreement, USFS shall be entitled to (and HSA shall promptly pay to USFS) reimbursement for its reasonable direct out-of-pocket costs incurred in connection therewith, which amounts USFS may deduct from amounts otherwise required to be remitted to HSA, and a report of any such deducted amounts shall be furnished to HSA, in reasonable detail, each time amounts are remitted to HSA. 43 ARTICLE VII Miscellaneous 7.1 Arbitration. (a) In case of any dispute arising under this Agreement the same shall be resolved exclusively by arbitration conducted in accordance with the provisions of this Section 7.1. (b) In any matter submitted to arbitration, the arbitrators shall each be individuals having not less than ten years experience in senior executive positions in the lodging industry. The parties intend that the third arbitrator selected by the two arbitrators previously appointed by each of the parties (if any shall be appointed hereunder) shall be independent and impartial. Consequently, the said third arbitrator shall not have or have had any professional relationship with either party hereto, or their respective Affiliates, or the respective directors, officers, supervisory employees or counsel of any such party or its said Affiliates, which could reasonably be considered as likely to affect his or her independence or impartiality. To this end, the third arbitrator shall be required to disclose to the parties any professional relationships, present or past, with either party, or its directors, officers, supervisory employees or counsel, or any of their respective Affiliates. (c) Whenever any disputes or disagreements shall arise between HSA and USFS hereunder, HSA and USFS shall meet and confer in an attempt to resolve such dispute, each party setting forth its position regarding the matter in question in writing and suggesting a proposed solution. After discussion, and review or revision of any of their respective proposals, if the parties remain unable to resolve their differences in full, the remaining unresolved issues may be submitted to arbitration. Any arbitration initiated pursuant hereto shall be conducted in the City of Chicago, Illinois in accordance with the rules and regulations of the local chapter of the American Arbitration Association, subject, however, to the specific terms and provisions of this Agreement. In any such arbitration, the party submitting the same to arbitration shall designate, in writing, its arbitrator and shall serve written notice thereof on the other party. Upon receipt of such notice, the other party shall have twenty (20) days in which to identify its arbitrator and to notify the other party of the identity of its arbitrator. If the other party shall fail to identify its arbitrator within the aforesaid period of twenty (20) days the matter in dispute shall be resolved by the single arbitrator previously selected. If both parties shall name their respective arbitrators as herein provided on a timely basis, the two arbitrators so selected shall thereafter, and in any event within thirty (30) days after selection of the second of the two arbitrators, select a third arbitrator. If the two arbitrators are 44 unable to agree on a third arbitrator, the third arbitrator shall be selected in accordance with the rules and regulations of the American Arbitration Association, provided that the third arbitrator shall meet the qualifications for an arbitrator herein specified. (d) The three arbitrators so selected shall have full power and authority to resolve the dispute, and issue any order or award which they deem reasonably necessary in connection therewith, including orders for specific or other equitable forms of relief, except that the arbitrators may not award any relief not previously suggested by one of the parties and not any other or modified relief, nor award any punitive or exemplary damages. A decision of the majority of the arbitrators shall constitute the decision or award of the arbitration panel, and shall, absent fraud or manifest error, be binding on the parties hereto. In any arbitration proceeding, the arbitrator shall be bound by the provisions of this Agreement, including, without limitation, the provisions of this Section 7.1(d). (e) The award or decision of the arbitrators may be enforced by appropriate court action. (f) Each party shall bear the costs and expenses of its own counsel in connection with any arbitration proceeding, and shall pay the fees and expenses of the arbitrator appointed by it. The fees and expenses of the third arbitrator shall be paid by USFS or HSA as the third arbitrator may determine, or shall be borne by both of them in such proportions or such amounts as the third arbitrator shall determine. (g) During the pendency of any arbitration proceedings, either party may seek temporary equitable relief in a court of competent jurisdiction such as temporary restraining orders or temporary injunctions. (h) The provisions of this Section 7.1 shall survive the termination of this Agreement. 7.2 Representation and warranties of HSA. HSA hereby represents and warrants to USFS, and its successors and assigns, as follows: (a) The Existing Licenses are in full force and effect. (b) To the Knowledge of HSA, neither the licensor nor the licensee under any of the Existing Licenses is in breach or default thereunder as of the date hereof, nor, to the Knowledge of HSA, does any condition exist which, with notice or lapse of time or both, would constitute a material breach or default or permit termination under or modification of the terms of any Existing License, and no 45 party has repudiated any provision of any Existing License. (c) Schedule 7.2(c) hereto contains a true and correct list of the Existing Licenses. Copies of the Existing Licenses heretofore delivered by HSA to USFS are true, accurate and complete in all respects. (d) (1) "Intellectual Property" shall mean: (i) United States and foreign trademarks, service marks, trade names, brand names, trade dress, designs and logos, and product or service identifiers, whether registered or unregistered, and all registrations and applications for registration thereof, that are, as of the date hereof, used by HSA in connection with the Hawthorn System (the "Trademarks"); (ii) Patents and patent applications throughout the world that are, as of the date hereof, actually used or intended for use by HSA in connection with the Hawthorn System (the "Patents"); (iii) Copyrights, registered or unregistered, throughout the world that are, as of the date hereof, actually used or intended to be used by HSA in connection with the Hawthorn System (the "Copyrights"); (iv) Trade secrets (if any) used by HSA in connection with the Hawthorn System and other information in the possession of HSA concerning the Hawthorn System that is not generally available to the public and that is treated as confidential or proprietary by HSA (excluding information regarding employees); (v) Computer software programs, source code, object code, date and documentation to the extent owned by HSA that are, as of the date hereof, actually used or intended for use in connection with the Hawthorn System; (vi) All transferable permits, grants and licenses or other rights running to or from HSA relating to any of the foregoing; and 46 (viii) Any other similar intellectual property rights actually used in connection with the Hawthorn Brand. (2) To the Knowledge of HSA, HSA owns or is exclusively licensed or otherwise has the exclusive right to use, practice, sell, license and dispose of, without restriction, all Intellectual Property reasonably necessary for the operation of the business relating to the Hawthorn System as presently conducted, except that the name "Hawthorn" or variations thereof, are being used in connection with the operation of a hotel in Salem, Massachusetts without license from HSA or any Affiliate of HSA but, to the Knowledge of HSA, without violation or infringement of any rights of HSA. (3) Schedule 7.2(d)(3) hereto sets forth all Trademarks, Patents and Copyrights which, to the Knowledge of HSA, are owned by HSA and used by HSA in connection with the Hawthorn System which Schedule 7.2(d)(3) specifies, as to each item of Trademark, Patent or Copyright: (w) the nature of the item, including the title or description; (x) the jurisdictions by or in which the item is, to Knowledge of HSA, issued or registered, or in which an application for issuance or registration has been filed, including the respective registration or application numbers; (y) the issue date and expiration date of the item, and (z) with respect to each Trademark, the class or classes of goods or services on which such Trademark is or is intended to be used. (4) Schedule 7.2(d)(4) sets forth all licenses, sublicenses and other agreements or permissions ("IP Licenses") under which HSA is a licensee or otherwise is authorized to use or practice any Intellectual Property and all IP Licenses, other than the Existing Licenses, under which HSA is a licensor or otherwise authorizes any Person to use or practice Intellectual Property. (5) To the Knowledge of HSA, HSA possesses all right, title and interest in and to the Intellectual Property, free and clear of any lien, license or other restriction (other than the Existing Licenses and the IP Licenses), and has received no notice from any third party to the contrary. 47 (6) HSA is not, and, as a result of the execution and delivery of this Agreement or the performance of its obligations hereunder or thereunder, will not be, in violation of, and will not lose any rights pursuant to, any instrument or agreement governing Intellectual Property. Each IP License is now, to the Knowledge of HSA, valid and enforceable and in full force and effect, and will continue to be so on identical terms following the execution and delivery of this Agreement, in accordance with the terms of each such IP License. (7) To the Knowledge of HSA, no other party is in breach or default under any IP License in any material respect, nor does any condition exist which with notice or lapse of time or both would constitute a material breach or default by any such third party, or permit termination, modification or acceleration thereunder, and no such third party has repudiated any provision thereof. HSA has not received from any third party any notice, and has no actual knowledge of the existence of, any breach or default under any IP License in any material respect, nor, to the Knowledge of HSA, does any condition exist which with notice or the lapse of time or both would constitute a material breach or default by HSA or permit termination, modification or acceleration thereunder, or give rise to a right of repudiation, by any other party to any such IP License. (8) No litigation is pending or, to the Knowledge of HSA, threatened that challenges the validity, enforceability, ownership or right to use, sell, license or dispose of any item of Intellectual Property, and no item of Intellectual Property is subject to any outstanding order, ruling, judgment, decree, stipulation, charge or agreement restricting in any manner the use or licensing thereof by HSA or the sublicensing thereof by USFS. (9) HSA has received no notice of any claim, charge, complaint, demand or notice alleging any infringement upon or other violation of the intellectual property rights of third parties, and, to the Knowledge of HSA, no basis for any such claim exists. To the Knowledge of HSA, the use of the Intellectual Property by USFS pursuant to this Agreement will not infringe upon or otherwise violate any intellectual property right of third parties. 48 (10) To the Knowledge of HSA, no third party is infringing upon or otherwise violating any of its rights to the Intellectual Property. (e) HSA is a limited liability company, duly organized, validly existing and in good standing under the laws of the State of Delaware and has full right, power and authority to own and license the Hawthorn Brand, to operate the Hawthorn System, to execute, deliver and perform the Existing Licenses and the assignment thereof to USFS, and to enter into and perform this Agreement, all in accordance with the terms and provisions of this Agreement and the Existing Licenses. The execution and delivery of this Agreement has been duly authorized by all necessary action of the governing board of HSA and, upon the due authorization, execution and delivery hereof by and on behalf of USFS, constitutes and will constitute the valid and binding obligation of HSA enforceable against HSA in accordance with its terms, subject, however, to bankruptcy, moratorium, reorganization, insolvency and other similar laws of general application affecting the rights of creditors in general. (f) Neither the execution and delivery of this Agreement or any other agreement or instrument contemplated hereby, nor the consummation of the transactions contemplated hereby, nor the performance of this Agreement or any other agreement or instrument contemplated hereby in accordance with their respective terms and conditions, by HSA will require HSA to obtain any consent, approval or action of, or make any filing with or give any notice to, any governmental authority or other person, (i) conflict with or result in any breach or violation of any of the terms and conditions of, or constitute (with or without notice or lapse of time or both), to the Knowledge of HSA, a default under, the certificate of organization, operating agreement or other similar organizational documents of HSA or any law, statute, rule or regulation, order, writ, injunction, determination, award, judgment or decree applicable to HSA or the Hawthorn System, or any instrument, contract, franchise agreement or other agreement to which HSA is a party or by which HSA or the Hawthorn System may be bound or subject, or (iii) require any consent, approval or written notice under or result in a violation or breach of, or a material modification of the effect of, or constitute (with or without due notice or lapse of time or both) a default (or give rise to any right of termination, cancellation or acceleration) under, any of the terms, conditions or provisions of any note, bond, mortgage, indenture or any agreement, instrument, license or obligation to which HSA 49 is a party or by which HSA or the Hawthorn System may be bound. (g) There are no outstanding orders, writs, injunctions, determinations, awards, judgments or decrees against HSA relating to the Hawthorn System, and there are no actions, suits, claims or legal administrative or arbitral proceedings or investigations (collectively, "Claims"), pending, or to the Knowledge of HSA, threatened against HSA relating to the Hawthorn System. (h) Except as set forth in Schedule 7.2(h), (i) no franchisee that is a party to any Existing License has cancelled or otherwise terminated, or threatened in writing to cancel or otherwise terminate, its relationship with HSA, (ii) none of the franchisees that are parties to any Existing License have formed or organized any association relating to the franchisees' relationship with HSA, (iii) no party to any Existing License has commenced, or notified HSA in writing of any intention to commence, any Claim against HSA or any Affiliate thereof, or asserted that any provision of the franchise agreements used by HSA is not enforceable or that any offering circular or other disclosure statement issued by HSA or any of its Affiliates is false or misleading, and (iv) HSA has not entered into any agreement or arrangement, written or oral, with any franchisee for any concessions with respect to fees or other payments owed or to be owed by such franchisee to HSA. (i) To the Knowledge of HSA, the Hawthorn System is in material compliance with all laws (including, without limitation, all federal and state franchise laws and regulations), ordinances, regulations and orders, judgments, injunctions, awards or decrees as presently enacted and in force, of any governmental authority relating to the Hawthorn System. To the Knowledge of HSA, HSA has all licenses, permits, orders or approvals (including, without limitation, with respect to offer and sale of franchises) of any governmental authority (collectively, "Permits") that are necessary for the conduct of the Hawthorn System as now conducted and Schedule 7.2(i) contains a true and complete list of all Permits currently in effect and held by HSA. HSA has received no written notice from any governmental authority of any violation of any Permit and no proceeding is pending, or to the Knowledge of HSA, threatened, to revoke or limit any Permit. To the Knowledge of HSA, HSA has made all filings and disclosures under all state franchise disclosure laws required by reason of the business conducted by HSA in order to offer and sell franchises. The UFOCs filed by 50 HSA comply in all material respects with applicable state and federal law and HSA has not received any written notice that such offering circulars are not in compliance with any applicable laws. (j) Schedule 7.2(j) sets forth a true and complete list of all agreements, contracts, commitments or undertakings entered into by HSA or any of its Affiliates with respect to the Hawthorn System (the "Contracts"). HSA has delivered to USFS true and complete copies of each of the Contracts. Each of the Contracts is, to the Knowledge of HSA, legal, valid, binding and enforceable and in full force and effect and will continue to be so on identical terms after the consummation of the transactions contemplated hereby. To the Knowledge of HSA, no party is in breach or default under any Contract in any material respect, nor, to the Knowledge of HSA, does any condition exist which with notice or lapse of time or both would constitute a material breach or default or permit termination, modification or acceleration thereunder, and no party has repudiated any provision thereof. (k) HSA has, to the Knowledge of HSA, heretofore provided USFS with all material information in its possession regarding prospective Hawthorn Brand licensees with whom HSA is negotiating or for whom HSA has received inquiries. (1) HSA has, to the Knowledge of HSA, made available to USFS all prototype plans, specifications and drawings currently in effect with respect to the Hawthorn Brand, or under development by Hawthorn, including the specifications, plans and drawings being developed by HSA for a $65 to $90 per room Hawthorn Brand hotel prototype. USFS shall have no obligation to use such plans, specifications or drawings. Any amendments of modifications to the HSA plans shall be the sole cost and expense of USFS. 7.3 Representations and Warranties of USFS. USFS does hereby represent and warrant to HSA that USFS is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and is duly qualified as a foreign corporation in each jurisdiction in which the nature of the business conducted by it or the assets owned by it require such qualification, except where the failure to be so qualified would not have a material adverse effect on the financial condition of USFS and its subsidiaries, taken as a whole, or materially and adversely affect its ability to conduct its business as heretofore conducted or as contemplated by the provisions of this Agreement. USFS has full corporate right, power and authority to execute and 51 deliver this Agreement in accordance with the terms and provisions of this Agreement, and to perform its duties and obligations hereunder. The execution and delivery of this Agreement by or on behalf of USFS has been duly authorized by all necessary corporate action by USFS and, upon the due authorization, execution and delivery hereof constitutes and will constitute the valid and binding obligation of USFS enforceable against USFS in accordance with their respective terms, subject, however, to bankruptcy, moratorium, reorganization, insolvency and other similar laws of general application affecting the rights of creditors in general. 7.4 HSA and Rockwood Indemnity. Subject to the provisions of Section 7.6, HSA and Rockwood & Co., jointly and severally, for themselves and on behalf of their Affiliates do hereby indemnify and agree to defend and hold USFS, its officers, directors, shareholders, employees, agents, successors, permitted assigns and Affiliates completely free and harmless from any and all manner of claim, loss, damage, liability or expense (including, without limitation, reasonable legal fees and expenses) (collectively, the "Losses") arising under or in any relating to: (i) any representation or warranty of HSA herein contained being untrue or incorrect in any material respect as of the date made; (ii) failure of HSA to perform or comply in any material respect with any of its covenants or agreements contained in this Agreement; (iii) the operation of the Hawthorn System, including, without limitation, any matters pertaining to the Existing Licenses (including without limitation the administration of the Ad Fund), prior to the date hereof; (iv) the grant of any Hawthorn License, or the execution of any agreement, by HSA or any of its Affiliates; (v) any Restrictive Agreement that relates to or is asserted against any Hawthorn Brand hotel for which Deemed Approval was given under Section 2.4(b) or which is not listed on Schedule I; or (vi) any matters pertaining to any UFOC prepared or delivered by USFS to the extent relating to or arising out of information that was provided in writing by HSA or its Affiliates to USFS for inclusion therein. The provisions of this Section 7.4 shall survive the expiration or earlier termination of this Agreement. 7.5 USFS Indemnities. Subject to the provisions of Section 7.6, USFS, for itself and on behalf of its Affiliates, hereby agrees to indemnify, defend and hold HSA, its officers, directors, shareholders, employees, agents, successors, permitted assigns and Affiliates completely free and harmless of and from any and all manner of Losses arising out of or in any way relating to any of the Existing Licenses, or the operation of the Hawthorn System, or any other acts or omissions of USFS, or its Affiliates, with respect to the Hawthorn Brand or the Hawthorn System, to the extent the same relates to matters occurring or events arising or otherwise in any respect relating to the period on or after the date hereof (except for such matters that entitle USFS to indemnify from HSA under Section 7.4). Without in any way limiting the generality of the foregoing, the aforesaid indemnity shall relate 52 to: (i) any representation or warranty of USFS herein contained being untrue or incorrect in any material respect as of the date made; (ii) failure of USFS to perform or comply in any material respect with any of its covenants or agreements contained in this Agreement; (iii) the operation of the Hawthorn System, including, without limitation, any matters pertaining to the Existing Licenses, after the date hereof; (iv) the grant of any Hawthorn License or the execution of any agreement by USFS after the date hereof; or (v) any matters pertaining to any UFOC prepared or delivered by USFS other than any matters included therein relating to or arising out of information that was provided in writing by HSA or its Affiliates to USFS for inclusion therein. The provisions of this Section 7.5 shall survive the expiration or earlier termination of this Agreement. 7.6 Provisions Relating to Intellectual Property, Infringement and Restrictive Agreements. (a) Except as provided in Section 7.6(f), the provisions of this Section 7.6 shall prevail over contrary provisions, if any, contained in Sections 7.4, 7.5 or 2.4(b) above. (b) For purposes hereof, the term "infringement" shall mean the occurrence of any one or more of the following events: (i) any licensee under a Hawthorn License shall be enjoined, restrained or otherwise prevented from the use of any of the Intellectual Property the use of which it shall be entitled to under the applicable provisions of its Hawthorn License anywhere within the Primary Development Area; (ii) either HSA or USFS shall be enjoined, restrained or otherwise prevented from using or licensing others to use any of the Intellectual Property anywhere within the Primary Development Area; or (iii) any unauthorized or unlicensed use anywhere within the Primary Development Area of any of the Intellectual Property by a party other than HSA or USFS (in accordance with the provisions of this Agreement) or a Hawthorn licensee. Also, for purposes hereof, "Significant Intellectual Property" shall mean all of the Intellectual Property other than as described on Schedule 7.2(d)(3). (c) In the event HSA or USFS shall receive written or other actual notice of the existence of an infringement, or any claim by any third party of the occurrence of any infringement, relating to any Significant Intellectual Property, or any notice of the existence or claimed existence of a restriction on any of the rights of USFS hereunder, or of any licensee under a Hawthorn License, arising under or with respect to any contract, agreement or understanding with Hyatt or any of its Affiliates other than the Restrictive Agreements listed on Schedule I (a "Hyatt Claim"), the party receiving such notice shall promptly notify the other party thereof and shall include copies of any correspondence, complaints, petitions or other written materials relating thereto. The parties shall then meet and confer in an attempt to develop a mutually 53 satisfactory response to the infringement or claim of infringement, or the Hyatt Claim, as the case may be, which may include contesting the same by litigation or otherwise, settling any claim, electing to terminate or accept termination of an affected Hawthorn License, or electing to cease licensing activities in the geographic area in dispute. In the event the parties hereto are unable to agree, between themselves, as to the appropriate action to be taken, any claim of infringement, or any Hyatt Claim, as the case may be, will be contested by the parties hereto by all appropriate proceedings which shall be conducted in good faith and with due diligence, utilizing, where appropriate, counsel mutually satisfactory to HSA and USFS, and in the case of a Hyatt claim, Hyatt. All Losses (other than consequential damages) arising out of any infringement contest referred to in this Section 7.6 will be paid by USFS out of Franchise Royalty Fees collected by USFS under Hawthorn Licenses, and shall be deducted from Franchise Royalty Fees prior to any determination of the actual amount thereof collected by USFS; and any Losses (other than consequential damages) arising out of any Hyatt Claim contest will be paid by HSA or Hyatt and USFS shall be, and hereby is, indemnified with respect thereto. In determining the amount of such Losses attributable to each of the particular Hawthorn Licenses for purposes of allocating the remaining Franchise Royalty Fees and the determination of the amount of HSA Royalty Fees, such Losses shall be deemed to have been deducted from Franchise Royalty Fees actually received by USFS pro rata in accordance with the amount received under each Hawthorn License. In the event the Losses arising out of an infringement contest herein referred to shall exceed the amount of Franchise Royalty Fees actually collected by USFS during and as of the end of the month in which such costs are incurred, the excess shall be borne between the parties in the same proportion that the Franchise Royalty Fees theretofore collected have been allocated to the parties in accordance with Section 3.1 and HSA shall promptly pay to USFS the portion to be borne by HSA. (d) If in connection with any infringement, or claimed infringement, or in connection with any Hyatt Claim, whether as a result of a final determination by a court of other tribunal of competent jurisdiction, or by settlement of any such dispute, USFS or HSA, or both, shall be enjoined, restrained or otherwise restricted in its use of any of the Significant Intellectual Property, either permanently or temporarily, anywhere within the Primary Development Area or in selected geographic portions thereof, the parties shall meet and confer for the purpose of achieving an equitable revision to this Agreement as the same relates to the number of Hawthorn Licenses necessary to achieve Hawthorn Brand Saturation, compliance with the Termination Standard or compliance with the Royalty Reduction Standard, or all of the foregoing, taking into account the nature of the restriction and the geographic area in which such restriction shall be applicable, and its anticipated effect on the ability of USFS to enter into Hawthorn Licenses as herein contemplated, and to achieve maximum 54 amount of Franchise Royalty Fees. In the event of any disagreement between the parties hereto regarding the appropriate revisions, if any, to the Termination Standard, Royalty Reduction Standard or Hawthorn Brand Saturation, each party shall submit its proposals to arbitration conducted in accordance with the provisions of this Agreement, and the decision of the arbitration panel shall be binding and conclusive on the parties hereto. In addition to the foregoing, during such period of time, if any, in which USFS or HSA is enjoined, restrained, or otherwise restricted in the use of Significant Intellectual Property the restrictive covenants set forth in Section 4.4 shall be inapplicable but only with respect to the specific geographic area in which the injunction, restraint or limitation shall be applicable. In all other respects, and in all other areas, and at all other times, the said restrictive covenants shall continue in full force and effect in accordance with the provisions of this Agreement; provided that any franchises entered into or other activities commenced as hereinabove provided may continue in full force and effect, and may be extended or renewed in the ordinary course of business, even after the injunction, restraint or other restriction has been terminated, but no new franchises may be granted or new activities commenced thereafter. (e) Notwithstanding the foregoing, in the event of any infringement or claimed infringement with respect to portions of the Intellectual Property other than Significant Intellectual Property, any decision with respect to contesting the claimed infringement, consenting to cease and desist, or otherwise settling any claims with respect thereto, shall be at the sole option and election of HSA, which shall bear all costs and expenses in connection therewith. Any loss of the right to use any Intellectual Property which is not Significant Intellectual Property shall in no event be deemed a breach or default hereunder (except as provided in subsection (f) below), or entitle USFS to any reduction in the Termination Standard, Royalty Reduction Standard or Hawthorn Brand Saturation. (f) Anything in this Section 7.6 to the contrary notwithstanding, the indemnity provisions of Section 7.4 shall apply with respect to any infringement with respect to any of the Intellectual Property, whether or not Significant Intellectual Property, to the extent the same constitutes a breach of any representation or warranty by HSA hereunder. (g) The provisions of this Section 7.6 shall survive the expiration or earlier termination of this Agreement. 7.7 Indemnification Procedures. Any party that proposes to assert the right to be indemnified under Section 7.4 or 7.5 or 7.6 shall, promptly after receipt of notice of commencement or threatened commencement of any action against such party in respect 55 of which a claim is to be or may be made against an indemnifying party or parties under such Sections, notify the indemnifying party of the commencement or threatened commencement of such action, enclosing a copy of all papers served, it being understood and agreed, however, that the failure so to notify promptly the indemnifying party will not relieve the indemnifying party from any liability it may have to any indemnified party under such Sections unless, and only to the extent that, such omission results in the forfeiture of substantive rights or defenses by the indemnifying party or otherwise materially adversely affects the ability of the indemnifying party to defend against or diminish the losses arising out of such claim, action or proceeding. If any such action is brought against any indemnified party and it notifies the indemnifying party of its commencement, the indemnifying party will be entitled to participate in and, to the extent that it elects by delivering written notice to the indemnified party promptly after receiving notice of the commencement of the action from the indemnified party, to assume the defense of the action, with counsel selected by the indemnified party. After notice from the indemnifying party to the indemnified party of its election to assume the defense, the indemnifying party will not be liable to the indemnified party for any legal or other expenses except as provided below and except for the reasonable cost of investigation subsequently incurred by the indemnified party in connection with the defense. It is understood and agreed that the indemnifying party or parties shall not, in connection with any proceeding or related proceedings in the same jurisdiction, be liable for the reasonable fees, disbursements and other charges of more than one separate firm admitted to practice in such jurisdiction at any one time for all such indemnified party or parties. All such fees, disbursements and other charges will be paid or reimbursed by the indemnifying party promptly as they are incurred. An indemnifying party who has assumed the defense of any claim or action pursuant to this Section 7.7 will not be liable for any settlement of any action or claim effected without its written consent. If the indemnifying party assumes the defense of any claim or action pursuant to this Section 7.7, the indemnified party shall make available to the indemnifying party any books, records or other documents within its control that are reasonably necessary for such defense. The provisions of this Section 7.7 shall survive the expiration or earlier termination of this Agreement. 7.8 Governing Law. This Agreement is being made with reference to the laws of the State of Illinois, and shall be governed in all respects by the laws of the State of Illinois, and, to the extent applicable, the laws of the United States. 7.9 Successors and Assigns. This Agreement shall be binding on USFS and HSA and their respective successor and permitted assigns, subject, however, to the provisions of Article V. Wherever reference herein is made to HSA, the same shall mean HSA or any successor in interest to HSA hereunder, and wherever 56 reference is made to USFS, the same shall mean USFS and any successor in interest to USFS acquiring its interest in compliance with the provisions of Article V. 7.10 Entire Agreement. This Agreement and any exhibits hereto, constitute the entire understanding and agreement of the parties hereto, and shall supersede any prior agreements or understandings of the parties with respect to the subject matter hereof, including, without limitation, the provisions of that certain Letter of Intent dated December 14, 1995. 7.11 Confidentiality. The parties hereto do hereby agree to keep all matters concerning this Agreement, the Hawthorn Brand, the Hawthorn System and any information or documents delivered pursuant to this Agreement, completely confidential, and neither party shall make any public announcement with respect thereto to any Person except the parties' attorneys, accountants, advisors, shareholders or employees who are aware of and bound by the provisions of this Section 7.11 without the prior written consent of the other party. Notwithstanding the foregoing, nothing herein contained shall prohibit advertising, promotion, public relations or marketing efforts by USFS relating to the Hawthorn Brand and the Hawthorn System as herein contemplated. Notwithstanding the foregoing, either party may make disclosures as required by law, including, without limitation, in response to court order, in filings or registrations including UFOCs, and disclosures to counsel and accountants for the respective parties. In addition, any information which either party obtains with respect to the other party shall be kept in strict confidence (except as provided above). The provisions of this Section 7.11 shall survive the expiration or earlier termination of this Agreement. 7.12 Notices. All notices or other communications delivered hereunder shall be in writing and shall be deemed duly delivered: (i) three (3) business days after deposit thereof in the United States mails, certified mail, return receipt requested with postage prepaid; (ii) upon delivery by electronic facsimile delivery provided the equipment on which such transmission is made automatically encodes the transmission with the date and time thereof; (iii) the next business day following delivery to a nationally recognized air freight courier service; or (iv) upon actual hand delivery thereof by personal messenger; provided, however, no such notice shall be deemed duly delivered unless addressed as set forth on the first page of this Agreement. The cost of delivery of any notice shall be born by the party sending the same. Either party shall have the right to change its address, or facsimile number, by delivery of notice to the other party in the manner hereinabove set forth. As an accommodation to the parties, and without it being a condition to the effectiveness of delivery of any notice, copies of notices delivered hereunder 57 shall likewise be delivered to the following parties by any method of delivery which is permitted for delivery of the notice itself: (a) Copies of any notices delivered to USFS shall likewise be delivered to: Paul D. Ginsberg, Esq. Paul, Weiss, Rifkind, Wharton & Garrison 1285 Avenue of the Americas New York, New York 10019 Telecopy No.: (212) 757-3990 (b) Copies of any notices delivered to HSA shall likewise be delivered to: Philip M. Kayman, Esq. Neal Gerber & Eisenberg Two North LaSalle Street Suite 2100 Chicago, Illinois 60602 Telecopy No.: (312) 269-1747 7.13 Joint Drafting. Each of the parties hereto has been represented by counsel selected by it in connection with the negotiation, preparation, execution and delivery of this Agreement, and each party, and its counsel, has participated in the preparation of this Agreement. This Agreement shall not be construed against, or more strictly with respect to, either of the parties regardless of which party, or the counsel for such party, had principal drafting responsibilities. 7.14 Brokers. Each of the parties hereto does hereby represent and warrant to the other that neither has dealt with any broker or finder in connection with any of the matters or transactions herein. The provisions of this Section 7.14 shall constitute additional representations and warranties made by each of the parties hereto, which shall be subject to the indemnification provisions set forth in Section 7.4 and 7.5 hereof, and which shall survive the expiration or earlier termination of this Agreement. 7.15 Severability. In case any one or more of the provisions or part of a provision contained in this Agreement shall for any reason be held to be invalid, illegal or unenforceable in any respect in any jurisdiction, such invalidity, illegality or unenforceability shall be deemed not to affect any other jurisdiction or any other provision or part of a provision of this Agreement, but the Agreement shall be reformed and construed in such jurisdiction as if such provision or part of a provision held to be invalid or illegal or unenforceable had never been contained herein and such provision or part reformed so that it would be 58 valid, legal and enforceable in such jurisdiction to the maximum extent possible. 7.16 Waiver of Obligations. HSA and USFS shall each have the right, by written notice delivered to the other party, unilaterally to waive any obligation of or restriction upon the other party under this Agreement, either generally, or in any specific circumstance, for any limited period of time or subject to any other conditions or limitations as may be contained in such written notice. No acceptance by HSA of any payment by USFS or any other Person, and no failure, refusal or neglect of HSA or USFS to exercise any right under this Agreement or to insist upon full compliance by the other with its obligations hereunder, shall constitute a waiver of any provision of this Agreement. Any waiver granted by either party on any one occasion shall in no event be deemed a waiver applicable on any other occasion or in any other circumstance. HSA and USFS shall not be deemed to have waived or impaired any right, power or option reserved by this Agreement (including, without limitation, the right to demand exact compliance with every term, condition and covenant herein, or to declare any breach thereof to be a default and to terminate this Agreement prior to the expiration of its Term in accordance with the provisions hereof) by virtue of any custom or practice of the parties at variance with the terms hereof, or by reason of any failure or refusal by either party to act, it being the intention of the parties hereto that there shall be no implied waivers of any rights or obligations hereunder, and only a waiver contained in a written notice delivered as herein provided shall be binding on the waiving party, or may be relied upon by the other party. 7.17 Rights of Parties Are Cumulative. The rights of HSA and USFS hereunder are cumulative, unless otherwise herein expressly provided, and no exercise or infringement by HSA or USFS of any right or remedy hereunder shall preclude the exercise or enforcement by HSA or USFS of any other right or remedy hereunder or which HSA or USFS is entitled by law to enforce, unless otherwise herein provided. IN WITNESS WHEREOF, the parties hereto have cause this Agreement to be duly executed on their behalf as of the day and year first above written. HSA PROPERTIES, L.L.C., a Delaware limited liability company, by its managing member /s/ HSA PROPERTIES, INC. By /s/ Glen Miller __________________________ Vice President 59 U.S. FRANCHISE SYSTEMS, INC., a Delaware corporation By /s/ Michael A. Leven ____________________________ _____ President JOINDER OF ROCKWOOD & CO. The undersigned, Rockwood & Co., a Delaware corporation, for valuable consideration which is hereby acknowledged, hereby joins in the execution and delivery of this Agreement solely for purposes of binding itself to the provisions of Section 7.1 and Section 7.4. In addition, the undersigned does hereby unconditionally guarantee full payment, performance, satisfaction and discharge of the obligations of HSA under and pursuant to Section 7.6 hereof. Notwithstanding the foregoing, the liability of the undersigned hereunder shall be limited to an aggregate amount of Twenty-Five Million Dollars ($25,000,000) (the "Guarantee Amount"). At such time as the undersigned has paid, in the aggregate (and without consideration of interest or other carrying charges) the Guarantee Amount, whether or not as a result of any single or group of related occurrences, this joinder shall terminate and the undersigned shall have no further liability or obligation hereunder. The provisions of this joinder are intended solely for the benefit of USFS, and its successors in interest under the above Agreement, and is not intended for the benefit of, and may not be enforced by, any third party. ROCKWOOD & CO., a Delaware corporation By /s/ Glen Miller ____________________________ Vice President 60 EXHIBITS EXHIBIT A LIST OF EXISTING HOTELS Hawthorn Suites Atlanta 1500 Parkwood Circle Atlanta, GA 30339 Hawthorn Suites Austin (Central) 935 LaPosada Drive Austin, TX 78752 Hawthorn Suites Austin (Northwest) 8888 Tallwood Drive Austin, TX 78759 Hawthorn Suites Austin (South) 4020 IH 35 South Austin, TX 78704 Hawthorn Suites Charleston 181 Church Street Charleston, SC 29401 Hawthorn Suites Dallas (Arlington) 2401 Brookhollow Plaza Drive Arlington, TX 76006 Hawthorn Suites Dallas (Market Center) 7900 Brookriver Drive Dallas, TX 75247 Hawthorn Suites Dallas (Richardson) 250 Municipal Drive Richardson, TX 75080 Hawthorn Suites Durham (currently operating as Meredith Suites) 1900 Meredith Drive Durham, NC 27713 Hawthorn Suites Edina (Minneapolis) 3400 Edinborough Way Edina, MN 55435 Hawthorn Suites Houston 6910 Southwest Freeway Houston, TX Hawthorn Suites Kent 6329 South 212th Kent, WA 98032 Hawthorn Suites Lincolnshire (Chicago) 10 Westminster Way Road Lincolnshire, IL 60069 Hawthorn Suites Omaha 11025 M Street Omaha, NE 68137 Hawthorn Suites Orlando (at Sea World) 6435 Westwood Blvd. Orlando, FL 32821 Hawthorn Suites Pittsburgh 700 Mansfield Avenue Pittsburgh, PA 15205 Hawthorn Suites San Antonio 4041 Bluemel Road San Antonio, TX 78240 Hawthorn Suites Tulsa 3509 South 79th East Ave. Tulsa, OK 74145 3 New England Suites Hotels -Indianapolis, Indianapolis -Grand Rapids, Michigan -Columbus, Ohio Naperville, Illinois (new construction) Intersection of I-88 and Hwy 59 EXHIBIT B Location: [HOTELADDRESS1] [HOTELADDRESS2] ID Number: [IDNUMBER] Date:______________________ HAWTHORN SUITES LICENSE AGREEMENT BETWEEN HAWTHORN FRANCHISING, INC. AND [[ENTITYNAMECAPS]] TABLE OF CONTENTS PAGE RECITALS 1. THE LICENSE .......................................................... 2. GRANT OF LICENSE ..................................................... 3. LICENSEE'S RESPONSIBILITIES .......................................... 4. LICENSOR'S RESPONSIBILITIES .......................................... 5. PROPRIETARY RIGHTS ................................................... 6. RECORDS AND AUDITS ................................................... 7. INDEMNITY AND INSURANCE .............................................. 8. TRANSFER ............................................................. 9. CONDEMNATION AND CASUALTY ............................................ 10. TERMINATION .......................................................... 11. AGREEMENT IS RENEWABLE ............................................... 12. RELATIONSHIP OF PARTIES ............................................. 13. MISCELLANEOUS ........................................................ GUARANTY ATTACHMENT A ATTACHMENT B ATTACHMENT C LICENSE AGREEMENT Dated ___, between Hawthorn Franchising, Inc. ("Licensor" or "HFI") and [[ENTITYNAMECAPS]], a [[ENTITYTYPE]] ("Licensee"), whose address is -----------. PARTIES AGREE AS FOLLOWS: 1. The License. Licensor has been licensed by Hawthorn Suites Associates ("HSA"), under the terms of a master License Agreement (the "Master License Agreement"), the right to use and license others to use a unique concept and system relating to the establishment and operation of certain hotels that operate under the name "HAWTHORN SUITES" ("Hawthorn Hotels" or the "Hotel System"). Hawthorn Hotels are all-suite hotels in which the lodging units each contain sleeping quarters, bath, living room, and kitchen. You have independently investigated the risks of the business to be operated hereunder, including current and potential market conditions, competitive factors and risks, and have read Licensor's "Offering Circular for Prospective Franchisees", and have made an independent evaluation of all such facts. Aware of the relevant facts, you desire to enter into this Sublicense Agreement ("Agreement") in order to obtain a license to use the Hotel System in the operation of a hotel located at [[HOTELADDRESS1]], [[HOTELADDRESS2]] (the "Hotel"). A. The Hotel. The Hotel comprises all structures, facilities, appurtenances, furniture, fixtures, equipment, and entry, exit, parking and other areas from time to time located on the land identified on the plot plan most recently submitted to an acknowledged by Licensor in anticipation of the execution of this Agreement, or located on any land from time to time approved by Licensor for additions, signs or other facilities. The Hotel currently includes the facilities listed on Attachment A hereto. No change in the number of approved standard suites or guest rooms (which are hereinafter referred to collectively as "Suites") and no other significant change in the Hotel shall be made without Licensor's approval. Redecoration and minor structural changes that comply with Licensor's standards and specifications shall not be considered significant. You represent that you are entitled to possession of the Hotel during the entire License Term, as defined in Paragraph 2 hereof, without restrictions that would interfere with any of your obligations under this Agreement. B. The Hotel System. The Hotel System is composed of elements, as designated from time to time by Licensor, designed to identify Hawthorn Suites hotels to the consuming public and/or to contribute to such identification and its association with quality standards. The Hotel System at present includes, without limitation, the tradenames, trademarks, and service marks, "HAWTHORN SUITES" and such other tradenames, trademarks, and service marks as are now designated (and may hereafter be designated by Licensor in writing) as part of the Hotel System (hereinafter "Proprietary Marks"); prototypical architectural plans, designs, and layouts, including, without limitation, site plan, floor plan, roof plan, plumbing plan, lobby plan, electrical plan, and landscape plan; access to a reservation service; a centralized reservation system; a national Hawthorn Suites directory (the "National Directory"); management and personnel training, and training programs and materials; management and operational procedures and techniques as prescribed in the Confidential Manual (hereinafter the "Manual"); standards and specifications for construction, equipment, and furnishings, as described in the Manual; advertising, marketing, and promotional programs; and such other improvements that Licensor may make from time to time. 2. Grant of License. Licensor hereby grants to you a license (the "License") to use the Hotel System only at the Hotel, only in connection with the operation of the Hotel and, only in accordance with the Agreement, beginning with the date hereof and terminating as provided in Paragraph 10 hereof (the "License Term"). During the License Term, neither Licensor nor any affiliate of Licensor, shall develop any Hawthorn Hotel within the territorial boundaries as defined in Attachment B hereto (the "Exclusive Territory"). Your rights to the Exclusive Territory shall automatically terminate if the Hotel's Quality Assurance Score (defined in Paragraph 4.C. hereof) falls below 425, or its then-current equivalent, and you are unable to increase the score to 425 within thirty (30) days of the inspection, or if this Agreement is otherwise terminated in accordance with Section 10 hereof. This Agreement 2 does not limit Licensor's right, or the rights of any parent, subsidiary, division or affiliate of Licensor, to use or license to others the Hotel System or any part thereof at any location outside of the Exclusive Territory. Further, Licensor, or its parent, subsidiary, division or affiliate may conduct any business activity or license other hospitality concepts under brands other than the Proprietary Marks outside and within the Exclusive Territory. You acknowledge that Licensor, its parent, subsidiaries, divisions and affiliates are and may in the future be engaged in other business activities including activities related to transient lodging, which may be or may be deemed to be competitive with the Hotel System; that facilities, programs, services and/or personnel used in connection with the Hotel System may also be used in connection with such other business activities of Licensor, its parent, subsidiaries, divisions or affiliates; and that you are acquiring no rights hereunder other than the right to use the Hotel System in connection with a Hawthorn Hotel as specifically defined herein in accordance with the terms of the Agreement. 3. Licensee's Responsibilities. A. Operational and Other Requirements. During the License Term, you shall: (1) maintain a high moral and ethical standard and atmosphere at the Hotel; (2) maintain the Hotel in a clean,safe and orderly manner and in first class condition; (3) provide efficient, courteous, and high-quality service to the public; (4) operate the Hotel twenty four (24) hours a day, every day; (5) strictly comply in all respects of the Hotel System and the Manual and with all other policies, procedures and requirements of Licensor which may be from time to time communicated to you; (6) strictly comply with Licensor's reasonable requirements to use only reliable sources of supplies for the Hotel including any suppliers approved by Licensor; (7) strictly comply with Licensor's requirements as to: (a) the types of services, products, and amenities that may be used, promoted or offered at the Hotel; (b) use, display, style and type of signage; (c) directory and reservation service listings of the Hotel; 3 (d) training of persons to be involved in the operation of the Hotel, including all expenses incurred by you associated therewith; (e) participation in all marketing, reservation service, advertising,training and operating programs designated by Licensor as System-wide (or area-wide) programs in the best interests of hotels using the Hotel System; (f) maintenance, appearance and condition of the Hotel; and (g) quality and type of service offered to customers at the Hotel. (8) use such automated guest service and/or hotel management and/or telephone system(s) as Licensor shall specify, including any additions, enhancements, supplements or variants developed during the term hereof; (9) participate in and use the those reservation services as Licensor shall specify, including any additions, enhancements, supplements or variants thereof which may be developed during the term hereof; (10) adopt improvements or standard changes to the Hotel System as may be from time to time designated by Licensor, which improvements are not intended to cause undue hardship; (11) strictly comply with all governmental requirements including the filing and maintenance of any required trade name or fictitious name registrations, pay all taxes, and maintain all governmental licenses and permits necessary to operate the Hotel in accordance with the Hotel System; (12) permit inspection of the Hotel by Licensor's representatives at any time and give them free lodging for such time as may be reasonably necessary to complete their inspections; (13) insure that no part of the Hotel System is used to further or promote a competing business or other lodging facility, except as Licensor may approve for those competing businesses or lodging facilities owned, licensed, operated or otherwise approved by Licensor or its parent, divisions, subsidiaries and/or affiliates; (14) in all respects use your best efforts to reflect credit upon and create favorable public response to the name "Hawthorn Suites"; (15) promptly pay to Licensor all amounts due Licensor, its parent, divisions, subsidiaries and/or affiliates as royalties or fees or for goods or services purchased by you; 4 (16)comply with Licensor's requirements concerning confidentiality of information, and, specifically; treat the Manual and all supplements and revisions as confidential; use all reasonable efforts to keep the information confidential; not copy the Manual in any way, not make it available to any unauthorized person; only disclose information contained in the Manual only to persons who must have access to it in connection with their employment with you; and obtain each such person's agreement to keep such information confidential; and (17) conduct your advertising in a dignified manner and conform to the standards and requirements as Licensor may specify from time to time in writing; submit samples of all advertising and promotional materials to Licensor for approval; and discontinue use of any disapproved material upon receipt of such written notice. B. Performance of the Work. You agree to perform the construction and renovation and/or conversion work on the property including without limitation, the purchase of furniture, fixtures, and equipment set forth on Attachment C hereto and incorporated herein by reference (the "Work"). You acknowledge that your agreement to perform the Work is an essential element of the consideration relied upon by Licensor in entering into the Agreement. Your failure to perform the Work in accordance with Licensor's requirements and specifications (including the progress, milestone, completion and other dates specified in Attachment "C") shall constitute a material breach of your obligations under this License. Licensee may not commence operation of the Hotel as a Hawthorn Suites hotel without Licensor's written authorization. Notwithstanding any consent by Licensor to the authorized conditional opening of the Hotel, all upgrading shall be completed and the Hotel shall otherwise be in compliance with the License and shall be open as a Hawthorn Suites hotel on or before a date ____ months from the date hereof. C. Upgrading of the Hotel. Licensor shall review the Quality Assurance Scores (as defined in Paragraph 4.C hereof) of the Hotel upon each five (5) year anniversary of the opening of the Hotel. If over the previous five(5) year period, the Hotel has failed to maintain an average score of four hundred fifty (450) or greater out of a possible five hundred (500) (or its then-current equivalent), Licensor may require modernization of the Hotel, softgood rehabilitation (including but not limited to carpet, drapes, bedspreads) or other upgrading of the Hotel. If the upgrading requirements contained in this Paragraph 3.C. cause you undue hardship, you may terminate this Agreement by paying a fee computed according to Paragraph 10.E. D. Fees. (1)For each month (or part of a month) during the License Term, you shall pay to Licensor by the tenth (10th) of the following month: 5 (a) a royalty fee equal to five percent (5%) of the Gross Room Revenues of the Hotel, with deductions for sales and room taxes only ("Gross Room Revenues"); (b) an "Advertising Fund Contribution" of 2.5 percent of Gross Rooms Revenue. The Advertising Fund Contribution payments do not include the cost, installation or maintenance of reservation services equipment or training. Licensor may, in its sole discretion and at any time, increase the Advertising Fund Contribution amount above by no more than ten percent (10%) per year provided that Licensee's Advertising Fund Contributions shall not exceed a maximum of three percent (3.0%). Licensor hereby acknowledge that each such increase, if any, shall not be imposed unless Licensor imposes a similar increase on all licensees operating under the Hotel System according to license agreements that contain provisions similar to this Paragraph 3(D)(1)(6) that provides for such increased contributions by licensees; and (c) an amount equal to any sales, gross receipts, or similar tax imposed on Licensor and calculated solely on payment required hereunder, unless the tax is an optional alternative to an income tax otherwise payable by Licensor. (2) "Gross Room Revenues" shall mean the gross receipts attributable to or payable for the rental of guest rooms at the Hotel, including, without limitation, the net proceeds (after deduction of the expenses of adjustment and collection) of use and occupancy, or for business interruption, rent loss, or similar insurance with respect to the Hotel (provided that insurance proceeds shall be included in Gross Room revenues only when and to the extent actually received). Gross Room Revenues shall not include gratuities to employees or service charges levied in lieu of such gratuities, which, in either case, are payable to employees, or federal, state, and local taxes or fees collected by you for transmittal to the appropriate taxing authorities. (3) All monthly payments required by this Agreement shall be submitted to Licensor together with all reports required under this Agreement. Licensor may require that all monthly payments required under this Agreement shall be made by telegraphic transfer, automatic debit arrangement, or other means as Licensor may specify from time to time, to a bank account designated by Licensor. In the event such arrangements are made, Licensor shall be responsible for the cost of connection to such service and you shall maintain sufficient funds in your bank account to pay all such debited obligations. Any payment or report not actually received by Licensor on or before such date shall be deemed overdue, or, if an automatic debit or similar arrangement is utilized and funds are insufficient to cover your payment obligation, any amounts unpaid on or before such date shall be deemed overdue. If any payment is overdue, you shall pay to Licensor, in addition to the amount overdue, interest on such amount from the day it was due until paid at one and a half 6 percent (1.5%) per month or the maximum rate permitted by law, whichever is less. Entitlement to such interest shall be in addition to any of the remedies Licensor may have. (4) A standard initial fee for additional guest rooms equal to the higher of -(a) Three Hundred and Fifty Dollars ($350) per room; or (b) the then-current per room charge for the Application Fee per room shall be paid by you to Licensor on your submission of an application to add any Suites to the Hotel. As a condition to Licensor granting its approval of such application, Licensor may require you to upgrade the Hotel, subject to Paragraph 3.C. (5) Local and regional marketing programs and related activities may be conducted by you, but only at your expense and subject to Licensor's requirements. Reasonable charges may be made by Licensor for optional advertising materials ordered or used by you for such programs and activities. 4. Licensor's Responsibilities. A. Training. During the License Term, Licensor shall continue to specify and provide required and optional training programs at various locations that Licensor shall designate. Reasonable charges may be made for required training materials. Travel, lodging and other expenses of you and your employees shall be borne by you. If such training is held at your Hotel, you must provide Licensor's representatives lodging at the Hotel at no cost to Licensor. B. Reservation Services. Provided that Licensee is in full compliance with its material obligations under this Agreement, Licensor will afford License access to reservation services for the Hotel. C. Consultation on Operations, Facilities and Marketing. Licensor shall provide you with a set a confidential prototypical plans and specifications, which must be adapted by your architects and engineers. We will review your site layout and working drawings prepared by your architects, and any other related plans and specifications. In addition Licensor shall, from time to time at Licensor's sole discretion, make available to you consultation and advice in connection with operations, facilities and marketing, including lists of suppliers for Hotel fixtures, furnishings, signs and other equipment. Licensor shall also periodically evaluate the performance of the Hotel, but in any case at least once each year, by giving your Hotel a Quality Assurance Score. D. Use of Marketing/Reservation Contribution. The Marketing/Reservation Contribution shall be used by Licensor for costs associated with advertising, promotion, publicity, market research and other marketing programs and related activities, cost of 7 maintaining and producing a National Directory, as well as reservations programs, services and overhead for individuals directly related to national and local marketing and reservations. For the purpose of this Paragraph, overhead shall be limited to individuals directly related to the Reservation or Marketing departments such as the Vice President of Marketing and costs related to the financial management of the fund. Licensor shall not use any of the funds in the Marketing and Reservation Contributions to pay for marketing directly related to the sale of franchises. Licensor is not obligated to expend funds for marketing or reservation services in excess of the amounts received from licensees using the Hotel System. In the event excess amounts remain at the end of any taxable year, all expenditures in the following taxable year(s) shall be made first out of accumulated earnings from previous years, next out of earnings in the current year, and finally from contributions. Marketing and Reservation Contributions shall not be an asset of Licensor, and an audit of the operation of the Marketing and Reservation Contributions shall be prepared annually by an independent certified public accountant selected by Licensor and shall be made available to you on request. Licensor shall maintain the National Directory, listing the address and telephone number of all Hawthorn Suites operating under the Hotel System. E. Application of Manual. Licensor shall provide you, on loan, one (1) copy of the Manual. All hotels operated within the Hotel System shall be subject to the Manual, as it may from time to time be modified or revised by Licensor, including limited exceptions which may be made by Licensor based on local conditions or special circumstances. Each change in the Manual must be explained in writing to you at least thirty (30) days before it goes into effect. F. Other Arrangements for Marketing Etc. Licensor may enter into arrangements for development, marketing, operations, administrative, technical and support functions, facilities, programs, services and/or personnel with any other entity and may use any facilities, programs, services and/or personnel used in connection with the Hotel System in connection with any business activities of its parent, subsidiaries, divisions or affiliates. G. Inspections/Compliance Assistance. Licensor has the right to inspect the Hotel at any time, with or without notice to you, to determine if the Hotel is in compliance with the standards and rules of operation set forth in the Manual. If the Hotel fails to comply with such standards and rules of operation, Licensor may, at its option and at your cost, require an action plan to correct the deficiencies. You must then take all steps necessary to correct any deficiencies within the times established by Licensor. Licensor's approval of an action plan does not waive any rights it has or may have under this Agreement not does it relieve you of any obligations under this Agreement. 8 5. Proprietary Rights A. Ownership of the Hotel System and Proprietary Marks. You acknowledges and shall not contest, either directly or indirectly, Licensor's unrestricted and exclusive right to license the Hotel System and any element(s) or component(s) thereof, and acknowledges that Licensor has the sole right to grant licenses to use all or any element(s) or component(s) of the Hotel System. You specifically agree and acknowledge that HSA is the owner of all right, title and interest in and to the Proprietary Marks together with the goodwill symbolized thereby and that you shall not contest directly or indirectly the validity or ownership of the marks either during the term of this Agreement or at any time thereafter. All improvements and additions whenever made to or associated with the Hotel System by the parties to this Agreement or anyone else, and all Proprietary Marks, and all goodwill arising from your use of Licensor's marks shall inure to the benefit of and become the property of HSA. Upon expiration or termination of this Agreement, no monetary amount shall be assigned as attributable to any goodwill associated with your use of the Hotel System or any element(s) or component(s) of the Hotel System including the name or marks. B. Trademark Disputes. Licensor and/or HSA shall have the sole right and responsibility to handle disputes with third parties concerning use of all or any part of the Hotel System, and you shall, at your reasonable expense, extend your full cooperation to Licensor and/or HSA in all such matters. All recoveries made as a result of disputes with third parties regarding use of the Hotel System or any part thereof shall be for the account of Licensor and/or HSA. Neither Licensor nor HSA need initiate suit against alleged imitators or infringers and may settle any dispute by grant of a license or otherwise. You shall not initiate any suit or proceeding against alleged imitators or infringers or any other suit or proceeding to enforce or protect the Hotel System. C. Protection of Name and Marks. Both parties shall make every effort consistent with the foregoing to protect and maintain the Proprietary Marks and their distinguishing characteristics. You agree to execute any documents deemed necessary by Licensor, HSA or their respective counsel to obtain protection for Licensor's marks or to maintain their continued validity and enforceability. You agree to use the names and marks associated with the Hotel System only in connection with the operation of a Hawthorn Hotel and in the manner authorized by Licensor and you acknowledge that any unauthorized use thereof shall constitute infringement of Licensor's and HSA's rights. You must notify Licensor immediately, in writing, of any infringement or challenge to your use of Licensor's marks or of any unauthorized use or possible misuse of Licensor's marks or Licensor's proprietary information. 9 6. Records and Audits. A. Monthly Reports. At least monthly, you shall prepare a statement which shall include all information concerning Gross Rooms Revenue, other revenues generated at the Hotel, room occupancy rates, reservation data and other information required by Licensor that may be useful in connection with marketing and other functions of Licensor, its parent, subsidiaries, divisions or affiliates (the "Data"). The Data shall be the property of Licensor. By the tenth (10th) of each month, you shall submit to Licensor a statement setting forth the Data for the previous month and reflecting the computation of the amounts then due under Paragraph 3.D hereof. The statement shall be in such form and detail as Licensor may reasonably request from time to time, and may be used by Licensor for its reasonable purposes. Licensor shall not willingly or knowingly provide Data on your property as an inducement to develop other hotel brands in your market area. B. Preparation and Maintenance of Records. You shall, in a manner and form satisfactory to Licensor and utilizing accounting and reporting standards as reasonably required by Licensor, prepare on a current basis (and preserve for no less than four (4) years), complete and accurate records concerning Gross Rooms Revenue and all financial, operating, marketing and other aspects of the Hotel, and maintain an accounting system which fully and accurately reflects all financial aspects of the Hotel and its business. Such records shall include but not be limited to books of account, tax returns, governmental reports, register tapes, daily reports, and complete quarterly and annual financial statements (profit and loss statements, balance sheets and cash flow statements). C. Audit. Licensor or its designated agents shall have the right at any time to examine and copy, at its expense, all books, records, and your tax returns related to the Hotel and, at its option, to have an independent audit made. If an inspection or audit should reveal that payments have been understated in any report to Licensor, then you shall immediately pay to Licensor the amount understated upon demand, in addition to interest from the date such amount was due until paid, at one and one half percent (1.5%) per month or the maximum rate permitted by law, whichever is less. In such event, Licensor shall also have the right to require that all your future financial statements related to the Hotel be audited at your expense for each fiscal year by an independent certified public accounting firm selected by you and approved by Licensor. If an inspection discloses an underpayment to Licensor of five percent (5%) or more of the total amount that should have been paid to Licensor during any six (6) month period, you shall, in addition to repayment of such understated amount, with interest, reimburse Licensor for any and all costs and expenses incurred in connection with the inspection or audit (including, without limitation, reasonable 10 accounting and attorneys' fees). The foregoing remedies shall be in addition to any other remedies Licensor may have, including, without limitation the remedies for default. D. Annual Financial Statements. At Licensor's request, you shall submit to Licensor as soon as available but not later than ninety (90) days after the end of your fiscal year, complete financial statements for such year. You shall certify them to be true and correct and to have been prepared in accordance with generally accepted accounting principles consistently applied, and any false certification shall be a breach of this Agreement. Licensor may also request, from time to time, gross operating profits percentages and certain operating statistics (i.e. energy and repairs costs) which you must provide. 7. Indemnity and Insurance. A. Indemnity. It is understood and agreed that nothing in this Agreement authorizes either party to make any contract, agreement, warranty or representation on the other's behalf, or to incur any debt or other obligation in the other's name, and that neither party shall in any event assume liability for, or be deemed liable hereunder as a result of, any such action, or by reason of any act or omission of the other party or any claim or judgement arising therefrom. You shall indemnify and hold Licensor and HSA, their parents, affiliates, subsidiaries, officers, directors, agents, and employees, harmless against any and all claims arising directly or indirectly from, as a result of, or in connection with, your operation of the Hotel, including claims of intentional or negligent conduct by you, and any claims of acts or omissions by Licensor or HSA relating to the operation of the Hotel System (even though Neither HSA nor Licensor is actively involved in the operation or supervision of the Hotels, as well as the costs, including reasonable attorney's fees, of defending against them. You agree that all of the obligations of Licensor under this Agreement are to you, and no other party is entitled to rely on, enforce, or obtain relief for breach of such obligations either directly or indirectly or by subrogation. Licensor shall not indemnify or hold you harmless against any action or claim by any third party based upon Licensor's exercise of any of its rights in accordance with the terms of this Agreement. B. Insurance. During the License Term, you shall comply with all insurance requirements of any lease or mortgage covering the Hotel, and Licensor's specifications for insurance as to amount and type of coverage as may be reasonably specified by Licensor from time to time in writing, and shall in any event maintain as a minimum the following insurance underwritten by an insurer approved by Licensor: (1) employer's liability and workers' compensation insurance as prescribed by applicable law; and 11 (2) comprehensive general liability insurance (with products, completed operations and independent contractors coverage) and comprehensive automobile liability insurance, all on an occurrence basis naming Licensor and its then current parent, subsidiaries, divisions, affiliates and their successors and assigns as additional insureds and underwritten by an insurer approved by Licensor with single-limit coverage for personal and bodily injury and property damage of at least Five Million Dollars ($5,000,000) for each occurrence. In connection with all significant construction at the Hotel during the License Term, you shall cause the general contractor to maintain with an insurer approved by Licensor comprehensive general liability insurance (with products, completed operations and independent contractors coverage) in at least the amount of Five Million Dollars ($5,000,000) for each occurrence with Licensor and its then current parent, subsidiaries, divisions, affiliates and their successors and assigns named as additional insureds. C. Changes in Insurance. Simultaneously herewith, annually hereafter and each time a change is made in any insurance or insurance carrier, you shall furnish to Licensor certificates of insurance including the term and coverage of the insurance in force, the persons insured, and the fact that the coverage may not be cancelled, altered or permitted to lapse or expire without thirty (30) days' advance written notice to Licensor. 8. Transfer. A. Transfer by Licensor. Licensor shall have the right to transfer or assign all or any part of its rights or obligations in this Agreement to any person or legal entity, and you hereby consent to such transfer. B. Transfer by Licensee. (1) You understand and acknowledge that the rights and duties set forth in this Agreement are personal to you, and that Licensor has granted this license in reliance on your business skill, financial capacity, and character, and that of your partners or shareholders. Accordingly, neither you nor any immediate or remote successor to any part of your interest in this license, nor any individual, partnership, corporation, or other legal entity which directly or indirectly owns any interest in this license or in you shall sell, sign, transfer, convey, give away, mortgage, or otherwise encumber any direct or indirect interest in this License (including any ownership interest in you), the Hotel, or a substantial portion of the assets (including building and real estate) of the Hotel without the prior written consent of Licensor. (2) If the transfer is equal to less than a fifty percent (50%) equity interest in you and does not have the effect of transferring control (as described in Paragraphs (3) and (4) below), the transfer shall not require the prior approval of Licensor, provided that 12 (3) If a transfer, alone or together with other previous, simultaneous, or proposed transfers, would have the effect of transferring a controlling interest in the License, you, the Hotel, or greater than fifty percent (50%) of the assets (including building and real estate) of the Hotel, such transfer shall require Licensor's prior approval, and Licensor may, in its sole discretion, require any or all of the following as conditions of its approval, which approval shall not be unreasonably withheld: (a) all of your accrued monetary obligations to Licensor and its subsidiaries and affiliates and all other outstanding obligations related to the Hotel shall have been satisfied and you are not otherwise in default; (b) the transferee, and all shareholders in the transferee, shall demonstrate to Licensor's satisfaction that the transferee and its shareholders or general partners, as appropriate, meet Licensor's then current qualifications being applied to new applicants including, business standards, ability to conduct the Hotel (as may be evidenced by prior related business experience or otherwise), and have adequate financial resources and capital to operate the Hotel; (c) transferee and the shareholders or general partners in the transferee shall execute the standard form license agreement then being offered to new Hotel System licensees (provided, however, that the royalty fee and the Marketing/Reservation Contribution shall be the greater of the then-current fees or the same as the amount assessed on the date of the transfer, which amount shall be adjusted in accordance with the terms of the license agreement executed) and such other ancillary agreements as Licensor may require for the Hotel and the general manager shall complete the initial training program then in effect for new licensees; (d) The Hotel shall be upgraded to conform to the then-current standards and specifications for hotels operating under the Hotel System if the most recent Quality Assurance Score was below four hundred and fifty (450). In any event, all deficiencies noted on the most recent inspection must be remedied by the transferee within ninety (90) days of such transfer. You shall complete any upgrade required under this Paragraph within the time specified by Licensor; (e) You shall pay a transfer fee equal to Two Thousand Five Hundred Dollars ($2,500.00), for a term equal to the balance of the original term of this License. No fee shall be required for transfers to the spouse, issue, parent, or sibling of a partner or shareholder in you, or from one partner or shareholder to another. If the transferee requests approval of a term greater than the remaining term of this License, the then-current standard minimum application fee, prorated according to the period of time requested which exceeds the original term of this License, shall be paid to Licensor; 13 (f) the transferor shall have executed a general release, in a form satisfactory to Licensor, of any and all claims against Licensor and its officers, directors, shareholders, and employees, in their corporate and individual capacities, including, without limitation, claims arising under federal, state, and local laws, rules, and ordinances; (g) the transferee, and all shareholders or general partners in the transferee, shall enter into a written assignment, in a form satisfactory to Licensor, assuming and agreeing to discharge all of your obligations under this Agreement; (h) you shall remain liable for all obligations to Licensor and its subsidiaries and affiliates in connection with the Hotel prior to the effective date of the transfer and shall execute any and all instruments reasonably requested by Licensor to evidence such liability. (4) For the purposes of this Agreement, "control" shall mean the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, corporation or other business entity, whether through the ownership of voting securities, by contract, or otherwise. (5) Any purported assignment or transfer, by operation of law or otherwise, not having the prior written consent of Licensor shall be null and void and shall constitute a material breach of this Agreement, for which Licensor may then terminate without opportunity to cure pursuant to Paragraph 10.C. of this Agreement, and seek injunctive relief as well as monetary damages. C. Transfers of the License or Equity Interest in Licensee Upon Death. Upon the death or mental incompetency of you or a person owning all or any interest in you, the executor, administrator, or personal representative of such person shall transfer within three (3) months after such death or mental incompetency his interest to a third party approved by Licensor. Such transfers, including, without limitation, transfers by devise or inheritance, shall be subject to the same conditions as any inter vivos transfer. However, in the case of transfer by devise or inheritance, if the heirs or beneficiaries of any such person are unable to meet the conditions in this Paragraph 12, the personal representative of the deceased shareholder shall have reasonable time to dispose of the deceased's interest in you, which disposition shall be subject to all the terms and conditions for transfers contained in this Agreement. If the interest is not disposed of within nine (9) months, Licensor may terminate this Agreement. 14 D. Registration of a Proposed Transfer of Equity Interests. Securities in you may be offered to the public only with the prior written consent of Licensor, which consent shall not be unreasonably withheld. All materials required by federal or state law for the sale of any interest in you shall be submitted to Licensor for review prior to filing with any government agency; and any materials to be used and any exempt offering shall be submitted to Licensor for review prior to their use. No offering by you shall imply (by use of the Proprietary Marks or otherwise) that Licensor is participating as an underwriter, issuer, or officer of you or Licensor's securities; and Licensor's review of any offering shall be limited solely to the subject of the relationship between you and Licensor. You and other participants in the offering must fully indemnify Licensor in connection with the offering. For each proposed offering, you shall pay to Licensor a non-refundable fee of Five Thousand Dollars ($5,000.00), or such greater amount as is necessary to reimburse Licensor for its reasonable cost and expenses associated with reviewing the proposed offering, including, without limitation, legal and accounting fees. E. Non-Waiver of Claims. Licensor's consent to a transfer of any interest in the license granted herein shall not constitute a waiver of any claims it may have against the transferring party, nor shall it be deemed a waiver of Licensor's right to demand exact compliance with any of the terms of this Agreement by the transferee. F. Licensor's Right of First Refusal. If in the event that any party holding any direct or indirect interest in this License, in you, or in all or substantially all of the assets of the Hotel desires to accept any bona fide offer from a third party to purchase such interest, you shall notify Licensor as provided in Paragraph 13.F. hereof, and shall provide such information and documentation relating to the offer as Licensor may require. Licensor shall have the right and option, provided the third party wishes to remove the Hotel from the Hotel System, exercisable within thirty (30) days after receipt of such written notification, to send written notice to the seller that Licensor intends to purchase the seller's interest on the same terms and conditions offered by the third party. If Licensor elects to purchase the seller's interest, closing on such purchase shall occur within ninety (90) days from the date of notice to the seller of the election to purchase by Franchisor. If Licensor elects not to purchase the seller's interest, any material change thereafter in the terms of the offer from a third party shall constitute a new offer subject to the same rights of first refusal by Licensor as in the case of the third party's initial offer (minor changes to the offer shall not constitute a new offer and shall be subject to the notice period of the initial offer). Failure of Licensor to exercise the option afforded by this Paragraph 8.F. shall not constitute a waiver of any other provision of this Agreement, including all of the requirements of this Paragraph 8.F., with respect to a proposed transfer. In the event the consideration, terms, and/or conditions offered by a third party are such that Licensor may not reasonably be required to furnish the same consideration, terms, and/or conditions, then Licensor may purchase the interest proposed to be sold for the reasonable equivalent in cash. If the parties cannot agree within thirty (30) days on the reasonable equivalent in cash of the consideration, terms, and/or conditions 15 shall have no right of first refusal provided the third party meets the qualifications set forth in Paragraph 8. 9. Condemnation and Casualty. A. Condemnation. You shall, at the earliest possible time, give Licensor full notice of any proposed taking of the Hotel by eminent domain. In the event the Hotel is taken by eminent domain, Licensor shall give due and prompt consideration, without any obligation, to transferring this Agreement to a nearby location selected by you and approved by Licensor as promptly as reasonably possible, and in any event within four (4) months of the taking. If the new location is approved by Licensor and the transfer authorized by Licensor and if you open a new hotel at the new location in accordance with Licensor's specifications within two (2) years of the closing of the Hotel, the new hotel shall thenceforth be deemed to be the Hotel licensed under this Agreement. If a condemnation takes place and a new hotel does not, for whatever reason, become the Hotel under this Agreement in strict accordance with this Paragraph (or if it is reasonably evident to Licensor that such shall be the case), this Agreement will terminate forthwith upon notice thereof by Licensor to you, without the payment of liquidated damages hereunder. B. Casualty. If the Hotel is damaged by fire or other casualty, you shall expeditiously repair the damage. If the damage or repair requires closing the Hotel, you shall immediately notify Licensor, shall repair or rebuild the Hotel in accordance with Licensor's standards, shall commence reconstruction within four (4) months after closing, and shall reopen the Hotel for continuous business operations as soon as practicable (but in any event within twenty four (24) months after closing of the Hotel), giving Licensor ample advance notice of the date of reopening. If the Hotel is not reopened in accordance with this Paragraph 9.B., this Agreement shall forthwith terminate upon notice thereof by Licensor to you, with the payment of liquidated damages calculated in the manner set forth in Paragraph 10.E. C. No Extensions of Term. Nothing in this Paragraph 9 shall extend the License Term but you shall not be required to make any payments pursuant to Paragraphs 3.C. (1), (2) or (3) for periods during which the Hotel is closed by reason of condemnation or casualty. 10. Termination A. Expiration of Term. This Agreement shall expire without notice effective 20 years from the authorized opening date, subject to earlier termination as set forth herein. The parties recognize the difficulty of ascertaining damages to Licensor resulting from premature termination of this Agreement, and have provided for liquidated damages in Paragraph 10.F. below, which liquidated damages represent the parties' best estimate as to the damages arising from the circumstances in which they are provided. 16 B. Default with Opportunity to Cure. (1) Except as provided in Paragraphs 10.C. hereof, you shall have thirty (30) days (unless otherwise specified herein or in the notice by Licensor) from receipt of written notice of a default within which to remedy such default. If any such default is not cured within that time, or such longer period as applicable law may require (or such longer period as may be reasonably required by you to cure any non-monetary default if you immediately commence, diligently and in good faith pursues, and cures such default), this Agreement shall terminate without further notice to you effective immediately upon the expiration of the thirty (30) day period, expiration of any extended period as described above, or such longer period as applicable law may require. Alternatively, Licensor may, at its option, suspend your access to the reservation system until such default has been cured to Licensor's satisfaction. You shall be in default hereunder for any failure to comply with any of the requirements imposed by this Agreement, as it may from time to time reasonably be supplemented by the Manual, or to carry out the terms of this Agreement in good faith. (2) If during the twelve (12) months preceding a notice of default in (1) above you shall have engaged in a violation of this Agreement for which a notice of default was given and such default was remedied, the period given to remedy defaults thereafter shall, if and to the extent permitted by law, be ten (10) days instead of thirty (30). (3) In any judicial proceeding in which the validity of termination is at issue, Licensor shall not be limited to the reasons set forth in any notice sent under this Paragraph. (4) Licensor's notice of termination or suspension of services as described in Section 10(B)(1) shall not relieve you of your obligations hereunder. C. Immediate Termination by Licensor. This Agreement shall immediately terminate without notice to you if: (1) (a) you, or any Guarantor of your obligations hereunder (a "Guarantor"), shall generally not pay your debts as they become due or shall admit in writing an inability to pay your debts, or shall make a general assignment for the benefit of creditors; or (b) you, or any Guarantor, shall commence or consent to any case, proceeding or other action seeking reorganization, arrangement, adjustment, liquidation, dissolution 17 or composition of you or your debts under any law relating to bankruptcy, insolvency, reorganization or relief of debtors, or seeking appointment of a receiver, trustee, custodian or other similar official for it or for all or any substantial part of its property; or (c) you, or any Guarantor, shall take any corporate or other action to authorize any of the actions set forth above in Paragraphs (a) or (b); or (d) any case, proceeding or other action against you or any such guarantor shall be commenced seeking to have an order for relief entered against it as debtor, or seeking reorganization, arrangement, adjustment, liquidation, dissolution or composition of it or its debts under any law relating to bankruptcy, insolvency, reorganization or relief of debtors, or seeking appointment of a receiver, trustee, custodian or other similar official for it or for all or any substantial part of its property, and such case, proceeding or other action (i) results in the entry of an order for relief against it which is not fully stayed within seven (7) business days after the entry thereof or (ii) remains undismissed for a period of forty-five (45) days; or (e) an attachment remaining on all or a substantial part of the Hotel or of your or any Guarantor's assets for thirty (30) days; or (f) you or any Guarantor fails, within sixty (60) days of the entry of a final judgment against you in any amount exceeding Fifty Thousand Dollars ($50,000), to discharge, vacate or reverse the judgment, or to stay execution of it, or if appealed, to discharge the judgment within thirty (30) days after a final adverse decision in the appeal; or (2) you cease to operate the Hotel at the Location or under the Proprietary Marks, or loses possession or the right to possession of all or a significant part of the Hotel, except as otherwise provided in Paragraph 9 hereof; or (3) you contest in any court or proceeding Licensor's ownership of the Hotel System or any part of it, or the validity of any of the Proprietary Marks; or (4) a breach of Paragraph 8 hereof occurs; or (5) you fail to continue to identify the Hotel to the public as a Hawthorn Hotel; or (6) any action is taken toward dissolving or liquidating you or any Guarantor, if it is a corporation or partnership, except for death of a partner; or (7) you or any of your principals is, or is discovered to have been, convicted of a felony (or any other offense if it is likely to adversely reflect upon or affect the Hotel, the Hotel 18 (8) you knowingly maintains false books and records of account or knowingly submits false reports or information to Licensor; or (9) if you intentionally discloses or divulges the contents of the Manual or other trade secrets or confidential information provided to you by Licensor to any unauthorized person or fails to exercise reasonable care to prevent such disclosure; or (10) if you intentionally or negligently makes any material false statements or omissions to Licensor in connection with your Application. D. De-identification of Hotel Upon Termination. You shall take whatever action is necessary to assure that no use is made of any part of the Hotel system at or in connection with the Hotel or otherwise after the license term ends. This shall involve, among other things, returning to Licensor the Manual and all other materials proprietary to Licensor, removal of all distinctive signs, changing the telephone listing and removal of all terms bearing the Hawthorn Hotel logo, name, trademarks and/or service marks. Further, until all modifications required by this Paragraph 10.D. are completed, your shall (i) maintain a conspicuous sign at the registration desk in a form specified by Licensor stating that the Hotel is no longer associated with the Hotel System, and (ii) advise all customers or prospective customers telephoning the Hotel that it is no longer associated with the Hotel System. Anything not done by you within thirty (30) days after the license term ends, may be done at your expense by Licensor or its agents, who may enter upon the premises of the Hotel for that purpose. E. Payment of Liquidated Damages. If this Agreement terminates pursuant to Paragraphs 3.B., 9.B., 10.C. or 10.D. above at any time after the first twenty four (24) months of operation, you shall promptly pay Licensor (in addition to any amounts then due to Licensor, and only as liquidated damages for the premature termination of this Agreement, and not as a penalty or as damages for breaching this Agreement or in lieu of any other payment) a lump sum based on the average occupancy rate for the twelve (12) months preceding the termination as follows: 1. if the occupancy rate was less than fifty percent (50%) then you shall pay no liquidated damages; 2. if the occupancy rate was fifty percent (50%) to fifty nine and nine tenths percent (59.9%) then you shall pay an amount equal to twelve (12) months of fees required under Paragraph 3.C.1; 19 3. if the occupancy rate was sixty percent (60%) to sixty nine and nine tenths percent (69.9%) then you shall pay an amount equal to twenty four (24) months of fees required under Paragraph 3.C.1; 4. if the occupancy rate was seventy percent (70%) or greater then you shall pay an amount equal to thirty six (36) months of fees required under Paragraph 3.C.1; 5. if this Agreement terminates at any time during the first twenty four (24) months of operation, you shall promptly pay to Licensor liquidated damages equal to thirty six (36) times the average monthly royalty paid under Paragraph 3.C.1. 11. Renewal. Licensee may apply to renew this License Agreement for a term of ten years. Licensor will require submission of a completed application on Licensor's then current form, submission of an application fee in the amount equal to the then current fee charged to new licensees, and Licensor's approval of the application. Licensor may require reasonable renovation and upgrading of the Hotel to applicable Hotel System standards as a condition or pre-condition thereof. 12. Relationship of Parties. A. No Agency Relationship. You are an independent contractor. Neither party is the legal representative or agent of, or has the power to obligate (or has the right to direct or supervise the daily affairs of) the other for any purpose whatsoever. Licensor and you expressly acknowledge that the relationship intended by them is a business relationship based entirely on, and defined by, the express provisions of this Agreement and that no partnership, joint venture, agency, fiduciary or employment relationship is intended or created by reason of this Agreement. B. Licensee's Notices to Public Concerning Independent Status. You shall take such steps as are necessary and such steps as Licensor may from time to time reasonably request to minimize the chance of a claim being made against Licensor for anything that occurs at the Hotel, or for acts, omissions or obligations of you or anyone associated or affiliated with you or the Hotel. Such steps may, for example, include giving notice in private rooms, public rooms and advertisements, on business forms and stationery, and any other materials, making clear to the public that Licensor is not the owner or operator of the Hotel and is not accountable for what happens at the Hotel. Unless required by law, you shall not use the word "Hawthorn" or any similar words in your corporate, partnership, or trade name, nor authorize or permit such use by anyone else. You shall not use the word "Hawthorn" or any other name or mark associated with the Hotel System to incur any obligation or indebtedness on behalf of Licensor. 20 C. Third Party Beneficiary. You hereby acknowledge that HSA is a third party beneficiary under this Agreement, with the independent right to enforce your obligations hereunder and to obtain such remedies for any failure on your part to perform your obligations to the full extent permitted by this Agreement and in the place of the Licensor. 13. Miscellaneous. A. Severability and Interpretation. The remedies provided in this Agreement are not exclusive. In the event any provision of this Agreement is held to be unenforceable, void or voidable as being contrary to the law or public policy of the United States or any other jurisdiction entitled to exercise authority hereunder, all remaining provisions shall nevertheless continue in full force and effect unless deletion of the provision(s) deemed unenforceable, void or voidable impairs the consideration for this Agreement in a manner which frustrates the purpose of the parties or makes performance commercially impracticable. In the event any provision of this Agreement requires interpretation, such interpretation shall be based on the reasonable intention of the parties in the context of this transaction without interpreting any provision in favor of or against any party hereto by reason of the drafting of the party or its position relative to the other party. Any covenant, term or provision of this Agreement which, in order to effect the intent of the parties, must survive the termination of this Agreement, shall survive any such termination. B. Binding Effect. This Agreement shall become valid when executed and accepted by Licensor at Atlanta, Georgia. It shall be deemed made and entered into in the state of Georgia and shall be governed and construed under and in accordance with the laws of the state of Georgia. In entering into this Agreement, you acknowledge that it has sought, voluntarily accepted and become associated with Licensor who is headquartered in Atlanta, Georgia and that this Agreement contemplates and shall result in business relationships with Licensor's headquarter's personnel. The choice of law designation permits, but does not require that all suits concerning this Agreement be filed in the state of Georgia. C. Exclusive Benefit. This Agreement is exclusively for the benefit of the parties hereto and it shall not give rise to liability to a third party, except as otherwise specifically set forth herein. No agreement between Licensor and anyone else is for the benefit of you. D. Entire Agreement. This is the entire Agreement (and supersedes all previous agreements including without limitation, any commitment agreement between the parties concerning the Hotel) between the parties relating to the Hotel. Neither Licensor nor any other person on Licensor's behalf has made any representation to you concerning this Agreement or relating to the Hotel System, which representation is not fully set forth herein or in Licensor's "Offering Circular for Prospective Franchisees." No change in this Agreement shall be valid unless in writing signed by both parties. No failure to require strict performance or to exercise 21 any right or remedy hereunder shall preclude requiring strict performance or exercising any right or remedy in the future. E. Licensor's Withholding of Consent. Licensor's consent, wherever required, may be withheld if any default by you exists under this Agreement. Approvals and consents by Licensor shall not be effective unless evidenced by a writing duly executed on behalf of Licensor. F. Notices. Any and all notices required or permitted under this Agreement shall be in writing and shall be delivered by any means which shall provide evidence of the date received, to the respective parties at the following addresses unless and until a different address has been designated by written notice to the other party: Notices to LICENSOR: Hawthorn Franchising, Inc., 13 Corporate Square, Suite 250 Atlanta, Georgia 30329 (404) 321-4045 Notices to you: [ENTITYNAMECAPS] [PCADDRESS1] [PCADDRESS2] Attn: [PCNAME] Any notice shall be deemed to have been given at the date and time it is evidenced to have been received. G. Descriptive Headings. The descriptive headings in this Agreement are for convenience only and shall not control or affect the meaning or construction of any provision in this Agreement. H. Management of the Hotel. You must at all times retain and exercise direct management control over the Hotel's business. You shall not enter into any lease, management agreement or other similar arrangement for the operation of the Hotel or any part thereof (including without limitation, food and/or beverage service facilities), with any independent entity without the prior consent of Licensor. J. Guest Room Rates. You acknowledge that it is your responsibility to establish room rates for the Hotel. Rates must be submitted to Licensor prior to the deadline for the upcoming National Directory and you may not charge a rate in excess of the rate published in the National Directory for a particular time period. 22 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first stated above. LICENSEE: [ENTITYNAMECAPS] By: ____________________________ [SIGNEENAME] [SIGNEETITLE] Attest:_______________________ Secretary LICENSOR: HAWTHORN FRANCHISING, INC. By:_____________________ Jon Leven Attest:____________________ Asst. Secretary 23 GUARANTY As an inducement to _______________________("Licensor") to execute the above License Agreement, the undersigned, jointly and severally, hereby unconditionally warrant to Licensor and its successors and assigns that all of Licensee's representations in the License Agreement and the application submitted by Licensee to obtain the License Agreement are true and guarantee that all of Licensee's obligations under the above License Agreement, including any amendments thereto whenever made (the "Agreement"), shall be punctually paid and performed. Upon default by Licensee or notice from Licensor, the undersigned shall immediately make each payment and perform each obligation required of Licensee under the Agreement. Without affecting the obligations of the undersigned under this Guaranty, Licensor may without notice to the undersigned extend, modify or release any indebtedness or obligation of Licensee, or settle, adjust or compromise any claims against Licensee. The undersigned waive notice of amendment of the Agreement and notice of demand for payment or performance by Licensee. Upon the death of an individual guarantor, the estate of such guarantor will be bound by this Guaranty but only for defaults and obligations hereunder existing at the time of death, and the obligations of the other guarantors shall continue in full force and effect. The Guaranty constitutes a guaranty of payment and performance and not of collection, and each of the guarantors specifically waives any obligation of Licensor to proceed against Licensee on any money or property held by Licensee or by any other person or entity as collateral security, by way of set off or otherwise. The undersigned further agree that this Guaranty shall continue to be effective or be reinstated as the case may be, if at any time payment or any of the guaranteed obligations is rescinded or must otherwise be restored or returned by Licensor upon the insolvency, bankruptcy or reorganization of Licensee or any of the undersigned, all as though such payment has not been made. IN WITNESS WHEREOF, each of the undersigned has signed this Guaranty as of the date of the above Agreement. Witnesses: Guarantors: ________________________________ __________________________________ [GUARANTOR1], Legal Signature ________________________________ ________________________________ [GUARANTOR2], Legal Signature ATTACHMENT A Facilities (Paragraph 1): Site - Area and general description: Number of approved Guest Rooms (including suites): Number of Suites included: Ownership of Licensee (Paragraph 8): ATTACHMENT B EXCLUSIVE TERRITORY The Exclusive Territory is defined as that area bordered by: ATTACHMENT C You acknowledge that every detail of the Hotel System is important to Licensor and other licensees operating under the Hotel System in order to develop and maintain the standards and public image of the Hotel System. You agree to comply with the details of the Hotel System as specified by Licensor in the Manual, or otherwise in writing, and not to deviate therefrom. Specifically, you acknowledge that the Hotel is intended to offer minimal amenities and to compete directly with hotels offering the lowest average room rate in each target market. You therefore agree that it shall offer or install only those amenities that are approved in advance by Licensor. The dates below set forth the development schedule for the Hotel, whether new development or upgrading an existing facility. 1) You shall submit preliminary plans, including site layout and outline specifications adapting Licensor's then-prototypical plans by ____________________________________________________________________________ 2) You shall submit complete working drawings and specifications for the Hotel and Hotel premises, including its proposed equipment, furnishings, facilities and signs with such detail and containing such information as Licensor may request by . _________________________________________________________________ The Plans as submitted to Licensor shall conform to then prevailing Hotel System standards, including the construction standards set forth in the Manual. Construction shall not begin unless and until Licensor has approved the Plans. Thereafter, no change shall be made to the Plans without the advance consent of Licensor. Notwithstanding the foregoing, after the Plans have been approved, if in the course of actual construction any change in the Plans occurs, you shall notify Licensor promptly. Licensor shall determine whether construction has been completed in accordance with the Plans. 3) Construction of the Hotel shall commence on or before. ______________________________________________________________ Commencement of construction shall mean excavation and poured footings with a finished building slab. Once the construction has commenced, it shall continue uninterrupted (except for interruption by reason of events constituting force majeure) until construction is completed. You shall, within five (5) days of the commencement of construction, provide written notice to Licensor that construction has begun. As used in this License, "force majeure" means an act of God, war, civil disturbance, government action, fire, flood, accident, hurricane, earthquake or other calamity, strike or other labor dispute, or other action beyond the control of you. 4) The Hotel shall be furnished, equipped and shall otherwise be made ready to open for business in accordance with the License not later than _____________________________________("Completion Date"). 5) If the Hotel shall be a conversion from an existing lodging facility to a Hawthorn Suites Hotel, following is a required timetable for certain required changes/upgrades. Requirements By (date): _________________________________________________________________ _________________________________________________________________ _________________________________________________________________ You shall, within ten (10) days of the Completion Date, submit a written request to Licensor for Licensor to conduct a final inspection. Upon receipt of such request, Licensor shall promptly conduct such final inspection. You shall open for business within ten (10) days after receipt of Licensor's authorization to do so. The date upon which you receive authorization to open for business shall be the "Opening Date". You shall not open for business until Licensor provides final approval and authorization in writing. The Hotel shall not be opened for business as a Hawthorn Hotel unless and until: (i) Licensor has approved and accepted, in advance, in writing the construction of the Hotel in accordance with the Plans; the installation of all items of equipment, furniture, signs, computer terminals and related supplies; and the hiring and training of staff necessary to operate the Hotel in accordance with Licensor's requirements; (ii) no accounts are past due to Licensor, its parent, divisions, subsidiaries or affiliated companies by you; (iii) you are in full compliance with all of the terms of this License Notwithstanding anything else herein to the contrary, Licensor may authorize License to open and operate the Hotel even though you have not fully complied with the terms of this License, provided that you agree to fulfill all remaining terms of this License on or before the dates designated by Licensor. EX-10.8 6 EXHIBIT 10.8 STATE OF GEORGIA COUNTY OF FULTON U.S. FRANCHISE SYSTEMS, INC. EMPLOYMENT AGREEMENT This Employment Agreement (the "Agreement"), is made as of October 1, 1995, by and between U.S. FRANCHISE SYSTEMS, INC., a Delaware corporation having its principal place of business in Atlanta, Georgia (the "Company"); and MICHAEL A. LEVEN, an individual resident of the State of Georgia ("Employee"). This Agreement shall become effective upon the Effective Date. Company desires to employ Employee and Employee desires to be employed by Company, on the terms and conditions set forth in this Agreement. Accordingly, both parties, in consideration of the mutual and exchanged promises and agreements contained herein and of wages paid and services rendered hereunder, hereby agree as follows: Section 1. Definitions. For purposes hereof, the following terms shall be defined as follows: a. "Affiliate" shall mean, with respect to a specified entity, an entity that directly, or indirectly through one or more intermediaries, controls or is controlled by or is under common control with, the entity specified. For purposes of this definition, the term "control" (including the terms "controlled by" and "under common control with") means possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of an entity, whether through ownership of voting securities, by contract, or otherwise. b. "Cause" shall mean: (i) the conviction of or plea of guilty or nolo contendere by Employee of any felony; (ii) fraud, theft, embezzlement or intentional misappropriation by Employee of funds of the Company or the Group; (iii) repeated neglect of his duties hereunder (other than on account of Disability); provided, however, that Cause as defined in clause (iii) hereunder shall in no event mean: (a) bad judgment or incompetence; (b) negligence other than repeated neglect of duty; (c) dissatisfaction by the Company with the Employee's performance of his duties hereunder (other than as a result of any of the occurrences set forth in clauses (i), (ii) or (iii) set forth above) or a bona fide disagreement over corporate policy; (d) any act or omission believed by the Employee in good faith to have been in the interest of the Company (without intent of the Employee to gain therefrom, directly or indirectly, a profit to which the Employee was not legally entitled), unless such act or omission is in contravention of a lawful and reasonable direction of the Company's Board of Directors. (iv) a material breach of Employee's obligations pursuant to this Employment Agreement; (v) material breach of Employee's obligations pursuant to the Stockholders' Agreement. Notwithstanding the foregoing, the Employee shall not be deemed to have repeatedly neglected his duties within the meaning of clause (iii) or materially breached his obligations under this Employment Agreement or the Stockholders' Agreement within the meaning of clause (iv) or (v) above unless the Company gives written notice to the Employee thereof, and the Employee fails to remedy the matter within 15 days after receiving such notice. c. "Company Activities" shall mean the business of franchising in general and franchising, operating or managing hotels or motels and all operations, financial and marketing activities connected with that business. d. "Disability" shall be defined as the inability for a continuous period of six (6) months or for a total of six (6) months in any twelve (12) month period of Employee to render substantial services to the Company or to perform the daily functions required of such Employee due to accident, illness, sickness, or other physical or mental condition, as certified to the Company by a physician licensed to practice medicine in the State of Georgia. e. "Effective Date" shall be the date that Employee's resignation from his current employer shall have become effective (which resignation Employee has delivered in writing to his current employer on or prior to the date hereof). f. "Good Reason" means the occurrence of any one of the following events: (i) any material breach (which is not corrected in 30 days following written notice from the Employee to the Company specifying such breach) by the Company of its obligations under this Agreement, the Stock Purchase Agreement or the Stockholders Agreement (including, without limitation, (a) the refusal or failure of the Company to pay the compensation and/or benefits due under this Agreement, (b) any material diminution (without the Employee's consent), other than an insignificant or incidental diminution, in the Employee's duties, authority, responsibilities or reporting requirements (whether or not accompanied by a change in title), (c) the failure to elect the Employee to and continue his membership on the Board of Directors of the Company, or (d) the involuntary relocation of the Employee outside Atlanta, Georgia, or (ii) resignation by Employee at the written request of the Company which has been authorized by the Company's Board of Directors. g. "Group" shall mean the Company and any other Affiliate of the Company, including any subsidiary entity; and shall also include all other companies or entities under common management as Company even if not an Affiliate. h. "Noncompete Period" shall mean the period of Employee's employment with Company and a period of five (5) years after the date that Employee's employment with Company terminates either for cause or due to resignation of Employee (other than for Good Reason). i. "Territory" shall be entire continental United States and Canada. The Territory shall include those countries, at the time of termination of Employee's employment hereunder, where the Company or the Group shall be selling franchises or operating hotels. Employee acknowledges that in his capacity as President of Company, he will be substantially involved in overseeing and conducting Company Activities in all geographic areas served by Company and he therefore agrees that the foregoing definition of "Territory" is fair and reasonable. j. "Year" shall mean the twelve calendar month period commencing on the Effective Date if dated as of the first day of a given calendar month, and as of the first day of the first calendar month immediately following if dated as of a date other than the first day of a given calendar month, and ending on the last day of the twelfth (12) full calendar month thereafter. 2 Section 2. Employment. a. Subject to the terms contained in this Agreement, Company hereby employs Employee and Employee hereby accepts such employment. Employee shall serve as President, Chief Executive Officer, and Chairman of the Board of Directors of the Company and certain of the members of the Group and shall serve and perform the duties, exercise the powers, have the authority given to Employee, all as provided pursuant to that certain Stockholders' Agreement among the Company, the Company's Stockholders and Employee dated September 29, 1995 (the "Stockholders' Agreement") and that certain Stock Purchase Agreement between the Company and Employee dated September 29, 1995 ("Stock Purchase Agreement"), such Stock Purchase Agreement hereby made a part hereof, and perform those duties and exercise those powers which are consistent with those given to Employee pursuant to the Stockholders' Agreement and Stock Purchase Agreement, which may from time to time be assigned to or vested in him by the Board of Directors of the Company or the duly authorized committee thereof. Employee shall not be required to report to any other officer or employee of the Company or a member of the Group. Subject to his election or appointment as such, the Employee agrees to serve without additional compensation during the Term as a director and a member of any committees of the Board of Directors of the Company or any company within the Group, provided that the Employee is indemnified for serving in any and all such capacities on a basis no less favorable than provided to any other director of the Company or a member of the Group. The Company agrees to use its best efforts to cause the Employee to be elected and continued in office throughout the Term as a member of the Board of Directors of the Company and as Chairman of the Board of Directors of the Company and shall include him in the management slate for election as a director of the Company at every stockholders meeting or vote of the stockholders of the Company at which his term as a director would otherwise expire. The Company further agrees that if the Board of Directors of the Company shall appoint an executive committee, the Employee shall be elected to serve as a member and chairman of such committee. b. The parties acknowledge and agree that this Agreement and the obligations and benefits of the parties hereto are expressly made subject to and conditioned upon the ratification, adoption and approval of this Agreement by a majority of the Board of Directors of the Corporation. This Agreement has been negotiated in good faith by the Employee with the initial sole director of the Corporation, Mr. Neal K. Aronson, prior to the appointment of the full Board of Directors of the Corporation by its Stockholders; however, Mr. Aronson has reserved the final ratification, adoption and acceptance of this Agreement to the initial Board of Directors to be elected. Accordingly, the Employee agrees that he may not withdraw or rescind this Agreement until the earlier of: (1) the rejection of this Agreement by the Board of Directors of the Corporation (as elected pursuant to the Stockholders' Agreement) after due consideration, or (2) the day of , 1995, if it has not then been ratified, adopted and approved by the Board of Directors of the Corporation. The parties further acknowledge and agree that the Employee may continue his current employment or continue to consult for such employer for such period of time as is required under the Employee's employment agreement with his current employer (but in no event for a period of six (6) months following his resignation from such current employer). c. During the Term and unless otherwise agreed with the Company, the Employee shall devote his primary attention to the performance of his duties and responsibilities on a substantially full time and exclusive basis during such business hours and such other periods and times as may be necessary for the proper performance of his duties. Notwithstanding any other provision to the contrary contained herein but consistent with the commitment to perform services for the Company on substantially a full time and exclusive basis, nothing in this Agreement is intended to preclude the Employee from devoting reasonable time to (i) serving on the boards of other entities (profit or not-for-profit), making public appearances, making speaking engagements, writing books or articles or other similar activities and retaining all compensation received from such activities; (ii) engaging in charitable and community activities; and (iii) managing his own investments. 3 Section 3. Term. The term of Employee's employment hereunder (the "Term") shall commence on the Effective Date and unless earlier terminated as provided in Section 5 of this Agreement, Employee's employment hereunder shall continue for a period of ten (10) years from the Effective Date. Section 4. Compensation. During the Term, the Company shall provide to the Employee the following: a. A basic salary of U.S. $375,000 per year, payable bi-weekly in arrears, inclusive of any remuneration to which he may be entitled as an officer of the Company or any other company within the Group. All deductions and taxes required to be withheld by the Company under the law of the United States and the State of Georgia shall be deducted from such basic salary; b. The basic salary referred to in this paragraph shall be subject to increase by the Company at annual intervals in the light of prevailing economic circumstances and the Employee's performance but in any event such annual increases shall be equal to the annual percentage increase in the Consumer Price Index for the same annual intervals. For the purpose of this Agreement, "Consumer Price Index" shall mean the Consumer Price Index for all Urban Consumers, U.S. City average compiled and published by the United States Department of Labor. c. Payment on behalf of the Employee of such sums as shall be required to maintain the following benefits on behalf of Employee: (1) Life Insurance. If available on commercially reasonable terms, the Company shall provide term life insurance coverage on Employee's life in an amount at least equal to $1,500,000.00. If available on commercially reasonable terms, such insurance shall be transferable to the Employee in the event of the termination of employment hereunder. Upon Company's request, Employee shall make himself available for physical or other related examination. (2) Health Insurance. If available on commercially reasonable terms, the Company shall provide executive health, dental and medical insurance covering Employee, Employee's spouse and Employee's dependents. If available on commercially reasonable terms, such insurance shall be transferable to the Employee in the event of the termination of employment hereunder. (3) Long term Disability Insurance. If available on commercially reasonable terms, the Company shall provide long-term disability insurance for the Employee with coverage in the annual amount of at least $250,000 payable to death with no greater than a 90-day waiting period. If available on commercially reasonable terms, such insurance shall be transferable to the Employee in the event of the termination of employment hereunder. (4) Long Term Home Care Insurance. If available on commercially reasonable terms, the Company shall provide to the Employee, Employee's spouse and Employee's dependents insurance coverage for executive home or other facility assisted care. If available on commercially reasonable terms, such insurance shall be transferable to the Employee in the event of the termination of employment hereunder. (5) Automobile Allowance. The Company shall provide the Employee with a monthly automobile allowance in the amount of $1,000. d. The Employee shall be eligible for participation in all employee welfare and benefit plans, programs and arrangements of the Company now or hereafter made available to senior executives of the Company, as such plans, programs and arrangements may be in effect from time to time (including, without limitation, each retirement plan, supplemental and excess retirement plans, annual and long-term incentive compensation plans, 4 group life insurance, accident and death insurance, medical and dental insurance, sick leave, pension plans and disability plans); provided, however, the Employee shall not be eligible to participate in any stock option or other stock plans (except as is provided for or contemplated in the Stock Purchase Agreement and the Stockholders' Agreement). The Employee shall also be eligible to participate in the Company's executive perquisites in accordance with the terms and provisions of the arrangements as in effect from time to time for the Company's senior executives. To the extent permitted under all applicable plans, programs, arrangements, and benefits (including, without limitation, the benefits or plans in Section 4.c. hereof), benefits shall inure to the Employee's spouse and eligible dependents. e. Prompt reimbursement of all out-of-pocket expenses properly incurred by the Employee in the performance of his duties and as shall properly be incurred by him and vouched for in connection with the Company's business. f. The Employee shall be entitled to not less than five (5) weeks annual holiday (in addition to legal or national holidays at his location of work) in each Year. g. In addition to the basic salary set forth above, Employee shall be paid a performance bonus as follows: (i) One Thousand Dollars ($1,000) for every franchise agreement executed by the Company or any company within the Group in a given Year up to one hundred fifty (150) franchises; and (ii) Two Thousand Dollars ($2,000) for every franchise agreement executed by the Company or any company within the Group in such given year above the aforesaid 150. Such performance bonus shall be paid quarterly on last day of the month following the applicable quarter. For the purposes of this Section 4.g, such performance bonus of $1,000 or $2,000 per executed franchise agreement shall be payable on a proportionate basis to the extent that the Company or any company within the Group receives payment of initial franchise or similar fees ("Initial Fee") from a franchisee (based on 100% of an Initial Fee equalling $30,000). Section 5. Termination. Notwithstanding anything contained herein to the contrary, this Agreement may be terminated at any time by either party in accordance with the following terms: a. Death. In the event of Employee's death, this Agreement shall terminate immediately, provided, however, the Company shall be obligated to pay within thirty (30) days of Employee's death to Employee's family or estate a lump sum payment equal to the basic salary, unused vacation time (not to exceed five (5) weeks), and performance bonus actually earned or accrued as of the date of Employee's death, and Company shall for a period of twelve (12) months from the date of death continue for the benefit of the Employee's spouse and dependents all of Employee's benefits in effect at such time (if available under the plans). b. Disability. In the event the employment of Employee is interrupted due to the Disability of such Employee, the basic salary and other benefits payable to such Employee shall be continued by the Company for a period of six (6) full calendar months from the date of last regular employment. Should such Disability continue thereafter, no additional salary, performance bonus, fringe benefits, or other benefits shall be paid to such Employee, and the Company shall have the right to terminate this Agreement upon written notice to Employee. During the period of his Disability (including any period after the date of termination), the Employee shall be entitled to continued participation for himself, his spouse and his dependents Employee's benefits (including without limitation) those under the Company's health and welfare plans and to continued participation in all the Company's employee benefit plans all to the extent permitted under the plans, and all vested rights which the Employee may have shall remain in full force and effect. Upon request, the Employee shall submit to tests and examination by a physician on behalf of the Company. In the event of disagreement of the two physicians, the two shall select a third physician whose determination shall be deemed conclusive. 5 c. Termination Without Cause or For Good Reason. If Company terminates Employee's employment hereunder without Cause or Employee resigns for Good Reason, Company shall be obligated to pay all basic salary, fringe benefits, unused vacation time, and performance bonus accrued as of the date of termination, and shall thereafter continue to pay Employee's base salary and fringe benefits for three years following the effective date of termination of employment. Company shall have the option of paying the remaining contract amount in a single lump sum (discounted using the then applicable SunTrust Bank prime rate) or in regular installments over the remaining term of the Agreement. Any performance bonus shall accrue through the Year including the date of termination. During the Term (including the three-year period after the effective date of such termination), the Employee shall be entitled to continue participation for himself, his spouse and his dependents under the Company's health and welfare plans and to continued participation in all of the Company's employee benefit plans, and all vested rights which the Employee may have shall remain in full force and effect and shall be deemed vested. d. Resignation. In addition to Employee's right to resign for Good Reason, after the first five (5) years of the term of this Agreement and provided the Preferred Stock issued by Company as contemplated by the Stockholders' Agreement has been redeemed, Employee may resign from employment hereunder at any time by providing Company with written notice at least six (6) months in advance of the effective date of the resignation. If Employee resigns without Good Reason, Company shall pay the basic salary, unused vacation time, and performance bonus actually earned or accrued through the effective date of resignation but shall have no further obligations under this Agreement whatsoever. Without limitation, if Employee shall resign without Good Reason during the first five (5) years of this Agreement, the Employee shall not be liable for any consequential damages or damages for loss of economic opportunity or profits to the Company. e. Termination for Cause. Company may terminate this Agreement and Employee's employment hereunder immediately for Cause. If Company terminates Employee for Cause, Company shall be obligated to pay Employee's basic salary, fringe benefits, and performance bonus accrued only through the effective date of termination and shall not be responsible to pay any other amounts or provide any other benefits thereafter. Section 6. Other Provisions Governing Termination. The Employee shall not be required to mitigate amounts payable pursuant to Section 5 by seeking other employment or otherwise. The Employee's acceptance of other employment during the Term shall not, directly or indirectly, diminish or impair the amounts payable by the Company pursuant to Section 5. Section 7. Nondisclosure of Trade Secrets and Confidential Information. a. Trade Secrets Defined. As used in this Agreement, the term "Trade Secrets" shall mean all secret, proprietary or confidential information regarding Company, Company activities or Company Affiliates, or any member of the Group of which Company is a part, including any and all information not generally known to, or ascertainable by, persons not employed by Company or the Group, the disclosure or knowledge of which would permit those persons to derive actual or potential economic value therefrom or to cause economic or financial harm to Company or its affiliates. Such information shall include, but not be limited to, customer lists, customer billing information, technical information regarding Company products, prices paid by customers, purchase and supply information, current and future development and expansion or contraction plans of Company or its affiliates, sales and marketing techniques, information concerning personnel assignments and operations of Company or its affiliates and matters concerning the financial affairs, future plans and management of Company or Affiliates. "Trade Secrets" shall not include information that has become generally available to the public by the act of one who has the right to disclose such information without violating any right or privilege of Company or Affiliates. This definition shall not limit any definition of "trade secrets" under state or federal law. b. Nondisclosure of Trade Secrets. Throughout the term of this Agreement and at all times after the date that this Agreement terminates for any reason, Employee shall not (except where Employee believes in good faith that disclosure is in furtherance of his employment hereunder) directly or indirectly transmit or disclose any 6 Trade Secret of Company or of any affiliate of Company to any person, concern or entity, and shall not make use of any such Trade Secret, directly or indirectly, for himself or for others, without the prior consent of Company. c. Confidential Information Defined. As used in this Agreement, the term "Confidential Information" shall mean all information regarding Company, Company's affiliates, Company's activities, Company's business or Company's customers that is not generally known to persons not employed by Company but that does not rise to the level of a Trade Secret and that is not generally disclosed by Company practice or authority to persons not employed by Company Affiliates. "Confidential Information" shall not include information that has become generally available to the public by the act of one who has the right to disclose such information without violating any right or privilege of Company. d. Equipment, Records, Papers or Documents. All equipment, records, papers and documents kept or made by, or supplied to, the Employee relating to the business of the Company or any member of the Group, shall be and remain the property of such member of the Group, and on the termination of the Employee's employment hereunder, shall, so far as they are in possession, be delivered to the Company. e. Nondisclosure of Confidential Information. Throughout the term of this Agreement and for a period of five (5) years after the date this Agreement terminates for any reason, Employee shall not (except where Employee believes in good faith that disclosure is in furtherance of his employment hereunder) directly or indirectly transmit or disclose any Confidential Information to any person, concern or entity, or make use of any such Confidential Information, directly or indirectly, for himself or for others, without the prior consent of Company. f. Injunctive Relief. Employee acknowledges that the nondisclosure covenants contained in this Section are a reasonable means of protecting and preserving Company's interest in the confidentiality of this information. Employee agrees that any breach of these covenants will result in irreparable damage and injury to Company and that Company will be entitled to injunctive relief in any court of competent jurisdiction without the necessity of posting any bond. Employee also agrees that any such injunctive relief shall be in addition to any damages that may be recoverable by Company. g. Enforceability of Covenants. Employee and Company agree that Employee's obligations under these nondisclosure covenants are separate and distinct from other provisions of this Agreement, and a failure or alleged failure of Company to perform its obligations under any provision of this Agreement shall not constitute a defense to the enforceability of these nondisclosure covenants. Section 8. Noncompetition and Nonsolicitation Covenants. a. Special Value of Employee Services. The parties acknowledge: (1) that Employee is employed under this Agreement in connection with the formation of the Company as a new business enterprise in which Employee has been given the opportunity to acquire a significant ownership interest; (2) that Employee's services under this Agreement require special expertise and talent in the area of operations, sales, franchising, marketing and management, and that such experience has been and will continue to be built up over the years, including Employee's period of employment with Company; (3) that Employee will be a management employee and will be well-compensated under this Agreement for the expertise and knowledge he has obtained and will obtain; (4) that pursuant to this Agreement, Employee will be placed in a position of trust and responsibility and he will have access to a substantial amount of Confidential Information, Trade 7 Secrets and Company goodwill and that Company is placing him in such position and giving him access to such information in reliance upon his not competing against Company, not soliciting Company's customers, not using Company's goodwill for his own benefit or for the benefit of others, except Company and Affiliates, and not recruiting Company's employees during the time periods set forth below; and (5) that due to Employee's special experience and talent, the loss of Employee's services to Company under this Agreement cannot reasonably or adequately be fully compensated solely by damages in an action at law. b. Employee's Covenants. In consideration of the compensation and benefits being paid and to be paid by Company to Employee hereunder, Employee hereby agrees that, during the Noncompete Period, he shall not, in any manner (other than as an employee of or a consultant to Company or Affiliate), directly or indirectly: (1) engage in Company Activities or have any equity or profit interest in any person or entity, other than Company or an Affiliate of Company, or any member of the Group, that engages in the Company Activities within the Territory; provided however, Employee may own, directly or indirectly, solely as an investment, securities of any person traded on any national securities exchange or listed on the NASDAQ National Market (including, without limitation, in Employee's current employer or an affiliate or such employer) if Employee is not a controlling person of, or a member of a group which controls, such person or Employee does not, directly or indirectly, own 5% or more of any class of equity securities, or securities convertible into or exercisable or exchangeable for 5% or more of any class of equity securities, of such person and provided further that Employee may enter the employ of, or render consulting or other services to, a corporation or other person engaged in diversified businesses that derives less than 5% of its annual revenues from the Company Activities, so long as Employee is not employed in, or does not render consulting or other services to, the division of such corporation or other person engaged in the Company Activities except for incidental services rendered pursuant to his position with such person; or (2) employ or seek to employ, on his own behalf or on behalf of any other person or entity other than Company, any Affiliate of Company, or any member of the Group, any person who was employed within the Territory by Company or any member of the Group during Employee's employment with Company. (3) induce or attempt to induce any franchisee or supplier of Company, an Affiliate of Company, or any member of the Group from terminating their contractual relationship with Company, such Affiliate or member. c. Injunctive Relief. Employee acknowledges that the above covenants are a reasonable means of protecting and preserving Company's goodwill, its investment in Employee and its other legitimate business interests. Employee agrees that any breach of these covenants will result in irreparable damage and injury to Company and that Company will be entitled to injunctive relief in any court of competent jurisdiction without the necessity of posting any bond. Employee also agrees that any such injunctive relief shall be in addition to any damages that may be recoverable by Company. d. Enforceability of Covenants. Employee and Company agree that Employee's obligations under the above covenants are separate and distinct under this Agreement, and the failure or alleged failure of Company to perform its obligations under any other provisions of this Agreement shall not constitute a defense to the enforceability of these covenants. 8 Section 9. Enforcement of Restrictive Covenants. Employee acknowledges that the nondisclosure and noncompetition covenants contained in this Agreement are a reasonable means of protecting and preserving Company's interest in the confidentiality of its information, of protecting Company's legitimate business and financial interests, including future plans, and of preserving Company's investment in Employee. Employee agrees that any breach of these covenants will result in irreparable jurisdiction without the necessity of posting any bond. Section 10. Indemnification. The Company shall indemnify the Employee to the maximum extent permitted by applicable law and the Company's charter and by-laws as currently in effect (copies of which have heretofore been provided to the Employee) against all costs, charges and expenses (including, without limitation, legal fees or the provision of counsel by the Company) incurred or sustained by him in connection with any action, suit or proceeding to which he may be made a party by reason of his entering into this Agreement or his being an officer, director or employee of the Company or the Group whether or not such action, suit or proceeding is brought during the Employee's employment by the Company. The Company will reimburse Employee for all reasonable legal fees and disbursements incurred by Employee in connection with the negotiation and preparation of this Agreement and all reasonable fees and disbursements incurred by Employee in connection with any dispute over the enforcement by Employee of his rights under this Agreement, but only if Employee prevails in such dispute. Section 11. Notice. All notices or other communications hereunder shall be in writing and shall be deemed to have been duly given (a) when delivered personally, (b) on the business day following the day such notice or other communication is sent by recognized overnight courier, (c) on acknowledgment of the receipt of a facsimile of such notice or other communication, or (d) on the fifth day following the date of deposit in the United States mail if sent first class, postage prepaid, by registered or certified mail. The addresses for such notices shall be as follows: If to the Company: U.S. Franchise Systems, Inc. ATTN: Neal K. Aronson 13 Corporate Square Suite 250 Atlanta, Georgia 30329 If to the Employee: Michael A. Leven 5 West Wesley Ridge Atlanta, Georgia 30327 Section 12. Miscellaneous. a. Severability. The covenants set forth in this Agreement shall be considered and construed as separate and independent covenants. Should any part or provision of any covenant be held invalid, void or unenforceable in any court of competent jurisdiction, such invalidity, voidness or unenforceability shall not render invalid, void or unenforceable any other part or provision of this Agreement. If any portion of the foregoing provisions is found to be invalid or unenforceable by a court of competent jurisdiction because its duration, the territory, the definition of activities or the definition of information covered is invalid or unreasonable in scope, the invalid or unreasonable term shall be redefined, or a new enforceable term provided, such that the intent of Company and Employee in agreeing to the provisions of this Agreement will not be impaired and the provision in 9 question shall be enforceable to the fullest extent of the applicable laws. Without limitation of the other agreements contained in this Section, this provision shall be considered to be Employee's express consent to modification of any restriction or provision that is deemed to be overbroad or otherwise unreasonable in scope. b. Waiver. The waiver by any party to this Agreement of a breach of any of the provisions of this Agreement shall not operate or be construed as a waiver of any other or subsequent breach. c. Governing Law. This Agreement shall be deemed to be made in and shall in all respects be interpreted, construed and governed by and in accordance with the laws of the State of Georgia (without giving effect to the conflict of law principles thereof). No provision of this Agreement or any related documents shall be construed against, or interpreted to the disadvantage of, any party hereto, by any court or any governmental or judicial authority by reason of such party having or being deemed to have structured or drafted such provision. d. Entire Agreement. This Agreement is intended by the parties hereto to be the final expression of their agreement with respect to the subject matter hereof and this is the complete and exclusive statement of the terms of their agreement, notwithstanding any representations, statements or agreements to the contrary heretofore made. This Agreement supersedes any former agreements, correspondence, or other communication governing the same subject matter. This Agreement may be modified only by a written instrument signed by each of the parties hereto. e. Counterparts. This Agreement may be executed simultaneously in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. COMPANY: EMPLOYEE: U.S. FRANCHISE SYSTEMS, INC., a Delaware corporation By: /s/ Neal Aronson /s/Michael A. Leven(SEAL) MICHAEL A.LEVEN EVP and Chief Financial Officer 9/29/95 9/29/95 DATE DATE 10 EX-10.10 7 EXHIBIT 10.10 STATE OF GEORGIA COUNTY OF FULTON U.S. FRANCHISE SYSTEMS, INC. EMPLOYMENT AGREEMENT This Employment Agreement (the "Agreement"), is made as of October 1, 1995, by and between U.S. FRANCHISE SYSTEMS, INC., a Delaware corporation having its principal place of business in Atlanta, Georgia (the "Company"); and NEAL K. ARONSON, an individual resident of the State of New York ("Employee"). This Agreement shall become effective upon the Effective Date. Company desires to employ Employee and Employee desires to be employed by Company, on the terms and conditions set forth in this Agreement. Accordingly, both parties, in consideration of the mutual and exchanged promises and agreements contained herein and of wages paid and services rendered hereunder, hereby agree as follows: Section 1. Definitions. For purposes hereof, the following terms shall be defined as follows: a. "Affiliate" shall mean, with respect to a specified entity, an entity that directly, or indirectly through one or more intermediaries, controls or is controlled by or is under common control with, the entity specified. For purposes of this definition, the term "control" (including the terms "controlled by" and "under common control with") means possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of an entity, whether through ownership of voting securities, by contract, or otherwise. b. "Cause" shall mean: (i) the conviction of or plea of guilty or nolo contendere by Employee of any felony; (ii) fraud, theft, embezzlement or intentional misappropriation by Employee of funds of the Company or the Group; (iii) repeated neglect of his duties hereunder (other than on account of Disability); provided, however, that Cause as defined in clause (iii) hereunder shall in no event mean: (a) bad judgment or incompetence; (b) negligence other than repeated neglect of duty; (c) dissatisfaction by the Company with the Employee's performance of his duties hereunder (other than as a result of any of the occurrences set forth in clauses (i), (ii) or (iii) set forth above) or a bona fide disagreement over corporate policy; (d) any act or omission believed by the Employee in good faith to have been in the interest of the Company (without intent of the Employee to gain therefrom, directly or indirectly, a profit to which the Employee was not legally entitled), unless such act or omission is in contravention of a lawful and reasonable direction of the Company's Board of Directors. (iv) a material breach of Employee's obligations pursuant to this Employment Agreement; (v) material breach of Employee's obligations pursuant to the Stockholders' Agreement. Notwithstanding the foregoing, the Employee shall not be deemed to have repeatedly neglected his duties within the meaning of clause (iii) or materially breached his obligations under this Employment Agreement or the Stockholders' Agreement within the meaning of clause (iv) or (v) above unless the Company gives written notice to the Employee thereof, and the Employee fails to remedy the matter within 15 days after receiving such notice. c. "Company Activities" shall mean the business of franchising in general and franchising, operating or managing hotels or motels and all operations, financial and marketing activities connected with that business. d. "Disability" shall be defined as the inability for a continuous period of six (6) months or for a total of six (6) months in any twelve (12) month period of Employee to render substantial services to the Company or to perform the daily functions required of such Employee due to accident, illness, sickness, or other physical or mental condition, as certified to the Company by a physician licensed to practice medicine in the State of Georgia. e. "Effective Date" shall be October 1, 1995. f. "Good Reason" means the occurrence of any one of the following events: (i) any material breach (which is not corrected in 30 days following written notice from the Employee to the Company specifying such breach) by the Company of its obligations under this Agreement, the Stock Purchase Agreement or the Stockholders Agreement (including, without limitation, (a) the refusal or failure of the Company to pay the compensation and/or benefits due under this Agreement, (b) any material diminution (without the Employee's consent), other than an insignificant or incidental diminution, in the Employee's duties, authority, responsibilities or reporting requirements (whether or not accompanied by a change in title), (c) the failure to elect the Employee to and continue his membership on the Board of Directors of the Company, or (d) the involuntary relocation of the Employee outside Atlanta, Georgia, or (ii) resignation by Employee at the written request of the Company which has been authorized by the Company's Board of Directors. g. "Group" shall mean the Company and any other Affiliate of the Company, including any subsidiary entity; and shall also include all other companies or entities under common management as Company even if not an Affiliate. h. "Noncompete Period" shall mean the period of Employee's employment with Company and a period of five (5) years after the date that Employee's employment with the Company terminates either for cause or due to resignation of Employee (other than for Good Reason). i. "Territory" shall be entire continental United States and Canada. The Territory shall include those countries, at the time of termination of Employee's employment hereunder, where the Company or the Group shall be selling franchises or operating hotels. Employee acknowledges that in his capacity as Chief Financial Officer of Company, he will be substantially involved in overseeing and conducting Company Activities in all geographic areas served by Company and he therefore agrees that the foregoing definition of "Territory" is fair and reasonable. j. "Year" shall mean the twelve calendar month period commencing on the Effective Date if dated as of the first day of a given calendar month, and as of the first day of the first calendar month immediately following if dated as of a date other than the first day of a given calendar month, and ending on the last day of the twelfth (12) full calendar month thereafter. Section 2. Employment a. Subject to the terms contained in this Agreement, Company hereby employs Employee and Employee hereby accepts such employment. Employee shall serve as Chief Financial Officer of the Company and certain of the members of the Group and shall serve and perform the duties, exercise the powers, have the authority 2 given to Employee, all as provided pursuant to that certain Stockholders' Agreement among the Company, the Company's Stockholders and Employee dated September 29, 1995 (the "Stockholder Agreement") and that certain Stock Purchase Agreement between the Company and Employee dated September 29, 1995 ("Stock Purchase Agreement"), such Stock Purchase Agreement hereby made a part hereof, and perform those duties and exercise those powers which are consistent with those given to Employee pursuant to the Stockholders' Agreement and Stock Purchase Agreement, which may from time to time be assigned to or vested in him by the Board of Directors of the Company or the duly authorized committee thereof. Subject to his election or appointment as such, the Employee agrees to serve without additional compensation during the Term as a director and a member of any committees of the Board of Directors of the Company or any company within the Group, provided that the Employee is indemnified for serving in any and all such capacities on a basis no less favorable than provided to any other director of the Company or a member of the Group. The Company agrees to use its best efforts to cause the Employee to be elected and continued in office throughout the Term as a member of the Board of Directors of the Company and shall include him in the management slate for election as a director of the Company at every stockholders meeting or vote of the stockholders of the Company at which his term as a director would otherwise expire. The Company further agrees that if the Board of Directors of the Company shall appoint an executive committee, the Employee shall be elected to serve as a member of such committee. b. The parties acknowledge and agree that this Agreement and the obligations and benefits of the parties hereto are expressly made subject to and conditioned upon the ratification, adoption and approval of this Agreement by a majority of the Board of Directors of the Corporation. This Agreement has been negotiated in good faith by the Employee with the initial sole director of the Corporation, Mr. Neal K. Aronson, prior to the appointment of the full Board of Directors of the Corporation by its Stockholders; however, Mr. Aronson has reserved the final ratification, adoption and acceptance of this Agreement to the initial Board of Directors to be elected. Accordingly, the Employee agrees that he may not withdraw or rescind this Agreement until the earlier of: (1) the rejection of this Agreement by the Board of Directors of the Corporation (as elected pursuant to the Stockholders' Agreement) after due consideration, or (2) the ___ day of ____________, 1995, if it has not then been ratified, adopted and approved by the Board of Directors of the Corporation. c. During the Term and unless otherwise agreed with the Company, the Employee shall devote his primary attention to the performance of his duties and responsibilities on a substantially full time and exclusive basis during such business hours and such other periods and times as may be necessary for the proper performance of his duties. Notwithstanding any other provision to the contrary contained herein but consistent with the commitment to perform services for the Company on substantially a full time and exclusive basis, nothing in this Agreement is intended to preclude the Employee from devoting reasonable time to (i) serving on the boards of other entities (profit or not-for-profit), making public appearances, making speaking engagements, writing books or articles or other similar activities and retaining all compensation received from such activities; (ii) engaging in charitable and community activities; and (iii) managing his own investments. Section 3. Term. The term of Employee's employment hereunder (the "Term") shall commence on the Effective Date and unless earlier terminated as provided in Section 5 of this Agreement, Employee's employment hereunder shall continue for a period of ten (10) years from the Effective Date. Section 4. Compensation. During the Term, the Company shall provide to the Employee the following: a. A basic salary of U.S. $200,000 per year, payable bi-weekly in arrears, inclusive of any remuneration to which he may be entitled as an officer of the Company or any other company within the Group. 3 All deductions and taxes required to be withheld by the Company under the law of the United States and the State of Georgia shall be deducted from such basic salary; b. The basic salary referred to in this paragraph shall be subject to increase by the Company at annual intervals in the light of prevailing economic circumstances and the Employee's performance but in any event such annual increases shall be equal to the annual percentage increase in the Consumer Price Index for the same annual intervals. For the purpose of this Agreement, "Consumer Price Index" shall mean the Consumer Price Index for all Urban Consumers, U.S. City average compiled and published by the United States Department of Labor. c. Payment on behalf of the Employee of such sums as shall be required to maintain the following benefits on behalf of Employee: (1) Life Insurance. If available on commercially reasonable terms, the Company shall provide term life insurance coverage on Employee's life in an amount at least equal to $500,000.00. If available on commercially reasonable terms, such insurance shall be transferable to the Employee in the event of the termination of employment hereunder. Upon Company's request, Employee shall make himself available for physical or other related examination. (2) Health Insurance. If available on commercially reasonable terms, the Company shall provide executive health, dental and medical insurance covering Employee, Employee's spouse and Employee's dependents. If available on commercially reasonable terms, such insurance shall be transferable to the Employee in the event of the termination of employment hereunder. (3) Automobile Allowance. The Company shall provide the Employee with a monthly automobile allowance in the amount of $750.00. d. The Employee shall be eligible for participation in all employee welfare and benefit plans, programs and arrangements of the Company now or hereafter made available to senior executives of the Company, as such plans, programs and arrangements may be in effect from time to time (including, without limitation, each retirement plan, supplemental and excess retirement plans, annual and long-term incentive compensation plans, group life insurance, accident and death insurance, medical and dental insurance, sick leave, pension plans and disability plans); provided, however, the Employee shall not be eligible to participate in any stock option or other stock plans (except as is provided for or contemplated in the Stock Purchase Agreement and the Stockholders' Agreement). The Employee shall also be eligible to participate in the Company's executive perquisites in accordance with the terms and provisions of the arrangements as in effect from time to time for the Company's senior executives. To the extent permitted under all applicable plans, programs, arrangements, and benefits (including, without limitation, the benefits or plans in Section 4.c. hereof), benefits shall inure to the Employee's spouse and eligible dependents. e. Prompt reimbursement of all out-of-pocket expenses properly incurred by the Employee in the performance of his duties and as shall properly be incurred by him and vouched for in connection with the Company's business. f. The Employee shall be entitled to not less than five (5) weeks annual holiday (in addition to legal or national holidays at his location of work) in each Year. g. In addition to the basic salary set forth above, Employee shall be paid a performance bonus as follows: (i) Five Hundred Dollars ($500) for every franchise agreement executed by the Company or any company within the Group in a given Year up to one hundred fifty (150) franchises; and (ii) One Thousand Dollars ($1,000) for every franchise agreement executed by the Company or any company within the Group in such given year above the aforesaid 150. Such performance bonus shall be paid quarterly on last day of the month following the applicable quarter. For the purposes of this Section 4.g, such performance bonus for $500 or $1,000 per executed franchise 4 agreement shall be payable on a proportionate basis to the extent that the Company or any company within the Group receives payment of initial franchise or similar fees ("Initial Fee") from a franchisee (based on 100% of an Initial Fee equaling $30,000). Section 5. Termination. Notwithstanding anything contained herein to the contrary, this Agreement may be terminated at any time by either party in accordance with the following terms: a. Death. In the event of Employee's death, this Agreement shall terminate immediately, provided, however, the Company shall be obligated to pay within thirty (30) days of Employee's death to Employee's family or estate a lump sum payment equal to the basic salary, unused vacation time (not to exceed five (5) weeks), and performance bonus actually earned or accrued as of the date of Employee's death, and Company shall for a period of twelve (12) months from the date of death continue for the benefit of the Employee's spouse and dependents all of Employee's benefits in effect at such time (if available under the plans). b. Disability. In the event the employment of Employee is interrupted due to the Disability of such Employee, the basic salary and other benefits payable to such Employee shall be continued by the Company for a period of six (6) full calendar months from the date of last regular employment. Should such Disability continue thereafter, no additional salary, performance bonus, fringe benefits, or other benefits shall be paid to such Employee, and the Company shall have the right to terminate this Agreement upon written notice to Employee. During the period of his Disability (including any period after the date of termination), the Employee shall be entitled to continued participation for himself, his spouse and his dependents Employee's benefits (including without limitation) those under the Company's health and welfare plans and to continued participation in all the Company's employee benefit plans all to the extent permitted under the plans, and all vested rights which the Employee may have shall remain in full force and effect. Upon request, the Employee shall submit to tests and examinations by a physician on behalf of the Company. In the event of disagreement of the two physicians, the two shall select a third physician whose determination shall be deemed conclusive. c. Termination Without Cause or For Good Reason. If Company terminates Employee's employment hereunder without Cause or Employee resigns for Good Reason, Company shall be obligated to pay all basic salary, fringe benefits, unused vacation time, and performance bonus accrued as of the date of termination, and shall thereafter continue to pay Employee's base salary and fringe benefits for three years following the effective date of termination of employment. Company shall have the option of paying the remaining contract amount in a single lump sum (discounted using the then applicable SunTrust Bank prime rate) or in regular installments over the remaining term of the Agreement. Any performance bonus shall accrue through the Year including the date of termination. During the Term (including the three-year period after the effective date of such termination), the Employee shall be entitled to continue participation for himself, his spouse and his dependents under the Company's health and welfare plans and to continued participation in all of the Company's employee benefit plans, and all vested rights which the Employee may have shall remain in full force and effect and shall be deemed vested. d. Resignation. In addition to Employee's right to resign for Good Reason, after the first five (5) years of term of this Agreement and provided the Preferred Stock issued by Company as contemplated by the Stockholders' Agreement has been redeemed, Employee may resign from employment hereunder at any time by providing Company with written notice at least six (6) months in advance of the effective date of the resignation. If Employee resigns without Good Reason, Company shall pay the basic salary, unused vacation time, and performance bonus actually earned or accrued through the effective date of resignation but shall have no further obligations under this Agreement whatsoever. Without limitation, if Employee shall resign without Good Reason during the first five (5) years of this Agreement, the Employee shall not be liable for any consequential damages or damages for loss of economic opportunity or profits to the Company. 5 e. Termination for Cause. Company may terminate this Agreement and Employee's employment hereunder immediately for Cause. If Company terminates Employee for Cause, Company shall be obligated to pay Employee's basic salary, fringe benefits, and performance bonus accrued only through the effective date of termination and shall not be responsible to pay any other amounts or provide any other benefits thereafter. Section 6. Other Provisions Governing Termination. The Employee shall not be required to mitigate amounts payable pursuant to Section 5 by seeking other employment or otherwise. The Employee's acceptance of other employment during the Term shall not, directly or indirectly, diminish or impair the amounts payable by the Company pursuant to Section 5. Section 7. Nondisclosure of Trade Secrets and Confidential Information. a. Trade Secrets Defined. As used in this Agreement, the term "Trade Secrets" shall mean all secret, proprietary or confidential information regarding Company, Company activities or Company Affiliates, or any member of the Group of which Company is a part, including any and all information not generally known to, or ascertainable by, persons not employed by Company or the Group, the disclosure or knowledge of which would permit those persons to derive actual or potential economic value therefrom or to cause economic or financial harm to Company or its affiliates. Such information shall include, but not be limited to, customer lists, customer billing information, technical information regarding Company products, prices paid by customers, purchase and supply information, current and future development and expansion or contraction plans of Company or its affiliates, sales and marketing techniques, information concerning personnel assignments and operations of Company or its affiliates and matters concerning the financial affairs, future plans and management of Company or Affiliates. "Trade Secrets" shall not include information that has become generally available to the public by the act of one who has the right to disclose such information without violating any right or privilege of Company or Affiliates. This definition shall not limit any definition of "trade secrets" under state or federal law. b. Nondisclosure of Trade Secrets. Throughout the term of this Agreement and at all times after the date that this Agreement terminates for any reason, Employee shall not (except where Employee believes in good faith that disclosure is in furtherance of his employment hereunder) directly or indirectly transmit or disclose any Trade Secret of Company or of any affiliate of Company to any person, concern or entity, and shall not make use of any such Trade Secret, directly or indirectly, for himself or for others, without the prior consent of Company. c. Confidential Information Defined. As used in this Agreement, the term "Confidential Information" shall mean all information regarding Company, Company's affiliates, Company's activities, Company's business or Company's customers that is not generally known to persons not employed by Company but that does not rise to the level of a Trade Secret and that is not generally disclosed by Company practice or authority to persons not employed by Company Affiliates. "Confidential Information" shall not include information that has become generally available to the public by the act of one who has the right to disclose such information without violating any right or privilege of Company. d. Equipment, Records, Papers or Documents. All equipment, records, papers and documents kept or made by, or supplied to, the Employee relating to the business of the Company or any member of the Group, shall be and remain the property of such member of the Group, and on the termination of the Employee's employment hereunder, shall, so far as they are in possession, be delivered to the Company. e. Nondisclosure of Confidential Information. Throughout the term of this Agreement and for a period of five (5) years after the date this Agreement terminates for any reason, Employee shall not (except where Employee believes in good faith that disclosure is in furtherance of his employment hereunder) directly or indirectly transmit or disclose any Confidential Information to any person, concern or entity, or make use of any such Confidential Information, directly or indirectly, for himself or for others, without the prior consent of Company. 6 f. Injunctive Relief. Employee acknowledges that the nondisclosure covenants contained in this Section are a reasonable means of protecting and preserving Company's interest in the confidentiality of this information. Employee agrees that any breach of these covenants will result in irreparable damage and injury to Company and that Company will be entitled to injunctive relief in any court of competent jurisdiction without the necessity of posting any bond. Employee also agrees that any such injunctive relief shall be in addition to any damages that may be recoverable by Company. g. Enforceability of Covenants. Employee and Company agree that Employee's obligations under these nondisclosure covenants are separate and distinct from other provisions of this Agreement, and a failure or alleged failure of Company to perform its obligations under any provision of this Agreement shall not constitute a defense to the enforceability of these nondisclosure covenants. Section 8. Noncompetition and Nonsolicitation Covenants. a. Special Value of Employee Services. The parties acknowledge: (1) that Employee is employed under this Agreement in connection with the formation of the Company as a new business enterprise in which Employee has been given the opportunity to acquire a significant ownership interest; (2) that Employee's services under this Agreement require special expertise and talent in the area of operations, sales, franchising, marketing and management, and that such experience has been and will continue to be built up over the years, including Employee's period of employment with Company; (3) that Employee will be a management employee and will be well-compensated under this Agreement for the expertise and knowledge he has obtained and will obtain; (4) that pursuant to this Agreement, Employee will be placed in a position of trust and responsibility and he will have access to a substantial amount of Confidential Information, Trade Secrets and Company goodwill and that Company is placing him in such position and giving him access to such information in reliance upon his not competing against Company, not soliciting Company's customers, not using Company's goodwill for his own benefit or for the benefit of others, except Company and Affiliates, and not recruiting Company's employees during the time periods set forth below; and (5) that due to Employee's special experience and talent, the loss of Employee's services to Company under this Agreement cannot reasonably or adequately be fully compensated solely by damages in an action at law. b. Employee's Covenants. In consideration of the compensation and benefits being paid and to be paid by Company to Employee hereunder, Employee hereby agrees that, during the Noncompete Period, he shall not, in any manner (other than as an employee of or a consultant to Company or Affiliate), directly or indirectly: (1) engage in Company Activities or have any equity or profit interest in any person or entity, other than Company or an Affiliate of Company, or any member of the Group, that engages in the Company Activities within the Territory; provided however, Employee may own, directly or indirectly, solely as an investment, securities of any person traded on any national securities exchange or listed on the NASDAQ National Market (including, without limitation, in Employee's current employer or an affiliate or such employer) if Employee is not a controlling person of, or a member of a group which controls, such person or Employee does not, directly or indirectly, own 5% or more of any class of equity securities, or securities convertible into or 7 exercisable or exchangeable for 5% or more of any class of equity securities, of such person and provided further that Employee may enter the employ of, or render consulting or other service to, a corporation or other person engaged in diversified businesses that derives less than 5% of its annual revenues from the Company Activities, so long as Employee is not employed in, or does not render consulting or other services to, the division of such corporation or other person engaged in the Company Activities except for incidental services rendered pursuant to his position with such person; or (2) employ or seek to employ, on his own behalf or on behalf of any other person or entity other than Company, any Affiliate of Company, or any member of the Group, any person who was employed within the Territory by Company or any member of the Group during Employee's employment with Company. (3) induce or attempt to induce any franchisee or supplier of Company, an Affiliate of Company, or any member of the Group from terminating their contractual relationship with Company, such Affiliate or member. c. Injunctive Relief. Employee acknowledges that the above covenants are a reasonable means of protecting and preserving Company's goodwill, its investment in Employee and its other legitimate business interests. Employee agrees that any breach of these covenants will result in irreparable damage and injury to Company and that Company will be entitled to injunctive relief in any court of competent jurisdiction without the necessity of posting any bond. Employee also agrees that any such injunctive relief shall be in addition to any damages that may be recoverable by Company. d. Enforceability of Covenants. Employee and Company agree that Employee's obligations under the above covenants are separate and distinct under this Agreement, and the failure or alleged failure of Company to perform its obligations under any other provisions of this Agreement shall not constitute a defense to the enforceability of these covenants. Section 9. Enforcement of Restrictive Covenants. Employee acknowledges that the nondisclosure and noncompetition covenants contained in this Agreement are a reasonable means of protecting and preserving Company's interest in the confidentiality of its information, of protecting Company's legitimate business and financial interests, including future plans, and of preserving Company's investment in Employee. Employee agrees that any breach of these covenants will result in irreparable damage and injury to Company and that Company will be entitled to injunctive relief in any court of competent jurisdiction without the necessity of posting any bond. Section 10. Indemnification. The Company shall indemnify the Employee to the maximum extent permitted by applicable law and the Company's charter and by-laws as currently in effect (copies of which have heretofore been provided to the Employee) against all costs, charges and expenses (including, without limitation, legal fees or the provision of counsel by the Company) incurred or sustained by him in connection with any action, suit or proceeding to which he may be made a party by reason of his entering into this Agreement or his being an officer, director or employee of the Company or the Group whether or not such action, suit or proceeding is brought during the Employee's employment by the Company. The Company will reimburse Employee for all reasonable legal fees and disbursements incurred by Employee in connection with the negotiation and preparation of this Agreement and all reasonable fees and disbursements incurred by Employee in connection with any dispute over the enforcement by Employee of his rights under this Agreement, but only if Employee prevails in such dispute. Section 11. Notice. All notices or other communications hereunder shall be in writing and shall be deemed to have been duly given (a) when delivered personally, (b) on the business day following the day such notice 8 or other communication is sent by recognized overnight courier, (c) on acknowledgment of the receipt of a facsimile of such notice or other communication, or (d) on the fifth day following the date of deposit in the United States mail if sent first class, postage prepaid, by registered or certified mail. The addresses for such notices shall be as follows: If to the Company: U.S. Franchise Systems, Inc. ATTN: Michael A. Leven 13 Corporate Square Suite 250 Atlanta, Georgia 30329 If to the Employee: Neal K. Aronson 196 East 75th Street Apt. 19-C New York, New York 10021 Section 12. Miscellaneous. a. Severability. The covenants set forth in this Agreement shall be considered and construed as separate and independent covenants. Should any part or provision of any covenant be held invalid, void or unenforceable in any court of competent jurisdiction, such invalidity, voidness or unenforceability shall not render invalid, void or unenforceable any other part or provision of this Agreement. If any portion of the foregoing provisions is found to be invalid or unenforceable by a court of competent jurisdiction because its duration, the territory, the definition of activities or the definition of information covered is invalid or unreasonable in scope, the invalid or unreasonable term shall be redefined, or a new enforceable term provided, such that the intent of Company and Employee in agreeing to the provisions of this Agreement will not be impaired and the provision in question shall be enforceable to the fullest extent of the applicable laws. Without limitation of the other agreements contained in this Section, this provision shall be considered to be Employee's express consent to modification of any restriction or provision that is deemed to be overbroad or otherwise unreasonable in scope. b. Waiver. The waiver by any party to this Agreement of a breach of any of the provisions of this Agreement shall not operate or be construed as a waiver of any other or subsequent breach. c. Governing Law. This Agreement shall be deemed to be made in and shall in all respects be interpreted, construed and governed by and in accordance with the laws of the State of Georgia (without giving effect to the conflict of law principles thereof). No provision of this Agreement or any related documents shall be construed against, or interpreted to the disadvantage of, any party hereto, by any court or any governmental or judicial authority by reason of such party having or being deemed to have structured or drafted such provision. d. Entire Agreement. This Agreement is intended by the parties hereto to be the final expression of their agreement with respect to the subject matter hereof and this is the complete and exclusive statement of the terms of their agreement, notwithstanding any representations, statements or agreements to the contrary heretofore made. This Agreement supersedes any former agreements, correspondence, or other communication governing the same subject matter. This Agreement may be modified only by a written instrument signed by each of the parties hereto. e. Counterparts. This Agreement may be executed simultaneously in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 9 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. COMPANY: EMPLOYEE: U.S. FRANCHISE SYSTEMS, INC., a Delaware corporation By: /s/ Michael A. Leven /s/ Neal K. Aronson (SEAL) MICHAEL A. LEVEN, CEO NEAL K. ARONSON Oct. 4, 1995 October 4, 1995 DATE DATE EX-10.12 8 EXHIBIT 10.12 OFFICE LEASE PROPERTY: Corporate Square LANDLORD: HALLWOOD REAL ESTATE INVESTORS FUND XV A Delaware General Partnership TENANT: U.S. Franchise Systems, Inc. SECTION ITEM PAGE 1. BASIC LEASE PROVISIONS......................................... 1 2. PREMISES ...................................................... 1 2.1 Premises ................................................. 1 2.2 Tenant's Proportionate Share.............................. 1 2.3 Use Clause ............................................... 1 2.4 Common Area .............................................. 1 3. TERM OF LEASE.................................................. 1 4. SECURITY DEPOSIT............................................... 1 5. RENTS.......................................................... 1 5.1 Payment................................................... 1 5.2 Late Fees................................................. 2 5.3 Base Rent................................................. 2 5.4 Additional Rent........................................... 2 5.5 Operating Expenses........................................ 2 5.6 Additional Taxes.......................................... 3 6. SERVICES....................................................... 3 7. COMPLETION OF IMPROVEMENTS..................................... 3 8. ACCEPTANCE..................................................... 4 9. ASSIGNMENT OR SUBLETTING....................................... 4 10. CONDUCT OF BUSINESS............................................ 4 11. RULES & REGULATIONS............................................ 4 12. DEFAULTS AND REMEDIES.......................................... 4 12.1 Defaults................................................. 4 12.2 Remedies................................................. 5 13. INSURANCE...................................................... 5 13.1 Tenant's Insurance....................................... 5 13.2 Landlord's Insurance..................................... 5 13.3 Insurance Policies....................................... 5 13.4 Waiver of Subrogation.................................... 5 14. NO PERSONAL LIABILITY OF LANDLORD.............................. 6 15. HOLD HARMLESS.................................................. 6 16. ACCESS TO PREMISES............................................. 6 17. ALTERATIONS.................................................... 6 17.1 Alterations by Landlord.................................. 6 17.2 Alterations by Tenant.................................... 6 18. REPAIRS AND MAINTENANCE........................................ 6 18.1 Landlord's Obligations................................... 6 18.2 Tenant's Obligations..................................... 6 18.3 Surrender................................................ 7 19. LIENS.......................................................... 7 20. DAMAGE OR DESTRUCTION.......................................... 7 20.1 Lease Termination........................................ 7 20.2 Repair or Restoration.................................... 7 21. CONDEMNATION................................................... 7 22. FORCE MAJEURE.................................................. 7 23. LANDLORD'S LIEN:............................................... 7 24. SUCCESSION TO LANDLORD'S INTEREST.............................. 8 24.1 Attornment............................................... 8 24.2 Subordination............................................ 8 24.3 Estoppel Certificate..................................... 8 25. SURRENDER OF PREMISES.......................................... 8 26. PARKING........................................................ 8 27. HAZARDOUS SUBSTANCES........................................... 8 28. MISCELLANEOUS.................................................. 8 28.1 Partial Invalidity...................................... 8 28.2 Successors and Assigns.................................. 8 28.3 Waiver.................................................. 9 28.4 Accord and Satisfaction................................. 9 28.5 Attorney's Fees......................................... 9 28.6 Time is of the Essence.................................. 9 28.7 Broker's Commission..................................... 9 28.8 No Light, Air or View Easement.......................... 9 28.9 Entire Agreement........................................ 9 28.10 Applicable Law.......................................... 9 28.11 Notices................................................. 9 28.12 Quiet Enjoyment......................................... 9 28.13 Compliance with Law..................................... 9 28.14 Superior Law............................................ 9 28.15 Guarantor............................................... 9 28.16 Exhibits/Riders......................................... 9 28.17 Execution of Lease...................................... 9 28.18 Confidentiality......................................... 9 EXHIBITS RIDERS "A" - The Premises "B" - The Property "C" - Leasehold Improvements Agreement "D" - Rules and Regulations (OFFICE LEASE AGREEMENT) LEASE DATE: September 25, 1995 TENANT: U.S. Franchise Systems, Inc. ADDRESS (A) Notice Address: 13 Corporate Square, Suite 250 OF TENANT Atlanta, Georgia 30329 (Articles 5.1, 28.11): (B) Billing Address: 13 Corporate Square, Suite 250 Atlanta, Georgia 30329 CONTACT: Mike Leven Telephone: ( ) ___________ LANDLORD: Hallwood Real Estate Investors Fund XV, a Delaware General Partnership ADDRESSES OF (A) Notice Address: 3 Corporate Square, Suite 315 LANDLORD Atlanta, Georgia 30329 (Articles 5.1, 28.11): (B) Payment Address: 3 Corporate Square, Suite 315 Atlanta, Georgia 30329 CONTACT: Hallwood Management Company Telephone: (404)321-6644 PREMISES Unit # 13.250 (Article 2.1): Building 13 Address 13 Corporate Square, Suite 250 City Atlanta State Georgia Zip 30329 RENTABLE AREA OF THE PREMISES (Article 2.1): approximately 8,439 square feet (the "Area") TOTAL RENTABLE ARE OF THE PROPERTY approximately N/A square feet (the "Total Rentable (Article 2.2): Area") PERMITTED USE (Article 2.3): General Office Use TERM OF LEASE 5 Years, 0 Months, commencing on the Lease (Article 3): Commencement Date and ending at 5:00 p.m. on the Lease Expiration Date, subject to adjustment and earlier termination as provided in this Lease. LEASE COMMENCEMENT DATE (Article 3): October 1, 1995 LEASE EXPIRATION DATE (Article 3.1): September 30, 2000 SECURITY DEPOSIT (Article 4): $11,112.47 BASE RENT COMMENCEMENT DATE (Article 5.3): October 1, 1995 BASE RENT From 10/01/95 To 09/30/96 Monthly $9,142.25 MONTHLY From 10/01/96 To 09/30/97 Monthly $9,599.36 INSTALLMENTS From 10/01/97 To 09/30/98 Monthly $10,079.33 (Article 5.3): From 10/01/98 To 09/30/99 Monthly $10,583.30 From 10/01/99 To 09/30/2000 Monthly $11,112.47 BASE EXPENSES Operating Expenses for calendar year N/A or (Article 5.4): Total Rentable Area of the Property multiplied by $ N/A (per square foot expense) or $ N/A in total BROKERS Hallwood Management Company has acted as agent for (Article 28.7): Landlord in connection with this Lease, and N/A has acted as agent for Tenant in connection with this Lease. Landlord shall be responsible for the payment of all brokerage commissions to be paid to Brokers in connection with this Lease. The foregoing Basic Lease Information is incorporated into and made a part of the Lease identified above. If any conflict exists between any Basic Lease Information and the Lease, then the Lease shall control. LANDLORD: TENANT: Hallwood Real Estate Investors Fund XV, U.S. Franchise Systems, Inc. a Delaware General Partnership Hallwood Management Company, as Agent By: /s/ Richard D. Stilovich By: /s/ Michael A. Leven Name: Richard D. Stilovich Name: Michael A. Leven Title: Regional Director Title: Chief Executive Officer OFFICE LEASE AGREEMENT THIS OFFICE LEASE AGREEMENT (this "Lease") is entered into this 25th day of September, 1995, by and between Hallwood Real Estate Investors Fund XV ("Landlord"), as landlord, and U.S. Franchise Systems, Inc. d/b/a N/A ("Tenant"), as tenant. 1. BASIC LEASE PROVISIONS: The definitions and basic provisions set forth in the Basic Lease Information (the "Basic Lease Information"), entered into by Landlord and Tenant concurrently herewith, are incorporated herein by reference for all purposes. The descriptions and amounts set forth in the Basic Lease Information are qualified by their usage elsewhere in this Lease. 2. PREMISES: 2.1 Premises. (a) Landlord leases to Tenant and Tenant leases from Landlord, for the term, at the rental and upon all of the conditions set forth in this Lease, the premises known by the unit number and address, and consisting of the approximate Area, as specified in the Basic Lease Information (the "Premises"). The Premises are outlined and depicted on the floor plan attached to this Lease as Exhibit "A". The Premises are located in a building (the "Building") being situated on the real property described on Exhibit "B" attached hereto (the Building, the real property, other buildings and improvements thereon, and any parking facilities or structures appurtenant thereto, are hereinafter referred to collectively as the "Property.") (b) Landlord shall have the right to verify the actual square footage of the Premises from time to time during the Term of this Lease and to adjust the Area of the Premises to reflect the actual square footage of the Premises as determined by measurement, provided, however, such adjustment shall not affect the Base Rent. (c) Landlord shall have the right at any time during the Term of this Lease, upon giving the Tenant sixty (60) days prior written notice, to provide and furnish Tenant with space elsewhere in the Building of approximately the same size and Area as the Premises and to remove and place Tenant in such new space. Any such substitution is affected for the purpose of accommodating a tenant that will occupy all or a substantial portion of the Area in which the Premises are located, and, if Tenant is occupying the Premises at the time of any such substitution, Landlord shall pay the expense of moving Tenant, Tenant's property and equipment to the new premises, and shall at Landlord's sole cost, improve the new premises with improvements substantially similar to those located in the Premises. Should Tenant refuse to move to such new space at the end of said sixty (60) day period, Landlord shall have the right to cancel and terminate this Lease effective immediately without further notice to Tenant. In the event Tenant moves to said new space, this Lease and all of the terms, covenants, and provisions hereof, shall remain in full force and effect and be deemed applicable to such new space. 2.2 Tenant's Proportionate Share. Tenant's share of the Total Rentable Area of the Property shall be the percentage ("Tenant's Proportionate Share") equal to a fraction, the numerator of which shall be the Rentable Area of the Premises and the denominator of which shall be the Total Rentable Area of the Property. Tenant's Proportionate Share may be adjusted from time to time as the Rentable Area of the Premises or the Total Rentable Area of the Property changes, for whatever reason. 2.3 Use Clause. Tenant is permitted to use the Premises for the purpose specified in the Basic Lease Information, and for no other purpose whatsoever (the "Use"). Tenant shall obtain, at Tenant's own expense, all necessary governmental licenses and permits, inclusive of any impact or use fees imposed by said governmental bodies, for such Use. Tenant shall not conduct any secondhand, auction, distress, fire, bankruptcy or going-out-of-business sales. 2.4 Common Area. As long as this Lease remains in effect and Tenant is not in default hereunder, Tenant shall have the nonexclusive right, in common with Landlord, other tenants, subtenants, employees and invitees, to use the common area of the Property (the "Common Area"), which includes, without limitation, the following: walkways, patios, landscaped areas and parks, sidewalks, service corridors, lobbies, recreational facilities, restrooms, stairways, elevators, plazas, malls, throughways, parking areas and roadways; provided, however, that Landlord shall have the right at any time to exclude from the Common Area such areas as Landlord may determine so long as access to the Premises is not unreasonably denied. 3. TERM OF LEASE: The Term of this Lease, the Lease Commencement Date and the Lease Expiration Date shall be as set forth in the Basic Lease Information, unless sooner terminated pursuant to any provision of this Lease. 4. SECURITY DEPOSIT: Tenant shall deposit with Landlord upon execution of this Lease the amount specified in the Basic Lease Information as the Security Deposit to be held by Landlord as security for Tenant's faithful performance of Tenant's duties and obligations under this Lease. In the event Landlord invests the Security Deposit to earn interest thereon, Tenant shall not be entitled to such interest on the Security Deposit. If Tenant fails to pay rent or other charges due under this Lease, or otherwise defaults with respect to the provisions of this Lease, Landlord may, without notice to Tenant, apply or retain all or any portion of the Security Deposit for the payment of rent or other charges in default or for the payment of any sum to which Landlord may become obligated by reason of Tenant's default or to compensate Landlord for any loss or damage which Landlord may suffer thereby. If Landlord so uses or applies all or any portion of the Security Deposit, Tenant shall within five (5) days after written demand therefor deposit cash with Landlord in an amount sufficient to restore the Security Deposit to its full amount. The Security Deposit shall be returned to Tenant within sixty (60) days following the expiration of the Term of this Lease, provided Tenant has fully performed all of its duties and obligations under this Lease. 5. RENTS: 5.1 Payment. (a) All rents are payable in advance, without prior demand or any right of offset or deduction, in monthly installments on the first day of each calendar month of the Term of this Lease. Tenant promises and agrees to pay all rents to Landlord in lawful money of the United States of America at the address stated in the Basic Lease Information for payment or to such other persons or at such other places as Landlord may designate in writing. (b) If the Lease Commencement Date occurs on a day other than the first day of a calendar month, then all rents except Base Rent shall be prorated for the balance of that month based upon the actual number of days this Lease is in effect during said calendar month. The term "Lease Year", as used in this Lease, refers to each successive twelve-month period beginning with the Lease Commencement Date, as it may be adjusted pursuant to Article 7 of this Lease. Notwithstanding anything to the contrary contained in this Lease, after the Lease Expiration Date, Landlord shall have the right to reconcile all rents billed, paid and/or owed by Tenant during the Term of this Lease, and thereafter submit a final billing to Tenant. Upon receipt of such final billing, Tenant shall submit payment in full to Landlord within thirty (30) days. 5.2 Late Fees. If Tenant fails to pay any installment of rent or any other sum payable to Landlord under the terms of this Lease within ten (10) days of when due, Landlord may assess interest on such sum at the lesser of eighteen percent (18%) per annum or the highest legal rate from and after the date on which any such sum shall be due and payable, and such interest, and/or at the option of Landlord a late fee of $50.00, shall be paid by Tenant to Landlord at the time of payment of the delinquent sum; provided, however, nothing charged hereby shall ever exceed the amount that may properly be charged or recovered under the laws of the state in which the Premises are located. 5.3 Base Rent. (a) Payment of Base Rent shall begin on the Base Rent Commencement Date (as set forth in the Basic Lease Information). If the Base Rent Commencement Date occurs on a day other than the first day of a calendar month, then Base Rent shall be prorated for the balance of that month based upon the actual number of days from the Base Rent Commencement Date through the last day of said calendar month. The amount of each Base Rent Monthly Installment for the entire Term of this Lease shall be as specified in the Basic Lease Information, subject to adjustment pursuant to Paragraph 5.3(b) below. (c) In the event of the enactment, adoption or enforcement by any governmental authority of any assessment, levy, or tax, whether sales, use or otherwise, on or with respect to the rentals and charges set forth in this Lease, on or with respect to the right to lease or occupy the Property, the Building, or the Premises, so long as such assessment, levy or tax is not in substitution of or in connection with a reduction of expenses referred to in Section 5.5(a) above, Tenant shall pay such assessment, levy or tax to Landlord or, at Landlord's option, Tenant shall pay such assessment, levy or tax directly to the governmental authority. If such assessment, levy or tax is imposed on or with respect to all of the rentals derived from the Building or the Property, or is imposed on or with respect to the Property as a whole, Tenant shall pay to Landlord Tenant's Proportionate Share of such assessment, levy or tax. Notwithstanding the foregoing, this shall not impose upon Tenant the obligation to reimburse Landlord for any income, gift, inheritance or estate tax as such taxes are now structured. 5.6 Additional Taxes. If Landlord is assessed additional taxes or if Landlord's present taxes are increased as a result of any value placed on Tenant's leasehold, fixtures, furnishings, goods or services, then immediately upon demand Tenant shall pay to Landlord the amount of said additional tax, or the amount of the increase. 6. SERVICES: A. Landlord shall maintain the Common Area in reasonably good order and condition except for damage occasioned by the act of Tenant, which damage shall be repaired by Landlord at Tenant's expense. B. Landlord shall furnish the Premises with (i) electricity sufficient to provide power for typewriters, personal computers other office machines of similar low electrical consumption; provided, however, Landlord shall not be required to provide electricity required for electronic data processing equipment, special lighting in excess of building standard improvements, and any other item of electrical equipment which (singly) consumes more than .5 kilowatts per hour at rated capacity or requires a voltage other than one hundred twenty (120) volts single phase and if the installation of such electrical equipment requires additional air conditioning capacity above that provided by the building standard improvements, the additional air conditioning installation and operating costs shall be paid by Tenant, (ii) heat and air conditioning to the extent reasonably required for the comfortable occupation of the Premises during reasonable and usual business hours of 8:00 a.m. to 6:00 p.m. weekdays and 8:00 a.m. to 1:00 p.m. on Saturdays (exclusive of state and national holidays) or such shorter period specified or prescribed by any applicable policies or regulations adopted by any utility or government agency, (iii) elevator service, (iv) restroom supplies, (v) janitorial service on a five (5) day/week basis, excluding holidays; provided, however, if tenant improvements are not consistent in quality and quantity with building standard improvements, Tenant shall pay any cleaning and janitorial costs attributable thereto, and (vi) security for the building; provided, however, Landlord shall not be liable to Tenant for any losses, including personal injury and property damage, that may result to Tenant from theft, burglary or intentional conduct on the part of any person or entity, or for damages directly or indirectly resulting therefrom, nor shall the rental herein reserved be abated by reason of (1) the installation, use or interruption of any services, or (2) the failure to furnish or delay in furnishing any such services when such failure or delay is caused by accident or any condition beyond the reasonable control of Landlord or by the making of necessary repairs or improvements to the Premises, the Building or the Property. Landlord shall use reasonable efforts to remedy any interruption in the furnishing of such services. C. It is understood that Landlord does not represent or warrant that any of the services referred to above, or any other services which Landlord may supply, will be free from interruption. Tenant acknowledges that any one or more of such services may be suspended or reduced by reason of accident or repairs, alterations or improvements necessary to be made, by strikes or by any other cause beyond the reasonable control of Landlord, or by orders or regulations of any federal, state, county or municipal authority or otherwise. Tenant agrees that any such interruption or suspension of services shall never be deemed an eviction or disturbance to Tenant's use and possession of the Premises or any part thereof, or render Landlord liable to Tenant for damages or abatement of rent or relieve Tenant of performance of Tenant's obligations under this Lease. Landlord will use its reasonable efforts in the event of a strike to secure parties not involved in the labor dispute to provide minimum services for cleaning restrooms, waste removal, and janitorial services. D. Tenant shall notify Landlord of any need for an increase in power usage. Should an increase in usage of power by Tenant be recognized by Landlord in the absence of notice from Tenant, the increased amount of usage shall be deemed to have been initiated the first day of occupancy of the Premises by Tenant. E. Whenever heat generating machines or equipment or lighting other than building standard lights, are used in the Premises by Tenant which affect the temperature otherwise maintained by the air conditioning system, Landlord shall have the right to install supplementary air conditioning units in the Premises, and the cost thereof, including the cost of installation and the cost of operating and maintenance thereof, shall be paid by Tenant to Landlord upon billing by Landlord. If Tenant installs lighting requiring power in excess of that required for normal desk-top office equipment or normal copying equipment as determined by Landlord, Tenant shall immediately pay to Landlord for the cost of such excess power as Additional Rent, together with the cost of installing any additional risers or other facilities that may be necessary to furnish such excess power to the Premises. In the event the water usage by Tenant exceeds the normal office use of water for such items as coffeemakers, sinks, dishwashers, refrigerators and icemakers, the cost of such excess water usage shall be paid by Tenant to Landlord upon billing by Landlord. Landlord shall have the right to cause any of the utilities servicing the Premises to be separately metered, in which event the cost of any such utility and the installation of metering equipment shall be paid by Tenant to Landlord upon billing by Landlord. 7 COMPLETION OF IMPROVEMENTS: A. Prior to the Lease Commencement Date, Landlord shall complete, construct or install in the Premises the improvements shown on the Approved Working Drawings (as defined in Exhibit "C", attached hereto) upon the terms and conditions set forth in the Leasehold Improvements Agreement (the "Agreement"), attached hereto as Exhibit "C" and made a part hereof for all purposes. The Premises shall be deemed complete and possession delivered to Tenant and accepted by Tenant upon the date Tenant commences occupancy of any portion of the Premises or when Landlord has substantially completed these improvements, whichever occurs first. As used in this Lease and the Agreement, the phrase "substantial completion" shall mean when (i) installation of building standard improvements has occurred, (ii) Tenant has direct access from street to the elevator lobby on the floor where the Premises are located, and (iii) building services are ready to be furnished to the Premises. Substantial completion shall be deemed to have occurred notwithstanding a requirement to complete "punchlist" or similar corrective work. Landlord shall use its best efforts to advise Tenant of the anticipated date of completion at least 30 days prior to such date, but the failure to give such notice shall not constitute a default by Landlord under this Lease. If Landlord, for any reason whatsoever other than Tenant's Delay (as defined in the Agreement), cannot deliver possession of the Premises to Tenant at the Lease Commencement Date (i) this Lease shall not be void or voidable and such failure shall not affect the validity of this Lease or the obligations of Tenant hereunder, (ii) Landlord shall not be liable to Tenant for any loss or damage resulting therefrom, (iii) Base Rent shall be waived for the period between the Lease Commencement Date and the time when Landlord can deliver possession, and (iv) the Lease Expiration Date shall be extended for the number of days between the Lease Commencement Date and the time when Landlord can deliver possession. In the event that Landlord shall permit Tenant to occupy the Premises prior to the Lease Commencement Date, such occupancy shall be subject to all of the provisions of this Lease and shall not affect the Lease Expiration Date. Upon Landlord's request, Landlord and Tenant shall execute an acceptance of premises Rider establishing the Lease Commencement Date and confirming the Lease Expiration Date, but this Lease shall not be affected in any manner if either party fails or refuses to execute such Rider. Except as specifically set forth herein, no delay in delivery of possession shall operate to extend the Term of this Lease. Any abatement of rent pursuant to this Article 7 shall constitute full settlement of all claims that Tenant might otherwise have against Landlord by reason of the Premises not being ready for occupancy by Tenant on the Lease Commencement Date. B. In the event Tenant does not occupy the Premises, all interior finishing costs, among other amounts owed by Tenant hereunder, shall become due and payable by Tenant upon billing by Landlord. C. In the event Landlord provides Tenant any concessions, including, without limitation, rent abatement and/or tenant improvements, Tenant acknowledges, understands and agrees that (i) any concessions are personal to Tenant and shall not be assigned or sublet, in whole or in part, to any assignee or subtenant without the prior written approval of Landlord, and (ii) Landlord has provided such concessions to Tenant in reliance upon Tenant's warranty that Tenant shall faithfully and timely perform all of the terms and conditions of this Lease. Accordingly, in the event Tenant fails, after written notice to Tenant as required by this Lease, to timely perform any term or condition of this Lease, including, without limitation, the timely payment of rent, any concessions provided to Tenant under this Lease shall be immediately due and payable as Additional Rent without further notice or demand to Tenant. 8. ACCEPTANCE: Subject to the terms and provisions of the Agreement attached hereto as Exhibit "C", Tenant acknowledges that it has fully inspected the Premises, and by moving into the Premises or taking possession thereof, Tenant accepts the Premises "As Is", as suitable for the purposes for which the same are leased and in their present condition. Tenant further acknowledges that Landlord has made no warranties or representations with respect to the Property, the Building, the Premises or otherwise or as to either the condition or the suitability of the Premises for the Use and Tenant hereby waives any and all defects with respect thereto. This Lease is, and shall be considered as, the only agreement between the parties hereto and their representatives and agents. All negotiations and oral agreements have been merged into and are included herein. There are no other representations or warranties between the parties and any reliance with respect to representations is solely upon the representations and agreements contained in this Lease, if any. 9. ASSIGNMENT OR SUBLETTING: A. Tenant shall not voluntarily or by action of law transfer, assign, sublet, mortgage or otherwise transfer or encumber all or any part of this Lease or Tenant's interest in this Lease or in the Premises without Landlord's prior written consent (which consent shall not be unreasonably withheld), nor shall Tenant suffer or permit the Premises or any part thereof to be used or occupied by others except Tenant's employees without Landlord's prior written consent. Any attempted assignment, transfer, mortgage, encumbrance or subletting without such consent shall be void and shall constitute a breach of this Lease. Regardless of Landlord's consent, no subletting or assignment or other transfer shall release Tenant of Tenant's obligations, or alter the primary liability of Tenant to pay the rent and to perform all other obligations to be performed by Tenant, under this Lease.* B. In the event that Tenant is a privately owned corporation, if there shall occur any change in the ownership of and/or power to vote more than 50% of the outstanding capital stock of Tenant without the prior written consent of Landlord, then in addition to any and all other remedies herein provided, Landlord shall have the option to terminate this Lease upon at least thirty (30) days' notice to Tenant. In the event that Tenant is a partnership, if there shall occur any change in the ownership of and/or power to vote more than 50% of the partnership interests of Tenant without the prior written consent of Landlord, then in addition to any and all other remedies herein provided, Landlord shall have the option to terminate this Lease upon at least thirty (30) days' notice to Tenant. C. As a condition precedent to obtaining Landlord's consent to any assignment, subletting or transfer of stock or partnership interests, Tenant shall submit to Landlord with Tenant's request for consent the effective date of the transfer (which must be at least sixty days after the submission date), the name of the proposed assignee, subtenant or transferee, the terms and provisions of the proposed transaction, the proposed use (which must be consistent with the Use provided in the Basic Lease Information), a financial statement, a business history and such other information regarding the proposed assignee, subtenant or transferee as is necessary to demonstrate to Landlord that the proposed assignee, subtenant or transferee has business experience and financial strength and stability equal to or greater than that of Tenant. D. In addition, Tenant shall execute a written agreement with Landlord agreeing to pay to Landlord, as Additional Rent, fifty percent (50%) of all monies or other consideration received by Tenant from its transferee in excess of the amounts owed by Tenant to Landlord under this Lease, which Additional Rent shall be paid to Landlord as and when received by Tenant. In the event Landlord shall consent to a sublease, assignment or transfer, Tenant shall pay Landlord $200.00 for administrative fees incurred in connection with such consent, in addition to any associated legal fees and expenses. Consent by Landlord to one assignment, sublease or transfer shall not be deemed a waiver of Landlord's right to reject future assignments, subleases or transfers. 10. CONDUCT OF BUSINESS: Tenant covenants and agrees that, continuously and uninterruptedly from and after Tenant's initial opening for business, Tenant shall operate and conduct within the Premises the business Tenant is permitted to operate and conduct under the provisions of this Lease, except while the Premises are untenable by reason of fire or other casualty. Tenant agrees to conduct Tenant's business at all times in a first class manner consistent with reputable business standards and practices. 11. RULES & REGULATIONS: A. Tenant agrees to comply with and observe the rules and regulations set forth on Exhibit "D", attached hereto (the "Rules and Regulations"), and Tenant's failure to keep and observe them shall constitute a default of this Lease. Landlord reserves the right from time to time to amend or supplement the Rules and Regulations, and to adopt and promulgate additional rules and regulations applicable to the Premises and the Property. Notice of such amended and additional rules and regulations shall be given to Tenant, and Tenant agrees thereupon to comply with and observe all rules and regulations and amendments and additions thereto. B. Landlord may waive any one or more of the Rules and Regulations for the benefit of any particular tenant or tenants, but no such waiver by Landlord shall be construed as a waiver of the Rules and Regulations in favor of any other tenant or tenants, nor prevent Landlord from thereafter enforcing the Rules and Regulations against any or all of the tenants of the Property. C. The Rules and Regulations are in addition to, and shall not be construed to in any way modify or amend, in whole or in part, the terms, covenants, agreements and conditions of any lease of premises in the Property. 12. DEFAULTS AND REMEDIES: 12.1 Defaults. The occurrence of any one or more of the following events shall constitute a default and breach of this Lease by Tenant: (A) The failure by Tenant to make any payment of Base Rent, Additional Rent or any other payment required to be made by Tenant under this Lease, as and when due and such failure shall continue for a period of ten (10) days after written notice thereof from Landlord to Tenant: provided, however, that for each Lease Year during which Landlord has already given Tenant two written notices of the failure to make such payments, no further notice shall be required and an event of default shall automatically occur on the date upon which such payment was due; or *Tenant may freely sublease, transfer or assign this Lease to any operating subsidiary or affiliated company, provided however, that no such sublease, transfer or assignment shall release Tenant from its obligations hereunder without consent of Landlord. (B) The failure by Tenant to observe or perform any of the covenants, conditions or provisions of this Lease to be observed or performed by Tenant, other than Paragraph (A) above, and such failure shall continue for a period of thirty (30) days after written notice thereof from Landlord to Tenant; or (C) The insolvency of Tenant or the execution by Tenant of an assignment for the benefit of creditors; or (D) The filing by or for reorganization or arrangement of Tenant under any law relating to bankruptcy or insolvency; or (E) The appointment of a receiver or trustee to take possession of substantially all of Tenant's assets located at the Premises or of Tenant's interest in this Lease; or (F) The abandonment of the Premises by Tenant for a period of seven (7) days or more, or dispossession by process of law or otherwise. 12.2 Remedies. Upon the occurrence of any event of default, Landlord shall have the right at any time thereafter to pursue any one or more of the remedies set forth in Paragraphs 12.2(A) - (E) below without notice or demand, both of which are hereby waived by Tenant. Pursuit of any one or more of such remedies by Landlord shall not preclude pursuit of any of the other remedies set forth below or any other remedies provided by law, nor shall pursuit of any remedy set forth below constitute a forfeiture or waiver of any rents due to Landlord hereunder or of any damages accruing to Landlord by reason of the Tenant's violation of any of the terms, conditions or covenants herein contained. (A) Terminate this Lease, in which event Tenant shall immediately surrender the Premises to Landlord, and if Tenant fails to do so, Landlord may, without prejudice to any other remedy which Landlord may have for possession or arrearages in rents, enter upon and take possession of the Premises and expel or remove Tenant and any other person who may be occupying the Premises or any part thereof, without being liable for prosecution or any claim for damages therefor. Tenant agrees to pay to Landlord on demand the amount of all loss and damage which Landlord may suffer by reason of such termination, whether through inability to relet the Premises on satisfactory terms or otherwise. (B) Without terminating this Lease, enter upon and take possession of the Premises and expel or remove Tenant and any other person who may be occupying the Premises, without being liable for prosecution or any claim for damages therefor, and relet the Premises and receive the rents therefrom. Tenant agrees to pay to landlord on demand any deficiency that may arise by reason of such reletting. (C) Without terminating this Lease, enter upon the Premises without being liable for prosecution or any claim for damages therefor, and do whatever Tenant is obligated to do under the terms of this Lease. Tenant agrees to reimburse Landlord on demand for expenses which Landlord may incur in effecting compliance with Tenant's obligations under this Lease, and Tenant further agrees that Landlord shall not be liable for any damages resulting to the Tenant from such action. (D) At its option, declare the rents, including Base Rent and any Additional Rent due hereunder, for the entire remaining Term of this Lease and any other indebtedness due and payable without regard to whether or not possession shall have been surrendered to or taken by Landlord, and Landlord may commence action for the recovery of a judgment for such amounts. (E) Demand that payments for any rents, whether past due or to become due in the future, be made by certified check, cashier's check or money order. 13. INSURANCE: 13.1 Tenant's Insurance. Tenant, at Tenant's sole cost and expense, shall obtain and keep in force during the Term of this Lease the following policies of insurance, naming Landlord as an additional insured: (A) Comprehensive general liability insurance and personal injury liability insurance, insuring Tenant against liability for injury to persons or damage to property occurring in or about the Premises or arising out of the ownership, maintenance, use or occupancy thereof. Said insurance shall specify a combined single limit of at least $1,000,000 per occurrence; (B) All Risk property insurance, including coverage against damage caused by fire, windstorm, explosion, aircraft, vehicles, smoke, riot or vandalism on all of Tenant's personal property, trade fixtures, leasehold improvements and furnishings in the minimum amount of 80% of their replacement cost; and (C) Worker's Compensation insurance insuring Tenant from all claims for personal injury, disease and/or death under the worker's compensation laws of the state where the Property is located, in the amounts required by law. 13.2 Landlord's Insurance. Landlord shall obtain and keep in force during the Term of this Lease fire and extended coverage on the Building. Tenant agrees that it will not store, keep, use, or sell in or upon the Premises, gasoline and related products, firearms, explosives or any other article which may be prohibited by the standard form of fire insurance policy, or which will increase Landlord's insurance cost. 13.3 Insurance Policies. Insurance required to be obtained by Tenant hereunder shall be by companies rated A- or better in "Best's Insurance Guide", and licensed to do business in the state where the policy is written. Tenant shall furnish Landlord proof of insurance policies within ten (10) days after the execution of this Lease. Such policies shall provide that coverage may not be canceled or reduced without at least thirty (30) days prior written notice first being given to Landlord. If Tenant shall fail to procure and maintain the insurance required under this Lease, Landlord may, but shall not be required to, procure and maintain such insurance, and any amounts paid by Landlord for such insurance shall be Additional Rent, which shall be due and payable by Tenant on the next succeeding date on which a Base Rent Monthly Installment is due. 13.4 Waiver of Subrogation. As long as their respective insurers so permit without additional premium, Tenant and Landlord each waives any and all rights of recovery against the other, or against the officers, employees, agents and representatives of the other for loss or damage to such waiving party or its property or the property of others under its control, where such loss or damage is insured under any insurance policy in force at the time of such loss or damage. In addition, Tenant shall cause the insurance company issuing Tenant's liability and worker's compensation insurance to include in the respective policy or certificate, or by way of separate endorsement thereto, a waiver of subrogation provision for the benefit of Landlord. 14. NO PERSONAL LIABILITY OF LANDLORD: "Landlord", as used in this Lease insofar as covenants or obligations on the part of Landlord are concerned, shall be limited to mean and include only the owner or owners of the Premises at the time in question. In the event of any transfer of title, the Landlord named herein shall automatically be related and discharged from and after the date of such transfer or conveyance of and from all personal liability with respect to the performance of any covenants or obligations on the part of Landlord contained in this Lease thereafter to be performed, provided that any funds of Tenant in the hands of such landlord at the time of such transfer shall be turned over to the grantee. Notwithstanding the foregoing, except as specifically set forth in Article 15 below, Tenant shall look solely to the estate and property of Landlord in the Property of which the Premises are a part for the satisfaction of Tenant's remedies for collection of a judgment or other judicial process requiring the payment of money by Landlord in the event of any default or breach by Landlord of any of the terms, covenants and conditions of this Lease to be observed and/or performed by Landlord, and no other property or assets of Landlord, its partners, shareholders or agents shall be subject to levy, execution or other enforcement procedure for the satisfaction of Tenant's damages or remedies. 15. HOLD HARMLESS: Tenant shall indemnify, defend and hold Landlord harmless from and against any and all claims, liabilities, damages and costs, including attorneys' fees, incurred by Landlord which may arise from Tenant's use of the Premises or from the conduct of its business or from any activity, work or things which may be permitted or suffered by Tenant in, on or about the Premises, and shall further indemnify, defend and hold Landlord harmless from and against any and all claims, liabilities, damages and costs, including attorneys' fees, incurred by Landlord which may arise from any breach or default in the performance of any obligation on Tenant's part under this Lease or which may arise from any negligence of Tenant or any of Tenant's agents, representatives, customers, employees or invitees. Landlord shall indemnify, defend and hold Tenant harmless from and against any and all claims, liabilities, damages and costs, including attorney's fees, incurred by Tenant which may arise from any gross negligence or willful misconduct by Landlord or Landlord's agents, representatives, customers, employees or invitees in, on or about the Premises. 16. ACCESS TO PREMISES: Landlord, Landlord's agents, representatives and designees shall have the right to enter the Premises upon reasonable prior notice (but in no event less than 24 hours prior notice) from Landlord (except in the event of an emergency and normal maintenance, janitorial and security services, in which event no prior notice is required), at any time to examine and inspect the same, or to make such repairs, additions or alterations as Landlord may deem necessary or proper for the safety, improvement or preservation thereof. Landlord shall also have the right to enter the Premises during Tenant's regular business hours, upon reasonable prior notice (but in no event less than 24 hours prior notice) from Landlord, to exhibit same to prospective purchasers, mortgagees, lessees and tenants. 17. ALTERNATIONS: 17.1 Alterations by Landlord. The Property and common areas are at all times subject to the exclusive control and management of Landlord. Without limiting the generality of the foregoing, Landlord has the right to do and perform such acts in and to the Property, in the use of Landlord's good business judgment and without materially interfering with the operation of Tenant's business at the Premises, that Landlord determines to be advisable for the more efficient and proper operation of the Property, including, but not limited to, the following: (A) Obstruct or close off all or any part of the Property for the purpose of maintenance, repair or construction; (B) Use any part of the common area for merchandising, display, decorations, entertainment, and structures designed for retail selling or special features or promotional activities; (C) Change area, level, location, arrangement or use of the Property or any part thereof; (D) Construct other buildings, structures or improvements on the Property and make alterations thereto, additions thereto, subtractions therefrom, or rearrangements thereof, build additional stories on any building, and construct additional buildings or facilities adjoining or proximate to the Property; and (E) Construct multiple deck, elevated or underground parking facilities, and expand, reduce or alter same in any manner whatsoever. 17.2 Alterations by Tenant. Tenant shall not make any structural, mechanical, interior or other alterations in any portion of the Premises, or any non-structural alterations, without first obtaining the written consent of Landlord. All alterations, additions and improvements provided for herein shall become, upon completion thereof, the property of Landlord; provided, however, upon termination of tenant's right to possession of the Premises, if Landlord elects at Landlord's sole option, Tenant shall promptly remove all alterations, additions and improvements and any other property placed in the Premises by Tenant and Tenant shall be responsible for restoring the Premises to its original condition, normal wear and tear excepted, and for any damage caused by such removal. 18. REPAIRS AND MAINTENANCE: 18.1 Landlord's Obligations. Landlord shall keep in good order, condition and repair the structural portions of the Buildings and those portions of the Property not occupied or leased by any tenant, and all costs incurred by Landlord in making such repairs or performing such maintenance shall be Operating Expenses as defined in Article 5.5 of this Lease, provided that Landlord shall have no obligation to perform any act which is the obligation of Tenant or any other tenant in the Building. Tenant expressly waives the benefit of any statute now or hereafter in effect which would otherwise afford Tenant the right to make repairs at Landlord's expense or to terminate this Lease because of Landlord's failure to keep the Premises in good order, condition or repair. Landlord shall comply with the Americans With Disabilities Act (the "ADA"), and specifically "Title III: The Provisions Governing Public Accommodations and Services Operated by Private Entities" of the ADA, and all amendments thereto and any standards and regulations issued thereunder, but only to the extent applicable to and affecting the Building, with respect to those portions of the Building for which it is responsible to maintain and repair under the terms and provisions of this Lease and which are within its control. Any penalty or damage assessed against Tenant by reason of the failure of Landlord to comply with this paragraph shall be paid by landlord, and any such failure shall be rectified by Landlord at its own expense. 18.2 Tenant's Obligations. Tenant, at Tenant's sole cost and expense, shall keep in good order, condition and repair the Premises and every part thereof including, without limitation, all plumbing and sewer lines to the point where they intersect with common lines, fixtures, interior walls and interior surfaces of exterior walls, ceilings, windows, doors and plate glass located within or upon the Premises. All repairs made by Tenant shall be at least of the same quality, design and class as that of the original work. Tenant shall comply with the ADA, and specifically "Title III: The Provisions Governing Public Accommodations and Services Operated By Private Entities" of the ADA, and all amendments thereto and any standards and regulations issued thereunder, but only to the extent applicable to and affecting the Building, with respect to those portion of the Building and the Premises for which it is responsible to maintain and repair under the terms and provisions of this Lease and which are within its control. Any penalty or damage assessed against Landlord by reason of the failure of Tenant to comply with this paragraph shall be paid by Tenant, and any such failure shall be rectified by Tenant at its own expense. If Tenant refuses or neglects to make repairs and/or to maintain the Premises or any part thereof in a manner reasonably satisfactory to Landlord, Landlord shall have the right, but not the obligation, upon giving Tenant five (5) days (or in the case of emergency, twenty-four hours) written notice of its election to do so, to make such repairs or perform such maintenance on behalf of and for the account of Tenant. Such work shall be paid for by Tenant, as Additional Rent under this Lease, promptly upon receipt of a bill for such work. 18.3 Surrender. On the last day of the Term of this Lease, or on any sooner termination or date on which Tenant ceases to possess the Premises, Tenant shall surrender to Landlord (i) the Premises in good and clean condition, ordinary wear and tear excepted, and (ii) the keys to the Premises. Prior to such surrender, Tenant shall repair any damage to the Premises occasioned by Tenant or Tenant's removal of trade fixtures, furnishings and equipment, which repair shall include the patching and filling of holes and repair of structural damage. 19. LIENS: Tenant shall not cause any liens of any kind to be placed upon the Premises or the Property. Subject to the performance of Landlord's duties and obligations under Section 7 of this Lease, if any lien is placed upon the Premises or the Property as a result of any work done for or on behalf of Tenant, or as a result of any goods or services sold or rendered to Tenant or otherwise, then Tenant shall, within ten (10) days after the imposition of the lien, cause said lien to be removed, at Tenant's sole cost and expense. If at any time Tenant either desires to or is required to make repairs or alterations in accordance with this Lease, Landlord may require Tenant, at Tenant's sole cost and expense, to obtain and provide to Landlord lien waivers and/or a completion bond (or such other applicable bond as determined by Landlord) in an amount equal to one and one-half times the estimated cost of such improvements to insure Landlord against liability arising out of such repairs or alterations, including, without limitation, liability for mechanics' and materialmen's liens, and to insure completion of the work. 20. DAMAGE OR DESTRUCTION: 20.1 Lease Termination. (A) If the Building or the Premises is damaged or destroyed to the extent of fifty percent (50%) or more of its reasonable market value prior to the time of said damage or destruction, Landlord may terminate this Lease as of the date of the occurrence. (B) If the Building or the Premises is damaged or destroyed to the extent of less than fifty percent (50%) of its reasonable market value prior to the time of said damage or destruction, but the Building cannot, in the sole judgment of Landlord, be operated economically as an integral unit, then Landlord may terminate this Lease as of the date of the occurrence. (C) If the Premises is damaged or destroyed within the last thirty-six (36) months of the Term of this Lease or any extension thereof, to the extent that Tenant cannot carry on Tenant's business and Landlord fails to restore the Premises within ninety (90) days of such damage or destruction, then Tenant may terminate this Lease as of the date of the occurrence. 20.2 Repair or Restoration. If Landlord elects to repair or restore the Premises to the same condition as existed before such damage or destruction, Landlord shall proceed with reasonable dispatch to perform the necessary work. However, notwithstanding anything in this Lease to the contrary, if the cost of repair or restoration exceeds any insurance proceeds available for such work, Landlord may terminate this Lease unless Tenant shall, after notice of the amount of deficiency, pay to Landlord that deficiency. Upon Landlord's election to repair or restore the Premises, the Base Rent and the Additional Rent shall be abated until such work is completed, but Landlord shall not be liable to Tenant for any delay which arises by reason of labor strikes, adjustments of insurance or any other cause beyond Landlord's control, and in no event shall Landlord by liable for any loss of profits or income. If fire or other casualty causing damage to the Premises or other parts of the Building shall have been caused by the negligence or misconduct of the Tenant, its agents, representatives, employees, or of any other person entering the Premises under express or implied invitation of Tenant, such damage, at the option of Landlord, may be repaired by Landlord at the expense of Tenant despite contrary provisions appearing in this Lease and in such event there shall be no abatement of rent as set forth in the preceding sentence. 21. CONDEMNATION: If the Premises, in whole or in part, shall be taken by right of eminent domain for public purposes or should be sold by Landlord under the threat of the exercise of such power, then this Lease, at the option of Landlord, shall terminate and the Base Rent and any Additional Rent shall be properly apportioned to the date of such taking, and the Landlord shall receive the entire award for the lands and improvements so taken, or the entire amount of any payment made under the threat of the exercise of the power of eminent domain, and Tenant shall have no claim for the value of any portion of its leasehold estate so terminated or otherwise. If less than a substantial portion of the Premises shall be taken, this Lease shall not terminate and Landlord, at its sold expense, shall promptly restore and reconstruct the Premises to the extent necessary for the Premises to be reasonably suitable for the uses for which the Premises are leased, but in no event shall Landlord be required to expend any amount greater than the amount received by Landlord as compensation for the portion of the Premises taken by the condemnor. Tenant's rental obligations during the unexpired portion of this Lease shall be adjusted proportionately to reflect the Rentable Area in the Premises remaining, as of the date on which the condemning authority takes title or possession. 22. FORCE MAJEURE: In the event that either party hereto shall be delayed or hindered in or prevented from the performance of any act required hereunder by reason of strikes, lockouts, inability to procure materials, loss of utility services, restrictive governmental laws or regulations, riots, insurrection, war, acts of God, or other reason of a like nature not the fault of or under the control of the party delayed in performing work or doing acts required under the terms of this Lease, then performance of such act shall be excused for the period of delay and the period for the performance of any such act shall be extended for a period equivalent to the period of such delay. The provisions of this Article 22 shall not operate to excuse Tenant from the prompt payment of Base Rent, any Additional Rent or any other charges under this Lease. 23. SUCCESSION TO LANDLORD'S INTEREST: 23.1 Attornment. Tenant shall attorn and be bound to any of Landlord's successors and assigns under all terms, covenants and conditions of this Lease for the balance of the remaining Term of this Lease. 23.2 Subordination. This Lease shall be subordinate to the lien of any mortgage or security deed or the lien resulting from any other method of financing or refinancing now or hereafter in force against the Property, any portion thereof, or upon any buildings hereafter placed upon the land of which the Premises are a part, and to any and all advances to be made under such mortgages, and all renewals, modifications, extensions, consolidations and replacements thereof. The aforesaid provisions shall be self-operative and no further instrument shall be required to evidence such subordination. Within ten (10) days after written notice to do so, Tenant covenants and agrees to execute and deliver such further instrument(s) subordinating this Lease on the foregoing basis to the lien of any such mortgage(s) as shall be desired by Landlord and any mortgagees or proposed mortgagees, and if Tenant fails to do so, Tenant hereby irrevocably appoints Landlord the attorney-in-fact of Tenant to execute and deliver such instrument(s). 23.3 Estoppel Certificate. Within ten (10) days after request therefor by Landlord or any mortgagee, or in the event that upon any sale, assignment or hypothecation of the Premises and/or the land thereunder by Landlord an estoppel certificate shall be required from Tenant, Tenant agrees to deliver in recordable form a certificate (in form and substance satisfactory to Landlord) to any proposed mortgagee or purchaser, or to Landlord, certifying that, among other things, this Lease is unmodified and in full force and effect (or if modified, the same is in full force and effect as modified, and stating the modifications), that there are no defenses or offsets thereto (or stating those claimed by Tenant), the amount of the Security Deposit, the dates to which Base Rent and Additional Rent under this Lease have been paid, and such other matters and items reasonably required by any proposed mortgagee or purchaser or Landlord. 24. SURRENDER OF PREMISES, HOLDOVER: At the expiration or earlier termination of this Lease, Tenant shall surrender the Premises to Landlord in the same condition as when tendered by Landlord, reasonable wear and tear and insured casualty excepted, and in broom clean condition. Tenant shall promptly repair any damage to the Premises caused by the removal of any furniture, trade fixtures or other personal property placed in the Premises. If Tenant holds over at the end of the term of this Lease without Landlord's written consent, Tenant shall pay Landlord as liquidated damages a sum equal to twice the Base Rent, Additional Rent and other charges to be paid by Tenant to Landlord under this Lease for all the time Tenant shall so retain possession of the Premises; provided that the exercise of Landlord's rights under this clause shall not be interpreted as a grant of permission to Tenant to continue in possession. 25. PARKING: A. The parking areas, or designated portions thereof, (i) shall be available for the use of tenants of the Property and, to the extent designated by Landlord, the employees, agents, customers and invitees of said tenants, and (ii) shall be subject to the rules, regulations, charges, and rates as set forth by the Landlord from time to time. However, Landlord may restrict parking for the Tenant and other tenants of the Property and their employees and agents to certain portions of the parking areas, and may designate other areas to be used at large only by customers and invitees of the Property. Notwithstanding anything contained in this Lease to the contrary, Landlord reserves the right from time to time to make reasonable changes in, additions to and deletions from the parking areas and the purposes to which the same may be devoted, and the use of parking areas shall at all times be subject to rules and regulations as may be promulgated by Landlord provided that Landlord shall not reduce Tenant's parking rights as described above (although it may change the locations thereof). B. Landlord or its agents (if Landlord has delegated such privileges) shall have the right to remove or cause to be removed any vehicles of Tenant, its employees or agents, that are parked in violation of this Lease or the Rules and Regulations, without liability of any kind to Landlord, its agents or employees, and Tenant agrees to hold Landlord harmless from and defend it against any and all claims, losses, or damages asserted or arising with respect to or in connection with the removal of any such vehicles. Tenant shall from time to time upon request of Landlord supply Landlord with a list of license plate numbers of all vehicles operated by its employees and agents who are to have parking privileges hereunder. Landlord may, as a part of the regulations promulgated by Landlord, require that Tenant cause an identification sticker issued by Landlord to be affixed to all vehicles of Tenant and its employees or agents who are authorized to park in the parking areas. 26. HAZARDOUS SUBSTANCES: Tenant, at its sole cost and expense, shall fully, diligently and promptly comply with all present and future laws, ordinances, requirements, orders, directives, rules and regulations of all federal, state or local authorities (collectively, "Applicable Laws") in connection with Tenant's use, operation and maintenance of the Premises, to ensure that the Premises are not contaminated with any substance or material currently identified by any Applicable Laws to be toxic or hazardous, including without limitation, any asbestos, pcb, radioactive substance, methane, volatile hydrocarbons, industrial solvents, or any other material or substance which has in the past or could at any time in the future cause or constitute a health, safety, or environmental hazard to any person or property (collectively, "Hazardous Substance"). Tenant will not cause to occur any discharge, spillage, uncontrolled loss, seepage or filtration of oil or petroleum or chemical liquids or solids, liquid or gaseous products or Hazardous Substance (a "Spill") at, under or within the Premises or otherwise violate any Applicable Laws. Tenant will not be involved in operations which could lead to the imposition of any liability or lien on any person or any lessor of the Premises under any applicable federal, state or local statute, rule or regulation. If Tenant knows, or has reasonable cause to believe, that a Hazardous Substance, or a condition involving or resulting from same, has come to be located in, on, under or about the Premises, Tenant shall immediately give written notice of such fact to Landlord. Tenant shall also immediately give Landlord a copy of any statement, report, notice, registration, application, permit, business plan, license, claim, action or proceeding given to, or received from, any governmental authority or private party, or persons entering or occupying the Premises, concerning the presence, spill, release, discharge of, or exposure to, any Hazardous Substance or contamination in, on, or about the Premises. Tenant shall pay all costs, expenses, liabilities, losses, damages, fines, penalties, claims and demands that may in any manner arise from or be imposed because of the failure of Tenant to comply with this Section 27 ("Costs") and Tenant shall indemnify, protect, hold harmless and defend Landlord from and against the Costs. 27. MISCELLANEOUS: 27.1 Partial Invalidity. If any term, covenant or condition of this Lease or the application thereof to any person or circumstance shall, to any extent, be invalid or unenforceable, the remainder of this Lease, or the application of such term, covenant or condition to persons or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby, and all other terms, covenants or conditions of this Lease shall be valid and be enforced to the fullest extent permitted by law. 27.2 Successors and Assigns. Except as otherwise provided herein, this Lease shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, personal representatives, executors, successors and assigns. 27.3 Waiver. The waiver by Landlord of any breach of any term, covenant or condition contained in this Lease shall not be deemed to be a waiver of such term, covenant or condition for any subsequent breach of the same or any other term, covenant or condition contained in this Lease. The subsequent acceptance of rent by Landlord under this Lease shall not be deemed to be a waiver of any preceding breach by Tenant by any term, covenant or condition of this Lease, other than the failure of Tenant to pay the particular rental so accepted, regardless of Landlord's knowledge of such preceding breach at the time of acceptance of such rent. No covenant, term or condition of this Lease shall be deemed to have been waived by Landlord, unless such waiver be in writing by landlord. 27.4 Accord and Satisfaction. No payment by Tenant or receipt by Landlord of a lesser amount than the monthly rent herein stipulated shall be deemed to be other than on account of the earliest stipulated rent, nor shall any endorsement of statement on any check or any letter accompanying any check or payment as rent be deemed an accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlord's right to recover the balance of such rent or pursue any other remedy provided in this Lease or otherwise. 27.5 Attorney's Fees. In the event any action is commenced for any breach of any covenant, condition or agreement herein contained, the prevailing party in such action shall be entitled to receive all costs incurred in such action, including, without limitation, all reasonable attorneys' fees. 27.6 Time is of the Essence. Time is of the essence of this Lease. 27.7 Broker's Commission. Tenant warrants that it has had no dealing with any broker or agent in connection with this Lease except as designated in the Basic Lease Information, and covenants to pay, hold harmless and indemnify Landlord from and against any and all cost, expense or liability for any compensation, commissions and charges claimed by any other broker or agent with respect to this Lease or the negotiation thereof. In no event shall Landlord by liable to any such broker for the payment of any fees or commissions. 27.8 No Light, Air or View Easement. Any diminution or shutting off of light, air or view by any structure which may be erected on lands adjacent to the Building shall in no way affect this Lease or impose any liability on Landlord. 27.9 Entire Agreement. This Lease and the Exhibits and Riders, if any, attached hereto and forming a part hereof, se forth all the covenants, promises, agreements, conditions and understandings between Landlord and Tenant concerning the Premises and there are no covenants, promises, agreements, conditions or understandings, either oral or written, between Landlord and Tenant other than as are set forth in this Lease, the Exhibits and Riders attached hereto. Except as otherwise provided herein, no subsequent alteration, amendment, change or addition to this Lease shall be binding upon Landlord or Tenant unless reduced to writing and signed by Landlord and Tenant. 27.10 Applicable Law. The validity, performance and enforcement of this Lease shall be governed by the laws of the state in which the Property is located. 27.11 Notices. Whenever provision is made for any demand, notice or declaration of any kind under this Lease, or where it is deemed desirable or necessary by either party to give or serve any such notice, demand or declaration to the other party, it shall be in writing and sent by certified mail, return receipt requested, postage prepaid, to the address set forth in the Basic Lease Information, or to such other address as may be given by a party to the other by proper notice hereunder. The date on which the certified mail is deposited with the United States Postal Service shall be the date on which any proper notice hereunder shall be deemed given. 27.12 Quiet Enjoyment. Landlord warrants that Tenant, on payment of the sums due hereunder and performance of all of the covenants, conditions and provisions on Tenant's part to be observed and performed hereunder, shall peacefully and quietly have, hold and enjoy the Premises during the Term of this Lease and any extension or renewal hereof. 27.13 Compliance with Law. Tenant shall comply with all present and future laws, ordinances and regulations applicable to the use of the Premises, and shall promptly comply with all governmental orders and directives for the correction, prevention and abatement of nuisance in, upon or connected with the Premises, all at Tenant's sole cost and expense. 27.14 Superior Law. If any provision of this Lease is ever in conflict with any applicable law or regulation, either now in effect or hereafter adopted, said law or regulation shall control. 27.15 Guarantor. In the event that there is a guarantor of this Lease, said guarantor shall have the same obligations as Tenant under this Lease and said guarantor shall execute the Lease Guaranty in form and substance satisfactory to Landlord. 27.16 Exhibits/Riders. The Exhibits/Riders listed in the Table of Contents are attached hereto and by this Article made a part hereof for all purposes. 27.17 Execution of Lease. The submission of this Lease for examination does not constitute a reservation of or option for the Premises and this Lease becomes effective as a lease only upon execution and delivery thereof by Landlord and Tenant. If Tenant is a partnership or corporation, Tenant shall furnish Landlord with such evidence as Landlord reasonably requires to evidence the binding effect on Tenant of the execution and delivery of this Lease. 27.18 Confidentiality. As a material part of the consideration for the agreements on the part of the Landlord contained herein, Tenant agrees for itself and its employees, agents, legal representatives, successors and assigns, that the terms and conditions of Tenant's leasing of space in the Property shall be maintained in confidence and not disclosed to any third persons (other than Tenant's accountants, attorneys and others within Tenant's organization with a similar need to know) including other current (or prospective) tenants of the Property and real estate agents. IN WITNESS WHEREOF, the parties have subscribed their respective signatures in execution hereof, on the day and year written. LANDLORD: TENANT: Hallwood Real Estate U.S. Franchise Systems, Inc. Investors Fund XV, a Delaware General Partnership * By: /s/ Richard D. Stilovich By: /s/ Michael A. Leven Name: Richard D. Stilovich Name: Michael A. Leven Title: Regional Director Title: Chief Executive Officer Date: 9/26/95 Date: 9/27/95 Signed in the presence of: Signed in the presence of: Witness: Witness: /s/ Robin [UNREADABLE] Title: Title: A.A. *BY: Hallwood Management Company, as Agent Exhibit "A" The Premises (Floor Plan) [Diagram of Floor Plan] Exhibit "C" Leasehold Improvements Agreement This Leasehold Improvements Agreement (this "Agreement)) is made a part of that certain Office Lease Agreement (the "Lease), executed concurrently herewith by and between Hallwood Real Estate Investors Fund XV ("Landlord") and U.S. Franchise Systems, Inc. ("Tenant"), and constitutes the entire agreement of Landlord and Tenant with respect to the construction and completion of the Premises described in the Lease. In the event of a conflict between the provisions of this Agreement and other provisions of the Lease, the provisions of this Agreement will control. Terms defined in the Lease, when used herein, shall have the same meanings as are ascribed to them in the Lease. 1. Premises Condition. Since the Premises have been occupied by a previous tenant, Tenant hereby agrees to accept the Premises in its "as is" condition, subject to the installation of any improvements identified below. 2. Space Plan. Tenant shall deliver to Landlord a space plan showing the configuration of the leasehold improvements that Tenant desires to have constructed in the Premises. The space plan and any revisions thereto shall be prepared at Tenant's sole cost and expense and shall be subject to the written approval of Landlord, which approval may be granted or withheld at the sole discretion of Landlord. If Tenant employs a consultant, such as an architect, engineer, interior designer or decorator, whether in connection with Tenant's space plan or the working drawings referred to below, Tenant shall be responsible for coordinating the consultant's work with Landlord and shall also be responsible for any delays resulting from any lack of coordination or the consultant's lack of responsiveness, and any other delays caused by the consultant. Landlord reserves the right to approve any such consultant; such approval may be conditioned upon the payment of the reasonable costs associated with updating the Building's master plans to incorporate Tenant's working drawings. 3. Working Drawings. After Tenant's proposed space plan and any revisions thereto have been approved by Landlord, Tenant shall deliver to Landlord proposed working drawings for the fixed leasehold improvements to be constructed in the Premises based upon the space plan approved by Landlord. The working drawings shall consist of any and all architectural, electrical, mechanical, plumbing, structural and communication/security drawings and written specifications necessary to permit Landlord to construct the fixed leasehold improvements. The working drawings and any revisions thereto shall be prepared at Tenant's sole cost and expense, in accordance with the Landlord approved space plans, and shall be subject to the written approval of Landlord. Landlord's review of the proposed space plan or such working drawings shall not constitute any representation, warranty or agreement of Landlord as to the adequacy, efficiency, performance or desirability of the space plan, working drawings or contemplated leasehold improvements, or the compliance of the working drawings or the leasehold improvements with the space plan or any applicable laws, ordinances, codes, rules or regulations. The working drawings and revisions thereto approved by Landlord are hereinafter referred to as the "Approved Working Drawings". 4. Schedule and Delays. Tenant acknowledges that in order for Tenant's leasehold improvements to be substantially completed and for the Premises to be ready for occupancy by Tenant on or before the Lease Commencement Date stated in the Lease, the space plan desired by Tenant must be submitted to Landlord on or before N/A, 199 , and the working drawings for the leasehold improvements contemplated by the space plan must be submitted to Landlord on or before N/A, 199 (jointly the "Submission Dates"). Landlord agrees to notify Tenant within ten (10) business days after its receipt of any material delivered by Tenant pursuant to this Agreement whether the material is approved by Landlord. Accordingly, Tenant acknowledges and agrees that in order for Tenant's leasehold improvements to be substantially completed and for the Premises to be ready for occupancy on or before the Lease Commencement Date, Tenant's proposed space plan and proposed working drawings must be submitted to Landlord on or before the applicable Submission Dates. Tenant further acknowledges that the Lease Commencement Date shall not be extended on account of a delay in the substantial completion of the leasehold improvements if the delay is due to any of the following (referred to herein and in the Lease, individually or collectively as "Tenant's Delay"): (a) Tenant's failure to submit its proposed space plan and proposed working drawings on or before the applicable Submission Dates; (b) Tenant's failure to submit a space plan and/or working drawings that are acceptable to Landlord; (c) Any delay caused by any of Tenant's consultants; (d) Any delay due to revisions of Tenant's space plan or proposed working drawings and the Approved Working Drawings and any delay due to a change reflected in a Change Order; or (e) Any other delay that is the responsibility of Tenant under this Agreement or otherwise. If Landlord objects to any aspect of Tenant's proposed space plan or working drawings or any revision thereto, Landlord shall notify Tenant in writing within ten (10) business days after Landlord's receipt of the material submitted by Tenant and shall specify the aspects of the material to which Landlord objects. If Landlord fails to notify Tenant of Landlord's approval of such material prior to the expiration of such ten (10) business-day period, it shall be deemed that Landlord has disapproved of the material in question. 5. Cost Estimate. Within fifteen (15) days after Landlord approves Tenant's proposed working drawings, Landlord shall advise Tenant of Landlord's estimate of the total cost that Tenant must pay in order for Landlord to construct Tenant's leasehold improvements in accordance with the Approved Working Drawings. If the cost proposed by Landlord is satisfactory to Tenant, Tenant and Landlord shall execute a written confirmation to that effect. The confirmation shall constitute an authorization by Tenant for Landlord to proceed with construction of the leasehold improvements contemplated by the Approved Working Drawings. All of the work required by the Approved Working Drawings (the "Work") will be performed by one or more contractors approved and engaged by Landlord. If Tenant is not satisfied with the proposed cost, Tenant shall so notify Landlord in writing and shall either revise the scope of the Work by modifying Tenant's space plan and Approved Working Drawings, or shall ask Landlord to solicit bids from three (3) additional contractors who are approved by Landlord for the performance of construction work in the Building. If one of the three bids is lower than the cost proposed initially by Landlord, Landlord and Tenant shall execute a written confirmation approving the reduced cost and Landlord shall proceed to construct the leasehold improvements for the agreed cost. The cost of the Work agreed upon by Landlord and Tenant pursuant to this Paragraph 5, as affected by any Change Order accepted by Tenant as provided below, is hereinafter referred to as the "Agreed Cost". Any delay in the substantial completion of the Work that is due to change in the scope of the Work or the completion of the bidding process to arrive at an Agreed Cost shall be the responsibility of Tenant. 6. Change Orders. In the event Tenant desires any changes to the Approved Working Drawings, Tenant shall submit the proposed changes to Landlord for Landlord's approval. If any proposed change is acceptable to Landlord, Landlord shall prepare and submit to Tenant a change order (a "Change Order") setting forth, among other things, any increase or decrease in the Agreed Cost as a result of the change sought by Tenant, specifically including, without limitation, any change in the cost of the Work, changes in the contractor's fees, architectural and engineering fees, Landlord's construction coordination fee, and any increased cost due to delays in construction of any aspect of the Work on account of the change sought by tenant. The Change Order shall also set forth the anticipated delay, if any, in the substantial completion of the leasehold improvements on account of the change sought by tenant. If Tenant fails to execute and approve the Change Order within five (5) business days following delivery of the Change Order by Landlord to Tenant, Tenant shall be deemed to have withdrawn the proposed change and it shall not be implemented by Landlord. If Tenant executes the Change Order within the five (5) business-day period, Landlord shall implement the change and the Agreed Cost shall be adjusted as set forth in the Change Order. 7. Tenant Payments; Construction Coordination Fee. Tenant shall pay the Agreed Cost for construction of the leasehold improvements in monthly installments as the Work progresses, each such installment to be paid by Tenant within three (3) days after Tenant's receipt from Landlord of an invoice for the amount due on account of construction during the preceding month, together with a copy of the contractor's bill to Landlord substantiating the amount due. However, to the extent provided in Paragraph 10 below, Tenant shall have the right to use the construction Allowance (hereinafter defined) as a credit against the installments of the Agreed Cost payable by Tenant. In the event the estimate of the Agreed Cost exceeds the Allowance or Tenant requests a Change Order which results in an increase in the Agreed Cost in excess of the Allowance, Tenant shall deposit such additional funds with Landlord and Landlord shall advance such funds as the Work progresses prior to the Landlord advancing any of the Allowance. In addition, Tenant shall pay to Landlord in monthly installments as the Work progresses, a construction coordination fee equal to ten percent (10%) of the Agreed Cost. 8. Occupancy of the Premises. The Term of the Lease and Tenant's rental obligations under the Lease will commence upon the Lease Commencement Date set forth in the Lease except as otherwise expressly provided herein or in the Lease. Subject to any delays that are the responsibility of Tenant, Landlord shall cause all of the Work to be completed on or before the Lease Commencement Date set forth in the Lease, subject to Tenant's Delays, delays caused by force majeure and subject to the provisions of Paragraphs 7 and 8 of the Lease. Tenant agrees that upon substantial completion of the Work, Tenant will occupy and accept the Premises, subject to any incomplete or defective work described on a punch list prepared by Landlord and approved by Tenant prior to occupancy. Only one punch list will be prepared prior to Tenant's occupancy of the Premises. Tenant shall not enter into possession of the Premises prior to substantial completion without Landlord's written consent, which consent may be granted or withheld at the sole discretion of Landlord. In the event Tenant takes possession of all or any portion of the Premises with Landlord's consent prior to substantial completion of the Premises, without limitation of Landlord's other rights and remedies, Tenant agrees to indemnify Landlord and hold Landlord harmless from and against any and all loss, cost, expense, damage, claim, action and liability that Landlord may ever suffer or incur or have asserted against it on account of any loss of or damage to property (whether owned by Landlord, Tenant or any third party) or injury or death of any person that occurs prior to the date of substantial completion, whether due to the negligence of Landlord or Tenant, or their respective employees, agents or contractors. 9. Defaults. The Agreed Cost and any other sums payable by Tenant to Landlord under this Agreement shall constitute Additional Rent under the Lease. In the event Tenant shall fail to pay any amount of such Additional Rent when due, and any such failure continues for a period of five (5) days after written notice of such failure is issued by Landlord to Tenant, then such failure shall constitute an event of default under the Lease and hereunder and Landlord shall have the right to exercise all of its rights and remedies under the Lease and under applicable law. In no event shall any termination of the Lease by Landlord relieve Tenant of Tenant's obligation to pay to Landlord the Agreed Cost and any other sums payable by Tenant hereunder. 10. Landlord agrees, at its own expense, to provide the following improvements to the Premises: A. Recarpet the Premises with Tenant's choice of color from Landlord's building standard selection. B. Repaint all prior painted walls with color of Tenant's choice from Landlord's standard selection. C. Install new entrance door. D. Rekey the Premises and provide Tenant door sign. E. Install all new ceiling tiles to the Premises. 11. Landlord hereby grants Tenant the right to relocate into larger Premises within Corporate Square, subject to availability, during the entire lease term. Terms and conditions on the larger Premises shall be negotiated at that time. 12. Tenant shall provide a Letter of Credit for a period of three (3) years after the Lease Commencement Date in the amount of $50,000 as additional security hereunder. Such Letter of Credit shall include terms mutually agreeable to Landlord and Tenant but shall provide that Landlord may draw upon such Letter in the event of a default (after full opportunity to cure) hereunder or if such Letter of Credit is not renewed in year two (2) and year three (3) by the date which is sixty (60) days prior to the first and second anniversary of this Lease Commencement Date, respectively. Tenant shall provide proof of renewal to Landlord. EXHIBIT "D" Rules and Regulations 1. No Tenant shall allow the Premises to be used for lodging, nor shall cooking be done or permitted by any Tenant on the Premises; except, use by the Tenant of insurance underwriters' laboratory approved equipment for brewing coffee, tea, hot chocolate and similar beverages or microwave ovens or similar appliances installed for occasional use by Tenant's employees or invitees shall be permitted, provided that such use is in accordance with all applicable federal, state and city laws, codes, ordinances, rules and regulations. 2. Neither Tenant, its agents nor its employees shall solicit business in the parking area or other common areas, nor shall Tenant, its agents or its employees, distribute or display any handbills or other advertising matter in or on automobiles or other vehicles parked in the parking area, or in other common areas. If any such materials are distributed, Tenant shall pay Landlord for the cost of cleanup. 3. No aerial antenna, satellite dish or similar device shall be erected on the roof or exterior walls of the Building or on the grounds, without the prior written consent of Landlord. Any such device so installed without such consent shall be subject to removal without notice at any time, without liability to the Landlord therefor; costs incurred by Landlord for such removal shall be paid by Tenant. 4. No loudspeakers, televisions, phonographs, radios or other devices shall be used in a manner so as to be heard or seen outside of the Premises without the prior written consent of Landlord. 5. No Tenant shall use or keep or permit to be used or kept any foul or obnoxious gas or substance in the Premises, or permit or suffer the Premises to be occupied or used in a manner offensive of objectionable to Landlord or to other occupants of the Building by reason of noise, odors or vibrations, or interfere in any way with other Tenants or those having business therein. 6. The plumbing facilities, including fixtures and appliances, shall not be used for any purpose other than that for which they are constructed, and no foreign substance of any kind shall be deposited therein. The expense of any breakage, stoppage, or damage resulting from a violation of this provision shall be borne by the Tenant whose employees, agents or invitees shall have caused same. Tenant shall be responsible for all private sanitary sewer lines up to the point they connect with a common sanitary sewer line, whether or not such lines or point are located within the Premises. 7. Tenant's access to the roof is limited to maintenance of equipment installed with Landlord's approval and inspections for damage to that equipment. Neither Tenant nor its agents or employees shall enter upon the roof at any time without the express prior approval of Landlord. 8. Tenant and its employees shall park their motor vehicles only in those parking areas designated for that purpose by Landlord, and Tenant shall provide Landlord with a list of its employees' automobile or motor vehicle license tag numbers. If Tenant and/or its employees are in violation of this rule, Landlord shall have the right to tow said automobile or vehicle at Tenant's expense. 9. No Tenant shall use or keep in the Premises or the Building any kerosene, gasoline or inflammable or combustible fluid or material other than limited quantities thereof reasonably necessary for the operation or maintenance of office equipment, without Landlord's prior written approval. 10. Landlord shall have the right, exercisable without notice and without liability to any Tenant, to change the name and street address of the Building. 11. No curtains, draperies, blinds, shutters, shades, screens or other coverings, hangings or decorations shall be attached to, hung or placed in, or used in connection with any window of the Building without the prior written consent of Landlord, and such items shall be installed as instructed by landlord. 12. Should a Tenant require telegraphic, telephonic, annunciator or any other communication service, the Landlord will direct the electricians and installers where and how the wires are to be introduced and placed, and none shall be introduced or placed except as the Landlord shall direct. 13. The Landlord has the right to evacuate the Building in event of emergency or catastrophe. 14. Tenant agrees not to allow or keep any animals or pets of any kind on the Premises, except those guide dogs which are for the direct purposes of aiding and assisting the visually impaired. 15. The requirements of the Tenants will be attended to only upon application by telephone or in person at the office of Landlord. Employees of Landlord shall not perform any work or do anything outside of their regular duties unless under special instructions from Landlord. 16. The sidewalks, halls, passages, exits, entrances, elevators and stairways of the Building shall not be obstructed by any of the Tenants or used by them for any purpose other than for ingress to and egress from their respective Premises. The halls, passages, exits, entrances, elevators and stairways are not for the general public, and Landlord shall in all cases retain the right to control and prevent access thereto of all persons whose presence in the judgment of Landlord would be prejudicial to the safety, character, reputation and interest of the Building and its Tenants, provided that nothing herein contained shall be construed to prevent such access to persons with whom any tenant normally deals in the ordinary course of its business, unless such persons are engaged in illegal activities. 17. No sign, placard, picture, name, advertisement or notice, visible from the exterior of any Tenant's business shall be inscribed, painted, affixed or otherwise displayed by any Tenant on any part of the Building without the prior written consent of Landlord. Landlord will adopt and furnish to Tenant general guidelines relating to signs inside the Building on the office floors. Tenant agrees to conform to such guidelines, but may request approval of Landlord for modifications, which approval will not be unreasonably withheld. Material visible from outside the Building will not be permitted. 18. Tenant shall not allow a fire or bankruptcy sale or any auction to be held on the Premises or allow the Premises to be used for the storage of merchandise held for sale to the general public. 19. No Tenant shall employ any person or persons other than the janitor of Landlord for the purpose of cleaning the Premises, unless otherwise agreed to by Landlord in writing. Except with the written consent of Landlord, no person or persons other than those approved by Landlord shall be permitted to enter the Building for the purpose of cleaning the same. No Tenant shall cause any unnecessary labor by reason of such Tenant's carelessness or indifference in the preservation of good order and cleanliness. Janitor services will not be furnished on nights when rooms are occupied after 9:30 p.m. unless, by agreement in writing, service is extended to a later hour for specifically designated rooms. 20. Landlord will furnish each Tenant free of charge with two keys to each door lock in the Premises. Landlord may make a reasonable charge for any additional keys. No Tenant shall have any keys made. No Tenant shall alter any lock or install a new or additional lock or any bolt on any door of its Premises without the prior written consent of Landlord. Tenant shall in each case furnish Landlord with a key for any such lock. Each Tenant, upon the termination of its tenancy, shall deliver to Landlord all keys to doors in the Building which shall have been furnished to Tenant. 21. No tenant shall use any method of heating or air conditioning other than that supplied by Landlord. 22. Landlord reserves the right to exclude from the Building, between the hours of 6:00 p.m. and 7:00 a.m. and at all hours on Sundays, legal holidays and on Saturdays any person who, in Landlord's sole opinion, has no legitimate business in the Building. Landlord shall in no case be liable for damages for any error with regard to the admission to or exclusion from the Building of any person. In the case of invasion, mob, riot, public excitement or other circumstances rendering such action advisable in Landlord's opinion, Landlord reserves the right to prevent access to the Building during the continuance of the same by such action as Landlord may deem appropriate, including closing doors. 23. The directory of the Building will be provided for the display of the name and location of Tenants. Any additional name which Tenant shall desire to place upon said directory must first by approved by landlord in writing, and, if so approved, a charge will be made therefore. 24. Each Tenant shall see that the doors of its Premises are closed and locked and that all water faucets, water apparatus and utilities are shut off before Tenant or Tenant's employees leave the Premises, so as to prevent waste or damage, and for any default or carelessness in this regard Tenant shall make good all losses or injuries sustained by other tenants or occupants of the building or Landlord. All Tenants shall keep the doors to the Building corridors closed at all times except for ingress and egress. 25. Except with the prior written consent of Landlord, no Tenant will sell, or permit the sale at retail, of newspapers, magazines, periodicals, theatre tickets or any other goods or merchandise to the general public in or on the Premises, nor shall any Tenant carry on, or permit or allow any employee or other person to carry on, the business of stenography, typewriting or any similar business in or from the Premises for the service or accommodation of occupants of any other portion of the Building, nor shall the Premises of any Tenant be used for manufacturing of any kind, or any business or activity other than that specifically provided for in such Tenant's lease. 26. Landlord shall designate the time and how all office equipment, furniture, appliances and other large objects or property ("Equipment") shall be moved in and/or out of the Building. The persons employed to move such Equipment in or out of the Building must be acceptable to Landlord. Landlord shall have the right to prescribe the weight, size and position of all Equipment brought into the Building. Heavy objects shall, if considered necessary by Landlord, stand on wood strips of such thickness as is necessary to properly distribute the weight. Landlord will not be responsible for loss of or damage to any such Equipment from any cause, and all damage done to the Building by moving or maintaining such Equipment shall be repaired at the expense of Tenant. Tenant agrees to coordinate all moving activities of Equipment in and out of the Building with Landlord or Landlord's agent, and to use the services of an insured professional moving company. Tenant acknowledges that any attempts to bring in or take out any Equipment from the Building without prior written approval of Landlord or Landlord's agent will be prevented by the on-site security guard. 27. Hand trucks shall not be used in any space or public halls of the Building, either by any Tenant or others, except those equipped with rubber tires and side guards or such other material-handling equipment as Landlord may approve, and shall not be placed in any elevators servicing the Building other than designated freight elevators. No other vehicles of any kind shall be brought by any Tenant into the Building or kept in or about the Premises. 28. Each Tenant shall store all its trash and garbage within its Premises. No material shall be placed in the trash boxes, receptacles or common areas if such material is of such nature that it may not be disposed of in the ordinary and customary manner of removing and disposing of trash ordinance governing such disposal. All garbage and refuse disposal shall be made only through entry ways and elevators provided for such purposes and at such times as Landlord shall designate. EX-10.13 9 EXHIBIT 10.13 FIRST AMENDMENT STATE OF GEORGIA COUNTY OF DEKALB Amendment, made this 20th Day of May, 1996, by and between HALLWOOD 95, L.P., a Delaware Limited Partnership, hereinafter referred to as "Landlord", and US Franchise Systems, Inc., having an office at 13 Corporate Square, Suite 250, Atlanta, Georgia, hereinafter referred to as "Tenant". WITNESSETH WHEREAS, by lease dated September 25, 1995, Landlord leased to Tenant certain premises, more particularly described as Building 13, Suite 250, Corporate Square, Atlanta, Georgia 30329, and WHEREAS, Landlord and Tenant are desirous of further amending said Lease in the manner set forth below: EXPANSION Tenant agrees to expand its premises into approximately 1,644 rentable square feet as shown on Exhibit A attached hereto. The new total square footage shall be 10,083 rentable square feet which includes, 8,439 rentable square feet of existing space and 1,644 rentable square feet of expansion space. The commencement of said amendment shall be July 1, 1996 and shall continue through September 30, 2000. The rental schedule shall be the following:
TERM CURRENT RENT EXPANSION RENT COMBINED SPACE (8,439 square feet) (1,644 square feet) (10,083 square feet) 07/01/96 - 09/30/96 $9,142.25 per month $1,781.00 per month $10,923.25 per month 10/01/96 - 09/30/97 $9,599.36 per month $1,870.05 per month $11,469.41 per month 10/01/97 - 09/30/98 $10,079.33 per month $1,963.55 per month $12,042.88 per month 10/01/98 - 09/30/99 $10,583.30 per month $2,061.73 per month $12,645.03 per month 10/01/99 - 09/30/2000 $11,112.47 per month $2,164.82 per month $13,277.29 per month
EFFECTIVE DATE This First Amendment to the Lease shall take effect as of July 1, 1996, and shall continue in effect for the duration of the said Amendment, that is to September 30, 2000. GENERAL TERMS All the terms, covenants provisions and agreements of the said Lease dated September 25, 1995, and as amended herein, shall remain in full force and effect. TENANT IMPROVEMENTS Landlord agrees to re-paint and install carpet in expansion space with building standard selections. Landlord also agrees to install ceiling tile, shelving 18" x 15'/7-high (using existing brackets), re-key and provide suite signage for expansion space. BROKERAGE Hallwood Management Company has acted for the Landlord in this transaction, and is to be paid a commission by the Landlord. Hallwood Management Company has acted as agent for the Tenant in this transaction. IN WITNESS WHEREOF, each party has caused this Amendment to Lease to be executed by its duly authorized officer(s). LANDLORD: HALLWOOD 95, L.P., a Delaware General Partnership TENANT: US FRANCHISE SYSTEMS, INC. BY: Hallwood Management Company, as Agent BY: /s/ Michael A. Leven NAME: Richard D. Stilovich NAME: Michael A. Leven TITLE: Regional Director TITLE: President & CEO DATE: 5/24/96 DATE: 5/22/96 [Technical Drawing: floor plan] CORPORATE SQUARE BUILDING 13, SUITE 220 1,644 SQ. FT. TO: ALL CORPORATE SQUARE TENANTS 13/250 FROM: PROPERTY MANAGEMENT SUBJECT: UPDATED PROOF OF INSURANCE / EMERGENCY CONTACT LIST DATE: JANUARY 2, 1996 ============================================================================= Hallwood Management Company is currently updating our Tenant files for 1996. To ensure that all Tenant files are correct and up to date, we are requesting the following: 1. All Corporate Square Tenants are to submit an updated proof of insurance form to the Hallwood Management Office by January 15, 1996. Please refer to your lease for guidance on what information the proof of insurance form should contain. 2. All Corporate Square Tenants are to complete the attached Tenant Contact/Emergency Notification forms. Please include area codes and any pager numbers. We thank you in advance for your cooperation in this matter. If you have any questions, please contact the management Office at (404-321-6644). FAX- 634-3296 File Office Lease TENANT CONTACT AND EMERGENCY NOTIFICATION LISTINGS CORPORATE SQUARE OFFICE PARK Please complete the information requested below, sign and date the form, and return it to the Property Manager at the address listed below. This information is for emergency use only and will not be distributed to anyone other than qualified Hallwood Management Company and emergency personnel. This information is necessary to enable us to contact your designated representative in the event of after hour emergencies. The day time Tenant Contact Information will also help us to contact the proper personnel should we have any administrative, maintenance, or billing questions. Thank you for your prompt assistance. HALLWOOD MANAGEMENT COMPANY TENANT CONTACT INFORMATION TENANT: U. S. Franchise Systems, Inc. BUILDING AND SUITE: 13 - Suite 250 PHONE NUMBER: 321-4045 OFFICE CONTACT: Shelley Shapiro MAINTENANCE CONTACT: Geno Welch MAILING ADDRESS (IF DIFFERENT THAN ABOVE): __________________________________ _____________________________________________________________________________ BILLING CONTACT NAME: David E. Shaw TITLE: EVP - Admin BILLING ADDRESS (IF DIFFERENT THAN ABOVE): __________________________________ _____________________________________________________________________________ ____________________ PHONE NUMBER: ___________________________________________ EMERGENCY NOTIFICATION LISTING TENANT * Michael A. Leven HOME PHONE 404-355-8920 OWNER(S) * Neal K. Aronson HOME PHONE 404-812-3722 TENANT * David E. Shaw HOME PHONE 770-587-0403 MGR(s) _______________________ HOME PHONE ________________________ OTHER Shelley Shapiro HOME PHONE 770-410-1173 _______________________ HOME PHONE ________________________ Signed and Approved by: /s/ David E. Shaw Date: 1/5/96 *NOTE: ALL CONTACTS LISTED WITH AN ASTERISK WILL AUTOMATICALLY BE LISTED AS PERSONNEL AUTHORIZED FOR GRANTING PERMISSION TO HALLWOOD MANAGEMENT COMPANY PERSONNEL TO UNLOCK TENANT SPACE FOR TENANT EMPLOYEES. IF YOU DO NOT WISH THESE PERSONS TO BE AUTHORIZED FOR UNLOCKING APPROVAL, THEN PLEASE NOTE AT THE BOTTOM OF THE PAGE. IF YOU WISH TO AUTHORIZE ANY OTHER PERSONNEL FOR UNLOCKING APPROVAL, PLEASE ATTACH A LIST OF NAMES AND HOME PHONE NUMBERS. EX-21 10 SUBSIDIARIES OF THE REGISTRANT Exhibit 21.1 List of Direct and Indirect Subsidiaries of U.S. Franchise Systems, Inc. 1. Microtel Inns and Suites Franchising, Inc., a Georgia corporation 2. Hawthorn Suites Franchising, Inc., a Georgia corporation 3. US Funding Corp., a Georgia corporation 4. Microtel International, Inc., a Georgia corporation and a wholly owned subsidiary of Microtel Inns and Suites Franchising, Inc. EX-23.3 11 CONSENTS OF EXPERTS AND COUNSEL Exhibit 23.3 Consent of Director U.S. Franchise Systems, Inc. I hereby consent to be named in the Registration Statement on Form S-1 of U.S. Franchise Systems, Inc. relating to the proposed initial public offering of shares of its Class A Common Stock, including in any supplement to any prospectus included in such Registration Statement, any amendment to such Registration Statement or any subsequent Registration Statement filed pursuant to Rule 462(b) under the Securities Act of 1933, as amended. By: /s/ Dean S. Adler Dean S. Adler Atlanta, Georgia August 31, 1996 EX-23.4 12 CONSENTS OF EXPERTS AND COUNSEL Exhibit 23.4 Consent of Director U.S. Franchise Systems, Inc. I hereby consent to be named in the Registration Statement on Form S-1 of U.S. Franchise Systems, Inc. relating to the proposed initial public offering of shares of its Class A Common Stock, including in any supplement to any prospectus included in such Registration Statement, any amendment to such Registration Statement or any subsequent Registration Statement filed pursuant to Rule 462(b) under the Securities Act of 1933, as amended. By: /s/ Jeffrey A. Sonnenfeld Jeffrey A. Sonnenfeld Atlanta, Georgia August 31, 1996 EX-27.1 13 FINANCIAL DATA SCHEDULE WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
5 This schedule contains summary financial information extracted from the consolidated statements of financial position of U.S. Franchise Systems, Inc. and subsidiaries as of June 30, 1996 and December 31, 1995 and the related consolidated statements of operations for the six months ended June 30, 1996 and the period from August 28, 1995 (inception) to December 31, 1995. 0001020350 4-MOS 6-MOS DEC-31-1995 DEC-31-1995 APR-28-1995 JAN-01-1996 DEC-31-1995 JUN-30-1996 13,893,000 12,732,000 0 0 0 122,000 0 0 0 0 14,379,000 13,290,000 137,000 408,000 3,000 19,000 18,072,000 19,027,000 1,114,000 5,261,000 731,000 731,000 16,759,000 17,597,000 0 0 111,000 111,000 (643,000) (4,673,000) 18,072,000 19,027,000 0 0 0 395,000 0 0 1,327,000 3,849,000 0 0 0 0 36,000 72,000 (1,168,000) (3,195,000) 0 0 (1,168,000) (3,195,000) 0 0 0 0 0 0 (1,645,000) (4,033,000) $ 1.48 $ 3.63 $ 1.48 $ 3.63 Common stock and other stockholder's equity include common stock and additional paid-in-capital classified as redeemable common stock in the Companies financial statements. The net loss and related per share amounts are based on the losses applicable to common shareholders which represents the net loss adjusted for accrued dividends on the redeemable preferred stock.
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