-----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, C2SC61gKeyIoNVTddbsS7bPJ+Vhd7/0+q3vzRey0uPAbVDtNAQhbIddPtDTFVVY4 BetwP177H7G/OorkUyoaLQ== 0000950144-97-005986.txt : 19970520 0000950144-97-005986.hdr.sgml : 19970520 ACCESSION NUMBER: 0000950144-97-005986 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970515 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: US FRANCHISE SYSTEMS INC CENTRAL INDEX KEY: 0001020350 STANDARD INDUSTRIAL CLASSIFICATION: HOTELS & MOTELS [7011] IRS NUMBER: 582190911 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-28908 FILM NUMBER: 97608372 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 10-Q 1 U.S. FRANCHISE SYSTEMS, INC. 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (MARK ONE) X QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________TO __________ COMMISSION FILE NUMBER 0-28908 U.S. FRANCHISE SYSTEMS, INC. (Exact Name of Registrant as Specified in its Charter) DELAWARE 58-2190911 (State or other jurisdiction of (I.R.S Employer Identification No.) Incorporation or Organization) 13 CORPORATE SQUARE, SUITE 250 ATLANTA, GEORGIA 30329 (Address of Principal Executive Offices) (Zip Code) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (404) 321-4045 Indicate by check mark whether the registrant: (1) has filed all reports required by Sections 12, 13, or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No There were 9,872,476 shares of the registrant's Class A Common Stock and 2,707,919 shares of the registrant's Class B Common Stock outstanding as of May 6, 1997. 1 2 U.S. FRANCHISE SYSTEMS, INC. INDEX
PAGE ---- PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Consolidated Statements of Financial Position at December 31, 1996 and March 31, 1997 (Unaudited) 3 Consolidated Statements of Operations for the quarters ended March 31, 1996 and March 31, 1997 (Unaudited) 4 Consolidated Statement of Cash Flows for the quarters ended March 31, 1996 and March 31, 1997 (Unaudited) 5 Notes to Consolidated Financial Statements (Unaudited) 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 7 PART II.OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS 12 ITEM 2. CHANGES IN SECURITIES 12 ITEM 3. DEFAULTS UPON SENIOR SECURITIES 12 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 12 ITEM 5. OTHER INFORMATION ITEM 6. EXHIBITS, FINANCIAL STATEMENT AND REPORTS ON FORM 8-K 13 SIGNATURES 13 EXHIBITS 15
2 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS U.S. FRANCHISE SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (UNAUDITED) DECEMBER 31, 1996 MARCH 31, 1997 ----------------- -------------- ASSETS CURRENT ASSETS: Cash and temporary cash investments $31,188,000 $ 28,467,000 Accounts receivable 114,000 133,000 Deposits 93,000 93,000 Prepaid expenses 494,000 535,000 Promissory notes receivable 784,000 548,000 Deferred commissions 1,261,000 1,657,000 ----------- ------------ Total current assets 33,934,000 31,433,000 PROMISSORY NOTES RECEIVABLE 390,000 597,000 EQUIPMENT - Net 292,000 315,000 FRANCHISE RIGHTS 3,264,000 3,223,000 DEFERRED COMMISSIONS 1,492,000 1,516,000 OTHER ASSETS 733,000 742,000 ----------- ------------ $40,105,000 $ 37,826,000 =========== ============ LIABILITIES AND STOCKHOLDERS' DEFICIT CURRENT LIABILITIES: Accounts payable $ 679,000 $ 304,000 Commissions payable 837,000 444,000 Deferred application fees 2,916,000 3,181,000 Accrued expenses 1,110,000 1,482,000 Due to Hudson Hotels Corporation 277,000 277,000 ----------- ----------- Total current liabilities 5,819,000 5,688,000 DUE TO HUDSON HOTELS CORPORATION 454,000 454,000 DEFERRED APPLICATION FEES 2,749,000 2,812,000 SUBORDINATED DEBENTURES - 18,708,000 ----------- ----------- Total liabilities 9,022,000 27,662,000 REDEEMABLE STOCK: Preferred shares, par value $0.01 per share; authorized 525,000 shares; issued and outstanding 163,500 shares; cumulative exchangeable (entitled in liquidation to $18,477,000 at December 31, 1996) 18,477,000 Common shares, par value $0.01 per share; issued and outstanding 3,186,280 Class A shares entitled in redemption (under certain conditions) to $330,000 at December 31, 1996 and March 31, 1997. 330,000 330,000 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY : Common shares, par value $0.01 per share; authorized 30,000,000 shares of Class A Common Stock and 5,000,000 shares of Class B Common Stock; issued and outstanding 6,686,196 Class A shares and 2,707,919 Class B shares at December 31,1996 and March 31, 1997 96,000 96,000 Capital in excess of par 20,547,000 20,620,000 Accumulated deficit (8,367,000) (10,882,000) ----------- ----------- Total stockholders' equity 12,276,000 9,834,000 ----------- ----------- $40,105,000 $37,826,000 =========== =========== See notes to consolidated financial statements.
3 4 U.S. FRANCHISE SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
QUARTER ENDED QUARTER ENDED MARCH 31, 1996 MARCH 31, 1997 ---------------- ---------------- REVENUES: Marketing and reservation fees $ 31,000 $ 376,000 Franchise Application and Royalty fees - 136,000 Other - 33,000 --------------- ---------------- 31,000 545,000 =============== ================ EXPENSES: Marketing and reservations $ 114,000 $ 382,000 Other franchise sales and advertising 464,000 846,000 Corporate salaries, wages, and benefits 543,000 884,000 Other general and administrative 316,000 719,000 Depreciation and amortization 131,000 132,000 --------------- ---------------- 1,568,000 2,963,000 --------------- ---------------- LOSS FROM OPERATIONS (1,537,000) (2,418,000) OTHER INCOME(EXPENSE): Interest income (175,000) (383,000) Interest expense 36,000 480,000 --------------- ---------------- NET LOSS $ (1,398,000) $ (2,515,000) =============== ================ LOSS APPLICABLE TO COMMON STOCKHOLDERS $ (1,817,000) $ (2,515,000) =============== ================ WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 10,755,409 12,580,395 =============== ================ NET LOSS APPLICABLE TO COMMON STOCKHOLDERS PER SHARE $ (0.17) $ (0.20) =============== ================ See notes to consolidated financial statements.
4 5 U.S. FRANCHISE SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
QUARTER ENDED QUARTER ENDED MARCH 31, 1996 MARCH 31, 1997 -------------- -------------- OPERATING ACTIVITIES: Net loss $(1,398,000) $(2,515,000) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 131,000 132,000 Deferred Compensation Amortization 73,000 Increase in deposits and accounts receivable (17,000) (19,000) Increase in prepaid expenses (78,000) (99,000) (Decrease)/ increase in promissory notes receivable (277,000) 29,000 Increase in deferred commissions (562,000) (420,000) Increase in other assets (164,000) (25,000) Decrease in accounts payable (76,000) (375,000) Increase in accrued expenses 28,000 372,000 Increase/(decrease) in commissions payable 400,000 (393,000) Increase in deferred application fees 1,348,000 328,000 Increase in subordinated debentures paid in kind - 231,000 ----------- ----------- Net cash used in operating activities (665,000) (2,681,000) INVESTING ACTIVITIES: Acquisition of equipment (28,000) (40,000) Acquisition of franchise rights (9,000) - ----------- ----------- Net cash used in investing activities (37,000) (40,000) NET DECREASE IN CASH AND TEMPORARY CASH (702,000) (2,721,000) INVESTMENTS ----------- ----------- CASH AND TEMPORARY CASH INVESTMENTS: Beginning of period 13,893,000 31,188,000 ----------- ----------- End of period $13,191,000 $28,467,000 =========== =========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Noncash activities: Undeclared dividends accrued on redeemable preferred stock $ 419,000 $ - =========== =========== Exchange of redeemable preferred stock for subordinated debentures $ - $18,477,000 =========== =========== Portion of purchase price due to Hudson Hotels Corporation in future years, discounted at 10% $ - $ 454,000 =========== =========== See notes to consolidated financial statements.
5 6 U.S. FRANCHISE SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION The accompanying unaudited financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission for reporting on Form 10-Q. Accordingly, certain information and footnotes required by generally accepted accounting principles for complete financial statements have been omitted. In the opinion of management, all adjustments, consisting of normal recurring adjustments, which are necessary for a fair presentation of financial position and results of operations have been made. These interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto, presented in the Company's Annual Report on Form 10-K for the year ended December 31, 1996, filed with the Securities and Exchange Commission. The results of operations for the three months ended March 31, 1997 are not necessarily indicative of results that may be expected for the full year. 2. EARNINGS PER SHARE Earnings per share for the quarters ended March 31, 1996 and 1997 have been calculated by dividing the loss applicable to common shareholders by the weighted average shares outstanding. Weighted averaged shares include redeemable common shares outstanding. Loss applicable to common stockholders for the quarter ended March 31, 1996 represents net loss adjusted for accrued dividends on the redeemable preferred stock. 3. SUBORDINATED DEBENTURES On January 1, 1997, the Company exercised its option to exchange the Redeemable Preferred Stock at the Liquidation Value of $18,477,000 into 10% Subordinated Debentures due September 29, 2007. The Company is required to pay interest expense by issuing additional debentures for 50% of the expense with the remaining 50% to be paid in cash. Interest is payable semi-annually on the last business day in June and December of each year. If Mr. Michael A. 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 Subordinated Debentures. 6 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL This "Management's Discussion and Analysis of Financial Condition and Results of Operations" should be read in conjunction with the consolidated financial statements included herein of the Company and its subsidiaries. Certain statements under this caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" that are not historical facts constitute "forward-looking statements" under the Private Securities Litigation Reform Act of 1995 (the "Reform Act"). Certain, but not necessarily all, of such forward-looking statements can be identified by the use of forward-looking terminology such as "believes," "expects," "may," "will," "should," or "anticipates" or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy that involve risks and uncertainties. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of U.S. Franchise Systems, Inc. ("USFS" or the "Company") and its subsidiaries to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, but are not limited to, the following: general economic and business conditions; competition in the lodging and franchising industries; success of acquisitions and operating initiatives; management of growth; dependence on senior management; brand awareness; general risks of the lodging and franchising industries; development risk; risk relating to the availability of financing for franchisees; the existence or absence of adverse publicity; changes in business strategy or development plan; availability, terms and deployment of capital; business abilities and judgment of personnel; availability of qualified personnel; labor and employee benefit costs; changes in, or failure to comply with, government regulations; construction schedules; the costs and other effects of legal and administrative proceedings; and other factors referenced in this Form 10-Q. The Company will not undertake and specifically declines any obligation to publicly release the results of any revisions which may be made to any forward-looking statement to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. Comparisons have been made between the first quarter of 1996, the year ended December 31, 1996 and the first quarter of 1997 for the purposes of the following discussion: RESULTS OF OPERATIONS FRANCHISE SALES GROWTH - 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: 7 8
AS OF MARCH 31, AS OF DEC 31, AS OF MARCH 31, MICROTEL FRANCHISE DATA 1996 1996 1997 - ------------------------------------------------------------------------------------------- PROPERTIES OPEN (1) 26 28 32 PROPERTIES UNDER CONSTRUCTION(2) 1 25 28 UNDER DEVELOPMENT: EXECUTED FRANCHISE AGREEMENTS(3)(4)(5) 48 193 197 FRANCHISE APPLICATIONS PENDING (6) n/a n/a 29 FRANCHISE APPLICATIONS ACCEPTED (7) 40 82 55 - ------------------------------------ --- --- --- TOTAL UNDER DEVELOPMENT 88 271 281 - ------------------------------------------------------------------------------------------- TOTAL OPEN OR UNDER DEVELOPMENT 113 299 313 - -------------------------------------------------------------------------------------------
(1) The Company does not receive royalties from 25, 27, and 28 hotels as of March 31, 1996, December 31, 1996 and March 31, 1997, respectively. (2) The Company will not receive royalties from zero, two, and two of the hotels under construction as of March 31, 1996, December 31, 1996 and March 31, 1997, respectively. (3) Includes hotels under construction but not open hotels. (4) Four of these agreements were terminated between April 1 and April 11, 1997. (5) The Company will not receive royalties from one, four, and seven of the Executed Franchise Agreements as of March 31, 1996, December 31, 1996 and March 31, 1997, respectively. (6) These franchise agreements were executed between April 1 and April 11, 1997. (7) The Company will not receive royalties from eight, six, and two of the Franchise Applications Accepted as of March 31, 1996, December 31, 1996 and March 31, 1997, respectively. Since acquiring the Hawthorn Suites brand in March 1996 and establishing it sales force by July 1996, the Company has realized franchise sales growth as follows:
AS OF MARCH 31, AS OF DEC 31, AS OF MARCH 31, HAWTHORN SUITES FRANCHISE DATA 1996 1996 1997 - --------------------------------------------------------------------------------------- PROPERTIES OPEN (1) 17 19 19 PROPERTIES UNDER CONSTRUCTION (2) 0 2 3 UNDER DEVELOPMENT: EXECUTED FRANCHISE AGREEMENTS (3)(4) 0 19 23 FRANCHISE APPLICATIONS PENDING (5) n/a n/a 6 FRANCHISE APPLICATIONS ACCEPTED 0 14 20 - ------------------------------- ---- --- --- TOTAL UNDER DEVELOPMENT 0 31 46 - --------------------------------------------------------------------------------------- TOTAL OPEN OR UNDER DEVELOPMENT 18 52 68 - ---------------------------------------------------------------------------------------
(1) The Company does not receive royalties from 18 hotels as of March 31, 1996, December 31, 1996 and March 31, 1997. (2) The Company will not receive royalties from zero, one, and one of the hotels under construction as of March 31, 1996, December 31, 1996 and March 31, 1997, respectively. (3) Includes hotels under construction but not open hotels. (4) The Company will not receive royalties from zero, one, and one of the Executed Franchise agreements as of March 31, 1996, December 31, 1996 and March 31, 1997, respectively. (5) These franchise agreements were executed between April 1 and April 11, 1997. The average franchise application fee was $24,000 and $26,000 for the first quarter of 1996 and the year ended December 31, 1996, respectively, compared to $24,000 for the first quarter of 1997. Such fees are recognized as revenue when the underlying hotel opens. 8 9 REVENUE - The Company has had revenues from the following sources:
FIRST QUARTER ENDED YEAR ENDED FIRST QUARTER ENDED MARCH 31, 1996 DECEMBER 31, 1996 MARCH 31, 1997 - ------------------------------------------------------------------------------------------------ FRANCHISE APPLICATION AND ROYALTY FEES $ - $ 20,000 $136,000 OTHER FEES - 75,000 33,000 MARKETING AND RESERVATION FEES 31,000 1,197,000 376,000 ------- ---------- -------- TOTAL $31,000 $1,292,000 $545,000 - ------------------------------------------------------------------------------------------------
Franchise application and royalty fees (the "Fees") of $20,000 for the year ended December 31, 1996 represent the Fees earned for one hotel which opened during the third quarter of 1996 and a transfer fee received due to a change of ownership. The Fees for a hotel which opened in the fourth quarter of 1996 were waived. The Fees earned in the first quarter of 1997 represent application fees from four properties opened during the quarter, royalties received from six hotels which were open as of March 31, 1997, and one transfer fee received. Other fee income was $0 and $75,000 for the first quarter of 1996 and year ended December 31, 1996, respectively, compared to $33,000 for the first quarter of 1997. The increase is primarily due to a management fee paid to the Company by Equity Partners, L.P., a Delaware limited partnership formed in June 1996. The Company began collecting marketing and reservation fees from existing Microtel and Hawthorn Suites franchisees in February and April 1996, respectively. While the Company recognizes marketing and reservations fees as revenue, such fees are intended to reimburse the Company for the expenses associated with providing support services to its franchisees and do not generate profit for the Company. During the first quarter of 1996 and year ended December 31, 1996, marketing and reservation fees were $31,000 and $1,197,000, respectively, compared to $376,000 for the first quarter of 1997. EXPENSES - The Company's expenses were as summarized below:
FIRST QUARTER ENDED YEAR ENDED FIRST QUARTER ENDED MARCH 31, 1996 DECEMBER 31, 1996 MARCH 31, 1997 - ------------------------------------------------------------------------------------------------------- MARKETING AND RESERVATIONS $ 114,000 $1,419,000 $ 382,000 OTHER FRANCHISE SALES AND ADVERTISING 464,000 2,802,000 846,000 CORPORATE SALARIES, WAGES, AND BENEFITS 543,000 2,218,000 884,000 OTHER GENERAL AND ADMINISTRATIVE 316,000 1,652,000 719,000 DEPRECIATION AND AMORTIZATION 131,000 537,000 132,000 ---------- ---------- ---------- TOTAL $1,568,000 $8,628,000 $2,963,000 - -------------------------------------------------------------------------------------------------------
Marketing and reservation expenses were $114,000 and $1,419,000, for the first quarter of 1996 and year ended December 31, 1996, respectively, compared with $382,000 for the first quarter 1997. The increase in marketing and reservation expenses is primarily due to the fact that the Hawthorn Suites brand was not acquired until April of 1996. Therefore, there were no marketing and reservation expenses for the Hawthorn brand during the first quarter of 1996. 9 10 Other franchise sales and advertising expenses, which are costs related to the Company's franchise sales effort, were $464,000 and $2,802,000 for the first quarter of 1996 and year ended December 31, 1996, respectively, compared to $846,000 for the first quarter of 1997. The increase is due primarily to the following factors: (i) a larger Microtel sales force was in place which resulted in additional salary and benefit expenses as well as other sales related costs (e.g. travel and telephone), (ii) the Hawthorn Suites brand was not acquired until April of 1996 and as a result, additional sales and advertising costs were incurred and (iii) commission costs for hotels opened in the first quarter of 1997 (no hotels were opened during the first quarter of 1996). Corporate salaries, wages and benefits, which are non-selling personnel expenses, were $543,000 and $2,218,000 for the first quarter of 1996 and year ended December 31, 1996, respectively, compared to $884,000 for the first quarter of 1997. The increase is primarily due to (i) 19 additional personnel hired, subsequent to the first quarter of 1996, in the areas of training, franchise services, franchise administration and quality control to handle the increased servicing requirements of additional executed franchise agreements and newly introduced programs and (ii) expenses related to the Company's Stock Option plans which were adopted in October 1996. Other general and administrative expenses were $316,000 and $1,652,000 for the first quarter of 1996 and year ended December 31, 1996 compared to $719,000 for the first quarter of 1997. The increase is primarily due to (i) general office and travel expenses for the additional staff in place during 1997, (ii) legal costs related to the Hawthorn Suites brand which was not acquired until April 1996, and (iii) expenses related to the Company's having become a publicly traded company in October 1996. Depreciation and amortization expense includes (i) depreciation of equipment for the corporate and regional sales offices, (ii) amortization for the cost of acquiring the Microtel brand and the exclusive rights to franchise the Hawthorn Suites brand, (iii) amortization of consulting payments made to Hudson under the Microtel Acquisition Agreement, and (iv) amortization of costs related to the formation of the Company. OTHER INCOME (EXPENSES) - Interest income was $175,000 and $871,000 for the first quarter of 1996 and year ended December 31, 1996, respectively, and resulted from investments in cash and marketable securities. Interest income for the first quarter of 1997 was $383,000. The increase was due to the additional interest earned on the cash received from the initial public offering in October of 1996. During the first quarter of 1996 and year ended December 31, 1996, interest expense was $36,000 and $126,000, respectively, compared to $480,000 for the first quarter of 1997. The interest expense in 1996 related to the note payable for purchasing the Microtel brand while the 1997 expense also includes the subordinated debentures (see footnote 3). 10 11 NET LOSS - A summary of operating results is as follows:
FIRST QUARTER ENDED YEAR ENDED FIRST QUARTER ENDED MARCH 31, 1996 DECEMBER 31, 1996 MARCH 31, 1997 - ------------------------------------------------------------------------------------ NET LOSS $1,398,000 $6,591,000 $2,515,000 LOSS APPLICABLE TO COMMON STOCKHOLDERS $1,817,000 $8,309,000 $2,515,000 - ------------------------------------------------------------------------------------
The Company had net losses of $1,398,000 and $6,591,000 for the first quarter of 1996 and year ended December 31, 1996, respectively, compared to $2,515,000 for the first quarter of 1997. The Company had a net loss applicable to common stockholders of $1,817,000 and $8,309,000 for the first quarter of 1996 and year ended December 31, 1996, respectively, compared to $2,515,000 for the first quarter 1997. The net loss applicable to common stockholders includes $419,000 and $1,718,000 of accumulated but undeclared and unpaid dividends on its 10% Cumulative Redeemable Exchangeable Preferred Stock (the "Redeemable Preferred Stock") for the first quarter of 1996 and year ended December 31, 1996, respectively. The Company had a net operating loss carryforward for income tax purposes as of March 31, 1996 and December 31, 1996 of $2,452,000 and $6,437,000, respectively, compared to $7,553,000 as of March 31, 1997. Given the limited operating history of the Company, management recorded a valuation allowance for the full amount of the deferred tax asset as of March 31, 1997. LIQUIDITY AND CAPITAL RESOURCES From August 28, 1995 (inception) to October 24, 1996, the Company financed its operations primarily through a private placement of securities, franchise application fees, and interest income. In October of 1995, the Company raised approximately $17.5 million in gross proceeds through sales of shares of its old common stock (i.e., stock prior to the reclassification of shares on October 11, 1996) and Redeemable Preferred Stock. On October 24, 1996, the Company completed an initial public offering of 1,825,000 shares of Class A Common Stock at $13.50 per share (the "Offering"). Net proceeds to the Company from the Offering were approximately $21,391,000 . The remaining proceeds of the Offering are held either as cash or cash equivalents and will be used for working capital and general corporate purposes, which may include (i) funding the Company's remaining obligations 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) investing in financing programs developed by its wholly owned subsidiary, US Funding Corp., (iv) servicing interest on the Subordinated Debentures 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. Cash and cash equivalents were $28,467,000 as of March 31, 1997. On January 1, 1997, the Company exercised its option to exchange the Redeemable Preferred Stock at the Liquidation Value of $18,477,000 into 10% Subordinated Debentures due September 29, 2007. The Company is required to pay interest expense by issuing additional debentures for 50% of the expense with the remaining 50% to be paid in cash. Interest is payable 11 12 semi-annually on the last business day in June and December of each year. If Mr. Michael A. 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 Subordinated Debentures. The Company also had outstanding indebtedness related to the Microtel Acquisition of approximately $731,000 as of March 31, 1997. 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 increase in leisure travel, are expected to produce higher 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 also may have an impact on the seasonality of 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. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is and may become party to claims and litigations that arise in the Company's normal course of business. It is the opinion of management that the outcome of any currently pending matters will not have a material adverse effect on the Company's consolidated financial statements. ITEM 2. CHANGES IN SECURITIES Not applicable ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable ITEM 5. OTHER INFORMATION Not Applicable 12 13 ITEM 6. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K A) EXHIBITS:
Exhibit Number Description - ------- ----------- 27.1 Financial Data Schedule for the quarter ended March 31, 1997, submitted to the Securities and Exchange Commission in electronic format.
B) REPORTS ON FORM 8-K During the first quarter ended March 31, 1997 the Company did not file any report on Form 8-K. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. U.S. FRANCHISE SYSTEMS, INC. (Registrant) By /s/ Michael A. Leven -------------------- Michael A. Leven Chairman of the Board, President and Chief Executive Officer By /s/ Neal K. Aronson ------------------- Neal K. Aronson Executive Vice President, Chief Financial Officer and Director (Principal Financial and Accounting Officer) Dated May 6, 1997 13 14 EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION - ------- ----------- 27.1 Financial Data Schedule 14 EX-27.1 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM U. S. FRANCHISE SYSTEMS, INC. CONSOLIDATED FINANCIAL STATEMENT FOR THE QUARTER ENDED MARCH 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS DEC-31-1997 JAN-01-1997 MAR-31-1997 28,467 0 133 0 0 31,433 365 50 37,826 5,688 18,708 0 0 426 9,738 37,826 545 545 2,963 2,963 0 0 480 (2,515) 0 (2,515) 0 0 0 (2,515) (0.20) (0.20) INCLUDES 3,186,280 SHARES OF CLASS A COMMON STOCK THAT ARE REDEEMABLE UNDER CERTAIN CIRCUMSTANCES BY THE COMPANY FOR REASONS NOT UNDER THE COMPANY'S CONTROL. 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 DIVIDENDS ACCRETED ON THE REDEEMABLE PREFERRED STOCK.
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