-----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, I7jaDhAaHZZ2qWrzJwsQpmQ2D3+Va/Ifq7zQ5x/M+fcTet31stCACC0hkCZJ7pYn Tba/a/LlmEkPOF36NCngYA== 0000950144-97-012358.txt : 19971117 0000950144-97-012358.hdr.sgml : 19971117 ACCESSION NUMBER: 0000950144-97-012358 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971114 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: SEC FILE NUMBER: 000-28908 FILM NUMBER: 97720182 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 SEPTEMBER 30 , 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 9,863,789 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 October 30, 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 September 30, 1997 (Unaudited) 3 Consolidated Statements of Operations for the three and nine months ended September 30, 1996 and 1997 (Unaudited) 4 Consolidated Statement of Cash Flows for the nine months ended September 30 , 1996 and 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 13 ITEM 3. DEFAULTS UPON SENIOR SECURITIES 14 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 14 ITEM 5. OTHER INFORMATION 14 ITEM 6. EXHIBITS, FINANCIAL STATEMENT AND REPORTS ON FORM 8-K 14 SIGNATURES 15 EXHIBIT INDEX 16 EXHIBIT 27.1 17
2 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS U.S. FRANCHISE SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(Unaudited) Dec. 31, 1996 Sept. 30, 1997 ------------- -------------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 31,188,000 $ 21,740,000 Accounts receivable 114,000 195,000 Deposits 93,000 106,000 Prepaid expenses 494,000 529,000 Promissory notes receivable 784,000 1,381,000 Deferred commissions 1,261,000 1,775,000 ------------ ------------ Total current assets 33,934,000 25,726,000 PROMISSORY NOTES RECEIVABLE 390,000 1,532,000 EQUIPMENT - Net 292,000 849,000 FRANCHISE RIGHTS 3,264,000 3,140,000 DEFERRED COMMISSIONS 1,492,000 2,827,000 OTHER ASSETS 733,000 2,441,000 ------------ ------------ Total assets $ 40,105,000 $ 36,515,000 ============ ============ LIABILITIES AND STOCKHOLDERS' DEFICIT CURRENT LIABILITIES: Accounts payable $ 679,000 $ 216,000 Commissions payable 837,000 1,022,000 Deferred application fees 2,916,000 3,301,000 Accrued expenses 1,110,000 1,391,000 Due to Hudson Hotels Corporation 277,000 277,000 ------------ ------------ Total current liabilities 5,819,000 6,207,000 DUE TO HUDSON HOTELS CORPORATION 454,000 454,000 DEFERRED APPLICATION FEES 2,749,000 4,729,000 SUBORDINATED DEBENTURES -- 19,175,000 ------------ ------------ Total liabilities 9,022,000 30,565,000 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 September 30, 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; issued and outstanding 6,647,206 Class A shares and 2,707,919 Class B shares at September 30, 1997 96,000 96,000 Treasury Stock (4,000) Capital in excess of par 20,547,000 20,765,000 Accumulated deficit (8,367,000) (15,237,000) ------------ ------------ Total stockholders' equity 12,276,000 5,620,000 ------------ ------------ $ 40,105,000 $ 36,515,000 ============ ============
See notes to consolidated financial statements. 3 4 U.S. FRANCHISE SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
3 MONTHS ENDED 3 MONTHS ENDED 9 MONTHS ENDED 9 MONTHS ENDED SEPT. 30, 1996 SEPT. 30, 1997 SEPT. 30, 1996 SEPT. 30, 1997 -------------- -------------- -------------- -------------- REVENUES: Marketing and reservation fees $ 452,000 $ 552,000 $ 847,000 $ 1,409,000 Franchise application and royalty fees 15,000 551,000 15,000 1,057,000 Other 2,000 73,000 2,000 148,000 --------------------------------------------------------------------------- 469,000 1,176,000 864,000 2,614,000 =========================================================================== EXPENSES: Marketing and reservations $ 532,000 $ 535,000 $ 1,022,000 $ 1,447,000 Royalties paid to third parties -- 35,000 -- 73,000 Franchise sales commissions 17,000 259,000 17,000 496,000 Other franchise sales and advertising 757,000 749,000 2,020,000 2,237,000 Corporate salaries, wages, and benefits 548,000 850,000 1,541,000 2,519,000 Other general and administrative 360,000 634,000 1,195,000 1,948,000 Depreciation and amortization 143,000 142,000 411,000 409,000 --------------------------------------------------------------------------- 2,357,000 3,204,000 6,206,000 9,129,000 --------------------------------------------------------------------------- LOSS FROM OPERATIONS (1,888,000) (2,028,000) (5,342,000) (6,515,000) OTHER INCOME(EXPENSE): Interest income 206,000 339,000 537,000 1,097,000 Interest expense (36,000) (492,000) (108,000) (1,452,000) --------------------------------------------------------------------------- NET LOSS $ (1,718,000) $ (2,181,000) $ (4,913,000) $ (6,870,000) =========================================================================== LOSS APPLICABLE TO COMMON STOCKHOLDERS $ (2,158,000) $ (2,181,000) $ (6,191,000) $ (6,870,000) =========================================================================== WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 10,755,409 12,541,405 10,755,409 12,567,398 =========================================================================== NET LOSS APPLICABLE TO COMMON STOCKHOLDERS PER SHARE $ (0.20) $ (0.17) $ (0.58) $ (0.55) ===========================================================================
See notes to consolidated financial statements. 4 5 U.S. FRANCHISE SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED NINE MONTHS ENDED SEPT 30, 1996 SEPT 30, 1997 ------------- ------------- OPERATING ACTIVITIES: Net loss $ (4,913,000) $ (6,870,000) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 409,000 409,000 Deferred compensation amortization -- 218,000 Increase in deposits and accounts receivable (153,000) (94,000) Increase in prepaid expenses (131,000) (210,000) Increase in promissory notes receivable (1,022,000) (1,739,000) Increase in deferred commissions (1,847,000) (1,849,000) Increase in other assets (618,000) (1,755,000) Increase (decrease) in accounts payable 124,000 (463,000) Decrease in accrued expenses 952,000 282,000 Increase (decrease) in commissions payable 541,000 185,000 Increase in deferred application fees 4,069,000 2,365,000 Increase in royalties due to HSA properties 321,000 -- Decrease in liability to Hudson Hotels Corporation (352,000) -- Increase in subordinated debentures paid in kind -- 698,000 ------------ ------------ Net cash used in operating activities (2,620,000) (8,823,000) INVESTING ACTIVITIES: Acquisition of equipment (382,000) (621,000) Acquisition of franchise rights (117,000) -- ------------ ------------ Net cash used in investing activities (499,000) (621,000) FINANCING ACTIVITIES: Issuance of capital stock 122,000 -- Redemption of capital stock (119,000) -- Treasury stock -- (4,000) ------------ ------------ Net cash provided by financing activities 3,000 (4,000) NET DECREASE IN CASH AND CASH EQUIVALENTS (3,116,000) (9,448,000) ------------ ------------ CASH AND CASH EQUIVALENTS: Beginning of period 13,893,000 31,188,000 ------------ ------------ End of period $ 10,777,000 $ 21,740,000 ============ ============ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Noncash activities: Undeclared dividends accrued on redeemable preferred stock $ 1,278,000 ============ 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 nine months ended September 30, 1997 are not necessarily indicative of results that may be expected for the full year. 2. EARNINGS PER SHARE Earnings per share for the three and nine months ended September 30, 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 three and nine months ended September 30, 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 three and nine months ended September 30, 1996 and the three and nine months ended September 30, 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
=================================================================================================================== MICROTEL FRANCHISE DATA AS OF SEPT 30, AS OF DEC 31 AS OF SEPT 30, (inception to date) 1996 1996 1997 - ------------------------------------------------------------------------------------------------------------------- Properties open(1) 27 28 58 Executed agreements & under construction(2) 10 25 40 Executed franchise agreements but not under construction(3) 140 168 224 Approved applications(4) 80 82 92 - -------------------------- -- -- -- Total under development 230 275 356 =================================================================================================================== OPEN PLUS UNDER DEVELOPMENT 257 303 414 ===================================================================================================================
(1) The Company does not receive royalties from 26, 27, and 28 hotels open as of September 30,1996, December 31, 1996, and September 30, 1997, respectively. (2) The Company will not receive royalties from three, two, and zero of the hotels under construction as of September 30,1996, December 31, 1996, and September 30, 1997, respectively. (3) The Company will not receive royalties from, two, two and five of the executed franchise agreements as of September 30,1996, December 31, 1996,and September 30, 1997, respectively. (4) The Company will not receive royalties from six, six, and two of the franchise applications accepted as of September 30,1996, December 31, 1996, and September 30, 1997, respectively. Since acquiring the Hawthorn Suites brand in March 1996 and establishing its sales force by July 1996, the Company has realized franchise sales growth as follows:
========================================================================================================================= HAWTHORN SUITES FRANCHISE DATA AS OF SEPT 30, AS OF DEC 31, AS OF SEPT 30, (inception to date) 1996 1996 1997 - ------------------------------------------------------------------------------------------------------------------------- Properties open(1) 18 19 22 Executed agreements & under construction(2) 2 2 9 Executed franchise agreements but not under construction(3) 4 17 51 Approved applications 16 14 23 - ------------------------ -- -- -- Total under development 22 33 83 ========================================================================================================================= OPEN PLUS UNDER DEVELOPMENT 40 52 105 =========================================================================================================================
(1) The Company does not receive royalties from 18 hotels open as of September 30 1996, December 31, 1996, and September 30, 1997. (2) The Company will not receive royalties from zero, one, and one of the hotels under construction as of September 30 1996, December 31, 1996, and September 30, 1997, respectively. (3) The Company will not receive royalties from one, zero, and zero of the executed franchise agreements as of September 30 1996, December 31, 1996, and September 30, 1997, respectively. The average franchise application fee was $28,000 and $26,000 for the nine months ended September 30, 1996 and year ended December 31, 1996, respectively, compared to $24,000 for the nine months ended September 30, 1997. Such fees are recognized as revenue when the underlying hotel opens. REVENUE - The Company has had revenues from the following sources:
===================================================================================================================== THREE MONTHS THREE MONTHS NINE MONTHS ENDED NINE MONTHS ENDED SEPT 30, ENDED SEPT 30, SEPT 30, 1996 ENDED SEPT 30, 1996 1997 1996 1997 - --------------------------------------------------------------------------------------------------------------------- Franchise application and royalty fees $ 15,000 $ 551,000 $ 15,000 $1,057,000 Other fees 2,000 73,000 2,000 148,000 Marketing and reservation fees 452,000 552,000 847,000 1,409,000 -------- ---------- -------- ---------- TOTAL $469,000 $1,176,000 $864,000 $2,614,000 =====================================================================================================================
8 9 Franchise application and royalty fees (the "Fees") were $551,000 and $1,057,000 for the three and nine months ended September 30, 1997, respectively compared with $15,000 for the three and nine months ended September 30, 1996. Fees for the three months ended September 30, 1997 represent application fees from seventeen of the eighteen properties opened during the quarter, and royalties received from twenty-five of the eighty hotels which were open as of September 30, 1997. The Fees earned for the nine months ended September 30, 1997, in addition to the above, included application fees from fourteen hotel openings and one transfer fee received during the first two quarters of 1997. The Fees earned for the three and nine months ended September 30, 1996 are the application fees from one hotel which opened during the third quarter of 1996. Other fee income was $73,000 and $148,000 for the three and nine months ended September 30, 1997, respectively, compared to $2,000 for the three and nine months ended September 30, 1996. In 1997, the two main components of this income were the monthly management fee received from Equity Partners and commissions earned from the National Accounts program. 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. Marketing and reservation fees were $552,000 and $1,409,000 for the three and nine months ended September 30, 1997, respectively, compared to $452,000 and $847,000 for the respective periods in 1996. EXPENSES - The Company's expenses were as summarized below:
================================================================================================================== THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS ENDED SEPT 30, ENDED SEPT 30, ENDED SEPT 30, ENDED SEPT 30, 1996 1997 1996 1997 - ------------------------------------------------------------------------------------------------------------------ Marketing and reservations $ 532,000 $ 535,000 $1,022,000 $1,447,000 Royalties paid to third parties 0 35,000 0 73,000 Franchise sales commissions 17,000 259,000 17,000 496,000 Other franchise sales and advertising 757,000 749,000 2,020,000 2,237,000 Corporate salaries, wages, and benefits 548,000 850,000 1,541,000 2,519,000 Other general and administrative 360,000 634,000 1,195,000 1,948,000 Depreciation and amortization 143,000 142,000 411,000 409,000 ---------- ---------- ---------- ---------- TOTAL $2,357,000 $3,204,000 $6,206,000 $9,129,000 ==================================================================================================================
Marketing and reservation expenses were $535,000 and $1,447,000, for the three and nine months ended September 30, 1997, respectively, compared to $532,000 and $1,022,000 for the respective periods in 1996. The increase in marketing and reservation expenses for the nine months ended September 30, 1997 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 Royalties paid to third parties were $35,000 and $73,000 for the three and nine months ended September 30, 1997, respectively. No royalties were paid in the respective periods in 1996. The Company is required to pay monthly royalties to Hudson for each new Microtel property opened and to Hyatt for each new Hawthorn property opened. Franchise sales commissions were $259,000 and $496,000 for the three and nine months ended September 30, 1997, respectively, compared to $17,000 for the respective periods in 1996. Commissions were expensed for the 18 and 34 hotels which opened during the three and nine months ended September 30, 1997, respectively. The commission expense for the three and nine months ended September 30, 1996 is due to the opening of one hotel and the execution of an international master franchise agreement. Other franchise sales and advertising expenses, which are costs related to the Company's franchise sales effort, were $749,000 and $2,237,000 for the three and nine months ended September 30, 1997, respectively, compared to $757,000 and $2,020,000 for the respective periods in 1996. The increase for the nine months ended September 30, 1997 was 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) and (ii) the Hawthorn Suites brand was not acquired until April of 1996 and as a result, additional sales and advertising costs were incurred, (iii) the first franchise conference was held in 1997, and (iv) a program was initiated in 1997 in which a replica of a Microtel room, constructed such that it can be transported across the country, was present when each hotel broke ground (expenses include lease payments for the truck, driving and driver expenses). The increase in these expenses was partially offset by the following: (i) there were less advertising and promotions expenses (ii) a lower volume of potential franchisees were brought in to the corporate offices for education and tours of the products and (iii) lower expenses were incurred by the sales department on printing and mailings. Corporate salaries, wages and benefits, which are non-selling personnel expenses, were $850,000 and $2,519,000 for the three and nine months ended September 30, 1997, respectively, compared to $548,000 and $ 1,541,000 for the respective periods in 1996. The increase since September 30, 1996 is primarily due to (i) additional personnel hired 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 $634,000 and $1,948,000 for the three and nine months ended September 30, 1997, respectively, compared to $360,000 and $1,195,000 (including a $200,000 non-recurring charge related to the anticipated termination of the Company's corporate office lease) for the respective periods in 1996. 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 10 11 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 resulting from investments in cash and marketable securities was $339,000 and $1,097,000 for the three and nine months ended September 30, 1997, respectively, compared to $206,000 and $537,000 for the respective periods in 1996. The increase was due to the additional interest earned on the cash received from the initial public offering in October of 1996. During the three and nine months ended September 30, 1997 interest expense was $492,000 and $1,452,000, respectively, compared to $36,000 and $108,000 for the respective periods in 1996. 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). NET LOSS - A summary of operating results is as follows:
============================================================================================================ THREE MONTHS THREE MONTHS NINE MONTHS ENDED NINE MONTHS ENDED SEPT 30, ENDED SEPT 30, SEPT 30, 1996 ENDED SEPT 30, 1996 1997 1997 - ------------------------------------------------------------------------------------------------------------ Net Loss $1,718,000 $2,181,000 $4,913,000 $6,870,000 Loss appl. to common stockholders $2,158,000 $2,181,000 $6,191,000 $6,870,000 ============================================================================================================
The Company had net losses of $ 2,181,000 and $6,870,000 for the three and nine months ended September 30, 1997, respectively, compared to $1,718,000 and $4,913,000 for the respective periods in 1996. The Company had a net loss applicable to common stockholders of $2,181,000 and $6,870,000 for the three and nine months ended September 30, 1997, respectively, compared to $2,158,000 and $6,191,000 for the respective periods in 1996. The net loss applicable to common stockholders includes $440,000 and $1,278,000 of accumulated but undeclared and unpaid dividends on its 10% Cumulative Redeemable Exchangeable Preferred Stock (the "Redeemable Preferred Stock") for the three and nine months ended September 30, 1996, respectively. The Company had a net operating loss carryforward for income tax purposes as of September 30, 1997 of $10,472,000 compared to $3,707,000 as of September 30, 1996. Given the limited operating history of the Company, management recorded a valuation allowance for the full amount of the deferred tax asset as of September 30, 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 11 12 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, (v) the building of hotel properties, and (vi) 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 $21,740,000 as of September 30, 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 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 $805,000 in principal and interest as of September 30, 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. 12 13 ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS On October 30, 1996, the Company completed an initial public offering of its Class A Common Stock, with par value $0.01 (the "Offering"). The managing underwriters in the Offering were Schroder Wertheim & Co. and Montgomery Securities (the "Underwriters"). The shares of Class A Common Stock sold in the Offering were registered under the Securities Act of 1933, as amended, on a Registration Statement on Form S-1 (the "Registration Statement", registration number 333-11427). The Registration Statement was declared effective by the Securities and Exchange Commission on October 24, 1996. The Offering terminated on October 30, 1996 after all 2,325,000 shares of Class A Common Stock registered under the Registration Statement were sold. Of the amount registered, 1,825,000 shares were sold by the Company (the "Company Shares") and 500,000 shares were sold by the original shareholders (the "Secondary Shares"). With respect to the Company Shares, the shares were sold at a price to the public of $13.50 per share for an aggregate offering price of $24,637,500. With respect to the Secondary Shares, the shares were sold at a price to the public of $13.50 per share for an aggregate offering price of $6,750,000. From the effective date of the Registration Statement to October 30, 1996, the Company incurred estimated expenses of $3,245,816 in connection with the Offering. The following table provides a further breakdown these expenses. All of the amounts shown are estimated except the underwriting discounts and commissions. None of the amounts shown were paid directly or indirectly to any director, officer, general partner of the Company or their associates, persons owning ten percent or more of any class of equity securities of the Company, or an affiliate of the Company. Underwriting discounts and commissions $1,715,500 Expenses paid to or for underwriters 38,844 Other expenses 1,491,472 ---------- Total Offering Expenses $3,245,816 ==========
After deducting the Offering expenses described above, net proceeds to the Company from the Offering were approximately $21,391,684. As of September 30, 1997, all of the proceeds have been invested as follows (amounts are estimated): Temporary investments: Auction Market Preferred Investments $ 1,000,000 Commercial Paper 12,600,000 Floating Rate Bonds 2,800,000 Preferred Money Market account 2,700,000 General Operating accounts 2,300,000 ----------- Total proceeds used $21,400,000
None of the net proceeds of the Offering were paid directly or indirectly to any director, officer, general partner of the Company or their associates, persons owning ten percent or more of any class of equity securities of the Company, or an affiliate of the Company. 13 14 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 On November 5, 1997, the Company signed a letter of intent to acquire full ownership of the successor to HSA Properties, L.L.C. ("HSA") , which owns the Hawthorn Suites brand of hotels. HSA, which is controlled by the Pritzker family business interests, is the owner of certain intellectual property and other assets pertaining to the Hawthorn Suites brand of hotels, which it currently licenses to the Company. The proposed transaction is subject to, among other things, completion of a definitive purchase agreement, clearance of the transaction in accordance with the Hart-Scott-Rodino Act, and approval by the Company's shareholders. Shareholders representing a majority of the Company's total voting power have already indicated that they will vote in favor of the transaction. Under the proposed terms of the transaction, approximately 2.2 million shares of Class A common stock will be issued in connection with the acquisition of HSA. Upon completion of this transaction, the Company will no longer be obligated to pay franchise royalty fees in respect of the Company's 23 open Hawthorn Suites properties or future royalties on additional Hawthorn Suites properties that would have accrued to HSA. As a result, the Company's royalty income will increase by approximately $2 million on an annual basis related to the 23 open hotels, increasing further as additional properties open in the future. These additional royalties, however, will be offset, in part, by the non-cash amortization expenses related to this transaction. Upon the completion of this transaction, all restriction on the Company's ability to purchase other hotel brands will also be eliminated. Hawthorn Suites will retain its unique relationship with the Spirit Reservation System, which also operates the Hyatt Worldwide Reservations System. ITEM 6. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K A) EXHIBITS: Exhibit Number Description 27.1 Financial Data Schedule for the nine months ended September 30, 1997, submitted to the Securities and Exchange Commission in electronic format. 14 15 B) REPORTS ON FORM 8-K During the third quarter ended September 30, 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 By /s/ Neal K. Aronson -------------------- ------------------- Michael A. Leven Neal K. Aronson Chairman of the Board, President Executive Vice President, Chief Financial Officer and and Chief Executive Officer Director (Principal Financial and Accounting Officer) Dated November 12, 1997
15 16 EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION 27.1 Financial Data Schedule 16 EX-27.1 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM U.S. FRANCHISE SYSTEMS, INC. CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 21,740 0 195 0 0 25,726 944 95 36,515 6,207 19,175 0 0 426 5,524 36,515 2,614 2,614 9,129 9,129 0 0 1,452 (6,870) 0 (6,870) 0 0 0 (6,870) (0.55) (0.55) 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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