FORM 10-Q
---------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(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, 1996
[ ] 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.
DELAWARE 58-2190911
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
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 to be filed 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 No X
----- -----
---------------
The number of shares of Class A Common Stock outstanding as of
December 5, 1996 was 9,872,490; the number of shares of Class B Common Stock
outstanding as of December 5, 1996 was 2,707,919.
<PAGE>
U.S. FRANCHISE SYSTEMS, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<S> <C>
Consolidated Statements of Financial Position at December 31, 1995
and September 30, 1996 (Unaudited) 3
Consolidated Statements of Operations for the Three Months and
Nine Months Ended September 30, 1996 (Unaudited) 4
Consolidated Statement of Cash Flows for the Nine Month Period Ended
September 30, 1996 (Unaudited) 5
Notes to Consolidated Financial Statements (Unaudited) 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 8
PART II - OTHER INFORMATION 12
SIGNATURES 17
EXHIBITS 18
</TABLE>
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<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
U.S. FRANCHISE SYSTEMS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31, September 30,
ASSETS 1995 1996
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and temporary cash investments $ 13,893,000 $ 10,777,000
Accounts receivable -- 144,000
Deposits 87,000 96,000
Prepaid expenses 399,000 355,000
Deferred commissions -- 528,000
Promissory notes receivable -- 997,000
------------ ------------
Total current assets 14,379,000 12,897,000
PROMISSORY NOTES RECEIVABLE -- 25,000
EQUIPMENT - Net 134,000 487,000
FRANCHISE RIGHTS 3,371,000 3,306,000
DEFERRED COMMISSIONS 41,000 1,360,000
OTHER ASSETS 147,000 742,000
------------ ------------
$ 18,072,000 $ 18,817,000
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 201,000 $ 325,000
Commissions payable 22,000 563,000
Deferred application fees 120,000 949,000
Accrued expenses 65,000 1,017,000
Royalties due to HSA Properties -- 321,000
Due to Hudson Hotels Corporation 706,000 354,000
------------ ------------
Total current liabilities 1,114,000 3,529,000
DUE TO HUDSON HOTELS CORPORATION 731,000 731,000
DEFERRED APPLICATION FEES -- 3,240,000
------------ ------------
Total liabilities 1,845,000 7,500,000
REDEEMABLE STOCK:
Preferred stock 16,759,000 18,037,000
------------ ------------
Common stock 330,000 330,000
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT:
Common stock 78,000 78,000
Capital in excess of par 228,000 --
Accumulated deficit (1,168,000) (7,128,000)
------------ ------------
Total stockholders' deficit (862,000) (7,050,000)
------------ ------------
$ 18,072,000 $ 18,817,000
============ ============
</TABLE>
See notes to consolidated financial statements.
-3-
<PAGE>
U.S. FRANCHISE SYSTEMS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
September 30, September 30,
1996 1996
<S> <C> <C>
REVENUES $ 469,000 $ 864,000
EXPENSES:
Marketing and reservations 532,000 1,022,000
Other franchise sales and advertising 774,000 2,037,000
Corporate salaries, wages, and benefits 548,000 1,541,000
Other general and administrative 360,000 1,195,000
Depreciation and amortization 143,000 411,000
----------- -----------
2,357,000 6,206,000
----------- -----------
LOSS FROM OPERATIONS 1,888,000 5,342,000
OTHER INCOME (EXPENSE):
Interest income 206,000 537,000
Interest expense 36,000 108,000
----------- -----------
NET LOSS $ 1,718,000 $ 4,913,000
=========== ===========
LOSS APPLICABLE TO COMMON
STOCKHOLDERS $ 2,158,000 $ 6,191,000
=========== ===========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 10,755,409 10,755,409
=========== ===========
NET LOSS APPLICABLE TO COMMON
SHAREHOLDERS PER SHARE $ 0.20 $ 0.58
=========== ===========
</TABLE>
See notes to consolidated financial statements.
-4-
<PAGE>
U.S. FRANCHISE SYSTEMS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months
Ended
September 30,
1996
(Unaudited)
<S> <C>
OPERATING ACTIVITIES:
Net loss ($ 4,913,000)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 409,000
Changes in assets and liabilities:
Accounts receivable (144,000)
Prepaid expenses (131,000)
Deposits (9,000)
Promissory notes receivable (1,022,000)
Deferred commissions (1,847,000)
Other assets (618,000)
Accounts payable 124,000
Commissions payable 541,000
Deferred application fees 4,069,000
Accrued expenses 952,000
Due to Hudson Hotels Corporation (352,000)
Royalties due to HSA Properties 321,000
------------
Net cash used in operating activities (2,620,000)
------------
INVESTING ACTIVITIES:
Acquisition of equipment (382,000)
Acquisition of franchise rights (117,000)
------------
Net cash used in investing activities (499,000)
------------
FINANCING ACTIVITIES:
Issuance of capital stock 122,000
Redemption of capital stock (119,000)
------------
Net cash provided by financing activities 3,000
------------
NET DECREASE IN CASH AND TEMPORARY
CASH INVESTMENTS (3,116,000)
CASH AND TEMPORARY CASH INVESTMENTS:
Beginning of period 13,893,000
------------
End of period $ 10,777,000
============
NONCASH ACTIVITIES:
Undeclared dividends accrued on redeemable preferred stock $ 1,278,000
============
Portion of purchase price due to Hudson Hotels Corporation
in future years, discounted at 10% $ 0
============
</TABLE>
See notes to consolidated financial statements.
-5-
<PAGE>
U.S. FRANCHISE SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
1. GENERAL MATTERS
On October 24, 1996, U.S. Franchise Systems, Inc. (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 $21,978,000. 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 franchising 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. Had such Offering occurred
on January 1, 1996, pro-forma loss applicable to common stockholders per
share would have been $.17 for the three months ended September 30, 1996
and $.49 for the nine months ended September 30, 1996. Pro-forma weighted
average shares of 12,580,409 are assumed outstanding for purposes of
pro-forma loss applicable to common stockholder per share calculation.
2. 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 Registration Statement of
Form S-1 (Registration No. 333-11427), as amended (the "Registration
Statement"), and the Company's prospectus dated October 24, 1996, filed
with the Securities and Exchange Commission.
All significant intercompany balances and transactions have been
eliminated.
3. EARNINGS PER SHARE
Earnings per share for the three and nine month periods ended September
30, 1996 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 represents net loss adjusted for accrued dividends on
the redeemable preferred stock.
All references in the financial statements to the number of shares and per
share amounts of the Company's common stock have been retroactively
restated to reflect the increased number of common shares outstanding
resulting from a 9.67 to 1 stock split which occurred on October 11, 1996
(Note 4).
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<PAGE>
4. SUBSEQUENT EVENTS
RECLASSIFICATION OF SHARES - On October 11, 1996, the stockholders
approved the creation of two classes of stock: Class A Common Stock, par
value $.01 per share and Class B Common Stock, par value $.01 per share,
and to split and reclassify each share of its existing common stock, par
value $.10 per share, into 9.67 shares of Class A Common Stock. In
connection with the reclassification, certain members of management and
related stockholders holding 2,707,919 shares of Class A Common Stock
exchanged such shares for the same number of shares of Class B Common
Stock. Shares of Class A Common Stock and Class B Common Stock are
identical in all respects except that (i) holders of Class B Common Stock
are entitled to ten votes per share and holders of Class A Common Stock
are entitled to one vote per share, and (ii) the Class B Common Stock is
convertible into Class A Common Stock at the option of the holder and,
with limited exceptions, upon the transfer thereof. Following the
reclassification, there were 30 million shares of Class A Common Stock and
5 million shares of Class B Common Stock authorized for issuance.
In addition, upon the completion of the public offering, certain Stock
Purchase Agreements (the "Agreements") were amended to revise the earning
and vesting requirements with respect to 50% of the restricted shares
(approximately 13% of the old common stock outstanding before the
Offering). Shares representing 11% of the old common stock were deemed to
be earned and vested shares notwithstanding the fact that performance
criteria have not been met by the Company; the other 2% of such stock are
considered to be earned but are subject to a vesting schedule. Remaining
restricted shares will continue to be Class A Common Stock when earned
under the Agreements. No effect has been given in the historical financial
statements for the change in vesting requirements.
STOCK OPTIONS - On October 11, 1996, the Company's stockholders approved
two stock option plans, one for officers, employees, consultants, and
advisors of the Company (the "Option Plan") and one for its nonemployee
directors [the "Directors Plan" and together with the Option Plan (the
"Plans")]. The Option Plan authorizes the grant of awards to eligible
participants of a maximum of 325,000 shares of the Company's Class A
Common Stock, subject to terms, including exercise price and timing of
exercise, which are determinable by the Board of Directors. The Directors
Plan provides for the issuance of 2,000 shares of Class A Common Stock
each year to each nonemployee director of the Company. Options vest and
become exercisable under the Directors Plan one year from the date of
grant provided that the optionee shall continue to serve as a director of
the Company on such date. Immediately prior to the Offering, the Board of
Directors awarded options to purchase a total of 10,000 shares of Class A
Common Stock to its five nonemployee directors and awarded to eligible
participants under the Employee Plan options to purchase 168,100 shares of
Class A Common Stock at the public offering price. The options issued
under the Employee Plan will vest over a four year period and will expire
ten years from the date of grant. Compensation expense will be recorded in
accordance with FASB Statement 123, "Accounting for Stock Based
Compensation," for the fair value of the options awarded under the Plans.
-7-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Although the Company was formed in August 1995, it did not begin operations
until October 1995; therefore, there are no comparable results of operations for
the three and nine month periods ended September 30, 1995. Comparisons have been
made between the three month period ended September 30, 1996 and the six month
period ended June 30, 1996 for purposes of the following discussion:
RESULTS OF OPERATIONS
REVENUE - The Company had revenues from the following sources:
<TABLE>
<CAPTION>
Six Months Three Months Nine Months
Ended Ended Ended
June 30, September 30, September 30,
1996 1996 1996
<S> <C> <C> <C>
Franchise Applications and Royalties $ 15,000 $ 15,000
Other 2,000 2,000
Reservation/Marketing Fees $395,000 452,000 847,000
-------- ------- -------
$395,000 $469,000 $864,000
======== ======== ========
</TABLE>
Franchise Applications and Royalty Fees ("Fees") represent the Fees earned for
one hotel which opened during the quarter.
The Company began collecting reservation and marketing fees from existing
Microtel and Hawthorn Suites franchisees in February and April 1996,
respectively. While the Company recognizes reservations and marketing 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 three months ended September 30,
1996, reservations and marketing fees were $452,000. The reservations and
marketing fee revenue for the quarter ended September 30, 1996 exceeded such
revenue generated in the six months ended June 30, 1996 by $57,000 primarily due
to higher franchisee summer revenues.
During the three month period ended September 30, 1996, the company executed 57
new franchise license agreements compared with a total of 90 license agreements
during the first six months of 1996. As a result the Company received franchise
application fees of $1,359,000 for the three months ended September 30, 1996,
compared with an average of $1,361,000 in each of the first two quarters of
1996. However, such fees are recognized as revenue when the applicable hotel
opens; therefore, the Company did not recognize revenues related to such fees
during the applicable periods, except for $12,000 related to the one hotel which
opened during the three months ended September 30, 1996.
-8-
<PAGE>
EXPENSES - The Company expenses were as summarized below:
<TABLE>
<CAPTION>
Six Months Three Months Nine Months
Ended Ended Ended
June 30, September 30, September 30,
1996 1996 1996
<S> <C> <C> <C>
Marketing and reservations $ 490,000 $ 532,000 $1,022,000
Other franchise sales and advertising 1,263,000 774,000 2,037,000
Corporate salaries, wages, and benefits 993,000 548,000 1,541,000
Other general and administrative 835,000 360,000 1,195,000
Depreciation and amortization 268,000 143,000 411,000
---------- ---------- ----------
$3,849,000 $2,357,000 $6,206,000
========== ========== ==========
</TABLE>
Reservation and marketing costs were $532,000 for the three month period ended
September 30, 1996 and $490,000 for the six months ended June 30, 1996. The
increase in marketing and reservation cost in the current 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 $617,000 were paid during the three months ended September
30, 1996 for 57 license agreements executed during the period compared with
commissions of $1,241,000 that were paid with respect to the 90 license
agreements executed during the six months ended June 30, 1996. 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 noncommission costs
related to the Company's franchise sales effort, were $761,000 for the three
months ended September 30, 1996 compared to $1,263,000 for the six months ended
June 30, 1996. The increase of $129,000 over the average quarterly costs in the
first six months of 1996 is due to the presence for a full quarter of the six
sales people added for the Hawthorn acquisition, and additional advertising and
promotion costs for the Hawthorn brand, the American Dream Program, and the
Company's Franchisee Financing Facility Program. Commission expense was $13,000
for the three months ended September 30, 1996 reflecting the commission paid to
the salesman on the one hotel that opened during the quarter.
Corporate salaries, wages and benefits, which are nonselling personnel costs,
were $548,000 during the three months ended September 30, 1996 and $993,000 for
the six months ended June 30, 1996. The increase of $51,000 over the average
quarterly cost in the first six months of 1996 was due to eight additional
personnel hired in the areas of training, franchise services, franchise
administration, and quality control to handle the increased servicing
requirements of additional executed license agreements.
Other general and administrative expenses were $360,000 during the three months
ended September 30, 1996 compared with $835,000 (including a $200,000
nonrecurring charge related to the anticipated termination of the Company's
corporate office lease) for the six months ended June 30, 1996. The increase of
$42,000 over the average quarterly cost (exclusive of nonrecurring lease costs)
in the first six months of 1996 was due primarily to legal fees and general
office expenses.
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<PAGE>
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.
OTHER INCOME (EXPENSES) - Interest income in the three and nine months ended
September 30, 1996 resulting from investments in cash and marketable securities
held by the Company was $206,000 and $537,000, respectively.
During the three and nine periods ended September 30, 1996, interest expense of
$36,000 and $108,000, respectively, was accrued on the note payable relating to
the purchase of the Microtel brand.
NET LOSS - A summary of operating results is as follows:
<TABLE>
<CAPTION>
Six Months Three Months Nine Months
Ended Ended Ended
June 30, September 30, September 30,
1996 1996 1996
<S> <C> <C> <C>
Net loss $3,195,000 $1,718,000 $4,913,000
========== ========== ==========
Loss applicable to common
stockholders $4,033,000 $2,158,000 $6,191,000
========== ========== ==========
</TABLE>
The Company had a net loss of $4,913,000 and a net loss applicable to common
stockholders of $6,191,000 (including $1,278,000 of accumulated but undeclared
and unpaid dividends on its 10% Cumulative Redeemable Exchangeable Preferred
Stock (the "Redeemable Preferred Stock") for the nine months ended September 30,
1996. 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 June 30, 1996 and September 30, 1996 of $2,792,000 and $4,486,000,
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
June 30, 1996 and September 30, 1996.
LIQUIDITY AND CAPITAL RESOURCES
Prior to October 24, 1996, the Company had 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 its old
common stock (i.e., stock prior to the reclassification of shares on October 11,
1996) and Redeemable Preferred Stock. Franchise application fees and interest
income generated cash of $3,341,000 and $537,000, respectively, for the nine
months ended September 30, 1996. In the nine months ended September 30, 1996,
the Company spent a total of $499,000, $382,000 of which was used to purchase
equipment and $117,000 was spent primarily on legal costs relating to the
Hawthorn Acquisition in April 1996.
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 $21,978,000.
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
-10-
<PAGE>
$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 franchising 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.
In addition, the Company will support a franchising program for Microtel Hotels
known as 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.
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. 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 $1,085,000 at September 30, 1996.
As of September 30, 1996, there were 163,500 shares of the Company's Redeemable
Preferred Stock outstanding. Pursuant to the terms of the Company's Amended and
Restated Certificate of Incorporation (the "Charter"), the Company is required,
upon the earlier of (i) September 29, 2007 or (ii) a Change of Control (as
defined in the Charter) 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
September 30, 1996, of $18,037,000.
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 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.
INFLATION
The rate of inflation has not had a material effect on the revenues or operating
results of the Company since its inception.
-11-
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable
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
The annual meeting of the Stockholders (the "Stockholders") of U.S.
Franchise Systems, Inc., a Delaware corporation (the "Company"), was held on
Friday, October 11, 1996, at the Company's offices at 13 Corporate Square, Suite
250, Atlanta, Georgia 30329 and by telephone conference
The following matters were submitted to the Stockholders: (i) approval
of the Initial Public Offering (the "IPO") of the Class A Common Stock of the
Company and the ratification of the filing of the Registration Statement; (ii) a
proposal to amend and restate the Certificate of Incorporation of the Company to
reclassify the outstanding shares, to create two classes of stock, and to
accomplish certain other changes; (iii) a proposal to approve and adopt
amendments to the Stockholders' Agreement (iv) the election of the following
persons to serve as directors: Michael A. Leven, Neal K. Aronson, Dean S. Adler,
Irwin Chafetz, Richard D. Goldstein, Barry S. Sternlicht and Jeffrey H.
Sonnenfeld; (v) a proposal to approve and adopt the U.S. Franchise Systems, Inc.
1996 Stock Option Plan and (vi) a proposal to approve and adopt the U.S.
Franchise Systems, Inc. 1996 Stock Option Plan for Non-Employee Directors.
Each proposal that came before the meeting was passed by the
Stockholders. The tally of the votes was as follows:
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<PAGE>
Tally of Votes at Annual Meeting of Stockholders of
U.S. Franchise Systems, Inc. Held on October 11, 1996
<TABLE>
<CAPTION>
Subject of Vote # For % For* # Against % Against # Abstain % Abstain
- --------------- ----- ------ --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
IPO/Registration
Statement 875,000 78.7% 0 0% 0 0%
Amended
Certificate of
Incorporation 875,000 78.7% 0 0% 0 0%
Amended
Stockholders
Agreement 875,000 78.7% 0 0% 0 0%
Directors:
Michael A. 875,000 78.7% 0 0% 0 0%
Leven
Neal K. 875,000 78.7% 0 0% 0 0%
Aronson
Dean S. Adler 875,000 78.7% 0 0% 0 0%
Irwin Chafetz 875,000 78.7% 0 0% 0 0%
Richard D. 875,000 78.7% 0 0% 0 0%
Goldstein
Barry S. 875,000 78.7% 0 0% 0 0%
Sternlicht
Jeffrey H. 875,000 78.7% 0 0% 0 0%
Sonnenfeld
1996 Stock
Option Plan 875,000 78.7% 0 0% 0 0%
1996 Stock
Option Plan for
Non-Employee
Directors 848,980 76.3% 0 0% 17,000 1.5%
</TABLE>
* Out of 1,112,345 shares of Common Stock entitled to vote
-13-
<PAGE>
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
No. Description
- ------- -----------
3.1 Amended and Restated Certificate of Incorporation of U.S.
Franchise Systems, Inc. (incorporated by reference from the
Company's Registration Statement on Form S-1 (Registration
No. 333-11427)).
3.2 Amended and Restated By-laws of the Company (incorporated by
reference from the Company's Registration Statement on Form S-
1 (Registration No. 333-11427)).
10.1 Form of License Agreement for Microtels (incorporated by
reference from the Company's Registration Statement on Form S-
1 (Registration No. 333-11427)).
10.2 Form of License Agreement for Hawthorn Suites Hotels
(incorporated by reference from the Company's Registration
Statement on Form S-1 (Registration No. 333-11427)).
10.3 Joint Venture Agreement between Microtel Franchise and
Development Corporation and U.S. Franchise Systems, Inc. dated
as of September 7, 1995 (incorporated by reference from the
Company's Registration Statement on Form S-1 (Registration No.
333-11427)).
10.4 Master Franchise Agreement between HSA Properties, L.L.C.
and U.S. Franchise Systems, Inc., dated as of March 27, 1996
(incorporated by reference from the Company's Registration
Statement on Form S-1 (Registration No. 333-11427)).
10.5 Amended and Restated Stockholders' Agreement, dated as of
September 29, 1995, as amended on October 11, 1996, among
the Company and the Original Investors (incorporated by
reference from the Company's Registration Statement on Form S-
1 (Registration No. 333-11427)).
-14-
<PAGE>
Exhibit
No. Description
- ------- -----------
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 effectively
simultaneously with the closing of the Offering (incorporated by
reference from the Company's Registration Statement on Form S-
1 (Registration No. 333-11427)).
10.7 Amended and Restated Employee Stock Purchase Agreement
between U.S. Franchise Systems, Inc. and Neal K. Aronson,
entered into as of September 29, 1995, as amended effective
simultaneously with the closing of the Offering (incorporated by
reference from the Company's Registration Statement on Form S-
1 (Registration No. 333-11427)).
10.8 Employment Agreement by and between U.S. Franchise Systems,
Inc. and Michael A. Leven, dated as of October 1, 1995
(incorporated by reference from the Company's Registration
Statement on Form S-1 (Registration No. 333-11427)).
10.9 Employment Agreement by and between U.S. Franchise Systems,
Inc. and Neal K. Aronson, dated as of October 1, 1995
(incorporated by reference from the Company's Registration
Statement on Form S-1 (Registration No. 333-11427)).
10.10 Voting Agreement between Michael A. Leven and Andrea Leven
to be entered into simultaneously with the closing of the Offering
(incorporated by reference from the Company's Registration
Statement on Form S-1 (Registration No. 333-11427)).
10.11 Voting Agreement between Michael A. Leven and Neal K. Aronson, to
be entered into simultaneously with the closing of the Offering
(incorporated by reference from the Company's Registration
Statement on Form S-1 (Registration No.
333-11427)).
10.12 Office Lease Agreement between Hallwood Real Estate Investors
Fund XV and U.S. Franchise Systems, Inc., dated September 25,
1996 (incorporated by reference from the Company's Registration
Statement on Form S-1 (Registration No. 333-11427)).
10.13 First Amendment to Office Lease between Hallwood 95, L.P. and U.S.
Franchise Systems, Inc., dated May 20, 1996 (incorporated by
reference from the Company's Registration Statement on Form S-1
(Registration No. 333-11427)).
-15-
<PAGE>
Exhibit
No. Description
- ------- -----------
10.14 U.S. Franchise Systems, Inc. 1996 Stock Option Plan
(incorporated by reference from the Company's Registration
Statement on Form S-1 (Registration No. 333-11427)).
10.15 U.S. Franchise Systems, Inc. 1996 Stock Option Plan for Non-
Employee Directors (incorporated by reference from the Company's
Registration Statement on Form S-1 (Registration No.
333-11427)).
10.16 Term Sheet, dated May 14, 1996, between the Company and NACC
regarding the Franchisee Financing Facility (incorporated by
reference from the Company's Registration Statement on Form S-1
(Registration No. 333-11427)).
27 Financial Data Schedule
(b) Reports on Form 8-K
Not Applicable
-16-
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
U.S. Franchise Systems
By /s/MICHAEL A. LEVEN
-------------------
Michael A. Leven
Chairman of the Board,
President
Chief Executive Officer
Date December 5, 1996
By /s/NEAL K. ARONSON
------------------
Neal K. Aronson
Executive Vice President
Chief Financial Officer
(Principal Financial and Accounting Officer)
Date December 5, 1996
-17-
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
No. Description Page
- ------- ----------- ----
<C> <S> <C>
3.1 Amended and Restated Certificate of Incorporation of U.S.
Franchise Systems, Inc. (incorporated by reference from the
Company's Registration Statement on Form S-1 (Registration
No. 333-11427)).
3.2 Amended and Restated By-laws of the Company (incorporated by
reference from the Company's Registration Statement on Form S-
1 (Registration No. 333-11427)).
10.1 Form of License Agreement for Microtels (incorporated by
reference from the Company's Registration Statement on Form
S-1 (Registration No. 333-11427)).
10.2 Form of License Agreement for Hawthorn Suites Hotels
(incorporated by reference from the Company's Registration
Statement on Form S-1 (Registration No. 333-11427)).
10.3 Joint Venture Agreement between Microtel Franchise and
Development Corporation and U.S. Franchise Systems, Inc. dated
as of September 7, 1995 (incorporated by reference from the
Company's Registration Statement on Form S-1 (Registration No.
333-11427)).
10.4 Master Franchise Agreement between HSA Properties, L.L.C.
and U.S. Franchise Systems, Inc., dated as of March 27, 1996
(incorporated by reference from the Company's Registration
Statement on Form S-1 (Registration No. 333-11427)).
10.5 Amended and Restated Stockholders' Agreement, dated as of
September 29, 1995, as amended on October 11, 1996, among
the Company and the Original Investors (incorporated by
reference from the Company's Registration Statement on
Form S-1 (Registration No. 333-11427)).
10.6 Amended and Restated Employee Stock Purchase Agreement
between U.S. Franchise Systems, Inc. and Michael A. Leven,
entered into as of September 29, 1995, as amended effectively
simultaneously with the closing of the Offering (incorporated by
reference from the Company's Registration Statement on Form
S-1 (Registration No. 333-11427)).
</TABLE>
-18-
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description Page
- ------- ----------- ----
<C> <S> <C>
10.7 Amended and Restated Employee Stock Purchase Agreement
between U.S. Franchise Systems, Inc. and Neal K. Aronson,
entered into as of September 29, 1995, as amended effective
simultaneously with the closing of the Offering (incorporated by
reference from the Company's Registration Statement on Form
S-1 (Registration No. 333-11427)).
10.8 Employment Agreement by and between U.S. Franchise Systems,
Inc. and Michael A. Leven, dated as of October 1, 1995
(incorporated by reference from the Company's Registration
Statement on Form S-1 (Registration No. 333-11427)).
10.9 Employment Agreement by and between U.S. Franchise Systems,
Inc. and Neal K. Aronson, dated as of October 1, 1995
(incorporated by reference from the Company's Registration
Statement on Form S-1 (Registration No. 333-11427)).
10.10 Voting Agreement between Michael A. Leven and Andrea Leven
to be entered into simultaneously with the closing of the Offering
(incorporated by reference from the Company's Registration
Statement on Form S-1 (Registration No. 333-11427)).
10.11 Voting Agreement between Michael A. Leven and Neal K. Aronson, to
be entered into simultaneously with the closing of the Offering
(incorporated by reference from the Company's Registration
Statement on Form S-1 (Registration No.
333-11427)).
10.12 Office Lease Agreement between Hallwood Real Estate Investors
Fund XV and U.S. Franchise Systems, Inc., dated September 25,
1996 (incorporated by reference from the Company's Registration
Statement on Form S-1 (Registration No. 333-11427)).
10.13 First Amendment to Office Lease between Hallwood 95, L.P. and U.S.
Franchise Systems, Inc., dated May 20, 1996 (incorporated by
reference from the Company's Registration Statement on Form S-1
(Registration No. 333-11427)).
10.14 U.S. Franchise Systems, Inc. 1996 Stock Option Plan
(incorporated by reference from the Company's Registration
Statement on Form S-1 (Registration No. 333-11427)).
</TABLE>
-19-
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description Page
- ------- ----------- ----
<C> <S> <C>
10.15 U.S. Franchise Systems, Inc. 1996 Stock Option Plan for Non-
Employee Directors (incorporated by reference from the Company's
Registration Statement on Form S-1 (Registration No.
333-11427)).
10.16 Term Sheet, dated May 14, 1996, between the Company and NACC
regarding the Franchisee Financing Facility (incorporated by
reference from the Company's Registration Statement on Form S-1
(Registration No. 333-11427)).
27 Financial Data Schedule
(b) Reports on Form 8-K
Not Applicable
</TABLE>
-20-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated statements of financial position of U.S. Franchise Systems, Inc.
and subsidiaries as of September 30, 1996 and the related consolidated
statements of operations for the nine months ended September 30, 1996.
Common stock and other stockholders' equity include common stock and additional
paid-in capital classified as redeemable common stock in the Company's 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.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 10,777,000
<SECURITIES> 0
<RECEIVABLES> 144,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 12,753,000
<PP&E> 516,000
<DEPRECIATION> 29,000
<TOTAL-ASSETS> 18,817,000
<CURRENT-LIABILITIES> 3,529,000
<BONDS> 731,000
18,037,000
0
<COMMON> 78,000
<OTHER-SE> (6,720,000)
<TOTAL-LIABILITY-AND-EQUITY> 18,817,000
<SALES> 0
<TOTAL-REVENUES> 864,000
<CGS> 0
<TOTAL-COSTS> 6,206,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 108,000
<INCOME-PRETAX> (4,913,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,913,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,191,000)
<EPS-PRIMARY> (0.58)
<EPS-DILUTED> (0.58)
</TABLE>
