<PAGE> 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.
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U.S. FRANCHISE SYSTEMS, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
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
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
U.S. FRANCHISE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
<TABLE>
(UNAUDITED)
DECEMBER 31, 1996 MARCH 31, 1997
----------------- --------------
<S> <C> <C>
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.
</TABLE>
3
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U.S. FRANCHISE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED QUARTER ENDED
MARCH 31, 1996 MARCH 31, 1997
---------------- ----------------
<S> <C> <C>
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.
</TABLE>
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U.S. FRANCHISE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED QUARTER ENDED
MARCH 31, 1996 MARCH 31, 1997
-------------- --------------
<S> <C> <C>
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.
</TABLE>
5
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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.
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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:
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<TABLE>
<CAPTION>
AS OF MARCH 31, AS OF DEC 31, AS OF MARCH 31,
MICROTEL FRANCHISE DATA 1996 1996 1997
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
- -------------------------------------------------------------------------------------------
</TABLE>
(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:
<TABLE>
<CAPTION>
AS OF MARCH 31, AS OF DEC 31, AS OF MARCH 31,
HAWTHORN SUITES FRANCHISE DATA 1996 1996 1997
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
- ---------------------------------------------------------------------------------------
</TABLE>
(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.
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REVENUE - The Company has had revenues from the following sources:
<TABLE>
<CAPTION>
FIRST QUARTER ENDED YEAR ENDED FIRST QUARTER ENDED
MARCH 31, 1996 DECEMBER 31, 1996 MARCH 31, 1997
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
- ------------------------------------------------------------------------------------------------
</TABLE>
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:
<TABLE>
<CAPTION>
FIRST QUARTER ENDED YEAR ENDED FIRST QUARTER ENDED
MARCH 31, 1996 DECEMBER 31, 1996 MARCH 31, 1997
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
- -------------------------------------------------------------------------------------------------------
</TABLE>
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.
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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).
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NET LOSS - A summary of operating results is as follows:
<TABLE>
<CAPTION>
FIRST QUARTER ENDED YEAR ENDED FIRST QUARTER ENDED
MARCH 31, 1996 DECEMBER 31, 1996 MARCH 31, 1997
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
- ------------------------------------------------------------------------------------
</TABLE>
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
<PAGE> 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
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ITEM 6. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
A) EXHIBITS:
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
27.1 Financial Data Schedule for the quarter ended March 31, 1997,
submitted to the Securities and Exchange Commission in electronic
format.
</TABLE>
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
<PAGE> 14
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
27.1 Financial Data Schedule
14
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
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.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 28,467
<SECURITIES> 0
<RECEIVABLES> 133
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 31,433
<PP&E> 365
<DEPRECIATION> 50
<TOTAL-ASSETS> 37,826
<CURRENT-LIABILITIES> 5,688
<BONDS> 18,708
0
0
<COMMON> 426<F1>
<OTHER-SE> 9,738
<TOTAL-LIABILITY-AND-EQUITY> 37,826
<SALES> 545
<TOTAL-REVENUES> 545
<CGS> 2,963
<TOTAL-COSTS> 2,963
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 480
<INCOME-PRETAX> (2,515)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,515)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,515)
<EPS-PRIMARY> (0.20)<F2>
<EPS-DILUTED> (0.20)<F2>
<FN>
<F1>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.
<F2>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.
</FN>
</TABLE>
