<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 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
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U.S. FRANCHISE SYSTEMS, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
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<S> <C>
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
</TABLE>
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
U.S. FRANCHISE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
(Unaudited)
Dec. 31, 1996 Sept. 30, 1997
------------- --------------
<S> <C> <C>
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
============ ============
</TABLE>
See notes to consolidated financial statements.
3
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U.S. FRANCHISE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
3 MONTHS ENDED 3 MONTHS ENDED 9 MONTHS ENDED 9 MONTHS ENDED
SEPT. 30, 1996 SEPT. 30, 1997 SEPT. 30, 1996 SEPT. 30, 1997
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
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)
===========================================================================
</TABLE>
See notes to consolidated financial statements.
4
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U.S. FRANCHISE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED NINE MONTHS ENDED
SEPT 30, 1996 SEPT 30, 1997
------------- -------------
<S> <C> <C>
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
============
</TABLE>
See notes to consolidated financial statements.
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 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.
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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 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:
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<TABLE>
<CAPTION>
===================================================================================================================
MICROTEL FRANCHISE DATA AS OF SEPT 30, AS OF DEC 31 AS OF SEPT 30,
(inception to date) 1996 1996 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
===================================================================================================================
</TABLE>
(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:
<TABLE>
<CAPTION>
=========================================================================================================================
HAWTHORN SUITES FRANCHISE DATA AS OF SEPT 30, AS OF DEC 31, AS OF SEPT 30,
(inception to date) 1996 1996 1997
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
=========================================================================================================================
</TABLE>
(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:
<TABLE>
<CAPTION>
=====================================================================================================================
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
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
=====================================================================================================================
</TABLE>
8
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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:
<TABLE>
<CAPTION>
==================================================================================================================
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS
ENDED SEPT 30, ENDED SEPT 30, ENDED SEPT 30, ENDED SEPT 30,
1996 1997 1996 1997
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
==================================================================================================================
</TABLE>
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.
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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
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<PAGE> 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:
<TABLE>
<CAPTION>
============================================================================================================
THREE MONTHS THREE MONTHS NINE MONTHS ENDED NINE MONTHS
ENDED SEPT 30, ENDED SEPT 30, SEPT 30, 1996 ENDED SEPT 30,
1996 1997 1997
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
============================================================================================================
</TABLE>
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
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<PAGE> 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
<PAGE> 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.
<TABLE>
<S> <C>
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
==========
</TABLE>
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):
<TABLE>
<S> <C>
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
</TABLE>
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
<PAGE> 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
<PAGE> 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)
<TABLE>
<S> <C>
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
</TABLE>
15
<PAGE> 16
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
27.1 Financial Data Schedule
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
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.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 21,740
<SECURITIES> 0
<RECEIVABLES> 195
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 25,726
<PP&E> 944
<DEPRECIATION> 95
<TOTAL-ASSETS> 36,515
<CURRENT-LIABILITIES> 6,207
<BONDS> 19,175
0
0
<COMMON> 426<F1>
<OTHER-SE> 5,524
<TOTAL-LIABILITY-AND-EQUITY> 36,515
<SALES> 2,614
<TOTAL-REVENUES> 2,614
<CGS> 9,129
<TOTAL-COSTS> 9,129
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,452
<INCOME-PRETAX> (6,870)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,870)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,870)
<EPS-PRIMARY> (0.55)<F2>
<EPS-DILUTED> (0.55)<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>
