<PAGE>
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- -------------------------------------------------------------------------------
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 June 30, 1998
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 0-23941
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U.S. FRANCHISE SYSTEMS, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 58-2361501
(State or other jurisdiction of (I.R.S Employer
Incorporation or Organization) Identification No.)
13 Corporate Square, Suite 250 30329
Atlanta, Georgia (Zip Code)
(Address of Principal Executive Offices)
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 17,167,194 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 August 1, 1998.
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- -------------------------------------------------------------------------------
1
<PAGE>
U.S. FRANCHISE SYSTEMS, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Statements of Financial Position at December 31, 1997 and June 30, 1998 (Unaudited)................ 3
Consolidated Statements of Operations for the three and six months ended June 30, 1998 and 1997 (Unaudited)..... 4
Consolidated Statement of Cash Flows for the six months ended June 30, 1998 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........................... 8
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...................................................... 15
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS............................................................................................... 15
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS....................................................................... 15
ITEM 3. DEFAULTS UPON SENIOR SECURITIES................................................................................. 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............................................................. 16
ITEM 5. OTHER INFORMATION............................................................................................... 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................................................................................ 17
SIGNATURES...................................................................................................... 17
EXHIBIT INDEX................................................................................................... 18
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
U.S. FRANCHISE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, 1998 DECEMBER 31, 1997
------------- -----------------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and temporary cash investments........................................ $ 21,501,000 $ 15,890,000
Accounts receivable (net of allowance for doubtful accounts
of $27,000 and $17,000 as of June 30, 1998 and
December 31, 1997, respectively)......................................... 1,244,000 268,000
Deposits................................................................... 402,000 114,000
Prepaid expenses........................................................... 271,000 602,000
Promissory notes receivable................................................ 3,241,000 862,000
Deferred commissions....................................................... 2,289,000 2,563,000
---------------- ----------------
Total current assets....................................... 28,948,000 20,299,000
PROMISSORY NOTES RECEIVABLE...................................................... 19,604,000 2,869,000
PROPERTY AND EQUIPMENT-Net....................................................... 2,718,000 5,595,000
FRANCHISE RIGHTS-Net............................................................. 25,952,000 3,322,000
DEFERRED COMMISSIONS............................................................. 4,803,000 3,049,000
OTHER ASSETS-Net................................................................. 1,869,000 1,217,000
---------------- ----------------
Total assets............................................... $ 83,894,000 $ 36,351,000
---------------- ----------------
---------------- ----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable........................................................... $ 1,966,000 $ 1,138,000
Commissions payable........................................................ 969,000 1,171,000
Deferred application fees.................................................. 3,530,000 4,402,000
Accrued expenses........................................................... 880,000 990,000
Due to Hudson Hotels Corporation........................................... 454,000 454,000
---------------- ----------------
Total current liabilities.................................. 7,799,000 8,155,000
DEFERRED APPLICATION FEES........................................................ 6,800,000 4,586,000
SUBORDINATED DEBENTURES.......................................................... - 19,412,000
---------------- ----------------
Total liabilities.......................................... 14,599,000 32,153,000
REDEEMABLE STOCK:
Common shares, par value $0.01 per share; issued and outstanding
3,128,473 (net of 58,807 shares in Treasury) at June 30, 1998 and
December 31, 1997 entitled to redemption under certain
circumstances to $324,000 (net of $6,000 in Treasury) at June 30,
1998 and December 31, 1997, respectively................................. 324,000 324,000
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 14,038,721 Class A shares and
2,707,919 Class B shares at June 30, 1998; issued and outstanding
6,716,499 Class A shares and 2,707,919 Class B shares at December
31, 1997................................................................ 167,000 96,000
Capital in excess of par........................................................ 89,228,000 21,092,000
Accumulated deficit............................................................. (20,424,000) (17,314,000)
---------------- ----------------
Total stockholders' equity......................................... 68,971,000 3,874,000
---------------- ----------------
---------------- ----------------
$ 83,894,000 $ 36,351,000
---------------- ----------------
---------------- ----------------
</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 THREE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
JUNE 30, 1998 JUNE 30, 1997 JUNE 30, 1998 JUNE 30, 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
REVENUES:
Royalty and Fee Income....................... $ 1,778,000 $ 52,000 $ 2,406,000 $ 84,000
Franchise application fees................... 903,000 305,000 1,505,000 420,000
Other........................................ 114,000 27,000 179,000 39,000
---------------- ----------------- ---------------- ---------------
2,795,000 384,000 4,090,000 543,000
EXPENSES:
General and administrative................... 3,443,000 2,153,000 5,847,000 4,525,000
Franchise sales commissions.................. 516,000 165,000 829,000 237,000
Depreciation and amortization................ 393,000 135,000 603,000 268,000
---------------- ----------------- ---------------- ---------------
4,352,000 2,453,000 7,279,000 5,030,000
---------------- ----------------- ---------------- ---------------
LOSS FROM OPERATIONS........................... (1,557,000) (2,069,000) (3,189,000) (4,487,000)
OTHER INCOME (EXPENSE):
Interest income.............................. 599,000 375,000 828,000 758,000
Interest expense............................. (298,000) (480,000) (749,000) (960,000)
---------------- ----------------- ---------------- ---------------
NET LOSS....................................... $(1,256,000) $(2,174,000) $(3,110,000) $(4,689,000)
---------------- ----------------- ---------------- ---------------
---------------- ----------------- ---------------- ---------------
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING.................................. 17,837,891 12,580,395 15,466,070 12,580,395
---------------- ----------------- ---------------- ---------------
---------------- ----------------- ---------------- ---------------
NET LOSS PER SHARE-BASIC AND DILUTED........... $(0.07) $(0.17) $(0.20) $(0.37)
---------------- ----------------- ---------------- ---------------
---------------- ----------------- ---------------- ---------------
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE>
U.S. FRANCHISE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 1998 JUNE 30, 1997
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss.............................................................................. $ (3,110,000) $ (4,689,000)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization................................................. 603,000 267,000
Deferred compensation amortization............................................ 129,000 145,000
Changes in assets and liabilities:
Increase in deposits and accounts receivable.................................. (1,264,000) (43,000)
(Increase)/Decrease in prepaid expenses....................................... 214,000 (217,000)
Increase in promissory notes receivable....................................... (4,114,000) (442,000)
Increase in deferred commissions.............................................. (1,480,000) (1,095,000)
Increase in other assets...................................................... (688,000) (604,000)
Increase/(Decrease) in accounts payable....................................... 828,000 (451,000)
Decrease in accrued expenses.................................................. (110,000) (7,000)
Decrease in commissions payable............................................... (202,000) (81,000)
Increase in deferred application fees......................................... 1,342,000 1,562,000
Increase in subordinated debentures........................................... - 461,000
----------------- -----------------
Net cash used in operating activities................................... (7,852,000) (5,194,000)
INVESTING ACTIVITIES:
Acquisition of property and equipment.............................................. (3,016,000) (62,000)
Issuance of long-term note receivable.............................................. (15,000,000) -
Proceeds from short-term debt...................................................... 10,000,000 -
Repayment of short-term debt....................................................... (10,000,000) -
Proceeds from sale of properties................................................... 5,752,000 -
Acquisition of franchise rights.................................................... (2,869,000) -
----------------- -----------------
Net cash used in investing activities................................... (15,133,000) (62,000)
FINANCING ACTIVITIES:
Repayment of subordinated debentures............................................... (19,412,000) -
Issuance of common stock........................................................... 48,008,000 -
----------------- -----------------
Net cash provided by financing activities............................... 28,596,000 -
----------------- -----------------
NET INCREASE (DECREASE) IN CASH AND TEMPORARY CASH INVESTMENTS........................... $ 5,611,000 $ (5,256,000)
CASH AND TEMPORARY INVESTMENTS
Beginning of period................................................................ 15,890,000 31,188,000
----------------- ------------------
End of period...................................................................... $ 21,501,000 $ 25,932,000
----------------- ------------------
----------------- ------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Noncash activities:
Issuance of 2,222,222 shares for acquisition of Hawthorn franchise rights.......... $ 17,777,000 $ -
----------------- ------------------
----------------- ------------------
Issuance of stock for acquisition of Best Inns and Suites franchise rights......... $ 2,293,000 $ -
----------------- ------------------
----------------- ------------------
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
<PAGE>
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 U.S. Franchise Systems, Inc. ("USFS" or the "Company") Annual Report on
Form 10-K for the year ended December 31, 1997 and the current report on Form
8-K dated April 22, 1998, filed with the Securities and Exchange Commission.
The results of operations for the six months ended June 30, 1998 are not
necessarily indicative of results that may be expected for the full year.
2. RECLASSIFICATIONS
Certain amounts in the June 30, 1997 statement of operations have been
reclassified to conform to current year classifications.
3. EARNINGS PER SHARE
Earnings per share for the three and six months ended June 30, 1998 and
three and six months ended June 30, 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.
4. RESERVATIONS AND ADVERTISING FUNDS
Subsequent to June 30, 1998, the Company has created independent
reservations and advertising funds ("the Funds") for the purpose of
collecting and disbursing reservations and advertising fees related to the
Microtel and Hawthorn brands. In connection with the creation of the Funds,
the Company eliminated reporting reservations and advertising fees and
expenses from its consolidated financial statements for the three months
ended June 30, 1998. Any differences between reservations and advertising
revenues and expenses for quarterly periods prior to March 31, 1998 have been
included in general and administrative expenses. The new presentation is
considered preferable to prior practice giving consideration to industry
trends, to providing a consistent reporting policy among its brands and in
understanding the Company's operating performance. The Company will manage
the reservations and advertising programs on behalf of the Funds.
5. ACQUISITION OF BEST INNS
On April 28, 1998, the Company completed its acquisition of the
exclusive worldwide franchise rights to the Best Inns hotel brands, including
the franchise agreements for the existing Best Inns hotels. In addition, the
Company acquired the management contracts and certain personnel relating to
the management of 29 Best Inns hotels.
In connection with this transaction, the Company and the sellers entered
into an agreement with Alpine Hospitality Ventures LLC ("Ventures") pursuant
to which Ventures (through a wholly-owned subsidiary) acquired 17 Best Inns
hotels (the "Acquired Hotels"). Contemporaneously with the closing of the
transaction, new franchise and management agreements were entered into
between the Company and Ventures with respect to the Acquired Hotels. As a
result of the transaction, the Company owns the exclusive worldwide franchise
rights to the Best Inns hotel brands which were recorded at $4,500,000
comprised of 150,000 shares of Class A Common Stock valued at $11.13 per
share ($1,668,000 in the aggregate),
6
<PAGE>
and the discount to the market of $11.13 per share on 200,000 shares of Class
A Common Stock sold for cash at $8.00 per share ($625,000 in the aggregate)
and related expenses.
To facilitate the transaction, the Company made a $15 million unsecured
subordinated loan to Ventures at an interest rate of 12% per annum, interest
on which will be paid in cash to the extent there is available cash and
otherwise will be paid-in-kind. The loan is subordinated to a guarantee
provided by Ventures in connection with a third-party loan in the principal
amount of approximately $65 million to its subsidiary that owns the Acquired
Hotels and is subordinated to such third party loan. The Company made the
subordinated loan and issued the Alpine Shares (as defined below) in order to
induce Ventures to purchase from the Sellers the Acquired Hotels. The Company
also committed to make up to $7.5 million of additional loans to Ventures
under certain circumstances.
Also in connection with the Best Inns acquisition, the Company issued to
Alpine Hospitality Equities LLC ("Alpine Equities"), an affiliate of
Ventures, 350,000 shares (the "Alpine Shares") of Class A Common Stock for a
purchase price of $1.6 million. Alpine Equities was granted certain demand
and piggy-back registration rights on customary terms with respect to the
Alpine Shares, as well as certain tag-along rights on certain sales of Common
Stock made by Messrs. Leven and Aronson. Additionally, the Company agreed to
pay to Alpine Equities $1,000 per year for each Best Inns hotel that is added
to the Best Inns system of hotels after the closing date of the transaction,
provided that such new hotels are paying royalties to the Company or any of
its affiliates (the "New Hotel Fee").
Richard D. Goldstein, a director of the Company, is an Executive Vice
President and a Senior Managing Director of the general partner Alpine Equity
Partners L.P., the entity that indirectly owns and controls a majority of
Alpine Equities and Ventures.
6. COMPLETION OF EQUITY OFFERING
On May 19, 1998, the Company completed a secondary public offering of
4,250,000 shares of Class A Common Stock at $10.50 per share (the "Equity
Offering"). Net proceeds to the Company from the Equity Offering were
approximately $40,800,000. As of June 30, 1998, approximately $30,100,000 of
such net proceeds had been used by the Company, primarily to: (i) repay
approximately $20,100,000 on the Company's 10% Subordinated Debentures due
September 29, 2007, consisting of the aggregate principal amount outstanding
plus interest accrued thereon to May 15, 1998, the date of repayment, and
(ii) repay approximately $10 million aggregate principal amount outstanding
under a loan incurred on April 28, 1998 in connection with the Company's
acquisition of the exclusive worldwide franchise rights to the Best Inns
hotel brands, plus interest accrued thereon to May 19, 1998, the date of
repayment. The remaining proceeds of approximately $10,700,000 were held
either as cash or cash equivalents and will be used for working capital and
general corporate purposes.
7. ACCOUNTING PRONOUNCEMENTS
The Company adopted Financial Accounting Standards Board (FASB)
Statement No. 130, "Reporting Comprehensive Income," at the beginning of
fiscal year 1998. Statement No. 130 established standards for reporting and
display of comprehensive earnings and its components in financial statements;
however, the adoption of this Statement had no impact on the Company's net
earnings or shareholders' equity.
The Financial Accounting Standards Board (FASB) has issued two
accounting pronouncements which the Company will adopt in the fourth quarter
of 1998. FASB Statement No. 131 "Disclosures about Segments of an Enterprise
and Related Information" requires that a publicly-held company report
financial and descriptive information about its operating segments in
financial statements issued to shareholders for interim and annual periods.
The statement also requires additional disclosures with respect to products
and services, geographic areas of operation, and major customers.
7
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FASB Statement No. 132 "Employers' Disclosures about Pensions and Other
Postretirement Benefits-an amendment of FASB Statements NO. 87, 88, and 106"
requires revised disclosures about pension and other postretirement benefit
plans. The Company does not expect that adoption of the disclosure
requirements of this pronouncement will have a material impact on its
financial statements.
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" 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. and its subsidiaries ("USFS" or the
"Company") 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.
The Company was formed to acquire, market and service well-positioned
brands with potential for rapid unit growth through franchising. The
Company's initial brands, which are in the lodging industry, were the
Microtel and Hawthorn Suites brands. The Company acquired the rights to these
brands because of their potential for significant growth, which reflects,
among other things, their potential profitability for franchisees at the
property level and their positions in attractive segments of the lodging
industry. In addition, the Company recently acquired the exclusive worldwide
franchise rights to the Best Inns brand, an economy and upper economy brand
positioned between the budget Microtel and upscale Hawthorn Suites brands.
With the acquisition of the Best Inns brand, the Company also acquired
management contracts and capabilities. (See footnote 5.- Acquisition of Best
Inns.)
As a franchisor, the Company licenses the use of its brand names to
independent hotel owners and operators (i.e. franchisees). The Company
provides its franchisees with a variety of benefits and services designed to
(i) decrease the development costs, (ii) shorten the time frame and reduce
the complexity of the construction process and (iii) increase the occupancy
rates, revenues and profitability of the franchised
8
<PAGE>
properties. The Company offers prospective franchisees access to financing, a
business format, design and construction assistance (including architectural
plans), uniform quality standards, training programs, national reservations
systems, national and local advertising, promotional campaigns and volume
purchasing discounts.
The Company expects that its future revenues will consist primarily of
(i) franchise royalty fees, (ii) franchise application fees, (iii) various
management fees, and (iv) payments made by vendors who supply the Company's
franchisees with various products and services. The Company recognizes
franchise application fees as revenue only upon the opening of the underlying
hotels.
The Company's predecessor was incorporated in Delaware in August 1995.
The Company was incorporated in Delaware on November 26, 1997 and merged with
its predecessor on March 12, 1998 with the Company as the surviving
corporation. The Company's executive offices are located at 13 Corporate
Square, Suite 250, Atlanta, Georgia 30329 and its telephone number is (404)
321-4045.
Comparisons have been made between the three and six months ended June
30, 1998 and June 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:
<TABLE>
<CAPTION>
MICROTEL FRANCHISE DATA AS OF JUNE 30, AS OF JUNE 30,
1998 1997
--------------- --------------
<S> <C> <C>
Properties open (1).......................................................... 98 43
Executed agreements & under construction(2)............................ 53 25
Executed franchise agreements but not under construction(3)............ 276 220
Accepted applications (4).............................................. 84 73
Total under development and accepted applications (5)........................ 413 318
--------------- --------------
OPEN PLUS UNDER DEVELOPMENT AND ACCEPTED APPLICATIONS........................ 511 361
</TABLE>
- -----------
(1) The Company does not receive royalties from twenty-eight hotels open as of
June 30, 1998 and June 30, 1997, respectively.
(2) The Company will not receive royalties from one of the hotels under
construction as of June 30, 1998.
(3) The Company will not receive royalties from four and five of the executed
franchise agreements as of June 30, 1998 and June 30, 1997, respectively.
(4) The Company will not receive royalties from two of the franchise
applications approved as of June 30, 1997.
(5) There can be no assurance that properties under development or for which
applications have been accepted will result in open hotels.
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:
9
<PAGE>
<TABLE>
<CAPTION>
HAWTHORN SUITES FRANCHISE DATA AS OF JUNE 30, AS OF JUNE 30,
1998 1997
-------------- --------------
<S> <C> <C>
Properties open (1)................................................... 34 20
Executed agreements & under construction........................ 24 5
Executed franchise agreements but not under construction........ 79 41
Accepted applications........................................... 35 22
Total under development and accepted applications (2)................. 138 68
-------------- --------------
OPEN PLUS UNDER DEVELOPMENT AND ACCEPTED APPLICATIONS................. 172 88
</TABLE>
- -----------
(1) The Company was not receiving royalties from 18 of the hotels open as of
June 30, 1997. As a result of the Company acquiring the full ownership and
interest to the exclusive worldwide rights to franchise and control the
development and operation of the Hawthorn Suites brand of hotels on March
12, 1998 ("HSA Acquisition"), the Company now receives and retains all
royalties from all hotels as of March 1998.
(2) There can be no assurance that properties under development or for which
applications have been accepted will result in open hotels.
Since acquiring the Best Inns brand in April 1998, the Company has realized
franchise sales growth as follows:
<TABLE>
<CAPTION>
AS OF JUNE 30, AS OF JUNE 30,
BEST INNS FRANCHISE DATA 1998 1997
------------------------ -------------- --------------
<S> <C> <C>
Properties open ...................................................... 35 --
Executed agreements & under construction ....................... 4 --
Executed franchise agreements but not under construction........ 8 --
Accepted applications .......................................... 30 --
Total under development and accepted applications (1) ................ 42 --
-------------- --------------
OPEN PLUS UNDER DEVELOPMENT AND ACCEPTED APPLICATIONS ................... 77 --
</TABLE>
- -----------
(1) There can be no assurance that properties under development or for which
applications have been accepted will result in open hotels.
REVENUE-The Company has derived revenues from the following sources:
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1998 JUNE 30, 1997 JUNE 30, 1998 JUNE 30, 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Royalty and fee income........ $1,778,000 $ 52,000 $2,406,000 $ 84,000
Franchise application fees.... 903,000 305,000 1,505,000 420,000
Other 114,000 27,000 179,000 39,000
------- ------ ------- ------
TOTAL $2,795,000 $ 384,000 $4,090,000 $ 543,000
</TABLE>
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997
Royalty and fee income increased $1,726,000 for the three months ended
June 30, 1998 as compared to the comparable prior year's period. The increase
is primarily attributable to (i) the royalty fees received on the 55
Microtels and 14 Hawthorn Suites open on June 30, 1998 which were not open on
June 30, 1997, (ii) the royalty fees received on the 18 Hawthorn Suites which
started paying royalties to the Company in March 1998 with the completion of
the HSA Acquisition, (iii) the royalty fees received on 35 Best Inns hotels
in connection with the Company's acquisition of the Best Inns brands in April
1998 (see
10
<PAGE>
footnote 5.-Acquisition of Best Inns), (iv) Development Fund management fee
revenue, and (v) management fees for the Best Inns hotels that the Company
manages as a result of the Best Inns acquisition.
Franchise application fees increased $598,000 for the three months ended
June 30, 1998 as compared to the comparable prior year's period. The increase
is primarily attributable to the application fees received on the 28 Microtel
and Hawthorn properties opened during the second quarter of 1998 compared to
the 12 properties opened during the second quarter of 1997.
Other income increased $87,000 for the three months ended June 30, 1998
as compared to the comparable prior year's period. The majority of the
increase is attributable to the incremental fees received from the National
Accounts program for the three months ended June 30, 1998.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
Royalty and fee income increased $2,322,000 for the six months ended
June 30, 1998 as compared to the comparable prior year's period. The increase
is primarily attributable to (i) the royalty fees received on the 55
Microtels and 14 Hawthorn Suites open on June 30, 1998 which were not open on
June 30, 1997, (ii) the royalty fees received on the 18 Hawthorn Suites which
started paying royalties to the Company in March 1998 with the completion of
the HSA Acquisition, (iii) the royalty fees received on 35 Best Inns hotels
in connection with the Company's acquisition of the Best Inns brands in April
1998 (see footnote 5.-Acquisition of Best Inns), (iv) Development Fund
management fee revenue, and (v) management fees for the Best Inns hotels that
the Company manages as a result of the Best Inns acquisition.
Franchise application fees increased $1,085,000 for the six months ended
June 30, 1998 as compared to the comparable prior year's period. The increase
is primarily attributable to the application fees received on the 42 Microtel
and Hawthorn properties opened during the first two quarters of 1998 compared
to the 16 properties opened during the first two quarters of 1997.
Other income increased $140,000 for the six months ended June 30, 1998
as compared to the comparable prior year's period. The majority of the
increase is attributable to the incremental fees received from the National
Accounts program for the six months ended June 30, 1998.
EXPENSES-The Company's expenses were as summarized below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1998 JUNE 30, 1997 JUNE 30, 1998 JUNE 30, 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
General and administrative............. $3,443,000 $2,153,000 $5,847,000 44,525,000
Franchise sales commissions............ 516,000 165,000 829,000 237,000
Depreciation and amortization.......... 393,000 135,000 603,000 268,000
------- ------- ------- -------
TOTAL.................................. $4,352,000 $2,453,000 $7,279,000 $5,030,000
</TABLE>
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997
Franchise sales commissions increased $351,000 for the three months
ended June 30, 1998 as compared to the comparable prior year's period because
commissions were expensed for the 28 hotels which opened during the second
quarter of 1998 compared to 12 hotels which opened during the second quarter
of 1997.
General and administrative expenses increased $1,290,000 for the three
months ended June 30, 1998 as compared to the comparable prior year's period
primarily due to additional salaries, wages and benefits, and general office
and travel expenses in connection with the
11
<PAGE>
acquisition of the Best Inns brand and the related management contracts.
Depreciation and amortization expense primarily includes amortization
for the cost of acquiring the Microtel, Hawthorn Suites and Best Inns hotel
brands and depreciation of fixed assets.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
Franchise sales commissions increased $592,000 for the six months ended
June 30, 1998 as compared to the comparable prior year's period because
commissions were expensed for the 42 hotels which opened during the first two
quarters of 1998 compared to 16 hotels which opened during the first two
quarters of 1997.
General and administrative expenses increased $1,322,000 for the six
months ended June 30, 1998 as compared to the comparable prior year's period
primarily due to additional salaries, wages and benefits, and general office
and travel expenses in connection with the acquisition of the Best Inns brand
and the related management contracts.
Depreciation and amortization expense primarily includes amortization
for the cost of acquiring the Microtel, Hawthorn Suites and Best Inns hotel
brands and depreciation of fixed assets.
OTHER INCOME (EXPENSES)
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1998 JUNE 30, 1997 JUNE 30, 1998 JUNE 30, 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Interest income............................ $ 599,000 $ 375,000 $ 828,000 $ 758,000
Interest expense........................... $ 298,000 $ 480,000 $ 749,000 $ 960,000
</TABLE>
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997
Interest income, resulting from investments in cash and marketable
securities, increased $224,000 for the three months ended June 30, 1998 as
compared to the comparable prior year's period.
Interest expense decreased $182,000 for the three months ended June 30,
1998 as compared to the comparable prior year's period. The decrease is a
result of repayment of the Company's 10% Subordinated Debentures during the
second quarter 1998.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
Interest income, resulting from investments in cash and marketable
securities, increased $70,000 for the six months ended June 30, 1998 as
compared to the comparable prior year's period.
Interest expense decreased $211,000 for the three months ended June 30,
1998 as compared to the comparable prior year's period. The decrease is a
result of repayment of the Company's 10% Subordinated Debentures during the
second quarter 1998.
NET LOSS-A summary of operating results is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1998 JUNE 30, 1997 JUNE 30, 1998 JUNE 30, 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net Loss............................ $1,256,000 $2,174,000 $3,110,000 $4,689,000
</TABLE>
12
<PAGE>
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997
The Company's net loss decreased $918,000 for the three months ended
June 30, 1998 as compared to the comparable prior year's period. Revenues
increased $2,411,000 and were offset by an increase in operating expenses of
$1,899,000. The Company did not expect to generate a profit in the second
quarter of 1997 or 1998 as it was investing in its infrastructure to
facilitate future growth. Total hotels open plus under development and
accepted applications increased from 449 to 760 from June 30, 1997 to June
30, 1998. A total of 139 of the 167 hotels open as of June 30, 1998 were
paying royalties to the Company compared to only 17 of the 63 properties open
as of June 30, 1997. The Company continues to focus on building its future
royalty stream.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
The Company's net loss decreased $1,579,000 for the six months ended
June 30, 1998 as compared to the comparable prior year's period. Revenues
increased $3,547,000 and was offset by an increase in operating expenses of
$2,249,000. The Company did not expect to generate a profit in the first two
quarters of 1997 or 1998 as it was investing in its infrastructure to
facilitate future growth. Total hotels open plus under development and
accepted applications increased from 449 to 760 from June 30, 1997 to June
30, 1998. A total of 139 of the 167 hotels open as of June 30, 1998 were
paying royalties to the Company compared to only 17 of the 63 properties open
as of June 30, 1997. The Company continues to focus on building its future
royalty stream.
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 1995, the Company
raised approximately $17.5 million in gross proceeds through private 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 a public offering of
1,825,000 shares of Class A Common Stock at $13.50 per share (the "Initial
Offering"). Net proceeds to the Company from the Initial Offering were
approximately $21,390,000. As of June 30, 1998 approximately all of such
proceeds had been used by the Company (details of the use of proceeds are
noted in Part II. Item 2. Changes in Securities and Use of Proceeds).
In connection with the establishment of Constellation Development Fund,
LLC ("the Development Fund") on March 17, 1998, the Company has committed to
lend up to $10 million to Constellation Equity Corp. ("Constellation"), which
will use the funds to make a subordinated equity investment in the
Development Fund. As of June 30, 1998, the Company has lent $1,068,000 to
Constellation. The Company's loan bears interest at an annual rate of 8%, is
non-recourse and is repayable from distributions and payments made to
Constellation from the Development Fund. In addition, the Company sold an
aggregate of 500,000 shares of Class A Common Stock to NorthStar Capital
Partners LLC (together with its affiliates, "NorthStar")and Lubert-Adler Real
Estate Opportunity Funds (together with its affiliates, "Lubert-Adler") for a
purchase price of $11.25 per share totaling $5.625 million. NorthStar and
Lubert-Adler also have the right to purchase up to an additional 500,000
shares of Class A Common Stock, exercisable as funds are committed by the
Development Fund, at a price of $11.25 per share. The Company will also be
paid $3.5 million over the next five years to manage the Development Fund.
On April 28, 1998 in connection with the Best Inns acquisition, the
Company made a $15 million unsecured subordinated loan to Ventures at an
interest rate of 12% per annum, (interest on which will be paid in cash to
the extent there is available cash and otherwise will be paid-in-kind) and
issued to Alpine Equities 350,000 shares of Class A Common Stock for a
purchase price of $1.6 million. (See footnote 5. Acquisition of Best Inns.)
The Company used the proceeds of a $10.0 million loan from NationsBank N.A.,
the $1.6 million it received from the sale to Alpine Equities of 350,000
shares of Class A Common Stock, and
13
<PAGE>
$3.4 million of its own cash to make the $15 million loan to Ventures. In
addition, the Company used its own cash to pay the expenses incurred in
connection with these transactions.
On May 19, 1998, the Company completed a secondary public offering of
4,250,000 shares of Class A Common Stock at $10.50 per share (the "Equity
Offering"). Net proceeds to the Company from the Equity Offering were
approximately $40,800,000. As of June 30, 1998, approximately $30,100,000 of
such net proceeds had been used by the Company, primarily to: (i) repay
approximately $20,100,000 on the Company's 10% Subordinated Debentures due
September 29, 2007, consisting of the aggregate principal amount outstanding
plus interest accrued thereon to May 15, 1998, the date of repayment, and
(ii) repay approximately $10 million aggregate principal amount outstanding
under a loan incurred on April 28, 1998 in connection with the Company's
acquisition of the Best Inns brands, plus interest accrued thereon to May 19,
1998, the date of repayment. The remaining proceeds of approximately
$10,700,000 were held either as cash or cash equivalents and will be used for
working capital and general corporate purposes.
Cash and cash equivalents were $21,501,000 as of June 30, 1998. In
Management's opinion, based on the Company's current operations, the
Company's capital resources are sufficient to fund operations for the next
twelve months.
The Company expects to satisfy its cash requirements during the next
twelve months, including those arising as a result of the Best Inns
acquisition and its commitments to the Development Fund, with its cash and
cash equivalents. The Company has no outstanding lines of credit in place.
For the six months ended June 30, 1998, the Company had a net loss of
$3,110,000. Net cash used in operating activities was $7,852,000 and the
primary operating activity was an increase in promissory notes receivable
related to the application fees on executed franchise agreements. For the
six months ended June 30, 1998 net cash used in investing activities was
$15,133,000. Such investments were primarily a result of (i) the $15 million
loan to Ventures in connection with the Best Inns acquisition, (ii) repayment
of the $10 million loan from NationsBank in connection with the Best Inns
acquisition, (iii) the capitalization of costs incurred in the acquisition of
the Hawthorn and Best Inns brands, and (iv) expenditures related to the
construction of hotels, the acquisition of additional office furniture and
equipment, and the purchase of a national reservation system. Such
expenditures were substantially offset by proceeds from the sale of the two
properties built by the Company and the $10 million NationsBank loan received
in connection with the Best Inns acquisition. For the six months ended June
30, 1998, such operating and investing uses of cash were funded by net cash
provided by financing activities of $28,596,000. The primary financing
activities included a secondary public offering of 4,250,000 shares of Class
A Common Stock, issuance of 350,000 shares of Class A Common Stock in
connection with the Best Inns Acquisition, and 500,000 shares of Class A
Common Stock issued in connection with the establishment of the Development
Fund during the period. The cash received from these financing activities was
partially offset by repayment of the Company's 10% Subordinated Debentures.
SEASONALITY
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.
14
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not a party to any material litigation. However, claims
and litigation may arise in the Company's normal course of business.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
INITIAL PUBLIC OFFERING. On October 30, 1996, the Company completed an
initial public offering of its Class A Common Stock, with par value $0.01
(the "Initial Offering").
Net proceeds to the Company from the Initial Offering were approximately
$21,390,000. As of June 30, 1998, all of the proceeds have been invested as
follows (amounts are estimated):
<TABLE>
<CAPTION>
<S> <C>
Proceeds Spent:
Microtel Acquisition......................................... $ 500,000
US Funding Corp. Program..................................... 433,000
Interest on Subordinated Debentures.......................... 935,000
Building of Hotel Properties................................. 6,605,000
Loans to Franchisees......................................... 4,001,000
Acquisition of Other Brands.................................. 3,092,000
Reservations System for Microtel............................. 863,000
General Working Capital, net of interest..................... 4,961,000
------------------
Total Proceeds..................................................... $21,390,000
------------------
------------------
</TABLE>
RECENT SALE OF UNREGISTERED SECURITIES.
In connection with the Best Inns acquisition, the Company issued to
Alpine Hospitality Equities LLC ("Alpine Equities"), an affiliate of
Ventures, 350,000 shares (the "Alpine Shares") of Class A Common Stock for a
purchase price of $1,668,000. Alpine Equities was granted certain demand and
piggy-back registration rights on customary terms with respect to the Alpine
Shares, as well as certain tag-along rights on certain sales of Common Stock
made by Messrs. Leven and Aronson.
The issuance of securities described above was made in reliance on the
exemption from registration provided by Section 4(2) of the Securities Act of
1933 as transactions by an issuer not involving a public offering. The
securities were acquired by the recipients thereof for investment and with no
view toward the resale or distribution thereof. The offer and sale in the
above transaction was made without any public solicitation, the certificates
bear a restrictive legend and appropriate stop transfer instructions have
been or will be given to the transfer agent. No underwriters were involved in
the transactions and no commissions were paid.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
15
<PAGE>
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. was held on Friday June 26, 1998 at 4:00 p.m., at the
Company's offices, 13 Corporate Square, Suite 250, Atlanta, Georgia 30329.
Three matters were submitted to the Stockholders:
(1) To elect ten (10) directors to constitute the Board of Directors, to
serve for a term of one year and until their successors are elected
and qualified;
(2) To approve an amendment to the Company's Amended and Restated 1996
Stock Option Plan to increase the number of shares of Class A Common
Stock available for grant thereunder from 325,000 to 725,000;
(3) To approve the award of performance-based options to purchase an
aggregate of 26,886 shares of Class A Common Stock to Steven
Romaniello, the Company's Executive Vice President-Franchise Sales and
Development and a Director.
The three proposals that came before the meeting were passed by the
Stockholders. The tally of the votes was as follows:
Tally of Votes of Annual Meeting of Stockholders of U.S. Franchise Systems, Inc.
Held on June 26, 1998
<TABLE>
<CAPTION>
SUBJECT OF VOTE # FOR % FOR* # AGAINST % AGAINST* # ABSTAIN %ABS.
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(1) Directors:
Michael A. Leven 36,566,889 99.98% 6,700 0.02% 0 0.00%
Neal K. Aronson 36,567,089 99.98% 6,500 0.02% 0 0.00%
Steven Romaniello 36,567,089 99.98% 6,500 0.02% 0 0.00%
Dean S. Adler 36,567,089 99.98% 6,500 0.02% 0 0.00%
Irwin Chafetz 36,567,089 99.98% 6,500 0.02% 0 0.00%
Douglas Geoga 36,567,089 99.98% 7,500 0.02% 0 0.00%
Richard D. Goldstein 36,567,089 99.98% 6,500 0.02% 0 0.00%
David Hamamoto 36,567,089 99.98% 6,500 0.02% 0 0.00%
Jeffrey Sonnenfeld 36,561,889 99.97% 11,700 0.03% 0 0.00%
Barry Sternlicht 36,567,089 99.98% 6,500 0.02% 0 0.00%
(2) Option Plan
Amendment 36,431,114 99.72% 103,715 0.28% 2,030 0.00%
(3) Performance-Based Options
to S. Romaniello 36,492,843 99.82% 67,156 0.18% 13,590 0.00%
</TABLE>
The total number of votes held by the shareholders of the Company as of
May 15, 1998, the record date for the June 26, 1998 Annual meeting, was
39,996,384.
*Percentage of votes for or against each subject matter is calculated
using total votes received for each subject matter. For the election of all
the Directors, except Douglas Geoga, total votes received were 36,573,589.
For the election of Director Douglas Geoga, total votes received were
36,574,589. Total votes received for the Option Plan Amendment and the
Performance-Based Options to Steven Romaniello were 36,534,826 and
36,559,999, respectively.
ITEM 5. OTHER INFORMATION
Not applicable
16
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
27.1 Financial Data Schedule.
</TABLE>
b) REPORTS ON FORM 8-K
During the second quarter ended June 30, 1998, the Company filed the
following report on Form 8-K: Current Report on Form 8-K dated April 22 1998.
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.
By /s/ Michael A. Leven By /s/ Neal K. Aronson
--------------------------------- ----------------------------------
Michael A. Leven Neal K. Aronson
CHAIRMAN OF THE BOARD, PRESIDENT EXECUTIVE VICE PRESIDENT AND CHIEF
AND CHIEF EXECUTIVE OFFICER FINANCIAL OFFICER
Dated: August 10, 1998
17
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
27.1 Financial Data Schedule.
</TABLE>
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM U.S.
FRANCHISE SYSTEMS, INC. CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS
ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 21,501
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 27
<INVENTORY> 0
<CURRENT-ASSETS> 28,948
<PP&E> 2,998
<DEPRECIATION> 280
<TOTAL-ASSETS> 83,894
<CURRENT-LIABILITIES> 7,799
<BONDS> 0
0
0
<COMMON> 491<F1>
<OTHER-SE> 68,804
<TOTAL-LIABILITY-AND-EQUITY> 83,894
<SALES> 4,090
<TOTAL-REVENUES> 4,090
<CGS> 0
<TOTAL-COSTS> 7,279
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 749
<INCOME-PRETAX> (3,110)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,110)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,110)
<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 REPRESENT NET LOSS ADJUSTED FOR DIVIDENDS ON THE REDEEMABLE
PREFERRED STOCK.
</FN>
</TABLE>
