SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
Quarterly Report Under Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For Quarter Ended. . . . . . . . . . . . . . . . . . . . . . . . March 31, 1996
Commission File Number . . . . . . . . . . . . . . . . . . . . . . . . .0-17838
Microtel Franchise & Development Corporation
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(Exact name of Registrant as specified in its charter)
New York 16-1312167
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State or other jurisdiction of I.R.S. Employer
in corporation or organization Identification No.
One Airport Way, Suite 200, Rochester, New York 14624
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(Address or principal executive offices) (Zip Code)
(716) 436-6000
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(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 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
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APPLICABLE ONLY TO CORPORATE ISSUERS:
As of April 22, 1996 the Registrant had issued and outstanding 3,251,852
shares of its $.001 par value common stock.
The total number of pages in this report is 19.
The Index of Exhibits filed with the Reports is found at page 17.
Page 1 of 18
MICROTEL FRANCHISE AND DEVELOPMENT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
(unaudited)
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1996 1995
---- ----
OPERATING REVENUES:
Hotel operations $ 917,002 $ 1,454,987
Beach club operations 744,825 722,688
Management fees -
Nonaffiliate 48,076 67,286
Affiliate 188,793 170,501
Royalties 107,541 77,952
Franchise placement income 75,000 --
Sale of land -- 185,055
Development fees 25,000 --
Consulting fees 200,000 --
Miscellaneous 586 60
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Total operating revenues 2,306,823 2,678,529
OPERATING COSTS AND EXPENSES:
Direct 929,299 1,743,926
Corporate 476,638 467,618
Depreciation and amortization 122,155 136,587
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Total operating costs and expenses 1,528,092 2,348,131
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Income from operations 778,731 330,398
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OTHER INCOME (EXPENSE):
Interest income - corporate 50,924 12,698
Interest income - minority interests 37,051 64,379
Interest expense - corporate (69,152) (54,042)
Interest expense - minority interests (136,237) (165,206)
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Total other income (expense) (117,414) (142,171)
Income from continuing operations, before
income taxes, minority interest and
equity on net losses of affiliates 661,317 188,227
PROVISION (BENEFIT) FROM INCOME TAXES 81,681 (877,542)
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Income from continuing operations,
before minority interest and equity
on net losses of affiliates 579,636 1,065,769
MINORITY INTEREST (371,183) (243,148)
EQUITY IN LOSSES OF AFFILIATES (3,946) (23,586)
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NET INCOME $204,507 $799,035
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NET INCOME PER COMMON SHARE - PRIMARY $ .05 $ .22
---------- ------------
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NET INCOME PER COMMON SHARE - FULLY DILUTED $ .05 $ .20
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The accompanying notes to consolidated financial statements are an integral
part of these consolidated statements.
Page 2 of 18
MICROTEL FRANCHISE AND DEVELOPMENT CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, 1996
(unaudited)
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ASSETS 1996
----
CURRENT ASSETS:
Cash and cash equivalents $ 500,855
Accounts receivable - trade 451,433
Inventories 75,992
Prepaid expenses and other 331,326
Accounts and notes receivable -
Affiliates 355,705
Nonaffiliate 345,306
-----------
Total current assets 2,060,617
-----------
INVESTMENTS IN PARTNERSHIP INTERESTS 2,520,632
-----------
INVESTMENT IN LAND 780,822
-----------
REAL ESTATE DEVELOPMENT 1,589,544
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PROPERTY AND EQUIPMENT, NET 6,472,466
-----------
DEFERRED TAX ASSET 567,800
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OTHER ASSETS:
Mortgage and note receivable -
Affiliate 1,300,000
Deposit 283,349
Intangibles and other assets 273,293
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Total other assets 1,856,642
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Total assets $15,848,523
-----------
-----------
The accompanying notes to consolidated financial statements are an integral
part of these consolidated balance sheets.
Page 3 of 18
MICROTEL FRANCHISE AND DEVELOPMENT CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, 1996
(unaudited)
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LIABILITIES AND SHAREHOLDERS' INVESTMENT 1996
- ---------------------------------------- ----
CURRENT LIABILITIES:
Line of credit $ 500,000
Accounts payable - trade 148,510
Accrued payroll and related taxes 29,347
Accrued interest 46,352
Other accrued expenses 71,004
Current portion of long-term debt 140,348
Deferred revenue - Beach Club 641,663
Deferred consulting 100,000
Deferred franchise revenue - current 64,000
Customer deposits 70,009
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Total current liabilities 1,811,233
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LONG-TERM DEBT 8,502,780
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DEFERRED REVENUE - LAND SALE 185,055
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LIMITED PARTNERS' INTEREST IN CONTROLLED PARTNERSHIPS 1,257,756
-----------
SHAREHOLDERS' INVESTMENT:
Preferred stock 295
Common stock 3,301
Additional paid-in capital 7,189,724
Warrants outstanding 50,000
Accumulated deficit (3,028,766)
-----------
4,214,554
Less 49,142 shares of common stock in treasury, at cost (122,855)
-----------
Total shareholders' investment 4,091,699
-----------
Total liabilities and shareholders' investment $15,848,523
-----------
-----------
The accompanying notes to consolidated financial statements are an integral
part of these consolidated balance sheets.
Page 4 of 18
MICROTEL FRANCHISE AND DEVELOPMENT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' INVESTMENT
FOR THE PERIOD ENDED MARCH 31, 1996
(unaudited)
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Additional Additional
Series A Paid-In Paid-In
Preferred Capital Common Capital Warrants Accumulated Treasury
Stock Preferred Stock Common Outstanding Deficit Stock Total
--------- --------- ------ ---------- ------------ ------------ ----------- -----
BALANCE, December 31, 1995 $ 295 $1,560,705 $3,280 $5,610,844 $60,000 $(3,201,443) $(122,855) $3,910,826
Net Income -- -- -- -- -- 204,507 -- 204,507
Exercise of stock options -- -- 21 11,646 (10,000) -- -- 1,667
Other -- -- -- 6,529 -- -- -- 6,529
Cash dividends paid on
preferred stock ` -- -- -- -- -- (31,830) -- (31,830)
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BALANCE, March 31, 1996 $ 295 $1,560,705 $3,301 $5,629,019 $50,000 $(3,028,766) $(122,855) $4,091,699
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Stock balances at December 31, 1995:
Common stock: 3,231,425 shares; Preferred stock: 294,723 shares
Stock balances at March 31, 1996:
Common stock: 3,251,852 shares; Preferred stock: 294,723 shares
The accompanying notes to consolidated financial statements are an integral
part of these consolidated statements.
Page 5 of 18
MICROTEL FRANCHISE AND DEVELOPMENT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTH PERIOD ENDED MARCH 31, 1996 and 1995
(unaudited)
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1996 1995
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 204,507 $ 799,035
Adjustments to reconcile net income to net cash
from operating activities:
Deferred tax benefit 75,415 (883,659)
Depreciation and amortization 122,155 136,587
Gain on sale of land -- (185,055)
Minority interest in earnings 371,183 243,148
Non-cash consulting 6,529 (1,111)
Equity in net losses of affiliates 3,946 23,586
Provision for bad debts -- 81,140
Capital distributions from unconsolidated
partnership interests 54,091 464
Cash proceeds on land sale -- 573,105
(Increase) decrease in assets -
Accounts receivable - trade (145,491) (80,320)
Inventories 653 (15,159)
Prepaid expenses (184,145) 87,598
Increase (decrease) in liabilities -
Accounts payable (46,289) 64,087
Accrued payroll and related taxes (11,713) 33,292
Accrued interest (148) (11,426)
Other accrued expenses (233,901) 106,129
Deferred revenue - Beach Club (280,313) (395,860)
Deferred consulting (200,000) --
Customer deposits (14,837) 59,496
Deferred franchise revenue (40,000) 25,000
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Net cash from operating activities (318,358) 660,077
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CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of land/real estate development 31,972) (325,135)
Capital contribution to unconsolidated partnership interests -- (487,500)
Collection on affiliate notes receivable 60,546 425,151
Increase in non-affiliates accounts and notes receivable (248,658) (755,519)
Purchase of equipment (20,363) (179,371)
Change in other assets 3,345 (11,477)
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Net cash from investing activities (237,102) (1,333,851)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to limited partners (111,417) (1,085,430)
Proceeds of borrowings -- 1,500,000
Payments of debt (68,533) (284,501)
Borrowings on line of credit, net 500,000 316,000
Cash received for options exercised 1,667 --
Dividends paid (31,830) (31,830)
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Net cash from financing activities 289,887 414,239
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NET DECREASE IN CASH AND CASH EQUIVALENTS (265,573) (259,535)
CASH AND CASH EQUIVALENTS - beginning of period 766,428 592,581
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CASH AND CASH EQUIVALENTS - end of period $ 500,855 $ 333,046
---------- ---------
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The accompanying notes to financial statements are an
integral part of these consolidated statements.
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 205,537 $ 162,963
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---------- ---------
Income taxes $ 171,269 $ 33,311
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Page 6 of 18
MICROTEL FRANCHISE AND DEVELOPMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
(UNAUDITED)
1. BASIS OF PRESENTATION
In the opinion of Management, the interim financial statements included
herewith reflect all adjustments which are necessary for a fair statement
of the results for the interim periods presented. All significant
intercompany transactions and accounts have been eliminated in
consolidation.
The results of operations for the interim periods presented are not
necessarily indicative of the results to be expected for the full year.
The accounting policies followed by the Company are set forth in Note 2 to
the Company's financial statements in the December 31, 1995 10-KSB.
Other footnote disclosures normally included in the financial statements
prepared in accordance with generally accepted accounting principles have
been condensed or omitted. It is suggested that these consolidated
financial statements be read in conjunction with the financial statements
and notes included in the Company's December 31, 1995 10-KSB.
2. THE COMPANY
On April 1, 1994, Microtel completed a statutory merger of Hudson Hotels
Corporation. As a result of the merger, the former (Hudson Hotels
Corporation) company will be referred to as Hudson Hotels, a division of
Microtel. The division provides a full menu of hotel services including
development, operations, management, sales and marketing, business systems,
financial management and food and beverage management.
3. LITIGATION
On October 26, 1990, a complaint was filed in Palm Beach County Circuit
Court, Florida, by Seagate Beach Quarters, Inc., a Florida corporation
(Bearing Case #90-12358-AB), seeking damages plus interest and costs,
against Rochester Community Savings Bank, ("RCSB"), a New York based bank,
Shore Holdings, Inc. ("SHORE"), a subsidiary of RCSB and naming Hudson as a
co-defendant. On December 6, 1990, Delray Beach Hotel Properties Limited,
a Florida limited partnership controlled by Hudson Hotels, purchased the
Seagate Hotel and Beach Club from RCSB's subsidiary, SHORE. The purchase
contract included an indemnification of Hudson Hotels against any action
resulting from previously negotiated contracts between RCSB's subsidiaries
and third-parties. Case #90-12358-AB contained allegations that RCSB's
subsidiary, SHORE, defaulted in its obligations under a Contract for
Purchase and Sale, dated August 16, 1990, and failed to go forward with the
transaction due to alleged tortious negotiations between RCSB and Hudson.
On March 17, 1994, the Court granted Summary Judgment in favor of RCSB and
Hudson Hotels which judgment was appealed by Seagate. The Fourth District
Court of Appeal in Florida affirmed the summary judgment on RCSB and
reversed the summary judgment granted in favor of Hudson, remanding the
action to Circuit Court for further consideration. On August 15, 1994,
Seagate proceeded to trial against SHORE in case #90-12358-AB. During the
course of the trial, Seagate took a voluntary dismissal of their action
against SHORE. On September 8, 1994, Seagate refiled its lawsuit against
SHORE and joined Delray Beach Hotel Properties Limited, through its general
partner, Delray Beach Hotel Corp. (bearing Case #94-6961-AF). The new case
against SHORE was
Page 7 of 18
brought essentially on the same facts as stated above. The claim against
Delray Beach Hotel Properties Limited was identical to the conspiracy and
tortious interference with a business relationship claim currently existing
against Hudson Hotels. On January 27, 1995, the Court issued an Order
dismissing the Amended Complaint as to Delray Beach Hotel Properties
Limited. The Circuit Court has consolidated the case against Hudson Hotels
(Case #90-12358-AB) and the case against SHORE (Case #94-6961-AF) and it is
anticipated those suits will go to trial during 1996.
On February 11, 1993, a complaint was filed in the Western District of New
York, United States District Court, by John Miranda, Susan Miranda and
Christopher Miranda, seeking damages and costs against Quality Inn
International, Choice Hotels International, and naming Hudson as a co-
defendant. The requested relief in this case, John Miranda and Susan
Miranda and Christopher Miranda vs. Quality Inns International Inc., Choice
Hotels International Inc., Ridge Road Hotel Properties, Ridge Road Hotel
Properties d/b/a Comfort Inn, a/k/a Comfort Inn West, Hudson Hotels Corp.,
and Jennifer L. Ansley, as Executrix of the Estate of Loren G. Ansley, was
based on allegations that John Miranda, while staying at the Comfort Inn,
stepped on a needle, and claims negligence and lack of due care on the part
of the defendants. This case is being diligently defended by the insurance
carrier of Ridge Road Hotel Properties and Hudson. The Company believes
that it has adequate insurance for any potential loss.
After taking into consideration legal Counsel's evaluation of all such
actions, management is of the opinion that the outcome of each such
proceeding or claim which is pending, or known to be threatened (as
described above), will not have a significant effect on the Company's
financial statements.
On June 20, 1995, Ladenburg, Thalmann & Co., Inc., the Company's former
investment bankers, filed a complaint in New York State Supreme Court
against the Company alleging breach of contract and damages of $906,250
relating to the Company's rescission of a warrant granted to them in
connection with the investment advisory agreement. In February 1994, the
Board of Directors of the Company determined that Ladenburg had been
otherwise adequately compensated for such services as were actually
performed, and voted to rescind the warrant. The Company has answered the
complaint, denying the relevant allegations and asserting several
affirmative defenses. Discovery in the case has commenced and is
continuing. The ultimate outcome of the litigation cannot presently be
determined. Accordingly, no provision for any liability that may result
has been made in the financial statements.
Page 8 of 18
4. SUMMARIZED FINANCIAL INFORMATION - INVESTMENTS IN PARTNERSHIP INTERESTS
The following is a summary of condensed financial information for the
partnerships which the Company exercises control for the three month period
ended March 31, 1996, and a combined summary of condensed financial information
for the partnerships which the Company does not control for the three month
period ended March 31, 1996.
DELRAY BEACH WATERTOWN TOTAL
HOTEL PROPERTIES HOTEL CONSOLIDATED UNCONSOLIDATED
LIMITED PROPERTIES PARTNERSHIPS PARTNERSHIPS
---------------- ---------- ------------ --------------
Property and equipment
net of accumulated
depreciation $6,356,739 $ -- $6,356,739 $36,713,388
Current assets 783,307 11,041 794,348 1,467,442
Notes and mortgage
receivable - noncurrent -- 1,300,000 1,300,000 1,500,000
Other assets 181,517 -- 181,517 1,038,088
---------- --------- ---------- -----------
TOTAL ASSETS 7,321,563 1,311,041 8,632,604 40,718,918
---------- --------- ---------- -----------
Mortgage and notes
payable - current 69,407 -- 69,407 2,620,832
Other current liabilities 897,908 -- 897,908 1,876,551
Mortgage/Notes payable - non
current 6,310,644 -- 6,310,644 29,054,121
---------- --------- ---------- -----------
TOTAL LIABILITIES 7,277,959 -- 7,277,959 33,551,504
---------- --------- ---------- -----------
NET ASSETS 43,604 1,311,041 1,354,645 7,167,414
---------- --------- ---------- -----------
---------- --------- ---------- -----------
Net Revenues 1,578,009 -- 1,578,009 3,472,781
Operating Expenses 999,688 2,330 1,002,018 2,138,063
---------- --------- ---------- -----------
Income (Loss) from Operations 578,321 (2,330) 575,991 1,334,718
Other Income (Expense), net (161,686) 32,500 (129,186) (1,564,422)
---------- --------- ---------- -----------
NET INCOME (LOSS) $ 416,635 $30,170 $ 446,805 $ (229,704)
---------- --------- ---------- -----------
---------- --------- ---------- -----------
Page 9 of 18
5. LONG TERM DEBT
Future minimum repayments under long-term debt are as follows:
Remainder 1996 $ 140,348
1997 117,189
1998 131,219
1999 138,943
2000 and thereafter 8,115,429
The Company has guaranteed repayment of the Delray Beach Hotel Properties
Limited mortgage payable. The limited partners of Delray Beach Hotel
Properties Limited have guaranteed, in the aggregate, repayment of 50% of
the mortgage. The mortgage also requires Delray Beach Hotel Properties
Limited to meet certain financial covenants, which were met at March 31,
1996.
6. LINES OF CREDIT
On December 13, 1995, the Company signed a $500,000 working capital demand
line of credit agreement with a commercial bank, which bears interest at
prime plus 3/4%. Amounts borrowed are collateralized by substantially all
of the Company's assets. At March 31, 1996, $500,000 was borrowed under
the terms of this line.
On December 13, 1995, the Company signed a commitment letter for a
$2,000,000 loan limit with a commercial bank for the intended purpose of
purchasing land for the development of hotel properties. The loan limit
bears interest at prime plus 1% and a fee of 1/4% on each advance. Each
advance is due nine months from the date of the draw. Amounts borrowed are
collateralized by substantially all of the Company's assets. At March 31,
1996, no funds were borrowed under the terms of this loan limit.
7. COMMITMENTS AND CONTINGENCIES
The Company has various operating lease arrangements for automobiles and
office space. Total rent expense under operating leases amounted to
$39,094 and $46,947 for the periods ending March 31, 1996 and 1995,
respectively. Future minimum lease payments under operating leases are
approximately: 1996 remainder - $108,364; 1997 - $96,256; 1998 - $2,328.
In November 1994, the Company provided a $250,000 cash deposit to secure a
ten year operating lease and management contract of a full-service hotel
located in Canandaigua, New York, from L, R, R & M, L.L.C. One of the
minority owners of L, R, R & M, L.L.C. is a greater than 5% Microtel
shareholder who is not involved in the management or operation of the
Company. The deposit shall be returned to the Company in the event the
Landlord sells the premises based on 25% of the net proceeds of such sale,
as defined in the lease agreement. Future minimum lease payments under
this operating lease are approximately: 1996 remainder $391,647; 1997 -
$595,000; 1998 - $595,000; 1999 - $595,000; thereafter $2,925,417.
As an equity partner in various hotel partnerships, the Company has
guaranteed portions of mortgages payable relating to the partnerships. The
guarantees range from 100% to 200% of the outstanding mortgages payable to
banks. Amounts guaranteed by the Company related to the partnerships'
mortgages payable were approximately $8.6 million at March 31, 1996. This
balance includes the Company's guarantee of Delray Beach Hotel Properties
Limited mortgage payable to a bank which has an outstanding balance of
$5,380,051 at March 31, 1996, along with limited partner guarantees.
Page 10 of 18
8. INCOME TAXES
Income taxes are provided in accordance with Statement of Financial
Accounting Standard No. 109, "Accounting for Income Taxes", which requires
an asset and liability approach to financial accounting and reporting for
income taxes. The Statement requires that deferred income taxes be
provided to reflect the impact of "temporary differences" between the
amount of assets and liabilities for financial reporting purposes and such
amounts as measured by current tax laws and regulations. A valuation
allowance is established, when necessary, to reduce deferred tax assets to
the amount expected to be realized.
Deferred tax assets include loss carryforwards and deferred revenue.
Deferred tax liability represents the gross up relating to the purchase of
Hudson.
At March 31, 1996, Company has net operating loss carryforwards for income
tax purposes of approximately $1,116,000 which may be used to offset future
taxable income. These loss carryforwards will begin to expire in 2003.
9. RECEIVABLES/PAYABLES WITH AFFILIATES
The Company has advanced affiliated entities the following as of March 31,
1996:
Microtel Partners 1995-I, L.P. $113,306
Airport Hotel Properties, L.P. 48,300
Gatlinburg Microtel, LP 15,000
S&W Restaurants, Inc. 64,500
Rochester Hospitality Partners, L.P. 53,860
Other 60,739
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$355,705
--------
--------
10. EXCLUSIVE DEVELOPMENT AGREEMENT
On June 30, 1995, the Company entered into an agreement with the former
partners of S&E Hospitality Partnership where as one of the former partners
of S&E sold all of their assigned prepaid franchises (14) for $200,000 back
to the Company. The 14 prepaid franchises had been recorded as deferred
revenue with a value of $350,000 on the Company's balance sheet prior to
the transaction. This transaction resulted in a $150,000 gain. The
remaining 5 prepaid franchises are still being held by the other former
partner of S&E. At March 31, 1996, all five (5) prepaid franchises were
used for the following Microtels opened: Colonie, New York; Greensboro,
North Carolina; Chattanooga, Tennessee; Raleigh, North Carolina and
Charlotte, North Carolina. The last two Microtels were opened during the
first quarter of 1996.
11. JOINT VENTURE AGREEMENT
On October 5, 1995, the Company signed an exclusive joint venture agreement
with US Franchise Systems, Inc. in which USFS assumed worldwide franchising
and administration for the Microtel hotel chain.
The Company in return will receive $4 million over a three year period in
exchange for the exclusive franchise rights of the Microtel name and
various consulting services; $2 million was paid at closing, another $1
million will be paid at the first anniversary and $500,000 each at the
second and third
Page 11 of 18
anniversary. In addition to the lump sum payment, the Company will receive
royalty payments from properties franchised by USFS. Royalty payments will
consist of 1% of gross room revenues from hotels 1-100; .75% from hotels
101-250; and .5% above 250 units. In addition, the Company issued USFS
100,000 warrants exercisable at the Company's common stock market price on
October 5, 1995.
The Company has retained the right to franchise and construct an additional
twenty-three (23) Microtel properties and ten (10) "Suites" properties (if
offered by USFS), and to receive all royalties on the fifty (50) Microtels
(27 existing and 23 new ones to be undertaken by the Company) and ten (10)
Suites.
Page 12 of 18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
Selected Financial Data (item 6); Management's Discussion and Analysis of
Financial Condition and Results of Operations (item 7); and Accountant's Report,
Financial Statements and Notes to Financial Statements (item 8) of the Company's
December 31, 1995 Transition Report on Form 10-KSB.
Franchise placement income for the three month period ended March 31, 1996
reflects the opening of three franchises (Raleigh, North Carolina; Lake Norman,
North Carolina and Charlotte, North Carolina). There were no franchise sales
during the three month period ended March 31, 1995. Royalties for the three
month period ended March 31, 1996 have increased $29,589 over the three month
period ended March 31, 1995, an increase of 38%. The increase is attributable
to twenty six franchised Microtels in operation, as opposed to nineteen during
the same three month period in 1995.
As a result of the Company's joint venture with US Franchise Systems, Inc. (see
Note 11), the Company has retained the right to franchise, construct and collect
franchise placement fees on an additional twenty-three (23) Microtel properties
and ten (10) "suite" properties and retain all royalties on the fifty (50)
Microtels (27 existing and 23 new ones to be undertaken by the Company) and ten
(10) suites. The Company will also receive royalty payments in the future from
US Franchise Systems, Inc., for franchises they open, along with consulting
payments over the next three years.
Overall, management fees for the three month period ended remained relatively
flat from the same period in 1995. This is a result of non-renewal of contracts
and their replacement with new contracts, which are in the start-up mode. The
Company has added two additional management contracts during the three month
period ended March 31, 1996, for a total of eighteen (18) managed properties.
Development fees increased $25,000 from the same period in 1995. The increase
is attributable to three Microtels under various stages of development for which
fees were charged, compared with no projects under development for the three
months ended March 31, 1995. These fees represent a reimbursement of costs
incurred.
A significant decrease in hotel operating revenue $537,985, or 37%, is a result
of the shutdown of the Company leased hotel ("Inn on the Lake") in November 1995
which is undergoing major renovations. Currently, the Inn on the Lake is
scheduled to re-open in May 1996. For the three months ended March 31, 1996,
all of the hotel and beach club revenue relates to the operation of Delray Beach
Hotel Properties Limited, of which the Company is a controlling partner. In
total, hotel operating revenue and beach club income for the three month period
ended March 31, 1996 increased approximately $50,000 from the same period in
1995. This is primarily a result of consistent occupancies with higher room
rates and a slight increase in rates for beach club dues.
Consulting fees for the three months ended March 31, 1996 represent fees
received as part of our joint venture with US Franchise Systems, Inc., in which
the Company will be receiving fees for various consulting services over the next
three years.
During the three month period ended March 31, 1995, the gain on sale of land
relates to the sale of 2.87 acres of land the Company owned in Tonawanda, New
York, to a partnership in which the Company has an interest. The Company only
recognized its pro rata share of income on the sale based on the non-related
ownership of the partnership. The remaining deferred revenue will be recognized
as the Company's partnership interest is diluted or at such time the project is
development and operating. There was no sale of land during the same period in
1996.
Page 13 of 18
With the signing of the Joint Venture Agreement with US Franchise Systems, Inc.
(see Note 11), the Company is focusing its efforts on developing, building and
managing Microtels, which has been the Company's strength since purchasing
Hudson Hotels in 1992. The Company will focus on an aggressive development
schedule through joint venture of Microtel properties, funded, in part, with the
proceeds from the joint venture with US Franchise Systems, Inc.
Expenses - Direct expenses and costs represent the operation of the Company's
leased hotel and its controlled affiliate (Delray Beach Hotel Properties
Limited), which are consolidated in the Company's financial statement. For the
three month period ended March 31, 1996, direct expenses decreased $814,627 or
47%, from the same period in 1995. The decrease is a result of the shutdown and
renovation of the Company leased hotel ("Inn on the Lake") in November 1995 for
a major renovation. Currently, the Inn on the Lake is scheduled to open in May
1996. Direct expenses and costs for Delray Beach Hotel Properties Limited
remained relatively flat for the same period in 1995. Corporate costs and
expenses remained relatively flat for the three month period ended March 31,
1996, compared to the same period in 1995. $86,178, or 71%, of depreciation and
amortization for the three month period ended March 31, 1996 represents
depreciation of building and furniture and fixtures of Delray Beach Hotel
Properties Limited, while the majority of the remaining depreciation and
amortization represents amortization associated with the adjustment to fair
value of real estate investments. This amortization will continue at a current
quarterly level of approximately $30,000 for the next seven years and decreasing
through fifteen years. This accounting item does not impact the Company's cash
flow.
Interest Income (Expense) - Interest income - corporate - represents interest
earned by the corporate entity. Approximately $48,000, or 94%, represents
interest earned on the balance of payments due from USFS (see Note 11). Interest
income - minority interests represents interest earned by the Company's
controlled affiliates (Delray Beach Hotel Properties Limited and Watertown Hotel
Properties II, L.P.). $32,500, or 88%, is generated by interest on the mortgage
receivable from Watertown Hotel Properties II, L.P. Interest expense -
corporate represents interest paid by the corporate entity on its outstanding
convertible debentures, notes payable relating to purchase of partnership
interests, Tonawanda bond issue and line of credit. Interest Expense - Minority
Interests represents interest on the financing of Delray Beach Hotel Properties
Limited.
Minority interest represents the elimination of the minority partners interest
in operations of Delray Beach Hotel Properties Limited and Watertown Hotel
Properties II, L.P. Equity in losses of affiliates represents the net losses
incurred from the Company's equity investment in various hotels. The majority
of the equity in losses of affiliates in the transition period ended March 31,
1996 relates to first year losses for hotels opened within the preceding
eighteen month period.
Income Taxes - The provision for income taxes of $81,681 for the three month
period ended March 31, 1996, represents federal and state tax expense on income
before tax of $286,188. The income tax benefit of $877,542 for the three months
ended March 31, 1995 represents the future benefit from tax loss carryforwards
recognized as a result of current year earnings and the expected profitability
in future fiscal periods. The net benefit for the three months ended
March 31, 1995, was offset by certain minimal state tax liabilities.
As a result of the above factors, net income before tax considerations increased
by $364,695 for the three month period ended March 31, 1996 from that of 1995.
Net after tax income decreased by $594,528 to $204,507 for the three month
period ended March 31, 1996. The net income of $.22 per share for the three
month period ended March 31, 1996, compared with net income of $.22 per share
for the three months ended March 31, 1995. Shares used in computing net income
per share increased from 3,452,586 for March 31, 1995 to 3,837,165 for March 31,
1996. The predominant factors for this increase are (i) stock issued for
options and warrants being exercised and (ii) additional options and warrants
included in the calculation due to an increase in the Company's stock price.
Consolidation of revenues and expenses of Delray Beach Hotel Properties Limited
and Watertown Hotel Properties II provides no additional net income or loss to
the Company, other than from reporting the investment under the equity method of
accounting.
Page 14 of 18
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1996, the Company had working capital of $249,384, as compared to a
working capital deficit of $394,178 at December 31, 1995. Cash and cash
equivalents totaled $500,855. The increase in working capital from December 31,
1995 is primarily attributable to recognition of deferred revenue - beach club.
Investment in real estate partnership interests represents the Company's
interest in various partnerships. Investment in real estate partnership
interests decreased $63,237 from December 31, 1995. The predominant factors for
the decrease are income/losses recorded from the various partnerships and cash
distributions received from the partnerships which are accounted for under the
equity method.
Investment in land represents land purchased for the purpose of future
development or sale. Real estate development represents parcels of land owned
by the Company which are currently under development or consideration as hotel
sites. As of March 31, 1996, three parcels are under development.
The majority of property and equipment reflected on the balance sheet relates to
real and personal property of Delray Beach Hotel Properties, Limited. The
Company maintains an ongoing capital improvement policy at the property, which
is funded through the hotel and beach club operations.
Deferred tax assets represent the future benefit from tax loss carryforwards
realized as a result of current year earnings and the expected profitability in
future fiscal periods, along with an alternative minimum tax credit and deferred
revenue relating to consulting, initial franchise placement fees and land sale.
Deferred tax liability relates to the acquisition of Hudson and the tax effect
related temporary differences associated with the difference in the financial
reporting and tax basis of the purchased assets.
Other assets consist of (i) a mortgage note receivable held by Watertown Hotel
Properties II, L.P. in the amount of $1,300,000, collateralized by land and the
Microtel hotel located in Watertown, New York; (ii) a $250,000 cash deposit to
secure a ten year operating lease and management contract of a full-service
hotel located in Canandaigua, New York, from L, R, R & M, L.L.C. One of the
minority owners of L, R, R & M, L.L.C. is a greater than 5% Microtel shareholder
who is not involved in the management or operation of the Company. Also, in
January 1995, the Company received a note from Delray Beach Hotel Properties
Limited, for $1,000,000 due May 1, 2000. Under the terms of the note, payments
are interest only and are calculated at 12% per annum. Minimum monthly
principal payments of $7,500 will be required beginning May 1, 1996. Additional
principal payments can be made at any time, without penalty. The note does not
appear on the face of the balance sheet, as it is eliminated during
consolidation. The Company was able to provide these funds through the proceeds
of a $1,500,000 subordinated debenture. The increase in intangible and other
assets is primarily the result of mortgage acquisition costs relating to the
refinance of the Delray Beach Hotel Properties Limited mortgage in 1995.
Long-term debt is substantially comprised of a $5,380,051 mortgage on the real
property of Delray Beach Hotel Properties Limited, which was refinanced in
November 1995. The remaining long-term debt relates to Microtel issuing two
$1,500,000 convertible subordinated debentures, a note issued by the Company for
the purchase of various partnership interests and a bond with the Town of
Tonawanda relating to improvements to land in that township.
Shareholders' equity increased to $4,091,699 as of March 31, 1996 from
$3,910,826 as of December 31, 1995. The factors which affected the level of
shareholders' equity are represented by an increase of $1,667 for
options/warrants exercised, including related tax benefits, a decrease of
$31,830 resulting from preferred dividend payment, other of $6,529 and an
increase of $204,507 for net income for the three months ended March 31, 1996.
The Company has, in total, $2,500,000 in two lines of credit, which are
available for short term requirements which may arise. The Company believes it
has sufficient resources from its present cash position to meet its current
obligations and believes that its cash position and revenues from operations are
sufficient to meet its cash requirements for the next twelve months. The
Company has not been negatively impacted by inflation during any of the periods
presented.
Page 15 of 18
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On October 26, 1990, a complaint was filed in Palm Beach County Circuit Court,
Florida, by Seagate Beach Quarters, Inc., a Florida corporation (Bearing Case
#90-12358-AB), seeking damages plus interest and costs, against Rochester
Community Savings Bank, ("RCSB"), a New York based bank, Shore Holdings, Inc.
("SHORE"), a subsidiary of RCSB and naming Hudson as a co-defendant. On
December 6, 1990, Delray Beach Hotel Properties Limited, a Florida limited
partnership controlled by Hudson Hotels, purchased the Seagate Hotel and Beach
Club from RCSB's subsidiary, SHORE. The purchase contract included an
indemnification of Hudson Hotels against any action resulting from previously
negotiated contracts between RCSB's subsidiaries and third-parties. Case #90-
12358-AB contained allegations that RCSB's subsidiary, SHORE, defaulted in its
obligations under a Contract for Purchase and Sale, dated August 16, 1990, and
failed to go forward with the transaction due to alleged tortious negotiations
between RCSB and Hudson. On March 17, 1994, the Court granted Summary
Judgment in favor of RCSB and Hudson Hotels which judgment was appealed by
Seagate. The Fourth District Court of Appeal in Florida affirmed the summary
judgment on RCSB and reversed the summary judgment granted in favor of Hudson,
remanding the action to Circuit Court for further consideration. On August 15,
1994, Seagate proceeded to trial against SHORE in case #90-12358-AB. During the
course of the trial, Seagate took a voluntary dismissal of their action against
SHORE. On September 8, 1994, Seagate refiled its lawsuit against SHORE and
joined Delray Beach Hotel Properties Limited, through its general partner,
Delray Beach Hotel Corp. (bearing Case #94-6961-AF). The new case against SHORE
was brought essentially on the same facts as stated above. The claim against
Delray Beach Hotel Properties Limited was identical to the conspiracy and
tortious interference with a business relationship claim currently existing
against Hudson Hotels. On January 27, 1995, the Court issued an Order
dismissing the Amended Complaint as to Delray Beach Hotel Properties Limited.
The Circuit Court has consolidated the case against Hudson Hotels
(Case #90-12358-AB) and the case against SHORE (Case #94-6961-AF) and it is
anticipated those suits will go to trial during 1996.
On February 11, 1993, a complaint was filed in the Western District of New York,
United States District Court, by John Miranda, Susan Miranda and Christopher
Miranda, seeking damages and costs against Quality Inn International, Choice
Hotels International, and naming Hudson as a co-defendant. The requested relief
in this case, John Miranda and Susan Miranda and Christopher Miranda vs. Quality
Inns International Inc., Choice Hotels International Inc., Ridge Road Hotel
Properties, Ridge Road Hotel Properties d/b/a Comfort Inn, a/k/a Comfort Inn
West, Hudson Hotels Corp., and Jennifer L. Ansley, as Executrix of the Estate of
Loren G. Ansley, was based on allegations that John Miranda, while staying at
the Comfort Inn, stepped on a needle, and claims negligence and lack of due care
on the part of the defendants. This case is being diligently defended by the
insurance carrier of Ridge Road Hotel Properties and Hudson. The Company
believes that it has adequate insurance for any potential loss.
After taking into consideration legal Counsel's evaluation of all such actions,
management is of the opinion that the outcome of each such proceeding or claim
which is pending, or known to be threatened (as described above), will not have
a significant effect on the Company's financial statements.
On June 20, 1995, Ladenburg, Thalmann & Co., Inc., the Company's former
investment bankers, filed a complaint in New York State Supreme Court against
the Company alleging breach of contract and damages of $906,250 relating to the
Company's rescission of a warrant granted to them in connection with the
investment advisory agreement. In February 1994, the Board of Directors of the
Company determined that Ladenburg had been otherwise adequately compensated for
such services as were actually performed, and voted to rescind the warrant. The
Company has answered the complaint, denying the relevant allegations and
asserting several affirmative defenses. Discovery in the case has commenced and
is continuing. The ultimate outcome of the litigation cannot presently be
determined. Accordingly, no provision for any liability that may result has
been made in the financial statements.
Page 16 of 18
On January 29, 1996, William Lerner filed a complaint in the Court of Common
Pleas of Washington County, Pennsylvania, against the Company, alleging breach
of contract and damages of $253,125 relating to the Company's rescission of a
warrant granted to this individual in connection with establishing a
relationship with Ladenburg, Thalmann & Co., Inc. In February 1994, the Board
of Directors of the Company rescinded the warrant to William Lerner as a result
of terminating the Company's relationship with Ladenburg, Thalmann & Co., Inc.
On March 26, 1996, William Lerner dismissed the complaint filed against the
Company. As part of the dismissal, the Company allowed him to exercise his
warrants on a cashless basis and issued 19,594 shares of Microtel common stock
as a result of this transaction.
ITEM 2. CHANGE IN SECURITIES - None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - None
ITEM 5. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
Exhibit No. Description
- ----------- -----------
11 Statement re: computation of per share earnings
27 Financial Data Schedule
B. Form 8-K: The following report was filed on Form 8-K:
DATE OF REPORT ITEM
-------------- ----
January 19, 1996 Change in Company's Fiscal Year End to
December 31, 1995
Page 17 of 18
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.
MICROTEL FRANCHISE AND DEVELOPMENT CORPORATION
----------------------------------------------
(Registrant)
Date: 4/26/96 /s/ Bruce A. Sahs
-----------------------------------------------
Bruce A. Sahs, Executive Vice President
and Chief Operating Officer
Date: 4/26/96 /s/ Taras M. Kolcio
-----------------------------------------------
Taras M. Kolcio, Controller
Page 18 of 18