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 . . . . . . . . . . . . . . . . . . . . . . . . June 30, 1995
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
incorporation 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
----------------- -----------------
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of August 2, 1995, the Registrant had issued and outstanding 3,161,267
shares of its $.001 par value common stock.
The total number of pages in this report is 14.
The Index of Exhibits filed with the Reports is found at Page 12.
Page 1 of 18
PART 1 - FINANCIAL INFORMATION
Item 1 - Financial Statements
MICROTEL FRANCHISE AND DEVELOPMENT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 1995 and 1994
(unaudited)
___________________________________________________________________________
1995 1994
---- ----
OPERATING REVENUES:
Hotel room rental $ 1,140,191 $ 413,886
Beach Club income 687,089 650,489
Management fees -
Nonaffiliate 62,815 113,091
Affiliate 143,770 129,589
Royalties 108,729 78,243
Franchise placement income 25,000 50,500
Development fees 40,000 125,000
Miscellaneous
5,500 31
----------- ----------
Total operating revenues 2,213,094 1,560,829
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 1,866,562 1,140,632
----------- ----------
Income from operations before depreciation
and amortization 346,532 420,197
DEPRECIATION AND AMORTIZATION
120,202 110,438
----------- ----------
Income from operations 226,330 309,759
----------- ----------
OTHER INCOME (EXPENSE):
Interest Income 77,570 68,282
Interest expense (231,633) (182,077)
Gain on Repurchase on Franchise Rights 150,000 --
----------- ----------
Total other income (expense) (4,063) (113,795)
----------- ----------
Income from operations, before income taxes,
minority interest and equity in net
losses of affiliates 222,267 195,964
PROVISION (BENEFIT) FROM INCOME TAXES 43,099 (768)
----------- ----------
Income from operations, before minority interest
and equity in net losses of affiliates 179,168 196,732
MINORITY INTEREST (58,536) (94,688)
EQUITY IN INCOME/(LOSSES) OF AFFILIATES 1,825 (44,677)
----------- ----------
NET INCOME $ 122,457 $ 57,367
=========== ==========
NET INCOME PER COMMON SHARE $ 0.03 $ 0.01
=========== ==========
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
JUNE 30, 1995
(unaudited)
________________________________________________________________________________
ASSETS 1995
------ ----
CURRENT ASSETS:
Cash and cash equivalents $ 125,840
Accounts receivable - trade 304,619
Inventories 107,363
Prepaid expenses and other 416,658
Accounts and notes receivable -
Affiliates 700,556
Nonaffiliate 637,942
-----------
Total current assets 2,292,978
----------
INVESTMENTS IN PARTNERSHIP INTERESTS 2,055,307
-----------
INVESTMENT IN LAND 1,697,309
-----------
PROPERTY AND EQUIPMENT, NET 6,524,058
-----------
DEFERRED TAX ASSET 722,091
-----------
OTHER ASSETS:
Mortgage and note receivable - Affiliate 1,400,000
Deposit 253,749
Intangibles and other assets 161,439
-----------
Total other assets 1,815,188
-----------
Total assets $15,106,931
===========
The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements.
Page 3 of 18
______________________________________________________________________________
LIABILITIES AND SHAREHOLDERS' INVESTMENT 1995
---------------------------------------- ----
CURRENT LIABILITIES:
Line of credit $ 1,250,000
Accounts payable - trade 248,590
Accrued payroll and related taxes 83,752
Accrued interest 48,058
Other accrued expenses 241,213
Current portion of long-term debt 174,393
Obligation under franchise agreements 1,750
Deferred revenue - Beach Club 383,403
Deferred franchise revenue - current 100,000
Customer deposits 77,975
-----------
Total current liabilities 2,609,134
-----------
LONG-TERM DEBT 8,546,000
-----------
DEFERRED FRANCHISE REVENUE 104,000
-----------
DEFERRED REVENUE - LAND SALE 185,055
-----------
LIMITED PARTNERS' INTEREST IN CONTROLLED PARTNERSHIPS 1,224,082
-----------
SHAREHOLDERS' INVESTMENT:
Preferred stock 295
Common stock 3,197
Additional paid-in capital 6,826,086
Warrants outstanding 60,000
Accumulated deficit (4,325,918)
-----------
2,563,660
Less 50,000 shares of common stock in treasury, at cost (125,000)
Total shareholders' investment 2,438,660
-----------
Total liabilities and shareholders' investment $15,106,931
===========
The accompanying notes to consolidated financial statements are
an integral part of these consolidated statements.
Page 4 of 18
MICROTEL FRANCHISE AND DEVELOPMENT CORP. AND SUBSIDIARIES
CONSOLIDATION STATEMENTS OF CHANGES IN SHAREHOLDERS' INVESTMENT
FOR THE PERIOD ENDED JUNE 30, 1995
(unaudited)
_________________________________________________________________________________________________________
Additional Additional
Series A Paid-In Paid-In
Preferred Capital Common Capital Warrants Accumulated Treasury
Stock Preferred Stock Common Outstanding Deficit Stock Total
--------- ---------- ---------- ----------- ----------- ----------------- --------- -----
BALANCE, March 31, 1995 $ 295 $1,560,705 $3,161 $5,187,217 $105,000 $(4,416,545) $(125,000) $2,314,833
Net income -- -- -- -- -- 122,457 -- 122,457
Exercise of stock options -- -- 36 78,164 (45,000) -- -- 33,200
Cash dividends paid on
preferred stock -- -- -- -- -- (31,830) -- (31,830)
------ ----------- ------ ---------- ----------- ------------ --------- -----------
BALANCE, June 30, 1995 $ 295 $1,560,705 $3,197 $5,265,381 $60,000 $(4,325,916) $(125,000) $2,438,660
===== ========== ====== ========== ======= ============ ========== ==========
Stock balances at March 31, 1995:
Common stock: 3,111,067 shares; Preferred Stock: 294,723 shares
Stock balances at June 30, 1995:
Common stock: 3,071,067 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 PERIOD ENDED JUNE 30, 1995 and 1994
(unaudited)
________________________________________________________________________________
1995 1994
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income/(Loss) $ 122,457 $ 57,367
Adjustments to reconcile net income (loss) to
net cash from operating activities:
Deferred tax benefit 43,099 (2,500)
Depreciation and amortization 120,202 110,438
Other income (150,000) --
Minority interest in earnings 58,536 94,688
Non-cash consulting 9,344 --
Equity in net losses of affiliates (1,825) 44,677
Capital distributions from unconsolidated
partnership interests 1,595 5,415
Acquisition of prepaid franchises (200,000) --
(Increase) decrease in assets -
Accounts receivable - trade 165,090 110,180
Inventories (14,516) 3,352
Prepaid expenses (24,394) (119,832)
Increase (decrease) in liabilities -
Accounts payable 23,247 (2,487)
Accrued payroll and related taxes (14,954) (41,930)
Accrued interest (10,259) (232)
Other accrued expenses (16,285) 81,450
Deferred revenue - Beach Club (233,074) (209,210)
Customer deposits 1,908 (12,739)
Deferred franchise revenue (26,000) (25,500)
------------ ---------
Net cash provided by operating activities (145,829) 93,137
------------ ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of land (601,352) (150,000)
Capital contribution to unconsolidated
partnership interests -- (436,500)
Collection on affiliate notes receivable 24,488 229,756
Increase in non-affiliate accounts and notes
receivable (214,247) (31,201)
Purchase of equipment (52,277) (24,676)
Cash received for options exercised 33,200 --
Change in other assets (69,347) (10,497)
----------- --------
Net cash used in investing activities (879,535) (423,118)
------------ ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to limited partners (33,700) (75,798)
Payments of debt (50,311) (45,737)
Borrowings on line of credit, net 934,000 --
Dividends paid (31,830) (31,830)
----------- ---------
Net cash provided by (used in) financing
activities 818,159 (153,365)
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS (207,205) (483,346)
CASH AND CASH EQUIVALENTS - beginning of period 333,046 1,149,041
---------- ---------
CASH AND CASH EQUIVALENTS - end of period $ 125,841 $ 665,695
========== =========
The accompanying notes to financing statements
are an integral part of these consolidated statements.
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 241,902 $ 182,309
========== =========
Income taxes $ 14,006 $ 4,518
========== =========
Page 6 of 18
MICROTEL FRANCHISE AND DEVELOPMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1995
(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 March 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 March 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,
seeking damages plus interest and costs, against Rochester Community
Savings Bank ("RCSB"), a New York based bank, and naming Hudson as a co-
defendant. On December 6, 1990, Delray Beach Hotel Properties, Ltd., a
Florida limited partnership controlled by Hudson, purchased the Seagate
Hotel and Beach Club from Rochester Community Savings Bank. The Purchase
Contract includes an indemnification of Hudson against any action
resulting from previously negotiated contracts between RCSB and third
parties. The requested relief in this case, Seagate Beach Quarters,
Inc., vs. Rochester Community Savings Bank, etc., et al, including Hudson
Hotels Corp., etc., was based on allegations that RCSB, through its
subsidiary, Shore Holdings, defaulted in its obligations under a Contract
for Purchase and Sale, and failed to go forward with the transaction due
to tortious ongoing negotiations between RCSB and Hudson, and that there
was a breach of contract by RCSB. RCSB is diligently defending this
suit, and is holding Hudson harmless. On March 17, 1994, the court
granted summary judgement in favor of all defendants, that judgement has
been appealed. On September 8, 1994, Seagate Beach Quarters, Inc., sued
Delray Beach Hotel Properties, L.P., Delray Beach Hotel Corp. and Shore
Holdings, Inc., in a cause of action for conspiracy and tortious
interference with business relationship based on essentially the same
facts stated above. On January 27, 1995, the Court issued an order
dismissing the amended complaint as to Delray Beach Hotel Properties,
L.P. Plaintiff has field a notice of appeal from that order; the judge
has issued an order setting jury trial on the docket commencing October
2, 1995.
Page 7 of 18
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 described above, 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's legal counsel
has not yet had an opportunity to fully assess the Company's alternatives
under the lawsuit. It is the intent of the Board of Directors to defend
this action. 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 June 30, 1995 and a combined summary of condensed financial information
for the partnerships which the Company does not control for the three month
period ended June 30, 1995.
Delray Beach Watertown Total
Hotel Properties Hotel Consolidated Unconsolidated
Limited Properties Partnerships Partnerships
----------------- ---------- ------------ ---------------
Property and equipment
net of accumulated
depreciation $6,354,189 $ -- $6,354,189 $22,986,291
Current assets 473,326 11,875 485,201 1,419,270
Notes and mortgage
receivable - noncurrent -- 1,400,000 1,400,000 1,500,000
Other assets 124,840 -- 124,840 660,250
---------- ---------- ---------- -----------
TOTAL ASSETS 6,952,355 1,411,875 8,364,230 26,565,811
---------- ---------- ---------- -----------
Mortgage and notes
payable - current 81,705 -- 81,705 2,754,770
Other current liabilities
689,528 -- 689,528 999,063
Mortgage payable - non
current 6,282,923 -- 6,282,923 22,123,240
---------- ---------- ---------- -----------
TOTAL LIABILITIES 7,054,156 -- 7,054,156 25,877,073
---------- ---------- ---------- -----------
NET ASSETS (101,801) 1,411,875 1,310,074 688,738
========== ========== ========== ===========
Net Revenues 1,114,094 -- 1,114,094 3,344,664
Operating Expenses 915,726 -- 915,726 2,657,372
---------- ---------- --------- -----------
Income (Loss) from
Operations 198,368 -- 198,368 687,292
Other Income (Expense), net (168,511) 35,000 (133,511) (871,982)
---------- ---------- ---------- -----------
NET INCOME (LOSS) $ 29,857 $ 35,000 $ 64,857 (184,689)
========== ========== ========== ===========
Page 9 of 18
5. Long Term Debt
Future minimum repayments under long-term debt are as follows:
Remainder 1996 $ 174,393
1997 184,718
1998 123,370
1999 130,273
2000 and thereafter 8,107,639
The Company is in the process of obtaining refinancing for the mortgage
payable by Delray Beach Hotel Properties, L.P. and has received a
commitment letter dated June 5, 1995. The term of the loan is 10 years,
with amortization calculated on a term of 20 years, with monthly payments
of principal and interest. Interest shall be adjusted annually at prime
plus 1%. The current and long term debt on the financial statements, along
with the future minimum repayments, reflect the terms of the commitment
letter.
6. Line of Credit
In May 1995, the Company obtained a second line of credit of $750,000, from
a commercial bank, which bears interest at prime plus 1 1/4%. Outstanding
balances on this line are to be repaid no later than nine months from the
date of the draw. Amounts borrowed are collateralized by substantially all
of the Company's assets and personally guaranteed by the Chairman and
C.E.O. of the Company. At June 30, 1995, $750,000 was borrowed under the
terms of this line and $500,000 was borrowed under the terms of the first
line. As of July 24, 1995, the Company has paid a total of $355,000
against amounts outstanding under these lines at June 30, 1995.
7. Commitments and Contingencies
The Company has various operating lease arrangements for automobiles and
office space. Total rent expense under operating leases amounted to
$38,143 and $35,547 for the periods ending June 30, 1995 and 1994,
respectively. Future minimum lease payments under operating leases are
approximately 1996 remainder - $95,540; 1997 - $121,680; 1998 - $41,454.
As an equity partner in various hotel partnerships, the Company has
guaranteed portions of mortgages payable relating to the partnerships. The
guarantees range from 50% to 200% of the outstanding mortgages payable to
banks. Amounts guaranteed by Hudson related to the partnership's mortgages
payable were approximately $3.6 million at June 30, 1995. In addition,
Delray Beach Hotel Corp., a wholly owned subsidiary, has guaranteed Delray
Beach Hotel Properties, Ltd.'s mortgage payable to a bank which has an
outstanding balance of $5,364,628 at June 30, 1995.
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.
Page 10 of 18
Deferred tax assets include loss carryforwards and deferred revenue.
Deferred tax liability represents the gross up relating to the purchase of
Hudson. At June 30, 1995, a valuation allowance has been provided to
reduce the Company's deferred tax asset.
At June 30, 1995, the Company has net operating loss carryforwards for
income tax purposes of approximately $2,400,000 which may be used to offset
future taxable income. These loss carryforwards will begin to expire in
2003.
9. Note Receivable Non-Affiliate - Master Franchise Agreement
On June 30, 1995, a Third Amendment was executed by Essex Microtel
International Lodging, Inc., ("EMILI") and the Company relating to the
Canadian Master Franchise Agreement. This occurred because the current
economic conditions in Canada prevented EMILI from meeting the Development
Schedule. The Third Amendment has extended the Development Schedule to 10
1/4 years, extended the period that the Company is to provide to EMILI
certain products, services and assistance to August 13, 1997, temporarily
suspended the requirement that EMILI not employ a training director until
the earlier of May 15, 1997, or the time EMILI has four Microtels open or
under construction, allowed EMILI to utilize the Company's training
facilities and trainers until such time that EMILI has an operating
Microtel open. In addition, the Company has obtained the absolute right,
at its option, to terminate the Master Franchise Agreement in the event
that the Company shall negotiate the licensing or sale to a third party of
the world-wide franchise rights. In connection with this amendment, EMILI
paid the Company its remaining financial obligation.
10. Receivables with Affiliates
The Company has advanced affiliated entities the following as of June 30,
1995:
Fishers Road Hotel Properties, L.P. $146,756
Airport Hotel Properties 249,700
950 Jefferson Road Associates 219,600
Brookwood Hotel Properties 64,500
Muar Lakes Associates 20,000
--------
$700,556
========
11. Acquisition of Land
In May 1995, the Company purchased 2 acres of land in Plano, Texas, for
approximately $600,000, or $300,000 an acre. The parcel is zoned for
commercial use and is located north of Dallas, Texas, off Interstate 75 and
is in proximity of major businesses and shopping centers. Funds used to
purchase this land were provided through the use of the Company's line of
credit. The Company is currently in the process of developing this land
for the future construction of a Microtel.
12. 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 five prepaid franchises are still being held by the other former
partner of S&E. In May 1995, one of the five prepaid franchises was used
for the Microtel opened in Colonie, New York.
Page 11 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
March 31, 1995 Annual Report on Form 10-KSB.
Results of Operations
---------------------
During the three month period ended June 30, 1995, there was $25,000 of
franchise placement income recognized as one Microtel was opened (in Colonie,
New York). There were two Microtels opened during the same three month period
ended June 30, 1994. Royalties increased by $30,486 for the three months ended
June 30, 1995 over the same period in 1994, an increase of 39%. This is
attributable to an increase in operating Microtel hotels from sixteen in 1994 to
twenty at June 30, 1995. Development fees decreased $85,000, or 68%, from the
same period in 1994. The decrease is attributable to two Microtels currently
under various stages of development in which fees were due, compared to three
under development during the same period in 1994. Overall, management fees for
the three month period ended June 30, 1995, decreased $36,095, or 15%, from the
same period in 1994. The decrease is a result of non-renewal of contracts on
four mature properties throughout fiscal 1995 and replacing them with contracts
on four properties during fiscal 1995 which are in a start-up mode.
A significant increase in hotel room rental ($726,305, or 175%) is attributable
to the operations of a hotel which the Company leased (Inn on the Lake) in
November 1994. Thirty seven percent (37%) of hotel room revenue and all of the
Beach Club income relate to the operation of Delray Beach Hotel Properties,
L.P., of which the Company is the controlling partner. Delray Beach Hotel
Properties, L.P. hotel room revenue increased slightly (3%) due to a slightly
higher daily room rate from prior year and Beach Club income increased $36,600,
or 6%, from prior year due to increased dues and food and beverage sales. Sixty
three percent (63%) of the hotel room revenue for the period ended June 30, 1995
represents the operations of the Inn on the Lake.
Selling, general and administrative expenses for the three month period ended
June 30, 1995 increased $725,930, or 64% from the period ended June 30, 1994.
$707,664, or 97%, of the expense represents the operations of the Inn on the
Lake, which the Company is leasing. Also, expenses for the three month periods
ended June 30, 1995 and 1994 include the operations of the Company and its
controlled affiliates (Delray Beach Hotel Properties, L.P. and Watertown Hotel
Properties II). Expenses for the controlled affiliate (Delray Beach Hotel
Properties, L.P.) increased slightly (3%) from the same period last year.
Expenses, excluding controlled affiliates and the Inn on the Lake, for the three
month period ended June 30, 1995, remained flat, as compared to the three month
period ended June 30, 1994. Depreciation and amortization increased $9,764, or
9%, due to capital improvements performed in fiscal 1995 to Delray Beach Hotel
Properties, L.P., a controlled affiliate. Amortization expense associated with
the adjustment of fair value of real estate investment will continue at a
current quarterly level of approximately $25,000 for the next 7 years.
Interest income increased $9,288, or 14%, due to interest earned on notes from
affiliates and nonaffiliates. $35,000, or 45%, of the $77,570 relates to
interest on the mortgage receivable from Watertown Hotel Properties II. Of the
$231,623 in total interest expense, 62% relates to the financing of an operating
hotel entity (Delray Beach Hotel Properties, L.P.). The remaining relates to
interest on the lines of credit, two convertible debentures, note payable
relating to purchase of partnership interests and the Tonawanda bond issue.
Other income of $150,000 represents the reacquisition of 14 prepaid franchises
for $200,000 from a former partner of S&E Hospitality. 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.
Page 12 of 18
Minority interest represents the elimination of the minority partners interest
in Delray Beach Hotel Properties, L.P. and Watertown Hotel Properties II.
Equity in Income/losses of affiliates represents net income incurred from the
Company's equity investment in various hotels.
The majority of income tax expense for the three month period ended June 30,
1995 represents deferred federal and state taxes related to net operating loss
carryforwards. Also, certain minimal state liabilities were recorded, which are
incurred by the Company on a regular basis.
As a result of the above factors, net income increased by $65,090 to $122,457
for the three month period ended June 30, 1995. The net income of $.03 per
share for the three month period ended June 30, 1995 compares with net income of
$.01 per share for the three months ended June 30, 1994. Shares used in
computing net income per share increased from 3,121,482 for June 30, 1994 to
3,468,314 for June 30, 1995. The predominant factors for this increase are (i)
stock issued for consulting services, 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, L.P.
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.
Financial Condition, Liquidity and Capital Resources
----------------------------------------------------
At June 30, 1995 the Company had a working capital deficit of $316,156, as
compared to a positive working capital of $443,604 at March 31, 1995. Cash and
cash equivalents totaled $125,840. The reduction in working capital from March
31, 1995 is attributable to a draw on the Company's lines of credit to purchase
land in Plano, Texas, and the reacquisition of previously purchased franchises
which had not been reflected in income at a discount. (See Note 12). As of
July 24, 1995, the Company has paid down $355,000 on the line of credit from
excess cash.
Investment in real estate partnership interests represents the Company's
interest in various partnerships. Investment in real estate partnership
interests decreased $27,453 from March 31, 1995. The predominant factor for the
decrease is cash distributions received from the partnerships. Investment in
real-estate land represents land purchased for the purpose of future development
or sale. In May 1995, the Company purchased 2 acres of land in Plano, Texas,
for approximately $600,000 (See Note 11).
The majority of property and equipment reflected on the balance sheet relates to
real and personal property of Delray Beach Hotel Properties, L.P. The Company
maintains an ongoing capital improvement policy at the property, which is funded
through the hotel and beach club operations.
On June 30, 1995, Essex Microtel International Lodging, Inc., the master
franchisee for the Canadian territory, paid its remaining obligation to the
Company, but has failed to meet its development schedule as of March 31, 1995.
The Company, recognizing that the economic climate in Canada is not favorable
with respect to real estate development, executed an amendment to the original
agreement on June 30, 1995, which extended the development schedule and
modified other terms. (See Note 8 - Note Receivable Non-Affiliate - Master
Franchise Agreement)
Deferred tax assets represents federal and state tax assets relating to the
future benefit from tax loss carryforwards realized as a result of current year
earnings and the expected profitability in future periods, net of deferred tax
liability related to the acquisition of Hudson and the related temporary
differences associated with the difference in the financial reporting and tax
basis of the purchased assets.
Other assets consist of a mortgage note receivable held by Watertown Hotel
Properties II in the amount of $1,400,000, collateralized by land and the
Microtel hotel located in Watertown, New York. Also, 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, LLC. One of the minority owners of L, R,
Page 13 of 18
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, L.P. for $1,000,000 due May
1, 2000. Under the terms of the note, payments are required for 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.
In fiscal 1994, the first of the twenty hotels was opened under the exclusive
development agreement with S&E Hospitality Partnership (S&E) (see Note 11 -
Exclusive Development Agreement). In March 1994, a Termination of Exclusive
Development Agreement was executed by S&E Hospitality Partnership and the
Company, due to the occurrence of the second consecutive default by S&E on the
Development Schedule, resulting in the exclusive territorial rights reverting
back to the Company. According to the terms and conditions of the Termination
Agreement, certain provisions survive; namely, that S&E retains the right to
develop the balance of the Microtels for which S&E has paid the non-refundable
franchise fees. Therefore, 19 Microtels to be developed by S&E at any approved
location within or outside of the originally defined territory. In June 1995,
the Company and a former partner in the S&E Partnership agreed to have the
Company buy back their prepaid franchises for a discount. The Company paid
$200,000 to repurchase 14 franchises valued at $350,000. The remaining five
prepaid franchises are assigned to the other partner of the former S&E
Partnership. In May, one of the five prepaid franchises was used for the
Microtel opened in Colonie, New York. The remaining $100,000 has been
classified as deferred franchise revenue on the June 30, 1995 balance sheet.
The Company will recognize revenue as the franchised hotels are opened. The
remaining $104,000 of the $204,000 total deferred revenue (current and long
term) represents deposits submitted by franchisees to secure a Microtel
franchise which will be built at a later date. During the quarter ended June
30, 1995 the Company recognized revenue for the opening of one Microtel, while
returning a deposit. The deferred revenue will be recognized as each franchised
hotel is opened.
Long-term debt is substantially comprised of a $5,364,628 mortgage on the real
property of Delray Beach Hotel Properties, L.P. Debt service will be paid
through income from operations. The Company has received a commitment letter
dated June 5, 1995, from a commercial bank in Florida and intends to refinance
the mortgage by August 15, 1995, in accordance with terms in the commitment
letter. 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 a land purchase.
Shareholders' equity increased to $2,438,660 as of June 30, 1995 from $2,314,833
as of March 31, 1995. The three factors which affected the level of
shareholders' equity are represented by an increase of $33,200 for shares issued
relating to the exercise of stock options, a decrease of $31,830 resulting from
preferred dividend payments, and an increase of $122,457 due to the net income
for the three month period ended June 30, 1995.
The Company has, in total, $1,250,000 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 14 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, seeking damages
plus interest and costs, against Rochester Community Savings Bank ("RCSB"), a
New York based bank, and naming Hudson as a co-defendant. On December 6, 1990,
Delray Beach Hotel Properties, Ltd., a Florida limited partnership controlled by
Hudson, purchased the Seagate Hotel and Beach Club from Rochester Community
Savings Bank. The Purchase Contract includes an indemnification of Hudson
against any action resulting from previously negotiated contracts between RCSB
and third parties. The requested relief in this case, Seagate Beach Quarters,
Inc., vs. Rochester Community Savings Bank, etc., et al, including Hudson Hotels
Corp., etc., was based on allegations that RCSB, through its subsidiary, Shore
Holdings, defaulted in its obligations under a Contract for Purchase and Sale,
and failed to go forward with the transaction due to tortious ongoing
negotiations between RCSB and Hudson, and that there was a breach of contract by
RCSB. RCSB is diligently defending this suit, and is holding Hudson harmless.
On March 17, 1994, the court granted summary judgement in favor of all
defendants, that judgement has been appealed. On September 8, 1994, Seagate
Beach Quarters, Inc., sued Delray Beach Hotel Properties, L.P., Delray Beach
Hotel Corp. and Shore Holdings, Inc., in a cause of action for conspiracy and
tortious interference with business relationship based on essentially the same
facts stated above. On January 27, 1995, the Court issued an order dismissing
the amended complaint as to Delray Beach Hotel Properties, L.P. Plaintiff has
field a notice of appeal from that order; the judge has issued an order setting
jury trial on the docket commencing October 2, 1995.
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
described above, 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's legal counsel has not yet had an opportunity to fully assess the
Company's alternatives under the lawsuit. It is the intent of the Board of
Directors to defend this action. 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.
Item 2. Change in Securities - None
--------------------
Page 15 of 18
Item 3. Defaults Upon Senior Securities - None
-------------------------------
Item 4. Submission of Matters to a Vote of Security Holders - None
---------------------------------------------------
Item 5. Other Information - Not applicable
-----------------
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
A. Exhibits
Exhibit No. Description
----------- -----------
11 Statement re: computation of per share earnings
B. Form 8-K: None filed
Page 16 of 18
Exhibit 11
COMPUTATION OF EARNINGS PER COMMON SHARE
June 30, 1995 June 30, 1994
------------- -------------
PRIMARY
------------------------------------------
Net earnings applicable to common stock:
Net earnings (loss) $ 122,457 $ 57,367
Deduct preferred stock dividends paid (31,830) (31,830)
---------- ---------
Net earnings (loss) applicable to common stock $ 90,627 $ 25,537
========== =========
Weighted average number of common shares and
common equivalents outstanding:
Weighted average common shares outstanding 3,119,254 3,001,012
Additional shares assuming conversion of
options and warrants 349,060 120,470
---------- ----------
Weighted average number of common shares and
common equivalents outstanding 3,468,314 $3,121,482
========== ==========
Primary earnings per share $0.03 $0.01
========== ==========
FULLY DILUTED*
------------------------------------------------
Net earnings applicable to common stock
on a fully diluted basis:
Net earnings applicable to common stock
per above $ 90,627 $ 25,537
Add net interest expense related to
convertible debentures 42,000 23,100
Add dividends on convertible preferred
stock 31,830 31,830
---------- ----------
Net earnings applicable to common stock
on a fully diluted basis $ 164,457 $ 80,467
========== ==========
Total shares for fully diluted:
Shares used in calculating primary earnings
per share 3,468,314 3,121,482
Additional shares to be issued under full
conversion of convertible debentures 600,000 300,000
Additional shares to be issued under full
conversion of preferred stock 294,723 294,723
---------- ----------
Total shares for fully diluted 4,363,037
==========
Fully diluted earnings per share $0.04 $0.02
========== ==========
*This calculation is submitted in accordance with Securities Exchange Act of
1934 Release No. 9083, although not required by footnote 8, paragraph 40, of APB
No. 15 because it results in anti-dilution.
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: 8/4/95 /s/Bruce A. Sahs
--------------- ------------------------------
Bruce A. Sahs, Executive Vice President
and Chief Operating Officer
Date: 8/4/95 /s/Taras M.Kolcio
--------------- ------------------------------
Taras M. Kolcio, Controller
Page 18 of 18