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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 1999
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
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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 17,182,969 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 5, 1999.
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1
U.S. FRANCHISE SYSTEMS, INC.
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Statements of Financial Position at December 31, 1998 and June 30, 1999 (Unaudited)............. 3
Consolidated Statements of Operations for the three and six months ended June 30, 1999 and 1998 (Unaudited).. 4
Consolidated Statements of Cash Flows for the six months ended June 30, 1999 and 1998 (Unaudited)............ 5
Notes to Consolidated Financial Statements (Unaudited)....................................................... 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS........................ 7
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK................................................... 12
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS............................................................................................ 12
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.................................................................... 12
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.............................................................................. 12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.......................................................... 12
ITEM 5. OTHER INFORMATION............................................................................................ 13
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................................................................. 13
SIGNATURES................................................................................................... 13
EXHIBIT INDEX................................................................................................ 14
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
U.S. FRANCHISE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (UNAUDITED)
JUNE 30, 1999 DECEMBER 31, 1998
------------- -----------------
ASSETS
CURRENT ASSETS
Cash and temporary cash investments................................... $ 5,496,000 $ 15,966,000
Accounts receivable .................................................. 2,919,000 2,070,000
Deposits and prepaid expenses......................................... 368,000 315,000
Promissory notes receivable........................................... 2,509,000 919,000
Deferred commissions.................................................. 3,372,000 1,615,000
----------- ------------
TOTAL CURRENT ASSETS.......................................... 14,664,000 20,885,000
PROMISSORY NOTES RECEIVABLE.............................................. 24,295,000 23,590,000
PROPERTY AND EQUIPMENT-Net............................................... 2,575,000 3,396,000
FRANCHISE RIGHTS-Net..................................................... 24,707,000 25,138,000
DEFERRED COMMISSIONS..................................................... 5,792,000 6,682,000
DEVELOPMENT SUBSIDIES.................................................... 10,193,000 1,299,000
OTHER ASSETS-Net......................................................... 4,401,000 3,186,000
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TOTAL ASSETS.................................................. $86,627,000 $ 84,176,000
----------- ------------
----------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable...................................................... $ 389,000 $498,000
Commissions payable................................................... 1,082,000 1,464,000
Deferred application fees............................................. 4,234,000 1,973,000
Accrued expenses...................................................... 1,212,000 1,252,000
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TOTAL CURRENT LIABILITIES..................................... 6,917,000 5,187,000
----------- ------------
----------- ------------
DEFERRED APPLICATION FEES................................................ 7,594,000 9,280,000
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TOTAL LIABILITIES............................................. 14,511,000 14,467,000
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----------- ------------
REDEEMABLE STOCK:
Common shares ........................................................ 324,000 324,000
STOCKHOLDERS' EQUITY:
Common shares ........................................................ 167,000 167,000
Capital in excess of par............................................... 89,805,000 89,416,000
Accumulated deficit.................................................... (18,180,000) (20,198,000)
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TOTAL STOCKHOLDERS' EQUITY.................................... 71,792,000 69,385,000
----------- ------------
----------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 86,627,000 $ 84,176,000
----------- ------------
----------- ------------
See notes to consolidated financial statements.
3
U.S. FRANCHISE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
JUNE 30, 1999 JUNE 30, 1998 JUNE 30, 1999 JUNE 30, 1998
------------- ------------- ------------- -------------
REVENUES:
Royalty and Other Fee Income ......................... $3,389,000 $1,892,000 $5,949,000 $2,585,000
Franchise application fees ........................... 1,362,000 903,000 1,978,000 1,505,000
---------- ---------- ---------- ----------
4,751,000 2,795,000 7,927,000 4,090,000
EXPENSES:
General and administrative ........................... 2,377,000 3,443,000 4,799,000 5,847,000
Franchise sales commissions .......................... 1,204,000 516,000 1,863,000 829,000
Depreciation and amortization ........................ 364,000 393,000 705,000 603,000
Interest income ...................................... (794,000) (599,000) (1,545,000) (828,000)
Interest expense ..................................... -- 298,000 -- 749,000
---------- ---------- ---------- ----------
3,151,000 4,051,000 5,822,000 7,200,000
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NET INCOME (LOSS) BEFORE TAXES $1,600,000 $(1,256,000) $2,105,000 $(3,110,000)
Income taxes 87,000 -- 87,000 --
---------- ---------- ---------- ----------
NET INCOME (LOSS) AFTER TAXES 1,513,000 $(1,256,000) 2,018,000 $(3,110,000)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted average number of common shares outstanding 19,880,326 17,837,891 19,877,719 15,466,070
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted average number of common shares outstanding,
assuming dilution 20,044,600 17,837,891 20,041,993 15,466,070
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
EARNINGS (LOSS) PER SHARE (BASIC AND DILUTED) $ 0.08 $ (0.07) $ 0.10 $ (0.20)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
See Notes to Consolidated Financial Statements.
4
U.S. FRANCHISE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 1999 JUNE 30, 1998
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OPERATING ACTIVITIES:
Net Income/(Loss) ........................................................................ $ 2,018,000 $ (3,110,000)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization ......................................................... 705,000 603,000
Deferred compensation amortization .................................................... 236,000 129,000
Gain on sale of land .................................................................. (155,000) --
Changes in assets and liabilities:
Decrease/(Increase) in accounts receivable, prepaid expenses & deposits ............... (902,000) (1,050,000)
Decrease/(Increase) in promissory notes receivable .................................... (2,295,000) (4,114,000)
Decrease/(Increase) in deferred commissions ........................................... (867,000) (1,480,000)
Decrease/(Increase) in other assets ................................................... (1,178,000) (538,000)
(Decrease)/Increase in accounts payable ................................................ (109,000) 828,000
(Decrease)/Increase in accrued expenses ................................................ (40,000) (110,000)
(Decrease)/Increase in commissions payable ............................................. (382,000) (202,000)
(Decrease)/Increase in deferred application fees ....................................... 575,000 1,342,000
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NET CASH USED IN OPERATING ACTIVITIES ............................................... (2,394,000) (7,702,000)
INVESTING ACTIVITIES:
Acquisition of property and equipment ..................................................... (143,000) (3,016,000)
Proceeds from sale of properties .......................................................... 809,000 5,752,000
Issuance of development subsidies ......................................................... (8,894,000) (150,000)
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)
Acquisition of franchise rights ........................................................... (2,000) (2,869,000)
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NET CASH USED IN INVESTING ACTIVITIES ............................................... (8,230,000) (15,283,000)
FINANCING ACTIVITIES:
Exercise of stock options ................................................................. 154,000 --
Repayment of subordinated debt ............................................................ -- (19,412,000)
Issuance of common stock, net ............................................................. -- 48,008,000
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NET CASH PROVIDED/(USED) IN FINANCING ACTIVITIES .................................... 154,000 28,596,000
NET INCREASE (DECREASE) IN CASH AND CASH INVESTMENTS ........................................ (10,470,000) 5,611,000
CASH AND TEMPORARY INVESTMENTS
Beginning of period ...................................................................... 15,966,000 15,890,000
End of period ............................................................................ 5,496,000 21,501,000
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SUPPLEMENTAL DISCLOSURES OF CASHFLOW INFORMATION
Noncash activities:
Issuance of 2,222,222 shares for acquisition of Hawthorn franchise rights ................. -- $ 17,777,000
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Issuance of stock for acquisition of Best Inns and Suites ................................... -- $ 2,293,000
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Franchise rights
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
5
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, 1998, filed with the Securities and
Exchange Commission. The results of operations for the three months ended
June 30, 1999 are not necessarily indicative of results that may be expected
for the full year.
2. RECLASSIFICATIONS
Certain amounts in the June 30, 1999 statement of operations and
consolidated statement of cashflows have been reclassified to conform to
current year classifications. For instance, other income was combined with
royalty and other fee income. In addition, certain reclassifications have
been made in the balance sheet from December 31, 1998.
3. EARNINGS PER SHARE
Basic earnings per common share are computed using the weighted
average number of common shares outstanding during the period. Diluted
earnings per common share incorporates the incremental shares issuable upon
the assumed exercise of stock options. Certain of the Company's stock options
were excluded from the calculation of diluted earnings per share because they
were antidilutive, but these options could be dilutive in the future.
4. STOCK OPTION PLANS
The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions.
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THREE MONTHS SIX MONTHS THREE MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
30-JUN-99 30-JUN-99 30-JUN-98 30-JUN-98
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Expected life (years) 4.30 3.75 3.89 3.65
Expected volatility 36.6% 34.8% 30.0% 30%
Risk free interest rate 6.0% 5.9% 6.0% 6.0%
Dividend yield 0% 0% 0% 0%
Number of options granted 73,550 277,100 23,300 130,422
Wgt. avg. exercise price - options $19.25 $11.77 $7.85 $8.28
granted
Number of options forfeited 24,175 38,675 10,000 15,100
Number of options exercised 15,625 15,625 0 0
Stock option expense $88,000 $175,000 $77,000 $130,000
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6
5. SEGMENT REPORTING
The Company owns three brands and operates a management company
primarily in the United States. Revenues, expenses and capital expenditures
directly attributable to each business segment are reflected as such and
shown below. Common expenses and capital expenditures are classified in
other/corporate:
THREE MONTHS ENDED, JUNE 30, 1999
MICROTEL HAWTHORN BEST MANAGEMENT OTHER/CORPORATE CONSOLIDATED
COMPANY
Revenue
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June 30, 1999 1,821,000 1,595,000 855,000 480,000 0 4,751,000
June 30, 1998 1,297,000 947,000 187,000 364,000 0 2,795,000
Net Income (loss)
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June 30, 1999 1,228,000 1,186,000 1,045,000 176,000 (2,122,000) 1,513,000
June 30, 1998 1,000,000 640,000 612,000 154,000 (3,662,000) (1,256,000)
Capital Expenditures
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June 30, 1999 305,000 3,640,000 3,350,000 11,000 44,000 7,352,000
June 30, 1998 1,555,000 (165,000) 4,577,000 29,000 32,000 6,028,000
SIX MONTHS ENDED, JUNE 30, 1999
MICROTEL HAWTHORN BEST MANAGEMENT OTHER/ CORPORATE CONSOLIDATED
COMPANY
Revenue
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June 30, 1999 2,918,000 2,644,000 1,432,000 933,000 0 7,927,000
June 30, 1998 2,106,000 1,433,000 187,000 364,000 0 4,090,000
Net Income (loss)
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June 30, 1999 2,002,000 2,052,000 1,569,000 311,000 (3,916,000) 2,018,000
June 30, 1998 1,625,000 902,000 762,000 154,000 (6,553,000) (3,110,000)
Capital Expenditures
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June 30, 1999 365,000 3,764,000 4,778,000 63,000 67,000 9,037,000
June 30, 1998 3,051,000 18,362,000 4,577,000 29,000 86,000 26,105,000
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
7
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, in April 1998 the Company acquired the
exclusive worldwide franchise rights to the Best Inns brand, a mid-priced
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.
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 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 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.
8
Comparisons have been made between the three months ended June 30,
1999 and June 30, 1998 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:
FRANCHISE SALES GROWTH
AS OF JUNE 30,
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MICROTEL FRANCHISE DATA 1999 1998
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Properties open (1) 159 98
Executed agreements and under construction 53 53
Executed franchise agreements but not under construction 262 276
Accepted applications 86 84
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Total in development and accepted applications (2) 401 413
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OPEN PLUS IN DEVELOPMENT AND ACCEPTED APPLICATIONS 560 511
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(1) The Company does not receive royalties from 28 hotels open as of June 30,
1999.
(2) There can be no assurance that properties in 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:
AS OF JUNE 30,
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HAWTHORN SUITES FRANCHISE DATA 1999 1998
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Properties open(1) 63 34
Executed agreements and under construction 39 24
Executed franchise agreements but not under construction 126 79
Accepted applications 65 35
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Total in development and accepted applications (2) 230 138
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OPEN PLUS IN DEVELOPMENT AND ACCEPTED APPLICATIONS 293 172
- ------------------------------------------------------------------------------------------ ------------------- -------------------
(1) The Company does not receive royalties from 1 hotel open as of June 30,
1999.
(2) There can be no assurance that properties in development or for which
applications have been accepted will result in open hotels.
Since acquiring the Best Inns brand on April 28, 1998 and establishing
its sales force in June 1998, the Company has realized franchise sales growth
as follows:
AS OF JUNE 30,
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BEST INNS FRANCHISE DATA 1999 1998(2)
(inception to date)
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Properties open 80 35
Executed agreements and under construction 24 4
Executed franchise agreements but not under construction 36 8
Accepted applications 108 30
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Total in development and accepted applications (1) 168 42
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OPEN PLUS IN DEVELOPMENT AND ACCEPTED APPLICATIONS 248 77
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(1) There can be no assurance that properties in development or for which
applications have been accepted will result in open hotels.
(2) The Company acquired the Best Inns brand in April 1998.
9
REVENUE-The Company has derived revenues from the following sources:
THREE MONTHS THREE MONTHS
ENDED ENDED SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1999 JUNE 30, 1998 JUNE 30, 1999 JUNE 30, 1998
------------- ------------- ------------- -------------
Royalty and other fee income.................. $3,389,000 $1,892,000 $5,949,000 $2,585,000
Franchise application fees.................... 1,362,000 903,000 1,978,000 1,505,000
--------- ------- --------- ---------
TOTAL......................................... 4,751,000 $2,795,000 7,927,000 $4,090,000
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998
Royalty and other fee income increased $1.5 million for the three
months ended June 30, 1999 as compared to the comparable prior year's period.
The increase is primarily attributable to the increase in royalty paying
hotels from 138 to 273.
Franchise application fees increased $459,000 for the three months
ended June 30, 1999 as compared to the comparable prior year's period. The
increase is primarily attributable to an increase in the number of hotels
opened during the quarter.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
Royalty and other fee income increased $3.36 million for the six
months ended June 30, 1999 as compared to the comparable prior year's period.
The increase is primarily attributable to the increase in royalty paying
hotels from 138 to 273.
Franchise application fees increased $473,000 for the six months
ended June 30, 1999 as compared to the comparable prior year's period. The
increase is primarily attributable to an increase in the number of hotels
opened during the period.
EXPENSES-The Company's expenses were as summarized below:
THREE MONTHS ENDED THREE MONTHS ENDED SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1999 JUNE 30, 1998 JUNE 30, 1999 JUNE 30, 1998
------------- ------------- ------------- -------------
General and administrative.................. $2,377,000 $3,443,000 $4,799,000 $5,847,000
Franchise sales commissions................. 1,204,000 516,000 1,863,000 829,000
Depreciation and amortization............... 364,000 393,000 705,000 603,000
Interest income............................. (794,000) (599,000) (1,545,000) (828,000)
Interest expense............................ 298,000 749,000
--------- --------- --------- ---------
TOTAL....................................... 3,151,000 4,051,000 5,822,000 7,200,000
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998
Franchise sales commissions increased $688,000 for the three months
ended June 30, 1999 as compared to the comparable prior year's period due to
an increase in the number of hotels opened during the quarter.
Depreciation and amortization expense decreased by $29,000,
primarily due to the elimination of amortization related to certain
consulting fees previously paid to the prior owner of the Microtel Brand and
other marketing related amortization.
Interest income, resulting primarily from promissory notes
receivable and investments in cash and marketable securities, increased
$195,000 for the three months ended June 30, 1999 as compared to the
comparable prior year's period due primarily to higher cash balances.
Interest expense decreased $298,000 for the three months ended June
30, 1999 as compared to the comparable prior year's period due to the
repayment of the Company's 10% Subordinated Debentures during the second
quarter of 1998.
10
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
Franchise sales commissions increased by approximately $1 million
for the six months ended June 30, 1999 as compared to the comparable prior
year's period due to an increase in the number of hotels opened during the
period.
Depreciation and amortization expense increased $102,000 primarily
due to the amortization of the Best Inns and Hawthorn acquisitions and
depreciation of development subsidies.
Interest income, resulting primarily from promissory notes
receivable and investments in cash and marketable securities, increased
$717,000 for the six months ended June 30, 1999 as compared to the comparable
prior year's period due primarily to higher cash balances.
Interest expense decreased $749,000 for the six months ended June
30, 1999 as compared to the comparable prior year's period due to the
repayment of the Company's 10% Subordinated Debentures during the second
quarter of 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company had approximately $5.5 million in cash or equivalents as
of June 30, 1999. The Company expects to satisfy its cash requirements during
the next twelve months with its cash and cash equivalents. The Company has no
outstanding lines of credit in place.
For the six months ended June 30, 1999, the Company had net income
of $2.02 million. Net cash used in operating activities was $2.39 million and
the primary operating adjustment to net income was an increase in promissory
notes receivable ($2.3 million) and an increase in other assets ($1.18
million). For the six months ended June 30, 1999 net cash provided in
investing activities was $8.23 million with the primary adjustments to net
income resulting from development subsidies issued to franchisees ($8.9
million) and the receipt of proceeds from the sale of land ($809,000). For
the six months ended June 30, 1999 net cash provided in financing activities
was $154,000, resulting from the exercise of stock options by certain current
and former employees.
YEAR 2000 COMPUTER MATTER
The Year 2000 Issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
Company's computer programs that have time-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result
in a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions
or customer reservations or engage in similar normal business activities. The
Company has devoted substantial resources and time to analyzing and
remediating Year 2000 Issues that are within the Company's control that may
significantly impact the Company's operations. Based on these efforts,
management believes that the Year 2000 Issue will not pose material
operational problems for its computer systems and does not expect that any
remaining costs of compliance will have a materially adverse impact on the
results of operations during any quarterly or annual reporting period. The
Company is in the process of communicating with its significant suppliers of
goods and services to determine the extent to which the Company's operations
and systems are vulnerable to those third parties' failure to remediate their
own Year 2000 Issues. There can be no guarantee that the systems of other
companies on which the Company's operations and systems rely will be timely
converted and would not have an adverse effect in the Company's systems or
results of operations. Although the Company has utilized both external and
internal resources to reprogram or replace and test its software and systems
for Year 2000 modifications, there can be no assurances that circumstances
will not arise
11
in the future that will require management to take additional action on the
Year 2000 Issues. The Company has considered the need for establishing
applicable contingency plans related to Year 2000 Issues and will put such
contingency plans in place should it become evident that such arrangements
are required by the relevant circumstances.
SEASONALITY
Royalties generated by gross room revenues of franchised properties are
expected to be the largest source of revenue for the Company for the
immediate future. The Company expects to experience seasonal revenue patterns
similar to those experienced by the lodging industry generally. The summer
months, because of increase in leisure travel, are expected to produce higher
revenues for the Company than other periods. 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is and may become party to claims and litigations that
arise in its normal course of business. In management's opinion, the outcome
of any currently pending matters will not have a material adverse effect on
the Company's consolidated financial statements.
ITEM 2. RECENT SALE OF UNREGISTERED SECURITIES
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
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 Thursday May 27, 1999 at 4:00 p.m., at
the Company's offices, 13 Corporate Square, Suite 250, Atlanta, Georgia 30329.
The following proposal was submitted to, and passed by the Stockholders:
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.
The tally of the votes was as follows:
12
TALLY OF VOTES OF ANNUAL MEETING OF STOCKHOLDERS OF U.S. FRANCHISE SYSTEMS, INC.
HELD ON MAY 27, 1999
SUBJECT OF VOTE # FOR % FOR* # AGAINST % AGAINST* # ABSTAIN % ABSTAIN
- -------------------------------------- ------------------ ------------ --------------- ----------------- --------------- -----------
Directors:
Michael A. Leven 41,670,984 99.97% 13,800 0.03% 0 0.00%
Neal K. Aronson 41,670,984 99.97% 13,800 0.03% 0 0.00%
Steven Romaniello 41,670,984 99.97% 13,800 0.03% 0 0.00%
Dean S. Adler 41,670,984 99.97% 13,800 0.03% 0 0.00%
Irwin Chafetz 41,670,984 99.97% 13,800 0.03% 0 0.00%
Douglas Geoga 41,670,984 99.97% 13,800 0.03% 0 0.00%
Richard D. Goldstein 41,670,984 99.97% 13,800 0.03% 0 0.00%
David Hamamoto 41,670,984 99.97% 13,800 0.03% 0 0.00%
Jeffrey Sonnenfeld 41,670,984 99.97% 13,800 0.03% 0 0.00%
Barry Sternlicht 41,670,984 99.97% 13,800 0.03% 0 0.00%
The total number of votes held by the stockholders of the
Company as of April 9, 1999, the record date for the Annual Meeting, was
44,246,384.
*Percentage of votes for or against each director is
calculated based on a total of 41,684,784 votes received.
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) EXHIBITS:
Exhibit Description
Number
------
27.1 Financial Data Schedule.
b) REPORTS ON FORM 8-K
During the period from April 1, 1999 to June 30, 1999, the
Company did not file any reports on Form 8-K.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
U.S. FRANCHISE SYSTEMS, INC.
By
By /s/______________________ /s/____________________
Michael A. Leven Neal K. Aronson
CHAIRMAN OF THE BOARD, PRESIDENT EXECUTIVE VICE PRESIDENT AND CHIEF
AND CHIEF EXECUTIVE OFFICER FINANCIAL OFFICER
Dated: August 13, 1999
13
EXHIBIT INDEX
Exhibit Description
Number -----------
------
27.1 Financial Data Schedule.
14