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U.S. Franchise Systems for 1999; Receives Inquiries Regarding the Possible Sale of the Company |
ATLANTA, March 30, 2000 - -- U.S. Franchise
Systems, Inc. (Nasdaq: USFS) today reported earnings from operations before
special charges of $214,000 or $0.01 per share for its fourth quarter 1999
compared to $118,000 or $0.01 per share in the fourth quarter 1998. Earnings
from operations before special charges for the full year were $5.5 million
or $0.28 per share in 1999 compared to a loss of $2.9 million or $0.16
per share in 1998.
Earnings from operations in 1999 are before giving effect to special charges of $19.0 million in the fourth quarter and $19.3 million for the full year, approximately $1 million of which represents cash expenditures to be made by the Company in 2000. These charges primarily relate to reserves taken against the Company�s loan portfolio. After giving effect to the special charges mentioned above, USFS reported a loss of $18.8 million or $0.94 per share in the fourth quarter and a loss of $13.7 million or $0.69 per share for the full year in 1999. Total revenues for the three months ended December 31, 1999 increased 52 percent to $4.8 million, up from $3.1 million in the same period in 1998. Revenues for the year increased 86 percent from $10.6 million in 1998 to $19.7 million in 1999, reflecting an 88 percent increase in the number of hotels paying royalties to USFS from 197 at the end of 1998 to 370 at the end of 1999. USFS also announced that in recent months it received a number of unsolicited inquiries regarding the possible sale of the company, including inquiries from several competitors. In response to those unsolicited inquiries, the Company retained Banc of America Securities LLC as an advisor. The Company has had discussions with several of those persons, although none resulted in offers which were satisfactory to the Company and to the Board of Directors. The Company has requested that Banc of America Securities assist the Company more generally in evaluating strategic alternatives and opportunities that may be or become available to the Company. According to Mike Leven, president and chief executive officer, �We have retained Banc of America Securities to ensure that the Company consistently explores all avenues to maximize shareholder value.� According to Leven, �Although we are disappointed that earnings have not accelerated as quickly as we had hoped and we continue to be disappointed in the price of our stock, USFS had record revenues, franchise sales and hotel openings for 1999.� Leven continued, �While we are feeling the effects of the cyclical nature of the hotel industry, we are proud to say that U.S. Franchise Systems has grown from 22 open hotels in 1995 to establishing itself as a leader in the franchise industry and one of the top 10 hotel companies in the world in less than five years.� According to Neal Aronson, executive vice president and chief financial officer, �The key indicator of the progress of our Company can be seen in the growth of our franchise royalty fees. In the fourth quarter 1999, franchise royalty income increased 93% from $1.5 million to $2.9 million compared to fourth quarter 1998 while increasing from $4.5 million for the full year of 1998 to $10.4 million for the full year of 1999, representing an annual growth rate of 131%. The combination of new hotel openings, ramping-up RevPar of new hotels and increasing royalty rates are proving that our business model is viable and effective.� Aronson added, �The continued health of our Company is bolstered by our unlevered balance sheet with $6.3 million of cash on hand at year-end 1999.� USFS achieved a solid quarter of franchise sales, executing 81 agreements
during the fourth quarter 1999. For the year, the Company executed a record
371 agreements, an increase of 12 percent over 1998. The Company�s franchisees
opened 34 hotels and broke ground on 51 hotels in the fourth quarter. For
the full year 1999, the Company�s franchisees opened and broke ground on
182 and 200 hotels, respectively. The total number of hotel properties
open or in development as of December 31, 1999 was 1,218, a 15 percent
increase over the number one year ago. This includes 398 open hotels and
120 under construction.
* The Company does not receive royalties from 27 open Microtel hotels and one Hawthorn property. ** There can be no assurance that properties in development or for which applications have been accepted will result in open hotels. During 1999, five previously opened hotels ceased operating as Microtels and seven previously opened hotel ceased operating as Best Inns. Since the Microtel brand was acquired by the Company, 35% of accepted applications did not become executed agreements and 38% of executed agreements terminated before resulting in open hotels. Since the Company acquired the franchise rights to the Hawthorn brand, 32% of accepted applications did not become executed agreements and 14% of executed agreements terminated before resulting in open hotels. Since the Company acquired the Best Inn brand, 60% of accepted applications did not become executed agreements and 11% of executed agreements terminated before resulting in open hotels. Review of 1999 Fourth quarter 1999 results were adversely effected by the termination of 17 management contracts, delayed timing of openings and slower ramp-up of newly opened hotels, and no recognition of interest income related to the pay-in-kind interest payments received on the Company�s $15 million loan to the 17 Best Inn Suites properties owned by Alpine Hospitality Ventures (�Ventures�). Commenting on the more competitive environment for franchisors and hotel owners, Leven stated that, �During the fourth quarter 1999, we moved quickly to address the challenges facing the industry by strengthening our team in areas of service, quality and training to provide additional support for our franchisees to open and operate their hotels. This has impacted our corporate overhead expense.� The Company recorded a special charge of approximately $19.3 million in 1999, all but $250,000 of which occurred in the fourth quarter. Of the total charge, approximately $1 million relates to cash expenditures to be made in 2000. The largest portion of the charge ($17.1 million) came from reserves against the Company�s loan portfolio. As described in the Company�s Form 10-Q for the quarter ended September 30, 1999, such charges are a result of the deterioration of the performance of certain hotels adversely affecting the current valuation of the loans USFS has made to those properties. Of the $17.1 million charge, $15.5 million related to reserves taken against the principal and accrued interest on the loan made to Ventures in connection with the 1998 acquisition of the Best Inns brand. In the fourth quarter 1999, the Company was advised by Ventures that the senior lender to its operating subsidiary planned to institute a �lock-box� arrangement because of the deteriorating financial condition of the 17 hotels owned by that subsidiary. The lock-box arrangement, which was executed in March 2000, effectively precludes the payment of cash interest to the Company while such arrangement is in place. The Company will continue to receive interest as in-kind payments. Based upon the current performance level of the properties owned by the subsidiary of Ventures and the steps taken to institute a lock-box by the senior lender, the Company concluded that the value of the loan was impaired and therefore it was appropriate to take a reserve against the value of the loan and the accrued interest. The Company did not recognize the paid-in-kind interest income in the fourth quarter 1999. Unless performance of these properties improves, the Company does not intend to include in income the pay- in-kind interest related to the Ventures loan in 2000. The difficult environment confronting hotel operators combined with the lack of scale of the Company�s hotel management operations has caused the Company to begin to reevaluate the future prospects of its hotel management business line. As of March 10, 2000, the Company had agreed to terminate three additional management contracts which will leave the Company with only 21 contracts (including 17 with the operating subsidiary of Ventures). The Company is currently considering various alternatives related to the remaining contracts. Accordingly, because the Company is managing fewer properties, hotel management revenues will decline substantially in 2000 as compared to 1999. If the Company determines not to continue to provide management services, the Company may be required to take a non-recurring charge related to exiting the management business line in 2000. The amount of this charge cannot be determined at this time. Brand Highlights
Certain matters discussed in this release are �forward-looking statements�, including statements about the Company�s future plans, goals and other events which have not yet occurred. USFS does not intend to update the information contained herein with respect to its exploration of potential strategic alternatives for any future developments or circumstances unless and until there is a definitive transaction agreement entered into between USFS and any third party or until its exploration of potential alternatives is definitively terminated. There can be no assurance whatsoever that any transaction between USFS and any third party will take place or, even if one does occur, about the nature and extent of any terms and conditions of any such potential transaction. |
Barbara Wiener, Vice President, Corporate Communications of U.S. Franchise Systems, Inc., 404-235-7400, or [email protected] |