U.S. Franchise Systems -- which celebrated its third anniversary on Oct. 2 -- franchises Microtel Inn Suites, the chain of all newly-constructed, budget/economy hotels; Hawthorn Suites, the extended-stay chain; and Best Inns Suites, the economy/mid-priced chain.

U.S. Franchise Systems Reports Best Quarter

"While reaching profitability is another milestone for our Company," said Mike Leven, president and chief executive officer, "it is even more important to note that the key indicators that translate into future earnings growth remain positive.  These include record quarterly results for franchise sales, and the largest number of hotels under construction and biggest backlog of potential properties since U.S. Franchise Systems began."

Neal Aronson, executive vice president and chief financial officer, said, "In the third quarter, we finally started to see the operating leverage in our Company. Quarterly results, compared to the prior year, should continue to be very positive in the future."

Aronson also pointed to the fact that April's acquisition of Best Inns Suites continues to exceed the Company's expectations. "The Best brand represents an opportunity to capitalize on Mike Leven's strong relationships among purchasers and owners of stabilized hotels, many of whom do not build new hotels. In only six months, the number of Best properties open or under development has increased from 38 to 166, including the opening of 10 hotels in the third quarter of 1998 alone."

Discussion of Financial Results

Revenue for the third quarter of 1998 was $3,354,000 vs. $590,000 in 1997. The largest component of revenue growth came from royalty and fee income, which increased from $94,000 to $2,326,000.  The number of hotels paying royalties to the Company increased from 34 at September 30, 1997 to 169 this year.  U.S. Franchise Systems also benefited from asset management fees from the recent acquisition of a fee-based management company that were not part of last year's results.  Franchise application fees increased from $443,000 to $973,000, compared to the third quarter of 1997, reflecting an increased number of hotel openings.  U.S. Franchise Systems opened 32 properties in the third quarter of 1998 compared to 18 properties in the same period last year.

For the nine months ended September 30, 1998, total revenue was $7.4 million, up from $1.1 million in the comparable prior period of 1997. Royalty and fee income increased from $177,000 to $4,732,000. The net loss for the nine months was $3.0 million, or 18 cents per share, vs. a loss of $6.9 million, or 55 cents, last year. Aronson noted, "The combination of hotel openings, increasing royalty rates and natural ramp-up of new hotels will result in increased earnings in 1999 and beyond. In addition, our conservative balance sheet gives us the opportunity to take advantage of external growth opportunities as they arise."
 

 
Third Quarter 1998 Brand Highlights

Microtel Inn  Suites

• A survey by Lodging Econometrics in the November 1998 issue of Lodging Magazine reported: "Thanks to a very successful franchise sales team, Microtel has quietly moved to having the largest number of projects in the development pipeline nationally.  The brand will soon reach critical mass, a notable accomplishment in such a short time."
• Forty-three new franchise agreements were executed in the quarter. 
• Twelve Microtels opened and 19 broke ground during the quarter:
• The opening of Oregon's first Microtel and properties under development in California and Washington represent the brand's growing presence in the West. 
• Recent openings or ground breaks at airports include Richmond, Va.; BWI, Md.; Baton Rouge, La.; and Salt Lake City, Utah.
• Microtel broke ground on its first international hotels in Buenos Aires, Argentina and San Pedro Sula, Honduras.
• Average daily rate for properties open one year or more increased from $42.77 to $45.00 or 5.2 percent; occupancy rate increased from 71.2 percent to 72.0 percent; and RevPar increased from $30.44 to $32.40 or 6.5 percent, compared to the third quarter of 1997.
• Microtel introduced a new on-line bookings capability at microtelinn.com, becoming the first budget hotel chain to offer full Internet booking capabilities down to last-room availability.  This is an extension of FIRST, the Internet-based central reservations system pioneered by the Company earlier this year.

Hawthorn Suites

• Twenty new franchise agreements were executed in the quarter.
• Ten properties opened and 11 broke ground during the quarter in such high profile, high-barrier-to-entry markets as suburban Boston and Washington, D.C., and Chicago.
• The first Hawthorn Suites Golf Resorts property will open in the next few months in Gurnee, Ill., and a second is scheduled to open in Conyers, Ga., in the second half of 1999.
• Average daily rate for properties open one year or more increased from $83.84 to $86.30 or 2.9 percent; occupancy declined from 77.9 percent to 73.6 percent; and RevPar declined from $65.34 to $63.48 or 2.9 percent, primarily reflecting those older, fully-stabilized properties which were open when USFS acquired the brand. 
• During the first nine months of 1998, the Spirit Reservation System,  (which operates Hyatt's Worldwide Reservations), contributed 25.6 percent of room nights for hotels open more than one year, compared with 25.2 percent for the same period last year.

• Eighteen new franchise agreements were executed in the quarter.
• In the less than six months since U.S. Franchise Systems acquired Best, the brand has expanded from 38 to 166 hotels open or under development.
• Originally located throughout the Midwest and Southeast, Best recently made its debut in the Middle Atlantic, New England, Southwest and West.  The number of states in which Best hotels are open or under development has increased from 13 to 38. 
• Ten hotels opened and 17 began the conversion process in the quarter, reflecting the shorter time between signing a franchise agreement and opening a property compared to a new build.
• Douglas Longerbone, former executive vice president of operations for Red Roof Inns, joined U.S. Franchise Systems as president of its hotel management company.

About U.S. Franchise Systems

Atlanta-based U.S. Franchise Systems was formed in 1995 by Mike Leven, a 38-year veteran of the lodging industry, and Neal Aronson, former principal of a leading New York investment firm.  USFS' three brands include Microtel Inn Suites, the all-newly constructed, interior corridor, budget hotels; Hawthorn Suites, an upper-end extended-stay all suite brand; and Best Inns  Suites, a mid-level economy brand.  USFS also offers hotel management services to its franchisees.  The Company trades under the symbol USFS on the Nasdaq National Market.

Certain of the above statements are forward looking statements that involve risks and uncertainties. Actual results could differ materially as a result of a variety of factors, including competitive developments, and risk factors listed from time to time in the Company's SEC reports.