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M A N A G E M E N T' S D I S C U S S I O N A N D A N A LYS I S |
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Net franchise revenues were $157.7 million for Calendar 1999 and $143.6 million for Calendar 1998. Royalties increased $13.5 million to $128.7 million from $115.2 million in Calendar 1998, an increase of 11.7 %. The increase in royalties is attributable to a 2% increase in the number of domestic franchised hotel rooms, an increase in the effective royalty rate of the domestic hotel system to 3.7% from 3.6%, and an improvement in domestic RevPAR of 3.0%. Domestic initial fee revenue generated from franchise contracts signed was $10.1 million down from $13.1 million in Calendar 1998. Total franchise agreements signed in Calendar 1999 were 318, a decline from the 440 total agreements executed in Calendar 1998. An increasingly competitive hotel franchising environment, coupled with stricter hotel brand standards being enforced by the Company contributed to the decline in the total franchise agreements signed in the period. Revenues generated from partner service relationships increased to $9.1 million from $6.4 million in Calendar 1998. Under the partner services program, the Company generates revenue from hotel industry vendors (who have been designated as preferred providers) based on the level of goods or services purchased from the vendors by hotel owners and hotel guests who stay in the Company’s franchised hotels. The number of domestic rooms on-line increased to 258,120 from 252,357, an increase of 2% for the year ended December 31, 1999. For 1999, the total number of domestic hotels on-line grew 3% to 3,123 from 3,039 for 1998. The total number of international hotels on-line increased to 1,125 from 632, an increase of 78% for the year ended December 31, 1999. International rooms on-line increased to 80,134 as of December 31, 1999 from 53,095, an increase of 51%. As of December 31, 1999, the Company had 596 franchised hotels with 46,664 rooms either in design or under construction in its domestic system. The Company has an additional 165 franchised hotels with 17,431 rooms under development in its international system as of December 31, 1999. Franchise Expenses: The cost to operate the franchising business is reflected in selling, general and administrative expenses. Selling, general and administrative expenses were $55.9 million for Calendar 1999, an increase of $3.0 million from the Calendar 1998 total of $52.9 million. As a percentage of net franchise revenues, selling, general and administrative expenses declined to 35.4% in Calendar 1999 from 36.8% in Calendar 1998. The improvement in the franchising margins relates to the economies of scale generated from operating a larger franchisee base and improvements in franchised hotel performance. Marketing and Reservations: The Company’s franchise agreements require the payment of franchise fees which include marketing and reservation fees. These fees, which are based on a percentage of the franchisees’ gross room revenues, are used exclusively to reimburse the Company for expenses associated with providing such franchise services as central reservation and yield management systems, national marketing and media advertising. The Company is contractually obligated to expend the reservation and marketing fees it collects from franchisees in accordance with the franchise agreements; as such, no income or loss to the Company is generated. During the second quarter of 1998, the Company changed its presentation of marketing and reservation fees such that the fees collected and associated expenses are reported net. All prior periods have been reclassified to conform to the new presentation. The total marketing and reservation fees received by the Company (previously reported as revenue) were $146.0 million and $127.4 million for the years ended December 31, 1999 and December 31, 1998, respectively. Depreciation and amortization charged to the marketing and reservation funds was $9.6 million and $6.2 million for the years ended December 31, 1999 and December 31, 1998, respectively. Interest expense incurred by the reservation fund was $3.3 million and $1.8 million for the years ended December 31, 1999 and 1998, respectively. Reservation fees and marketing fees not expended in the current year are carried over to the next fiscal year and expended in accordance with the franchise agreements. Shortfall amounts are similarly recovered in subsequent years. Excess or shortfall amounts from the operation of these programs are recorded as a payable or receivable from the particular fund. Under the terms of the franchise agreements, the Company may advance capital as necessary to the marketing and reservation funds and recover such advances through future fees. As of December 31, 1999, the Company’s balance sheet includes a receivable of $37.7 million related to advances made to the marketing ($12.5 million) and reservation ($25.2 million) funds. As of December 31, 1998, the Company’s balance sheet includes a receivable of $ 18.7 million related to advances made to the marketing ($7.8 million) and reservation ($10.9 million) funds. The Company has the ability under existing franchise agreements and expects to recover these advances through future marketing and reservation fees. Product Sales: The group purchasing program utilizes bulk purchases to obtain favorable pricing from third party vendors for franchisees ordering similar products. The Company acts as a clearinghouse between the franchisee and the vendor, and orders are shipped directly to the franchisee. |
