Comfort Inn 2004 Annual Report Download - page 16

year ended December 31, 2002. Relicensing fees are charged to the new property owner of a franchised property
whenever an ownership change occurs and the property remains in the franchise system. Revenues generated
from partner services increased 10.9% to $13.2 million for the year ended December 31, 2003 from $11.9 million
for the year ended December 31, 2002.
The number of domestic rooms on-line increased to 294,268 from 282,423, an increase of 4.2% for the year
ended December 31, 2003. For 2003, the total number of domestic hotels on-line grew 4.4% to 3,636 from 3,482
for 2002. International rooms on-line increased to 94,350 as of December 31, 2003 from 91,299 as of December
31, 2002, an increase of 3.3%. The total number of international hotels on-line decreased slightly to 1,174 from
1,182, a decrease of 0.7% for the year ended December 31, 2003. As of December 31, 2003, the Company had
401 franchised hotels with 31,409 rooms either in design or under construction in its domestic system. The
Company had an additional 90 franchised hotels with 8,468 rooms under development in its international system
as of December 31, 2003.
Franchise Expenses: The cost to operate the franchising business is reflected in selling, general and
administrative expenses. Selling, general and administrative expenses were $62.9 million for the year ended
December 31, 2003, an increase of $6.4 million from the year ended December 31, 2002 total of $56.5 million.
As a percentage of revenues, excluding marketing and reservation fees and hotel operations, total SG&A
expenses were 33.6% for the year ended December 31, 2003, compared to 32.8% for 2002. The increase is
attributable to increased costs associated with the adoption of the fair value method of accounting for stock
options, performance based incentive compensation for sales and other management personnel, retirement plan
costs and the consolidation of Flag Choice Hotels upon acquisition of a controlling interest on July 1, 2002.
Marketing and Reservations: Total marketing and reservation revenues were $195.4 million and $190.1
million for the years ended December 31, 2003 and 2002, respectively. Depreciation and amortization
attributable to marketing and reservation activities was $12.1 million and $13.0 million for the years ended
December 31, 2003 and 2002, respectively. Interest expense attributable to reservation activities was $1.3 million
and $1.4 million for the years ended December 31, 2003 and 2002, respectively. Marketing and reservation
activities provided positive cash flow of $24.7 million and $17.2 million for the years ended December 31, 2003
and 2002, respectively. As of December 31, 2003 and 2002, the Company’s balance sheet includes a receivable
of $32.4 million and $44.9 million, respectively, for marketing and reservation fees. This receivable is recorded
as an asset in the financial statements as the Company has the contractual authority to require that the franchisees
in the system at any given point repay the Company for any deficits related to marketing and reservation
activities. The Company’s current franchisees are legally obligated to pay any assessment the Company imposes
on its franchisees to obtain reimbursement of such deficit regardless of whether those constituents continue to
generate gross room revenue. The Company has no present intention to accelerate repayment of the deficit from
current franchisees.
Interest and Other: Interest expense of $11.6 million in the year ended December 31, 2003 is down $1.5
million from $13.1 million in the year ended December 31, 2002 due primarily to lower effective interest rates
and lower average outstanding debt balances. The Company’s weighted average interest rate as of December 31,
2003 was 4.29% compared to 4.39% as of December 31, 2002. Included in the results for 2003 and 2002 is
approximately $4.5 million and $4.6 million, respectively, of interest income earned on the note receivable from
Sunburst.
Income Taxes: The Company’s effective income tax provision rate was 36.07% for the year ended
December 31, 2003, a decrease of 43 basis points from the effective income tax provision rate of 36.50% for the
year ended December 31, 2002. The reduction in the effective income tax provision rate resulted partially from
an increase in foreign income which are taxed at lower income tax rates than the statutory U.S. income tax rates.
Also, the increase in taxable income over non-tax deductible items between the two periods decreased the
effective income tax rate.
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