Comfort Inn 2002 Annual Report Download

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Building
On Our Shared
Success
2002 ANNUAL REPORT
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Table of contents

  • Page 1
    2002 ANNUAL REPORT ® ® ® ® Building On Our Shared Success ® ® ® ®

  • Page 2
    ... Choice Hotels International is one of the world's largest lodging franchisors, marketing more than 5,000 hotels open or under development in 48 countries and territories under the Comfor t Inn, Comfor t Suites, Quality, Clarion, Sleep Inn, MainStay Suites, Econo Lodge, and Rodeway Inn brand...

  • Page 3
    ... and in winning a greater market share of lodging franchises. Our product offering, with a mix of new build and conversion hotel brands in the mid-priced and economy segments, provides us with great flexibility to drive unit growth even in tougher economic times. In 2002, we saw unit growth increase...

  • Page 4
    ... well once the hotel market improves. A larger Choice franchise system benefits our franchisees by providing even more size, scale and distribution to drive cost efficiencies and deliver more value-added services. Proven Strategy for All Scenarios In my repor t last year, I stated our commitment to...

  • Page 5
    ... our franchisees, hotel guests, vendor partners, associates, Board members and all of you for your suppor t. With a firm commitment to shared success, Choice Hotels can continue to grow and prosper in the years ahead. Charles A. Ledsinger, Jr. President and Chief Executive Officer March 20, 2003

  • Page 6
    ... and hotel managers gain access to each brand's Rules and Regulations via ChoiceCentral, an on-line information source. May • Rudy Guiliani, former mayor of New York City, speaks to more than 4,000 attendees at Choice's 48th Annual Convention in Atlanta. • Revamped Franchise Services makes...

  • Page 7
    TABLE OF CONTENTS Financial Highlights ...Management's Discussion and Analysis of Financial Condition and Results of Operations ... F-1 F-2 Report of Independent Accountants ...F-13 Report of Independent Public Accountants ...Consolidated Financial Statements ...Notes to Consolidated Financial ...

  • Page 8

  • Page 9
    Financial Highlights 2002 As of or for the years ended December 31, 2001 2000 1999 1998 (in millions, except per share data) As Revised (See Note 1 to the Consolidated Financial Statements) Company Results Total Assets ...Long-Term Debt ...Total Revenues ...Net Income ...Cash Flow from Operations ...

  • Page 10
    ... the Comfort, Comfort Suites, Quality, Clarion, Sleep Inn, Econo Lodge, Rodeway Inn, MainStay Suites and Flag Choice Hotels brand names. The Company's franchises operate in all 50 states, Puerto Rico and 38 additional countries and territories. Approximately 96% of the Company's franchising revenue...

  • Page 11
    ... The Company generates partner services revenues from hotel industry vendors. Partner services revenues are generally earned based on the level of goods or services purchased from endorsed vendors by hotel owners and hotel guests who stay in the Company's franchised hotels. The Company accounts for...

  • Page 12
    ... the years ended December 31, 2002 or 2001. During the year ended December 31, 2000, the Company recorded $7.6 million of impairment losses related to its subordinated term note to Sunburst Hospitality Corporation (see Note 7). Stock Compensation The Company accounts for its stock-based employee...

  • Page 13
    ... financial results for the years ended December 31, 2002 and 2001 are as follows: 2001 2002 (In thousands) REVENUES: Royalty fees ...Initial franchise and relicensing fees ...Partner services ...Marketing and reservation ...Hotel operations ...Other ...Total revenues ...OPERATING EXPENSES: Selling...

  • Page 14
    ...of the franchisees' gross room revenues, are used exclusively by the Company for expenses associated with providing franchise services such as central reservation systems, national marketing and media advertising. The Company is contractually obligated to expend the marketing and reservation fees it...

  • Page 15
    ...below, the Company recorded equity method losses associated with its investment in Friendly totaling $10.3 million (net of tax) for the year ended December 31, 2001. On February 21, 2002, Friendly announced that it had been unable to find an acceptable buyer for its business and would terminate such...

  • Page 16
    ... million for the year ended December 31, 2000. Total domestic franchise agreements signed in 2001 were 300, compared to 298 total agreements executed in 2000. The number of rooms added increased to 25,757 in 2001 from 24,582 in 2000. Revenues generated from partner service relationships increased 16...

  • Page 17
    ... versus a negative cash flow of $14.5 million in 2000. As of December 31, 2001, the Company's balance sheet includes a receivable of $49.4 million for marketing and reservation activities. Hotel Operations: Revenue from hotel operations were $3.2 million and $1.2 million for the years ended December...

  • Page 18
    ... year ended December 31, 2001. The decrease in cash provided by operating activities was primarily due to lower repayments related to marketing and reservation activities offset by improved management of working capital. As of December 31, 2002, the total long-term debt outstanding for the Company...

  • Page 19
    ...plan as previously required. Costs covered by the standard include certain contract termination costs, certain employee termination benefits and other costs to consolidate or close facilities and relocate employees that are associated with an activity being exited or long-lived assets being disposed...

  • Page 20
    ... also requires prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. We have applied the disclosure provisions of SFAS No. 148 as of December 31, 2002. (See...

  • Page 21
    ... at December 31, 2002, and the results of their operations and cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is...

  • Page 22
    ... INCLUDES REFERENCES TO CERTAIN FISCAL YEARS AND PERIODS, WHICH ARE NOT REQUIRED TO BE PRESENTED IN THE ACCOMPANYING FINANCIAL STATEMENTS AS OF AND FOR THE FISCAL YEARS ENDED DECEMBER 31, 2002. Report of Independent Public Accountants To Choice Hotels International, Inc. and subsidiaries: We have...

  • Page 23
    ... INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME Years Ended December 31, 2002 2001 2000 (In thousands, except per share amounts) As Revised (See Note 1) REVENUES: Royalty fees ...Initial franchise and relicensing fees ...Partner services ...Marketing and reservation ...Hotel...

  • Page 24
    ... equipment, at cost, net ...Goodwill ...Franchise rights, net ...Receivable-marketing and reservation fees ...Note receivable from Sunburst ...Other assets ...Total assets ...LIABILITIES AND SHAREHOLDERS' DEFICIT: Current liabilities Current portion of long-term debt ...Accounts payable ...Accrued...

  • Page 25
    ...Net change in cash and cash equivalents ...Cash and cash equivalents at beginning of period ...Cash and cash equivalents at end of period ...Supplemental disclosure of cash flow information Cash payments during the year for: Income taxes, net of refunds ...Interest ...Non-cash investing activities...

  • Page 26
    .../grants, net . 442,869 Issuance of restricted stock ...109,894 Stock compensation related restructuring ...- Amortization of deferred compensation ...- Treasury purchases ...(5,387,184) Balance as of December 31, 2002 ...37,163,216 - - $ - 1,666 - (120,908) $240,019 $(113,799) The accompanying...

  • Page 27
    .... The Company generates partner services revenues from hotel industry vendors. Partner services revenues are generally earned based on the level of goods or services purchased from endorsed vendors by hotel owners and hotel guests who stay in the Company's franchised hotels. The Company accounts for...

  • Page 28
    ... Certified Public Accountants, Statement of Position 93-7, "Reporting on Advertising Costs". Advertising expense was $41.8 million, $55.1 million and $48.4 million for the years ended December 31, 2002, 2001, and 2000, respectively. The Company includes advertising costs in marketing and reservation...

  • Page 29
    ... during the years ended December 31, 2002 or 2001. During the year ended December 31, 2000, the Company recorded $7.6 million of impairment losses related to its subordinated term note to Sunburst Hospitality Corporation (see Note 7). Deferred Financing Costs. Debt financing costs are deferred...

  • Page 30
    ... accounting, described in SFAS No. 123, had been applied to employee stock option grants. The Company's stock option plans are described more fully in Note 14. No compensation expense related to the Company's stock option plans was reflected in net income for the three years ended December 31, 2002...

  • Page 31
    ... method. A summary of the ranges of estimated useful lives upon which depreciation rates is based follows: Building and improvements ...Furniture, fixtures and equipment ...3. Goodwill 10-40 years 3-20 years Goodwill primarily relates to the excess of the purchase price of the Company's stock...

  • Page 32
    ...price assigned to acquired long-term franchise contracts. As of December 31, 2002 and 2001, the unamortized balance relates primarily to the Econo Lodge and Flag franchise rights. The franchise rights are being amortized over lives ranging from 5 to 15 years. Amortization expense for the years ended...

  • Page 33
    ... conditions and incremental professional fees associated with the reorganization primarily account for the $16.4 million charge in 2001. The Company also recognized $1.1 million in royalty revenue from Friendly for the year ended December 31, 2000. The Company waived its royalty fees from Friendly...

  • Page 34
    ... related to marketing and reservation activities. The Company's current franchisees are legally obliged 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...

  • Page 35
    ...During 2002, the Company recognized a restructuring charge expense of $1.6 million pursuant to Statement of Financial Accounting Standards No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." The restructuring charge related to employee severance and termination benefits for...

  • Page 36
    ... relates to severance and termination benefits for 64 employees (consisting of brand management and new hotels support, reservation sales and administrative personnel and franchise sales and operations support) and $0.2 million relates to the cancellation of preexisting contracts for termination...

  • Page 37
    CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) The Company collects 5% of program member's room revenue from participating franchises. Revenues are deferred equal to the fair value of the future redemption obligation. Actuarial methods are ...

  • Page 38
    ... notes (the "Notes") at a discount of $0.6 million, bearing a coupon rate of 7.13% with an effective rate of 7.22%. The Notes will mature on May 1, 2008. Interest on the Notes is paid semi-annually. In August 2002, the Company entered into a new $10.0 million revolving line of credit with a maturity...

  • Page 39
    ... a non-qualified defined benefit plan for certain senior executives. The Company accounts for the SERP in accordance with Statement of Financial Accounting Standards No. 87, "Employers Accounting for Pensions". For the years ended December 31, 2002, 2001 and 2000, the Company recorded $0.3 million...

  • Page 40
    ... $ 80,647 $ 80,982 (35,230) (11,400) $ 45,417 $ 69,582 Years ended December 31, 2002 2001 (In thousands) 2000 Current tax expense Federal ...State ...Foreign ...Deferred tax (benefit) expense ...Federal ...State ...Foreign ...Income taxes ...Deferred tax assets (liabilities) are comprised of the...

  • Page 41
    ... exercise price not less than the fair market value of the common stock on the date of grant. In 2002, the Company granted key employees and non-employee directors 109,894 restricted shares of common stock with a fair value of $2.3 million on the date of grant, all of which vest over five years. In...

  • Page 42
    ... in 2002, 2001 and 2000: 2002 2001 2000 Risk-free interest rate ...Volatility ...Expected Lives ...Dividend Yield ... 3.58% 35.43% 6 years 0% 5.03% 43.3% 10 years 0% 5.10% 56.6% 10 years 0% The Company announced a stock repurchase program on June 25, 1998. Treasury stock is carried at cost in...

  • Page 43
    CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) common stock at a total cost of $434.9 million, including 5.4 million shares of common stock at a total cost of $120.9 million during the year ended December 31, 2002. During 2002, the Company ...

  • Page 44
    ...primarily for office space and computer equipment. Rental expense under non-cancelable operating leases was approximately $12.9 million, $12.0 million and $10.2 million for the years ended December 31, 2002, 2001 and 2000, respectively. The Company received sublease rental income related to computer...

  • Page 45
    ... 18. Reportable Segment Information The Company has a single reportable segment encompassing its franchising business. Revenues from the franchising business include royalty fees, initial franchise and relicensing fees, marketing and reservation fees, partner services revenue and other revenue. The...

  • Page 46
    ... financing of a Sleep Inn and MainStay Suites located in Atlanta, Georgia. The letter of credit expires in December 2003. In the ordinary course of business, the Company enters into numerous agreements that contain standard guarantees and indemnities whereby the Company indemnifies another party...

  • Page 47
    ... employees that are associated with an activity being exited or long-lived assets being disposed. As permitted by SFAS No. 146, we adopted SFAS No. 146 in 2002. In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including...

  • Page 48
    CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 22. Selected Quarterly Financial Data- (Unaudited) 2002 First Second Third Fourth (In thousands, except per share data) Total Year Revenues ...Operating income ...Income before income taxes ......

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  • Page 51
    ... Choice Hotels International 10750 Columbia Pike Silver Spring, MD 20901 General Inquiries: (301) 592-5000 Franchise Sales: (800) 547-0007 Investor Inquiries: (800) 404-5050, ext. 5026 or (301) 592-5026 e-mail: [email protected] Media Relations: (301) 592-5032 Corporate Web Site...

  • Page 52
    10750 Columbia Pike Silver Spring, MD 20901 www.choicehotels.com