Comfort Inn 2002 Annual Report Download - page 14

The number of domestic rooms on-line increased to 282,423 from 270,514, an increase of 4.4% for the year
ended December 31, 2002. For 2002, the total number of domestic hotels on-line grew 4.7% to 3,482 from 3,327
for 2001. International rooms on-line decreased slightly to 91,299 as of December 31, 2002 from 92,035 as of
December 31, 2001, a decrease of 0.8%. The total number of international hotels on-line decreased to 1,182 from
1,218, a decrease of 3.0% for the year ended December 31, 2002. The decrease in international hotels online is
primarily due to termination of certain Flag properties which failed to maintain the Company’s brand standards
or which declined to formalize a franchise relationship following the Company’s acquisition of a controlling
interest in Flag Choice Hotels during 2002. As of December 31, 2002, the Company had 310 franchised hotels
with 23,766 rooms either in design or under construction in its domestic system. The Company has an additional
164 franchised hotels with 17,799 rooms under development in its international system as of December 31, 2002.
Franchise Expenses: The cost to operate the franchising business is reflected in selling, general and
administrative expenses. Selling, general and administrative expenses were $54.9 million for the year ended
December 31, 2002, a decrease of $1.2 million from the year ended December 31, 2001 total of $56.1 million. As
a percentage of net franchise revenues, selling, general and administrative expenses declined to 31.9% in 2002
from 33.0% in 2001. This decline, which increased franchising margins from 67.0% to 68.1%, was largely due to
reductions in selling, general and administrative expenses resulting from the Company’s 2001 and 2000
restructurings.
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 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 collects from franchisees in accordance
with the franchise agreements; as such, no income or loss to the Company is generated.
Total marketing and reservation revenues were $190.1 million and $168.2 million for the years ended
December 31, 2002 and 2001, respectively. Depreciation and amortization attributable to marketing and
reservation activities was $13.0 million and $11.8 million for the years ended December 31, 2002 and 2001,
respectively. Interest expense attributable to reservation activities was $1.4 million and $2.0 million for the years
ended December 31, 2002 and 2001, respectively. Marketing and reservation activities provided a positive cash
flow of $17.2 million and $20.3 million for the years ended December 31, 2002 and 2001, respectively. As of
December 31, 2002 and 2001, the Company’s balance sheet includes a receivable of $44.9 million and
$49.4 million, respectively, for marketing and reservation fees. 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 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 has no present intention to
accelerate repayment of the deficit from current franchisees.
Hotel Operations: In September 2000, the Company received title to three MainStay properties from
Sunburst Hospitality Corporation (“Sunburst”) as consideration for $16.3 million of the then $149 million
amount due under a note receivable from Sunburst. Revenues from hotel operations were $3.3 million and
$3.2 million for the years ended December 31, 2002 and 2001, respectively. Selling, general and administrative
expenses from hotel operations were $2.9 million and $2.5 million for those years, respectively.
Depreciation and Amortization: Depreciation and amortization decreased to $11.3 million in the year ended
December 31, 2002 from $12.5 million in the year ended December 31, 2001. This decrease is primarily
attributable to the Company’s adoption of Statement of Financial Accounting Standards No. 142, “Goodwill and
Other Intangible Assets”, pursuant to which the Company stopped amortizing goodwill effective January 1, 2002.
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