Comfort Inn 2002 Annual Report Download - page 30

CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Derivatives.
SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” establishes accounting and
reporting standards for derivative instruments, including derivative instruments embedded in other contracts, and
for hedging activities. SFAS No. 133 requires the recognition of the fair value of derivatives in the balance sheet,
with changes in the fair value recognized either in earnings or as a component of other comprehensive income
dependent upon the hedging nature of the derivative. SFAS No. 133 also states that any deferred gain on previous
hedging activity does not meet the definition of a liability, due to a lack of expected future cash flows and
therefore should be included in comprehensive income. Except for the Flag put option discussed in Note 11, the
Company has no derivative financial instruments.
Stock-based compensation.
The Company accounts for its stock-based employee compensation plans in accordance with the provisions
of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and
related interpretations. As such, compensation expense related to fixed employee stock options is recorded only
if on the date of grant the fair value of the underlying stock exceeds the exercise price. The Company adopted the
disclosure only requirements of SFAS No. 123, “Accounting for Stock-Based Compensation,” which allows
entities to continue to apply the provisions of APB Opinion No. 25 for transactions with employees and to
provide pro forma net income disclosures as if the fair value based method of 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, as
all options granted under those plans had an exercise price equal to market value of the underlying common stock
on the date of grant. The following table illustrates the effect on net income and earnings per share if the
company had applied the fair value recognition provisions of SFAS No. 123.
Years Ended December 31,
2002 2001 2000
(In millions, except per
share amounts)
Net income, as reported .................................... $60.8 $14.3 $42.4
Total stock-based employee compensation expense determined under
fair value method for all awards, net of tax effects ............. (2.6) (3.0) (3.9)
Pro forma net income ...................................... $58.2 $11.3 $38.5
Earnings per share:
Basic—as reported ........................................ $1.55 $0.32 $0.80
Basic—pro forma ......................................... $1.48 $0.25 $0.72
Diluted—as reported ...................................... $1.52 $0.32 $0.80
Diluted—pro forma ....................................... $1.45 $0.25 $0.73
Effective January 1, 2003, the Company adopted, in accordance with SFAS No. 148, “Accounting for
Stock-Based Compensation—Transition and Disclosure,” the fair value based method of accounting for stock
option awards granted on or after January 1, 2003.
Notes Receivable.
From time to time, the Company provides financing to franchisees for property improvements and other
purposes in the form of interest free notes. The notes typically have a term of 10 years and are forgiven and
amortized over that time period if the franchisee remains in the system in good standing. As of December 31,
2002 and 2001, other assets included $5.0 million and $1.8 million, respectively, of these notes. Amortization
expense related to the notes was $0.4 million, $0.1 million and $35,000, respectively, for the years ended
December 31, 2002, 2001 and 2000.
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