Comfort Inn 2002 Annual Report Download - page 32

CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
On January 1, 2002, the Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets,”
pursuant to which the Company is no longer permitted to amortize goodwill. The impact of the adoption of
SFAS No. 142 on net income, basic EPS and diluted EPS for the years ended December 31, 2001 and 2000, as if
the adoption had taken place on January 1, 2000 is as follows:
Years Ended
December 31,
2001 2000
(In thousands,
except per share
amounts)
Reported net income ............................................. $14,327 $42,445
Add back: Goodwill amortization .................................. 1,995 2,290
Adjusted net income ............................................. $16,322 $44,735
Basic earnings per share: .........................................
Reported net income ......................................... $ 0.32 $ 0.80
Goodwill amortization ....................................... 0.05 0.04
Adjusted basic earnings per share ................................... $ 0.37 $ 0.84
Diluted earnings per share:
Reported net income ......................................... $ 0.32 $ 0.80
Goodwill amortization ....................................... 0.04 0.04
Adjusted diluted earnings per share ................................. $ 0.36 $ 0.84
4. Franchise Rights and Other Intangibles
Franchise rights represent the unamortized purchase 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 December 31, 2002, 2001 and 2000 amounted to $3.1 million,
$3.0 million and $3.9 million, respectively. Franchise rights are net of accumulated amortization of $35.1 million
and $32.0 million at December 31, 2002 and 2001, respectively. The estimated annual amortization expense
related to the Company’s franchise rights for 2003 through 2007 is $3.0 million for each of the years then ended.
Other assets includes approximately $5.1 million and $4.8 million of intangible assets related to trademarks
at December 31, 2002 and 2001, respectively. The trademarks are being amortized over ten years. Amortization
expense for each of the three years ended December 31, 2002 was $0.4 million. The estimated annual
amortization expense related to the Company’s trademarks for 2003 through 2007 is $0.3 million for each of the
years they ended.
5. Investment in Friendly Hotels
As of December 31, 2001, the Company had 1,227,622 shares of common stock and 31,097,755 shares of
5.75% convertible preferred stock in Friendly Hotels PLC (currently known as C.H.E. Group PLC) (“Friendly”),
the Company’s master franchisor for the United Kingdom, Ireland and continental Europe.
The Company appointed three directors to the board of Friendly giving the Company ability to exercise
significant influence over the operations of Friendly. Accordingly, the Company was required to apply the equity
method of accounting.
Friendly holds the master franchise rights for the Company’s Comfort, Quality and Clarion brand hotels in
the United Kingdom, Ireland and throughout Europe (with the exception of Scandinavia) for a 10-year period. In
exchange for granting the master franchise rights to Friendly, the Company received Friendly common stock and
was to receive $8.0 million payable in cash in eight equal annual installments from Friendly.
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