Comfort Inn 2003 Annual Report Download

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2003 Annual Report
Our passion.
Customer profitability.

Table of contents

  • Page 1
    Our passion. Customer profitability. 2003 Annual Report

  • 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 44 countries and territories under the Comfort Inn, Comfort Suites, Quality, Sleep Inn, Clarion, MainStay Suites, Econo Lodge, and Rodeway Inn brand names.

  • Page 3
    ... Chief Executive Officer served us well in challenging times. Your company enters 2004 stronger than ever, thanks to the hard work and dedication of our associates and franchisees who are deeply committed to building a franchise success system second to none. For the year 2003, Choice Hotels earned...

  • Page 4
    ... public in 49 states and 42 countries and territories globally. Our marketing promotions focus in part on building the strength of our guest rewards programs, Choice Privileges for the mid-priced brands and EA$Y CHOICE for the economy brands, by offering travelers the opportunity to earn free nights...

  • Page 5
    ... proprietary Internet site, providing consumers with ease of use, foreign language capability and our Best e-rate Guarantee program. We also have forged agreements with major third-party travel Web sites to obtain preferred placement and reduced fees for our hotels. By leveraging our size, scale and...

  • Page 6
    ... hotels offering weekly chances to win free gas and a Jeep Liberty vehicle and economy brand hotels offering a $50,000 grand prize in a Fast Cash sweepstakes. • The company extends the benefits and rewards of the Choice Privileges program to guests at MainStay Suites brand hotels. July • Choice...

  • Page 7
    TABLE OF CONTENTS Financial Highlights ...Management's Discussion and Analysis of Financial Condition and Results of Operation ...F-1 F-2 Report of Independent Auditors ...F-12 Report of Independent Public Accountants ...Consolidated Financial Statements ...Notes to Consolidated Financial ...

  • Page 8
    ... (estimated in millions) ...Franchised Hotels ...Franchised Hotels Under Development ...Franchised Rooms ...Revenue Per Available Room ...Total (Domestic and International) Franchised Hotels ...Franchised Hotels Under Development ...Franchised Rooms ...As of or for the years ended December 31, 2002...

  • Page 9
    ... 31, 2003, with 388,618 rooms and 39,877 rooms, respectively, in 44 countries and territories. Our brand names include Comfort Inn, Comfort Suites, Quality, Clarion, Sleep Inn, Econo Lodge, Rodeway Inn, MainStay Suites and Flag Hotels. The Company's franchises operate in 49 states, Puerto Rico and...

  • Page 10
    ... standard for measuring hotel operating performance is revenue per available room ("RevPAR"), which is calculated by multiplying the percentage of occupied rooms by the average daily room rate realized. Our variable overhead costs associated with franchise system growth have historically been less...

  • Page 11
    ...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...

  • Page 12
    ... 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. The Company's franchise agreements require the payment of franchise fees which include marketing and...

  • Page 13
    ... of such ownership changes in 2002 compared to 2001. Total domestic franchise agreements executed in 2002 were 304, compared to 300 total agreements executed in 2001. Revenues generated from partner services were $11.9 million, compared to $12.0 million in 2001. The number of domestic rooms on-line...

  • Page 14
    ... 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 had an additional 164 franchised hotels with 17,799 rooms under development in its international system...

  • Page 15
    ...of system-wide property and yield management systems, upgrades to financial and reservation systems, computer hardware and renovations to the Company's corporate headquarters (including a franchisee learning and training center). During 2003, the Company received a cash payment of $44.7 million from...

  • Page 16
    ...certain ratios identical to those included in the Company's New Credit Facility. Borrowings under the lines of credit bear interest at rates established at the time of borrowing based on prime minus 175 basis points. As of December 31, 2003, approximately $2.6 million was outstanding pursuant to one...

  • Page 17
    ... costs for certain activities, such as human resources, legal, accounting, etc., required to carry out marketing and reservation activities. The Company records marketing and reservation revenues and expenses in accordance with Emerging Issues Task Force ("EITF") Issue No. 99-19, "Reporting Revenue...

  • Page 18
    ... Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and all stock options granted in those years had an exercise price equal to the market value of the underlying common stock on the date of grant. The effect on net income and earnings per share as if the Company had applied...

  • Page 19
    ...of their operations and their cash flows for the years 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 to express an opinion on these financial...

  • Page 20
    ... 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, 2003. Report of Independent Public Accountants To Choice Hotels International, Inc. and subsidiaries: We have audited the accompanying...

  • Page 21
    CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME Years Ended December 31, 2003 2002 2001 (In thousands, except per share amounts) REVENUES: Royalty fees ...Initial franchise and relicensing fees ...Partner services ...Marketing and reservation ...Hotel operations...

  • Page 22
    CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, December 31, 2003 2002 (In thousands, except share amounts) ASSETS: Current assets Cash and cash equivalents ...Receivables (net of allowance for doubtful accounts of $6,743 and $6,740, respectively) ......

  • Page 23
    CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, 2003 2002 2001 (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES Net income ...Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and ...

  • Page 24
    ... income ...Exercise of stock options ...Issuance and cancellation of restricted stock . . Stock compensation related to stock options . . Amortization of deferred compensation related to restricted stock grants ...Dividends declared ...Treasury purchases ...Balance as of December 31, 2003 ...462,522...

  • Page 25
    ... statements of income. The Company generates partner services revenues from endorsed 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...

  • Page 26
    ... costs for certain activities, such as human resources, legal, accounting, etc., required to carry out marketing and reservation activities. The Company records marketing and reservation revenues and expenses in accordance with Emerging Issues Task Force ("EITF") Issue No. 99-19, "Reporting Revenue...

  • Page 27
    ... in Debt and Equity Securities," and SFAS No. 130, "Reporting Comprehensive Income." The Company accounts for its investment in Choice Hotels Canada, Inc. ("CHC") in accordance with Accounting Principles Board Opinion ("APB") No. 18, "The Equity Method of Accounting for Investments in Common...

  • Page 28
    ... value based method had been applied to all outstanding and unvested awards in each period. Years Ended December 31, 2003 2002 2001 (In millions, except per share amounts) Net income, as reported ...Stock-based employee compensation cost included in reported net income, net of related tax effects...

  • Page 29
    ... of stock options and unvested restricted stock. Use of Estimates. The consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States and require management to make certain estimates and assumptions that affect the reported amounts...

  • Page 30
    ...-line method. A summary of the ranges of estimated useful lives upon which depreciation rates are based follows: Computer equipment and software ...Buildings and improvements ...Furniture, fixtures and equipment ...3. Goodwill 3-5 years 10-40 years 3-20 years Goodwill relates to the purchase price...

  • Page 31
    ... Friendly. Accordingly, the Company was required to apply the equity method of accounting. 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. On...

  • Page 32
    ...has procured for the benefit of the franchise system, including fees to reimburse the Company for past services rendered. The Company has the contractual authority to require that the franchisees in the system at any given point repay any deficits related to marketing and reservation activities. The...

  • Page 33
    ... Effective October 15, 1997, Choice Hotels International, Inc. ("CHI"), which at that point included both the franchising business and owned hotel business, separated the businesses via spin-off of the Company. CHI changed its name to Sunburst Hospitality Corporation (referred to hereafter as...

  • Page 34
    ... related 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 35
    ...loyalty program revenue relates to the Company's Choice Privileges program. Choice Privileges is a frequent guest incentive program that enables members to earn points based on their spending levels at participating brands. The points may be redeemed for free accommodations or other benefits. Points...

  • Page 36
    ... lines of credit. 11. Foreign Operations The Company accounts for foreign currency translation in accordance with SFAS No. 52, "Foreign Currency Translation." Revenues generated by foreign operations, including royalty, marketing and reservations fees, for the years ended December 31, 2003, 2002...

  • Page 37
    ... to control the Choice and Flag brands in Australia, Papua New Guinea and Fiji and the Flag brand in New Zealand. In September 2003, our master franchise agreement with a third party that included the right to franchise the Choice brands in New Zealand was terminated. At that time, Flag obtained the...

  • Page 38
    ... interest in Choice Hotels Canada, Inc. ("CHC"), a joint venture with a third party. During 2003 and 2002, the Company recorded $0.6 million and $0.5 million, respectively, of equity method income related to this investment pursuant to APB No. 18 in the accompanying consolidated statements of income...

  • Page 39
    CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 13. Income Taxes Income before income taxes was derived from the following: Years ended December 31, 2003 2002 2001 (In thousands) Income before income taxes: Domestic operations ...Foreign ...

  • Page 40
    ...expense at the statutory rate to income tax expense included in the accompanying consolidated statements of income follows: Years ended December 31, 2003 2002 2001 (In thousands, except Federal income tax rate) Federal income tax rate ...Federal taxes at statutory rate ...State income taxes, net of...

  • Page 41
    ... purchase stock for up to 9.6 million shares of the Company's common stock, of which 1.3 million shares remain available for grant as of December 31, 2003. Restricted stock and stock options may be granted to officers, key employees and non-employee directors. Restricted Stock. In 2003, the Company...

  • Page 42
    ... from corporations owned or controlled by family members of the Company's largest shareholder related to the lease of personal and real property during 2003 and 2002. On February 19, 1998, the Board of Directors adopted a shareholder rights plan under which a dividend of one preferred stock purchase...

  • Page 43
    ... interest rate swap agreement was settled resulting in a deferred gain. In accordance with SFAS 133, the unamortized gain was reclassified in 2001 to other comprehensive income and is being amortized over the remaining life of the related debt as a reduction of interest expense. In each of 2003 and...

  • Page 44
    ...19. 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 45
    ... financing of a Sleep Inn and a MainStay Suites located in Atlanta, Georgia. The letter of credit expires in March 2005. In the ordinary course of business, the Company enters into numerous agreements that contain standard guarantees and indemnities whereby the Company indemnifies another party for...

  • Page 46
    ... voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock...

  • Page 47
    CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) January 2002, clarifies the application of the majority voting interest requirement of ARB No. 51, "Consolidated Financial Statements," to certain types of variable interest entities that do not...

  • Page 48
    ... 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: www.choicehotels.com Copies of the company's public filings as well as its Corporate Governance Guidelines...

  • Page 49
    10750 Columbia Pike Silver Spring, MD 20901 www.choicehotels.com