Comfort Inn 2003 Annual Report Download - page 10

repurchases and dividends. In 1998, we instituted a share repurchase program which has generated substantial
value for our shareholders. We have repurchased 29.3 million shares of common stock at a total cost of $514.8
million, or an average price of $17.54 per share since the program’s inception. Our cash flows from operations
support our ability to complete the repurchase of approximately 1.4 million shares presently remaining under our
current board of directors authorization. Upon completion of the current authorization we will evaluate the
propriety of additional share repurchases with our board of directors. In 2003, we initiated a cash dividend of
$0.20 per share per quarter on our common stock. The initial dividend was declared in December 2003 and paid
in January 2004. We presently expect to continue to pay dividends in the future. Based on our present dividend
rate and outstanding share count aggregate annual dividends would be approximately $27.5 million.
We believe these value drivers, when properly implemented, will enhance our profitability, maximize our
financial returns and continue to generate value for our shareholders. The ultimate measure of our success will be
reflected in the items below.
Results of Operations. Royalty fees, operating income, net income and diluted earnings per share represent
key measurements of these value drivers. In 2003, royalty fees revenue totaled approximately $151.3 million, a
6% increase from 2002. Operating income totaled $114.0 million in 2003, a 9% increase from 2002. Net income
increased to $71.9 million, an 18% increase from 2002. Diluted earnings per share were $1.96, a 29%
improvement over 2002. Net income and diluted earnings per share include a $3.4 million gain from the
prepayment of a note receivable during 2003. These measurements will continue to be a key management focus
in 2004 and beyond. Refer to MD&A heading “Operations Review” for additional analysis of our results.
Liquidity and Capital Resources. In 2003, net cash provided by operating activities was $115.5 million, a
17% increase from 2002. Since our business does not require significant reinvestment of capital, we utilize cash
in ways that management believes provides the greatest returns to our shareholders which include share
repurchases and dividends. We believe the Company’s cash flow from operations and available financing
capacity are sufficient to meet the expected future operating, investing and financing needs of the business.
Refer to MD&A heading “Liquidity and Capital Resources” for additional analysis.
The principal factors that affect the Company’s results are: the number and relative mix of franchised hotels;
growth in the number of hotels under franchise; occupancy and room rates achieved by the hotels under
franchise; the effective royalty rate achieved; and our ability to manage costs. The number of rooms at franchised
properties and occupancy and room rates at those properties significantly affect the Company’s results because
our fees are based upon room revenues at franchised hotels. The key industry 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 than incremental royalty fees generated from new
franchisees. Accordingly, continued growth of our franchise business should enable us to realize benefits from
the operating leverage in place and improve operating results.
Operations Review
Comparison of 2003 Operating Results and 2002 Operating Results
The Company recorded net income of $71.9 million for the year ended December 31, 2003, an increase of
$11.1 million from $60.8 million for the year ended December 31, 2002. Net income in 2003 included a $3.4
million gain on the prepayment of the Sunburst Hospitality note. In addition to the note prepayment gain, the
increase in net income for the period is attributable to improved operating income resulting from a $15.0 million,
or 8.7%, increase in franchise revenues partially offset by increased selling, general and administrative costs.
F-3