|
Franchise Expenses. The cost to operate the franchising business is reflected in selling, general and administrative expenses. Selling, general and administrative expenses were $62.9 million for the year ended December 31, 2003, an increase of $6.4 million from the year ended December 31, 2002 total of $56.5 million. As a percentage of revenues, excluding marketing and reservation fees and hotel operations, total SG&A expenses were 33.6% for the year ended December 31, 2003, compared to 32.8% for 2002. The increase is attributable to increased costs associated with the adoption of the fair value method of accounting for stock options, performance based incentive compensation 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 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 $195.4 million and $190.1 million for the years ended December 31, 2003 and 2002, respectively. Depreciation and amortization attributable to marketing and reservation activities was $12.1 million and $13.0 million for the years ended December 31, 2003 and 2002, respectively. Interest expense attributable to reservation activities was $1.3 million and $1.4 million for the years ended December 31, 2003 and 2002, respectively. Marketing and reservation activities provided positive cash flow of $24.7 million and $17.2 million for the years ended December 31, 2003 and 2002, respectively. As of December 31, 2003 and 2002, the Company’s balance sheet includes a receivable of $32.4 million and $44.9 million, respectively, for marketing and reservation fees. This receivable is recorded as an asset in the financial statements as 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.
Interest and Other. Interest expense of $11.6 million in the year ended December 31, 2003 is down $1.5 million from $13.1 million in the year ended December 31, 2002 due primarily to lower effective interest rates and lower average outstanding debt balances. The Company’s weighted average interest rate as of December 31, 2003 was 4.29% compared to 4.39% as of December 31, 2002. Included in the results for 2003 and 2002 is approximately $4.5 million and $4.6 million, respectively, of interest income earned on the note receivable from Sunburst.
Comparison of 2002 Operating Results and 2001 Operating Results
The Company recorded net income of $60.8 million for the year ended December 31, 2002, an increase of $46.5 million from net income of $14.3 million for the year ended December 31, 2001. Net income in 2001 included an impairment charge of $22.7 million associated with the Company’s determination to write-off its entire investment in Friendly Hotels PLC (currently known as C.H.E. Group PLC) (“Friendly”). Net income for 2001 also reflects $10.3 million of equity losses (net of taxes) in Friendly.
|
