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Franchise Expenses. The cost to operate the franchising business is reflected in selling, general and administrative expenses. Selling, general and administrative expenses were $56.5 million (including restructuring charges of $1.6 million) for the year ended December 31, 2002, a decrease of $5.5 million from the year ended December 31, 2001 total of $62.0 million (including restructuring charges of $5.9 million). As a percentage of net franchise revenues, selling, general and administrative expenses declined to 32.8% in 2002 from 36.5% in 2001. This decline, which increased franchising margins from 63.5% to 67.2%, was largely due to a $4.3 million reduction in restructuring charges incurred in 2002 compared to 2001.
Marketing and Reservations. Total marketing and reservation revenues were $190.1 million and $168.2 million for the years ended December 31, 2002 and 2001, respectively. Depreciation and amortization attributable to marketing and reservation activities was $13.0 million and $11.8 million for the years ended December 31, 2002 and 2001, respectively. Interest expense attributable to reservation activities was $1.4 million and $2.0 million for the years ended December 31, 2002 and 2001, respectively. Marketing and reservation activities provided a positive cash flow of $17.2 million and $20.3 million for the years ended December 31, 2002 and 2001, respectively. As of December 31, 2002 and 2001, the Company’s balance sheet included a receivable of $44.9 million and $49.4 million, respectively, for marketing and reservation fees. 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.
Depreciation and Amortization. Depreciation and amortization decreased to $11.3 million in the year ended December 31, 2002 from $12.5 million in the year ended December 31, 2001. This decrease is primarily attributable to the Company’s adoption of Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” pursuant to which the Company stopped amortizing goodwill effective January 1, 2002.
Friendly. The Company’s entire investment in Friendly was written off in 2001; accordingly, the Company’s 2002 results of operations do not include any equity method losses or other amounts related to Friendly. In addition to the $22.7 million impairment described below, the Company recorded equity method losses associated with its investment in Friendly totaling $10.3 million (net of taxes) for the year ended December 31, 2001.
On February 21, 2002, Friendly announced that it had been unable to find an acceptable buyer for its business and would terminate such efforts to sell its business. Given this termination and the adverse economic conditions of Friendly, the Company disposed of its entire investment in Friendly on March 20, 2002. The Company wrote-off its entire investment in Friendly through a $22.7 million charge to reflect the permanent impairment of this asset as of December 31, 2001.
Interest and Other. Interest expense of $13.1 million in the year ended December 31, 2002 is down $2.3 million from $15.4 million in the year ended December 31, 2001 due primarily to lower effective interest rates. The Company’s weighted average interest rate as of December 31, 2002 was 4.39% compared to 4.52% as of December 31, 2001. Included in the results for 2002 and 2001 is approximately $4.6 million and $4.2 million, respectively, of interest income earned on the note receivable from Sunburst. The note from Sunburst accrued interest up until June 2002, at which point interest became payable semi-annually in arrears. As of December 31, 2002, the Company’s balance sheet included an interest receivable from Sunburst of $2.3 million which is included in other current assets in the accompanying consolidated balance sheets and was paid to the Company by Sunburst in January 2003.
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