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CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Stock-based compensation.
The Company has stock-based employee compensation plans, which are described more fully in Note 15. Prior to January 1, 2003, the Company accounted for those plans under the recognition and measurement provisions of APB No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. No stock-based employee compensation cost is reflected in 2002 or prior years’ net income related to the grant of stock options, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. Effective January 1, 2003, the Company adopted, in accordance with the prospective method prescribed by SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure,” the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” for all employee awards granted, modified, or settled after January 1, 2003. Therefore, the cost related to stock-based employee compensation included in the determination of net income for the years ended December 31, 2002 and 2001 is less than that which would have been recognized if the fair value based method had been applied to all awards since the original effective date of SFAS 123. The following table illustrates the effect on net income and earnings per share if the fair 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 |
$ |
71.9 |
|
$ |
60.8 |
|
$ |
14.3 |
|
| Stock-based employee compensation cost included in reported net income, |
| net of related tax effects |
|
1.4 |
|
|
1.2 |
|
|
0.5 |
|
| Total stock-based employee compensation expense determined under fair |
| value method for all awards, net of tax effects |
|
(2.9 |
) |
|
(3.8 |
) |
|
(3.5 |
) |
|
|
|
|
| Pro forma net income |
$ |
70.4 |
|
$ |
58.2 |
|
$ |
11.3 |
|
|
|
|
|
| Earnings per share: |
| Basic—as reported |
$ |
2.01 |
|
$ |
1.55 |
|
$ |
0.32 |
|
| Basic—pro forma |
$ |
1.97 |
|
$ |
1.48 |
|
$ |
0.25 |
|
| Diluted—as reported |
$ |
1.96 |
|
$ |
1.52 |
|
$ |
0.32 |
|
| Diluted—pro forma |
$ |
1.92 |
|
$ |
1.45 |
|
$ |
0.25 |
|
Notes Receivable.
From time to time, the Company provides financing to franchisees for property improvements and other purposes in the form of interest free notes. The terms of the notes range from 5 to 10 years and are forgiven and amortized over that time period if the franchisee remains in the system in good standing. As of December 31, 2003 and 2002, other non-current assets included $7.6 million and $3.6 million, respectively, related to the unamortized balance of these notes. Amortization expense included in the accompanying consolidated statements of income related to the notes was $0.8 million, $0.4 million and $0.1 million for the years ended December 31, 2003, 2002 and 2001, respectively. As of December 31, 2003 and 2002, other non-current assets includes an allowance for doubtful accounts related to these notes of $0.8 million and $0.9 million, respectively.
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