Comfort Inn 2004 Annual Report Download - page 33

CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Therefore, the cost related to stock-based employee compensation included in the determination of net income
for each of the three years ended December 31, 2004 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,
2004 2003 2002
(In millions, except per
share amounts)
Net income, as reported ...................................... $74.3 $71.9 $60.8
Stock-based employee compensation expense included in reported net
income, net of related tax effects ............................. 2.2 1.4 1.2
Total stock-based employee compensation expense determined under
fair value method for all awards, net of related tax effects ......... (3.5) (2.9) (3.8)
Pro forma, net income ........................................ $73.0 $70.4 $58.2
Earnings per share:
Basic, as reported ........................................... $2.24 $2.01 $1.55
Basic, pro forma ............................................ $2.20 $1.97 $1.48
Diluted, as reported .......................................... $2.15 $1.96 $1.52
Diluted, pro forma ........................................... $2.12 $1.92 $1.45
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 3 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,
2004 and 2003, other non-current assets included $8.7 million and $7.6 million, respectively, net of allowance,
related to the unamortized balance of these notes. As of December 31, 2004 and 2003, other non-current assets
include an allowance for doubtful accounts related to these notes of $0.9 million and $0.8 million, respectively.
Amortization expense included in the accompanying consolidated statements of income related to the notes was
$1.2 million, $0.8 million and $0.4 million for the years ended December 31, 2004, 2003 and 2002, respectively.
Income Taxes.
The Company accounts for income taxes in accordance with SFAS No. 109, “Accounting for Income
Taxes”. Deferred tax assets and liabilities are recognized for the expected future tax consequences of events that
have been included in the financial statements or income tax returns. Deferred tax assets and liabilities are
determined based on the difference between the financial statement and tax basis of assets and liabilities using
enacted rates expected to apply to taxable income in the years in which those differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
The Company does not provide additional United States income taxes on undistributed earnings of
consolidated foreign subsidiaries included in retained earnings. Such earnings could become taxable upon the
sale or liquidation of these foreign subsidiaries or upon dividend repatriation. The Company’s intent is for such
earnings to be reinvested by the subsidiaries or to be repatriated only when required for domestic business
operations, tax or cash reasons. On October 22, 2004, the American Jobs Creation Act of 2004 (“AJCA”) was
signed into law. The AJCA creates a temporary incentive for United States multinational corporations to
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