Comfort Inn 2004 Annual Report Download - page 40

CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
fees, for the years ended December 31, 2004, 2003 and 2002 were $22.0 million, $19.1 million and $14.2
million, respectively. Net income, including equity in the income and (loss) of equity method investments,
attributable to the Company’s foreign operations was $4.8 million, $4.4 million and $3.0 million for the years
ended December 31, 2004, 2003 and 2002, respectively.
Choice Hotels Australasia (formerly Flag Choice Hotels)
On July 1, 2002, the Company acquired a controlling interest in Choice Hotels Australasia Pty. Ltd.
(formerly Flag Choice Hotels) (“Flag”) (the “Flag Transaction”). Flag, based in Melbourne, Australia, is a
franchisor of certain hotel brands in Australia, Papua New Guinea, American Samoa, Fiji and New Zealand. The
acquisition of a controlling interest in Flag gave the Company the ability to control the Choice and Flag brands in
Australia, Papua New Guinea, American Samoa and Fiji and the Flag brand in New Zealand. In September 2003,
our master franchise agreement with a third party that included the right to franchise the Choice brands in New
Zealand was terminated. At that time, Flag obtained the rights to the Choice brands in New Zealand.
Pursuant to the Flag Transaction, the Company converted an existing $1.1 million convertible note due from
Flag into an additional 15% of Flag’s equity (beyond the 15% equity interest held prior to the Flag Transaction)
and purchased an additional 25% of Flag’s equity for approximately $1.6 million increasing the Company’s total
ownership in Flag to 55% as of July 1, 2002.
Pursuant to the Flag Transaction, the Company gave the seller the right to “put” the remaining 45% equity
interest in Flag to the Company for approximately $1.1 million. The put right was permitted to be exercised
between January 1, 2003 and June 30, 2007. The Company accounted for the put right in accordance with SFAS
133, “Accounting for Derivative Instruments and Hedging Activities”. SFAS 133 requires the recognition of all
derivatives, except certain qualifying hedges, as either assets or liabilities measured at fair value, with changes in
value reflected as current period income or loss unless specific hedge accounting criteria are met. The fair value
of the put rights was $0 at December 31, 2002, and no income or expense related to this derivative was recorded
for the year ended December 31, 2002. The seller exercised the put right in January 2003. The put transaction
closed in February 2003, at which time Flag became a wholly owned subsidiary.
The Company accounted for the Flag Transaction in accordance with SFAS No. 141, “Business
Combinations.” The excess of the total purchase price over the net tangible assets acquired of approximately $4.3
million has been allocated to identifiable intangible assets as follows:
Estimated Fair Value
Estimated
Useful Lives
(in thousands)
Trademarks and non-compete agreements .............. $ 235 5years
Franchise rights ................................... 4,115 5-15 years
$4,350
The Company began consolidating the results of Flag on July 1, 2002. The pro forma results of operations
as if Flag had been combined at the beginning of 2002 would not be materially different from the Company’s
reported results for that period.
Choice Hotels Scandinavia
The Company accounts for its investment, representing 1% of the outstanding common stock of Choice
Hotels Scandinavia (“CHS”) as an available for sale security in accordance with SFAS 115. The investment is
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