Comfort Inn 2005 Annual Report Download - page 20

Income Taxes: The Company’s effective income tax provision rate was 35.1% for the year ended
December 31, 2004, a decrease of 100 basis points from the effective income tax provision rate of 36.1% for the
year ended December 31, 2003. The reduction in the effective income tax provision rate resulted partially from
an increase in foreign income, which is taxed at lower income tax rates than the statutory U.S. income tax rates.
Also, the favorable resolution of several state income tax issues in the current year and the increase in taxable
income over non-tax deductible items between the two periods decreased the effective income tax provision rate.
Income tax expense for 2004 includes approximately $1.2 million of income tax benefits resulting from the
reversal of income tax contingencies. Income tax expense for 2003 includes $1.5 million of provisions for
income tax contingencies.
Net income for fiscal 2004 increased by 3.5% to $74.3 million, and diluted earnings per share increased
10.2% to $1.08 in 2004 from $0.98 reported for 2003. A portion of the increase in diluted earnings per share is
attributable to stock repurchases made by the Company in 2004 and 2003.
Liquidity and Capital Resources
Net cash provided by operating activities was $132.9 million and $108.1 million for the years ended
December 31, 2005 and 2004, respectively. The increase primarily reflects improvements in operating income
and timing differences related to payments for income taxes.
Net cash repayments related to marketing and reservation activities totaled $19.4 million during the year
ended December 31, 2005, compared to net repayments of $19.7 million during the year ended December 31,
2004. The Company expects marketing and reservation activities to generate positive cash flows of between $9.0
million and $13.0 million in 2006.
Cash provided by (used in) investing activities for the years ended December 31, 2005, 2004 and 2003 was
($23.9 million), ($13.7 million), and $27.8 million, respectively. As a lodging franchisor, Choice has relatively
low capital expenditure requirements. During the years ended December 31, 2005, 2004 and 2003, capital
expenditures totaled $11.5 million, $6.9 million, and $8.5 million, respectively. Capital expenditures include the
installation and upgrades of system-wide property and yield management systems and upgrades to disaster
recovery hardware and financial and reservation systems. During 2005, investing cash flows included the
payment of $7.3 million related to the Company’s acquisition of Suburban. During 2003, the Company received
a cash payment of $44.7 million from Sunburst related to the prepayment of a note receivable due to the
Company. During 2003, approximately $4.5 million of interest income related to this note was included in net
income. As a result of the prepayment, no interest income related to this note will be realized in future periods.
Financing cash flows relate primarily to the Company’s borrowings under its credit lines, treasury stock
purchases and dividends. In July 2004, the Company entered into a $265 million senior unsecured revolving
credit facility (the “Revolver”) with a syndicate of lenders. In April 2005, the Company increased the available
credit under the Revolver from $265 million to $350 million. The Revolver permits the Company to borrow,
repay and reborrow revolving loans until the scheduled maturity date in July 2009. Borrowings pursuant to the
Revolver bear interest, at one of several rates selected by the Company, based upon the credit rating of the
Company and include LIBOR plus 62
1
⁄ 2 basis points to 125 basis points; prime rate; and prime rate minus 175
basis points. In addition, the Company has the option to request participating banks to bid on loan participation at
lower rates than those contractually provided by the Revolver. On February 28, 2005, Standard & Poor’s Rating
Services raised its rating of the Company’s debt from BBB- to BBB. This rating and any other ratings by other
rating organizations, may be subject to revision or withdrawal at any time by the assigning rating organization.
Each rating should be evaluated independently of any other rating. The Revolver requires the Company to pay a
commitment fee ranging, based upon the credit rating of the Company, between 12
1
⁄ 2 basis points and 25 basis
points of the average daily-unused portion of the aggregate available commitment. The Revolver also provides
for the issuances of letters of credit on behalf of the Company. The Revolver includes customary financial and
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