Comfort Inn 2002 Annual Report Download - page 38

CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
On May 1, 1998, the Company issued $100 million of senior unsecured notes (the “Notes”) at a discount of
$0.6 million, bearing a coupon rate of 7.13% with an effective rate of 7.22%. The Notes will mature on May 1,
2008. Interest on the Notes is paid semi-annually.
In August 2002, the Company entered into a new $10.0 million revolving line of credit with a maturity of
August 2003. The new line of credit includes customary financial and other covenants that require the
maintenance of certain ratios identical to those included in the Company’s existing senior credit facility.
Borrowings under the line of credit bear interest at rates established at the time of borrowing based on prime
minus 175 basis points. The Company had $6.4 million outstanding at December 31, 2002 under this line of
credit.
11. Foreign Operations
The Company accounts for foreign currency translation in accordance with SFAS No. 52, “Foreign
Currency Translation.” Revenues generated by foreign operations for the years ended December 31, 2002, 2001
and 2000 were $6.3 million, $5.2 million and $5.3 million, respectively. Net income (loss) attributable to the
Company’s foreign operations was $2.4 million, $(35.2 million) and $(12.3 million) for the years ended
December 31, 2002, 2001 and 2000, respectively.
Flag Choice Hotels
On July 1, 2002, the Company acquired a controlling interest in Flag Choice Hotels (“Flag”) (the “Flag
Transaction”). Flag, based in Melbourne, Australia, is a franchisor of certain hotel brands in Australia, Papua
New Guinea, 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 and Fiji and the Flag brand 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. As of July 1, 2002, the
Company’s total ownership in Flag is 55%.
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 accounts 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 accordingly, there was no impact on reported net income for
the year ended December 31, 2002. The seller exercised the put right in January 2003 for the remaining 45%.
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 purchase price over the net tangible assets acquired of approximately $3.1
million has been allocated to identifiable intangible assets as follows:
Estimated
Fair Value
Estimated
Useful Lives
($000)
Trademarks and non-compete agreements ..................... $ 235 5years
Franchise rights .......................................... 2,904 5-15 years
$3,139
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