Comfort Inn 2005 Annual Report Download - page 37

CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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 each of the three
years ended December 31, 2005 is less than that which would have been recognized if the fair value based
method had been applied to all awards since the original issuance 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,
2005 2004 2003
(In millions, except per
share amounts)
Net income, as reported ..................................... $87.6 $74.3 $71.9
Stock-based employee compensation expense included in reported net
income, net of related tax effects ............................ 2.9 2.2 1.4
Total stock-based employee compensation expense determined under
fair value method for all awards, net of related tax effects ........ (4.7) (3.5) (2.9)
Proforma,netincome ...................................... $85.8 $73.0 $70.4
Earnings per share:
Basic, as reported .......................................... $1.36 $1.12 $1.01
Basic, pro forma ........................................... $1.33 $1.10 $0.99
Diluted, as reported ........................................ $1.32 $1.08 $0.98
Diluted,proforma ......................................... $1.29 $1.06 $0.96
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,
2005 and 2004, other non-current assets included $9.4 million and $8.7 million, respectively, net of allowance,
related to the unamortized balance of these notes. As of December 31, 2005 and 2004, other non-current assets
include an allowance for doubtful accounts related to these notes of $1.0 million and $0.9 million, respectively.
Amortization expense included in the accompanying consolidated statements of income related to the notes was
$1.3 million, $1.2 million and $0.8 million for the years ended December 31, 2005, 2004 and 2003, 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
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