Comfort Inn 2005 Annual Report Download - page 41

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CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
point repay any deficits related to marketing and reservation activities. The Company’s current franchisees are
legally obligated to pay any assessment the Company imposes on its franchisees to obtain reimbursement of such
deficit regardless of whether those constituents continue to generate gross room revenue. The Company has no
present intention to accelerate repayment of the deficit from current franchisees. Cumulative reservation and
marketing fees not expended are recorded as a payable in the financial statements and are carried over to the next
fiscal year and expended in accordance with the franchise agreements.
The marketing fees receivable at December 31, 2005 and 2004 was $13.2 million and $15.6 million,
respectively. The reservation fees receivable was $6.1 million at December 31, 2004. As of December 31, 2005,
cumulative reservation fees collected exceeded expenses by $3.6 million and the excess has been reflected as a
long-term liability in the accompanying consolidated balance sheets. Depreciation and amortization expense
attributable to marketing and reservation activities for the years ended December 31, 2005, 2004 and 2003 was
$7.6 million, $9.1 million and $12.1 million, respectively. Interest expense attributable to reservation activities
was $1.1 million, $1.5 million and $1.3 million for the years ended December 31, 2005, 2004 and 2003,
respectively.
7. Transactions with Sunburst
Effective October 15, 1997, Choice Hotels International, Inc. (“CHI”), which at that point included both the
franchising business and owned hotel business, separated the businesses via spin-off of the Company. CHI
changed its name to Sunburst Hospitality Corporation (referred to hereafter as “Sunburst”). As part of the spin-
off, Sunburst and the Company entered into a strategic alliance agreement. Among other things, the strategic
alliance agreement, as amended, provided for the determination of liquidated damages related to termination of
Choice branded Sunburst properties and certain franchise fee credits. The liquidated damage provisions extend
through the life of existing Sunburst franchise agreements. The franchise fee credit provisions expired in October
2003. Other revenues for the year ended December 31, 2003 includes $1.7 million of liquidated damages
received from Sunburst for the termination of franchises. As of December 31, 2005, Sunburst operates 26 hotels
under franchise with the Company.
In January 2001, the Company received certain consideration including a $35 million seven-year senior
subordinated note bearing interest at 11
3
⁄
8
% (the “New Note”) in conjunction with the restructuring and
cancellation of a subordinated term note from Sunburst received pursuant to the spin-off. The New Note accrued
interest up until June 2002, at which point interest became payable semi-annually in arrears.
On September 4, 2003, the Company and Sunburst entered into an agreement to amend certain terms of the
New Note. At the time of the agreement, the principal amount of the New Note was approximately $41.3 million.
Pursuant to the agreement, as an incentive for Sunburst to accelerate repayment of the New Note, the Company
agreed to modify the redemption provisions of the New Note. Pursuant to the agreement, at any time prior to
January 31, 2004, upon Sunburst’s election to redeem the Note, Choice agreed to amend the existing optional
redemption provision to allow Sunburst to redeem the New Note at a percentage of the principal amount equal to
(i) 105.6875%, plus (ii) 2.84375% multiplied by the number of days prior to January 5, 2005 that redemption is
made, divided by 365 days.
On December 19, 2003, Sunburst redeemed the New Note for approximately $47.1 million (including
accrued interest of $2.2 million). The Company recognized a gain of $3.4 million in the accompanying
consolidated statement of income for the year ended December 31, 2003 related to the note prepayment. The
Company also recognized tax benefits of approximately $1.3 million in 2003 through reduction of liabilities for
tax contingencies as a result of the gain on the transaction.
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