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2006
ANNUAL฀REPORT

Table of contents

  • Page 1
    2006 ANNUAL฀REPORT

  • Page 2
    CONTENTS FINANCIAL฀HIGHLIGHTS 2 LETTER฀TO฀SHAREHOLDERS 3 A฀CHOICE฀YEAR฀IN฀REVIEW 6 FINANCIAL฀REVIEW 9 TABLE฀OF

  • Page 3
    ...,฀Comfort฀Suites,฀Comfort฀Inn,฀Sleep฀Inn,฀ MainStay฀ Suites,฀ Suburban฀ Extended฀ Stay฀ Hotel,฀ Econo฀ Lodge฀ and฀ Rodeway฀ Inn,฀ are฀ among฀ the฀ world's฀most฀recognized฀brands.฀Ranging฀from฀limited฀ service฀to฀full฀service฀hotels...

  • Page 4
    ...- DOMESTIC฀FRANCHISE฀SYSTEM฀ Hotels฀Open฀and฀Operating฀ Hotels฀Under฀Development฀ Rooms฀Open฀and฀Operating฀ TOTAL฀FRANCHISE฀SYSTEM฀ (Domestic฀and฀International)฀ Hotels฀Open฀and฀Operating฀ Hotels฀Under฀Development฀ Rooms฀Open฀and฀Operating...

  • Page 5
    ...of฀ new฀domestic฀hotel฀franchises,฀greater฀focus฀will฀be฀ placed฀on฀bringing฀these฀properties฀online฀quickly. Our฀eight฀established฀brands฀-฀Comfort฀Inn,฀Comfort฀ Suites,฀Sleep฀Inn,฀Quality,฀Clarion,฀MainStay฀Suites,฀ Econo฀Lodge,฀and...

  • Page 6
    ...provide฀more฀ information฀about฀our฀best฀guests฀at฀key฀customer฀ touch฀points฀in฀order฀to฀better฀serve฀them.฀฀ We฀are฀exploring฀ways฀to฀better฀manage฀rate฀and฀ revenue฀at฀the฀property฀level฀by฀dedicating฀resources฀ and฀tools...

  • Page 7
    ...฀the฀ long฀term,฀primarily฀through฀dividends฀and฀share฀ repurchases.฀The฀company฀generated฀$853.3฀million฀ of฀free฀cash฀ï¬,ow฀(operating฀cash฀ï¬,ows฀less฀investing฀ cash฀ flows)฀ since฀ the฀ company's฀ first฀ full฀ year฀ of฀ franchise...

  • Page 8
    ...฀Privileges฀Visa฀ Card฀program฀letting฀new฀cardholders฀earn฀three฀free฀ nights฀in฀the฀mid-priced฀brands. Choice฀opens฀three฀new฀hotels฀in฀Mexico฀City฀and฀ announces฀a฀new฀partnership฀with฀Mexicana฀Airlines. JUNE฀ The฀company฀extends...

  • Page 9
    ...Suites฀brand,฀the฀company฀places฀a฀full-scale฀ room฀suite฀in฀Boise฀Airport฀to฀preview฀the฀hotel฀to฀ prospective฀guests.฀The฀company฀executes฀30฀domestic฀ hotel฀franchise฀agreements฀for฀the฀new฀brand฀in฀2006,฀ bringing฀its฀two-year...

  • Page 10
    ...12/31/01฀in฀stock฀or฀ *฀฀ index-including฀reinvestment฀of฀dividends.฀ ฀ Fiscal฀year฀ending฀December฀31. Choice฀Hotels฀฀ International,฀Inc. NYSE฀Composite S฀&฀P฀Hotels,฀Resorts฀฀ &฀Cruise฀Lines ฀ Choice฀Hotels฀International,฀Inc. NYSE...

  • Page 11
    ... Business ...Management's Discussion and Analysis of Financial Condition and Results of Operation ...Management's Report on Internal Control Over Financial Reporting ...Report of Independent Registered Public Accounting Firm ...Consolidated Financial Statements ...Notes to Consolidated Financial...

  • Page 12
    ...the "Choice brands"): Comfort Inn®, Comfort Suites®, Quality®, Clarion®, Sleep Inn®, Econo Lodge®, Rodeway Inn®, MainStay Suites®, Suburban Extended Stay Hotel®, Cambria Suites™ and Flag Hotels®. We operate in a single reportable segment encompassing our franchising business. The Company...

  • Page 13
    ... rooms by the average daily room rate realized. Our variable overhead costs associated with franchise system growth have historically been less than incremental royalty fees generated from new franchises. Accordingly, continued growth of our franchise business should enable us to realize benefits...

  • Page 14
    ... following chart demonstrates these trends: US Lodging Industry Trends - 1997 - 2006 Average Daily Room Rates (ADR) Increase in ADR Versus Prior Year Increase in CPI Versus Prior Year Revenue Per Available Room (RevPAR) New Rooms Added (Gross) Year Occupancy Rates Profits (in billions) 1997 1998...

  • Page 15
    ...large franchise lodging chains, including us, generally provide a number of services to hotel operators to improve the financial performance of their properties including central reservation systems, marketing and advertising programs, direct sales programs, training and education programs, property...

  • Page 16
    ... a new brand, Cambria Suites®, which will compete in the upscale segment. As a result of our acquisition of Suburban Franchise Holding Company, Inc., the Suburban Extended Stay Hotel® brand was added to our portfolio on September 28, 2005. Economics of Franchising Business. The fee and cost...

  • Page 17
    ... our brands. Local and regional co-op marketing campaigns will continue to leverage the national marketing programs to drive business to Choice properties at a local level. We expect our efforts at marketing directly to guests will continue to be enhanced through the use of our customer relationship...

  • Page 18
    ...Choice brand names: Comfort Inn®, Comfort Suites®, Quality®, Clarion®, Sleep Inn®, Econo Lodge®, Rodeway Inn®, MainStay Suites® and Suburban Extended Stay Hotel®. The following table presents key statistics related to our domestic franchise system over the five years ended December 31, 2006...

  • Page 19
    ..., 24-hour business center, swimming pool or exercise room, guest laundry, room service and bell service. Principal competitor brands include Sheraton Four Points, Holiday Inn Select, Radisson and Doubletree. MainStay Suites: MainStay Suites hotels compete in the mid-scale extended stay category...

  • Page 20
    ... ...67.9% 62.9% 62.2% 65.7% 69.4% Average daily room rate (ADR) ...$ 61.50 $ 61.50 $ 61.09 $ 64.76 $ 67.26 RevPAR ...$ 41.77 $ 38.70 $ 37.97 $ 42.54 $ 46.66 ECONO LODGE DOMESTIC SYSTEM Number of properties, end of period ...715 734 781 805 816 Number of rooms, end of period ...44,522 45,420 48,301...

  • Page 21
    ...of our brands by third parties in foreign countries are governed by master franchising agreements which generally provide the master franchisee with the right to use our brands in a specific geographic region, usually for a fee. In some territories outside the United States hotel franchising is less...

  • Page 22
    ... America, India, Central America, Japan and Indonesia. In addition, the Company has direct franchise relationships with properties in Malaysia, China, and Lebanon. The following table summarizes Choice's non-domestic franchise system as of December 31, 2006: Comfort Quality Clarion Sleep Econo Lodge...

  • Page 23
    ... extended stay market brands (Cambria Suites, MainStay Suites and Suburban Extended Stay Hotels), mid-market brands (Comfort Inn, Comfort Suites and Sleep Inn), full service market brands (Quality and Clarion) and economy market brands (Econo Lodge and Rodeway Inn). These changes support the Company...

  • Page 24
    .... This policy offers existing franchisees protection from the opening of a same-brand property within a specified distance, depending upon the market in which the property is located. Franchise Agreements Our standard domestic franchise agreement, excluding contracts for Suburban Extended Stay Hotel...

  • Page 25
    ...'s Gross Room Revenues Initial Fee Per Room/Minimum Reservation Fees Combined Marketing and Reservation Fees Brand Royalty Fees Marketing Fees Cambria Suites ...Comfort Inn ...Comfort Suites ...Quality Inn ...Quality Suites ...Clarion ...Sleep Inn ...MainStay Suites ...Econo Lodge ...Rodeway Inn...

  • Page 26
    ... marketing promotions with vendors and corporate partners. Numerous marketing and sales programs are conducted which target specific groups, including corporate travelers, senior citizens, automobile club members, families, government and military employees, and meeting planners. Other marketing...

  • Page 27
    ... Marks and Other Intellectual Property The service marks Choice Hotels International, Comfort Inn, Comfort Suites, Quality, Clarion, Sleep Inn, Econo Lodge, Rodeway Inn, MainStay Suites, Cambria Suites, Suburban Extended Stay Hotel, Choice Privileges, Easy Choice and related marks and logos are...

  • Page 28
    ... laws governing employee relations, including minimum wage requirements, overtime, working conditions and work permit requirements. Impact of Inflation and Other External Factors Franchise fees can be impacted by external factors including, in particular, the supply of hotel rooms within the lodging...

  • Page 29
    ... the United States. Our brand names include Comfort Inn®, Comfort Suites®, Quality®, Clarion®, Sleep Inn®, Econo Lodge®, Rodeway Inn®, MainStay Suites®, Suburban Extended Stay Hotel®, Cambria Suites™ and Flag Hotels®. The Company conducts its international franchise operations through...

  • Page 30
    ... through our company wide efforts related to improving property level performance. In addition to these revenues, we also collect marketing and reservation fees to support centralized marketing and reservation activities for the franchise system. As a lodging franchisor, Choice has relatively...

  • Page 31
    ... common stock at a total cost of $711.9 million since the program's inception. Considering the effect of the two-for-one stock split, the Company has repurchased 66.6 million shares at an average price of $10.69 per share through December 31, 2006. Our cash flows from operations support our ability...

  • Page 32
    ... and administrative expense. Summarized financial results for the years ended December 31, 2006 and 2005 are as follows: 2006 2005 (In thousands) REVENUES: Royalty fees ...Initial franchise and relicensing fees ...Brand solutions ...Marketing and reservation ...Hotel operations ...Other ...Total...

  • Page 33
    ...the year ended December 31, 2005. A summary of the Company's domestic franchised hotels operating information is as follows: 2006 2005 Change Average Average Average Daily Rate Occupancy RevPAR Daily Rate Occupancy RevPAR Daily Rate Occupancy RevPAR Comfort Inn ...Comfort Suites ...Sleep ...Midscale...

  • Page 34
    ... 31, 2005 by brand is as follows: December 31, 2006 Hotels Rooms December 31, 2005 Hotels Rooms Variance Rooms Hotels % % Comfort Inn ...Comfort Suites ...Sleep ...Midscale without Food & Beverage ...Quality ...Clarion ...Midscale with Food & Beverage . . Econo Lodge ...Rodeway ...Economy...

  • Page 35
    ... fees caption above, generated from executed domestic franchise agreements increased 18.5% to $17.9 million for 2006 from $15.1 million for 2005. The increased revenues primarily reflect increased sales of our new construction brands, most notably our Cambria Suites and Comfort Suites offerings...

  • Page 36
    ... revenues, excluding marketing and reservation fees and hotel operations, total SG&A expenses were 33.2% for 2006 compared to 34.0% for 2005. Expenses increased primarily due to higher compensation costs related to stock compensation, variable franchise sales compensation, the launch of the Company...

  • Page 37
    ...agreements require the payment of franchise fees, which include marketing and reservation fees. The fees, which are based on a percentage of the franchisees' gross room revenues, are used exclusively by the Company for expenses associated with providing franchise services such as central reservation...

  • Page 38
    ... and administrative expense. Summarized financial results for the years ended December 31, 2005 and 2004 are as follows: 2004 2005 (In thousands) REVENUES: Royalty fees ...Initial franchise and relicensing fees ...Brand solutions ...Marketing and reservation ...Hotel operations ...Other ...Total...

  • Page 39
    ... of royalty fees in 2005. A summary of the Company's domestic franchised hotels operating information is as follows: 2004 Change 2005 Average Average Average Daily Rate Occupancy RevPAR Daily Rate Occupancy RevPAR Daily Rate Occupancy RevPAR Comfort Inn ...Comfort Suites ...Sleep ...Midscale without...

  • Page 40
    ... franchised hotels that did not meet our brand standards or were underperforming in their market. Domestic initial fee revenue, included in the initial franchise and relicensing fees caption above, generated from executed franchise agreements increased 13.5% to $15.1 million for the year ended...

  • Page 41
    ...agreements require the payment of franchise fees, which include marketing and reservation fees. The fees, which are based on a percentage of the franchisees' gross room revenues, are used exclusively by the Company for expenses associated with providing franchise services such as central reservation...

  • Page 42
    ... reported income statement or balance sheet amounts. Net cash repayments related to marketing and reservation activities totaled $19.0 million during 2006 compared to repayments of $19.4 million during the year ended December 31, 2005. The Company expects marketing and reservation activities...

  • Page 43
    ... hardware and financial and reservation systems. Financing cash flows relate primarily to the Company's borrowings under its credit lines, treasury stock purchases and dividends. On June 16, 2006, the Company entered into a $350 million senior unsecured revolving credit agreement (the "Revolver...

  • Page 44
    ... $41.0 Long-term debt amounts include interest on fixed rate debt obligations. Subsequent to year end, certain executive officers were terminated from the Company. Other long-term liabilities at December 31, 2006 included deferred compensation and retirement plan obligations owed to these employees...

  • Page 45
    .... For most of the Company's franchised hotels, demand is lower in December through March than during the remainder of the year. Our principal source of revenues is franchise fees based on the gross room revenues of our franchised properties. The Company's franchise fee revenues and operating income...

  • Page 46
    ... in affiliated partners' programs, such as those offered by credit card companies. The points may be redeemed for free accommodations or other benefits. Points cannot be redeemed for cash. The Company collects a percentage of program members' room revenue from participating franchises. Revenues are...

  • Page 47
    ... of grant. Therefore, the cost related to stock-based employee compensation included in the determination of net income for the years ended 2005 and 2004 is less than that which would have been recognized if the fair value based method had been applied to all awards since the original effective date...

  • Page 48
    ... $2.6 million with a corresponding change, net of tax, reported in comprehensive income. See Notes 1 and 14 to our consolidated financial statements. Recently Issued Accounting Standards In March 2006, the EITF issued EITF Issue 06-3, "How Taxes Collected from Customers and Remitted to Governmental...

  • Page 49
    ... Misstatements When Quantifying Misstatements in Current Year Financial Statements", providing guidance on quantifying financial statement misstatement and implementation when first applying this guidance. SAB 108 is effective for the year ending December 31, 2006. The adoption of SAB 108 did not...

  • Page 50
    ... Over Financial Reporting The management of Choice Hotels International, Inc. and its subsidiaries (together "the Company") is responsible for establishing and maintaining adequate internal control over financial reporting. The Company's internal control over financial reporting was designed to...

  • Page 51
    ...their operations and their cash flows for each of the three years in the period ended December 31, 2006 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management. Our responsibility is to...

  • Page 52
    ... reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or...

  • Page 53
    CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME Years Ended December 31, 2006 2005 2004 (In thousands, except per share amounts) REVENUES: Royalty fees ...Initial franchise and relicensing fees ...Brand solutions ...Marketing and reservation ...Hotel operations ...

  • Page 54
    ...-marketing fees ...Investments, employee benefit plans, at fair value ...Deferred income taxes ...Other assets ...Total assets ...LIABILITIES AND SHAREHOLDERS' DEFICIT Current liabilities Current portion of long-term debt ...Accounts payable ...Accrued expenses and other ...Deferred revenue...

  • Page 55
    ... net ...Net cash used in investing activities ...CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from long-term debt ...Principal payments of long-term debt ...Net repayments pursuant to revolving credit facilities ...Debt issuance costs ...Excess tax benefits from stock-based compensation ...Purchase...

  • Page 56
    CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT AND COMPREHENSIVE INCOME (In thousands, except share amounts) Common Common Accumulated Stock Stock - Additional Other Shares Par Paid-in- Comprehensive Deferred Treasury Comprehensive Retained ...

  • Page 57
    ..., 2006, the Company had franchise agreements representing 5,376 open hotels and 930 hotels under development in 49 states, the District of Columbia and more than 40 countries and territories outside the United States under the brand names: Comfort Inn®, Comfort Suites®, Quality®, Clarion®, Sleep...

  • Page 58
    ... participation in affiliated partners' programs, such as those offered by credit card companies. The points, which we accumulate and track on the members' behalf, may be redeemed for free accommodations, airline frequent flier program miles or other benefits. Points cannot be redeemed for cash. 56

  • Page 59
    ... FINANCIAL STATEMENTS-(Continued) We provide Choice Privileges as a marketing program to participating hotels. The cost of operating the program, including the estimated cost of award redemptions, are charged to the participating hotels by collecting a percentage of program members' room revenue...

  • Page 60
    CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Impairment Policy The Company evaluates the impairment of property and equipment and other long-lived assets, including franchise rights and other definite-lived intangibles, in accordance with ...

  • Page 61
    ... 31, 2006 and 2005 the Company had no derivative financial instruments. Stock-based compensation In December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS No. 123 (Revised 2004), "Share-Based Payment" ("SFAS No. 123R"). SFAS No. 123R requires that compensation cost relating to...

  • Page 62
    ...$1.06 The Company's stock-based compensation plans and related accounting policies are described more fully in Note 17. 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...

  • Page 63
    ... operations. The Company accounts for income tax contingencies in accordance with SFAS No. 5, "Accounting for Contingencies." Tax savings resulting from deductions greater than compensation cost reflected in net income, if any, for stock-based employee compensation is credited directly to additional...

  • Page 64
    CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Use of Estimates The consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States and require management to make certain ...

  • Page 65
    CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) The adoption of SFAS No. 158 had no effect on the Company's consolidated statements of operations or cash flows for the year ended December 31, 2006, or for any prior period presented. See Note ...

  • Page 66
    ...-term franchise contracts. As of December 31, 2006 and 2005, the unamortized balance relates primarily to the Econo Lodge, Suburban Extended Stay Hotel and Flag franchise rights. The franchise rights are being amortized over lives ranging from 5 to 17 years. Amortization expense for the years ended...

  • Page 67
    ... related to the Company's trademarks for each of the years ending December 31, 2007 through 2011 is as follows; Year (In millions) 2007 2008 2009 2010 2011 6. ... $0.5 0.5 0.4 0.4 0.3 Receivable-Marketing and Reservation Fees The Company's franchise agreements require the payment of franchise...

  • Page 68
    ... FINANCIAL STATEMENTS-(Continued) Total franchise fees, including royalty, marketing and reservation fees, paid by Sunburst to the Company, included in the accompanying consolidated financial statements were $5.0 million, $5.3 million and $5.3 million for the years ended December 31, 2006...

  • Page 69
    ... 2 basis points to 125 basis points; prime rate; and prime rate minus 175 basis points. The Old Credit Facility required 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...

  • Page 70
    CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) proceeds from the offering of approximately $99 million to repay amounts outstanding under the Company's previous credit facility. The Senior Notes contain a call provision that would require ...

  • Page 71
    ... Statement of Income For the Year Ended December 31, 2006 (In Thousands) Choice Hotels International, Inc. Guarantor Subsidiaries Non-Guarantor Subsidiaries Eliminations Consolidated REVENUES: Royalty fees ...Initial franchise and relicensing fees ...Brand solutions ...Marketing and reservation...

  • Page 72
    ... Statement of Income For the Year Ended December 31, 2005 (In Thousands) Choice Hotels International, Inc. Guarantor Subsidiaries Non-Guarantor Subsidiaries Eliminations Consolidated REVENUES: Royalty fees ...Initial franchise and relicensing fees ...Brand solutions ...Marketing and reservation...

  • Page 73
    ... Statement of Income For the Year Ended December 31, 2004 (In Thousands) Choice Hotels International, Inc. Guarantor Subsidiaries Non-Guarantor Subsidiaries Eliminations Consolidated REVENUES: Royalty fees ...Initial franchise and relicensing fees ...Brand solutions ...Marketing and reservation...

  • Page 74
    ..., 2006 (In thousands) Choice Hotels International, Inc. Guarantor Subsidiaries Non-Guarantor Subsidiaries Eliminations Consolidated ASSETS Cash and cash equivalents ...Receivables ...Other current assets ...Total current assets ...Property and equipment, at cost, net ...Goodwill ...Franchise rights...

  • Page 75
    ... (In thousands) Choice Hotels International, Inc. Guarantor Subsidiaries Non-Guarantor Subsidiaries Eliminations Consolidated ASSETS Cash and cash equivalents ...Receivables ...Other current assets ...Total current assets ...Property and equipment, at cost, net ...Goodwill ...Franchise rights and...

  • Page 76
    CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Choice Hotels International, Inc. Condensed Consolidating Statement of Cash Flows For the Year Ended December 31, 2006 (In thousands) Choice Hotels Guarantor Non-Guarantor International, Inc. ...

  • Page 77
    CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Choice Hotels International, Inc. Condensed Consolidating Statement of Cash Flows For the Year Ended December 31, 2005 (In thousands) Choice Hotels Guarantor Non-Guarantor International, Inc. ...

  • Page 78
    ..., INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Choice Hotels International, Inc. Condensed Consolidating Statement of Cash Flows For the Year Ended December 31, 2004 (In thousands) Choice Hotels International, Inc. Guarantor Subsidiaries Non-Guarantor Subsidiaries...

  • Page 79
    ...New Zealand and Papua New Guinea. During 2006, 2005 and 2004, the Company recognized in the accompanying consolidated statements of income, revenues of $8.4 million, $8.2 million and $8.1 million, respectively, including royalty, marketing, reservation fees and other revenues from CHA. Choice Hotels...

  • Page 80
    ... in Choice Hotels Canada, Inc. ("CHC"), a joint venture with a third party. During 2006, 2005 and 2004, the Company recorded $1.0 million, $0.8 million and $0.7 million, respectively, based on CHC's results for the twelve months ended November 30, 2006, 2005 and 2004 of equity method income related...

  • Page 81
    ... first quarter of 2006. Suburban was the franchisor of Suburban Extended Stay Hotel, a 67-unit, 8,942 room (at the date of consolidation) lodging chain operating in the economy extended stay segment primarily in the southeastern United States. The acquisition of Suburban allowed the Company to enter...

  • Page 82
    ...three years ended December 31, 2006. Years ended December 31, 2006 2005 2004 (In thousands) Components of net periodic pension cost: Service cost ...Interest cost ...Amortization Prior service cost ...(Gain)/Loss ...Net periodic pension cost ...Weighted average assumptions: Discount rate ...Average...

  • Page 83
    CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) The components of projected net periodic pension cost for the year ended December 31, 2007 are as follows: (In thousands) Service cost ...Interest cost ...Amortization Prior service cost ...(...

  • Page 84
    CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 15. Income Taxes Income before income taxes was derived from the following: Years ended December 31, 2006 2005 2004 (In thousands) Income before income taxes: Domestic operations ...Foreign ...

  • Page 85
    ... included in the accompanying consolidated statements of income follows: Years ended December 31, 2006 2005 2004 (In thousands, except Federal income tax rate) Federal income tax rate ...Federal taxes at statutory rate ...State income taxes, net of federal tax benefit ...Foreign income taxed at...

  • Page 86
    ... to officers of the Company at a fair value of approximately $2.8 million, $3.6 million and $0.1 million during the years ended December 31, 2006, 2005 and 2004, respectively. The stock options granted by the Company had an exercise price equal to the average of the high and low market price of...

  • Page 87
    ... service period based on those restricted stock grants that ultimately vest. The fair value is measured by the average of the high and low market price of the Company's common stock on the date of the grant. Restricted stock awards in 2006 generally vest ratably at 25 percent per year beginning...

  • Page 88
    CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) specified performance periods and the employees continued employment. The performance conditions affect the number of shares that will ultimately vest. The range of possible stock-based award ...

  • Page 89
    ... eligible executive officer during the year ended December 31, 2006 was recognized upon issuance of the grants rather than over the awards' vesting period since the terms of the grant provide that the awards will vest upon retirement of the employee. Compensation costs recognized in 2006 related to...

  • Page 90
    CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) The total unrecognized compensation costs related to stock-based awards that have not yet vested and the related weighted average amortization period over which the costs are to be recognized as...

  • Page 91
    CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Total other comprehensive income for years ended 2006, 2005 and 2004 is as follows: Amount Before Taxes Income Tax (Expense)/Benefit Amount Net of Taxes 2006 Foreign currency translation ...

  • Page 92
    ... under its franchise agreements to provide marketing and reservation services appropriate for the successful operation of its systems. These services do not represent separate reportable segments as their operations are directly related to the Company's franchising business. The revenues received...

  • Page 93
    CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Year Ended December 31, 2005 Corporate Elimination Franchising & Other Adjustments Consolidated (In thousands) Revenues ...Operating income (loss) ...Depreciation and amortization ...Capital ...

  • Page 94
    ... payments to be made. 23. Fair Value of Financial Instruments The balance sheet carrying amount of cash and cash equivalents and receivables approximates fair value due to the short-term nature of these items. Long-term debt consists of bank loans and senior notes. Interest rates on the Company...

  • Page 95
    CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) In September 2006, FASB issued SFAS No. 157, "Fair Value Measurements'" which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and...

  • Page 96
    CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) consolidated statements of income during 2007. In addition, deferred compensation and retirement obligations totaling approximately $1.7 million included as non-current liabilities in the ...

  • Page 97
    ...฀and฀business฀travelers.฀The฀company's฀10฀brands฀include฀Cambria฀Suites,฀Clarion,฀Quality,฀ Comfort฀Suites,฀Comfort฀Inn,฀Sleep฀Inn,฀MainStay฀Suites,฀Suburban฀Extended฀Stay฀Hotel,฀Econo฀Lodge฀and฀Rodeway฀Inn.฀The฀company's฀headquarters...

  • Page 98
    10750฀Columbia฀Pike Silver฀Spring,฀Maryland฀20901 www.choicehotels.com