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CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The marketing and reservation fees receivable at December 31, 2003 and 2002 was $32.4 million and $44.9 million, respectively. Depreciation and amortization expense attributable to marketing and reservation activities for the years ended December 31, 2003, 2002 and 2001 was $12.1 million, $13.0 million and $11.8 million, respectively. Interest expense attributable to reservation activities was $1.3 million, $1.4 million and $2.0 million for the years ended December 31, 2003, 2002 and 2001, 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 spinoff, Sunburst and the Company entered into a strategic alliance agreement. Among other things, the strategic alliance agreement, as amended, provided for (i) certain commitments by Sunburst for the development of MainStay Suites hotels; (ii) the determination of liquidated damages related to termination of Choice branded Sunburst properties; and (iii) certain franchise fee credits. The Mainstay development commitments expired in October 2002. The liquidated damage provisions extend through the life of existing 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, 2003, Sunburst operates 29 hotels under franchise with the Company.
In connection with the spin-off, the Company received a subordinated term note from Sunburst (the “Old Note”). In connection with an amendment of the strategic alliance agreement, effective October 15, 2000, interest on the Old Note accrued at a rate of 11% per annum compounded daily. The Old Note was scheduled to mature in full, along with accrued interest, on October 15, 2002.
In September 2000, the Company and Sunburst agreed to restructure the Old Note. Pursuant to the agreement the Old Note was cancelled and the Company received cash, a parcel of land, and a new subordinated note. On January 5, 2001, the Company received $102.0 million, a parcel of land valued at approximately $1.5 million and a $35 million seven-year senior subordinated note bearing interest at 11 3 / 8 % (the “New Note”). The New Note accrued interest up until June 2002, at which point interest became payable semi-annually in arrears. As of December 31, 2002, the Company’s balance sheet included interest receivable from Sunburst of $2.3 million which was included in other current assets in the accompanying consolidated balance sheets and was paid to the Company by Sunburst in January 2003.
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. 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.
The Company recognized interest income related to the New Note of $4.5 million, $4.6 million and $4.2 million for the years ended December 31, 2003, 2002 and 2001, respectively.
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