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CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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. In September 2003, our master franchise agreement with a third party that included the right to franchise the Choice brands in New Zealand was terminated. At that time, Flag obtained the rights to the Choice brands 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 increasing the Company’s total ownership in Flag to 55% as of July 1, 2002.
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 accounted 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 no income or expense related to this derivative was recorded for the year ended December 31, 2002. The seller exercised the put right in January 2003. 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 total purchase price over the net tangible assets acquired of approximately $4.3 million has been allocated to identifiable intangible assets as follows:
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Estimated Fair Value |
|
Estimated Useful Lives |
 |
|
|
| |
(in thousands) |
|
|
|
| Trademarks and non-compete agreements |
$ |
235 |
|
|
5 years
|
|
| Franchise rights |
|
4,115 |
|
|
5-15 years |
|
|
|
|
| |
$ |
4,350 |
|
|
|
|
|
|
The Company began consolidating the results of Flag on July 1, 2002. The pro forma results of operations as if Flag had been combined at the beginning of 2001 and 2002, would not be materially different from the Company’s reported results for those periods.
Choice Hotels Scandinavia
The Company accounts for its investment, representing 1% of the outstanding common stock of Choice Hotels Scandinavia (“CHS”) as an available for sale security in accordance with SFAS 115. The investment is included in other non-current assets in the accompanying consolidated balance sheets at fair value. As of December 31, 2003 and 2002, the fair value of the Company’s investment in CHS was $0.7 million and $0.6 million, respectively, based on quoted market prices. During the years ended December 31, 2003, 2002 and 2001,
the Company recognized approximately $98,000, $89,000 and ($178,000), respectively, of unrealized gains (losses) attributable to this investment.
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