Comfort Inn 2013 Annual Report Download - page 55

Table of Contents
As of December 31, 2012 and 2011, the Company’s balance sheets include deferred costs of $42.2 million and $54.0 million, respectively resulting
from cumulative marketing and reservation expenses incurred in excess of cumulative system fee revenues earned. During the year ended December 31, 2012,
the Company collected $11.8 million of marketing and reservation system revenue in excess of expense incurred. As a result, the fees collected in excess of
expenses incurred were utilized to reimburse the Company for a portion of the outstanding cumulative advances for marketing and reservation activities. This
resulted in expense recognition of an equivalent amount of previously unrecognized costs. The decline in cumulative advances for marketing and reservation
activities from December 31, 2011 to 2012 primarily reflects increased revenues related to the growth of the number of units and RevPAR in the franchise
system as well as the Company's strategy to recover prior year advances for marketing and reservation activities in future periods.
Costs incurred in excess of fees collected are deferred and recorded as an asset in the financial statements as the Company has the contractual authority
to recover the deficits incurred related to marketing and reservation activities from the franchisees in the system at any given point in time. The Company’s
current franchisees are contractually 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 and whether or not they joined the system following the deficit’s occurrence.
The Company expects to recover the deferred costs over a period of time by expending fewer amounts on marketing and reservation activities than marketing
and reservation system fees collected, depending on the marketing and reservation needs of the system. Conversely, cumulative marketing and reservation
system fees not expended are recorded as a liability in the financial statements and are carried over to the next fiscal year and expended in accordance with the
franchise agreements.
Other Income and Expenses, Net: Other income and expenses, net, increased $10.2 million to an expense of $24.0 million in 2012 from $13.8 million
in 2011 primarily due to the following items:
Interest expense increased $14.3 million from the prior year to $27.2 million in 2012 due to the issuance of the Company's $400 million senior notes due
in 2022 with an effective rate of 5.94% on June 27, 2012 as well as the $350 million senior secured credit facility entered into by the Company on July 25,
2012. The Company utilized the proceeds from these debt issuances to pay a special cash dividend on August 23, 2012 totaling approximately $600.7 million
to common shareholders.
In conjunction with the refinancing of the Company's $300 million revolving credit facility, which was scheduled to mature in February 2016, the
Company recognized a $0.5 million loss on extinguishment of debt.
Other gains and losses decreased $4.4 million from a loss of $2.4 million in 2011 to a gain of $2.0 million in 2012. The decrease in the loss reflects a
$1.8 million loss on assets held for sale recorded in 2011 resulting from the Company reducing the carrying amount of a parcel of land held for sale to its
estimated fair value. In addition, the decline in other gains and losses reflects fluctuations in the fair value of investments held in the Company's non-qualified
employee benefit plans. This activity included a $2.0 million appreciation in the fair value of these investments during 2012 compared to a $0.6 million
decline in the fair value of these investments in 2011.
As discussed in the accompanying critical accounting policies, the Company sponsors two non-qualified retirement and savings plans: the Non-
Qualified Plan and the EDCP plan. The fair value of the Non-Qualified Plan investments increased $0.8 million during 2012 compared to a decline of $0.5
million in the fair value during 2011. The fair value of the Company's investments held in the EDCP plan appreciated by $1.2 million during the year ended
December 31, 2012 compared to a decline in fair value of $0.1 million during the same period of the prior year.
The Company accounts for the EDCP Plan and Non-Qualified Plan in accordance with accounting for deferred compensation arrangements when
investments are held in a rabbi trust and invested. Therefore, the Company also recognizes compensation expense or benefits in SG&A related to changes in
the fair value of investments held in the Non-Qualified Plan and a portion of the investments held in the EDCP Plan, excluding investments in the Company's
stock. As a result, during the year ended December 31, 2012 and 2011, the Company's SG&A expense was increased by $1.0 million and reduced by $0.4
million respectively, due to the change in fair value of these investments.
Income Taxes: In 2012 and 2011, the effective income tax rates were 28.7% and 30.1%, respectively. The effective income tax rate for the year ended
December 31, 2012 was lower than the United States federal statutory rate of 35% primarily due to the recurring impact of foreign operations, partially offset
by state income taxes. Additionally, the effective income tax rate also includes a $4.5 million benefit related to a change in estimate of the benefit from foreign
operations. The effective income tax rate for the period ended December 31, 2011 was lower than the United States federal statutory rate of 35% primarily due
to the impact of foreign operations, $1.4 million of changes in unrecognized tax positions and the identification of $2.8 million of additional federal tax
benefits, partially offset by state income taxes. Additionally, an adjustment to our current federal taxes payable of $1.4 million reduced the effective tax rate.
55