Comfort Inn 2014 Annual Report Download - page 48

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Table of Contents
Marketing and Reservations: The Company’s franchise agreements require the payment of franchise fees, which include marketing and reservation
system fees. The fees, which are primarily 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 systems, national marketing and media advertising. The Company is contractually
obligated to expend the marketing and reservation system fees it collects from franchisees in accordance with the franchise agreements; as such, no income or
loss to the Company is generated.
Total marketing and reservation system revenues increased $5.0 million from $407.6 million for the year ended December 31, 2013 to $412.6 million
for the year ended December 31, 2014. Marketing and reservation system revenues recognized during the year ended December 31, 2014 were impacted by
the deferral of approximately $44.3 million of revenue as the Company billed marketing and reservation system fees in excess of cumulative expenses. The
Company is contractually obligated by its franchise agreements to use the marketing and reservations system fees collected for marketing and reservation
activities. As a result, cumulative marketing and reservation fees not expended are deferred and recorded as a liability in the Company’s financial statements
and carried over to the next fiscal year and expended in accordance with the franchise agreements. Conversely, cumulative marketing and reservation
expenditures incurred in excess of fees billed for marketing and reservation activities are deferred and recorded as an asset in the Company’s financial
statements and recovered in future periods. During the year ended December 31, 2013, the Company’s cumulative expenses exceeded cumulative marketing
and reservation fees and therefore marketing and reservation fees collected in excess of current period expenses were utilized to reimburse cumulative
advances. As a result, no revenues were deferred during 2013.
Excluding the impact of the revenue deferred during 2014, marketing and reservation revenues increased approximately 12%. The increase in revenues
was primarily due to improved system fees resulting from RevPAR increases, increasing revenues from the Choice Privileges loyalty program resulting from
the growth in program membership and new marketing and distribution program fees.
At December 31, 2013, the Company incurred marketing and reservation system expenses in excess of cumulative marketing and reservation system
fees earned of $5.8 million. At December 31, 2014, cumulative marketing and reservation system fees billed exceeded expenses by $44.3 million with the
excess reflected as an other long-term liability in the accompanying consolidated balance sheets.
Interest Expense: Interest expense decreased $1.1 million from the prior year to $41.5 million for the year ended December 31, 2014 due to lower
outstanding borrowings on the Company's revolving credit facility, lower effective borrowing costs, and increased capitalization of interest related to our
software development activities in 2014.
Income Taxes: The Company's effective income tax rates for continuing operations were 30.1% and 28.6%, for the years ended December 31, 2014 and
2013, respectively. The effective income tax rate for discontinued operations was 37.1% for the years ended December 31, 2014 and 2013. The effective
income tax rates from continuing operations for the periods ended December 31, 2014 and 2013 were lower than the United States federal income tax rate of
35% due to the recurring impact of foreign operations, partially offset by state income taxes. Additionally, the effective income tax rates for the periods
ended December 31, 2014 and 2013 were reduced by the settlement of unrecognized tax positions. The effective income tax rate for the period ended
December 31, 2013 also included the impact of legislation retroactively extending the U.S. controlled foreign corporation look-through rules.
Discontinued Operations: In the first quarter of 2014, the Company's management approved a plan to dispose of three Company owned Mainstay
Suites hotels. As a result, the Company has reported the operations related to these three hotels as discontinued operations in this Form 10-K. Net income
from discontinued operations was $1.7 million for the year ended December 31, 2014 compared to $0.4 million in 2013. The increase in net income was
primarily due to a $2.8 million gain on the sale of the three hotels.
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