Comfort Inn 2014 Annual Report Download - page 53

Table of Contents
The Company had an additional 81 franchised hotels with 7,171 rooms under construction, awaiting conversion or approved for development in its
international system as of December 31, 2013 compared to 88 hotels and 7,851 rooms at December 31, 2012. While the Company’s hotel pipeline provides a
strong platform for growth, a hotel in the pipeline does not always result in an open and operating hotel due to various factors.
Procurement Services: Revenues increased $2.7 million or 15% from $18.0 million for the year ended December 31, 2012 to $20.7 million for the year
ended December 31, 2013. The increase in procurement services revenue primarily reflects the implementation of new brand programs as well as an increased
volume of business transacted with existing and new qualified vendors and strategic alliance partners.
Selling, General and Administrative Expenses: The cost to operate the franchising business is reflected in SG&A on the consolidated statements of
income. SG&A expenses were $111.7 million for 2013, an increase of $9.8 million from the 2012 total of $101.9 million.
SG&A expenses for the year end December 31, 2013 and 2012 include approximately $9.6 million and $3.4 million, respectively related to the
Company's new division, SkyTouch. SkyTouch is a division of the Company that develops and markets cloud-based technology products to hoteliers not
under franchise agreements with the Company. The new division was announced to the public in March 2013 and the increase in expenses primarily relate to
business development, sales and marketing and product development.
Excluding the SG&A expenses for the SkyTouch division, SG&A for the year end December 31, 2013 increased $3.6 million or 4% from $98.5 million
in 2012 to $102.1 million in 2013. The fluctuations in SG&A include a $1.3 million increase in occupancy costs related to the relocation of the Company's
corporate headquarters and a $2.1 million increase in variable franchise sales compensation and procurement services expenses which increased due to a 26%
and 15% increase in initial franchise and procurement services revenues, respectively. In addition, compensation expense recognized on deferred
compensation arrangements increased $1.3 million. The increase in compensation expense reflects the increase in the fair value of investments held in the
Company's Non-Qualified and Executive Deferred Compensation Plan ("EDCP") retirement and savings plans. The increase in deferred compensation
expenses are partially offset by investment gains recorded in other gains and losses. These increases in the current year SG&A expenses were partially offset
by a loss on settlement of the Company's pension plan totaling $1.8 million recognized during the year ended December 31, 2012 resulting from the
recognition of previously unrecognized actuarial losses which had been recorded as a component of the Company's accumulated other comprehensive loss
on the Company's consolidated balance sheets. In addition, expenses declined by $3.3 million resulting from lower management incentive plan
compensation earned based on Company earnings per share performance.
Depreciation and Amortization: Expenses increased $1.4 million from $7.7 million for the year ended December 31, 2012 to $9.1 million for the
year ended December 31, 2013. The increase in depreciation and amortization expenses primarily reflects additional capital expenditures incurred in
conjunction with the Company's relocation of its corporate headquarters in April 2013 as well as an increase in amortization related to the issuance of
forgivable notes receivable in conjunction with brand and development programs.
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 were $407.6 million and $389.7 million for the years ended December 31, 2013 and 2012,
respectively. The increase in revenues was primarily due to improved system fees resulting from system growth and RevPAR increases as well as increased
revenues from the Choice Privileges loyalty program resulting from the growth in program membership. Depreciation and amortization attributable to
marketing and reservation activities was $16.0 million and $14.5 million for the years ended December 31, 2013 and 2012, respectively. Interest expense
attributable to reservation activities was $3.7 million and $4.0 million for the years ended December 31, 2013 and 2012, respectively.
As of December 31, 2013 and 2012, the Company’s balance sheets include deferred costs of $5.8 million and $29.5 million, respectively resulting from
cumulative marketing and reservation expenses incurred in excess of cumulative system fee revenues earned. During the year ended December 31, 2013, the
Company collected $23.7 million of marketing and reservation system revenue in excess of expense incurred compared to $12.5 million for the year ended
December 31, 2012. 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 expenses. This resulted in expense recognition of an equivalent amount of previously
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