Comfort Inn 2014 Annual Report Download - page 54

Table of Contents
unrecognized costs. The increase in excess fees collected in 2013 compared to 2012 primarily reflects increased revenues related to growth in the number of
units, RevPAR in the franchise system and the size of the Company's loyalty program.
The decline in cumulative advances for marketing and reservation activities since December 31, 2012 reflects 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.
Interest Expense: Interest expense increased $15.3 million from the prior year to $42.5 million for the year ended December 31, 2013 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 stockholders.
Loss on Extinguishment of Debt: 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 during the year ended December 31, 2012.
Other Gains and Losses: Other gains and losses decreased $0.2 million from a gain of $2.0 million in 2012 to a gain of $1.8 million in 2013 primarily
due to the fluctuations in the fair value of investments held in the Company's non-qualified employee benefit plans.
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 $1.3 million during 2013 compared to an appreciation of
$0.8 million in the fair value during 2012. The fair value of the Company's investments held in the EDCP plan increased $0.3 million during the year ended
December 31, 2013 compared to an appreciation in fair value of $1.2 million in 2012.
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, 2013 and 2012, the Company's SG&A expense was increased by $2.2 million and $1.0 million
respectively, due to the change in fair value of these investments.
Income Taxes: In 2013 and 2012, the effective income tax rates for continuing operations were 28.6% and 28.5%, respectively. The effective income tax
rate for discontinued operations was 37.1% for the periods ended December 31, 2013 and 2012. The effective income tax rates from continuing operations for
the years ended December 31, 2013 and 2012 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 years ended December 31, 2013 and 2012 reflect
adjustments to our federal and foreign accruals. The effective income tax rate for the year ended December 31, 2013 was further reduced by the settlement of
unrecognized tax positions and legislation retroactively extending the U.S. controlled foreign corporation look-through rules. The effective income tax rate
for the year ended December 31, 2012 also includes a $4.5 million benefit related to a change in estimate of the benefit from foreign operations.
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.
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Operating Activities
Net cash flows provided by operating activities were $183.9 million for the year ended December 31, 2014 compared to $153.9 million for the same
period of 2013. Cash flow from operating activities increased primarily due to an increase in operating income, a $27.2 million improvement in cash flows
from marketing and reservation activities partially offset by a
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