Comfort Inn 2005 Annual Report Download - page 17

contractually obligated to expend the marketing and reservation 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 reservations revenues were $243.1 million and $220.7 million for the years ended
December 31, 2005 and 2004, respectively. Depreciation and amortization attributable to marketing and
reservation activities was $7.6 million and $9.1 million for the years ended December 31, 2005 and 2004,
respectively. Interest expense attributable to reservation activities was $1.1 million and $1.5 million for the years
ended December 31, 2005 and 2004, respectively. Marketing and reservations activities provided positive cash
flow of $19.4 million and $19.7 million for the years ended December 31, 2005 and 2004, respectively. As of
December 31, 2005, the Company’s balance sheet includes a receivable of $13.2 million for marketing fees and a
payable of $3.6 million for reservation fees. At December 31, 2004, the Company’s balance sheet contained a
receivable for marketing and reservation fees of $21.7 million. This receivable is recorded as an asset in the
financial statements as the Company has the contractual authority to require that the franchisees in the system at
any given point repay the Company for any deficits related to marketing and reservations activities. The
Company’s current franchisees are legally 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. The Company has no present intention to accelerate repayment of the deficit from current
franchisees. Cumulative reservation and marketing fees not expended are recorded as a payable 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: Other income and expense, net increased $2.5 million to an expense of $13.0
million for the year ended December 31, 2005 from $10.5 million for the same period in 2004. This increase
resulted from a $3.7 million increase in interest expense to $15.3 million for the twelve months ended
December 31, 2005 resulting from higher average interest rates and outstanding borrowings on the Company’s
variable rate debt. The Company’s weighted average interest rate as of December 31, 2005 was 5.96% compared
to 4.58% as of December 31, 2004. The increase in interest expense was partially offset by a loss on
extinguishment of debt of approximately $0.7 million attributable to the refinancing of the Company’s senior
credit facility during the third quarter of 2004.
Income Taxes: The Company’s effective income tax provision rate was 33.0% for the year ended
December 31, 2005, a decrease of 210 basis points from the effective income tax provision rate of 35.1% for the
year ended December 31, 2004. The effective income tax rate for 2005 declined due to the reversal of reserves
resulting from the resolution of certain tax contingencies of approximately $4.9 million offset by additional
income tax expense of $1.2 million related to the Company’s repatriation of foreign earnings. The 2004 effective
income tax rate reflects the resolution of certain tax contingencies totaling approximately $1.2 million.
Depending upon the outcome of certain income tax contingencies during 2006 up to $14.1 million of additional
income tax benefits may be reflected in our 2006 results of operations from the reversal of reserves.
Net income for 2005 increased by 17.8% to $87.6 million, and diluted earnings per share increased 22.2% to
$1.32 in 2005 from $1.08 reported for 2004. A portion of the increase in diluted earnings per share is attributable
to stock repurchases made by the Company in 2005 and 2004.
Comparison of 2004 Operating Results and 2003 Operating Results
The Company recorded net income of $74.3 million for the year ended December 31, 2004, an increase of
$2.4 million from $71.9 million for the year ended December 31, 2003. The increase in net income for the year is
primarily attributable to an $11.0 million improvement in operating income partially offset by an $8.9 million
increase in other income and expenses. Interest and other investment income in 2003 included $4.5 million of
interest income and a $3.4 million gain on the prepayment attributable to the Sunburst note receivable. As a
result of Sunburst’s prepayment, these items did not recur in 2004. Operating income increased as a result of a
$16.7 million increase in franchising revenues (total revenues excluding marketing and reservation revenues and
hotel operations) and a decrease in depreciation and amortization expense partially offset by an increase in
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