Comfort Inn 2007 Annual Report Download - page 42

2006 and 2005, the Company’ s balance sheet includes a receivable of $6.7 million and $13.2 million, respectively
resulting from cumulative marketing expenses incurred in excess of cumulative marketing fee revenues earned. These
receivables are 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. A
payable has been recorded in the Company’ s balance sheet within other long-term liabilities related to cumulative
reservation fee revenues received in excess of reservation fee expenses incurred totaling $8.4 million and $3.6 million at
December 31, 2006 and 2005, respectively. 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, Net: Other income and expenses, net, declined $1.7 million to an expense of $11.3
million for 2006 from $13.0 million for 2005. This decline resulted primarily from a reduction in interest expense from
$15.3 million to $14.1 million and a $0.9 million increase in interest income and the appreciation of investments held in
the non-qualified employee benefit plans. Interest expense declined due to lower outstanding borrowings on the
Company’ s variable rate debt offset by higher average interest rates. The Company’ s weighted average interest rate as of
December 31, 2006 was 6.6% compared to 6.0% as of December 31, 2005. The increase in investment income and
decline in interest expense was offset by a loss on extinguishment of debt of $0.3 million attributable to the refinancing of
our senior credit facility during the second quarter of 2006 and a $0.4 million gain on sale of investments in the third
quarter of 2005.
Income Taxes: The Company’ s effective income tax provision rate was 27.4% for 2006, compared to the effective
income tax provision rate of 33.0% for 2005. The effective income tax rate declined primarily due to the resolution of
provisions for income tax contingencies totaling approximately $12.8 million as well as an increase in the proportion of
foreign income earned over the prior year period, which is taxed at lower rates than statutory federal income tax rates. The
effective income tax rate for 2005 also includes additional tax expense of approximately $1.2 million related to the
Company’ s repatriation of foreign earnings and a reduction of income tax expense related to the resolution of certain tax
contingencies of approximately $4.9 million.
Net income for 2006 increased by 28.8% to $112.8 million, and diluted earnings per share increased 27% to $1.68
for 2006 from $1.32 reported for 2005.
Liquidity and Capital Resources
Net cash provided by operating activities declined $7.8 million to $146.1 million for the year ended December 31,
2007 from $153.9 million for the year ended December 31, 2006, respectively. The decline in cash flows from operating
activities primarily reflects timing of working capital items and lower cash repayments from marketing and reservation
activities compared to the prior year.
Net cash repayments related to marketing and reservation activities totaled $12.0 million during 2007 compared to
repayments of $19.0 million during the year ended December 31, 2006. The Company expects marketing and reservation
activities to be a use of cash between $1.0 million and $3.0 million in 2008.
Cash used in investing activities for the years ended December 31, 2007, 2006 and 2005 was $21.3 million, $17.3
million and $24.5 million, respectively. During 2005, investing cash flows included the payment of $7.3 million related to
the Company’ s acquisition of Suburban. As a lodging franchisor, the Company has relatively low capital expenditure
requirements. During the years ended December 31, 2007, 2006 and 2005, capital expenditures totaled $12.0 million, $7.7
million, and $11.5 million, respectively. Capital expenditures for 2007 primarily include leasehold improvements to the
Company’ s facilities as well as upgrades of system-wide property and yield management systems and the purchase of
computer equipment. In addition, the Company provides financing to franchisees for property improvements, hotel
development efforts and other purposes. During 2007, 2006 and 2005, the Company advanced $7.4 million, $2.4 million
and $2.7 million, respectively. At December 31, 2007, the Company had commitments to extend an additional $9.5
million in financing provided certain conditions are met by its franchisees of which $5.2 million is expected to be
advanced in 2008.
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