Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 _____________________________________________ 
FORM 10-Q
 _____________________________________________ 
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED March 31, 2013
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NO. 001-13393
 _____________________________________________ 
CHOICE HOTELS INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
_____________________________________________ 
DELAWARE
 
52-1209792
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
1 CHOICE HOTELS CIRCLE, SUITE 400
ROCKVILLE, MD 20850
(Address of principal executive offices)
(Zip Code)
(301) 592-5000
(Registrant’s telephone number, including area code)
 
10750 COLUMBIA PIKE
SILVER SPRING, MD. 20901
(Former name, former address and former fiscal year, if changed since last report)
_____________________________________________  
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.    Yes   x     No   o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months.    Yes   x      No   o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x
 
Accelerated filer
o
Non-accelerated filer
o
 
Smaller reporting company
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   o No   x

Table of Contents

CLASS
 
SHARES OUSTANDING AT MARCH 31, 2013
Common Stock, Par Value $0.01 per share
 
58,491,263
 
 
 
 
 
 

Table of Contents

CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX
 
 
 
 
PAGE NO.
 
 
 
 
 
 
 
 
 
 
 
 


3
Table of Contents

PART I. FINANCIAL INFORMATION
 
ITEM 1.
FINANCIAL STATEMENTS

CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
 
    
 
Three Months Ended
 
March 31,
 
2013
 
2012
REVENUES:
 
 
 
Royalty fees
$
49,736

 
$
47,853

Initial franchise and relicensing fees
3,777

 
2,528

Procurement services
3,950

 
3,315

Marketing and reservation
76,440

 
70,929

Hotel operations
956

 
978

Other
2,013

 
3,566

Total revenues
136,872

 
129,169

 
 
 

OPERATING EXPENSES:
 
 

Selling, general and administrative
26,916

 
24,349

Depreciation and amortization
2,175

 
2,017

Marketing and reservation
76,440

 
70,929

Hotel operations
875

 
809

Total operating expenses
106,406

 
98,104

 
 
 


Operating income
30,466

 
31,065

OTHER INCOME AND EXPENSES, NET:
 
 

Interest expense
10,770

 
3,117

Interest income
(644
)
 
(337
)
Other gains
(710
)
 
(2,003
)
Equity in net loss of affiliates
141

 
55

Total other income and expenses, net
9,557

 
832

Income before income taxes
20,909

 
30,233

Income taxes
5,386

 
10,236

Net income
$
15,523

 
$
19,997

 
 
 
 
Basic earnings per share
$
0.27

 
$
0.34

Diluted earnings per share
$
0.26

 
$
0.34

The accompanying notes are an integral part of these consolidated financial statements.


4
Table of Contents

CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED, IN THOUSANDS)
 
        
 
Three Months Ended
 
March 31,
 
2013
 
2012
Net income
$
15,523

 
$
19,997

Other comprehensive income (loss), net of tax:
 
 
 
Amortization of loss on cash flow hedge
215

 
215

Foreign currency translation adjustment, net
(232
)
 
412

Amortization of pension related costs, net of tax:
 
 
 
 Actuarial loss (net of income tax of $12 for the three months ended March 31, 2012)
—

 
20

Other comprehensive income (loss), net of tax
(17
)
 
647

Comprehensive income
$
15,506

 
$
20,644


The accompanying notes are an integral part of these consolidated financial statements.

5
Table of Contents


CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED, IN THOUSANDS, EXCEPT SHARE AMOUNTS)
 
March 31,
2013
 
December 31,
2012
ASSETS
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
140,225

 
$
134,177

Receivables (net of allowance for doubtful accounts of $11,298 and $10,820, respectively)
54,202

 
52,270

Income taxes receivable
—

 
2,732

Deferred income taxes
4,136

 
4,136

Investments, employee benefit plans, at fair value
378

 
3,486

Other current assets
40,832

 
36,669

Total current assets
239,773

 
233,470

Property and equipment, at cost, net
71,289

 
51,651

Goodwill
65,813

 
65,813

Franchise rights and other identifiable intangibles, net
12,550

 
13,473

Receivable – marketing and reservation fees
51,297

 
42,179

Investments, employee benefit plans, at fair value
13,933

 
12,755

Deferred income taxes
14,969

 
15,418

Other assets
76,349

 
76,013

Total assets
$
545,973

 
$
510,772

LIABILITIES AND SHAREHOLDERS’ DEFICIT
 
 
 
Current liabilities
 
 
 
Accounts payable
$
59,429

 
$
38,714

Accrued expenses
35,134

 
55,552

Deferred revenue
76,316

 
71,154

Deferred compensation and retirement plan obligations
2,361

 
2,522

Current portion of long-term debt
8,201

 
8,195

Income taxes payable
1,550

 
—

Total current liabilities
182,991

 
176,137

Long-term debt
863,114

 
847,150

Deferred compensation and retirement plan obligations
19,940

 
20,399

Other liabilities
19,257

 
15,990

Total liabilities
1,085,302

 
1,059,676

Commitments and Contingencies


 


SHAREHOLDERS’ DEFICIT
 
 
 
Common stock, $0.01 par value, 160,000,000 shares authorized; 95,345,362 shares issued at March 31, 2013 and December 31, 2012 and 58,491,263 and 58,171,059 shares outstanding at March 31, 2013 and December 31, 2012, respectively
585

 
582

Additional paid-in-capital
108,995

 
110,246

Accumulated other comprehensive loss
(4,233
)
 
(4,216
)
Treasury stock (36,854,099 and 37,174,303 shares at March 31, 2013 and December 31, 2012, respectively), at cost
(921,421
)
 
(927,776
)
Retained earnings
276,745

 
272,260

Total shareholders’ deficit
(539,329
)
 
(548,904
)
Total liabilities and shareholders’ deficit
$
545,973

 
$
510,772

The accompanying notes are an integral part of these consolidated financial statements.

6
Table of Contents

CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
 
Three Months Ended
 
March 31,
 
2013
 
2012
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
15,523

 
$
19,997

Adjustments to reconcile net income to net cash provided by operating activities:
 
 

Depreciation and amortization
2,175

 
2,017

Provision for bad debts, net
844

 
679

Non-cash stock compensation and other charges
2,549

 
2,543

Non-cash interest and other (income) loss
76

 
(1,593
)
Deferred income taxes
446

 
(30
)
Dividends received from equity method investments
146

 
—

Equity in net loss of affiliates
141

 
55

Changes in assets and liabilities:
 
 
 
Receivables
(3,531
)
 
(870
)
Receivable – marketing and reservation fees, net
(4,101
)
 
(6,187
)
Accounts payable
10,471

 
6,712

Accrued expenses
(31,145
)
 
(25,342
)
Income taxes payable/receivable
4,367

 
8,180

Deferred revenue
5,160

 
1,997

Other assets
(3,869
)
 
(2,611
)
Other liabilities
2,622

 
(1,135
)
Net cash provided by operating activities
1,874

 
4,412

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 

Investment in property and equipment
(13,645
)
 
(3,129
)
Equity method investments
(1,000
)
 
(2,600
)
Issuance of notes receivable
(1,729
)
 
(3,719
)
Collections of notes receivable
19

 
151

Purchases of investments, employee benefit plans
(1,242
)
 
(743
)
Proceeds from sales of investments, employee benefit plans
3,882

 
8,652

Other items, net
(101
)
 
(108
)
Net cash used in investing activities
(13,816
)
 
(1,496
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 

Net borrowings pursuant to revolving credit facilities
18,000

 
5,900

Principal payments on long-term debt
(2,046
)
 
(166
)
Purchase of treasury stock
(3,634
)
 
(14,854
)
Dividends paid
(503
)
 
(10,713
)
Excess tax benefits from stock-based compensation
952

 
422

Proceeds from exercise of stock options
5,367

 
389

Net cash provided by (used) in financing activities
18,136

 
(19,022
)
Net change in cash and cash equivalents
6,194

 
(16,106
)
Effect of foreign exchange rate changes on cash and cash equivalents
(146
)
 
361

Cash and cash equivalents at beginning of period
134,177

 
107,057

Cash and cash equivalents at end of period
$
140,225

 
$
91,312

Supplemental disclosure of cash flow information:
 
 
 
Cash payments during the period for:
 
 
 
Income taxes, net of refunds
$
1,029

 
$
1,746

Interest
$
20,400

 
$
7,388

Non-cash investing and financing activities:
 
 
 
Dividends declared but not paid
$
10,759

 
$
10,690

Issuance of restricted shares of common stock
$
7,151

 
$
8,497

Issuance of performance vested restricted stock units
$
1,298

 
$
—

Investment in property and equipment
$
10,356

 
$
—

The accompanying notes are an integral part of these consolidated financial statements.

7
Table of Contents

CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1.
Company Information and Significant Accounting Policies
The accompanying unaudited consolidated financial statements of Choice Hotels International, Inc. and subsidiaries (together the “Company”) have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). These unaudited consolidated financial statements include all adjustments that are necessary, in the opinion of management, to fairly present our financial position and results of operations. Except as otherwise disclosed, all adjustments are of a normal recurring nature.
Certain information and footnote disclosures normally included in financial statements presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been omitted. The year-end balance sheet information was derived from audited financial statements, but does not include all disclosures required by GAAP. The Company believes the disclosures made are adequate to make the information presented not misleading.
The consolidated financial statements should be read in conjunction with the consolidated financial statements for the year ended December 31, 2012 and notes thereto included in the Company’s Form 10-K, filed with the SEC on February 28, 2013(the “10-K”). Interim results are not necessarily indicative of the entire year results because of seasonal variations. All inter-company transactions and balances between Choice Hotels International, Inc. and its subsidiaries have been eliminated in consolidation.
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with a maturity of three months or less at the date of purchase to be cash equivalents. As of March 31, 2013 and December 31, 2012 , $3.1 million and $5.0 million respectively, of book overdrafts representing outstanding checks in excess of funds on deposit are included in accounts payable in the accompanying consolidated balance sheets.
The Company maintains cash balances in domestic banks, which at times, may exceed the limits of amounts insured by the Federal Deposit Insurance Corporation. In addition, the Company also maintains cash balances in international banks which do not provide deposit insurance.
Recently Adopted Accounting Guidance
In February 2013, the Financial Accounting Standards Board issued Accounting Standards Update ("ASU") No. 2013-02, "Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income" (“ASU 2013-02”). This update requires companies to present either in a single note or parenthetically on the face of the financial statements, the effect of significant amounts reclassified from each component of accumulated other comprehensive income based on its source and the income statement line items affected by the reclassification. If a component is not required to be reclassified to net income in its entirety companies would instead cross reference to the related footnote for additional information. ASU 2013-02 became effective for interim and annual periods beginning after December 15, 2012 and the Company has adopted this ASU during the current quarter. The Company has elected to present the required disclosures in a single note rather than on the face of the financial statement. See Note 8 for additional information.

Future Adoption of Recently Announced Accounting Guidance
In February 2013, the FASB issued ASU No. 2013-04, “Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date” (“ASU 2013-04”). The ASU requires entities to measure obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this guidance is fixed at the reporting date, as the sum of the following: (a) The amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and (b) any additional amount the reporting entity expects to pay on behalf of its co-obligors. Required disclosures include a description of the joint-and-several arrangement and the total outstanding amount of the obligation for all joint parties. The ASU permits entities to aggregate disclosures (as opposed to providing separate disclosures for each joint-and-several obligation). ASU 2013-04 is effective for all interim and annual

8

periods beginning after December 15, 2013. The ASU should be applied retrospectively to obligations with joint-and-several liabilities existing at the beginning of an entity's fiscal year of adoption. Early adoption is permitted. The Company is currently evaluating the impact the adoption of this statement will have on its financial statement presentation, if any, and will adopt the provision of this ASU on January 1, 2014.

In March 2013, the FASB issued ASU No. 2013-05, “Parent's Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity” (“ASU 2013-05”). ASU 2013-05 clarifies that when a reporting entity ceases to have a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business within a foreign entity, the parent is required to apply the guidance in Accounting Standards Codification 830 "Foreign Currency Matters" Subtopic 830-30 to release any related cumulative translation adjustment into net income. Accordingly, the cumulative translation adjustment should be released into net income only if the sale or transfer results in the complete or substantially complete liquidation of the foreign entity in which the subsidiary or group of assets had resided. The amendments ASU 2013-05 are effective prospectively for reporting periods beginning after December 15, 2013. The Company does not currently believe that the adoption of this update will have a material impact on its financial statements and will adopt the provisions of this ASU on January 1, 2014.

2.
Other Current Assets
Other current assets consist of the following:
 
March 31, 2013
 
December 31, 2012
 
(In thousands)
Notes receivable (See Note 3)
$
14,923

 
$
14,415

Prepaid expenses
13,864

 
10,694

Land held for sale
8,798

 
8,541

Other current assets
3,247

 
3,019

Total
$
40,832

 
$
36,669

Land held for sale represents the Company’s purchase of various parcels of real estate as part of its program to incent franchise development in strategic markets for certain brands. The Company has acquired this real estate with the intent to resell it to third-party developers for the construction of hotels operated under the Company’s brands. The real estate is accounted for as assets held for sale and therefore is carried at the lower of its carrying value or its estimated fair value (based on comparable sales), less estimated costs to sell.

3.
Notes Receivable and Allowance for Losses
The Company segregates its notes receivable for the purposes of evaluating allowances for credit losses between two categories: Mezzanine and Other Notes Receivable and Forgivable Notes Receivable . The Company utilizes the level of security it has in the various notes receivable as its primary credit quality indicator (i.e. senior, subordinated or unsecured) when determining the appropriate allowances for uncollectible loans within these categories.

9

The following table shows the composition of our notes receivable balances:
 
March 31, 2013
 
December 31, 2012
 
($ in thousands)
 
($ in thousands)
Credit Quality Indicator
Forgivable
Notes
Receivable

Mezzanine
& Other
Notes
Receivable

Total
 
Forgivable
Notes
Receivable

Mezzanine
& Other
Notes
Receivable

Total
Senior
$
—

 
$
27,842

 
$
27,842

 
$
—

 
$
27,549

 
$
27,549

Subordinated
—

 
15,020

 
15,020

 
—

 
15,019

 
15,019

Unsecured
16,950

 
1,822

 
18,772

 
16,235

 
1,265

 
17,500

Total notes receivable
16,950

 
44,684

 
61,634

 
16,235

 
43,833

 
60,068

Allowance for losses on non-impaired loans
1,695

 
1,303

 
2,998

 
1,623

 
638

 
2,261

Allowance for losses on receivables specifically evaluated for impairment
—

 
8,288

 
8,288

 
—

 
8,289

 
8,289

Total loan reserves
1,695

 
9,591

 
11,286

 
1,623

 
8,927

 
10,550

Net carrying value
$
15,255

 
$
35,093

 
$
50,348

 
$
14,612

 
$
34,906

 
$
49,518

Current portion, net
$
561

 
$
14,362

 
$
14,923

 
$
420

 
$
13,995

 
$
14,415

Long-term portion, net
14,694

 
20,731

 
35,425

 
14,192

 
20,911

 
35,103

Total
$
15,255

 
$
35,093

 
$
50,348

 
$
14,612

 
$
34,906

 
$
49,518

 
 
 
 
 
 
 
 
 
 
 
 

The Company classifies notes receivable due within one year as other current assets and notes receivable with a maturity greater than one year as other assets in the Company’s consolidated balance sheets.
The following table summarizes the activity related to the Company’s Forgivable Notes Receivable and Mezzanine and Other Notes Receivable allowance for losses from December 31, 2012 through March 31, 2013 :
 
Forgivable
Notes
Receivable
 
Mezzanine
& Other  Notes
Receivable
 
(In thousands)
Balance, December 31, 2012
$
1,623

 
$
8,927

Provisions
165

 
664

Recoveries
—

 
—

Write-offs
(6
)
 
—

Other (1)
(87
)
 
—

Balance, March 31, 2013
$
1,695

 
$
9,591

 
(1) Consists of default rate assumption changes
Forgivable Notes Receivable
As of March 31, 2013 and December 31, 2012 , the unamortized balance of the Company's forgivable notes receivable totaled $17.0 million and $16.2 million , respectively. The Company recorded an allowance for credit losses on these forgivable notes receivable of $1.7 million and $1.6 million at March 31, 2013 and December 31, 2012 , respectively. At March 31, 2013 and December 31, 2012 , the Company did not have any forgivable unsecured notes that were past due. Amortization expense included in the accompanying consolidated statements of income related to the notes for the three months ended March 31, 2013 and 2012 was $0.9 million and $0.6 million , respectively.

10

Mezzanine and Other Notes Receivable
The Company has determined that approximately $13.3 million of its mezzanine and other notes receivable were impaired at both March 31, 2013 and December 31, 2012 , respectively. The Company has recorded allowance for credit losses on these impaired loans at both March 31, 2013 and December 31, 2012 totaling $8.3 million resulting in a carrying value of impaired loans of $5.0 million for both periods which we had no related allowance for credit losses. The Company recognized approximately $66 thousand and $31 thousand of interest income on impaired loans during the three months ended March 31, 2013 and 2012 , respectively on the cash basis. The Company had provided loan reserves on non-impaired loans totaling $1.3 million and $0.6 million at March 31, 2013 and December 31, 2012 , respectively.
Past due balances of mezzanine and other notes receivable by credit quality indicators are as follows:
 
30-89 days
Past Due
 
> 90 days
Past Due
 
Total
Past Due
 
Current
 
Total
Receivables
 
($ in thousands)
As of March 31, 2013
 
 
 
 
 
 
 
 
 
Senior
$
—

 
$
—

 
$
—

 
$
27,842

 
$
27,842

Subordinated
162

 
9,629

 
9,791

 
5,229

 
15,020

Unsecured
—

 
47

 
47

 
1,775

 
1,822

 
$
162

 
$
9,676

 
$
9,838

 
$
34,846

 
$
44,684

As of December 31, 2012
 
 
 
 
 
 
 
 
 
Senior
$
—

 
$
—

 
$
—

 
$
27,549

 
$
27,549

Subordinated
619

 
9,629

 
10,248

 
4,771

 
15,019

Unsecured
—

 
47

 
47

 
1,218

 
1,265

 
$
619

 
$
9,676

 
$
10,295

 
$
33,538

 
$
43,833


Loans Acquired with Deteriorated Credit Quality
On December 2, 2011, the Company acquired an $11.5 million mortgage, held on a franchisee hotel asset, from a financial institution for $7.9 million . At the time of acquisition, the Company determined that it would be unable to collect all contractually required payments under the original mortgage terms. The contractually required payments receivable, including principal and interest, under the terms of the acquired mortgage totaled $12.0 million . The Company expects to collect $9.7 million of these contractually required payments. No prepayments were considered in the determination of contractual cash flows and cash flows expected to be collected. At both March 31, 2013 and December 31, 2012 , the carrying amount of this loan, which is reported under senior mezzanine and other notes receivables, was $7.9 million and there was no allowance for uncollectable amounts. The Company's accretable yield at acquisition was $1.8 million or 7.36% and a reconciliation of the accretable yield for the three months ended March 31, 2013 is as follows:
 
 
Accretable Yield ($ in thousands)
Balance, December 31, 2012
 
$
1,161

Additions
 
—

Accretion
 
(141
)
Disposals
 
—

Reclassifications from nonaccretable yield
 
—

Balance, March 31, 2013
 
$
1,020

4.
Receivable – Marketing and Reservation Fees
The marketing fees receivable from cumulative marketing expenses incurred in excess of cumulative marketing fees earned at March 31, 2013 and December 31, 2012 was $11.5 million and $7.9 million , respectively. As of March 31, 2013 and December 31, 2012 , the reservation fees receivable related to cumulative reservation expenses incurred in excess of cumulative reservation fees earned was $39.8 million and $34.2 million , respectively. Depreciation and amortization expense attributable to marketing and reservation activities for the three months ended March 31, 2013 and 2012 was $4.0 million and $3.5 million , respectively. Interest expense attributable to marketing and reservation activities was $0.9 million and $1.2 million for the three months ended March 31, 2013 and 2012 , respectively.

11

The Company evaluates the receivable for marketing and reservation costs in excess of cumulative marketing and reservation system revenues earned on a periodic basis for collectibility. The Company will record an allowance when, based on current information and events, it is probable that it will be unable to collect all amounts due for marketing and reservation activities according to the contractual terms of the franchise agreements. The receivables are considered to be uncollectible if the expected net, undiscounted cash flows from marketing and reservation activities are less than the carrying amount of the asset. Based on the Company's analysis of projected net cash flows from marketing and reservation activities for all periods presented, the Company concluded that the receivable for marketing and reservation activities was fully collectible and as a result no allowance for possible losses was recorded.

5.
Other Assets
Other assets consist of the following:
 
March 31, 2013
 
December 31, 2012
 
(In thousands)
Notes receivable (see Note 3)
$
35,425

 
$
35,103

Equity method investments
28,140

 
27,453

Deferred financing fees
10,619

 
11,174

Land held for sale
1,300

 
1,300

Other assets
865

 
983

Total
$
76,349

 
$
76,013


Variable Interest Entities

Equity method investments include investments in joint ventures totaling $24.2 million and $24.3 million at March 31, 2013 and December 31, 2012 , respectively that the Company has determined to be variable interest entities. These investments relate to the Company's program to offer equity support to qualified franchisees to develop and operate Cambria Suites hotels in strategic markets. Based on an analysis of who has the power to direct the activities that most significantly impact these entities performance and who has an obligation to absorb losses of these entities or a right to receive benefits from these entities that could potentially be significant to the entity, the Company has determined that it is not the primary beneficiary of any of its joint venture investments. We based our quantitative analysis on the forecasted cash flows of the entity and our qualitative analysis on our review of the design of the entity, its organizational structure including decision-making ability and the relevant development, operating management and financial agreements. As a result, the Company's investment in these entities is accounted for under the equity method. For the three months ended March 31, 2013 , the Company recognized losses totaling $0.1 million . No income or losses were recognized related to these investments during the three months ended March 31, 2012 .

6.
Deferred Revenue
Deferred revenue consists of the following:
 
March 31,
2013
 
December 31,
2012
 
(In thousands)
Loyalty programs
$
63,101

 
$
64,636

Initial, relicensing and franchise fees
4,366

 
4,994

Procurement service fees
3,743

 
1,225

Other
5,106

 
299

Total
$
76,316

 
$
71,154


12


7.
Debt
Debt consists of the following at:
 
March 31, 2013
 
December 31, 2012
 
(In thousands)
$400 million senior unsecured notes with an effective interest rate of 5.94% at March 31, 2013 and December 31, 2012
$
400,000

 
$
400,000

$250 million senior unsecured notes with an effective interest rate of 6.19% less discount of $0.5 million at March 31, 2013 and December 31, 2012
249,524

 
249,508

$350 million senior secured credit facility with an effective interest rate of 2.59% and 2.66% at March 31, 2013 and December 31, 2012, respectively
219,375

 
203,250

Capital lease obligations due 2016 with an effective interest rate of 3.18% at March 31, 2013 and December 31, 2012
2,352

 
2,519

Other notes payable
64

 
68

Total debt
$
871,315

 
$
855,345

Less current portion
8,201

 
8,195

Total long-term debt
$
863,114

 
$
847,150

Senior Unsecured Notes Due 2022
On June 27, 2012 , the Company issued unsecured notes in the principal amount of $400 million ("the 2012 Senior Notes") at par, bearing a coupon of 5.75% with an effective rate of 5.94% . The 2012 Senior Notes will mature on July 1, 2022 , with interest to be paid semi-annually on January 1st and July 1st. The Company used the net proceeds of this offering, after deducting underwriting discounts and commissions and other offering expenses, together with a portion of the proceeds from a new credit facility, to pay a special cash dividend totaling approximately $600.7 million paid to shareholders on August 23, 2012. The Company's 2012 Senior Notes are guaranteed jointly, severally, fully and unconditionally, subject to certain customary limitations by eight 100% -owned domestic subsidiaries.
Senior Unsecured Notes Due 2020
On August 25, 2010 , the Company issued unsecured senior notes in the principal amount of $250 million (“the 2010 Senior Notes”) at a discount of $0.6 million , bearing a coupon of 5.7% with an effective rate of 6.19% . The 2010 Senior Notes will mature on August 28, 2020 , with interest to be paid semi-annually on February 28 th and August 28 th . The Company used the net proceeds from the offering, after deducting underwriting discounts and other offering expenses, to repay outstanding borrowings and for other general corporate purposes. The Company's 2010 Senior Notes are guaranteed jointly, severally, fully and unconditionally, subject to certain customary limitations by eight 100% -owned domestic subsidiaries.
Revolving Credit Facilities
On July 25, 2012 , the Company entered into a $350 million senior secured credit facility, comprised of a $200 million revolving credit tranche (the "New Revolver") and a $150 million term loan tranche (the "Term Loan") with Deutsche Bank AG New York Branch, as administrative agent, Wells Fargo Bank, National Association, as administrative agent and a syndication of lenders (the "New Credit Facility"). The New Credit Facility has a final maturity date of July 25, 2016 , subject to an optional one-year extension provided certain conditions are met. Up to $25 million of the borrowings under the New Revolver may be used for letters of credit, up to $10 million of borrowings under the New Revolver may be used for swing-line loans and up to $35 million of borrowings under the New Revolver may be used for alternative currency loans. The Term Loan requires quarterly amortization payments (a) during the first two years, in equal installments aggregating 5% of the original principal amount of the Term Loan per year, (b) during the second two years, in equal installments aggregating 7.5% of the original principal amount of the Term Loan per year, and (c) during the one-year extension period (if exercised), equal installments aggregating 10% of the original principal amount of the Term Loan.

The Company utilized the proceeds from the Term Loan and borrowings from the New Revolver, together with the net proceeds from the Company's 2012 Senior Notes, to pay a special cash dividend of approximately $600.7 million in the aggregate to the Company's stockholders on August 23, 2012 .


13

The New Credit Facility is unconditionally guaranteed, jointly and severally, by certain of the Company's domestic subsidiaries. The subsidiary guarantors currently include all subsidiaries that guarantee the obligations under the Company's Indenture governing the terms of its 2010 and 2012 Senior Notes.
The New Credit Facility is secured by first priority pledges of (i) 100% of the ownership interests in certain domestic subsidiaries owned by the Company and the guarantors, (ii) 65% of the ownership interests in (a) Choice Netherlands Antilles N.V. (“ Choice NV ”), the top-tier foreign holding company of the Company's foreign subsidiaries, and (b) the domestic subsidiary that owns Choice NV and (iii) all presently existing and future domestic franchise agreements (the “ Franchise Agreements ”) between the Company and individual franchisees, but only to the extent that the Franchise Agreements may be pledged without violating any law of the relevant jurisdiction or conflicting with any existing contractual obligation of the Company or the applicable franchisee. At the time that the maximum total leverage ratio is required to be no greater than 4.0 to 1.0 (beginning of year 4 of the New Credit Facility), the security interest in the Franchise Agreements will be released.
The Company may at any time prior to the final maturity date increase the amount of the New Credit Facility by up to an additional $100 million to the extent that any one or more lenders commit to being a lender for the additional amount and certain other customary conditions are met. Such additional amounts may take the form of an increased Revolver or Term Loan.
The Company may elect to have borrowings under the New Credit Facility bear interest at a rate equal to (i)  LIBOR , plus a margin ranging from 200 to 425 basis points based on the Company's total leverage ratio or (ii) a base rate plus a margin ranging from 100 to 325 basis points based on the Company's total leverage ratio.
The New Credit Facility requires the Company to pay a fee on the undrawn portion of the New Revolver, calculated on the basis of the average daily unused amount of the New Revolver multiplied by 0.30% per annum.
The Company may reduce the New Revolver commitment and/or prepay the Term Loan in whole or in part at any time without penalty, subject to reimbursement of customary breakage costs, if any. Any Term Loan prepayments made by the Company shall be applied to reduce the scheduled amortization payments in direct order of maturity.
Additionally, the New Credit Facility requires that the Company and its restricted subsidiaries comply with various covenants, including with respect to restrictions on liens, incurring indebtedness, making investments, paying dividends or repurchasing stock, and effecting mergers and/or asset sales. With respect to dividends, the Company may not make any payment if there is an existing event of default or if the payment would create an event of default. In addition, if the Company's total leverage ratio exceeds 4.50 to 1.00, the Company is generally restricted from paying aggregate dividends in excess of $50.0 million during any calendar year.
The New Credit Facility also imposes financial maintenance covenants requiring the Company to maintain:
•
a total leverage ratio of not more than 5.75 to 1.00 in year 1, 5.00 to 1.00 in year 2, 4.50 to 1.00 in year 3 and 4.00 to 1.00 thereafter,
•
a maximum secured leverage ratio of not more than 2.50 to 1.00 in year 1, 2.25 to 1.00 in year 2, 2.00 to 1.00 in year 3 and 1.75 to 1.00 thereafter, and
•
a minimum fixed charge coverage ratio of not less than 2.00 to 1.00 in years 1 and 2, 2.25 to 1.00 in year 3 and 2.50 to 1.00 thereafter.
The New Credit Facility includes customary events of default, the occurrence of which, following any applicable cure period, would permit the lenders to, among other things, declare the principal, accrued interest and other obligations of the Company under the New Credit Facility to be immediately due and payable. At March 31, 2013 , the Company was in compliance with all covenants under the New Credit Facility.
At March 31, 2013 , the Company had $144.4 million and $75.0 million outstanding under the Term Loan and New Revolver, respectively. At December 31, 2012, the Company had $146.3 million and $57.0 million outstanding under the Term Loan and New Revolver, respectively.
In connection with the entering into the New Credit Facility, the Company's $300 million senior unsecured revolving credit agreement, dated as of February 24, 2011, among the Company, Wells Fargo Bank, National Association, as administrative agent, and a syndicate of lenders (the “ Old Credit Facility ”), was terminated and replaced by the New Credit Facility. Borrowings under the Old Credit Facility bore interest at (i) a base rate plus a margin ranging from 5 to 80 basis points based on the Company's credit rating or (ii) LIBOR plus a margin ranging from 105 to 180 basis points based on the Company's credit rating. In addition, the Old Credit Facility required the Company to pay a quarterly facility fee on the full amount of the commitments under the Old Credit Facility (regardless of usage) ranging from 20 to 45 basis points based upon the credit rating of the Company.

14


8.
Accumulated Other Comprehensive Income (Loss)

The following represents the changes in accumulated other comprehensive loss, net of tax by component for the three months ended March 31, 2013 :

 
Loss on Cash Flow Hedge
 
Foreign Currency Items
 
Total
 
($ in thousands)
Balance, December 31, 2012
$
(6,607
)
 
$
2,391

 
$
(4,216
)
Other comprehensive income (loss) before reclassification
—

 
(232
)
 
(232
)
Amounts reclassified from accumulated other comprehensive income (loss)
215

 
—

 
215

Net current period other comprehensive income (loss)
215

 
(232
)
 
(17
)
Balance, March 31, 2013
$
(6,392
)
 
$
2,159

 
$
(4,233
)

The amounts reclassified from other accumulated other comprehensive income (loss) during the three months ended March 31, 2013 were reclassified to the following line items in the Company's Consolidated Statement of Income.
Component
Amount Reclassified from Accumulated Other Comprehensive Income(Loss)
 
Affected Line Item in the Consolidated Statement of Net Income
Loss on cash flow hedge
 
 
 
Interest rate contract
$
215

 
Interest expense
 
—

 
Tax (expense) benefit
 
$
215

 
Net of tax



9.
Non-Qualified Retirement, Savings and Investment Plans
The Company sponsors two non-qualified retirement savings and investment plans for certain employees and senior executives. Employee and Company contributions are maintained in separate irrevocable trusts. Legally, the assets of the trusts remain those of the Company; however, access to the trusts' assets is severely restricted. The trusts' cannot be revoked by the Company or an acquirer, but the assets are subject to the claims of the Company's general creditors. The participants do not have the right to assign or transfer contractual rights in the trusts.
In 2002, the Company adopted the Choice Hotels International, Inc. Executive Deferred Compensation Plan (“EDCP”) which became effective January 1, 2003. Under the EDCP, certain executive officers may defer a portion of their salary into an irrevocable trust. Prior to January 1, 2010, participants could elect an investment return of either the annual yield of the Moody's Average Corporate Bond Rate Yield Index plus 300 basis points, or a return based on a selection of available diversified investment options. Effective January 1, 2010, the Moody's Average Corporate Bond Rate Yield Index plus 300 basis points is no longer an investment option for salary deferrals made on compensation earned after December 31, 2009. The Company recorded current and long-term deferred compensation liabilities of $10.1 million and $11.7 million , as of March 31, 2013 and December 31, 2012 , respectively, related to these deferrals and credited investment returns. Compensation expense is recorded in SG&A expense on the Company's consolidated statements of income based on the change in the deferred compensation obligation related to earnings credited to participants as well as changes in the fair value of diversified investments. Compensation expense recorded in SG&A for the three months ended March 31, 2013 and 2012 was $0.3 million and $0.4 million , respectively. In addition, the EDCP Plan held shares of the Company's common stock with a market value of $0.2 million and $0.1 million at March 31, 2013 and December 31, 2012 , respectively which were recorded as a component of shareholders' deficit.
The Company has invested the employee salary deferrals in diversified long-term investments which are intended to provide investment returns that partially offset the earnings credited to the participants. The diversified investments held in the trusts

15

totaled $3.4 million and $6.0 million as of March 31, 2013 and December 31, 2012 , respectively, and are recorded at their fair value, based on quoted market prices. At March 31, 2013 , the Company expects $0.4 million of the assets held in the trusts to be distributed to participants during the next twelve months. These investments are considered trading securities and therefore the changes in the fair value of the diversified assets is included in other gains and losses in the accompanying consolidated statements of income. The Company recorded investment gains during the three months ended March 31, 2013 and 2012 of approximately $0.1 million and $1.1 million , respectively.
In 1997, the Company adopted the Choice Hotels International, Inc. Non-Qualified Retirement Savings and Investment Plan (“Non-Qualified Plan”). The Non-Qualified Plan allows certain employees who do not participate in the EDCP to defer a portion of their salary and invest these amounts in a selection of available diversified investment options. As of March 31, 2013 and December 31, 2012 , the Company had recorded a deferred compensation liability of $12.2 million and $11.2 million , respectively, related to these deferrals. Compensation expense is recorded in SG&A expense on the Company's consolidated statements of income based on the change in the deferred compensation obligation related to earnings credited to participants as well as changes in the fair value of diversified investments. The net increase in compensation expense recorded in SG&A for the three months ended March 31, 2013 and 2012 was $0.8 million and 0.9 million , respectively.
The diversified investments held in the trusts were $10.9 million and $10.2 million as of March 31, 2013 and December 31, 2012 , respectively, and are recorded at their fair value, based on quoted market prices. These investments are considered trading securities and therefore the changes in the fair value of the diversified assets is included in other gains and losses in the accompanying consolidated statements of income. The Company recorded investment gains during the three months ended March 31, 2013 and 2012 of approximately $0.6 million and $0.9 million , respectively. In addition, the Non-Qualified Plan held shares of the Company's common stock with a market value of $1.2 million and $1.0 million at March 31, 2013 and December 31, 2012 , respectively, which are recorded as a component of shareholders' deficit.

10.
Fair Value Measurements
The Company estimates the fair value of its financial instruments utilizing a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. The following summarizes the three levels of inputs, as well as the assets that the Company values using those levels of inputs.
Level 1 : Quoted prices in active markets for identical assets and liabilities. The Company’s Level 1 assets consist of marketable securities (primarily mutual funds) held in the Company’s EDCP and Non-Qualified Plan deferred compensation plans.
Level 2 : Observable inputs, other than quoted prices in active markets for identical assets and liabilities, such as quoted prices for similar assets and liabilities; quoted prices in markets that are not active; or other inputs that are observable. The Company’s Level 2 assets consist of money market funds held in the Company’s EDCP and Non-Qualified Plan deferred compensation plans and those recorded in cash and cash equivalents.
Level 3 : Unobservable inputs, supported by little or no market data available, where the reporting entity is required to develop its own assumptions to determine the fair value of the instrument. The Company does not currently have any assets whose fair value was determined using Level 3 inputs.
 

16

As of March 31, 2013 and December 31, 2012 , the Company had the following assets measured at fair value on a recurring basis:
 
Fair Value Measurements at
Reporting Date Using
 
Total
 
Level 1
 
Level 2
 
Level 3
Assets (in thousands)
 
 
 
 
 
 
 
As of March 31, 2013
 
 
 
 
 
 
 
Money market funds, included in cash and cash equivalents
$
50,001

 
$
—

 
$
50,001

 
$
—

Mutual funds (1)
13,260

 
13,260

 
—

 
—

Money market funds (1)
1,051

 
—

 
1,051

 
—

 
$
64,312

 
$
13,260

 
$
51,052

 
$
—

As of December 31, 2012
 
 
 
 
 
 
 
Money market funds, included in cash and cash equivalents
$
20,001

 
$
—

 
$
20,001

 
$
—

Mutual funds (1)
11,884

 
11,884

 
—

 
—

Money market funds (1)
4,357

 
—

 
4,357

 
—

 
$
36,242

 
$
11,884

 
$
24,358

 
$
—

________________________ 
(1)
Included in Investments, employee benefit plans fair value on the consolidated balance sheets.
The Company's policy is to recognize transfers in and transfers out of the three levels of the fair value hierarchy as of the end of each quarterly reporting period. There were no transfers between Level 1 and 2 assets during the three months ended March 31, 2013 .
Other Financial Instruments
The Company believes that the fair value of its current assets and current liabilities approximate their reported carrying amounts due to the short-term nature of these items. In addition, the interest rates of the Company's New Credit Facility adjust frequently based on current market rates; accordingly its carrying amount approximates fair value.
The Company estimates the fair value of notes receivable which approximate their carrying value, utilizing an analysis of future cash flows and credit worthiness for similar types of arrangements. Based upon the availability of market data, we have classified these notes receivables as Level 3 inputs. The primary sensitivity in these calculations is based on the selection of appropriate interest and discount rates. For further information on the notes receivables see Note 3.
The Company estimates the fair value of the Company's $250 million and $400 million senior notes using quoted market prices, which are directly observable Level 1 inputs. At March 31, 2013 and December 31, 2012 , the $250 million senior notes had an approximate fair value of $276.9 million and $271.6 million , respectively. At March 31, 2013 and December 31, 2012 , the $400 million senior notes had an approximate fair value of $444.0 million and $442.0 million , respectively.

Fair values estimated are made at a specific point in time, are subjective in nature and involve uncertainties and matters of significant judgment.  Settlement of such fair value amounts may not be possible and may not be a prudent management decision.

11.
Income Taxes
The effective income tax rates were 25.8% and 33.9% for the three months ended March 31, 2013 and 2012 , respectively.
The effective income tax rate for the three months ended March 31, 2013 and 2012 were lower than the U.S federal income tax rate of 35% due to the impact of foreign operations, partially offset by state taxes. The effective income tax rate for the three months ended March 31, 2013 was further reduced by settlements of unrecognized tax positions and by legislation retroactively extending the U.S. controlled foreign corporation look-through rule.

17

12.
Share-Based Compensation and Capital Stock
Stock Options
The Company granted 0.2 million and 0.2 million options to certain employees of the Company at a fair value of $1.7 million and $1.6 million for the three months ended March 31, 2013 and 2012 , respectively. The stock options granted by the Company had an exercise price equal to the market price of the Company's common stock on the date of grant. The fair value of the options granted was estimated on the grant date using the Black-Scholes option-pricing model with the following weighted average assumptions:
        
 
2013 Grants
 
2012 Grants
Risk-free interest rate
0.73
%
 
0.78
%
Expected volatility
38.14
%
 
40.15
%
Expected life of stock option
4.5 years

 
4.4 years

Dividend yield
2.01
%
 
2.08
%
Requisite service period
4 years

 
4 years

Contractual life
7 years

 
7 years

Weighted average fair value of options granted
$
9.89

 
$
9.98

The expected life of the options and volatility are based on historical data and are not necessarily indicative of exercise patterns or actual volatility that may occur. Historical volatility is calculated based on a period that corresponds to the expected life of the stock option. The dividend yield and the risk-free rate of return are calculated on the grant date based on the then current dividend rate and the risk-free rate of return for the period corresponding to the expected life of the stock option. Compensation expense related to the fair value of these awards is recognized straight-line over the requisite service period based on those awards that ultimately vest.
The aggregate intrinsic value of the stock options outstanding and exercisable at March 31, 2013 was $29.2 million and $23.3 million , respectively. The total intrinsic value of options exercised during the three months ended March 31, 2013 and 2012 was approximately $2.3 million and $0.4 million , respectively.

The Company received approximately $5.4 million and $0.4 million in proceeds from the exercise of 204,323 and 20,216  employee stock options during the three month periods ended March 31, 2013 and 2012 , respectively.

Restricted Stock
The following table is a summary of activity related to restricted stock grants:  
 
Three Months Ended
 
March 31,
 
2013
 
2012
Restricted share grants
194,541

 
238,019

Weighted average grant date fair value per share
$
36.76

 
$
35.70

Aggregate grant date fair value ($000)
$
7,151

 
$
8,497

Restricted shares forfeited
21,499

 
4,328

Vesting service period of shares granted
3 - 4 years

 
36 - 68 months

Grant date fair value of shares vested ($000)
$
6,999

 
$
5,013

Compensation expense related to the fair value of these awards is recognized straight-line over the requisite service period based on those restricted stock grants that ultimately vest. The fair value of grants is measured by the market price of the Company’s stock on the date of grant. Restricted stock awards generally vest ratably over the service period beginning with the first anniversary of the grant date. Awards granted to retirement eligible non-employee directors are recognized over the shorter of the requisite service period or the length of time until retirement since the terms of the grant provide that the awards will vest upon retirement.

18

Performance Vested Restricted Stock Units
The Company has granted performance vested restricted stock units (“PVRSU”) to certain employees. The fair value is measured by the market price of the Company's common stock on the date of the grant. The vesting of these stock awards is contingent upon the Company achieving performance targets at the end of specified performance periods and the employees' continued employment. The performance conditions affect the number of shares that will ultimately vest. The range of possible stock-based award vesting is generally between 0% and 200% of the initial target. If minimum performance targets are not attained then no awards will vest under the terms of the various PVRSU agreements. Compensation expense related to these awards is recognized over the requisite service period based on the Company's estimate of the achievement of the various performance targets. The Company has currently estimated that between 100% and 160% of the various award targets will be achieved. Compensation expense is recognized ratably over the requisite service period only on those PVRSUs that ultimately vest.
The following table is a summary of activity related to PVRSU grants:
 
Three Months Ended
 
March 31,
 
2013
 
2012
Performance vested restricted stock units granted at target
58,902

 
38,476

Weighted average grant date fair value per share
$
36.76

 
$
35.60

Aggregate grant date fair value ($000)
$
2,165

 
$
1,370

Stock units forfeited
—

 
—

Requisite service period
22-36 months

 
3 years

During the three months ended March 31, 2013 , 39,816 PVRSU grants vested at a fair value of $1.3 million . These PVRSU grants were initially granted at a target of 30,624 units. However, since the Company exceeded targeted performance conditions contained in the stock awards granted in prior periods by 130% , an additional 9,192 shares were earned and issued. No PVRSU grants vested during the three months ended March 31, 2012 . In addition, no stock units were forfeited in the three months ended March 31, 2013 and 2012 .
A summary of stock-based award activity as of March 31, 2013 and changes during the three months ended are presented below:
 
Stock Options
 
Restricted Stock
 
Performance Vested
Restricted  Stock Units
 
Options
 
Weighted
Average
Exercise
Price
 
Weighted
Average
Remaining
Contractual
Term
 
Shares
 
Weighted
Average
Grant Date
Fair Value
 
Shares
 
Weighted
Average
Grant Date
Fair Value
Outstanding at January 1, 2013
1,934,034

 
$
25.80

 
 
 
606,547

 
$
35.17

 
170,116

 
$
35.56

Granted
173,413

 
36.76

 
 
 
194,541

 
36.76

 
58,902

 
36.76

Performance based leveraging (1)
—

 
—

 
 
 
—

 
—

 
9,192

 
32.60

Exercised/Vested
(204,323
)
 
26.27

 
 
 
(207,622
)
 
33.71

 
(39,816
)
 
32.60

Expired
(75,473
)
 
36.99

 
 
 
—

 
—

 
—

 
—

Forfeited
—

 
—

 
 
 
(21,499
)
 
34.74

 
—

 
—

Outstanding at March 31, 2013
1,827,651

 
$
26.32

 
4.3 years
 
571,967

 
$
36.25

 
198,394

 
$
36.37

Options exercisable at March 31, 2013
1,317,396

 
$
24.61

 
3.0 years
 
 
 
 
 
 
 
 
_________________________________  
(1) PVRSU shares have been increased by 9,192 units due to the Company exceeding the targeted performance conditions contained in PVRSUs granted in prior periods during the three months ended March 31, 2013.

19

The components of the Company’s pretax stock-based compensation expense and associated income tax benefits are as follows for the three months ended March 31, 2013 and 2012 :
 
Three Months Ended
 
March 31,
(in millions)
2013
 
2012
Stock options
$
0.5

 
$
0.6

Restricted stock
1.8

 
2.0

Performance vested restricted stock units
0.6

 
0.2

Total
$
2.9

 
$
2.8

Income tax benefits
$
1.1

 
$
1.0

Dividends

The Company currently maintains the payment of a quarterly dividend on its common shares outstanding of $0.185 per share, however the declaration of future dividends are subject to the discretion of the board of directors.  In the fourth quarter of 2012, the Company's board of directors elected to pay prior to December 31, 2012 the regular quarterly dividend initially scheduled to be paid in the first quarter of 2013.
During the three months ended March 31, 2013 , the Company paid previously declared dividends totaling $0.5 million that were contingent upon the vesting of performance vested restricted units. No dividends on performance vested restricted units were paid during the three months ended March 31, 2012 .
On February 8, 2013 , the Company's board of directors declared a quarterly cash dividend of $0.185 per share (or approximately $10.8 million in the aggregate), which was paid on April 16, 2013 to shareholders of record as of April 2, 2013 .
Share Repurchases and Redemptions
No shares of common stock were purchased by the Company under the share repurchase program during the three months ended March 31, 2013 . During the three months ended March 31, 2012 , the Company purchased 0.3 million shares of common stock under the share repurchase program at a total cost of $12.9 million .
During the three months ended March 31, 2013 , the Company redeemed 96,977 shares of common stock at a total cost of approximately $3.6 million from employees to satisfy statutory minimum tax requirements from the vesting of restricted stock and performance vested restricted stock unit grants. During the three months ended March 31, 2012 , the Company redeemed 55,162 shares of common stock at a total cost of approximately $2.0 million from employees to satisfy statutory minimum tax requirements from the vesting of restricted stock grants. These redemptions were outside the share repurchase program initiated in June 1998.

20


13.
Earnings Per Share
The computation of basic and diluted earnings per common share is as follows:
 
Three Months Ended
 
March 31,
(In thousands, except per share amounts)
2013
 
2012
Computation of Basic Earnings Per Share:
 
 
 
Net income
$
15,523

 
$
19,997

Income allocated to participating securities
(163
)
 
(204
)
Net income available to common shareholders
$
15,360

 
$
19,793

Weighted average common shares outstanding – basic
57,720

 
57,622

Basic earnings per share
$
0.27

 
$
0.34

Computation of Diluted Earnings Per Share:
 
 
 
Net income
$
15,523

 
$
19,997

Income allocated to participating securities
(162
)
 
(204
)
Net income available to common shareholders
$
15,361

 
$
19,793

Weighted average common shares outstanding – basic
57,720

 
57,622

Diluted effect of stock options and PVRSUs
361

 
100

Weighted average shares outstanding – diluted
58,081

 
57,722

Diluted earnings per share
$
0.26

 
$
0.34


The Company's unvested restricted shares contain rights to receive non-forfeitable dividends, and thus are participating securities requiring the two-class method of computing earnings per share (“EPS”). The calculation of EPS for common stock shown above excludes the income attributable to the unvested restricted share awards from the numerator and excludes the dilutive impact of those awards from the denominator.
At March 31, 2013 and 2012 , the Company had 1.8 million and 1.7 million outstanding stock options, respectively. Stock options are included in the diluted earnings per share calculation using the treasury stock method and average market prices during the period, unless the stock options would be anti-dilutive. For the three month period ended March 31, 2013 , the Company did not exclude any anti-dilutive stock options from the diluted earnings per share calculation. For the three month period ended March 31, 2012 , the Company excluded 0.4 million of anti-dilutive stock options from the diluted earnings per share calculation.
PVRSUs are also included in the diluted earnings per share calculation assuming the performance conditions have been met at the reporting date. However, at March 31, 2013 and 2012 , PVRSUs totaling 198,394 and 148,245 , respectively, were excluded from the computation since the performance conditions had not been met.

14.
Condensed Consolidating Financial Statements
The Company’s Senior Notes due 2020 and 2022 are guaranteed jointly, severally, fully and unconditionally, subject to certain customary limitations, by eight 100% -owned domestic subsidiaries. There are no legal or regulatory restrictions on the payment of dividends to Choice Hotels International, Inc. from subsidiaries that do not guarantee the Senior Notes. As a result of the guarantee arrangements, the following condensed consolidating financial statements are presented. Investments in subsidiaries are accounted for under the equity method of accounting.

Certain revisions have been made to correct immaterial errors in the condensed consolidating statement of income and condensed consolidating statement of cash flows for the three months ended March 31, 2012.  The revisions to the condensed consolidating statement of income decreased the Guarantor's marketing and reservation expense and total operating expenses by $1.1 million and increased the Guarantor's interest expense and total other income and expenses, net by $1.1 million for the three months ended March 31, 2012, with corresponding offsetting adjustments to the same items in the Eliminations column.

The condensed consolidating statement of cash flows for the three months ended March 31, 2012 has been revised from prior filings to reflect the reclassification of certain operating, investing and financing cash flows related to inter-company investment transactions between wholly-owned subsidiaries. The revisions to the condensed consolidating statement of cash

21

flows increased the Guarantors net cash provided (used) by operating activities and increased investment in affiliates and net cash used in investing activities by $2.6 million and decreased the Non-Guarantor's net cash provided (used) by operating activities and increased proceeds from contributions from affiliates and net cash provided (used) by financing activities by $2.6 million for the three months ended March 31, 2012, with corresponding offsetting adjustments to the same items in the Eliminations column. 

These revisions are not material to our financial statements taken as a whole.

Choice Hotels International, Inc.
Condensed Consolidating Statement of Income
For the Three Months Ended March 31, 2013
(Unaudited, in Thousands)
 
Parent
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
REVENUES:
 
 
 
 
 
 
 
 
 
Royalty fees
$
44,236

 
$
24,205

 
$
9,195

 
$
(27,900
)
 
$
49,736

Initial franchise and relicensing fees
3,568

 
—

 
209

 
—

 
3,777

Procurement services
3,800

 
—

 
150

 
—

 
3,950

Marketing and reservation
65,159

 
76,131

 
4,582

 
(69,432
)
 
76,440

Other items, net
1,788

 
956

 
225

 
—

 
2,969

Total revenues
118,551

 
101,292

 
14,361

 
(97,332
)
 
136,872

OPERATING EXPENSES:
 
 
 
 
 
 
 
 
 
Selling, general and administrative
29,082

 
22,438

 
3,296

 
(27,900
)
 
26,916

Marketing and reservation
67,698

 
73,136

 
5,038

 
(69,432
)
 
76,440

Other items, net
714

 
2,136

 
200

 
—

 
3,050

Total operating expenses
97,494

 
97,710

 
8,534

 
(97,332
)
 
106,406

Operating income (loss)
21,057

 
3,582

 
5,827

 
—

 
30,466

OTHER INCOME AND EXPENSES, NET:
 
 
 
 
 
 
 
 
 
Interest expense
10,736

 
33

 
1

 
—

 
10,770

Equity in earnings of consolidated subsidiaries
(7,967
)
 
—

 
—

 
7,967

 
—

Other items, net
(548
)
 
(711
)
 
46

 
—

 
(1,213
)
Total other income and expenses, net
2,221

 
(678
)
 
47

 
7,967

 
9,557

Income (loss) before income taxes
18,836

 
4,260

 
5,780

 
(7,967
)
 
20,909

Income taxes (benefit)
3,313

 
1,891

 
182

 
—

 
5,386

Net income (loss)
$
15,523

 
$
2,369

 
$
5,598

 
$
(7,967
)
 
$
15,523


















22

Choice Hotels International, Inc.
Condensed Consolidating Statement of Income
For the Three Months Ended March 31, 2012
(Unaudited, in Thousands)



 
Parent
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
REVENUES:
 
 
 
 
 
 
 
 
 
Royalty fees
$
42,126

 
$
26,220

 
$
7,058

 
$
(27,551
)
 
$
47,853

Initial franchise and relicensing fees
2,433

 
—

 
95

 
—

 
2,528

Procurement services
3,148

 
—

 
167

 
—

 
3,315

Marketing and reservation
59,653

 
72,684

 
4,387

 
(65,795
)
 
70,929

Other items, net
3,441

 
978

 
125

 
—

 
4,544

Total revenues
110,801

 
99,882

 
11,832

 
(93,346
)
 
129,169

OPERATING EXPENSES:
 
 
 
 
 
 
 
 
 
Selling, general and administrative
24,487

 
22,828

 
4,585

 
(27,551
)
 
24,349

Marketing and reservation
61,554

 
69,797

 
4,270

 
(64,692
)
 
70,929

Other items, net
706

 
1,901

 
219

 
—

 
2,826

Total operating expenses
86,747

 
94,526

 
9,074

 
(92,243
)
 
98,104

Operating income
24,054

 
5,356

 
2,758

 
(1,103
)
 
31,065

OTHER INCOME AND EXPENSES, NET:
 
 
 
 
 
 
 
 
 
Interest expense
4,216

 
—

 
4

 
(1,103
)
 
3,117

Equity in earnings of consolidated subsidiaries
(6,881
)
 
—

 
—

 
6,881

 
—

Other items, net
(202
)
 
(2,003
)
 
(80
)
 
—

 
(2,285
)
Total other income and expenses, net
(2,867
)
 
(2,003
)
 
(76
)
 
5,778

 
832

Income before income taxes
26,921

 
7,359

 
2,834

 
(6,881
)
 
30,233

Income taxes
6,924

 
3,058

 
254

 
—

 
10,236

Net income
$
19,997

 
$
4,301

 
$
2,580

 
$
(6,881
)
 
$
19,997




















23

Choice Hotels International, Inc.
Condensed Consolidating Statement of Comprehensive Income
For the Three Months Ended March 31, 2013
(Unaudited, in Thousands)

 
Parent
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
 
 
 
 
 
 
 
 
 
 
Net income
$
15,523

 
$
2,369

 
$
5,598

 
$
(7,967
)
 
$
15,523

Other comprehensive income (loss), net of tax:

 

 

 

 
 
Amortization of loss on cash flow hedge
215

 
—

 
—

 
—

 
215

Foreign currency translation adjustment, net
(232
)
 
—

 
(232
)
 
232

 
(232
)
Other comprehensive income (loss), net of tax
(17
)
 
—

 
(232
)
 
232

 
(17
)
Comprehensive income
$
15,506

 
$
2,369

 
$
5,366

 
$
(7,735
)
 
$
15,506



24

Choice Hotels International, Inc.
Condensed Consolidating Statement of Comprehensive Income
For the Three Months Ended March 31, 2012
(Unaudited, in Thousands)


 
Parent
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
 
 
 
 
 
 
 
 
 
 
Net income
$
19,997

 
$
4,301

 
$
2,580

 
$
(6,881
)
 
$
19,997

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
 
Amortization of loss on cash flow hedge
215

 
—

 
—

 
—

 
215

Foreign currency translation adjustment, net
412

 
6

 
391

 
(397
)
 
412

Amortization of pension related costs, net of tax:
 
 
 
 
 
 
 
 
 
Actuarial loss
20

 
20

 
—

 
(20
)
 
20

Other comprehensive income, net of tax
647

 
26

 
391

 
(417
)
 
647

Comprehensive income
$
20,644

 
$
4,327

 
$
2,971

 
$
(7,298
)
 
$
20,644





25

Choice Hotels International, Inc.
Condensed Consolidating Balance Sheet
As of March 31, 2013
(Unaudited, in thousands)
 
 
Parent
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
5,185

 
$
328

 
$
134,712

 
$
—

 
$
140,225

Receivables, net
47,025

 
1,244

 
5,933

 
—

 
54,202

Other current assets
39,257

 
20,628

 
3,609

 
(18,148
)
 
45,346

Total current assets
91,467

 
22,200

 
144,254

 
(18,148
)
 
239,773

Property and equipment, at cost, net
13,445

 
56,844

 
1,000

 
—

 
71,289

Goodwill
60,620

 
5,193

 
—

 
—

 
65,813

Franchise rights and other identifiable intangibles, net
8,064

 
2,561

 
1,925

 
—

 
12,550

Receivable – marketing and reservation fees
51,297

 
—

 
—

 
—

 
51,297

Investments, employee benefit plans, at fair value
—

 
13,933

 
—

 
—

 
13,933

Investment in affiliates
338,267

 
26,027


—


(364,294
)

—

Advances to affiliates
13,840

 
193,247

 
9,649

 
(216,736
)
 
—

Deferred income taxes
—

 
28,538

 
637

 
(14,206
)
 
14,969

Other assets
31,349

 
19,034

 
25,966

 
—

 
76,349

Total assets
$
608,349

 
$
367,577

 
$
183,431

 
$
(613,384
)
 
$
545,973

LIABILITIES AND SHAREHOLDERS’ DEFICIT
 
 
 
 
 
 
 
 
 
Accounts payable
$
11,351

 
$
43,176

 
$
4,902

 
$
—

 
$
59,429

Accrued expenses
19,116

 
14,255

 
1,763

 
—

 
35,134

Deferred revenue
19,536

 
55,912

 
868

 
—

 
76,316

Current portion of long-term debt
7,500

 
680

 
21

 
—

 
8,201

Deferred compensation & retirement plan obligations
—

 
2,361

 
—

 
—

 
2,361

Other current liabilities
—

 
19,097

 
601

 
(18,148
)
 
1,550

Total current liabilities
57,503

 
135,481

 
8,155

 
(18,148
)
 
182,991

Long-term debt
861,398

 
1,674

 
42

 
—

 
863,114

Deferred compensation & retirement plan obligations
—

 
19,933

 
7

 
—

 
19,940

Advances from affiliates
208,942

 
249

 
7,545

 
(216,736
)
 
—

Other liabilities
19,835

 
13,418

 
210

 
(14,206
)
 
19,257

Total liabilities
1,147,678

 
170,755

 
15,959

 
(249,090
)
 
1,085,302

Total shareholders’ (deficit) equity
(539,329
)
 
196,822

 
167,472

 
(364,294
)
 
(539,329
)
Total liabilities and shareholders’ deficit
$
608,349

 
$
367,577

 
$
183,431

 
$
(613,384
)
 
$
545,973



26

Choice Hotels International, Inc.
Condensed Consolidating Balance Sheet
As of December 31, 2012
(In Thousands)
 
 
Parent
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
ASSETS

 

 

 

 

Cash and cash equivalents
$
8,420

 
$
407

 
$
125,350

 
$
—

 
$
134,177

Receivables,net
44,344

 
1,797

 
6,129

 
—

 
52,270

Other current assets
41,897

 
20,110

 
3,528

 
(18,512
)
 
47,023

Total current assets
94,661

 
22,314

 
135,007

 
(18,512
)
 
233,470

Property and equipment, at cost, net
11,307

 
39,298

 
1,046

 
—

 
51,651

Goodwill
60,620

 
5,193

 
—

 
—

 
65,813

Franchise rights and other identifiable intangibles, net
8,669

 
2,715

 
2,089

 
—

 
13,473

Receivable - marketing and reservation fees
42,179

 
—

 
—

 
—

 
42,179

Investments, employee benefit plans, at fair value
—

 
12,755

 
—

 
—

 
12,755

Investment in affiliates
329,038

 
26,194

 
—

 
(355,232
)
 
—

Advances to affiliates
14,252

 
206,770

 
13,479

 
(234,501
)
 
—

Deferred income taxes
—

 
28,539

 
640

 
(13,761
)
 
15,418

Other assets
32,085

 
18,925

 
25,003

 
—

 
76,013

Total assets
$
592,811

 
$
362,703

 
$
177,264

 
$
(622,006
)
 
$
510,772

LIABILITIES AND SHAREHOLDERS’ DEFICIT

 

 

 

 

Accounts payable
$
5,930

 
$
28,525

 
$
4,259

 
$
—

 
$
38,714

Accrued expenses
18,582

 
34,576

 
2,394

 
—

 
55,552

Deferred revenue
17,239

 
53,081

 
834

 
—

 
71,154

Current portion of long-term debt
7,500

 
675

 
20

 
—

 
8,195

Deferred compensation and retirement plan obligations
—

 
2,522

 
—

 
—

 
2,522

Other current liabilities
—

 
17,722

 
790

 
(18,512
)
 
—

Total current liabilities
49,251

 
137,101

 
8,297

 
(18,512
)
 
176,137

Long-term debt
845,257

 
1,845

 
48

 
—

 
847,150

Deferred compensation & retirement plan obligations
—

 
20,390

 
9

 
—

 
20,399

Advances from affiliates
226,917

 
189

 
7,395

 
(234,501
)
 
—

Other liabilities
20,290

 
9,216

 
245

 
(13,761
)
 
15,990

Total liabilities
1,141,715

 
168,741

 
15,994

 
(266,774
)
 
1,059,676

Total shareholders’ (deficit) equity
(548,904
)
 
193,962

 
161,270

 
(355,232
)
 
(548,904
)
Total liabilities and shareholders' deficit
$
592,811

 
$
362,703

 
$
177,264

 
$
(622,006
)
 
$
510,772



27

Choice Hotels International, Inc.
Condensed Consolidating Statement of Cash Flows
For the Three Months Ended March 31, 2013
(Unaudited, in thousands)
 
Parent
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
 
 
 
 
 
 
 
 
 
 
Net cash provided (used) by operating activities
$
(17,180
)
 
$
9,216

 
$
9,838

 
$
—

 
$
1,874

 
 
 
 
 
 
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
 
 
 
 
 
 
Investment in property and equipment
(2,328
)
 
(11,237
)
 
(80
)
 
—

 
(13,645
)
Equity method investments
—

 
—

 
(1,000
)
 
—

 
(1,000
)
Issuance of notes receivable
—

 
(1,484
)
 
(245
)
 
—

 
(1,729
)
Collections of notes receivable
19

 
—

 
—

 
—

 
19

Purchases of investments, employee benefit plans
—

 
(1,242
)
 
—

 
—

 
(1,242
)
Proceeds from sales of investments, employee benefit plans
—

 
3,882

 
—

 
—

 
3,882

Advances to and investments in affiliates
(1,000
)
 
—

 
—

 
1,000

 
—

Other items, net
(101
)
 
—

 
—

 
—

 
(101
)
 
 
 
 
 
 
 
 
 
 
Net cash provided (used) by investing activities
(3,410
)
 
(10,081
)
 
(1,325
)
 
1,000

 
(13,816
)

 
 
 
 
 
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 
 
 
 
 
 
Net borrowings pursuant to revolving credit facilities
18,000

 
—

 
—

 
—

 
18,000

Repayments of long-term debt
(1,875
)
 
(166
)
 
(5
)
 
—

 
(2,046
)
Purchase of treasury stock
(3,634
)
 
—

 
—

 
—

 
(3,634
)
Dividends paid
(503
)
 
—

 
—

 
—

 
(503
)
Excess tax benefits from stock-based compensation
—

 
952

 
—

 
—

 
952

Proceeds from contributions from affiliates
—

 
—

 
1,000

 
(1,000
)
 
—

Proceeds from exercise of stock options
5,367

 
—

 
—

 
—

 
5,367

Net cash provided (used) by financing activities
17,355

 
786

 
995

 
(1,000
)
 
18,136

Net change in cash and cash equivalents
(3,235
)
 
(79
)
 
9,508

 
—

 
6,194

Effect of foreign exchange rate changes on cash and cash equivalents
—

 
—

 
(146
)
 
—

 
(146
)
Cash and cash equivalents at beginning of period
8,420

 
407

 
125,350

 
—

 
134,177

 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents at end of period
$
5,185

 
$
328

 
$
134,712

 
$
—

 
$
140,225


28

Choice Hotels International, Inc.
Condensed Consolidating Statement of Cash Flows
For the Three Months Ended March 31, 2012
(Unaudited, in Thousands)

 
Parent
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
 
 
 
 
 
 
 
 
 
 
Net cash provided (used) by operating activities
$
5,388

 
$
(3,265
)
 
$
2,289

 
$
—

 
$
4,412

 
 
 
 
 
 
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
 
 
 
 
 
 
Investment in property and equipment
(1,354
)
 
(1,688
)
 
(87
)
 
—

 
(3,129
)
Equity method investments
—

 
—

 
(2,600
)
 
—

 
(2,600
)
Issuance of notes receivable
(3,136
)
 
(583
)
 
—

 
—

 
(3,719
)
Collections of notes receivable
44

 
107

 
—

 
—

 
151

Purchases of investments, employee benefit plans
—

 
(743
)
 
—

 
—

 
(743
)
Proceeds from sales of investments, employee benefit plans
—

 
8,652

 
—

 
—

 
8,652

Advances to and investments in affiliates
—

 
(2,623
)
 
—

 
2,623

 
—

Other items, net
(108
)
 
—

 
—

 
—

 
(108
)
 
 
 
 
 
 
 
 
 
 
Net cash provided (used) in investing activities
(4,554
)
 
3,122

 
(2,687
)
 
2,623

 
(1,496
)
 
 
 
 
 
 
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 
 
 
 
 
 
Net borrowings pursuant to revolving credit facility
5,900

 
—

 
—

 
—

 
5,900

Repayments of long-term debt
—

 
(161
)
 
(5
)
 
—

 
(166
)
Purchase of treasury stock
(14,854
)
 
—

 
—

 
—

 
(14,854
)
Dividends paid
(10,713
)
 
—

 
—

 
—

 
(10,713
)
Excess tax benefits from stock-based compensation
—

 
422

 
—

 
—

 
422

Proceeds from contributions from affiliates
—

 
—

 
2,623

 
(2,623
)
 
—

Proceeds from exercise of stock options
389

 
—

 
—

 
—

 
389

Net cash provided (used) by financing activities
(19,278
)
 
261

 
2,618

 
(2,623
)
 
(19,022
)
Net change in cash and cash equivalents
(18,444
)
 
118

 
2,220

 
—

 
(16,106
)
Effect of foreign exchange rate changes on cash and cash equivalents
—

 
—

 
361

 
—

 
361

Cash and cash equivalents at beginning of period
23,370

 
432

 
83,255

 
—

 
107,057

Cash and cash equivalents at end of period
$
4,926

 
$
550

 
$
85,836

 
$
—

 
$
91,312



29

15.
Reportable Segment Information
The Company has a single reportable segment encompassing its franchising business. Revenues from the franchising business include royalty fees, initial franchise and relicensing fees, marketing and reservation system fees, procurement services revenue and other revenue. The Company is obligated under its franchise agreements to provide marketing and reservation services appropriate for the operation of its systems. These services do not represent separate reportable segments as their operations are directly related to the Company's franchising business. The revenues received from franchisees that are used to pay for part of the Company's ongoing operations are included in franchising revenues and are offset by the related expenses paid for marketing and reservation activities to calculate franchising operating income.
Corporate and other revenue consists of hotel operations; corporate and other expenses consist primarily of overhead selling, general and administrative costs such as finance, legal, human resources, etc that are not allocated to the Company's franchising segment. As described in Note 4, certain interest expenses related to the Company's marketing and reservation activities are allocated to the franchising segment. The Company does not allocate the remaining interest expense, interest income, other gains and losses or income taxes to its franchising segment.
The following table presents the financial information for the Company's franchising segment:
        
 
Three Months Ended March 31, 2013
(In thousands)
Franchising
 
Corporate &
Other
 
Consolidated
Revenues
$
135,916

 
$
956

 
$
136,872

Operating income (loss)
$
45,504

 
$
(15,038
)
 
$
30,466

Income (loss) before income taxes
$
45,363

 
$
(24,454
)
 
$
20,909


        
 
Three Months Ended March 31, 2012
(In thousands)
Franchising
 
Corporate &
Other
 
Consolidated
Revenues
$
128,191

 
$
978

 
$
129,169

Operating income (loss)
$
44,352

 
$
(13,287
)
 
$
31,065

Income (loss) before income taxes
$
44,297

 
$
(14,064
)
 
$
30,233



16.
Commitments and Contingencies
The Company is not a party to any litigation other than routine litigation incidental to business. The Company's management and legal counsel do not expect that the ultimate outcome of any of its currently ongoing legal proceedings, individually or collectively, will have a material adverse effect on the Company's financial position, results of operations or cash flows.
Contingencies
On October 9, 2012, the Company entered into a limited payment guaranty with regards to a developer's $18.0 million bank loan for the construction of a Cambria Suites in White Plains, New York. Under the terms of the limited guaranty, the Company has agreed to guarantee 25% of the outstanding principal balance and accrued and unpaid interest, as well as any unpaid expenses incurred by the lender. The limited guaranty shall remain in effect until the maximum amount guaranteed by the Company is paid in full. In addition to the limited guaranty, the Company entered into an agreement in which the Company guarantees the completion of the construction of the hotel and an environmental indemnity agreement which indemnifies the lending institution from and against any damages relating to or arising out of possible environmental contamination issues with regards to the Cambria Suites property.

30

Commitments
The Company has the following commitments outstanding at March 31, 2013 :
•
The Company occasionally provides financing in the form of forgivable promissory notes or cash incentives to franchisees for property improvements, hotel development efforts and other purposes. At March 31, 2013 , the Company had commitments to extend an additional $11.7 million for these purposes provided certain conditions are met by its franchisees, of which $6.6 million is expected to be advanced in the next twelve months.
•
The Company has entered into an agreement to form a joint venture to construct a Cambria Suites whereby it has committed, subject to the satisfaction of certain contingencies, to make an initial capital contribution of $3.0 million for a 42.5% ownership interest. The Company expects to fund this commitment within the next twelve months.
•
The Company has committed to make additional capital contributions totaling $4.6 million to existing joint ventures related to the construction of two hotels to be operated under the Company's Cambria Suites brand. These commitments are expected to be funded in the next twelve months.
In the ordinary course of business, the Company enters into numerous agreements that contain standard indemnities whereby the Company indemnifies another party for breaches of representations and warranties. Such indemnifications are granted under various agreements, including those governing (i) purchases or sales of assets or businesses, (ii) leases of real estate, (iii) licensing of trademarks, (iv) access to credit facilities, (v) issuances of debt or equity securities, and (vi) certain operating agreements. The indemnifications issued are for the benefit of the (i) buyers in sale agreements and sellers in purchase agreements, (ii) landlords in lease contracts, (iii) franchisees in licensing agreements, (iv) financial institutions in credit facility arrangements, (v) underwriters in debt or equity security issuances and (vi) parties under certain operating agreements. In addition, these parties are also generally indemnified against any third party claim resulting from the transaction that is contemplated in the underlying agreement. While some of these indemnities extend only for the duration of the underlying agreement, many survive the expiration of the term of the agreement or extend into perpetuity (unless subject to a legal statute of limitations). There are no specific limitations on the maximum potential amount of future payments that the Company could be required to make under these indemnities, nor is the Company able to develop an estimate of the maximum potential amount of future payments to be made under these indemnifications as the triggering events are not subject to predictability. With respect to certain of the aforementioned indemnities, such as indemnifications of landlords against third party claims for the use of real estate property leased by the Company, the Company maintains insurance coverage that mitigates potential liability.

17.
Termination Charges
During the three months ended March 31, 2013 , the Company recorded an $0.8 million charge in SG&A and marketing and reservation expenses related to salary and continuation benefits provided to employees separating from service with the Company. At March 31, 2013 , the Company had approximately $0.3 million of these salary and benefits continuation payments remaining to be remitted. During the three months ended March 31, 2013 , the Company remitted an additional $1.8 million of termination benefits related to employee termination charges recorded in prior periods and had approximately $1.7 million of these benefits remaining to be paid. At March 31, 2013 and December 31, 2012 , total termination benefits of approximately $2.0 million and $3.1 million , respectively, remained payable and were included in current and non-current liabilities in the Company's consolidated financial statements. The Company expects $2.0 million of these benefits to be paid in the next twelve months.

18.
Subsequent Events
On April 26, 2013 , the Company's board of directors declared a quarterly cash dividend of $0.185 per share of common stock. The dividend is payable on July 15, 2013 to shareholders of record as of July 1, 2013 . Based on the Company's share count at March 31, 2013 , total dividends to be paid are expected to be approximately $10.8 million .



ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis (“MD&A”) is intended to help the reader understand Choice Hotels International, Inc. and subsidiaries (together the “Company”). MD&A is provided as a supplement to-and should be read in conjunction with-our consolidated financial statements and the accompanying notes.

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Overview
We are a hotel franchisor with franchise agreements representing 6,264 hotels open and 476 hotels under construction, awaiting conversion or approved for development as of March 31, 2013 , with 500,376 rooms and 37,977 rooms, respectively, in 49 states, the District of Columbia and over 35 countries and territories outside the United States. Our brand names include Comfort Inn®, Comfort Suites®, Quality®, Clarion®, Ascend Collection®, Sleep Inn®, Econo Lodge®, Rodeway Inn®, MainStay Suites®, Suburban Extended Stay Hotel®, and Cambria Suites® (collectively, the “Choice brands”).
The Company's domestic franchising operations are conducted through direct franchising relationships while its international franchise operations are conducted through a combination of direct franchising and master franchising relationships. Master franchising relationships are governed by master franchising agreements which generally provide the master franchisee with the right to use our brands and sub-license the use of our brands in a specific geographic region, usually for a fee.
Our business philosophy has been to conduct direct franchising in those international markets where both franchising is an accepted business model and we believe our brands can achieve significant distribution. We elect to enter into master franchise agreements in those markets where direct franchising is currently not a prevalent or viable business model. When entering into master franchising relationships, we strive to select partners that have professional hotel and asset management capabilities together with the financial capacity to invest in building the Choice brands in their respective markets. Master franchising relationships typically provide lower revenues to the Company as the master franchisees are responsible for managing certain necessary services (such as training, quality assurance, reservations and marketing) to support the franchised hotels in the master franchise area and therefore retain a larger percentage of the hotel franchise fees to cover their expenses. In certain circumstances, the Company has and may continue to make equity investments in our master franchisees.
As a result of our use of master franchising relationships and international market conditions, total revenues from international franchising operations comprised 9% of our total revenues for the three months ended March 31, 2013 , while representing approximately 19% of hotels open at March 31, 2013 . Therefore, our description of the franchise system is primarily focused on the domestic operations.
Our Company generates revenues, income and cash flows primarily from initial, relicensing and continuing royalty fees attributable to our franchise agreements. Revenues are also generated from qualified vendor arrangements, hotel operations and other sources. The hotel industry is seasonal in nature. For most hotels, demand is lower in December through March than during the remainder of the year. Our principal source of revenues is franchise fees based on the gross room revenues of our franchised properties. The Company's franchise fee revenues and operating income reflect the industry's seasonality and historically have been lower in the first quarter than in the second, third or fourth quarters.
With a focus on hotel franchising instead of ownership, we benefit from the economies of scale inherent in the franchising business. The fee and cost structure of our business provides opportunities to improve operating results by increasing the number of franchised hotel rooms and effective royalty rates of our franchise contracts resulting in increased initial fee and relicensing revenue, ongoing royalty fees and procurement services revenues. In addition, our operating results can also be improved through our company-wide efforts related to improving property level performance. The Company currently estimates, based on its current domestic portfolio of hotels under franchise, a 1% change in revenue per available room (“RevPAR”) or rooms under franchise would increase or decrease annual domestic royalty revenues by approximately $2.5 million and a 1 basis point change in the Company's effective royalty rate would increase or decrease annual domestic royalties by approximately $0.6 million . In addition to these revenues, we also collect marketing and reservation system fees to support centralized marketing and reservation activities for the franchise system. As a lodging franchisor, the Company currently has relatively low capital expenditure requirements.
The principal factors that affect the Company's results are: the number and relative mix of franchised hotel rooms in the various hotel lodging price categories; growth in the number of hotel rooms under franchise; occupancy and room rates achieved by the hotels under franchise; the effective royalty rate achieved; the level of franchise sales and relicensing activity; and our ability to manage costs. The number of rooms at franchised properties and occupancy and room rates at those properties significantly affect the Company's results because our fees are based upon room revenues at franchised hotels. The key industry standard for measuring hotel-operating performance is RevPAR, which is calculated by multiplying the percentage of occupied rooms by the average daily room rate realized. Our variable overhead costs associated with franchise system growth of our established brands have historically been less than incremental royalty fees generated from new franchises. Accordingly, continued growth of our franchise business should enable us to realize benefits from the operating leverage in place and improve operating results.
We are required by our franchise agreements to use the marketing and reservation system fees we collect for system-wide marketing and reservation activities. These expenditures, which include advertising costs and costs to maintain our central

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reservations system, help to enhance awareness and increase consumer preference for our brands. Greater awareness and preference promotes long-term growth in business delivery to our franchisees, which ultimately increases franchise fees earned by the Company.
Our Company articulates its mission as a commitment to our franchisees' profitability by providing our franchisees with hotel franchises that strive to generate the highest return on investment of any hotel franchise. We have developed an operating system dedicated to our franchisees' success that focuses on delivering guests to our franchised hotels and reducing costs for our hotel owners.
We believe that executing our strategic priorities creates value for our shareholders. Our Company focuses on two key value drivers:
Profitable Growth. Our success is dependent on improving the performance of our hotels, increasing our system size by selling additional hotel franchises, effective royalty rate improvement and maintaining a disciplined cost structure. We attempt to improve our franchisees' revenues and overall profitability by providing a variety of products and services designed to increase business delivery to and/or reduce operating and development costs for our franchisees. These products and services include national marketing campaigns, a central reservation system, property and yield management systems, quality assurance standards and qualified vendor relationships. We believe that healthy brands, which deliver a compelling return on investment for franchisees, will enable us to sell additional hotel franchises and raise royalty rates. We have established multiple brands that meet the needs of many types of guests, and can be developed at various price points and applied to both new and existing hotels. This ensures that we have brands suitable for creating growth in a variety of market conditions. Improving the performance of the hotels under franchise, growing the system through additional franchise sales and improving franchise agreement pricing while maintaining a disciplined cost structure are the keys to profitable growth.
Maximizing Financial Returns and Creating Value for Shareholders. Our capital allocation decisions, including capital structure and uses of capital, are intended to maximize our return on invested capital and create value for our shareholders. We believe our strong and predictable cash flows create a strong financial position that provides us a competitive advantage. Currently, our business does not require significant capital to operate and grow. Therefore, we can maintain a capital structure that generates high financial returns and use our excess cash flow to increase returns to our shareholders.
Historically, we have returned value to our shareholders in two primary ways: share repurchases and dividends. In 1998, we instituted a share repurchase program which has generated substantial value for our shareholders. Since the program's inception through March 31, 2013 , we have repurchased 45.3 million shares (including 33.0 million prior to the two-for-one stock split effected in October 2005) of common stock at a total cost of $1.1 billion . Considering the effect of the two-for-one stock split, the Company has repurchased 78.3 million shares at an average price of $13.89 per share. The Company did not purchase any shares under the share repurchase program during the three months ended March 31, 2013 . We currently believe that our cash flows from operations will support our ability to complete the current board of directors repurchase authorization of approximately 1.4 million shares remaining as of March 31, 2013 . Upon completion of the current authorization, our board of directors will evaluate the advisability of additional share repurchases.
The Company commenced paying quarterly dividends in 2004 and in 2012 the Company elected to pay a special cash dividend totaling approximately $600 million. The Company currently maintains the payment of a quarterly dividend on its common shares outstanding of $0.185 per share, however the declaration of future dividends are subject to the discretion of the board of directors. In the fourth quarter of 2012, the Company's board of directors elected to pay prior to December 31, 2012 the regular quarterly dividend initially scheduled to be paid in the first quarter of 2013. As a result, the Company did not pay a regular quarterly dividend during the first quarter of 2013. We expect to continue to pay dividends in the future, subject to future business performance, economic conditions, changes in income tax regulations and other factors, Based on the present dividend rate and outstanding share count, we expect that aggregate annual regular dividends for 2013, excluding the first quarter payment which was paid to shareholders in December 2012, would be approximately $32.8 million.
Our board of directors previously authorized us to enter into a program which permits us to offer investment, financing and guaranty support to qualified franchisees as well as to acquire and resell real estate to incent franchise development for certain brands in strategic markets. Recent market conditions have resulted in an increase in opportunities to incentivize development under this program and as a result over the next several years, we expect to deploy capital opportunistically pursuant to this program to promote growth of our emerging brands. The amount and timing of the investment will be dependent on market and other conditions. Our current expectation is that our annual investment in this program will range from $20 million to $40 million.
In addition, the Company may allocate capital to exploring additional growth opportunities in business areas that are adjacent or complementary to our core hotel franchising business, which leverage our core competencies and are additive to our franchising business model. The timing and amount of these investments are subject to market and other conditions.

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As a result of these investments in exploring growth alternatives, the Company recently announced the formation of its newest division, SkyTouch Technology ("SkyTouch"), which develops and markets cloud-based technology products for the hotel industry. In conjunction with this new division, the Company expects to incur operating expenses ranging between $12 million and $14 million during the full year ending December 31, 2013, of which the Company has incurred approximately $2.2 million in the first quarter of 2013, for business development, sales and marketing and continued software development. Notwithstanding investments in alternative growth strategies, the Company expects to continue to return value to its shareholders through a combination of share repurchases and dividends, subject to business performance, economic conditions, changes in income tax regulations and other factors.
We believe these investments and value drivers, when properly implemented, will enhance our profitability, maximize our financial returns and continue to generate value for our shareholders. The ultimate measure of our success will be reflected in the items below.
Results of Operation: Royalty fees, operating income, net income and diluted earnings per share (“EPS”) represent key measurements of these value drivers. In the three months ended March 31, 2013 , royalty fees revenue totaled $49.7 million , a 4% increase from the same period in 2012 . Operating income totaled $30.5 million for the three months ended March 31, 2013 , a $0.6 million or 2% decline from the same period in 2012 . Net income for the three months ended March 31, 2013 decreased 22% from the same period of the prior year to $15.5 million . Diluted EPS for the quarter ended March 31, 2013 were $0.26 compared to $0.34 for the three months ended March 31, 2012 . These measurements will continue to be a key management focus in 2013 and beyond.
Refer to MD&A heading “Operations Review” for additional analysis of our results.
Liquidity and Capital Resources: Historically, the Company has generated significant cash flows from operations . Since our business does not currently require significant reinvestment of capital, we typically utilize cash in ways that management believes provide the greatest returns to our shareholders, which include share repurchases and dividends. We believe the Company's cash flow from operations and available financing capacity is sufficient to meet the expected future operating, investing, and financing needs of the business.
Refer to MD&A heading “Liquidity and Capital Resources” for additional analysis.


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Operations Review
Comparison of Operating Results for the Three-Month Periods Ended March 31, 2013 and 2012
Summarized financial results for the three months ended March 31, 2013 and 2012 are as follows:
(in thousands, except per share amounts)
2013
 
2012
REVENUES:
 
 
 
Royalty fees
$
49,736

 
$
47,853

Initial franchise and relicensing fees
3,777

 
2,528

Procurement services
3,950

 
3,315

Marketing and reservation
76,440

 
70,929

Hotel operations
956

 
978

Other
2,013

 
3,566

Total revenues
136,872

 
129,169

OPERATING EXPENSES:

 
 
Selling, general and administrative
26,916

 
24,349

Depreciation and amortization
2,175

 
2,017

Marketing and reservation
76,440

 
70,929

Hotel operations
875

 
809

Total operating expenses
106,406

 
98,104

Operating income
30,466

 
31,065

OTHER INCOME AND EXPENSES, NET:
 
 
 
Interest expense
10,770

 
3,117

Interest income
(644
)
 
(337
)
Other (gains) and losses
(710
)
 
(2,003
)
Equity in net loss of affiliates
141

 
55

Total other income and expenses, net
9,557

 
832

Income before income taxes
20,909

 
30,233

Income taxes
5,386

 
10,236

Net income
$
15,523

 
$
19,997

Diluted earnings per share
$
0.26

 
$
0.34


On occasion, the Company utilizes certain measures which do not conform to generally accepted accounting principles in the United States (“GAAP”) when analyzing and discussing its results with the investment community. This information should not be considered as an alternative to any measure of performance as promulgated under GAAP. The Company's calculation of these measures may be different from the calculations used by other companies and therefore comparability may be limited. We have included below a reconciliation of the measures utilized during this period to the comparable GAAP measures as well as our reason for reporting these non-GAAP measures.
Franchising Revenues: The Company utilizes franchising revenues which exclude marketing and reservation system revenues and hotel operations rather than total revenues when analyzing the performance of the business. Marketing and reservation activities are excluded from revenues since the Company is required by its franchise agreements to use these fees collected for marketing and reservation activities; as such, no income or loss to the Company is generated. Cumulative marketing and reservation system fees not expended are recorded as a payable on the Company's financial statements and are carried over to the next fiscal year and expended in accordance with the franchise agreements. Cumulative marketing and reservation expenditures in excess of fees collected for marketing and reservation activities are recorded as a receivable on the Company's financial statements. Hotel operations are excluded since they do not reflect the most accurate measure of the Company's core franchising business. This non-GAAP measure is a commonly used measure of performance in our industry and facilitates comparisons between the Company and its competitors.

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Calculation of Franchising Revenues
 
Three Months Ended March 31,
 
($ amounts in thousands)
 
2013
 
2012
Franchising Revenues:
 
 
 
Total Revenues
$
136,872

 
$
129,169

Adjustments:
 
 
 
     Marketing and reservation system revenues
(76,440
)
 
(70,929
)
     Hotel operations
(956
)
 
(978
)
Franchising Revenues
$
59,476

 
$
57,262


EBITDA:  We also utilize earnings before interest, taxes, depreciation and amortization ("EBITDA") to analyze our results which reflects earnings excluding the impact of interest expense, provision for income taxes, depreciation and amortization other (gains) and losses and equity in net income (loss) of unconsolidated affiliates. We consider EBITDA to be an indicator of operating performance because we use it to measure our ability to service debt, fund capital expenditures, and expand our business. We also use EBITDA, as do analysts, lenders, investors and others, to evaluate companies because it excludes certain items that can vary widely across different industries or among companies within the same industry. For example, interest expense can be dependent on a company’s capital structure, debt levels and credit ratings. Accordingly, the impact of interest expense on earnings can vary significantly among companies. The tax positions of companies can also vary because of their differing abilities to take advantage of tax benefits and because of the tax policies of the jurisdictions in which they operate. As a result, effective tax rates and provision for income taxes can vary considerably among companies. EBITDA also excludes depreciation and amortization because companies utilize productive assets of different ages and use different methods of both acquiring and depreciating productive assets. These differences can result in considerable variability in the relative costs of productive assets and the depreciation and amortization expense among companies.

Calculation of EBITDA
 
Three Months Ended March 31,
 
($ amounts in thousands)
 
2013
 
2012
EBITDA:
 
 
 
Net income
$
15,523

 
$
19,997

Income taxes
5,386

 
10,236

Interest expense
10,770

 
3,117

Interest income
(644
)
 
(337
)
Other (gains) and losses
(710
)
 
(2,003
)
Equity in net loss of affiliates
141

 
55

Depreciation and amortization
2,175

 
2,017

EBITDA
$
32,641

 
$
33,082


The Company recorded EBITDA of $32.6 million for the three month period ended March 31, 2013 , a $0.4 million or 1.3% decline from the same period of the prior year. The decline in EBITDA reflects a $2.6 million or 11% increase in selling, general and administrative ("SG&A") expense partially offset by a $2.2 million or 4% increase in the Company's franchising revenues for the three months ended March 31, 2013 .
The Company recorded net income of $15.5 million for the three month period ended March 31, 2013 , a 22% decline from the $20.0 million recorded for the quarter ended March 31, 2012 . The decrease in net income primarily reflects the decline in EBITDA as well as $7.7 million increase in interest expense resulting from the issuance of debt in July and August 2012 to finance the Company's $600.7 million special dividend paid on August 23, 2012. Furthermore, net income was impacted by a decline in other (gains) and losses resulting from a $0.7 million appreciation in the fair value of investments held in the Company's non-qualified employee benefit plans during the three months ended March 31, 2013 compared to a $2.0 million appreciation in the fair value of these investments in the same period of the prior year.
Franchising Revenues: Franchising revenues were $59.5 million for the three months ended March 31, 2013 compared to $57.3 million for the three months ended March 31, 2012 , an increase of 4% . The increase in franchising revenues is primarily due to

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a 4% increase in royalty revenues, a $1.2 million increase in initial and relicensing fees, partially offset by a $1.6 million decline in other income.
Domestic royalty fees for the three months ended March 31, 2013 increased $2.0 million to $44.3 million from $42.3 million in the three months ended March 31, 2012 , an increase of 5% . The increase in royalties is attributable to a combination of factors including a 4.6% increase in RevPAR, a 0.8% increase in the number of domestic franchised hotel rooms and a 5 basis point increase in the effective royalty rate from 4.34% to 4.39% . System-wide RevPAR increased due to a combination of a 2.3% increase in average daily rates and a 100 basis point increase in occupancy rates.
A summary of the Company's domestic franchised hotels operating information is as follows:

 
For the Three Months Ended March 31, 2013*
 
For the Three Months Ended March 31, 2012*
 
Change
 
Average
Daily
Rate
 
Occupancy
 
RevPAR
 
Average
Daily
Rate
 
Occupancy
 
RevPAR
 
Average
Daily
Rate
 
Occupancy
 
RevPAR
Comfort Inn
$
76.30

 
47.5
%
 
$
36.24

 
$
74.29

 
46.8
%
 
$
34.76

 
2.7
%
 
70

bps
 
4.3
 %
Comfort Suites
81.82

 
52.6
%
 
43.04

 
79.88

 
51.0
%
 
40.72

 
2.4
%
 
160

bps
 
5.7
 %
Sleep
69.07

 
47.6
%
 
32.85

 
66.39

 
45.0
%
 
29.90

 
4.0
%
 
260

bps
 
9.9
 %
Quality
64.20

 
42.2
%
 
27.08

 
63.39

 
40.8
%
 
25.87

 
1.3
%
 
140

bps
 
4.7
 %
Clarion
68.84

 
41.1
%
 
28.32

 
67.90

 
38.7
%
 
26.26

 
1.4
%
 
240

bps
 
7.8
 %
Econo Lodge
51.67

 
38.6
%
 
19.95

 
50.31

 
38.7
%
 
19.45

 
2.7
%
 
(10
)
bps
 
2.6
 %
Rodeway
47.96

 
42.2
%
 
20.25

 
47.08

 
41.7
%
 
19.61

 
1.9
%
 
50

bps
 
3.3
 %
MainStay
68.55

 
57.0
%
 
39.05

 
64.60

 
61.8
%
 
39.94

 
6.1
%
 
(480
)
bps
 
(2.2
)%
Suburban
40.90

 
63.4
%
 
25.94

 
39.15

 
62.5
%
 
24.47

 
4.5
%
 
90

bps
 
6.0
 %
Ascend Collection
113.87

 
56.1
%
 
63.84

 
104.02

 
52.0
%
 
54.11

 
9.5
%
 
410

bps
 
18.0
 %
Total
$
68.87

 
45.5
%
 
$
31.34

 
$
67.32

 
44.5
%
 
$
29.95

 
2.3
%
 
100

bps
 
4.6
 %
___________________
*Operating statistics represent hotel operations from December through February and exclude Cambria Suites.
The number of domestic rooms on-line increased by 3,025 rooms or 0.8% to 395,902 as of March 31, 2013 from 392,877 as of March 31, 2012 . The total number of domestic hotels on-line increased by 1.7% to 5,091 as of March 31, 2013 from 5,006 as of March 31, 2012 .
A summary of domestic hotels and rooms on-line at March 31, 2013 and 2012 by brand is as follows:

 
March 31, 2013
 
March 31, 2012
 
Variance
 
Hotels
 
Rooms
 
Hotels
 
Rooms
 
Hotels
 
Rooms
 
%
 
%
Comfort Inn
1,332
 
104,159
 
1,392
 
108,777
 
(60
)
 
(4,618
)
 
(4.3
)%
 
(4.2
)%
Comfort Suites
597
 
46,079
 
613
 
47,506
 
(16
)
 
(1,427
)
 
(2.6
)%
 
(3.0
)%
Sleep
382
 
27,685
 
394
 
28,564
 
(12
)
 
(879
)
 
(3.0
)%
 
(3.1
)%
Quality
1,172
 
99,090
 
1,054
 
91,942
 
118

 
7,148

 
11.2
 %
 
7.8
 %
Clarion
190
 
27,268
 
188
 
27,550
 
2

 
(282
)
 
1.1
 %
 
(1.0
)%
Econo Lodge
811
 
49,244
 
797
 
49,254
 
14

 
(10
)
 
1.8
 %
 
—
 %
Rodeway
421
 
24,269
 
396
 
22,183
 
25

 
2,086

 
6.3
 %
 
9.4
 %
MainStay
41
 
3,165
 
39
 
3,024
 
2

 
141

 
5.1
 %
 
4.7
 %
Suburban
63
 
7,241
 
61
 
7,191
 
2

 
50

 
3.3
 %
 
0.7
 %
Ascend Collection
63
 
5,481
 
53
 
4,671
 
10

 
810

 
18.9
 %
 
17.3
 %
Cambria Suites
19
 
2,221
 
19
 
2,215
 
—

 
6

 
—
 %
 
0.3
 %
Total Domestic Franchises
5,091
 
395,902
 
5,006
 
392,877
 
85

 
3,025

 
1.7
 %
 
0.8
 %

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Domestic hotels open and operating increased by 8 hotels during the three months ended March 31, 2013 compared to a net increase of 5 domestic hotels open and operating during the three months ended March 31, 2012 . Gross domestic franchise additions increased from 39 for the three months ended March 31, 2012 to 62 for the same period of 2013 . New construction hotels represented 8 of the gross domestic additions during three months ended March 31, 2013 compared to 5 hotels in the same period of the prior year. Gross domestic additions for conversion hotels during the three months ended March 31, 2013 increased by 20 to 54 from 34 for the three months ended March 31, 2012 . The increase in franchise openings primarily reflects a 42% increase in the number of domestic franchise agreements executed during 2012 compared to the prior year. The Company expects the number of new franchise units that will open during 2013 to increase from 308 in 2012 to approximately 324 hotels. Although there has been an increase in the number of projected openings, new construction and conversion openings continue to be impacted by the restrictive lending environment, retention efforts implemented by other hotel brand companies and increased competition for existing hotels seeking a new brand affiliation.
Net domestic franchise terminations increased from 34 in the three months ended March 31, 2012 to 54 for the three months ended March 31, 2013 primarily due to an increase in the number of terminations related to the removal of hotels for non-compliance with the Company's rules, regulations and standards as well as non-payment of franchise fees.
International royalties decreased by $0.1 million or 1% from the first quarter of 2012 to $5.5 million for the same period of 2013 primarily due to RevPAR performance in the various countries in which we operate and foreign currency fluctuations. International available rooms increased 0.9% to 104,474 as of March 31, 2013 from 103,491 as of March 31, 2012 . The total number of international hotels increased 0.4% from 1,168 as of March 31, 2012 to 1,173 as of March 31, 2013 .
New domestic franchise agreements executed in the three months ended March 31, 2013 totaled 83 representing 6,330 rooms compared to 64 agreements representing 4,658 rooms executed in the first quarter of 2012. During the first quarter of 2013, 10 of the executed agreements were for new construction hotel franchises representing 754 rooms compared to 7 contracts representing 443 rooms for the three months ended March 31, 2012 . Conversion hotel executed franchise agreements totaled 73 representing 5,576 rooms for the three months ended March 31, 2013 compared to 57 agreements representing 4,215 rooms for the same period a year ago. Domestic initial fee revenue, included in the initial franchise and relicensing fees caption above, generated from executed franchise agreements increased $0.6 million to $2.0 million for the three months ended March 31, 2013 from $1.4 million for the three months ended March 31, 2012 . Domestic initial fee revenue increased approximately 44% due to a 30% increase in the number of new franchise agreements executed and an increase in amount of deferred revenue recognized in 2013 related to franchise agreements containing developer incentives that were executed in prior years. Revenues associated with agreements including incentives are deferred and recognized when the incentive criteria are met or the agreement is terminated, whichever comes first.
A summary of executed domestic franchise agreements by brand for the three months ended March 31, 2013 and 2012 is as follows:
 
 
Three Months Ended March 31, 2013
 
Three Months Ended March 31, 2012
 
% Change
 
 
New
Construction
 
Conversion
 
Total
 
New
Construction
 
Conversion
 
Total
 
New
Construction
 
Conversion
 
Total
Comfort Inn
 
3

 
5

 
8

 
1

 
8

 
9

 
200
 %
 
(38
)%
 
(11
)%
Comfort Suites
 
2

 
2

 
4

 
1

 
2

 
3

 
100
 %
 
—
 %
 
33
 %
Sleep
 
1

 
—

 
1

 
3

 
—

 
3

 
(67
)%
 
NM

 
(67
)%
Quality
 
—

 
19

 
19

 
—

 
27

 
27

 
NM

 
(30
)%
 
(30
)%
Clarion
 
—

 
3

 
3

 
—

 
2

 
2

 
NM

 
50
 %
 
50
 %
Econo Lodge
 
—

 
8

 
8

 
—

 
4

 
4

 
NM

 
100
 %
 
100
 %
Rodeway
 
—

 
9

 
9

 
—

 
12

 
12

 
NM

 
(25
)%
 
(25
)%
MainStay
 
1

 
—

 
1

 
—

 
—

 
—

 
NM

 
NM

 
NM

Suburban
 
—

 
1

 
1

 
—

 
—

 
—

 
NM

 
NM

 
NM

Ascend Collection
 
2

 
26

 
28

 
1

 
2

 
3

 
100
 %
 
1,200
 %
 
833
 %
Cambria Suites
 
1

 
—

 
1

 
1

 
—

 
1

 
—
 %
 
NM

 
—
 %
Total Domestic System
 
10

 
73

 
83

 
7

 
57

 
64

 
43%
 
28%
 
30%
Relicensing fees include fees charged to the new owners of a franchised property whenever an ownership change occurs and the property remains in the franchise system as well as fees required to renew expiring franchise contracts. Domestic relicensing and renewal contracts increased from 49 in the first quarter of 2012 to 69 for the three months ended March 31,

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2013 . As a result of the increase in contracts, domestic relicensing revenues increased $0.6 million or 52% from $1.0 million for the three months ended March 31, 2012 to $1.6 million for the three months ended March 31, 2013 .
As of March 31, 2013 , the Company had 395 franchised hotels with 30,984 rooms under construction, awaiting conversion or approved for development in its domestic system as compared to 388 hotels and 31,190 rooms at March 31, 2012 . The number of new construction franchised hotels in the Company's domestic pipeline declined 7% to 232 at March 31, 2013 from 250 at March 31, 2012 . New construction hotels in the domestic pipeline have been negatively impacted by the limited availability of hotel construction financing. As a result, the ability of existing projects to obtain financing and commence construction has been significantly impacted and has resulted in the termination of franchise agreements related to hotels that have not yet opened. The number of conversion franchised hotels in the Company's domestic pipeline increased by 25 units or 18% from March 31, 2012 to 163 hotels at March 31, 2013 due to higher franchise sales for the Company's Ascend Collection brand. The Company had an additional 81 franchised hotels with 6,993 rooms under construction, awaiting conversion or approved for development in its international system as of March 31, 2013 compared to 83 hotels and 7,020 rooms at March 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.
A summary of the domestic franchised hotels under construction, awaiting conversion or approved for development at March 31, 2013 and 2012 by brand is as follows:
 
 
 
 
 
 
 
 
 
 
 
 
 
Variance
 
March 31, 2013
Units
 
 
March 31, 2012
Units
 
 
Conversion
 
New Construction
 
Total
 
Conversion
 
New
Construction
 
Total
 
Conversion
 
New
Construction
 
Total
 
Units
 
%
 
Units
 
%
 
Units
 
%
Comfort Inn
30

 
49

 
79

 
28

 
44

 
72

 
2

 
7
 %
 
5

 
11
 %
 
7

 
10
 %
Comfort Suites
2

 
67

 
69

 
3

 
83

 
86

 
(1
)
 
(33
)%
 
(16
)
 
(19
)%
 
(17
)
 
(20
)%
Sleep
1

 
44

 
45

 
1

 
44

 
45

 
—

 
—
 %
 
—

 
—
 %
 
—

 
—
 %
Quality
35

 
2

 
37

 
40

 
4

 
44

 
(5
)
 
(13
)%
 
(2
)
 
(50
)%
 
(7
)
 
(16
)%
Clarion
9

 
—

 
9

 
12

 
1

 
13

 
(3
)
 
(25
)%
 
(1
)
 
(100
)%
 
(4
)
 
(31
)%
Econo Lodge
23

 
—

 
23

 
18

 
2

 
20

 
5

 
28
 %
 
(2
)
 
(100
)%
 
3

 
15
 %
Rodeway
30

 
—

 
30

 
25

 
1

 
26

 
5

 
20
 %
 
(1
)
 
(100
)%
 
4

 
15
 %
MainStay
—

 
25

 
25

 
2

 
22

 
24

 
(2
)
 
(100
)%
 
3

 
14
 %
 
1

 
4
 %
Suburban
3

 
12

 
15

 
2

 
16

 
18

 
1

 
50
 %
 
(4
)
 
(25
)%
 
(3
)
 
(17
)%
Ascend Collection
30

 
9

 
39

 
7

 
4

 
11

 
23

 
329
 %
 
5

 
125
 %
 
28

 
255
 %
Cambria Suites
—

 
24

 
24

 
—

 
29

 
29

 
—

 
NM

 
(5
)
 
(17
)%
 
(5
)
 
(17
)%
 
163

 
232

 
395

 
138

 
250

 
388

 
25

 
18
 %
 
(18
)
 
(7
)%
 
7

 
2
 %
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 $26.9 million for the three months ended March 31, 2013 , an increase of $2.6 million or 11% from the three months ended March 31, 2012 . SG&A for the three months ended March 31, 2013 increased from the prior year primarily due to a $2.2 million increase in alternative growth spending primarily related to the launch of the Company's new SkyTouch Technology division, a $0.8 million increase in rent expense related to the relocation of the Company's corporate headquarters and a $0.4 million increase in variable franchise sales compensation due to a 30% increase in domestic franchise agreements. SG&A expense for the three months ended March 31, 2012 included approximately $1.5 million related to a litigation settlement with a former franchisee. SG&A, excluding these items, increased by approximately 3.5%.
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.

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Total marketing and reservation system revenues increased 8% from $70.9 million for the three months ended March 31, 2012 to $76.4 million for the three months ended March 31, 2013 . The increase in revenues was primarily due to improved system fees resulting from system growth and RevPAR increases and increasing revenues from the Choice Privileges loyalty program resulting from the growth in program membership. Depreciation and amortization attributable to marketing and reservation activities was $4.0 million and $3.5 million for the three months ended March 31, 2013 and 2012 , respectively. Interest expense attributable to marketing and reservation activities was approximately $0.9 million and $1.2 million for the three months ended March 31, 2013 and 2012 , respectively.
As of March 31, 2013 and December 31, 2012 , the Company's balance sheet includes a receivable of $51.3 million and $42.2 million , respectively from cumulative marketing and reservation expenses incurred in excess of cumulative marketing and reservations system fee revenues earned. During the three months ended March 31, 2013 , the Company expended $9.1 million of marketing and reservation expenses in excess of revenues earned. As a result, these expenses in excess of revenue earned were added to the outstanding marketing and reservation receivable. The increase in the receivable primarily reflects the timing of various marketing programs and the seasonality of the Company's revenues. 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 reservation 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 and whether or not they joined the system following the deficit's occurrence. The Company has no present intention to accelerate repayment of the deficit from current franchisees. Conversely, cumulative marketing and reservation system revenues 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.
Our ability to recover these receivables may be adversely impacted by certain factors, including, among others, declines in the ability of our franchisees to generate revenues at properties they franchise from us, lower than expected franchise system growth of certain brands and/or lower than expected international franchise system growth. An extended period of occupancy or room rate declines or a decline in the number of hotel rooms in our franchise system could result in the generation of insufficient funds to recover marketing and reservation advances as well as meet the ongoing marketing and reservation needs of the overall system.
Other Income and Expenses, Net : Other income and expenses, net increased from an expense of $0.8 million during the three months ended March 31, 2012 to an expense of $9.6 million for the three months ended March 31, 2013 primarily due to the following items:
Interest expense increased $7.7 million for the three months ended March 31, 2013 to $10.8 million 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 shareholders.
Other gains and losses decreased from a gain of $2.0 million for the three months ended March 31, 2012 to a gain of $0.7 million for the three months ended March 31, 2013 primarily due to 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 by $0.6 million during the three months ended March 31, 2013 compared to an increase of $0.9 million during the three months ended March 31, 2012 . The fair value of the Company's investments held in the EDCP plan increased by $0.1 million during the three months ended March 31, 2013 compared to an increase in fair value of $1.1 million during the same period of the prior year.
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 three months ended March 31, 2013 and 2012 , the Company's SG&A expense was increased by $1.0 million for both periods.

Income Taxes: The effective income tax rates were 25.8% and 33.9% for the three months ended March 31, 2013 and 2012 , respectively. The effective income tax rate for the three months ended March 31, 2013 and 2012 were lower than the U.S federal income tax rate of 35% due to the recurring impact of foreign operations, partially offset by state taxes. The effective income tax rate for the three months ended March 31, 2013 was further reduced by settlements of unrecognized tax positions and by legislation retroactively extending the U.S. controlled foreign corporation look-through rule.

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Diluted EPS: Diluted EPS decreased 24% to $0.26 for the three months ended March 31, 2013 from $0.34 for the same period of the prior year. The decrease in diluted EPS primarily reflects the items discussed above.

Liquidity and Capital Resources
Operating Activities
During the three months ended March 31, 2013 , net cash provided by operating activities totaled $1.9 million compared to $4.4 million during the three months ended March 31, 2012 . The decrease in cash flows from operating activities primarily reflects a decline in EBITDA and the timing of working capital items.
Net cash advanced to marketing and reservation activities totaled $4.1 million during the three months ended March 31, 2013 compared to $6.2 million during the three months ended March 31, 2012 . The improvement in cash flows from marketing and reservation activities primarily reflects an improvement in marketing and reservation system fees resulting from domestic system size expansion and RevPAR performance and improved financial performance of the Company's loyalty program. Based on the current economic conditions, the Company expects marketing and reservation activities to provide cash flows from operations ranging between $12 million and $17 million in 2013.
Investing Activities
Cash utilized for investing activities totaled $13.8 million and $1.5 million for the three months ended March 31, 2013 and 2012 , respectively. The increase in cash utilized for investing activities for the three months ended March 31, 2013 primarily reflect an increase in capital expenditures. The increase in capital expenditures were partially offset by a decline in the proceeds from the sale of investments held in trust related to the Company's deferred compensation plans during the three months ended March 31, 2013 . During the three months ended March 31, 2013 and 2012 , the Company sold investments totaling $3.9 million and $8.7 million , respectively and utilized the proceeds to reimburse the Company for participant distributions made on behalf of the trust in prior years. The decline in proceeds from the sale of investments primarily reflects the timing of employee terminations and their deferred compensation distribution elections.
During the three months ended March 31, 2013 and 2012 , capital expenditures totaled $13.6 million and $3.1 million , respectively. The increase in capital expenditures for 2013 primarily reflect tenant improvements related to the relocation of the Company's corporate headquarters.
The Company occasionally provides financing to franchisees for property improvements, hotel development efforts and other purposes. During the three months ended March 31, 2013 and 2012 , the Company advanced $1.7 million and $3.7 million , respectively, for these purposes. At March 31, 2013 , the Company had commitments to extend an additional $11.3 million for these purposes provided certain conditions are met by its franchisees, of which $6.5 million is expected to be advanced in the next twelve months.
During the three months ended March 31, 2013 and 2012 , the Company invested $1.0 million and $2.6 million , respectively in joint ventures accounted for under the equity method of accounting. The Company's investment in these joint ventures primarily pertain to ventures that either support the Company's efforts to increase business delivery to its franchisees or promote growth of our emerging brands.
Our board of directors previously authorized us to enter into a program which permits us to offer financing, investment and guaranty support to qualified franchisees as well as to acquire and resell real estate to incent franchise development for certain brands in strategic markets. Recent market conditions have resulted in an increase in opportunities to incentivize development under this program. At March 31, 2013 and December 31, 2012, the Company had approximately $68.8 million and $68.3 million, respectively invested under this program. Over the next several years, we expect to continue to deploy capital opportunistically pursuant to this program to promote growth of our emerging brands. Our current expectation is that our annual investment in this program will range from $20 million to $40 million per year however, the amount and timing of the investment in this program will be dependent on market and other conditions.
Financing Activities
Financing cash flows relate primarily to the Company's borrowings, treasury stock purchases and dividends.

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Table of Contents

Debt
Senior Unsecured Notes due 2022
On June 27, 2012 the Company issued unsecured notes with a principal amount of $400 million ("the 2012 Senior Notes") at par, bearing a coupon of 5.75% with an effective rate of 5.94% . The 2012 Senior Notes will mature on July 1, 2022 , with interest to be paid semi-annually on January 1st and July 1st. The Company utilized the net proceeds of this offering, after deducting underwriting discounts and commissions and other offering expenses, together with a portion of the proceeds of a new credit facility, to pay a special cash dividend totaling approximately $600.7 million paid to shareholders on August 23, 2012. The Company's 2012 Senior Notes are guaranteed jointly, severally, fully and unconditionally, subject to certain customary limitations by eight 100% -owned domestic subsidiaries.
The Company may redeem the 2012 Senior Notes at its option at a redemption price equal to the greater of (a) 100% of the principal amount of the notes to be redeemed and (b) the sum of the present values of the remaining scheduled principal and interest payments from the redemption date to the date of maturity discounted to the redemption date on a semi-annual basis at the Treasury rate, plus 50 basis points.
Senior Unsecured Notes due 2020
On August 25, 2010, the Company completed a $250 million senior unsecured note offering (“the 2010 Senior Notes”) at a discount of $0.6 million, bearing a coupon of 5.7% with an effective rate of 6.19%. The 2010 Senior Notes will mature on August 28, 2020, with interest on the 2010 Senior Notes to be paid semi-annually on February 28 th and August 28 th . The Company used the net proceeds from the offering, after deducting underwriting discounts and other offering expenses, to repay outstanding borrowings and other general corporate purposes. The Company's 2010 Senior Notes are guaranteed jointly, severally, fully and unconditionally, subject to certain customary limitations, by eight 100%-owned domestic subsidiaries.
The Company may redeem the 2010 Senior Notes at its option at a redemption price equal to the greater of (a) 100% of the principal amount of the notes to be redeemed and (b) the sum of the present values of the remaining scheduled principal and interest payments from the redemption date to the date of maturity discounted to the redemption date on a semi-annual basis at the Treasury rate, plus 45 basis points.
Senior Credit Facility

On July 25, 2012, the Company entered into a $350 million senior secured credit facility, comprised of a $200 million revolving credit tranche ("the New Revolver") and a $150 million term loan tranche (the "Term Loan") with Deutsche Bank AG New York Branch, as administrative agent, Wells Fargo Bank, National Association, as administrative agent, and a syndication of lenders (the "New Credit Facility"). The New Credit Facility has a final maturity date of July 25, 2016, subject to an optional one-year extension, provided certain conditions are met. Up to $25 million of the borrowings under the New Revolver may be used for letters of credit, up to $10 million of borrowings under the New Revolver may be used for swing-line loans and up to $35 million of borrowings under the New Revolver may be used for alternative currency loans. The Term Loan requires quarterly amortization payments (a) during the first two years, in equal installments aggregating 5% of the original principal amount of the Term Loan per year, (b) during the second two years, in equal installments aggregating 7.5% of the original principal amount of the Term Loan per year, and (c) during the one-year extension period (if exercised), equal installments aggregating 10% of the original principal amount of the Term Loan.

The Company utilized the proceeds from the Term Loan and borrowings from the New Revolver, together with the net proceeds from the Company's recently issued senior notes offering, to pay a special cash dividend of approximately $600.7 million in the aggregate to the Company's stockholders on August 23, 2012.

The New Credit Facility is unconditionally guaranteed, jointly and severally, by certain of the Company's domestic subsidiaries. The subsidiary guarantors currently include all subsidiaries that guarantee the obligations under the Company's Indenture governing the terms of its 2010 and 2012 Senior Notes.
The New Credit Facility is secured by first priority pledges of (i) 100% of the ownership interests in certain domestic subsidiaries owned by the Company and the guarantors, (ii) 65% of the ownership interests in (a) Choice Netherlands Antilles N.V. (“ Choice NV ”), the top-tier foreign holding company of the Company's foreign subsidiaries, and (b) the domestic subsidiary that owns Choice NV and (iii) all presently existing and future domestic franchise agreements (the “ Franchise Agreements ”) between the Company and individual franchisees, but only to the extent that the Franchise Agreements may be pledged without violating any law of the relevant jurisdiction or conflicting with any existing contractual obligation of the Company or the applicable franchisee. At the time that the maximum total leverage ratio is required to be no greater than 4.00 to 1.00 (beginning of year 4 of the New Credit Facility), the security interest in the Franchise Agreements will be released.

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The Company may at any time prior to the final maturity date increase the amount of the New Credit Facility by up to an additional $100 million to the extent that any one or more lenders commit to being a lender for the additional amount and certain other customary conditions are met. Such additional amounts may take the form of an increased revolver or term loan.
The Company may elect to have borrowings under the New Credit Facility bear interest at a rate equal to (i) LIBOR, plus a margin ranging from 200 to 425 basis points based on the Company's total leverage ratio or (ii) a base rate plus a margin ranging from 100 to 325 basis points based on the Company's total leverage ratio.
The New Credit Facility requires the Company to pay a fee on the undrawn portion of the New Revolver, calculated based on the average daily unused amount of the New Revolver multiplied by 0.30% per annum.
The Company may reduce the New Revolver commitment and/or prepay the Term Loan in whole or in part at any time without penalty, subject to reimbursement of customary breakage costs, if any. Any Term Loan prepayments made by the Company shall be applied to reduce the scheduled amortization payments in direct order of maturity.
Additionally, the New Credit Facility requires that the Company and its restricted subsidiaries comply with various covenants, including with respect to restrictions on liens, incurring indebtedness, making investments, paying dividends or repurchasing stock, and effecting mergers and/or asset sales. With respect to dividends, the Company may not make any payments if there is an existing event of default or if the payment would create an event of default. In addition, if the Company's total leverage ratio exceeds 4.5 to 1.0, the Company is generally restricted from paying aggregate dividends in excess of $50 million during any calendar year.
The New Credit Facility also imposes financial maintenance covenants requiring the Company to maintain:
•
a total leverage ratio of not more than 5.75 to 1.00 in year 1, 5.00 to 1.00 in year 2, 4.50 to 1.00 in year 3 and 4.00 to 1.00 thereafter,
•
a maximum secured leverage ratio of not more than 2.50 to 1.00 in year 1, 2.25 to 1.00 in year 2, 2.00 to 1.00 in year 3 and 1.75 to 1.00 thereafter, and
•
a minimum fixed charge coverage ratio of not less than 2.00 to 1.00 in years 1 and 2, 2.25 to 1.00 in year 3 and 2.50 to 1.00 thereafter.
At March 31, 2013 , the Company maintained a total leverage ratio of approximately 3.72x, a maximum secured leverage ratio of 0.95x and a minimum fixed charge coverage ratio of approximately 6.53x. At March 31, 2013 , the Company was in compliance with all covenants under the New Credit Facility.
The New Credit Facility includes customary events of default, the occurrence of which, following any applicable cure period, would permit the lenders to, among other things, declare the principal, accrued interest and other obligations of the Company under the New Credit Facility to be immediately due and payable.
At March 31, 2013 , the Company had $144.4 million and $75.0 million outstanding under the Term Loan and New Revolver, respectively. At December 31, 2012, the Company had $146.3 million and $57.0 million outstanding under the Term Loan and New Revolver, respectively.
In connection with the entry into the New Credit Facility, the Company's $300 million senior unsecured revolving credit agreement, dated as of February 24, 2011, among the Company, Wells Fargo Bank, National Association, as administrative agent, and a syndicate of lenders (the “ Old Credit Facility ”), was terminated and replaced by the New Credit Facility. The Old Credit Facility permitted the Company to borrow, repay and re-borrow revolving loans until the scheduled maturity date of February 24, 2016. In addition, the Old Credit Facility bore interest, at the Company's election, at either (i) a base rate plus a margin ranging from 5 to 80 basis points based on the Company's credit rating or (ii) LIBOR plus a margin ranging from 105 to 180 basis points based on the Company's credit rating. The Old Credit Facility also required the Company to pay a quarterly facility fee on the full amount of the commitments under the Old Credit Facility (regardless of usage) ranging from 20 to 45 basis points based upon the credit rating of the Company.
Dividends
The Company currently maintains the payment of a quarterly dividend on its common shares outstanding of $0.185 per share, however the declaration of future dividends are subject to the discretion of the board of directors. In the fourth quarter of 2012, the Company's board of directors elected to pay prior to December 31, 2012 the regular quarterly dividend initially scheduled to be paid in the first quarter of 2013. As a result, the Company did not pay a regular quarterly dividend during the first quarter of 2013. We expect to continue to pay dividends in the future, subject to future business performance, economic conditions, changes in income tax regulations and other factors, Based on the present dividend rate and outstanding share count, we expect

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that aggregate annual regular dividends for 2013, excluding the first quarter payment which was paid to shareholders in December 2012, would be approximately $32.8 million.
Share Repurchases
Historically, we have returned value to our shareholders in two primary ways: share repurchases and dividends. In 1998, we instituted a share repurchase program which has generated substantial value for our shareholders. Since the program's inception through March 31, 2013 , we have repurchased 45.3 million shares (including 33.0 million prior to the two-for-one stock split effected in October 2005) of common stock at a total cost of $1.1 billion . Considering the effect of the two-for-one stock split, the Company has repurchased 78.3 million shares at an average price of $13.89 per share. No shares were repurchased under the share repurchase program during the three months ended March 31, 2013. As of March 31, 2013 , the Company had approximately 1.4 million shares remaining under the board of directors share repurchase authorization and we currently believe that our cash flows from operations will support our ability to complete the current authorization. Upon completion of the current authorization, our board of directors will evaluate the advisability of additional share repurchases.
Other items
Approximately $134.7 million of the Company's cash and cash equivalents at March 31, 2013 pertains to undistributed earnings of the Company's consolidated foreign subsidiaries. Since the Company's intent is for such earnings to be reinvested by the foreign subsidiaries, the Company has not provided additional U.S. income taxes on these amounts. While the Company has no intention to utilize these cash and cash equivalents in its domestic operations, any change to this policy would result in the Company incurring additional U.S. income taxes on any amounts utilized domestically.
During the three months ended March 31, 2013 , the Company recorded one-time employee termination charges totaling $0.8 million in SG&A and marketing and reservation expenses. These charges related to salary and benefits continuation payments for employees separating from service with the Company. At March 31, 2013 , the Company had approximately $0.3 million of these salary and benefits continuation payments remaining to be remitted. During the three months ended March 31, 2013 , the Company remitted an additional $1.8 million of termination benefits related to employee termination charges recorded in prior periods and had approximately $1.7 million of these benefits remaining to be paid. At March 31, 2013 , total termination benefits of approximately $2.0 million remained to be paid and the Company expects $2.0 million of these benefits to be paid in the next twelve months. In addition, the Company expects to satisfy approximately $2.4 million of deferred compensation and retirement plan obligations during the next twelve months.
The Company believes that cash flows from operations and available financing capacity are adequate to meet the expected future operating, investing and financing needs of the business.

Off Balance Sheet Arrangements
On October 9, 2012, the Company entered into a limited payment guaranty with regards to a developer's $18.0 million bank loan for the construction of a Cambria Suites in White Plains, New York. Under the terms of the limited guaranty, the Company has agreed to guarantee 25% of the outstanding principal balance and accrued and unpaid interest, as well as any unpaid expenses incurred by the lender. The limited guaranty shall remain in effect until the maximum amount guaranteed by the Company is paid in full. In addition to the limited guaranty, the Company entered into an agreement in which the Company guarantees the completion of the construction of the hotel and an environmental indemnity agreement which indemnifies the lending institution from and against any damages relating to or arising out of possible environmental contamination issues with regards to the Cambria Suites property.

Critical Accounting Policies
Our accounting policies comply with principles generally accepted in the United States. We have described below those policies that we believe are critical or require the use of complex judgment or significant estimates in their application. Additional discussion of these policies is included in Note 1 to our consolidated financial statements as of and for the year ended December 31, 2012 included in our Annual Report on Form 10-K.
Revenue Recognition.
We recognize continuing franchise fees, including royalty, marketing and reservations system fees, when earned and receivable from our franchisees. Franchise fees are typically based on a percentage of gross room revenues of each franchisee. Our estimate of the allowance for uncollectible royalty fees is charged to SG&A expense and our estimate of the allowance for uncollectible marketing and reservation fees is charged to marketing and reservation expenses.

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Initial franchise and relicensing fees are recognized, in most instances, in the period the related franchise agreement is executed because the initial franchise and relicensing fees are non-refundable and the Company is not required to provide initial services to the franchisee prior to hotel opening. We defer the initial franchise and relicensing fee revenue related to franchise agreements which include incentives until the incentive criteria are met or the agreement is terminated, whichever occurs first.
The Company may also enter into master development agreements (“MDAs”) with developers that grant limited exclusive development rights and preferential franchise agreement terms for one-time, non-refundable fees. When these fees are not contingent upon the number of agreements executed under the MDA, the Company recognizes the up-front fees over the MDA's contractual life. Fees that are contingent upon the execution of franchise agreements under the MDA are recognized upon execution of the franchise agreement.
The Company recognizes procurement services revenues from qualified vendors when the services are performed or the product delivered, evidence of an arrangement exists, the fee is fixed and determinable and collectibility is probable. We defer the recognition of procurement services revenues related to certain upfront fees and recognize them over a period corresponding to the Company's estimate of the life of the arrangement.
Marketing and Reservation Revenues and Expenses.
The Company's franchise agreements require the payment of certain marketing and reservation system fees, which are used exclusively by the Company for expenses associated with providing franchise services such as national marketing, media advertising, central reservation systems and technology services. 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. In accordance with our contracts, we include in marketing and reservation expenses an allocation of costs for certain activities, such as human resources, facilities, legal, accounting, etc., required to carry out marketing and reservation activities.
The Company records marketing and reservation system revenues and expenses on a gross basis since the Company is the primary obligor in the arrangement, maintains the credit risk, establishes the price and nature of the marketing or reservation services and retains discretion in supplier selection. In addition, net advances to and repayments from the franchise system for marketing and reservation activities are presented as cash flows from operating activities.
Marketing and reservation system fees not expended in the current year are carried over to the next fiscal year and expended in accordance with the franchise agreements. Shortfall amounts are similarly recovered in subsequent years. Cumulative excess or shortfall amounts from the operation of these programs are recorded as a marketing and reservation system fee payable or receivable. Under the terms of the franchise agreements, the Company may advance capital as necessary for marketing and reservation activities and recover such advances through future fees. Our current assessment is that the credit risk associated with the marketing and reservation system fees receivable is mitigated due to our contractual right to recover these amounts from a large geographically dispersed group of franchisees. However, our ability to recover these receivables may be adversely impacted by certain factors, including, among others, declines in the ability of our franchisees to generate revenues at properties they franchise from us, lower than expected franchise system growth of certain brands and/or lower than expected international franchise system growth. An extended period of occupancy or room rate declines or a decline in the number of hotel rooms in our franchise system could result in the generation of insufficient funds to recover marketing and reservation advances as well as meet the ongoing marketing and reservation needs of the overall system.
The Company evaluates the receivable for marketing and reservation costs in excess of cumulative marketing and reservation system revnues earned on a periodic basis for collectibility. The Company will record an allowance when, based on current information and events, it is probable that we will be unable to collect all amounts due for marketing and reservation activities according to the contractual terms of the franchise agreements. The receivables are considered to be uncollectible if the expected net, undiscounted cash flows from marketing and reservation activities are less than the carrying amount of the asset.
Choice Privileges is our frequent guest incentive marketing program. Choice Privileges enables members to earn points based on their spending levels with our franchisees and, to a lesser degree, through participation in affiliated partners' programs, such as those offered by credit card companies. The points, which we accumulate and track on the members' behalf, may be redeemed for free accommodations or other benefits.
We provide Choice Privileges as a marketing program to franchised hotels and collect a percentage of program members' room revenue from franchises to operate the program. Revenues are deferred in an amount equal to the estimated fair value of the future redemption obligation. A third-party actuary estimates the eventual redemption rates and point values using various actuarial methods. These judgmental factors determine the required liability attributable to outstanding points. Upon redemption of points, the Company recognizes the previously deferred revenue as well as the corresponding expense relating to the cost of the awards redeemed. Revenues in excess of the estimated future redemption obligation are recognized when earned

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to reimburse the Company for costs incurred to operate the program, including administrative costs, marketing, promotion and performing member services. Costs to operate the program, excluding estimated redemption values, are expensed when incurred.
Valuation of Intangibles and Long-Lived Assets
The Company evaluates the potential impairment of property and equipment and other long-lived assets, including franchise rights and other definite-lived intangibles, on an annual basis or whenever an event or other circumstances indicates that we may not be able to recover the carrying value of the asset. Recoverability is measured based on net, undiscounted expected cash flows. Assets are considered to be impaired if the net, undiscounted expected cash flows are less than the carrying amount of the assets. Impairment charges are recorded based upon the difference between the carrying value and the fair value of the asset. Significant management judgment is involved in developing these projections, and they include inherent uncertainties. If different projections are used in the current period, the balances for non-current assets could be materially impacted. Furthermore, if management uses different projections or if different conditions occur in future periods, future-operating results could be materially impacted.
The Company evaluates the impairment of goodwill and trademarks with indefinite lives on an annual basis, or during the year if an event or other circumstance indicates that we may not be able to recover the carrying amount of the asset. In evaluating these assets for impairment, the Company first assesses qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount. If we conclude that it is not more likely than not that the fair value of the reporting unit is less than its carrying value, then no further testing is required. If the conclusion is that it is more likely than not that the fair value of a reporting unit is less than its carrying value, then a two-step impairment test is performed. Since the Company has one reporting unit, the fair value of the Company's net assets is used to determine if goodwill may be impaired. Indefinite life trademarks are considered to be impaired if the net, undiscounted expected cash flows associated with the trademark are less than their carrying amount.
Loan Loss Reserves
The Company segregates its notes receivable for the purposes of evaluating allowances for credit losses between two categories: Mezzanine and Other Notes Receivable and Forgivable Notes Receivable . The Company utilizes the level of security it has in the various notes receivable as its primary credit quality indicator (i.e. senior, subordinated or unsecured) when determining the appropriate allowances for uncollectible loans within these categories.
Mezzanine and Other Notes Receivables
The Company has provided financing to franchisees in support of the development of properties in strategic markets. The Company expects the owners to repay the loans in accordance with the loan agreements, or earlier as the hotels mature and capital markets permit. The Company estimates the collectibility and records an allowance for loss on its mezzanine and other notes receivable when recording the receivables in the Company's financial statements. These estimates are updated quarterly based on available information.
The Company considers a loan to be impaired when, based on current information and events, it is probable that it will be unable to collect all amounts due according to the contractual terms of the loan agreement. All amounts due according to the contractual terms means that both the contractual interest payments and the contractual principal payments of a loan will be collected as scheduled in the loan agreement. The Company measures loan impairment based on the present value of expected future cash flows discounted at the loan's original effective interest rate or the estimated fair value of the collateral. For impaired loans, the Company establishes a specific impairment reserve for the difference between the recorded investment in the loan and the present value of the expected future cash flows or the estimated fair value of the collateral. The Company applies its loan impairment policy individually to all mezzanine and other notes receivable in the portfolio and does not aggregate loans for the purpose of applying such policy. For impaired loans, the Company recognizes interest income on a cash basis. If it is likely that a loan will not be collected based on financial or other business indicators it is the Company's policy to charge off these loans to SG&A expenses in the accompanying consolidated statements of income in the quarter when it is deemed uncollectible. Recoveries of impaired loans are recorded as a reduction of SG&A expenses in the quarter received.
The Company assesses the collectibility of its senior notes receivable by comparing the market value of the underlying assets to the carrying value of the outstanding notes. In addition, the Company evaluates the property's operating performance, the borrower's compliance with the terms of the loan and franchise agreements, and all related personal guarantees that have been provided by the borrower. For subordinated or unsecured receivables, the Company assesses the property's operating performance, the subordinated equity available to the Company, the borrower's compliance with the terms of loan and franchise agreements, and the related personal guarantees that have been provided by the borrower.

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The Company considers loans to be past due and in default when payments are not made when due. Although the Company considers loans to be in default if payments are not received on the due date, the Company does not suspend the accrual of interest until those payments are more than 30 days past due. The Company applies payments received for loans on non-accrual status first to interest and then principal. The Company does not resume interest accrual until all delinquent payments are received.
Forgivable Notes Receivable
In certain instances, the Company may provide financing to franchisees for property improvements and other purposes in the form of forgivable promissory notes which bear interest at market rates. Under these promissory notes, the franchisee promises to repay the principal sum together with interest upon maturity unless certain conditions are met throughout the term of the promissory note. The principal sum and related interest are forgiven ratably over the term of the promissory note if the franchisee remains in the system in good standing. If during the term of the promissory note, the franchisee exits our franchise system or is not operating their franchise in accordance with our quality or credit standards, the Company may declare a default under the promissory note and commence collection efforts with respect to the full amount of the then-current outstanding principal and interest.

In accordance with the terms of the promissory notes, the initial principal sum and related interest are ratably reduced over the term of the loan on each anniversary date until the outstanding amounts are reduced to zero as long as the franchisee remains within the franchise system and operates in accordance with our quality and brand standards. As a result, the amounts recorded as an asset on the Company's consolidated balance sheet are also ratably reduced since the amounts forgiven no longer represent probable future economic benefits to the Company. The Company records the reduction of its recorded assets through amortization and marketing and reservation system expenses on its consolidated statements of income.

The Company fully reserves all defaulted notes in addition to recording a reserve on the estimated uncollectible portion of the remaining notes. For those notes not in default, the Company calculates an allowance for losses and determines the ultimate collectibility on these forgivable notes based on the historical default rates for those unsecured notes that are not forgiven but are required to be repaid. The Company records bad debt expense in SG&A and marketing and reservation system expenses in the accompanying consolidated statements of income in the quarter when the note is deemed uncollectible.
Stock Compensation.
The Company's policy is to recognize compensation cost related to share-based payment transactions in the financial statements based on the fair value of the equity or liability instruments issued. Compensation expense related to the fair value of share-based awards is recognized over the requisite service period based on an estimate of those awards that will ultimately vest. The Company estimates the share-based compensation expense for awards that will ultimately vest upon inception of the grant and adjusts the estimate of share-based compensation for those awards with performance and/or service requirements that will not be satisfied so that compensation cost is recognized only for awards that ultimately vest.
Income Taxes.
Income taxes are recorded using the asset and liability method of accounting for income taxes. Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A valuation allowance is provided for deferred tax assets if it is more likely than not such assets will be unrealized. Deferred U.S. income taxes have not been recorded for temporary differences related to investments in certain foreign subsidiaries and corporate affiliates. The temporary differences consist primarily of undistributed earnings that are considered permanently reinvested in operations outside the U.S. If management's intentions change in the future, deferred taxes may need to be provided.
With respect to uncertain income tax positions, a tax liability is recorded in full when management determines that the position does not meet the more likely than not threshold of being sustained on examination. A tax liability may also be recognized for a position that meets the more likely than not threshold, based upon management's assessment of the position's probable settlement value. The Company records interest and penalties on unrecognized tax benefits in the provision for income taxes.
Pension, Profit Sharing and Incentive Plans
The Company sponsors two non-qualified retirement savings and investment plans for certain employees and senior executives. Employee and Company contributions are maintained in separate irrevocable trusts. Legally, the assets of the trusts remain those of the Company; however, access to the trusts' assets is severely restricted. The trusts' cannot be revoked by the Company or an acquirer, but the assets are subject to the claims of the Company's general creditors. The participants do not have the right to assign or transfer contractual rights in the trusts.

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In 2002, the Company adopted the Choice Hotels International, Inc. Executive Deferred Compensation Plan (“EDCP”) which became effective January 1, 2003. Under the EDCP, certain executive officers may defer a portion of their salary into an irrevocable trust. Prior to January 1, 2010, participants could elect an investment return of either the annual yield of the Moody's Average Corporate Bond Rate Yield Index plus 300 basis points, or a return based on a selection of available diversified investment options. Effective January 1, 2010, the Moody's Average Corporate Bond Rate Yield Index plus 300 basis points is no longer an investment option for salary deferrals made on compensation earned after December 31, 2009. The Company recorded current and long-term deferred compensation liabilities of $10.1 million and $11.7 million , as of March 31, 2013 and December 31, 2012 , respectively, related to these deferrals and credited investment returns. Compensation expense is recorded in SG&A expense on the Company's consolidated statements of income based on the change in the deferred compensation obligation related to earnings credited to participants as well as changes in the fair value of diversified investments. Compensation expense recorded in SG&A for the three months ended March 31, 2013 and 2012 was $0.3 million and $0.4 million , respectively. In addition, the EDCP Plan held shares of the Company's common stock with a market value of $0.2 million and $0.1 million at March 31, 2013 and December 31, 2012 , respectively which were recorded as a component of shareholders' deficit.
The Company has invested the employee salary deferrals in diversified long-term investments which are intended to provide investment returns that partially offset the earnings credited to the participants. The diversified investments held in the trusts totaled $3.4 million and $6.0 million as of March 31, 2013 and December 31, 2012 , respectively, and are recorded at their fair value, based on quoted market prices. At March 31, 2013 , the Company expects $0.4 million of the assets held in the trusts to be distributed to participants during the next twelve months. These investments are considered trading securities and therefore the changes in the fair value of the diversified assets is included in other gains and losses in the accompanying consolidated statements of income. The Company recorded investment gains during the three months ended March 31, 2013 and 2012 of approximately $0.1 million and $1.1 million , respectively.
In 1997, the Company adopted the Choice Hotels International, Inc. Non-Qualified Retirement Savings and Investment Plan (“Non-Qualified Plan”). The Non-Qualified Plan allows certain employees who do not participate in the EDCP to defer a portion of their salary and invest these amounts in a selection of available diversified investment options. As of March 31, 2013 and December 31, 2012 , the Company had recorded a deferred compensation liability of $12.2 million and $11.2 million , respectively, related to these deferrals. Compensation expense is recorded in SG&A expense on the Company's consolidated statements of income based on the change in the deferred compensation obligation related to earnings credited to participants as well as changes in the fair value of diversified investments. The net increase in compensation expense recorded in SG&A for the three months ended March 31, 2013 and 2012 was $0.8 million and 0.9 million , respectively.
The diversified investments held in the trusts were $10.9 million and $10.2 million as of March 31, 2013 and December 31, 2012 , respectively, and are recorded at their fair value, based on quoted market prices. These investments are considered trading securities and therefore the changes in the fair value of the diversified assets is included in other gains and losses in the accompanying consolidated statements of income. The Company recorded investment gains during the three months ended March 31, 2013 and 2012 of approximately $0.6 million and $0.9 million , respectively. In addition, the Non-Qualified Plan held shares of the Company's common stock with a market value of $1.2 million and $1.0 million at March 31, 2013 and December 31, 2012 , respectively, which are recorded as a component of shareholders' deficit.
New Accounting Standards
See Footnote No. 1 of the Notes to our Financial Statements for information related to our adoption of new accounting standards in 2013 and for information on our anticipated adoption of recently issued accounting standards.

FORWARD-LOOKING STATEMENTS
Certain matters discussed in this quarterly report constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.  Generally, our use of words such as "expect," "estimate," "believe," "anticipate,", "should", "will," "forecast," "plan”," project," "assume" or similar words of futurity identify such forward-looking statements.  These forward-looking statements are based on management's current beliefs, assumptions and expectations regarding future events, which in turn are based on information currently available to management.  Such statements may relate to projections of the Company's revenue, earnings and other financial and operational measures, Company debt levels, ability to repay outstanding indebtedness, payment of dividends, and future operations, among other matters.   We caution you not to place undue reliance on any such forward-looking statements.  Forward-looking statements do not guarantee future performance and involve known and unknown risks, uncertainties and other factors.

Several factors could cause actual results, performance or achievements of the Company to differ materially from those expressed in or contemplated by the forward-looking statements.  Such risks include, but are not limited to, changes to general,

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domestic and foreign economic conditions;  operating risks common in the lodging and franchising industries; changes to the desirability of our brands as viewed by hotel operators and customers; changes to the terms or termination of our contracts with franchisees; our ability to keep pace with improvements in technology utilized for reservations systems and other operating systems; fluctuations in the supply and demand for hotels rooms; the level of acceptance of alternative growth strategies we may implement; the outcome of litigation; and our ability to effectively manage our indebtedness.  These and other risk factors are discussed in detail in the Risk Factors section of the Company's Form 10-K for the year ended December 31, 2012, filed with the Securities and Exchange Commission on February 28, 2013.  We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except as required by law.


ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in interest rates and the impact of fluctuations in foreign currencies on the Company's foreign investments and operations. The Company manages its exposure to these market risks through the monitoring of its available financing alternatives including in certain circumstances the use of derivative financial instruments. We are also subject to risk from changes in debt and equity prices from our non-qualified retirement savings plan investments in debt securities and common stock, which have a carrying value of $14.3 million and $16.2 million at March 31, 2013 and December 31, 2012 , respectively which we account for as trading securities. The Company will continue to monitor the exposure in these areas and make the appropriate adjustments as market conditions dictate.
At March 31, 2013 , the Company had $219.4 million of variable interest rate debt instruments outstanding at an effective rate of 2.6% . A hypothetical change of 10% in the Company’s effective interest rate from March 31, 2013 levels would increase or decrease annual interest expense by $0.6 million . The Company expects to refinance its fixed and variable long-term debt obligations prior to their scheduled maturities.
The Company does not presently have any derivative financial instruments.

ITEM 4.
CONTROLS AND PROCEDURES
The Company has a disclosure review committee whose membership includes the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), among others. The CEO and CFO consider the disclosure review committee's procedures in performing their evaluations of the Company's disclosure controls and procedures (as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) and in assessing the accuracy and completeness of the Company's disclosures.
An evaluation was performed under the supervision and with the participation of the Company's CEO and CFO of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on that evaluation, the Company's management, including the CEO and CFO, concluded that the Company's disclosure controls and procedures were effective as of March 31, 2013 .
There has been no change in the Company's internal controls over financial reporting that occurred during the quarter ended March 31, 2013 , that materially affected, or is reasonably likely to materially affect the Company's internal controls over financial reporting.

PART II. OTHER INFORMATION

ITEM 1.
LEGAL PROCEEDINGS

The Company is not a party to any litigation other than routine litigation incidental to business. The Company's management and legal counsel do not expect that the ultimate outcome of any of its currently ongoing legal proceedings, individually or collectively, will have a material adverse effect on the Company's financial position, results of operations or cash flows.

ITEM 1A.
RISK FACTORS
There have been no material changes in our risk factors from those disclosed in Part I, Item 1A to our Annual Report on Form 10-K for the fiscal year ended December 31, 2012. In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2012, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently

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known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities
The following table sets forth purchases and redemptions of Choice Hotels International, Inc. common stock made by the Company during the three months ended March 31, 2013 :
 
Month Ending
 
Total Number of
Shares Purchased
or Redeemed
 
Average Price
Paid per Share
 
Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs (1),(2)
 
Maximum Number of
Shares that may yet be
Purchased Under  the Plans
or Programs, End of Period
January 31, 2013
 
—

 
$
—

 
—

 
1,418,991

February 28, 2013
 
91,788

 
37.32

 
—

 
1,418,991

March 31, 2013
 
5,189

 
40.32

 
—

 
1,418,991

Total
 
96,977

 
$
37.48

 
—

 
1,418,991

 _______________________
(1)
The Company’s share repurchase program was initially approved by the board of directors on June 25, 1998. The program has no fixed dollar amount or expiration date.
(2)
During the three months ended March 31, 2013 , the Company redeemed 96,977 shares of common stock from employees to satisfy minimum tax-withholding requirements related to the vesting of restricted stock and performance vested restricted stock unit grants. These redemptions were not part of the board repurchase authorization.

ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
None.

ITEM 4.
MINE SAFETY DISCLOSURES
None

ITEM 5.
OTHER INFORMATION
None.

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ITEM 6.
EXHIBITS
Exhibit Number and Description

Exhibit
Number
 
Description
 
 
 
3.01(a)
 
Restated Certificate of Incorporation of Choice Hotels Franchising, Inc. (renamed Choice Hotels International, Inc.)
 
 
 
3.02(b)
 
Amended and Restated Bylaws of Choice Hotels International, Inc.
 
 
 
10.01*
 
Non-Competition, Non-Solicitation & Severance Benefit Agreement between the Company and Simone Wu, dated February 13, 2012
 
 
 
10.02*
 
Amendment to Non-Competition, Non-Solicitation & Severance Benefit Agreement between the Company and Simone Wu, dated March 25, 2013
 
 
 
10.03*
 
Amendment to Non-Competition, Non-Solicitation & Severance Benefit Agreement between the Company and David White, dated March 25, 2013
 
 
 
31.1*
 
Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) or Rule 15d-14(a)
 
 
 
31.2*
 
Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) or Rule 15d-14(a)
 
 
 
32*
 
Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350
 
 
 
101.INS*
 
XBRL Instance Document
 
 
 
101.SCH*
 
XBRL Taxonomy Extension Schema Document
 
 
 
101.CAL*
 
XBRL Taxonomy Calculation Linkbase Document
 
 
 
101.DEF*
 
XBRL Taxonomy Extension Definition Linkbase Document
 
 
 
101.LAB*
 
XBRL Taxonomy Label Linkbase Document
 
 
 
101.PRE*
 
XBRL Taxonomy Presentation Linkbase Document
 
 
 
_______________________
*
Filed herewith

(a)
Incorporated by reference to the identical document filed as an exhibit to Choice Hotels International, Inc.'s Registration Statement on Form S-4, filed August 31, 1998 (Reg. No. 333-62543).
(b)
Incorporated by reference to the identical document filed as an exhibit to Choice Hotels International, Inc.'s Current Report on Form 8-K filed February 16, 2010.




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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
CHOICE HOTELS INTERNATIONAL, INC.
 
 
 
May 8, 2013
By:
/ S / D AVID  L. W HITE
 
 
David L. White
 
 
Senior Vice President, Chief Financial Officer & Treasurer


52

Non-Competition, Non-Solicitation & Severance Benefit Agreement

This Non-Competition, Non-Solicitation & Severance Benefit Agreement (“Agreement”) is entered into this 13 th day of February 2012 between Choice Hotels International, Inc. (“Choice”), a Delaware corporation with principal offices at 10750 Columbia Pike, Silver Spring, Maryland 20901, and Simone Wu (“Employee”).

Recitals

A. Employee is a management-level employee of Choice or a subsidiary of Choice (collectively, “Choice”);

B. Choice devotes significant time, resources and effort to the training and advancement of its management employees, and its management team constitutes a significant asset and important competitive edge;

C. Choice has determined that it is in the best interest of the company and its shareholders to enter into an agreement with Employee whereby Employee agrees to certain non-competition, non-solicitation and confidentiality restrictions in consideration of, among other things, certain severance benefits.

NOW, THEREFORE, in consideration of the promises contained in this Agreement, and other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties agree to the following terms:
 
1. Definitions . As used in this Agreement, the following terms shall have the ascribed meaning:
(a) “Board” means the Board of Directors of Choice.
(b) “Cause” means any one or more of the following, whether occurring before or after the date hereof: (i) Employee’s deliberate and continued refusal to carry out duties and instructions of the Board and CEO consistent with the position following notice by Choice and a five business days cure period; (ii) Employee’s commission of an act materially detrimental to the financial condition, operations and/or goodwill of Choice; (iii) Employee’s gross negligence or willful misconduct in the performance of duties to Choice; (iv) Employee’s commission of any act of theft, fraud, dishonesty, breach of trust or breach of fiduciary duty involving Choice; (v) Employee’s conviction of, or plea of guilty or nolo contendere to, a felony or any crime involving moral turpitude, fraud or embezzlement; (vi) any breach by Employee of the covenants contained in this Agreement, or (vii) the material violation by Employee of any Choice policy or any statutory or common law duty to Choice.
(c) “Change in Control” means the happening of the earliest of the following to occur:
(i)Any “person” as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (other than (i) Choice, (ii) any trustee or other fiduciary holding securities under an employee benefit plan of Choice, (iii) any corporations owned, directly or indirectly, by the stockholders of Choice in substantially the same proportions as their ownership of stock, or (iv) any Existing Shareholder) becomes the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of Choice representing 33% or more of the combined voting power of Choice’s then outstanding voting securities. An “Existing Stockholder” means:
(A) (i) Stewart Bainum, his wife, all the lineal descendents of Stewart Bainum, his wife, their lineal descendants, and their spouses (so long as they remain spouses) and adopted children of such descendents; (ii) all trusts for the benefit of any persons described in clause (i) and trustees of such trusts; (iii) all legal representatives of any person or trust described in clauses (i) and (ii); and (iv) all partnerships, corporations, limited liability companies or other entities controlled by the persons described in

- 1 -


clauses (i), (ii) or (iii) (such persons referred to in this clause (A) collectively, “Bainum Affiliates”); and
(B) any other stockholder of Choice which, together with such stockholder’s affiliates, owns more than 5% of the common stock of Choice Hotels International, Inc. as of the date of this Agreement so long as the Bainum Affiliates continue to own more common stock of Choice Hotels International, Inc. than such stockholder.
(ii)    Individuals constituting the Board on the date of this Agreement and the successors of such individuals (“Continuing Directors”) cease to constitute a majority of the Board. For this purpose, a director shall be a successor if and only if he or she was nominated by a Board (or a Nominating Committee thereof) on which individuals constituting the Board on the date of this Agreement and their successors (determined by prior application of this sentence) constituted a majority.
(iii)    The stockholders of Choice approve a plan of merger or consolidation (“Combination”) with any other corporation or legal person, other than a Combination which would result in stockholders of Choice immediately prior to the Combination owning, immediately thereafter, more than sixty-five percent (65%) of the combined voting power of either the surviving entity or the entity owning directly or indirectly all of the common stock, or its equivalent, of the surviving entity; provided, however, that if stockholder approval is not required for such Combination, the Change in Control shall occur upon the consummation of such Combination.
(iv)    The stockholders of Choice approve a plan of complete liquidation of Choice or an agreement for the sale or disposition by Choice of all or substantially all of Choice’s stock and/or assets, or accept a tender offer for substantially all of Choice’s stock (or any transaction having a similar effect); provided, however, that if stockholder approval is not required for such transaction, the Change in Control shall occur upon consummation of such transaction.
(d) “Change in Control Termination” means and includes the termination of Employee’s employment with Choice at any time during the twelve (12) month period after a Change in Control if such termination is (i) by Choice for any reason other than Cause, (ii) by Employee for Good Reason.
(e) “Competing Business” means any business or enterprise that: (i) is engaged in the mid-market or economy hotel franchising business, (ii) competes in the same upscale, select service segment as Cambria Suites or any successor or substantially similar Choice brand, or (iii) competes in any other line of business in which Choice is materially engaged at the time of the Termination Date.
(f) “Confidential Information” means any non-public information, in any format, relating to the business of Choice, including, but not limited to, present or prospective operating, marketing and development plans, training manuals, training policies and procedures, financial and technical information, passwords, source codes, personnel information, franchisee information, business systems, trade secrets, pricing and cost information, contact lists, strategic plans or strategies, operating data or Choice policies.

(g) “Disability” means if Employee is unable to perform the essential functions of Employee’s position, after any legally required reasonable accommodation, for more than 180 days (whether or not consecutive) in any period of 365 consecutive days.

(h) “Good Reason” means a voluntary termination by Employee following a material, substantial change in either Employee’s compensation or position and responsibilities, provided such termination occurs within forty-five days of the change in compensation or position. Employee must provide Choice with at least thirty (30) days’ prior written notice of electing a Good Reason termination.

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(i) “Non-Renewal” shall have the meaning set forth in Section 2.

(j) “Release Agreement” means the release of claims attached as Exhibit A.

(k) “Severance Benefits” means the benefits specified in Section 6.

(l) “Severance Benefit Period” means the seventy (70) week period following the Termination Date.

(m) “Termination Date” means the date the Employee’s employment with Choice ends.

(n) “Works” means any ideas, concepts, methods of operation, processes, programs or other materials (including training manuals, policies and procedures) that Employee conceived, created, developed or wrote while employed by Choice that relate in any manner to the business of Choice.

2. Term. The initial term of this Agreement shall be for a period commencing on February 13, 2012 and will remain in effect until February 13, 2015. The term of this Agreement shall be automatically extended for an additional three year period on February 13, 2015 and each subsequent three year anniversary thereafter, unless and until Choice or the Employee provides written notice to the other party in accordance with Section 10 hereof not less than one hundred eighty (180) days before such date that such party is electing not to extend the term of this Agreement (“Non-Renewal”). Anything herein to the contrary notwithstanding, if on the date of a Change in Control, the remaining term of this Agreement is less than twelve (12) months, the term of the Agreement shall be automatically extended to the end of the twelve month period following such Change in Control. References herein to the term of this Agreement shall include the initial term and any additional period for which this Agreement is extended.
3. Confidentiality . Employee acknowledges that Confidential Information and Works are valuable and unique assets belonging to Choice. During employment and after the Termination Date, Employee shall not, except as required by law or by Employee’s duties for Choice and for the benefit of Choice, directly or indirectly, or cause others to, make use of or disclose to others any Confidential Information or Works. Notwithstanding the foregoing, Confidential Information does not include information which was or becomes generally available to the public other than as a result of a disclosure by Employee. Works constitute works made for hire and in all circumstances shall be and remain the sole and exclusive property of Choice, whether or not protectable under any laws, including patent, trademark, copyright or trade secret laws.
4. Non-Solicitation. During employment and for a period of seventy (70) weeks following the Termination Date, Employee agrees, except as required by Employee’s duties for Choice and for the benefit of Choice or with the prior written consent of Choice, not to solicit or attempt to solicit, directly or indirectly, on Employee’s behalf or on behalf of any other person or entity, any person or entity who then is or who was as of the Termination Date, an employee, business partner or franchisee of Choice, or was actively solicited to have such a relationship with Choice within six (6) months prior to the Termination Date, to cease, curtail or refrain from entering into such a relationship with Choice. Nothing in the foregoing shall be construed as preventing Employee from otherwise lawfully soliciting business from any then current or prospective business partner or franchisee that is for a line of business other than any Competing Business.
5. Non-Competition. During employment and for a period of seventy (70) weeks after the Termination Date, Employee will not, except as required by Employee’s duties for Choice and for the benefit of Choice, or with the prior written consent of the Board, directly or indirectly, own, manage, operate, join, control, finance or participate in the ownership, management, operation, control or financing of, or be connected as an officer, director, employee, partner, principal, agent, representative, consultant or in any other capacity, or use or permit Employee’s name to be used in connection with, any business or enterprise that is engaged in a Competing Business in the U.S. or Canada; provided, however, that the foregoing shall not be construed as preventing Employee from otherwise lawfully (i) investing Employee’s assets in (A) the securities of any Competing Business that is a public company, or (B) the securities of any Competing Business that is a privately-held corporation, limited partnership, limited liability company or other business entity, if such holdings are passive investments of one percent (1%) or less of

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such entity’s outstanding securities or (ii) becoming an employee, agent or representative of, consultant to, or otherwise connected with, any business entity that has multiple lines of business, some of which are not a Competing Business, if Employee’s services for such entity are restricted so that Employee will provide no services or other assistance in support of, and will not otherwise be involved with, any such Competing Business conducted by such entity.
6. Severance Benefits. If Employee terminates for Good Reason or is terminated by Choice for any reason other than Cause, Change in Control Termination, Disability or death and Employee executes the Release Agreement within twenty-one (21) days of the Termination Date (or forty-five (45) days if such longer review period is required by the ADEA) and has not revoked the Release Agreement as permitted therein, Choice shall provide to Employee, in consideration of Employee’s promises and covenants contained in this Agreement and the Release Agreement, a Severance Benefit equal to:
(a) During the Severance Benefit Period, a bi-weekly payment equal to Employee’s bi-weekly base salary rate on the Termination Date, less standard deductions, payable in installments in accordance with Choice’s normal payroll practices (“Discretionary Pay”) ;
(b) If the Termination Date occurs after June 30 in a given year, then Employee shall be eligible for full payout of the bonus for that fiscal year based on the actual attainment level for the company objectives and at 100% of the individual Management Bonus Objectives. The bonus will be paid out, if at all, at such time as the other corporate officers receive their bonus.
(c) Stock option and stock awards granted under Choice’s Long-Term Incentive Plan after the date of this Agreement shall continue to vest and be exercisable during the Severance Benefit Period. At the end of the Severance Benefit Period, vesting shall cease and Employee shall have 90 days thereafter to exercise all stock options that are vested at the end of the Severance Benefit Period.
(d) During the Severance Benefit Period, Choice will provide Employee at its expense with its standard outplacement services for executive level employees. Upon obtaining other employment, Employee will be ineligible to continue receiving these outplacement services at Choice’s expense.
(e) During the Severance Benefit Period, (i) Employee may continue deductions for medical, dental, and pre-tax spending accounts while receiving Discretionary Pay, and Employee consents to the customary deductions for such benefits from Discretionary Pay, and (ii) Choice will continue to pay employer contributions to Employee’s medical and dental insurance, and pre-tax spending accounts while Employee is receiving Discretionary Pay. Choice will stop optional deductions for items such as retirement plans and life insurance with Employee’s last paycheck for regular hours worked through the Termination Date. Employee will be eligible to continue group health and dental benefits at Employee’s own expense in accordance with and to the extent required by the federal COBRA law.
7. Re-employment . After the Termination Date, Employee shall not be required to mitigate damages as a condition to receiving Severance Benefits, but nevertheless shall be entitled to pursue other employment as permitted by this Agreement. If Employee chooses to pursue and accept other employment or consulting during the Severance Benefit Period, Choice shall be entitled to receive as an offset, and thereby reduce its payment under Sections 5(a) and (b), the amounts received by Employee from any other active employment. Employee agrees to notify Choice within seven (7) days of accepting such employment by sending such notice to Choice Hotels International, 10750 Columbia Pike, Silver Spring, Maryland 20901, Attention: Vice President -- Human Resources. As a condition to Employee receiving the Severance Benefits from Choice, Employee agrees to permit verification of Employee’s employment records and Federal income tax returns by an independent attorney or accountant, selected by Choice but reasonably acceptable to Employee, who agrees to preserve the confidentiality of the information disclosed by Employee except to the extent required to permit Choice to verify the amounts received by Employee from other active employment. Choice shall receive credit for unemployment insurance benefits, social security insurance or like amounts actually received by Employee.


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8. Change in Control.
(a) If, within twelve (12) months after a Change in Control, there occurs a Change in Control Termination, Employee shall receive as severance compensation a lump sum payment in an amount equal to 200% of Employee’s base salary at the rate in effect as of the Termination Date, plus 200% of the amount of Employee’s eligible full year bonus for that fiscal year based on a 100% attainment level for the company objectives and a 100% attainment level for the individual Management Bonus Objectives. Additionally, all unvested restricted stock, performance vested restricted stock units and stock option awards granted after the date of this Agreement and then held by Employee shall automatically become fully vested as of the date of the Change of Control Termination.
(b) Employee’s right to receive the benefits described in Section 8(a) shall be conditioned upon Employee executing the Release Agreement.
9. Acknowledgments. Employee and Choice acknowledge and agree as follows:

(a) The restrictions contained in Sections 3, 4 and 5 are reasonable and necessary to protect and preserve the legitimate interests, properties, goodwill and business of Choice, that Choice would not have entered into this Agreement in the absence of such restrictions and that irreparable injury will be suffered by Choice should the Employee breach any of those provisions. Employee represents and acknowledges that (i) the Employee has been advised by Choice to consult Employee’s own legal counsel at Employee’s expense prior to executing this Agreement, and (ii) that the Employee has had full opportunity, prior to execution of this Agreement, to review thoroughly this Agreement with the Employee’s counsel.

(b) A breach of any of the restrictions in this Agreement cannot be adequately compensated by monetary damages and Choice shall be entitled to seek preliminary and permanent injunctive relief, without the necessity of proving actual damages, as well as any other appropriate equitable relief, which rights shall be cumulative and in addition to any other rights or remedies to which Choice may be entitled.

(c) In the event that any of the provisions of this Agreement should ever be adjudicated to exceed the time, geographic, service, or other limitations permitted by applicable law in any jurisdiction, it is the intention of the parties that the provision shall be amended to the extent of the maximum time, geographic, service, or other limitations permitted by applicable law, that such amendment shall apply only within the jurisdiction of the court that made such adjudication and that the provision otherwise be enforced to the maximum extent permitted by law. The invalidity of any provision of this Agreement shall not effect the validity of the remaining provisions of this Agreement.

(d) This Agreement supersedes and extinguishes any rights Employee may have under Choice’s standard Severance Benefit Plan.

(e) This Agreement shall not be construed as giving the Employee the right to be retained in the service of Choice for any definite period or otherwise to change Employee’s status as an at-will employee.

(f) If required under Section 409A of the Internal Revenue Code, any Severance Benefit or Change of Control payment will made six (6) months following the Termination Date.

(g) Employee agrees that Employee is not entitled to any unemployment benefits, and, to the extent permitted by law, that Employee does not intend to seek any unemployment benefits, during the Severance Benefit Period. Choice will not contest Employee’s claim for unemployment benefits after the Severance Benefit Period.

10. Notices. For purposes of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when hand delivered, sent by overnight courier, or mailed by first-class, registered or certified mail, return receipt requested, postage prepaid, or transmitted fax, addressed as follows:

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If to Choice:

Choice Hotels International, Inc.
10750 Columbia Pike
Silver Spring, Maryland 20901
Attn.: General Counsel
Fax: 301-592-6795

If to the Employee:

Simone Wu
3425 N. Emerson St.
Arlington, Virginia 22207


or top such other address as either party may have furnished to the other party in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt.

11. Arbitration.

(a) In the event of any dispute or claim relating to or arising out, directly or indirectly, of Employee’s employment relationship with Choice, this Agreement, or the termination of employment with Choice for any reason (including, but not limited to, any claims of breach of contract, tort, wrongful termination, violation of any law, or unlawful discrimination, harassment or retaliation), Employee and Choice agree that all such disputes shall be fully resolved by private, binding arbitration conducted by the American Arbitration Association (“ AAA ”) before a single arbitrator in Montgomery County, Maryland under the AAA’s  Employment Arbitration Rules then in effect, which rules are available online at the AAA's website at www.adr.org or by requesting a copy from Choice’s Human Resources Department. The arbitrator shall be a currently licensed attorney with at least ten (10) years experience in employment law in the United States. This arbitration provision shall apply to any and all claims asserted by Employee against Choice or any of its affiliates, and each of their respective employees, officers, agents, attorneys, owners, directors, or affiliates, and any and all claims against Employee by those entities. 

(b) The arbitrator shall permit the parties to conduct reasonable discovery and is empowered to award all remedies otherwise available in a court of competent jurisdiction and any judgment rendered by the arbitrator may be entered by any court of competent jurisdiction.  The arbitrator shall issue an award in writing and state the essential findings and conclusions on which the award is based.  This arbitration agreement shall provide the exclusive remedy of the parties to seek redress of claims, and each party knowingly and voluntarily waives the right to a trial before a judge or jury, and any right he, she, or it might have to seek redress in any other forum, except for the right to file a charge with applicable administrative agencies (including, but not limited to the National Labor Relations Board, Equal Employment Opportunity Commission, the Maryland Workers’ Compensation Commission or Division of Unemployment Insurance ).  If Employee still has the right to and chooses to pursue such administrative claim after exhausting all administrative remedies, such claim would be subject to arbitration under this arbitration agreement to the extent permitted by applicable law.

(c) In any arbitration conducted under this provision, each party will bear his, her or its own fees, expenses and costs associated with the arbitration, provided that, to the extent applicable law requires Choice to pay any of Employee’s portion of the fees, expenses and costs of the AAA and the arbitrator to make the arbitration agreement enforceable, Choice will pay or reimburse Employee for such fees, expenses and costs; and provided further, to the extent applicable law provides for the award of reasonable attorneys’ fees and costs to the prevailing party, the arbitrator may award such fees and costs.


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(d) In the event any provision of this arbitration agreement is found to be unenforceable by an arbitrator or court, such provision shall be deemed modified to the extent necessary to allow enforceability of the provision or deleted such that the enforceability of the remaining provisions remain unaffected.  If the court or arbitrator declines to modify this arbitration agreement to render it enforceable, the parties agree to do so. This arbitration agreement shall be interpreted and construed under the Federal Arbitration Act and the Maryland Uniform Arbitration Act. 
12. Miscellaneous.     

(a) This Agreement contains the entire agreement of the parties, and supersedes all other agreements, discussions or understandings concerning the subject matter. It may be changed only by an agreement in writing signed by both parties.
  
(b) This Agreement shall be governed by the laws of the State of Maryland, and any disputes arising out of or relating to this Agreement shall be brought and heard in any court of competent jurisdiction in the State of Maryland. Each party submits to the venue and jurisdiction of said courts.

(c) No failure by either party hereto at any time to give notice of any breach by the other party of, or to require compliance with, any condition or provision of this Agreement shall be deemed a waiver.



[Signatures on next page]

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IN WITNESS WHEREOF, the parties have executed this Agreement on the date first set forth above
 
CHOICE HOTELS INTERNATIONAL, INC.
 
/s/ Patrick Cimerola
 
 
Patrick Cimerola
 
Employee
 
/s/ Simone Wu  
 
Simone Wu



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EXHIBIT A

RELEASE AGREEMENT


This Release Agreement (“Release Agreement”) is made as of ___________, 20__ by _____________ ("Employee") in favor of Choice Hotels International, Inc. and its subsidiaries (collectively "Choice").

WHEREAS, Employee and Choice have previously entered into a Non-Competition, Non-Solicitation and Severance Benefit Agreement dated February __, 2012 (“Agreement”); and

WHEREAS, in consideration for certain covenants and benefits under the Agreement, Employee is obligated to execute this Release Agreement upon termination of employment;

NOW, THEREFORE, in consideration of the promises contained in this Agreement, and other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties agree to the following terms:

1. Last Day Worked . Employee’s employment terminated, or will terminate, on ___________, 20__ ("Termination Date"). Employee will return to Choice, no later than the close of business on the Termination Date, any Choice property, including original and copied computer hardware or software, credit cards, long distance telephone cards, and keys or passcards to Choice buildings, and all other property in Employee’s possession, custody or control.

2. Release . Employee agrees, in exchange for the benefits set forth in the Agreement, to irrevocably and unconditionally release Choice and its parents, subsidiaries and affiliated entities, and each of their respective officers, directors, shareholders, employees, agents, representatives, insurers, attorneys, employee welfare benefit plans and pension or deferred compensation plans under Section 401 of the Internal Revenue Code of 1954, as amended, and their trustees, administrators and other fiduciaries; and all persons acting by, through, under or in concert with them, and each of their predecessors, successors and assigns or any of them (collectively “Choice Releasees”), of and from any and all manner of action or actions, cause or causes of action, in law or equity, suits, debts, liens, contracts, agreements, promises, liability, claims, demands, grievances, damages, loss, cost or expense, of any nature, known or unknown, fixed or contingent, which Employee now has or may later have against the Choice Releasees, or any one of them, by reason of any matter, cause, or thing from the beginning of time to the Effective Date of this Agreement, including without limitation those arising out of, based on, or relating to the hire, employment, termination, remuneration (including any severance, salary, bonus, incentive or other compensation; vacation sick leave or medical insurance benefits; or any benefits from any employee stock ownership, profit-sharing and/or any deferred compensation plan under Section 401 of the Internal Revenue Code of 1954 ("Claims"). The Claims that Employee is releasing include, but are not limited to, a release of any rights or claims Employee may have under:

•
the Age Discrimination in Employment Act, which prohibits age discrimination in employment;
•
Title VII of the Civil Rights Act of 1964, which prohibits discrimination in employment based on race, color, national origin, religion or sex;
•
the Civil Rights Act of 1991;
•
the Equal Pay Act, which prohibits paying men and women unequal pay for equal work;
•
the Americans with Disabilities Act;
•
the Family and Medical Leave Act;
•
and any other federal, state or local laws or regulations prohibiting employment discrimination, harassment or retaliation.

Employee also releases any Claims for wrongful discharge or breach of contract, Claims for any personal injury or tort, Claims for any compensation, benefits, expenses, bonuses, or any other employee rights or benefits, Claims for employment or reinstatement, Claims for attorneys’ fees and costs, and all other Claims under any applicable statute, contract or other cause of action. This Agreement covers both Claims Employee knows about and those Employee

- 9 -


may not know about. Employee assumes the risk of any and all unknown Claims which may exist at the time Employee signs this Agreement, and Employee agrees that this Agreement shall apply to any and all known and unknown Claims.

3. No Release of Rights Under Agreement . By signing this Release Agreement, Employee does not waive or release Employee’s right to enforce the Agreement. Employee does not release claims for or rights to earned compensation, vested benefits or indemnification under Choice’s bylaws.

4. Lawsuits . To the fullest extent permitted by law, Employee promises never to file a lawsuit, claim, complaint, charge, demand, administrative proceeding, agency action or any other legal proceeding (collectively “Lawsuit”) asserting any Claims that are released in this Agreement. Employee agrees to withdraw with prejudice all Lawsuits, if any, Employee has filed against any Choice Releasee asserting any Claims with any agency or court. Employee also waives the right to seek or receive any monetary benefits with respect to Lawsuits asserted by administrative agencies or other third parties on Employee’s behalf. Employee further agrees not to assist any other person in bringing any Lawsuit against any Choice Releasee, unless compelled to do so pursuant to a valid court order or subpoena. Employee agrees not to make any derogatory remarks or provide and disparaging information about any Choice Releasee. Employee agrees to reasonably assist Choice in any Lawsuit arising from circumstances that took place during Employee’s employment, to the extent reasonably necessary to protect Choice’s interests. Choice will reimburse Employee for all reasonable and necessary expenses Employee incurs in complying with the foregoing sentence, provided they are approved by Choice in writing prior to being incurred.

5. No Admission . Employee agrees that this Release Agreement is not an admission of guilt or wrongdoing by the Choice Releasees, and Employee acknowledges that the Choice Releasees do not believe or admit that they have done anything wrong. Employee acknowledges that Employee has not suffered any wrongful treatment by any Choice Releasee.

6. Breach . If Employee breaches this Release Agreement and files a Lawsuit against any Choice Releasee on Claims that Employee released in this Release Agreement, Employee agrees to pay for all costs incurred by the Choice Releasee, including reasonable attorneys' fees, in defending against Employee’s Lawsuit. Employee further agrees not to assist any other person in bringing any Lawsuit against any Choice Releasee, unless compelled to do so pursuant to a valid subpoena or court order. If Employee breaches the promises in this Release Agreement, Choice may terminate all Severance Benefits under the Agreement that are still owed to Employee.

7. Governing Law . This Agreement is governed by Maryland law, without regard to the principles of conflicts of laws. If a dispute arises under this Agreement, any Lawsuit must be brought exclusively in the courts for Montgomery County, Maryland. Employee and Choice voluntarily submit to the jurisdiction and venue of said court.

8. Binding . Employee agrees and acknowledges this Release Agreement binds Employee’s heirs, administrators, representatives, executors, successors, and assigns, and will inure to the benefit of all Choice Releasees and their respective heirs, administrators, representatives, executors, successors, and assigns.

9. Severability . Any invalidity, in whole or in part, of any provision of this Release Agreement shall not affect the validity of any other of its provisions.

10. Period for Review and Consideration . Employee has 21 days from the date Employee receives this Release Agreement to review and consider this document before signing it. Employee may use as much of this 21 day period as Employee wishes before signing this Release Agreement. Choice advises Employee to consult with an attorney at Employee’s own expense before signing this Release Agreement; whether to do so is Employee’s decision. If Employee wishes to sign this Release Agreement and thereafter be eligible to receive the Severance Benefits under the Agreement, Employee must deliver one fully executed original of this Release Agreement, to Choice Hotels International, 10750 Columbia Pike, Silver Spring, Maryland 20901, Senior Vice President-- Human Resources, no later than the close of business on the 21st day after Employee receives this Release Agreement. Employee’s failure to deliver timely the executed Release Agreement will nullify the Agreement, and Employee will not be entitled to receive the Severance Benefits.


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11. Revocation of Release Agreement . Employee may revoke this Release Agreement within 7 days after signing it (the “Revocation Period”). If Employee wishes to revoke this Release Agreement after signing it, Employee must deliver a written notice of revocation to Choice Hotels International, 10750 Columbia Pike, Silver Spring, Maryland 20901, Attention: Senior Vice President, Human Resources. Choice must receive this revocation no later than the close of business on the 7th day after Employee signs this Release Agreement. If Employee revokes this Release Agreement, it shall not be effective or enforceable and Employee will not receive the Severance Benefits under the Agreement.] This Agreement will not become effective or enforceable until such date that is is signed by both parties and the Revocation Period expires without Employee exercising Employee’s right of revocation (the “Effective Date”).

EMPLOYEE ACKNOWLEDGES THAT EMPLOYEE HAS HAD AN OPPORTUNITY TO REVIEW AND CONSIDER THIS RELEASE AGREEMENT WITH AN ATTORNEY, AND THAT EMPLOYEE HAS HAD SUFFICIENT TIME TO CONSIDER IT. AFTER SUCH CAREFUL CONSIDERATION, EMPLOYEE KNOWINGLY AND VOLUNTARILY ENTERS INTO THIS RELEASE AGREEMENT WITH FULL UNDERSTANDING OF ITS MEANING AND EFFECT.

Employee:


______________________________

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Amendment to
Non-Competition, Non-Solicitation & Severance Benefit Agreement

This Amendment, dated this 25 th day of March 2013, amends that certain Non-Competition, Non-Solicitation & Severance Benefit Agreement (“Agreement”) entered into on February 13, 2012 between Choice Hotels International, Inc. (“Choice”), a Delaware corporation with principal offices at 10750 Columbia Pike, Silver Spring, Maryland 20901, and Simone Wu (“Employee”).

NOW, THEREFORE, in consideration of the promises contained in this Agreement, and other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties agree to the following terms:

1. Section 6 is amended by adding to the end thereof:
The Release Agreement must be irrevocably effective within sixty (60) days following the Termination Date. Subject to the six (6) month delay referenced in Section 9(f), the payments shall begin or be made on the sixtieth day following the Termination Date.
2. Section 8(b) is amended by adding to the end thereof:
The Release Agreement must be irrevocably effective within sixty (60) days following the Termination Date. Subject to the six (6) month delay referenced in Section 9(f), the payments shall begin or be made on the sixtieth day following the Termination Date.
3. Choice’s notification address in Section 10 of the Agreement shall be deleted in its entirety and replaced with the following:
“ Choice Hotels International, Inc.
One Choice Hotels Circle                
Rockville, Maryland 20850 ”

3. All other provisions of the Agreement not affected by this Amendment remain in full force and effect.
IN WITNESS WHEREOF, the parties have executed this Agreement on the date first set forth above.
CHOICE HOTELS INTERNATIONAL, INC.
 
Employee
 
 
 
/s/ Patrick Cimerola
 
/s/ Simone Wu
Patrick Cimerola
 
Simone Wu





Amendment to
Non-Competition, Non-Solicitation & Severance Benefit Agreement

This Amendment, dated this 25 th day of March 2013, amends that certain Non-Competition, Non-Solicitation & Severance Benefit Agreement (“Agreement”) entered into on August 1, 2011 between Choice Hotels International, Inc. (“Choice”), a Delaware corporation with principal offices at 10750 Columbia Pike, Silver Spring, Maryland 20901, and David White (“Employee”).

NOW, THEREFORE, in consideration of the promises contained in this Agreement, and other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties agree to the following terms:

1. Section 6 is amended by adding to the end thereof:
The Release Agreement must be irrevocably effective within sixty (60) days following the Termination Date. Subject to the six (6) month delay referenced in Section 9(f), the payments shall begin or be made on the sixtieth day following the Termination Date.
2. Section 8(b) is amended by adding to the end thereof:
The Release Agreement must be irrevocably effective within sixty (60) days following the Termination Date. Subject to the six (6) month delay referenced in Section 9(f), the payments shall begin or be made on the sixtieth day following the Termination Date.
3. Choice’s notification address in Section 10 of the Agreement shall be deleted in its entirety and replaced with the following:
“ Choice Hotels International, Inc.
One Choice Hotels Circle                
Rockville, Maryland 20850 ”

4. All other provisions of the Agreement not affected by this Amendment remain in full force and effect.
IN WITNESS WHEREOF, the parties have executed this Agreement on the date first set forth above.
CHOICE HOTELS INTERNATIONAL, INC.
 
Employee
 
 
 
/s/ Patrick Cimerola
 
/s/ David L. White
Patrick Cimerola
 
David L. White






Exhibit 31.1
CERTIFICATION
I, Stephen P. Joyce, certify that:
1.
I have reviewed this quarterly report on Form 10-Q of Choice Hotels International, Inc.;
2.
Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3.
Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4.
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and
(d)
Disclosed in this quarterly report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting;
5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
 
 
 
May 8, 2013
/s/ Stephen P. Joyce
 
 
Stephen P. Joyce
 
President and Chief Executive Officer
 





Exhibit 31.2
CERTIFICATION
I, David L. White, certify that:
1.
I have reviewed this quarterly report on Form 10-Q of Choice Hotels International, Inc.;
2.
Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3.
Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4.
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and
(d)
Disclosed in this quarterly report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting;
5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
 
 
 
May 8, 2013
/s/ David L. White
 
 
David L. White
 
Senior Vice President, Chief Financial Officer & Treasurer
 





Exhibit 32
WRITTEN STATEMENT
OF
CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
The undersigned hereby certify that the Quarterly Report on Form 10-Q for the quarter ended March 31, 2013 filed by Choice Hotels International, Inc. with the Securities and Exchange Commission fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in the report fairly presents, in all material respects, the financial condition and results of operations of the issuer.
 
 
 
May 8, 2013
/s/ Stephen P. Joyce
 
 
Stephen P. Joyce
 
President and Chief Executive Officer
 
 
May 8, 2013
/s/ David L. White
 
 
David L. White
 
Senior Vice President, Chief Financial Officer & Treasurer