Edgar Filing: CHOICE HOTELS INTERNATIONAL INC /DE

CHH-10Q-03.31.2013

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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

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

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

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CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES

INDEX




	PAGE NO.

PART I. FINANCIAL INFORMATION:

Item 1—Financial Statements (Unaudited)	4
Consolidated Statements of Income—For the three months ended March 31, 2013 and 2012	4
Consolidated Statements of Comprehensive Income—For the three months ended March 31, 2013 and 2012	5
Consolidated Balance Sheets—As of March 31, 2013 and December 31, 2012	6
Consolidated Statements of Cash Flows—For the three months ended March 31, 2013 and 2012	7
Notes to Consolidated Financial Statements	8
Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations	31
Item 3—Quantitative and Qualitative Disclosures About Market Risk	49
Item 4—Controls and Procedures	49

PART II. OTHER INFORMATION:

Item 1—Legal Proceedings	49
Item 1A—Risk Factors	49
Item 2—Unregistered Sales of Equity Securities and Use of Proceeds	50
Item 3—Defaults Upon Senior Securities	50
Item 4—Mine Safety Disclosures	50
Item 5—Other Information	50
Item 6—Exhibits	51

SIGNATURES	52

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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.

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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.

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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.

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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.

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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

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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.

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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.

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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.

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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

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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

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.

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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.

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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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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 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 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.

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.

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

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

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

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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.

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


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/ DAVID L. WHITE
		David L. White
		Senior Vice President, Chief Financial Officer & Treasurer