CHH-10Q-06.30.2012
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 _____________________________________________ 
FORM 10-Q
 _____________________________________________ 
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED June 30, 2012
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NO. 001-13393
 _____________________________________________ 
CHOICE HOTELS INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
_____________________________________________ 
DELAWARE
 
52-1209792
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
10750 COLUMBIA PIKE
SILVER SPRING, MD. 20901
(Address of principal executive offices)
(Zip Code)
(301) 592-5000
(Registrant’s telephone number, including area code)
 
(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
CLASS
 
SHARES OUSTANDING AT JUNE 30, 2012
Common Stock, Par Value $0.01 per share
 
57,950,952
 
 
 
 
 
 

Table of Contents

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


2
Table of Contents

PART I. FINANCIAL INFORMATION
 
ITEM 1.
FINANCIAL STATEMENTS

CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
 
    
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2012
 
2011
 
2012
 
2011
REVENUES:
 
 
 
 
 
 
 
Royalty fees
$
66,064

 
$
61,620

 
$
113,917

 
$
105,414

Initial franchise and relicensing fees
3,178

 
2,779

 
5,706

 
5,500

Procurement services
6,836

 
6,673

 
10,151

 
9,934

Marketing and reservation
94,633

 
90,832

 
165,562

 
153,799

Hotel operations
1,224

 
1,073

 
2,202

 
1,937

Other
1,686

 
2,324

 
5,252

 
3,998

Total revenues
173,621

 
165,301

 
302,790

 
280,582

 

 
 
 
 
 

OPERATING EXPENSES:

 
 
 
 
 

Selling, general and administrative
24,554

 
26,539

 
48,903

 
50,386

Depreciation and amortization
1,977

 
1,948

 
3,994

 
3,903

Marketing and reservation
94,633

 
90,832

 
165,562

 
153,799

Hotel operations
867

 
860

 
1,676

 
1,693

Total operating expenses
122,031

 
120,179

 
220,135

 
209,781

 


 
 
 
 
 


Operating income
51,590

 
45,122

 
82,655

 
70,801

OTHER INCOME AND EXPENSES, NET:

 
 
 
 
 

Interest expense
3,540

 
3,267

 
6,657

 
6,491

Interest income
(394
)
 
(221
)
 
(731
)
 
(431
)
Other (gains) and losses
377

 
(38
)
 
(1,626
)
 
1,005

Equity in net (income) loss of affiliates
128

 
—

 
183

 
(301
)
Total other income and expenses, net
3,651

 
3,008

 
4,483

 
6,764

Income before income taxes
47,939

 
42,114

 
78,172

 
64,037

Income taxes
16,077

 
14,536

 
26,313

 
20,729

Net income
$
31,862

 
$
27,578

 
$
51,859

 
$
43,308

 


 


 
 
 
 
Basic earnings per share
$
0.55

 
$
0.46

 
$
0.89

 
$
0.72

Diluted earnings per share
$
0.55

 
$
0.46

 
$
0.89

 
$
0.72

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


3
Table of Contents

CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED, IN THOUSANDS)
 
        
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2012
 
2011
 
2012
 
2011
Net income
$
31,862

 
$
27,578

 
$
51,859

 
$
43,308

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Amortization of loss on cash flow hedge
216

 
216

 
431

 
431

Foreign currency translation adjustment, net
(432
)
 
498

 
(20
)
 
1,003

Amortization of pension related costs, net of tax:
 
 
 
 
 
 
 
Actuarial loss (net of income tax of $12 and $24 for the three and six months ended June 30, 2012, respectively)
20

 
—

 
40

 
—

Actuarial pension loss (net of income tax of $6 for the six months ended June 30, 2011)
—

 
—

 
—

 
(10
)
Other comprehensive income (loss), net of tax
(196
)
 
714

 
451

 
1,424

Comprehensive income
$
31,666

 
$
28,292

 
$
52,310

 
$
44,732


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

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Table of Contents


CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED, IN THOUSANDS, EXCEPT SHARE AMOUNTS)
 
June 30,
2012
 
December 31,
2011
ASSETS
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
485,390

 
$
107,057

Receivables (net of allowance for doubtful accounts of $10,943 and $9,979, respectively)
62,643

 
53,012

Investments, employee benefit plans, at fair value
5,184

 
12,094

Other current assets
30,656

 
22,633

Total current assets
583,873

 
194,796

Property and equipment, at cost, net
50,561

 
51,992

Goodwill
65,996

 
66,005

Franchise rights and other identifiable intangibles, net
15,435

 
17,255

Receivable – marketing and reservation fees
64,838

 
54,014

Investments, employee benefit plans, at fair value
12,221

 
11,678

Deferred income taxes
22,017

 
22,665

Other assets
42,797

 
29,284

Total assets
$
857,738

 
$
447,689

LIABILITIES AND SHAREHOLDERS’ DEFICIT
 
 
 
Current liabilities
 
 
 
Accounts payable
$
45,548

 
$
38,389

Accrued expenses
36,137

 
53,851

Deferred revenue
64,422

 
68,825

Deferred compensation and retirement plan obligations
19,276

 
18,935

Current portion of long-term debt
683

 
673

Deferred income taxes
2,820

 
2,784

Income taxes payable
12,854

 
1,108

Total current liabilities
181,740

 
184,565

Long-term debt
651,717

 
252,032

Deferred compensation and retirement plan obligations
19,482

 
20,593

Other liabilities
16,042

 
16,060

Total liabilities
868,981

 
473,250

Commitments and Contingencies


 


SHAREHOLDERS’ DEFICIT
 
 
 
Common stock, $0.01 par value, 160,000,000 shares authorized; 95,345,362 shares issued at June 30, 2012 and December 31, 2011 and 57,950,952 and 58,277,646 shares outstanding at June 30, 2012 and December 31, 2011, respectively
580

 
583

Additional paid-in capital
101,719

 
102,665

Accumulated other comprehensive loss
(6,350
)
 
(6,801
)
Treasury stock (37,394,410 and 37,067,716 shares at June 30, 2012 and December 31, 2011, respectively), at cost
(932,663
)
 
(916,955
)
Retained earnings
825,471

 
794,947

Total shareholders’ deficit
(11,243
)
 
(25,561
)
Total liabilities and shareholders’ deficit
$
857,738

 
$
447,689

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)
 
Six Months Ended
 
June 30,
 
2012
 
2011
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
51,859

 
$
43,308

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
3,994

 
3,903

Provision for bad debts
1,236

 
1,340

Non-cash stock compensation and other charges
4,868

 
7,436

Non-cash interest and other (income) loss
(820
)
 
22

Dividends received from equity method investments
399

 
159

Equity in net (income) loss of affiliates
183

 
(301
)
Changes in assets and liabilities:
 
 
 
Receivables
(12,258
)
 
(11,058
)
Receivable – marketing and reservation fees, net
(2,389
)
 
(11,387
)
Accounts payable
6,330

 
6,026

Accrued expenses
(17,659
)
 
(11,004
)
Income taxes payable/receivable
11,808

 
11,404

Deferred income taxes
(194
)
 
40

Deferred revenue
(4,404
)
 
(6,463
)
Other assets
(4,331
)
 
(750
)
Other liabilities
(820
)
 
(624
)
Net cash provided by operating activities
37,802

 
32,051

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Investment in property and equipment
(6,236
)
 
(5,110
)
Equity method investments
(6,315
)
 
(1,600
)
Issuance of notes receivable
(5,820
)
 
(2,651
)
Collections of notes receivable
210

 
13

Purchases of investments, employee benefit plans
(969
)
 
(1,139
)
Proceeds from sales of investments, employee benefit plans
8,969

 
347

Other items, net
(226
)
 
(192
)
Net cash used in investing activities
(10,387
)
 
(10,332
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Net repayments pursuant to revolving credit facility
—

 
(200
)
Proceeds from issuance of long-term debt
393,444

 
75

Repayments of long-term debt
(333
)
 
(13
)
Purchase of treasury stock
(22,173
)
 
(2,527
)
Dividends paid
(21,396
)
 
(21,922
)
Excess tax benefits from stock-based compensation
641

 
1,061

Debt issuance costs
(153
)
 
(2,356
)
Proceeds from exercise of stock options
445

 
3,132

Net cash provided (used) by financing activities
350,475

 
(22,750
)
Net change in cash and cash equivalents
377,890

 
(1,031
)
Effect of foreign exchange rate changes on cash and cash equivalents
443

 
733

Cash and cash equivalents at beginning of period
107,057

 
91,259

Cash and cash equivalents at end of period
$
485,390

 
$
90,961

Supplemental disclosure of cash flow information:
 
 
 
Cash payments during the period for:


 


Income taxes, net of refunds
$
14,391

 
$
7,526

Interest
$
7,699

 
$
7,678

Non-cash investing and financing activities:


 
 
Declaration of dividends
$
21,335

 
$
21,972

Capital lease obligation
$
—

 
$
430

Issuance of restricted shares of common stock
$
9,267

 
$
8,222

Issuance of treasury stock to employee stock purchase plan
$
—

 
$
380

Debt issuance costs
$
6,556

 
$
—

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

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Table of Contents

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

1.
Company Information and Significant Accounting Policies
The accompanying unaudited consolidated financial statements of Choice Hotels International, Inc. and subsidiaries (together the “Company”) have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). These unaudited consolidated financial statements include all adjustments that are necessary, in the opinion of management, to fairly present our financial position and results of operations. Except as otherwise disclosed, all adjustments are of a normal recurring nature.
Certain information and footnote disclosures normally included in financial statements presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been omitted. The year-end balance sheet information was derived from audited financial statements, but does not include all disclosures required by GAAP. The Company believes the disclosures made are adequate to make the information presented not misleading.
The consolidated financial statements should be read in conjunction with the consolidated financial statements for the year ended December 31, 2011 and notes thereto included in the Company’s Form 10-K, filed with the SEC on February 29, 2012 (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.
Certain amounts in the prior year’s financial statements have been reclassified to conform to the current year presentation with no effect on previously reported net income, cash flows or shareholders’ deficit.
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 June 30, 2012 and December 31, 2011, $3.4 million and $4.4 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
The Company adopted Accounting Standards Update ("ASU") No. 2011-08, "Intangibles - Goodwill and Other (Topic 350): Testing Goodwill for Impairment" ("ASU No. 2011-08") in the first quarter of 2012. The guidance, which was issued in September 2011, reduces the complexity and costs by allowing an entity the option to make a qualitative evaluation about the likelihood of goodwill impairment to determine whether it should calculate the fair value of a reporting unit. The amendment improves previous guidance by expanding upon the examples of events and circumstances that an entity should consider between annual impairment tests in determining whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Furthermore, the amendment improves the examples of events and circumstances that an entity having a reporting unit with a zero or negative carrying amount should consider in determining whether to measure an impairment loss, if any, under the second step of the goodwill impairment test. The Company performs its annual goodwill impairment test in the fourth quarter and does not expect the adoption of this ASU to significantly impact its consolidated financial statements.
The Company adopted ASU No. 2011-05 “Comprehensive Income (Topic 220): Presentation of Comprehensive Income” (“ASU No. 2011-05”) in the first quarter of 2012. ASU No. 2011-05, which was issued in June 2011, amends existing guidance by allowing only two options for presenting the components of net income and other comprehensive income: (1) in a single continuous financial statement, statement of comprehensive income or (2) in two separate but consecutive financial statements, consisting of an income statement followed by a separate statement of other comprehensive income.

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Additionally, the Company adopted ASU No. 2011-12, "Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05” ("ASU 2011-12"), which was issued in December 2011. ASU 2011-12 defers until further notice ASU No. 2011-05's requirement that items that are reclassified from other comprehensive income to net income be presented on the face of the financial statements. ASU No. 2011-05 required retrospective application. The Company has elected to present other comprehensive income in a separate statement following the consolidated statements of income.
The Company adopted ASU No. 2011-04 “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs” (“ASU No. 2011-04”) in the first quarter of 2012. ASU No. 2011-04 generally provides a uniform framework for fair value measurements and related disclosures between U.S. GAAP and International Financial Reporting Standards (“IFRS”). Additional disclosure requirements in the update include: (1) for Level 3 fair value measurements, quantitative information about unobservable inputs used, a description of the valuation processes used by the entity, and a qualitative discussion about the sensitivity of the measurements to changes in the unobservable inputs; (2) for an entity’s use of a non-financial asset that is different from the asset’s highest and best use, the reason for the difference; (3) for financial instruments not measured at fair value but for which disclosure of fair value is required, the fair value hierarchy level in which the fair value measurements were determined; and (4) the disclosure of all transfers between Level 1 and Level 2 of the fair value hierarchy. The adoption of this update did not have a material impact on our financial statements.

2.
Other Current Assets
Other current assets consist of the following:
 
 
June 30, 2012
 
December 31, 2011
 
(In thousands)
Land held for sale
$
10,172

 
$
10,141

Prepaid expenses
9,544

 
8,202

Notes receivable (See Note 3)
6,413

 
3,104

Other current assets
4,527

 
1,186

Total
$
30,656

 
$
22,633

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:
 
 
June 30, 2012
 
December 31, 2011
 
($ in thousands)
 
($ in thousands)
Credit Quality Indicator
Forgivable
Notes
Receivable
 
Mezzanine
& Other
Notes
Receivable
 
Total
 
Forgivable
Notes
Receivable
 
Mezzanine
& Other
Notes
Receivable
 
Total
Senior
$
—

 
$
11,091

 
$
11,091

 
$
—

 
$
7,900

 
$
7,900

Subordinated
—

 
14,989

 
14,989

 
—

 
13,992

 
13,992

Unsecured
8,124

 
—

 
8,124

 
7,948

 
—

 
7,948

Total notes receivable
8,124

 
26,080

 
34,204

 
7,948

 
21,892

 
29,840

Allowance for losses on non-impaired loans
812

 
47

 
859

 
795

 
225

 
1,020

Allowance for losses on receivables specifically evaluated for impairment
—

 
8,315

 
8,315

 
—

 
8,208

 
8,208

Total loan reserves
812

 
8,362

 
9,174

 
795

 
8,433

 
9,228

Net carrying value
$
7,312

 
$
17,718

 
$
25,030

 
$
7,153

 
$
13,459

 
$
20,612

Current portion, net
$
120

 
$
6,293

 
$
6,413

 
$
102

 
$
3,002

 
$
3,104

Long-term portion, net
7,192

 
11,425

 
18,617

 
7,051

 
10,457

 
17,508

Total
$
7,312

 
$
17,718

 
$
25,030

 
$
7,153

 
$
13,459

 
$
20,612

 
 
 
 
 
 
 
 
 
 
 
 

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, 2011 through June 30, 2012:
 
 
Forgivable
Notes
Receivable
 
Mezzanine
& Other  Notes
Receivable
 
(In thousands)
Balance, December 31, 2011
$
795

 
$
8,433

Provisions
178

 
—

Recoveries
(16
)
 
(71
)
Write-offs
(217
)
 
—

Other(1)
72

 
—

Balance, June 30, 2012
$
812

 
$
8,362

 
(1) Consists of default rate assumption changes
Forgivable Notes Receivable
As of June 30, 2012 and December 31, 2011, the unamortized balance of the Company's forgivable notes receivable totaled $8.1 million and $7.9 million, respectively. The Company recorded an allowance for credit losses on these forgivable notes receivable of $0.8 million at both June 30, 2012 and December 31, 2011, respectively. At June 30, 2012 and December 31, 2011, 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 was $0.6 million and $1.3 million for the three and six months ended June 30, 2012, respectively. Amortization expense for the three and six months ended June 30, 2011 was $0.6 million and $1.1 million, respectively.

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Mezzanine and Other Notes Receivable
The Company has determined that approximately $12.6 million and $11.2 million of its mezzanine and other notes receivable were impaired at June 30, 2012 and December 31, 2011, respectively. The Company has recorded allowance for credit losses on these impaired loans at June 30, 2012 and December 31, 2011 totaling $8.3 million and $8.2 million resulting in a carrying value of impaired loans of $4.3 million and $3.0 million, respectively for which we had no related allowance for credit losses. The Company recognized approximately $31 thousand and $62 thousand of interest income on impaired loans during the three and six months ended June 30, 2012, respectively, on the cash basis. The Company did not recognize any interest on an accrual or cash basis on its impaired loans during the three and six months ended June 30, 2011. The Company had provided loan reserves on non-impaired loans totaling $47 thousand and $0.2 million at June 30, 2012 and December 31, 2011, 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 June 30, 2012
 
 
 
 
 
 
 
 
 
Senior
$
—

 
$
—

 
$
—

 
$
11,091

 
$
11,091

Subordinated
—

 
9,864

 
9,864

 
5,125


14,989

 
$
—

 
$
9,864

 
$
9,864

 
$
16,216

 
$
26,080

As of December 31, 2011
 
 
 
 
 
 
 
 
 
Senior
$
—

 
$
—

 
$
—

 
$
7,900

 
$
7,900

Subordinated
—

 
9,773

 
9,773

 
4,219

 
13,992

 
$
—

 
$
9,773

 
$
9,773

 
$
12,119

 
$
21,892


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 both June 30, 2012 and December 31, 2011, 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 six months ended June 30, 2012 is as follows:
 
 
Accretable Yield ($ in thousands)
Balance, December 31, 2011
 
$
1,793

Additions
 
—

Accretion
 
(290
)
Disposals
 
—

Reclassifications from nonaccretable yield
 
—

Balance, June 30, 2012
 
$
1,503

4.
Receivable – Marketing and Reservation Fees
The marketing fees receivable from cumulative marketing expenses incurred in excess of cumulative marketing fees earned at June 30, 2012 and December 31, 2011 was $25.3 million and $18.5 million, respectively. As of June 30, 2012 and December 31, 2011, the reservation fees receivable related to cumulative reservation expenses incurred in excess of cumulative reservation fees earned was $39.5 million and $35.5 million, respectively. Depreciation and amortization expense attributable to marketing and reservation activities for the three months ended June 30, 2012 and 2011 was $3.5 million and $3.3 million, respectively. Depreciation and amortization expense attributable to marketing and reservation activities for the six months ended June 30, 2012 and 2011 was $7.0 million and $6.5 million, respectively. Interest expense attributable to marketing and reservation activities was $1.0 million for both the three month periods ended June 30, 2012 and 2011. Interest expense attributable to marketing and reservation activities was $2.2 million and $2.0 million for the six months ended June 30, 2012 and 2011, respectively.
The Company evaluates the receivable for marketing and reservation costs in excess of cumulative marketing and reservation

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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:
 
 
June 30, 2012
 
December 31, 2011
 
(In thousands)
Notes receivable (see Note 3)
$
18,617

 
$
17,508

Equity method investments
10,069

 
4,338

Deferred financing fees
10,095

 
3,351

Land held for sale
1,300

 
1,300

Other
2,716

 
2,787

Total
$
42,797

 
$
29,284

During the three months ended March 31, 2011, the Company determined that one parcel of land no longer met the criteria to be classified as a current asset held for sale. As a result, the Company reclassified this land to other long-term assets on the Company’s consolidated balance sheets at the lower of its carrying amount or fair value. The Company determined that the carrying amount of the land exceeded its estimated fair value by approximately $1.8 million based on comparable sales. As a result, in the first quarter of 2011, the Company reduced the carrying amount of the land to its estimated fair value and recognized a $1.8 million loss in other gains and losses in the consolidated statements of income.
 
Fair Value Measurements Using
 
($ in millions)
Description
June 30, 2012
 
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total  Gains
(Losses)
 
 
 
 
 
 
 
 
 
 
Land held for sale
$
1.3

 
$
—

 
$
1.3

 
$
—

 
$
(1.8
)

6.
Deferred Revenue
Deferred revenue consists of the following:
 
 
June 30,
2012
 
December 31,
2011
 
(In thousands)
Loyalty programs
$
58,907

 
$
64,636

Initial, relicensing and franchise fees
3,998

 
3,198

Procurement service fees
703

 
957

Other
814

 
34

Total
$
64,422

 
$
68,825


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7.
Debt
Debt consists of the following at:
 
 
June 30, 2012
 
December 31, 2011
 
(In thousands)
$400 million senior notes with an effective interest rate of 5.94% at June 30, 2012
$
400,000

 
$
—

$250 million senior notes with an effective interest rate of 6.19% less discount of $0.5 million and $0.6 million at June 30, 2012 and December 31, 2011, respectively
249,475

 
249,444

Capital lease obligations due 2016 with an effective interest rate of 3.18% at both June 30, 2012 and December 31, 2011, respectively
2,848

 
3,172

Other notes payable
77

 
89

Total debt
$
652,400

 
$
252,705

Less current portion
683

 
673

Total long-term debt
$
651,717

 
$
252,032

Senior Unsecured Notes Due 2022
On June 27, 2012 the Company completed a $400 million unsecured note offering ("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 intends to use 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 proposed new credit facility, to pay the special cash dividend totaling approximately $600 million declared by the Company's board of directors on July 26, 2012 and payable 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 incurred debt issuance costs in connection with the 2012 Senior Notes totaling approximately $7.5 million, which are included in other current assets and other assets on the Company's consolidated balance sheets. These debt issuance costs are amortized, on a straight-line basis, which is not materially different than the effective interest method, through the maturity of the 2012 Senior Notes. Amortization of these costs is included in interest expense in the consolidated statements of income.
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 to be paid semi-annually on February 28th and August 28th. 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.
Revolving Credit Facility
On February 24, 2011, the Company entered into a new $300 million senior unsecured revolving credit agreement (the “Revolver”) with Wells Fargo Bank, National Association, as administrative agent and a syndicate of lenders. Simultaneously with the closing of the Revolver, the $350 million unsecured revolving credit agreement dated as of June 2006 was terminated. The Revolver provides for a $300 million unsecured revolving credit facility with a final maturity date on February 24, 2016. Up to $30 million of borrowings under the Revolver may be used for letters of credit and up to $20 million of borrowings under the Revolver may be used for swing-line loans.
The Revolver is unconditionally guaranteed, jointly and severally, on a senior unsecured basis by all of the Company's subsidiaries that currently guaranty the obligations under the Company's Indenture governing the terms of its senior notes due

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2020 and 2022.
The Company may at any time prior to the final maturity date increase the amount of the Revolver by up to an additional $150 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.
The Company may elect to have borrowings under the Revolver bear 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 Revolver requires the Company to pay a quarterly facility fee on the full amount of the commitments under the Revolver (regardless of usage) ranging from 20 to 45 basis points based upon the credit rating of the Company.
The Revolver requires that the Company and its restricted subsidiaries comply with various covenants, including with respect to restrictions on liens, incurring indebtedness, making investments and effecting mergers and/or asset sales. In addition, the Revolver imposes financial maintenance covenants requiring the Company to maintain a total leverage ratio of not more than 3.5 to 1.0 and an interest coverage ratio of at least 3.5 to 1.0. The Revolver 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 Revolver to be immediately due and payable. At June 30, 2012 the Company was in compliance with all covenants under the Revolver.
The proceeds of the Revolver are used for general corporate purposes, including working capital, debt repayment, stock repurchases, dividends, investments and other permitted uses. At June 30, 2012, the Company had no amounts outstanding under the Revolver.

8.
Pension Plan
The Company sponsors an unfunded non-qualified defined benefit plan (“SERP”) for certain senior executives. No assets are held with respect to the SERP; therefore benefits are funded as paid to participants. For the three months ended June 30, 2012 and 2011, the Company recorded $0.2 million and $0.1 million, respectively, in expenses related to the SERP which are included in selling general and administrative ("SG&A") expense in the accompanying consolidated statements of income. The expenses related to the SERP for each of the six month periods ended June 30, 2012 and 2011 were $0.3 million.
On December 26, 2011, the Company's board of directors approved the termination of the SERP effective immediately. The Company will effectuate the termination of the SERP through the payment of lump sum distributions to all SERP participants based upon the actuarial equivalent commuted lump sum value of the full accrued benefit earned by each such participant, using the actuarial and other assumptions that have not yet been determined. The Company expects to complete the settlement of the plan benefits prior to December 31, 2012. Based on the assumptions chosen to calculate the lump sum value of distributions, the actual settlement of the SERP liability may differ from the Company's current estimate of the projected benefit obligation which totals $12.0 million resulting in a settlement gain or loss in 2012.

The following table presents the components of net periodic benefit costs for the three and six months ended June 30, 2012 and 2011:
 
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
(In thousands)
2012
 
2011
 
2012
 
2011
Components of net periodic pension cost:
 
 
 
 
 
 
 
Interest cost
$
131

 
$
136

 
$
263

 
$
271

Amortization of actuarial loss
32

 
—

 
$
64

 
$
—

Net periodic pension cost
$
163

 
$
136

 
$
327

 
$
271


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The 2012 net periodic pension costs are expected to be approximately $0.7 million. The components of projected pension costs for the year ended December 31, 2012 are as follows:
 
(in thousands)
 
Components of net periodic pension cost:
 
Interest cost
$
526

Amortization of actuarial loss
128

Net periodic pension cost
$
654

The following is a reconciliation of the changes in the projected benefit obligation for the six months ended June 30, 2012:
 
(in thousands)
 
Projected benefit obligation, December 31, 2011
$
11,896

Interest cost
263

Benefit payments
(207
)
Projected benefit obligations, June 30, 2012
$
11,952

The amounts in accumulated other comprehensive income (loss) that have not yet been recognized as components of net periodic benefit costs at June 30, 2012 are as follows:
 
(in thousands)
 
Transition asset (obligation)
$
—

Prior service cost
—

Accumulated loss
(2,311
)
Total
$
(2,311
)

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 $15.9 million and $17.2 million, as of June 30, 2012 and December 31, 2011, 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 June 30, 2012 and 2011 was $0.1 million and $0.2 million, respectively. Compensation expense recorded in SG&A for each of the six months ended June 30, 2012 and 2011 was $0.5 million.
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 $7.4 million and $14.2 million as of June 30, 2012 and December 31, 2011, respectively, and are recorded at their fair value, based on quoted market prices. At June 30, 2012, the Company expects $5.2 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 (losses) gains during the three months ended June 30, 2012 and 2011 of approximately ($24 thousand) and $48 thousand, respectively. The Company recorded investment gains during the six

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months ended June 30, 2012 and 2011 of approximately $1.1 million and $0.5 million, respectively. In addition, the EDCP Plan held shares of the Company's common stock at a market value of $0.1 million at June 30, 2012 which were recorded as a component of shareholders' deficit.
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 June 30, 2012 and December 31, 2011, the Company had recorded a deferred compensation liability of $10.9 million and $10.4 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 decrease in compensation expense recorded in SG&A for the three months ended June 30, 2012 and 2011 was $0.3 million and $0.1 million, respectively. The net increase in compensation expense recorded in SG&A during the six months ended June 30, 2012 and 2011 was $0.6 million and $0.2 million, respectively.
The diversified investments held in the trusts were $10.0 million and $9.5 million as of June 30, 2012 and December 31, 2011, 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 losses during the three months ended June 30, 2012 and 2011 of approximately $0.3 million and $9 thousand, respectively. The Company recorded investment gains during the six months ended June 30, 2012 and 2011 of approximately $0.6 million and $0.3 million, respectively. In addition, the Non-Qualified Plan held shares of the Company's common stock with a market value of $0.9 million at both June 30, 2012 and December 31, 2011, 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 June 30, 2012 and December 31, 2011, 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 June 30, 2012
 
 
 
 
 
 
 
Money market funds, included in cash and cash equivalents
$
20,001

 
$
—

 
$
20,001

 
$
—

Mutual funds(1)
11,277

 
11,277

 
—

 
—

Money market funds(1)
6,128

 
—

 
6,128

 
—

 
$
37,406

 
$
11,277

 
$
26,129

 
$
—

As of December 31, 2011
 
 
 
 
 
 
 
Money market funds, included in cash and cash equivalents
$
20,001

 
$
—

 
$
20,001

 
$
—

Mutual funds(1)
21,534

 
21,534

 
—

 
—

Money market funds(1)
2,238

 
—

 
2,238

 
—

 
$
43,773

 
$
21,534

 
$
22,239

 
$
—

________________________ 
(1)
Included in Investments, employee benefit plans fair value on the consolidated balance sheets.
During the six months ended June 30, 2012, the Company sold approximately $11.8 million of mutual funds (Level 1 assets) held in the employee benefit plan trusts. Approximately $8.4 million of these assets were distributed from the irrevocable trust with the remaining $3.4 million transferred to money market funds (Level 2 assets). There were no transfers between Level 1 and 2 assets during the three months ended June 30, 2012. 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.
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 Revolver adjust frequently based on current market rates; accordingly its carrying amount approximates fair value.
We estimated 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 June 30, 2012 and December 31, 2011, the $250 million senior notes had an approximate fair value of $258.8 million and $267.7 million, respectively. At June 30, 2012, the $400 million senior notes, which were entered into in 2012, had an approximate fair value of $419.0 million.

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 33.5% and 34.5% for the three months ended June 30, 2012 and 2011, respectively. The effective income tax rate for the three months ended June 30, 2012 was lower than the effective income tax rate for the three months ended June 30, 2011 primarily due to the impact of foreign operations. The effective income tax rates were 33.7% and 32.4% for the six months ended June 30, 2012 and 2011, respectively. The effective income tax rate for the six months ended June 30, 2011 reflects a nonrecurring adjustment of $1.4 million to our current federal taxes payable.

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12.
Share-Based Compensation and Capital Stock
Stock Options
No stock options were granted during the three month periods ended June 30, 2012 and 2011. The Company granted 0.2 million and 0.2 million options to certain employees of the Company at a fair value of $1.6 million and $2.1 million for the six months ended June 30, 2012 and 2011, 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:
 
            
 
2012 Grants
 
2011 Grants
Risk-free interest rate
0.78
%
 
2.10
%
Expected volatility
40.15
%
 
39.51
%
Expected life of stock option
4.4 years

 
4.4 years

Dividend yield
2.08
%
 
1.79
%
Requisite service period
4 years

 
4 years

Contractual life
7 years

 
7 years

Weighted average fair value of options granted
$
9.98

 
$
12.42

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 June 30, 2012 was $11.5 million and $8.7 million, respectively. The total intrinsic value of options exercised during the three months ended June 30, 2012 and 2011 was approximately $0.1 million and $0.6 million, respectively. The total intrinsic value of options exercised during the six months ended June 30, 2012 and 2011 was $0.5 million and $2.3 million, respectively.

The Company received approximately $0.1 million and $0.9 million in proceeds from the exercise of 4,988 and 38,600 employee stock options during the three month periods ended June 30, 2012 and 2011, respectively. The Company received $0.4 million and $3.1 million in proceeds from the exercise of 25,204 and 120,931 of employee stock options during the six month periods ended June 30, 2012 and 2011, respectively.
Restricted Stock
The following table is a summary of activity related to restricted stock grants:
 
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2012
 
2011
 
2012
 
2011
Restricted share grants
20,468

 
20,979

 
258,487

 
201,624

Weighted average grant date fair value per share
$
37.62

 
$
36.71

 
$
35.85

 
$
40.78

Aggregate grant date fair value ($000)
$
770

 
$
770

 
$
9,267

 
$
8,222

Restricted shares forfeited
5,974

 
21,562

 
10,302

 
27,368

Vesting service period of shares granted
12 - 36 months

 
12 - 36 months

 
12 - 68 months

 
12 - 48 months

Grant date fair value of shares vested ($000)
$
1,605

 
$
1,526

 
$
6,618

 
$
6,357

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 board of directors are recognized over the shorter of the

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requisite service period or the length of time until retirement since the terms of the grant provide that the awards will vest upon retirement.
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 a minimum of 50% of the performance target is 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 130% 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
 
Six Months Ended
 
June 30,
 
June 30,
 
2012
 
2011
 
2012
 
2011
Performance vested restricted stock units granted at target
55,433

 
—

 
93,909

 
25,036

Weighted average grant date fair value per share
$
36.08

 
$
—

 
$
35.88

 
$
41.25

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

 
$
—

 
$
3,370

 
$
1,033

Stock units forfeited
57,176

 
2,442

 
57,176

 
41,512

Requisite service period
4-5 years

 
—

 
3-5 years

 
3 years

During the three and six months ended June 30, 2012 and 2011, no PVRSU grants vested. During the three months ended June 30, 2012, PVRSU grants totaling 57,176 units were terminated in accordance with an amended and restated employment agreement. During the six months ended June 30, 2011, PVRSU grants totaling 39,070 units were forfeited since the Company did not achieve the minimum performance conditions contained in the stock awards. The remaining 2,442 units were forfeited upon employee termination in the three and six months ended June 30, 2011.
A summary of stock-based award activity as of June 30, 2012 and changes during the six 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, 2012
1,573,726

 
$
33.30

 
 
 
565,627

 
$
34.43

 
109,769

 
$
35.57

Granted
160,408

 
35.60

 
 
 
258,487

 
35.85

 
93,909

 
35.88

Exercised/Vested
(25,204
)
 
17.65

 
 
 
(195,975
)
 
33.77

 
—

 
—

Forfeited/Expired
(3,161
)
 
37.46

 
 
 
(10,302
)
 
36.37

 
(57,176
)
 
34.98

Outstanding at June 30, 2012
1,705,769

 
$
33.74

 
4.3 years
 
617,837

 
$
35.21

 
146,502

 
$
36.00

Options exercisable at June 30, 2012
1,221,256

 
$
33.48

 
3.5 years
 
 
 
 
 
 
 
 

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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 and six months ended June 30, 2012 and 2011:
 
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
(in millions)
2012
 
2011
 
2012
 
2011
Stock options
$
0.5

 
$
0.7

 
$
1.1

 
$
1.3

Restricted stock
1.9

 
2.0

 
3.9

 
3.7

Performance vested restricted stock units
0.3

 
0.2

 
0.5

 
0.3

Total
$
2.7

 
$
2.9

 
$
5.5

 
$
5.3

Income tax benefits
$
1.0

 
$
1.1

 
$
2.0

 
$
2.0

Dividends
On April 30, 2012, the Company's board of directors declared a cash dividend of $0.185 per share (or approximately $10.7 million in the aggregate), which was paid on July 16, 2012 to shareholders of record as of July 2, 2012. On February 20, 2012, the Company's board of directors declared a cash dividend of $0.185 per share (or approximately $10.7 million in the aggregate), which was paid on April 16, 2012 to shareholders of record as of April 2, 2012.
On May 5, 2011 the Company's board of directors declared a cash dividend of $0.185 per share (or approximately $11.0 million in the aggregate), which was paid on July 15, 2011 to shareholders of record as of July 1, 2011. On February 21, 2011, the Company's board of directors declared a cash dividend of $0.185 per share (or approximately $11.0 million in the aggregate), which was paid on April 15, 2011 to shareholders of record as of April 1, 2011.
Share Repurchases and Redemptions
During the three and six months ended June 30, 2012, the Company purchased 0.2 million and 0.5 million shares of common stock under the share repurchase program at a total cost of $7.0 million and $19.9 million, respectively. No shares of common stock were purchased by the Company under the share repurchase program during the three and six months ended June 30, 2011.
During the three and six months ended June 30, 2012, the Company redeemed 7,350 and 62,512 shares of common stock at a total cost of approximately $0.3 million and $2.3 million from employees to satisfy statutory minimum tax requirements from the vesting of restricted stock grants. During the three and six months ended June 30, 2011, the Company redeemed 8,723 and 64,027 shares of common stock at a total cost of approximately $0.3 million and $2.5 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
 
Six Months Ended
 
June 30,
 
June 30,
(In thousands, except per share amounts)
2012
 
2011
 
2012
 
2011
Computation of Basic Earnings Per Share:
 
 
 
 
 
 
 
Net income
$
31,862

 
$
27,578

 
$
51,859

 
$
43,308

Income allocated to participating securities
(346
)
 
(274
)
 
(547
)
 
(430
)
Net income available to common shareholders
$
31,516

 
$
27,304

 
$
51,312

 
$
42,878

Weighted average common shares outstanding – basic
57,357

 
59,243

 
57,489

 
59,162

Basic earnings per share
$
0.55

 
$
0.46

 
$
0.89

 
$
0.72

Computation of Diluted Earnings Per Share:
 
 
 
 
 
 
 
Net income
$
31,862

 
$
27,578

 
$
51,859

 
$
43,308

Income allocated to participating securities
(346
)
 
(274
)
 
(546
)
 
(430
)
Net income available to common shareholders
$
31,516

 
$
27,304

 
$
51,313

 
$
42,878

Weighted average common shares outstanding – basic
57,357

 
59,243

 
57,489

 
59,162

Diluted effect of stock options and PVRSUs
101

 
81

 
101

 
98

Weighted average shares outstanding-diluted
57,458

 
59,324

 
57,590

 
59,260

Diluted earnings per share
$
0.55

 
$
0.46

 
$
0.89

 
$
0.72


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 June 30, 2012 and 2011, the Company had 1.7 million and 1.6 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 both the three and six month periods ended June 30, 2012 and 2011, 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 June 30, 2012 and 2011, PVRSUs totaling 146,502 and 111,436, respectively were excluded from the computation since the performance conditions had not been met.


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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.

Choice Hotels International, Inc.
Condensed Consolidating Statement of Income
For the Three Months Ended June 30, 2012
(Unaudited, in Thousands)
 
Parent
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
REVENUES:
 
 
 
 
 
 
 
 
 
Royalty fees
$
59,550

 
$
26,055

 
$
9,798

 
$
(29,339
)
 
$
66,064

Initial franchise and relicensing fees
3,030

 
—

 
148

 
—

 
3,178

Procurement services
6,712

 
—

 
124

 
—

 
6,836

Marketing and reservation
83,505

 
84,341

 
4,722

 
(77,935
)
 
94,633

Other items, net
1,526

 
1,224

 
160

 
—

 
2,910

Total revenues
154,323

 
111,620

 
14,952

 
(107,274
)
 
173,621

OPERATING EXPENSES:
 
 
 
 
 
 
 
 
 
Selling, general and administrative
28,536

 
21,191

 
4,166

 
(29,339
)
 
24,554

Marketing and reservation
83,551

 
84,463

 
4,554

 
(77,935
)
 
94,633

Other items, net
705

 
1,937

 
202

 
—

 
2,844

Total operating expenses
112,792

 
107,591

 
8,922

 
(107,274
)
 
122,031

Operating income
41,531

 
4,029

 
6,030

 
—

 
51,590

OTHER INCOME AND EXPENSES, NET:
 
 
 
 
 
 
 
 
 
Interest expense
4,510

 
(972
)
 
2

 
—

 
3,540

Equity in earnings of consolidated subsidiaries
(8,165
)
 
—

 
—

 
8,165

 
—

Other items, net
(287
)
 
377

 
21

 
—

 
111

Total other income and expenses, net
(3,942
)
 
(595
)
 
23

 
8,165

 
3,651

Income before income taxes
45,473

 
4,624

 
6,007

 
(8,165
)
 
47,939

Income taxes
13,611

 
2,252

 
214

 
—

 
16,077

Net income
$
31,862

 
$
2,372

 
$
5,793

 
$
(8,165
)
 
$
31,862



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Table of Contents

Choice Hotels International, Inc.
Condensed Consolidating Statement of Income
For the Three Months Ended June 30, 2011
(Unaudited, in Thousands)

 
Parent
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
REVENUES:
 
 
 
 
 
 
 
 
 
Royalty fees
$
55,170

 
$
26,711

 
$
8,525

 
$
(28,786
)
 
$
61,620

Initial franchise and relicensing fees
2,573

 
—

 
206

 
—

 
2,779

Procurement services
6,557

 
—

 
116

 
—

 
6,673

Marketing and reservation
78,514

 
87,289

 
4,588

 
(79,559
)
 
90,832

Other items, net
1,793

 
1,073

 
531

 
—

 
3,397

Total revenues
144,607

 
115,073

 
13,966

 
(108,345
)
 
165,301

OPERATING EXPENSES:
 
 
 
 
 
 
 
 
 
Selling, general and administrative
28,476

 
22,915

 
3,934

 
(28,786
)
 
26,539

Marketing and reservation
81,244

 
84,675

 
4,472

 
(79,559
)
 
90,832

Other items, net
706

 
1,879

 
223

 
—

 
2,808

Total operating expenses
110,426

 
109,469

 
8,629

 
(108,345
)
 
120,179

Operating income
34,181

 
5,604

 
5,337

 
—

 
45,122

OTHER INCOME AND EXPENSES, NET:
 
 
 
 
 
 
 
 
 
Interest expense
4,230

 
(965
)
 
2

 
—

 
3,267

Equity in earnings of consolidated subsidiaries
(8,797
)
 
—

 
—

 
8,797

 
—

Other items, net
(207
)
 
(39
)
 
(13
)
 
—

 
(259
)
Total other income and expenses, net
(4,774
)
 
(1,004
)
 
(11
)
 
8,797

 
3,008

Income before income taxes
38,955

 
6,608

 
5,348

 
(8,797
)
 
42,114

Income taxes
11,377

 
2,759

 
400

 
—

 
14,536

Net income
$
27,578

 
$
3,849

 
$
4,948

 
$
(8,797
)
 
$
27,578


























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Table of Contents



Choice Hotels International, Inc.
Condensed Consolidating Statement of Income
For the Six Months Ended June 30, 2012
(Unaudited, in Thousands)
 
Parent
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
REVENUES:
 
 
 
 
 
 
 
 
 
Royalty fees
$
101,676

 
$
52,275

 
$
16,856

 
$
(56,890
)
 
$
113,917

Initial franchise and relicensing fees
5,463

 
—

 
243

 
—

 
5,706

Procurement services
9,860

 
—

 
291

 
—

 
10,151

Marketing and reservation
143,158

 
157,025

 
9,109

 
(143,730
)
 
165,562

Other items, net
4,967

 
2,202

 
285

 
—

 
7,454

Total revenues
265,124

 
211,502

 
26,784

 
(200,620
)
 
302,790

OPERATING EXPENSES:
 
 
 
 
 
 
 
 
 
Selling, general and administrative
53,023

 
44,019

 
8,751

 
(56,890
)
 
48,903

Marketing and reservation
145,105

 
155,363

 
8,824

 
(143,730
)
 
165,562

Other items, net
1,411

 
3,838

 
421

 
—

 
5,670

Total operating expenses
199,539

 
203,220

 
17,996

 
(200,620
)
 
220,135

Operating income
65,585

 
8,282

 
8,788

 
—

 
82,655

OTHER INCOME AND EXPENSES, NET:
 
 
 
 
 
 
 
 
 
Interest expense
8,726

 
(2,075
)
 
6

 
—

 
6,657

Equity in earnings of consolidated subsidiaries
(15,046
)
 
—

 
—

 
15,046

 
—

Other items, net
(489
)
 
(1,626
)
 
(59
)
 
—

 
(2,174
)
Total other income and expenses, net
(6,809
)
 
(3,701
)
 
(53
)
 
15,046

 
4,483

Income before income taxes
72,394

 
11,983

 
8,841

 
(15,046
)
 
78,172

Income taxes
20,535

 
5,310

 
468

 
—

 
26,313

Net income
$
51,859

 
$
6,673

 
$
8,373

 
$
(15,046
)
 
$
51,859


23
Table of Contents


Choice Hotels International, Inc.
Condensed Consolidating Statement of Income
For the Six Months Ended June 30, 2011
(Unaudited, in Thousands)



 
Parent
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations