CHH-10Q/A-09.30.2013
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 _____________________________________________ 
FORM 10-Q/A
Amendment No. 1
 _____________________________________________ 
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED September 30, 2013
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NO. 001-13393
 _____________________________________________ 
CHOICE HOTELS INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
_____________________________________________ 
DELAWARE
 
52-1209792
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
1 CHOICE HOTELS CIRCLE, SUITE 400
ROCKVILLE, MD 20850
(Address of principal executive offices)
(Zip Code)
(301) 592-5000
(Registrant’s telephone number, including area code)
 
(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 SEPTEMBER 30, 2013
Common Stock, Par Value $0.01 per share
 
58,570,858
 
 
 
 
 
 


EXPLANATORY NOTE
 
As described in Choice Hotels International, Inc's (the "Company") Current Report on Form 8-K filed on August 5, 2014 and Form 10-Q for the quarter ended June 30, 2014 filed on August 11, 2014, in connection with the preparation of the consolidated financial statements for the second quarter of 2014, the Company reviewed its accounting policies and practices, including the historical practice of reporting royalty and certain marketing and reservation fees one month in arrears as compared to when the gross room revenues (on which the fees are based) are earned by the Company's franchisees. The Company previously determined that the impact of the revenue recognition timing related to these revenues on its annual financial statements was not material and therefore reported these revenues one month in arrears despite the fact that these fees meet the definition of being earned and realizable in the same period that the underlying gross room revenues are earned by its franchisees. However, the Company reassessed the impact of reporting these revenues one month in arrears on interim periods and determined that this revenue recognition practice, which was not in accordance with generally accepted accounting principles in the United States of America ("GAAP"), was material to interim periods. Due to the seasonality of the Company's business, the impact of this change on previously reported interim revenues, operating income and earnings per share as reported in the Company's consolidated statements of income varies for individual past quarters and is generally positive in the first two quarters of the year and negative in the final two quarters of the year. As a result, the Company has corrected its revenue recognition method to recognize royalty and certain marketing and reservation system fees as revenue in the same period as the gross room revenues are earned by its franchisees.

This Form 10-Q/A amends the Company’s Quarterly Report on Form 10-Q for the periods ended September 30, 2013 and 2012 as originally filed with the Securities and Exchange Commission (the “SEC”) on November 12, 2013 (the "Original Filing"). This Form 10-Q/A amends the Original Filing to correct the Company’s accounting for the Company's historical practice of reporting royalty and certain marketing and reservation fees one month in arrears as described in Note 1 to the consolidated financial statements and other immaterial errors as well as to correct management's evaluation of disclosure controls and procedures as of September 30, 2013. In addition, the Company's results of operations have been recast to reflect discontinued operations related to the Company's plan to dispose of the three Company owned Mainstay Suites hotels entered into in the first quarter of 2014. Revisions to the Original Filing have been made to the following items solely as a result of and to reflect the restatements:
 
•
Item 1 - Financial Statements
 
•
Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
•
Item 4 - Controls and Procedures
 
•
Item 6 - Exhibits

The Company has also determined that a control deficiency related to the recording revenues for certain royalty and marketing and reservations system fees one month in arrears, which gave rise to these restatements, constituted a material weakness in its internal controls over financial reporting. As a result, the Company is restating management's December 31, 2013 report on internal control over financial reporting and its conclusions on disclosure controls and procedures to address the material weakness in internal control over financial reporting. As a result of the restatement, management has concluded that our disclosure controls and procedures were not effective as of September 30, 2013. The Company plans to remediate this material weakness during the year ending December 31, 2014 by updating the revenue recognition practice to ensure the accounting for royalty and certain marketing and reservation system fees is in compliance with GAAP. The material weakness noted above cannot be considered remediated until the applicable remedial controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. The required testing for remediation will occur prior the Company completing its assessment of internal controls for the year ending December 31, 2014. See "Item 4 - Controls and Procedures."
 
In accordance with applicable SEC rules, this Form 10-Q/A includes certifications from our Chief Executive Officer and Chief Financial Officer dated as of the date of this filing.

Except for the foregoing amended and restated information, no other changes have been made to the Original Form 10-Q. This Amendment continues to describe conditions as of the date of the Original Filing Date, and the disclosures contained herein have not been updated to reflect events, results or developments that have occurred after the Original Filing Date, or to modify or update those disclosures affected by subsequent events. 

Accordingly, forward-looking statements included in this Form 10-Q/A represent management’s views as of the Original Filing date and should not be assumed to be accurate as of any date thereafter. This Form 10-Q/A should be read in conjunction with the Company’s other filings with the SEC, together with any amendments to those filings.





Table of Contents

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


4
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
 
Nine Months Ended
 
September 30,
 
September 30,
 
2013 (Restated)
 
2012 (Restated)
 
2013 (Restated)
 
2012 (Restated)
REVENUES:
 
 
 
 
 
 
 
Royalty fees
$
79,460

 
$
78,038

 
$
208,206

 
$
202,987

Initial franchise and relicensing fees
4,650

 
3,247

 
12,843

 
8,953

Procurement services
4,708

 
3,839

 
16,204

 
13,990

Marketing and reservation
124,809

 
117,965

 
311,204

 
294,345

Other
3,091

 
2,182

 
7,362

 
7,434

Total revenues
216,718

 
205,271

 
555,819

 
527,709

 
 
 
 
 
 
 
 
OPERATING EXPENSES:
 
 
 
 
 
 
 
Selling, general and administrative
26,409

 
23,072

 
82,808

 
72,322

Depreciation and amortization
2,272

 
1,860

 
6,701

 
5,588

Marketing and reservation
124,809

 
117,965

 
311,204

 
294,345

Total operating expenses
153,490

 
142,897

 
400,713

 
372,255

 
 
 
 
 
 
 
 
Operating income
63,228

 
62,374

 
155,106

 
155,454

OTHER INCOME AND EXPENSES, NET:
 
 
 
 
 
 
 
Interest expense
10,757

 
10,166

 
32,334

 
16,823

Interest income
(676
)
 
(425
)
 
(1,979
)
 
(1,156
)
Loss on extinguishment of debt
—

 
526

 
—

 
526

Other (gains) and losses
(703
)
 
(511
)
 
(1,266
)
 
(2,137
)
Equity in net (income) loss of affiliates
(421
)
 
(171
)
 
(340
)
 
12

Total other income and expenses, net
8,957

 
9,585

 
28,749

 
14,068

Income from continuing operations before income taxes
54,271

 
52,789

 
126,357

 
141,386

Income taxes
15,698

 
10,152

 
36,384

 
40,747

Income from continuing operations, net of income taxes
38,573

 
42,637

 
89,973

 
100,639

Income from discontinued operations, net of income taxes
143

 
107

 
293

 
270

Net income
$
38,716

 
$
42,744

 
$
90,266

 
$
100,909

 
 
 
 
 
 
 

Basic earnings per share
 
 
 
 
 
 

   Continuing operations
$
0.66

 
$
0.74

 
$
1.54

 
$
1.73

   Discontinued operations
—

 
—

 
—

 
0.01


$
0.66

 
$
0.74

 
$
1.54

 
$
1.74

Diluted earnings per share

 
 
 
 
 

   Continuing operations
$
0.65

 
$
0.73

 
$
1.53

 
$
1.73

   Discontinued operations
0.01

 
—

 
—

 
—


$
0.66

 
$
0.73

 
$
1.53

 
$
1.73

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

5
Table of Contents

CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED, IN THOUSANDS)
 
        
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2013 (Restated)
 
2012 (Restated)
 
2013 (Restated)
 
2012 (Restated)
Net income
$
38,716

 
$
42,744

 
$
90,266

 
$
100,909

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

 
215

 
646

 
646

Foreign currency translation adjustment
524

 
211

 
(1,803
)
 
191

Amortization of pension related costs, net of tax:
 
 
 
 
 
 
 
Actuarial loss (net of income tax of $12 and $36 for the three and nine months ended September 30, 2012, respectively)
—

 
20

 
—

 
60

Other comprehensive income (loss), net of tax
739

 
446

 
(1,157
)
 
897

Comprehensive income
$
39,455

 
$
43,190

 
$
89,109

 
$
101,806


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

6
Table of Contents


CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED, IN THOUSANDS, EXCEPT SHARE AMOUNTS)
 
September 30, 2013 (Restated)
 
December 31,
2012
ASSETS
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
161,138

 
$
134,177

Receivables (net of allowance for doubtful accounts of $11,546 and $11,658, respectively)
102,887

 
79,999

Income taxes receivable
—

 
2,201

Deferred income taxes
27,367

 
26,198

Investments, employee benefit plans, at fair value
386

 
3,486

Other current assets
30,002

 
36,669

Total current assets
321,780

 
282,730

Property and equipment, at cost, net
67,000

 
51,651

Goodwill
65,813

 
65,813

Franchise rights and other identifiable intangibles, net
10,875

 
13,473

Advances, marketing and reservation activities
14,070

 
29,467

Investments, employee benefit plans, at fair value
14,950

 
12,755

Other assets
88,204

 
76,013

Total assets
$
582,692

 
$
531,902

LIABILITIES AND SHAREHOLDERS’ DEFICIT
 
 
 
Current liabilities
 
 
 
Accounts payable
$
40,758

 
$
38,714

Accrued expenses
43,475

 
55,552

Deferred revenue
61,401

 
71,154

Current portion of long-term debt
9,132

 
8,195

Deferred compensation and retirement plan obligations
2,439

 
2,522

Income taxes payable
21,906

 
—

Total current liabilities
179,111

 
176,137

Long-term debt
815,957

 
847,150

Deferred compensation and retirement plan obligations
21,219

 
20,399

Deferred income taxes
11,722

 
10,864

Other liabilities
24,146

 
15,990

Total liabilities
1,052,155

 
1,070,540

Commitments and Contingencies


 


SHAREHOLDERS’ DEFICIT
 
 
 
Common stock, $0.01 par value, 160,000,000 shares authorized; 95,345,362 shares issued at September 30, 2013 and December 31, 2012 and 58,570,858 and 58,171,059 shares outstanding at September 30, 2013 and December 31, 2012, respectively
586

 
582

Additional paid-in-capital
114,571

 
110,246

Accumulated other comprehensive loss
(5,373
)
 
(4,216
)
Treasury stock (36,774,504 and 37,174,303 shares at September 30, 2013 and December 31, 2012, respectively), at cost
(919,516
)
 
(927,776
)
Retained earnings
340,269

 
282,526

Total shareholders’ deficit
(469,463
)
 
(538,638
)
Total liabilities and shareholders’ deficit
$
582,692

 
$
531,902

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

7
Table of Contents

CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
 
Nine Months Ended
 
September 30,
 
2013 (Restated)
 
2012 (Restated)
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
90,266

 
$
100,909

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

Depreciation and amortization
7,094

 
5,989

Provision for bad debts, net
2,264

 
2,051

Non-cash stock compensation and other charges
8,635

 
7,306

Non-cash interest and other (income) loss
1,057

 
(633
)
Deferred income taxes
(351
)
 
1,145

Loss on extinguishment of debt
—

 
526

Dividends received from equity method investments
1,109

 
855

Equity in net (income) loss of affiliates
(340
)
 
12

Changes in assets and liabilities:
 
 
 
Receivables
(26,635
)
 
(32,261
)
Advances to/from marketing and reservation activities, net
29,712

 
27,442

Forgivable notes receivable, net
(5,722
)
 
(2,853
)
Accounts payable
1,280

 
5,980

Accrued expenses
(22,757
)
 
(10,309
)
Income taxes payable/receivable
24,107

 
13,317

Deferred revenue
(9,686
)
 
8,018

Other assets
(2,395
)
 
(7,458
)
Other liabilities
8,851

 
(1,613
)
Net cash provided by operating activities
106,489

 
118,423

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 

Investment in property and equipment
(27,922
)
 
(12,525
)
Equity method investments
(3,761
)
 
(9,454
)
Issuance of mezzanine and other notes receivable
—

 
(4,236
)
Collections of mezzanine and other notes receivable
224

 
110

Purchases of investments, employee benefit plans
(1,845
)
 
(1,191
)
Proceeds from sales of investments, employee benefit plans
4,052

 
10,909

Other items, net
(578
)
 
(322
)
Net cash used in investing activities
(29,830
)
 
(16,709
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 

Net borrowings (repayments) pursuant to revolving credit facilities
(27,500
)
 
16,725

Proceeds from issuance of long-term debt
3,360

 
543,500

Principal payments on long-term debt
(6,158
)
 
(502
)
Purchase of treasury stock
(3,684
)
 
(22,227
)
Dividends paid
(22,026
)
 
(632,751
)
Excess tax benefits from stock-based compensation
1,216

 
793

Debt issuance costs
—

 
(4,753
)
Proceeds from exercise of stock options
6,677

 
4,695

Net cash used in financing activities
(48,115
)
 
(94,520
)
Net change in cash and cash equivalents
28,544

 
7,194

Effect of foreign exchange rate changes on cash and cash equivalents
(1,583
)
 
813

Cash and cash equivalents at beginning of period
134,177

 
107,057

Cash and cash equivalents at end of period
$
161,138

 
$
115,064

Supplemental disclosure of cash flow information:
 
 
 
Cash payments during the period for:
 
 
 
Income taxes, net of refunds
$
12,990

 
$
25,700

Interest
$
42,244

 
$
15,666

Non-cash investing and financing activities:
 
 
 
Dividends declared but not paid
$
10,773

 
$
10,677

Issuance of restricted shares of common stock
$
8,397

 
$
9,517

Issuance of performance vested restricted stock units
$
1,298

 
$
—

Investment in property and equipment acquired in accounts payable
$
763

 
$
—

Debt issuance costs
$
—

 
$
6,500

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

8
Table of Contents

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

1.
Company Information and Significant Accounting Policies (restated)
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 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/A, filed with the SEC on November 3, 2014 (the “10-K/A”). Interim results are not necessarily indicative of the entire year results. 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.
Revision to Prior Period Financial Statements -- Cash Flow Presentation
In connection with the preparation of the consolidated financial statements for the second quarter of 2013, a misapplication of GAAP was identified related to the presentation of cash flows pursuant to forgivable notes receivable. Previously, the Company applied Accounting Standards Codification ("ASC") 230 "Statement of Cash Flows" paragraphs 12 and 13 when reporting cash outflows and cash collections related to these notes receivable and as a result reported these items as cash flows from investing activities. In second quarter of 2013 and the following periods, the Company has revised its presentation of these cash flows in accordance with ASC 230 paragraphs 22 and 23 to reclassify them to operating activities on the Company's Consolidated Statements of Cash Flows.
In conjunction with brand and development programs, the Company issues forgivable notes receivable to qualifying franchisees for property improvements and other purposes. Under the terms of the forgivable promissory notes, the Company ratably reduces the outstanding principal balance and related interest over the term of the loan contingent upon the franchisee remaining within the franchise system and operating in accordance with the terms of the franchise agreement including credit, quality and brand standards. Therefore, the predominant reduction of these notes receivable is through non-cash operating expenses and not cash collections of note receivable amounts. As a result, the Company revised the cash flow classification of these forgivable notes receivable from investing activities to operating activities.
In accordance with ASC 250 (SEC's Staff Accounting Bulletin 99, "Materiality"), the Company assessed the materiality of the misapplication of GAAP and concluded that the reclassification of these cash flows was not material to any of its previously issued annual or interim financial statements. In accordance with the accounting guidance in ASC 250 (SEC Staff Accounting Bulletin No. 108, "Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements"), the Company has revised its previously issued financial statements to correct the presentation of these cash flows in both the current and future quarterly and annual filings beginning with the financial statements in the Quarterly Report on Form 10-Q filed on August 9, 2013 for the quarterly period ended June 30, 2013. These revisions did not impact the Company's previously reported net income, comprehensive income, assets, liabilities or shareholders' deficit.

9
Table of Contents

The following tables present the effect of the correction of the classification of the cash flows related to forgivable notes receivable on selected line items included in the Company's Consolidated Statements of Cash Flows for all periods affected:
 
Year Ended December 31, 2012
 
Year Ended December 31, 2011
 
Year Ended December 31, 2010
 
(In thousands)
 
As Previously Reported
 
Adjustment
 
As Revised
 
As Previously Reported
 
Adjustment
 
As Revised
 
As Previously Reported
 
Adjustment
 
As Revised
Forgivable notes receivable, net
$
—

 
$
(10,898
)
 
$
(10,898
)
 
$
—

 
$
(3,475
)
 
$
(3,475
)
 
$
—

 
$
(1,120
)
 
$
(1,120
)
Net cash provided by operating activities
161,020

 
(10,898
)
 
150,122

 
134,844

 
(3,475
)
 
131,369

 
144,935

 
(1,120
)
 
143,815

Issuance of mezzanine and other notes receivable
(34,925
)
 
11,189

 
(23,736
)
 
(12,766
)
 
3,539

 
(9,227
)
 
(11,786
)
 
1,203

 
(10,583
)
Collections of mezzanine and other notes receivable
3,561

 
(291
)
 
3,270

 
4,754

 
(64
)
 
4,690

 
5,083

 
(83
)
 
5,000

Net cash used in investing activities
(57,999
)
 
10,898

 
(47,101
)
 
(23,804
)
 
3,475

 
(20,329
)
 
(32,155
)
 
1,120

 
(31,035
)
 
Three Months Ended March 31, 2013
 
Three Months Ended March 31, 2012
 
(In thousands)
 
As Previously Reported
 
Adjustment
 
As Revised
 
As Previously Reported
 
Adjustment
 
As Revised
Forgivable notes receivable, net
$
—

 
$
(1,729
)
 
$
(1,729
)
 
$
—

 
$
(475
)
 
$
(475
)
Net cash provided by operating activities
1,874

 
(1,729
)
 
145

 
4,412

 
(475
)
 
3,937

Issuance of mezzanine and other notes receivable
(1,729
)
 
1,729

 
—

 
(3,719
)
 
583

 
(3,136
)
Collections of mezzanine and other notes receivable
19

 
—

 
19

 
151

 
(108
)
 
43

Net cash used in investing activities
(13,816
)
 
1,729

 
(12,087
)
 
(1,496
)
 
475

 
(1,021
)
 
Six Months Ended June 30, 2012
 
Nine Months Ended September 30, 2012
 
(In thousands)
 
As Previously Reported
 
Adjustment
 
As Revised
 
As Previously Reported
 
Adjustment
 
As Revised
Forgivable notes receivable, net
$
—

 
$
(1,537
)
 
$
(1,537
)
 
$
—

 
$
(2,853
)
 
$
(2,853
)
Net cash provided by operating activities
37,802

 
(1,537
)
 
36,265

 
121,276

 
(2,853
)
 
118,423

Issuance of mezzanine and other notes receivable
(5,820
)
 
1,684

 
(4,136
)
 
(7,305
)
 
3,069

 
(4,236
)
Collections of mezzanine and other notes receivable
210

 
(147
)
 
63

 
326

 
(216
)
 
110

Net cash used in investing activities
(10,387
)
 
1,537

 
(8,850
)
 
(19,562
)
 
2,853

 
(16,709
)

10
Table of Contents


Revision to Prior Annual Financial Statements and Restatement of Prior Interim Financial Statements
In connection with the preparation of the consolidated financial statements for the second quarter of 2014, the Company reviewed its accounting policies and practices, including the historical practice of reporting royalty and certain marketing and reservation fees one month in arrears as compared to when the gross room revenues (on which the fees are based) are earned by the Company's franchisees. The Company previously determined that the impact of the revenue recognition timing related to these revenues on its annual financial statements was not material and therefore reported these revenues one month in arrears despite the fact that these fees meet the definition of being earned and realizable in the same period that the underlying gross room revenues are earned by its franchisees. However, the Company reassessed the impact of reporting these revenues one month in arrears on interim periods and determined that this revenue recognition practice, which was not in accordance with GAAP, was material to interim periods due to the seasonality of the Company's business. As a result, the Company has corrected its revenue recognition method to recognize royalty and certain marketing and reservation system fees as revenue in the same period as the gross room revenues are earned by its franchisees.
In accordance with ASC 250 (SEC's Staff Accounting Bulletin 99, "Materiality"), the Company assessed the materiality of the misapplication of GAAP and concluded that the restatement of revenues was not material to any of its previously issued annual financial statements but was material to certain interim periods. In accordance with the accounting guidance in ASC 250 (SEC Staff Accounting Bulletin No. 108, "Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements"), the Company restated its previously issued interim financial statements for the periods ended June 30, 2013, March 31, 2014 and 2013, and September 30, 2013 and 2012 through the filing of amended quarterly filings on Form 10-Q. In addition, the Company has revised its previously issued audited financial statements for the years ended December 31, 2011, 2012, and 2013 to correct the presentation of revenues and amend its report on internal control over financial reporting.
The following tables present the effect of this and other immaterial errors for the financial statement line items impacted in the affected periods included within these interim financial statements.


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Table of Contents

Consolidated Statements of Income        
 
 
Three Months Ended September 30, 2013
 
Nine Months Ended September 30, 2013
 
 
As Previously Reported
 
Discontinued Operations
 
Adjustment
 
As Restated
 
As Previously Reported
 
Discontinued Operations
 
Adjustment
 
As Restated
 
 
(in thousands, except per share amounts)
Royalty fees
 
$
83,107

 
$
—

 
$
(3,647
)
 
$
79,460

 
$
201,222

 
$
—

 
$
6,984

 
$
208,206

Marketing and reservation revenues
 
126,296

 
—

 
(1,487
)
 
124,809

 
302,381

 
—

 
8,823

 
311,204

Hotel operations
 
1,310

 
(1,310
)
 
—

 
—

 
3,600

 
(3,600
)
 
—

 
—

Total revenues
 
223,162

 
(1,310
)
 
(5,134
)
 
216,718

 
543,612

 
(3,600
)
 
15,807

 
555,819

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Selling, general and administrative
 
26,982

 
—

 
(573
)
 
26,409

 
84,078

 
—

 
(1,270
)
 
82,808

Depreciation and amortization
 
2,379

 
(127
)
 
20

 
2,272

 
7,074

 
(393
)
 
20

 
6,701

Marketing and reservation expenses
 
126,296

 
—

 
(1,487
)
 
124,809

 
302,381

 
—

 
8,823

 
311,204

Hotel operations
 
956

 
(956
)
 
—

 
—

 
2,742

 
(2,742
)
 
—

 
—

Total operating expenses
 
156,613

 
(1,083
)
 
(2,040
)
 
153,490

 
396,275

 
(3,135
)
 
7,573

 
400,713

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating income
 
66,549

 
(227
)
 
(3,094
)
 
63,228

 
147,337

 
(465
)
 
8,234

 
155,106

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income from continuing operations before income taxes
 
57,592

 
(227
)
 
(3,094
)
 
54,271

 
118,588

 
(465
)
 
8,234

 
126,357

Income taxes
 
16,080

 
(84
)
 
(298
)
 
15,698

 
33,319

 
(172
)
 
3,237

 
36,384

Income from continuing operations, net of income taxes
 
41,512

 
(143
)
 
(2,796
)
 
38,573

 
85,269

 
(293
)
 
4,997

 
89,973

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic earnings per share, continuing operations
 
$
0.71

 
$
—

 
$
(0.05
)
 
$
0.66

 
$
1.46

 
$
—

 
$
0.08

 
$
1.54

Diluted earnings per share, continuing operations
 
$
0.70

 
$
(0.01
)
 
$
(0.04
)
 
$
0.65

 
$
1.45

 
$
—

 
$
0.08

 
$
1.53


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Table of Contents

 
 
Three Months Ended September 30, 2012
 
Nine Months Ended September 30, 2012
 
 
As Previously Filed
 
Discontinued Operations
 
Adjustment
 
As Restated
 
As Previously Filed
 
Discontinued Operations
 
Adjustment
 
As Restated
 
 
(in thousands, except per share amounts)
Royalty fees
 
$
80,845

 
$
—

 
$
(2,807
)
 
$
78,038

 
$
194,762

 
$
—

 
$
8,225

 
$
202,987

Marketing and reservation revenues
 
119,062

 
—

 
(1,097
)
 
117,965

 
284,624

 
—

 
9,721

 
294,345

Hotel operations
 
1,238

 
(1,238
)
 
—

 
—

 
3,440

 
(3,440
)
 
—

 
—

Total revenues
 
210,413

 
(1,238
)
 
(3,904
)
 
205,271

 
513,203

 
(3,440
)
 
17,946

 
527,709

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Selling, general and administrative
 
23,170

 
—

 
(98
)
 
23,072

 
72,073

 
—

 
249

 
72,322

Depreciation and amortization
 
1,995

 
(135
)
 
—

 
1,860

 
5,989

 
(401
)
 
—

 
5,588

Marketing and reservation expenses
 
119,062

 
—

 
(1,097
)
 
117,965

 
284,624

 
—

 
9,721

 
294,345

Hotel operations
 
933

 
(933
)
 
—

 
—

 
2,609

 
(2,609
)
 
—

 
—

Total operating expenses
 
145,160

 
(1,068
)
 
(1,195
)
 
142,897

 
365,295

 
(3,010
)
 
9,970

 
372,255

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating income
 
65,253

 
(170
)
 
(2,709
)
 
62,374

 
147,908

 
(430
)
 
7,976

 
155,454

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income from continuing operations before income taxes
 
55,668

 
(170
)
 
(2,709
)
 
52,789

 
133,840

 
(430
)
 
7,976

 
141,386

Income taxes
 
11,291

 
(63
)
 
(1,076
)
 
10,152

 
37,604

 
(160
)
 
3,303

 
40,747

Income from continuing operations, net of income taxes
 
44,377

 
(107
)
 
(1,633
)
 
42,637

 
96,236

 
(270
)
 
4,673

 
100,639

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic earnings per share, continuing operations
 
$
0.77

 
$
—

 
$
(0.03
)
 
$
0.74

 
$
1.66

 
$
(0.01
)
 
$
0.08

 
$
1.73

Diluted earnings per share, continuing operations
 
$
0.76

 
$
—

 
$
(0.03
)
 
$
0.73

 
$
1.65

 
$
—

 
$
0.08

 
$
1.73

                        


13
Table of Contents

 
 
Nine Months Ended September 30, 2013
 
Nine Months Ended September 30, 2012
 
 
As Previously Filed
 
Adjustment
 
As Restated
 
As Previously Filed
 
Adjustment
 
As Restated
Consolidated Statement of Cash Flows
 
(in thousands)
Operating Activities
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
$
85,269

 
$
4,997

 
$
90,266

 
$
96,236

 
$
4,673

 
$
100,909

Depreciation and amortization
 
7,074

 
20

 
7,094

 
5,989

 
—

 
5,989

Provision for bad debts, net
 
2,054

 
210

 
2,264

 
1,802

 
249

 
2,051

Non-cash stock compensation and other charges
 
8,638

 
(3
)
 
8,635

 
7,306

 
—

 
7,306

Deferred income taxes
 
(4,118
)
 
3,767

 
(351
)
 
(1,627
)
 
2,772

 
1,145

Receivables
 
(13,699
)
 
(12,936
)
 
(26,635
)
 
(17,405
)
 
(14,856
)
 
(32,261
)
Advances to/from marketing and reservation activities, net
 
23,756

 
5,956

 
29,712

 
20,811

 
6,631

 
27,442

Income taxes payable/receivable
 
24,638

 
(531
)
 
24,107

 
12,786

 
531

 
13,317

Net cash provided by operating activities
 
105,009

 
1,480

 
106,489

 
118,423

 
—

 
118,423

Investing Activities
 
 
 
 
 
 
 
 
 
 
 
 
Investment in property and equipment
 
(26,442
)
 
(1,480
)
 
(27,922
)
 
(12,525
)
 
—

 
(12,525
)
Net cash used in investing activities
 
(28,350
)
 
(1,480
)
 
(29,830
)
 
(16,709
)
 
—

 
(16,709
)

 
 
As of September 30, 2013
 
As of December 31, 2012
 
 
As Previously Reported
 
Adjustment
 
As Restated
 
As Previously Reported
 
Adjustment
 
As Revised
Consolidated Balance Sheets
 
(in thousands)
Receivables
 
$
62,605

 
$
40,282

 
$
102,887

 
$
52,270

 
$
27,729

 
$
79,999

Income taxes receivable
 
—

 
—

 
—

 
2,732

 
(531
)
 
2,201

Deferred income taxes
 
4,136

 
23,231

 
27,367

 
4,136

 
22,062

 
26,198

Total current assets
 
258,267

 
63,513

 
321,780

 
233,470

 
49,260

 
282,730

Property and equipment, at cost, net
 
65,540

 
1,460

 
67,000

 
51,651

 
—

 
51,651

Advances, marketing and reservation activities
 
32,564

 
(18,494
)
 
14,070

 
42,179

 
(12,712
)
 
29,467

Deferred income taxes
 
19,496

 
(19,496
)
 
—

 
15,418

 
(15,418
)
 
—

Total assets
 
555,709

 
26,983

 
582,692

 
510,772

 
21,130

 
531,902

Deferred income taxes
 
—

 
11,722

 
11,722

 
—

 
10,864

 
10,864

Total liabilities
 
1,040,433

 
11,722

 
1,052,155

 
1,059,676

 
10,864

 
1,070,540

Accumulated other comprehensive loss
 
(5,370
)
 
(3
)

(5,373
)
 
(4,216
)
 
—

 
(4,216
)
Retained earnings
 
325,005

 
15,264

 
340,269

 
272,260

 
10,266

 
282,526

Total shareholders' deficit
 
(484,724
)
 
15,261

 
(469,463
)
 
(548,904
)
 
10,266

 
(538,638
)

Discontinued Operations
In the first quarter of 2014, the Company's management approved a plan to dispose of the three Company owned Mainstay Suites hotels. As a result, the Company has reported the operations related to these three hotels as discontinued operations in this Amended Quarterly Report on Form 10-Q. The Company's results of operations for the prior year periods have been recast

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Table of Contents

to account for these operations as discontinued. For additional information regarding discontinued operations, see Note 18, Discontinued Operations.
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 September 30, 2013 and December 31, 2012, $3.4 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, as of September 30, 2013, the Company maintains cash balances of $149.8 million in international banks which do not provide deposit insurance.
Recently Adopted Accounting Guidance
In February 2013, the Financial Accounting Standards Board ("FASB") 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 adopted this ASU during the first quarter of 2013. 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 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 provisions 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 ASC 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 provisions of 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.

In July 2013, the FASB issued ASU No. 2013-11, "Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists" ("ASU 2013-11"). ASU 2013-11 requires an entity to present an unrecognized tax benefit as a reduction of a deferred tax asset for a net operating loss ("NOL") carryforward, or similar tax loss or tax credit carryforward, rather than as a liability when (1) the uncertain tax position would reduce the NOL or other carryforward under the tax law of the applicable jurisdiction and (2) the entity intends to use the deferred tax asset for that purpose. The ASU does not require new recurring disclosures. The provisions of ASU 2013-11 are effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2013. Early adoption and retrospective

15
Table of Contents

application are permitted. 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:
 
September 30, 2013
 
December 31, 2012
 
(In thousands)
Notes receivable (See Note 3)
$
14,126

 
$
14,415

Prepaid expenses
12,740

 
10,694

Land held for sale
—

 
8,541

Other current assets
3,136

 
3,019

Total
$
30,002

 
$
36,669

Land held for sale represents the Company’s purchase of real estate as part of its program to incent franchise development in strategic markets for certain brands. The Company 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, which is no longer classified as land held for sale, was accounted for as assets held for sale and therefore was 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.
The following table shows the composition of our notes receivable balances:
 
September 30, 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
$
—

 
$
27,548

 
$
27,548

 
$
—

 
$
27,549

 
$
27,549

Subordinated
—

 
14,841

 
14,841

 
—

 
15,019

 
15,019

Unsecured
19,018

 
1,812

 
20,830

 
16,235

 
1,265

 
17,500

Total notes receivable
19,018

 
44,201

 
63,219

 
16,235

 
43,833

 
60,068

Allowance for losses on non-impaired loans
1,902

 
1,443

 
3,345

 
1,623

 
638

 
2,261

Allowance for losses on receivables specifically evaluated for impairment
—

 
8,453

 
8,453

 
—

 
8,289

 
8,289

Total loan reserves
1,902

 
9,896

 
11,798

 
1,623

 
8,927

 
10,550

Net carrying value
$
17,116

 
$
34,305

 
$
51,421

 
$
14,612

 
$
34,906

 
$
49,518

Current portion, net
$
425

 
$
13,701

 
$
14,126

 
$
420

 
$
13,995

 
$
14,415

Long-term portion, net
16,691

 
20,604

 
37,295

 
14,192

 
20,911

 
35,103

Total
$
17,116

 
$
34,305

 
$
51,421

 
$
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.

16
Table of Contents

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 September 30, 2013:
 
Forgivable
Notes
Receivable
 
Mezzanine
& Other  Notes
Receivable
 
(In thousands)
Balance, December 31, 2012
$
1,623

 
$
8,927

Provisions
598

 
969

Recoveries
(25
)
 
—

Write-offs
(147
)
 
—

Other(1)
(147
)
 
—

Balance, September 30, 2013
$
1,902

 
$
9,896

 
(1) Consists of default rate assumption changes
Forgivable Notes Receivable
As of September 30, 2013 and December 31, 2012, the unamortized balance of the Company's forgivable notes receivable totaled $19.0 million and $16.2 million, respectively. The Company recorded an allowance for credit losses on these forgivable notes receivable of $1.9 million and $1.6 million at September 30, 2013 and December 31, 2012, respectively. At September 30, 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 and nine months ended September 30, 2013 was $1.1 million and $3.0 million, respectively. Amortization expense for the three and nine months ended September 30, 2012 was $0.7 million and $2.0 million, respectively.
Mezzanine and Other Notes Receivable
The Company determined that approximately $13.2 million and $13.3 million of its mezzanine and other notes receivable were impaired at September 30, 2013 and December 31, 2012, respectively. The Company recorded allowance for credit losses on these impaired loans at September 30, 2013 and December 31, 2012 totaling $8.5 million and $8.3 million, respectively, resulting in a carrying value of impaired loans of $4.7 million and $5.0 million, respectively. The Company recognized approximately $81 thousand and $0.2 million of interest income on impaired loans during the three and nine months ended September 30, 2013, respectively, on the cash basis. The Company recognized approximately $38 thousand and $100 thousand of interest income on impaired loans during the three and nine months ended September 30, 2012, respectively, on the cash basis. The Company provided loan reserves on non-impaired loans totaling $1.4 million and $0.6 million at September 30, 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
 Notes Receivable
 
($ in thousands)
As of September 30, 2013
 
 
 
 
 
 
 
 
 
Senior
$
9,500

 
$
—

 
$
9,500

 
$
18,048

 
$
27,548

Subordinated
—

 
10,268

 
10,268

 
4,573

 
14,841

Unsecured
—

 
47

 
47

 
1,765

 
1,812

 
$
9,500

 
$
10,315

 
$
19,815

 
$
24,386

 
$
44,201

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

Subsequent to September 30, 2013, the amounts reflected in the 30-89 past due column for senior mezzanine notes receivable totaling $9.5 million were repaid in full.

17
Table of Contents


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 September 30, 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 nine months ended September 30, 2013 is as follows:
 
 
Accretable Yield ($ in thousands)
Balance, December 31, 2012
 
$
1,161

Additions
 
—

Accretion
 
(433
)
Disposals
 
—

Reclassifications from nonaccretable yield
 
—

Balance, September 30, 2013
 
$
728

4.
Advances, Marketing and Reservation Activities (restated)
At September 30, 2013 and December 31, 2012, the Company had incurred cumulative marketing and reservation system expenses in excess of cumulative marketing and reservation system fees earned totaling $14.1 million and $29.5 million, respectively. These costs incurred in excess of fees collected have been deferred and recorded as an asset in the financial statements as the Company has the contractual authority to recover the deficits incurred related to marketing and reservation activities from the franchisees in the system at any given point in time.
Depreciation and amortization expense attributable to marketing and reservation activities for the three months ended September 30, 2013 and 2012 was $3.9 million and $3.7 million, respectively. Depreciation and amortization expense attributable to marketing and reservation activities for the nine months ended September 30, 2013 and 2012 was $12.0 million and $10.7 million, respectively. Interest expense attributable to marketing and reservation activities was $0.9 million for both the three months ended September 30, 2013 and 2012, respectively. Interest expense attributable to marketing and reservation activities was $2.8 million and $3.0 million for the nine months ended September 30, 2013 and 2012, respectively.
The Company evaluates the recoverability of marketing and reservation costs incurred in excess of cumulative marketing and reservation system revenues earned on a periodic basis. The Company will record a reserve when, based on current information and events, it is probable that it will be unable to recover the cumulative amounts advanced for marketing and reservation activities according to the contractual terms of the franchise agreements. These advances are considered to be unrecoverable 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 cumulative advances for marketing and reservation activities recorded as an asset on the balance sheet were fully recoverable and as a result no reserves were necessary.


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5.
Other Assets
Other assets consist of the following:
 
September 30, 2013
 
December 31, 2012
 
(In thousands)
Notes receivable (see Note 3)
$
37,295

 
$
35,103

Equity method investments
30,404

 
27,453

Deferred financing fees, net
9,509

 
11,174

Land
10,097

 
1,300

Other assets
899

 
983

Total
$
88,204

 
$
76,013


Land represents the Company’s purchase 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 either resell it to third-party developers for the construction of hotels operated under the Company’s brands or contribute the land into joint ventures for the same purpose. The real estate is carried at the lower of its carrying value or its estimated fair value (based on comparable sales).

Variable Interest Entities

Equity method investments include investments in joint ventures totaling $27.0 million and $24.3 million at September 30, 2013 and December 31, 2012, respectively that the Company determined to be variable interest entities ("VIEs"). 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 determined that it is not the primary beneficiary of any of its VIEs. The Company based its quantitative analysis on the forecasted cash flows of the entity and its qualitative analysis on its 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 and nine months ended September 30, 2013, the Company recognized income totaling $81 thousand and $9 thousand, respectively, from these investments. For the three and nine months ended September 30, 2012, the Company recognized income totaling $75 thousand and $84 thousand, respectively, from these investments.

6.
Deferred Revenue
Deferred revenue consists of the following:
 
September 30,
2013
 
December 31,
2012
 
(In thousands)
Loyalty programs
$
55,106

 
$
64,636

Initial, relicensing and franchise fees
4,369

 
4,994

Procurement service fees
1,197

 
1,225

Other
729

 
299

Total
$
61,401

 
$
71,154



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7.
Debt (restated)
Debt consists of the following at:
 
September 30, 2013
 
December 31, 2012
 
(In thousands)
$400 million senior unsecured notes with an effective interest rate of 5.94% at September 30, 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 $0.4 million and $0.5 million at September 30, 2013 and December 31, 2012
249,556

 
249,508

$350 million senior secured credit facility with an effective interest rate of 2.52% and 2.66% at September 30, 2013 and December 31, 2012, respectively
170,125

 
203,250

Economic development loans with an effective interest rate of 3.00% at September 30, 2013
3,360

 
—

Capital lease obligations due 2016 with an effective interest rate of 3.18% at September 30, 2013 and December 31, 2012
2,017

 
2,519

Other notes payable
31

 
68

Total debt
$
825,089

 
$
855,345

Less current portion
9,132

 
8,195

Total long-term debt
$
815,957

 
$
847,150

Senior Notes Due 2022
On June 27, 2012, the Company issued unsecured senior 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 wholly-owned domestic subsidiaries.
Senior 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 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 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 wholly-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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Table of Contents

The New Credit Facility is unconditionally guaranteed, jointly and severally, by certain of the Company's domestic subsidiaries. The subsidiary guarantors currently include the eight wholly-owned 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.
At September 30, 2013, the Company maintained a total leverage ratio of approximately 3.44x, a maximum secured leverage ratio of 0.72x and a minimum fixed charge coverage ratio of approximately 5.54x.
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 September 30, 2013, the Company was in compliance with all covenants under the New Credit Facility.
At September 30, 2013, the Company had $140.6 million and $29.5 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 was terminated and replaced by the New Credit Facility.


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Table of Contents

Economic Development Loans
The Company entered into economic development agreements with various governmental entities in conjunction with the relocation of its corporate headquarters in April 2013. In accordance with these agreements, the governmental entities agreed to advance approximately $4.4 million to the Company to offset a portion of the corporate headquarters relocation and tenant improvement costs in consideration of the employment of permanent, full-time employees within the jurisdictions. At September 30, 2013, the Company had been advanced approximately $3.4 million pursuant to these agreements and expects to receive the remaining $1 million over the next several years, subject to annual appropriations by the governmental entities. These advances bear interest at a rate of 3% per annum.
Repayment of the advances is contingent upon the Company achieving certain performance conditions. Performance conditions are measured annually on December 31st and primarily relate to maintaining certain levels of employment within the various jurisdictions. If the Company fails to meet an annual performance condition, the Company may be required to repay a portion or all of the advances including accrued interest by April 30th following the measurement date. Any outstanding advances at the expiration of the Company's ten year corporate headquarters lease in 2023 will be forgiven in full. The advances will be included in long-term debt in Company's consolidated balance sheets until the Company determines that the future performance conditions will be met over the entire term of the agreement and the Company will not be required to repay the advances. The Company accrues interest on the portion of the advances that it expects to repay. The Company was in compliance with all current performance conditions as of September 30, 2013.

8.
Accumulated Other Comprehensive Income (Loss) (restated)

The following represents the changes in accumulated other comprehensive loss, net of tax, by component for the nine months ended September 30, 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
—

 
(1,803
)
 
(1,803
)
Amounts reclassified from accumulated other comprehensive income (loss)
646

 
—

 
646

Net current period other comprehensive income (loss)
646

 
(1,803
)
 
(1,157
)
Balance, September 30, 2013
$
(5,961
)
 
$
588

 
$
(5,373
)

The amounts reclassified from other accumulated other comprehensive income (loss) during the three and nine months ended September 30, 2013 were reclassified to the following line items in the Company's Consolidated Statements of Income.
Component
 
Amount Reclassified from Accumulated Other Comprehensive Income(Loss)
 
Affected Line Item in the Consolidated Statement of Net Income
 
 
Three Months Ended September 30, 2013
 
Nine Months Ended September 30, 2013
 
 
 
 
($ in thousands)
 
 
Loss on cash flow hedge
 
 
 
 
 
 
Interest rate contract
 
$
215

 
$
646

 
Interest expense
 
 
—

 
—

 
Tax (expense) benefit
 
 
$
215

 
$
646

 
Net of tax



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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 $10.9 million and $11.7 million, as of September 30, 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 related to the EDCP for the three months ended September 30, 2013 and 2012 was $0.3 million and $0.2 million, respectively. Compensation expense recorded in SG&A related to the EDCP for the nine months ended September 30, 2013 and