10-Q
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 _____________________________________________ 
FORM 10-Q
 _____________________________________________ 
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED March 31, 2016
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 OUTSTANDING AT MARCH 31, 2016
Common Stock, Par Value $0.01 per share
 
56,487,684
 
 
 
 
 
 

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
 
March 31,
 
2016
 
2015
REVENUES:
 
 
 
Royalty fees
$
64,859

 
$
62,431

Initial franchise and relicensing fees
5,156

 
5,717

Procurement services
5,796

 
4,807

Marketing and reservation
126,361

 
98,713

Other
4,946

 
3,577

Total revenues
207,118

 
175,245

OPERATING EXPENSES:
 
 
 
Selling, general and administrative
35,119

 
32,438

Depreciation and amortization
2,765

 
2,690

Marketing and reservation
126,361

 
98,713

Total operating expenses
164,245

 
133,841

Operating income
42,873

 
41,404

OTHER INCOME AND EXPENSES, NET:
 
 
 
Interest expense
11,092

 
10,179

Interest income
(839
)
 
(346
)
Other (gains) and losses
62

 
(468
)
Equity in net losses of affiliates
2,180

 
1,005

Total other income and expenses, net
12,495

 
10,370

Income before income taxes
30,378

 
31,034

Income taxes
10,780

 
9,440

Net income
$
19,598

 
$
21,594

 
 
 
 
Basic earnings per share
$
0.35

 
$
0.38

Diluted earnings per share
$
0.35

 
$
0.37

 
 
 
 
Cash dividends declared per share
$
0.205

 
$
0.195

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 STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED, IN THOUSANDS)
 
        
 
 
Three Months Ended
 
 
March 31,
 
 
2016
 
2015
 
 
 
 
 
Net income
 
$
19,598

 
$
21,594

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

 
215

Foreign currency translation adjustment
 
1,528

 
(1,447
)
Other comprehensive income (loss), net of tax
 
1,743

 
(1,232
)
Comprehensive income
 
$
21,341

 
$
20,362


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)
 
March 31,
2016
 
December 31,
2015
ASSETS
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
194,072

 
$
193,441

Receivables (net of allowance for doubtful accounts of $7,679 and $8,719, respectively)
102,786

 
89,352

Income taxes receivable
7,134

 
5,486

Notes receivable, net of allowance
8,186

 
5,107

Other current assets
25,938

 
17,567

Total current assets
338,116

 
310,953

Property and equipment, at cost, net
88,345

 
88,158

Goodwill
79,982

 
79,327

Franchise rights and other identifiable intangibles, net
12,025

 
11,948

Notes receivable, net of allowances
92,477

 
82,572

Investments, employee benefit plans, at fair value
17,802

 
17,674

Investments in unconsolidated entities
66,685

 
67,037

Deferred income taxes
36,536

 
42,434

Other assets
55,295

 
16,907

Total assets
$
787,263

 
$
717,010

LIABILITIES AND SHAREHOLDERS’ DEFICIT
 
 
 
Current liabilities
 
 
 
Accounts payable
$
60,619

 
$
64,431

Accrued expenses and other current liabilities
46,616

 
70,648

Deferred revenue
112,076

 
71,587

Current portion of long-term debt
1,016

 
1,191

Income taxes payable
—

 
159

Total current liabilities
220,327

 
208,016

Long-term debt
892,447

 
812,945

Deferred compensation and retirement plan obligations
22,415

 
22,859

Deferred income taxes
779

 
506

Other liabilities
37,160

 
68,583

Total liabilities
1,173,128

 
1,112,909

Commitments and Contingencies


 


Common stock, $0.01 par value, 160,000,000 shares authorized; 95,065,638 shares issued at March 31, 2016 and December 31, 2015 and 56,487,684 and 56,336,566 shares outstanding at March 31, 2016 and December 31, 2015, respectively
951

 
951

Additional paid-in-capital
150,127

 
149,895

Accumulated other comprehensive loss
(7,035
)
 
(8,778
)
Treasury stock (38,577,954 and 38,729,072 shares at March 31, 2016 and December 31, 2015, respectively), at cost
(1,052,762
)
 
(1,052,864
)
Retained earnings
522,854

 
514,897

Total shareholders’ deficit
(385,865
)
 
(395,899
)
Total liabilities and shareholders’ deficit
$
787,263

 
$
717,010

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 STATEMENTS OF CASH FLOW
(UNAUDITED, IN THOUSANDS)
 
Three Months Ended
 
March 31,
 
2016
 
2015
 
 
 
 
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
19,598

 
$
21,594

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

Depreciation and amortization
2,765

 
2,690

(Gain) loss on sale of assets
9

 
(292
)
Provision for bad debts, net
655

 
823

Non-cash stock compensation and other charges
3,354

 
2,509

Non-cash interest and other (income) loss
667

 
506

Deferred income taxes
6,198

 
(233
)
Equity (earnings) losses from unconsolidated joint ventures, net of distributions received
2,471

 
1,205

Changes in assets and liabilities:
 
 
 
Receivables
(14,473
)
 
(11,624
)
Advances to/from marketing and reservation activities, net
(39,804
)
 
4,626

Forgivable notes receivable, net
(6,464
)
 
(13,371
)
Accounts payable
(3,980
)
 
(1,152
)
Accrued expenses and other current liabilities
(24,521
)
 
(24,052
)
Income taxes payable/receivable
(1,798
)
 
2,773

Deferred revenue
40,458

 
7,552

Other assets
(7,238
)
 
(9,826
)
Other liabilities
(842
)
 
437

Net cash used by operating activities
(22,945
)
 
(15,835
)
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 

Investment in property and equipment
(5,306
)
 
(6,804
)
Proceeds from sales of assets
1,700

 
1,592

Acquisitions of real estate
(25,389
)
 
—

Contributions to equity method investments
(4,293
)
 
(1,921
)
Distributions from equity method investments
67

 
—

Purchases of investments, employee benefit plans
(896
)
 
(1,089
)
Proceeds from sales of investments, employee benefit plans
363

 
925

Issuance of mezzanine and other notes receivable
(7,487
)
 
—

Collections of mezzanine and other notes receivable
109

 
105

Other items, net
(136
)
 
(77
)
Net cash provided by investing activities
(41,268
)
 
(7,269
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 

Net borrowings pursuant to revolving credit facilities
79,267

 
20,700

Principal payments on long-term debt
(318
)
 
(3,082
)
Purchases of treasury stock
(8,857
)
 
(6,227
)
Dividends paid
(11,612
)
 
(11,710
)
Excess tax benefits from stock-based compensation
1,575

 
4,473

Proceeds from exercise of stock options
4,137

 
5,619

Net cash provided by financing activities
64,192

 
9,773

Net change in cash and cash equivalents
(21
)
 
(13,331
)
Effect of foreign exchange rate changes on cash and cash equivalents
652

 
(1,004
)
Cash and cash equivalents at beginning of period
193,441

 
214,879

Cash and cash equivalents at end of period
$
194,072

 
$
200,544

Supplemental disclosure of cash flow information:
 
 
 
Cash payments during the period for:
 
 
 
Income taxes, net of refunds
$
4,208

 
$
2,357

Interest, net of capitalized interest
$
19,712

 
$
18,729

Non-cash investing and financing activities:
 
 
 
Dividends declared but not paid
$
11,580

 
$
11,230

Investment in property and equipment acquired in accounts payable
$
944

 
$
1,380

Equity method investments
$
—

 
$
6,952

Non-cash sale of investment in unconsolidated joint venture
$
2,350

 
$
—

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

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

1.
Company Information and Significant Accounting Policies
The accompanying unaudited consolidated financial statements of Choice Hotels International, Inc. and subsidiaries (together the "Company") have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). These unaudited consolidated financial statements include all adjustments that are necessary, in the opinion of management, to fairly present our financial position and results of operations. Except as otherwise disclosed, all adjustments are of a normal recurring nature.
Certain information and footnote disclosures normally included in financial statements presented in accordance with accounting principles generally accepted in the United States of America ("GAAP") have been omitted. The 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, 2015 and notes thereto included in the Company’s Form 10-K, filed with the SEC on February 29, 2016 (the "10-K"). 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.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with a maturity of three months or less at the date of purchase to be cash equivalents. As of March 31, 2016 and December 31, 2015, the Company had book overdrafts totaling $8.1 million and $10.8 million, respectively, which are included in accounts payable in the accompanying consolidated balance sheets. These overdrafts represent outstanding checks in excess of funds on deposit.
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 and money market funds which do not provide deposit insurance.
Recently Adopted Accounting Guidance

In January 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2015-01, Income Statement - Extraordinary and Unusual Items (Subtopic 225-20) ("ASU No. 2015-01"). ASU No. 2015-01 changes the requirements for reporting extraordinary and unusual items in the income statement by eliminating the concept of extraordinary items. The presentation and disclosure guidance for items that are unusual in nature or occur infrequently is retained and expanded to include items that are both unusual in nature and infrequently occurring. ASU No. 2015-01 is effective for annual reporting periods beginning after December 15, 2015, including interim periods within that reporting period. The Company adopted this ASU on January 1, 2016 and it did not have an impact on our consolidated financial statements.

In February 2015, the FASB issued ASU No. 2015-02, Consolidation (Topic 810) ("ASU No. 2015-02"). ASU No. 2015-02 changes the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. This guidance must be applied using one of two retrospective application methods and is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. The Company adopted this ASU on January 1, 2016 and it did not have an impact on our consolidated financial statements.

In April 2015, the FASB issued ASU No. 2015-05, Intangibles-Goodwill - Internal Use Software (Subtopic 350-40) ("ASU No. 2015-05"). ASU No. 2015-05 provides guidance to customers about whether a cloud computing arrangement includes a software license or should be accounted for as a service contract. The standard is effective for annual reporting periods, including interim periods within those annual periods beginning after December 15, 2015. The Company adopted this ASU on January 1, 2016, and elected to apply the revised standard prospectively to all new or materially altered agreements signed by the Company. The adoption did not have a material impact on our consolidated financial statements.


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Future Adoption of Recently Announced Accounting Guidance
In May 2014, the FASB issued ASU No. 2014-09, Revenue From Contracts with Customers ("ASU 2014-09"), which impacts virtually all aspects of an entity's revenue recognition. ASU No. 2014-09 supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, as well as most industry-specific guidance, and significantly enhances comparability of revenue recognition practices across entities and industries by providing a principles-based, comprehensive framework for addressing revenue recognition issues. In order for a provider of promised goods or services to recognize as revenue the consideration that it expects to receive in exchange for the promised goods or services, the provider should apply the following five steps: (1) identify the contract with a customer(s); (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when (or as) the entity satisfies a performance obligation. ASU No. 2014-09 also specifies the accounting for some costs to obtain or fulfill a contract with a customer and provides enhanced disclosure requirements. ASU No. 2014-09 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The guidance permits the retrospective or modified retrospective method when adopting ASU No. 2014-09 but early application is not permitted. The Company has not yet selected a transition method and is still assessing the impact that ASU 2014-09 will have on its financial statements and disclosures, but believes it could impact the timing of revenue recognition for the Company's initial franchise fees.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) ("ASU No. 2016-02"). ASU No. 2016-02 requires lessees to recognize most leases on their balance sheet by recording a liability for its lease obligation and an asset for its right to use the underlying asset as of the lease commencement date. The standard requires entities to determine whether an arrangement contains a lease or a service agreement as the accounting treatment is significantly different between the two arrangements. The standard also requires the lessee to evaluate whether a lease is a financing lease or an operating lease as the accounting and presentation guidance between the two are different. ASU No. 2016-02 also modifies the classification criteria and accounting for sales-type and direct financing leases for lessors. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently assessing the potential impact that ASU No. 2016-02 will have on the financial statements and disclosures.

In March 2016, the FASB issued ASU No. 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting ("ASU No. 2016-09"). ASU No. 2016-09 requires that excess tax benefits and tax deficiencies should be recognized as income tax expense or benefit to the income statement. The Company must also make an accounting policy election of whether to account for forfeitures based on estimate number of awards that are expensed to vest or to account for forfeitures when they occur. In addition, excess tax benefits are required to be classified along with other income tax cash flow as an operating activity on the statement of cash flows and cash paid by an employer when directly withholding shares for tax-withholding purposes should be classified as a financing activity. ASU No. 2016-09 is effective for fiscal years, and interim periods for those years, beginning after December 15, 2016. Early adoption is permitted, but if elected, a Company must adopt all of the amendments in the same period. The Company is currently evaluating the impact, if any, the adoption of this newly issued guidance will have on its consolidated financial statements.

2. Other Current Assets
Other current assets consist of the following:
 
March 31, 2016
 
December 31, 2015
 
(in thousands)
Prepaid expenses
$
19,880

 
$
14,144

Other current assets
3,168

 
1,725

Assets held for sale
2,890

 
1,698

Total
$
25,938

 
$
17,567



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 Company considers loans to be past due and in default when payments are not made when due. Although the Company considers loans to be in default if payments are not received on the due date, the Company does not suspend the accrual of interest until those payments are more than 30 days past due. The Company applies payments received for loans on non-accrual status first to interest and then principal. The Company does not resume interest accrual until all delinquent payments are received. For impaired loans, the Company recognizes interest income on a cash basis.
The following table shows the composition of our notes receivable balances:
 
March 31, 2016
 
December 31, 2015
 
(in thousands)
 
(in thousands)
Credit Quality Indicator
Forgivable
Notes
Receivable
 
Mezzanine
& Other
Notes
Receivable
 
Total
 
Forgivable
Notes
Receivable

Mezzanine
& Other
Notes
Receivable

Total
Senior
$
—

 
$
50,154

 
$
50,154

 
$
—

 
$
40,388

 
$
40,388

Subordinated
—

 
6,204

 
6,204

 
—

 
6,197

 
6,197

Unsecured
47,599

 
4,416

 
52,015

 
44,333

 
3,526

 
47,859

Total notes receivable
47,599

 
60,774

 
108,373

 
44,333

 
50,111

 
94,444

Allowance for losses on non-impaired loans
4,849

 
1,214

 
6,063

 
4,615

 
1,364

 
5,979

Allowance for losses on receivables specifically evaluated for impairment
—

 
1,647

 
1,647

 
—

 
786

 
786

Total loan reserves
4,849

 
2,861

 
7,710

 
4,615

 
2,150

 
6,765

Net carrying value
$
42,750

 
$
57,913

 
$
100,663

 
$
39,718

 
$
47,961

 
$
87,679

Current portion, net
$
160

 
$
8,026

 
$
8,186

 
$
143

 
$
4,964

 
$
5,107

Long-term portion, net
42,590

 
49,887

 
92,477

 
39,575

 
42,997

 
82,572

Total
$
42,750

 
$
57,913

 
$
100,663

 
$
39,718

 
$
47,961

 
$
87,679

 
 
 
 
 
 
 
 
 
 
 
 

The Company classifies notes receivable due within one year as other current 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 for the three months ended March 31, 2016:
            
 
Forgivable
Notes
Receivable
 
Mezzanine
& Other  Notes
Receivable
 
(in thousands)
Beginning balance
$
4,615

 
$
2,150

Provisions
470

 
861

Recoveries
(29
)
 
—

Write-offs
(273
)
 
(150
)
Other(1)
66

 
—

Ending balance
$
4,849

 
$
2,861

 
(1) Consists of changes in foreign currency exchange rates and default rate assumption changes
Forgivable Notes Receivable
As of March 31, 2016 and December 31, 2015, the unamortized balance of the Company's forgivable notes receivable totaled $47.6 million and $44.3 million, respectively. The Company recorded an allowance for credit losses on these forgivable notes receivable of $4.8 million and $4.6 million at March 31, 2016 and December 31, 2015, respectively. Amortization expense

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included in the accompanying consolidated statements of income related to the notes for the three months ended March 31, 2016 and 2015 was $2.2 million and $1.8 million, respectively.
Past due balances of forgivable notes receivable are as follows:
 
30-89 days
Past Due
 
> 90 days
Past Due
 
Total
Past Due
 
Current
 
Total
 Notes Receivable
 
(in thousands)
As of March 31, 2016
 
 
 
 
 
 
 
 
 
       Forgivable Notes
$
—

 
$
1,131

 
$
1,131

 
$
46,468

 
$
47,599

 
$
—

 
$
1,131

 
$
1,131

 
$
46,468

 
$
47,599

 
 
 
 
 
 
 
 
 
 
As of December 31, 2015
 
 
 
 
 
 
 
 
 
       Forgivable Notes
$
—

 
$
1,161

 
$
1,161

 
$
43,172

 
$
44,333

 
$
—

 
$
1,161

 
$
1,161

 
$
43,172

 
$
44,333

Mezzanine and Other Notes Receivable
The Company determined that approximately $1.9 million and $0.8 million of its mezzanine and other notes receivable were impaired at March 31, 2016 and December 31, 2015, respectively. The Company recorded allowance for credit losses on these impaired loans totaling $1.6 million and $0.8 million at March 31, 2016 and December 31, 2015, respectively. For the three months ended March 31, 2016 and 2015, the average mezzanine and other notes receivable on non-accrual status was approximately $0.8 million. The Company recognized approximately $43 thousand and $33 thousand of interest income on impaired loans during the three months ended March 31, 2016 and March 31, 2015, respectively, on the cash basis. The Company provided loan reserves on non-impaired loans totaling $1.2 million and $1.4 million at March 31, 2016 and December 31, 2015, 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 March 31, 2016
 
 
 
 
 
 
 
 
 
Senior
$
—

 
$
—

 
$
—

 
$
50,154

 
$
50,154

Subordinated
—

 
—

 
—

 
6,204

 
6,204

Unsecured
—

 
—

 
—

 
4,416

 
4,416

 
$
—

 
$
—

 
$
—

 
$
60,774

 
$
60,774

As of December 31, 2015
 
 
 
 
 
 
 
 
 
Senior
$
—

 
$
—

 
$
—

 
$
40,388

 
$
40,388

Subordinated
—

 
—

 
—

 
6,197

 
6,197

Unsecured
—

 
—

 
—

 
3,526

 
3,526

 
$
—

 
$
—

 
$
—

 
$
50,111

 
$
50,111


4.
Marketing and Reservation Activities
The Company’s franchise agreements require the payment of franchise fees, which include marketing and reservation system fees. The Company is obligated to use the marketing and reservation system revenues it collects from the current franchisees comprising its various hotel brands to provide marketing and reservation services appropriate to support the operation of the overall system. In discharging its obligation to provide sufficient and appropriate marketing and reservation services, the Company has the right to expend funds in an amount reasonably necessary to ensure the provision of such services, whether or not such amount is currently available to the Company for reimbursement. The franchise agreements provide the Company the right to advance monies to the franchise system when the needs of the system surpass the balances currently available. As a result, expenditures by the Company in support of marketing and reservation services in excess of available revenues are deferred and recorded as an asset in the Company’s financial statements. Conversely, cumulative marketing and reservation

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system revenues not expended in the current period are deferred and recorded as a liability in the financial statements and are carried over to the next fiscal year and expended in accordance with the franchise agreements or utilized to reimburse the Company for prior year advances.
Under the terms of these agreements, the Company has the contractually enforceable right to assess and collect from its current franchisees, fees sufficient to pay for the marketing and reservation services the Company has procured for the benefit of the franchise system, including fees to reimburse the Company for past services rendered. The Company has the contractual authority to require that the franchisees in the system at any given point repay any deficits related to marketing and reservation activities. The Company’s current franchisees are contractually obligated to pay any assessment the Company imposes on its franchisees to obtain reimbursement of such deficit regardless of whether those constituents continue to generate gross room revenue and whether or not they joined the system following the deficit's occurrence.
At March 31, 2016, cumulative marketing and reservation system costs exceeded cumulative marketing and reservation system revenues earned by $15.6 million with the excess reflected as a long-term asset in the accompanying consolidated balance sheet. At December 31, 2015 fees earned exceeded expenses by $30.7 million, with the excess reflected as an other long-term liability in the accompanying consolidated balance sheets. Depreciation and amortization expense attributable to marketing and reservation activities for the three months ended March 31, 2016 and March 31, 2015 were $5.9 million and $5.4 million, respectively. Interest expense attributable to marketing and reservation activities for the three months ended March 31, 2016 and March 31, 2015 were $3 thousand and $9 thousand, respectively.  


5.
Other Assets
Other assets consist of the following:
 
March 31, 2016
 
December 31, 2015
 
(in thousands)
Land and buildings
$
32,301

 
$
10,206

Advances, marketing and reservation (see Note 4)
15,646

 
—

Other assets
7,348

 
6,701

Total
$
55,295

 
$
16,907


Land and buildings

Land and buildings 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 develop the properties for the eventual construction of a hotel operated under the Company's brands or contribute the land into joint ventures for the same purpose.

6.
Investments in Unconsolidated Entities

The Company maintains a portfolio of investments owned through noncontrolling interest in equity method investments with one or more partners. Investments in unconsolidated entities include investments in joint ventures totaling $64.0 million and $64.3 million at March 31, 2016 and December 31, 2015, 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 hotel & 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 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. Although the Company is not the primary beneficiary of these VIEs, it does exercise significant influence through its equity ownership and as a result the Company's investment in these entities is accounted for under the equity method. For the three months ended March 31, 2016 and March 31, 2015, the Company recognized losses totaling $2.4 million and $1.2 million, respectively, from these investments. The Company's maximum exposure to losses related to its investments in VIEs is limited to its equity investments as well as certain guarantees described in Note 17 "Commitments and Contingencies" of these financial statements.

7.
Deferred Revenue
Deferred revenue consists of the following:
 
March 31,
2016
 
December 31,
2015
 
(in thousands)
Loyalty programs
$
97,458

 
$
62,258

Initial, relicensing and franchise fees
5,052

 
6,530

Procurement service fees
3,517

 
2,353

Other
6,049

 
446

Total
$
112,076

 
$
71,587




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8.
Debt
Debt consists of the following at:
 
March 31, 2016
 
December 31, 2015
 
(in thousands)
$400 million senior unsecured notes with an effective interest rate of 6.0% less deferred issuance costs of $5.2 million and $5.4 million at March 31, 2016 and December 31, 2015, respectively
$
394,789

 
$
394,618

$250 million senior unsecured notes with an effective interest rate of 6.19%, less a discount and deferred issuance costs of $1.4 million at March 31, 2016 and December 31, 2015
248,645

 
248,568

$450 million senior unsecured credit facility with an effective interest rate of 1.94% and 1.87%, less deferred issuance costs of $2.8 million and $3.0 million at March 31, 2016 and December 31, 2015, respectively
235,488

 
156,025

Fixed rate collateralized mortgage with an effective interest rate of 4.57%, plus a fair value adjustment of $0.9 million at March 31, 2016 and December 31, 2015
9,896

 
10,048

Economic development loans with an effective rate interest rate of 3.0% at March 31, 2016 and December 31, 2015
3,712

 
3,712

Capital lease obligations due 2016 with an effective interest rate of 3.18% at March 31, 2016 and December 31, 2015
247

 
430

Other notes payable
686

 
735

Total debt
$
893,463

 
$
814,136

Less current portion
1,016

 
1,191

Total long-term debt
$
892,447

 
$
812,945

Senior Unsecured 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 6.0%. 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 borrowings under the Company's senior credit facility, to pay a special cash dividend in 2012 totaling approximately $600.7 million paid to stockholders on August 23, 2012. The Company's 2012 Senior Notes are guaranteed jointly, severally, fully and unconditionally, subject to certain customary limitations by certain of the Company’s domestic subsidiaries.
Senior Unsecured Notes Due 2020
On August 25, 2010, the Company issued unsecured senior notes in the principal amount of $250 million (the "2010 Senior Notes") at a discount of $0.6 million, bearing a coupon of 5.70% 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 certain of the Company’s domestic subsidiaries.
Revolving Credit Facilities

On July 21, 2015, the Company entered into a a senior unsecured revolving credit agreement (“Credit Agreement”), with Deutsche Bank AG New York Branch, as administrative agent.

The Credit Agreement provides for a $450 million unsecured revolving credit facility (the “Revolver”) with a final maturity date of July 21, 2020, subject to optional one-year extensions that can be requested by the Company prior to each of the first, second and third anniversaries of the closing date of the Revolver. The effectiveness of any such extensions is subject to the consent of the lenders under the Credit Agreement and certain customary conditions. Up to $35 million of borrowings under the Revolver may be used for alternative currency loans and up to $15 million of borrowings under the Revolver may be used for swing line loans.

The Revolver is unconditionally guaranteed, jointly and severally, by certain of the Company’s domestic subsidiaries, which are considered restricted subsidiaries under the Credit Agreement. The subsidiary guarantors currently include all subsidiaries that guarantee the obligations under the Company's Indenture governing the terms of its 5.75% senior notes due 2020 and its

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5.70% senior notes due 2020. If the Company achieves and maintains an Investment Grade Rating, as defined in the Credit Agreement, then the subsidiary guarantees will at the election of the Company be released and the Revolver will not be guaranteed.

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 currently may elect to have borrowings under the Revolver bear interest at a rate equal to (i) LIBOR plus a margin ranging from 135 to 175 basis points based on the Company’s total leverage ratio or (ii) a base rate plus a margin ranging from 35 to 75 basis points based on the Company’s total leverage ratio. If the Company achieves an Investment Grade Rating, then the Company may elect to use a different, ratings-based, pricing grid set forth in the Credit Agreement.

The Credit Agreement requires the Company to pay a fee on the undrawn portion of the Revolver, calculated on the basis of the average daily unused amount of the Revolver multiplied by 0.20% per annum. If the Company achieves an Investment Grade Rating and it elects to use the ratings-based pricing grid set forth in the Credit Agreement, then the Company will be required to pay a fee on the total commitments under the Revolver, calculated on the basis of the actual daily amount of the commitments under the Revolver (regardless of usage) times a percentage per annum ranging from 0.10% to 0.25% (depending on the Company’s senior unsecured long-term debt rating).

The Credit Agreement 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. With respect to dividends, the Company may not declare or 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 4.0 to 1.0, the Company is generally restricted from paying aggregate dividends in excess of $50 million in any calendar year.

The Credit Agreement imposes financial maintenance covenants requiring the Company to maintain a total leverage ratio of not more than 4.5 to 1.0 and a consolidated fixed charge coverage ratio of at least 2.5 to 1.0. If the Company achieves and maintains an Investment Grade Rating, then the Company will not need to comply with the consolidated fixed charge coverage ratio covenant.

The Credit Agreement 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 Credit Agreement to be immediately due and payable. At March 31, 2016, the Company was in compliance with all financial covenants under the Credit Agreement.

The proceeds of the Revolver are expected to be used for general corporate purposes, including working capital, debt repayment, stock repurchases, dividends, investments and other permitted uses set forth in the Credit Agreement.
Fixed Rate Collateralized Mortgage
On December 30, 2014, a court awarded the Company title to an office building as settlement for a portion of an outstanding loan receivable for which the building was pledged as collateral. In conjunction with the court award, the Company also assumed the $9.5 million mortgage on the property with a fixed interest rate of 7.26%. The mortgage which is collateralized by the office building requires monthly payments of principal and interest and matures in December 2020 with a balloon payment due of $6.9 million. At the time of acquisition, the Company determined that the fixed interest rate of 7.26% exceeded market interest rates and therefore the Company increased the carrying value of the debt by $1.2 million to record the debt at fair value. The fair value adjustment is being amortized over the remaining term of the mortgage utilizing the effective interest method.

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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 March 31, 2016, the Company had been advanced approximately $3.7 million pursuant to these agreements and expects to receive the remaining $0.7 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 the 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 March 31, 2016.

9.
Accumulated Other Comprehensive Loss

The following represents the changes in accumulated other comprehensive loss, net of tax, by component for the three months ended March 31, 2016:

 
Loss on Cash Flow Hedge
 
Foreign Currency Items
 
Total
 
(in thousands)
Beginning balance, December 31, 2015
$
(4,022
)
 
$
(4,756
)
 
$
(8,778
)
Other comprehensive income (loss) before reclassification
—

 
1,528

 
1,528

Amounts reclassified from accumulated other comprehensive income (loss)
215

 
—

 
215

Net current period other comprehensive income (loss)
215

 
1,528

 
1,743

Ending balance, March 31, 2016
$
(3,807
)
 
$
(3,228
)
 
$
(7,035
)


The amounts reclassified from accumulated other comprehensive loss during the three months ended March 31, 2016 were reclassified to the following line items in the Company's Consolidated Statements of Income.

Component
 
Amount Reclassified from Accumulated Other Comprehensive Loss
 
Affected Line Item in the Consolidated Statement of Net Income
 
 
Three Months Ended March 31, 2016
 
 
 
 
(in thousands)
 
 
Loss on cash flow hedge
 
 
 
 
Interest rate contract
 
$
215

 
Interest expense
 
 
—

 
Tax (expense) benefit
 
 
$
215

 
Net of tax


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10.
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 and invest these amounts in a selection of available diversified investment options. 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. Under the EDCP and Non-Qualified Plan, (together, the "Deferred Compensation Plan"), the Company recorded current and long-term deferred compensation liabilities of $22.9 million and $23.0 million at March 31, 2016 and December 31, 2015, respectively, related to these deferrals and credited investment return under these two deferred compensation plans. Compensation expense is recorded in SG&A expense on the Company’s consolidated statements of income based on the change in the deferred compensation obligation related to earnings credited to participants as well as changes in the fair value of diversified investments. The net increase in compensation expense recorded in SG&A for the three months ended March 31, 2016 and 2015 was $0.1 million and $0.5 million, respectively.
Under the Deferred Compensation Plan, the Company has invested the employee salary deferrals in diversified long-term investments which are intended to provide investment returns that offset the earnings credited to the participants. The diversified investments held in the trusts totaled $18.3 million and $17.8 million as of March 31, 2016 and December 31, 2015, respectively, and are recorded at their fair value, based on quoted market prices. At March 31, 2016, the Company expects $0.5 million of the assets held in the trust to be distributed during the next twelve months to participants. These investments are considered trading securities and therefore the changes in the fair value of the diversified assets is included in other gains and losses in the accompanying consolidated statements of income. The Company recorded investment gains (losses) during the three months ended March 31, 2016 and 2015 of approximately $(0.1) million and $0.2 million, respectively.

11.
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 Deferred Compensation Plan.
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 Deferred Compensation Plan 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.
 
The Company's policy is to recognize transfers in and transfers out of the three levels of the fair value hierarchy as of the end of each quarterly reporting period. There were no transfers between Level 1, 2 and 3 assets during the three months ended March 31, 2016.

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As of March 31, 2016 and December 31, 2015, the Company had the following assets measured at fair value on a recurring basis:
 
Fair Value Measurements at
Reporting Date Using
 
Total
 
Level 1
 
Level 2
 
Level 3
Assets
(in thousands)
As of March 31, 2016
 
 
 
 
 
 
 
Money market funds, included in cash and cash equivalents
$
50,003

 
$
—

 
$
50,003

 
$
—

Mutual funds(1)
16,737

 
16,737

 
—

 
—

Money market funds(1)
1,592

 
—

 
1,592

 
—

 
$
68,332

 
$
16,737

 
$
51,595

 
$
—

As of December 31, 2015
 
 
 
 
 
 
 
Money market funds, included in cash and cash equivalents
$
50,001

 
$
—

 
$
50,001

 
$
—

Mutual funds(1)
16,542

 
16,542

 
—

 
—

Money market funds(1)
1,307

 
—

 
1,307

 
—

 
$
67,850

 
$
16,542

 
$
51,308

 
$
—

________________________ 
(1)
Included in Investments, employee benefit plans at fair value and other current assets on the consolidated balance sheets.
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 Credit Facility adjust frequently based on current market rates; accordingly its carrying amount approximates fair value.
The Company estimates the fair value of notes receivable which approximate their carrying value, utilizing an analysis of future cash flows and credit worthiness for similar types of arrangements. Based upon the availability of market data, the notes receivable have been classified 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 fair value of the Company's $250 million and $400 million senior notes are classified as Level 2 as the significant inputs are observable in an active market. At March 31, 2016 and December 31, 2015, the $250 million senior notes had an approximate fair value of $271.3 million and $267.7 million, respectively. At March 31, 2016 and December 31, 2015, the $400 million senior notes had an approximate fair value of $430.0 million and $432.0 million, respectively.

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

12.
Income Taxes
The effective income tax rates from continuing operations were 35.5% and 30.4% for the three months ended March 31, 2016 and 2015, respectively. The effective income tax rates for the three months ended March 31, 2016 was higher than the U.S. federal income tax rate of 35% due to the impact of state income taxes, partially offset by the impact of foreign operations. The rate was also impacted by an unfavorable adjustment of $1.2 million to our tax rate benefit from foreign operations. The effective income tax rate for the three months ended March 31, 2015 was lower than the U.S. federal income tax rate of 35.0% due to the impact of foreign operations, partially offset by state income taxes and the settlement of unrecognized tax positions.
13.
Share-Based Compensation and Capital Stock
Stock Options
The Company granted 0.7 million and 0.5 million options to certain employees of the Company at a fair value of $6.9 million and $6.2 million for the three months ended March 31, 2016 and 2015, 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

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of the options granted was estimated on the grant date using the Black-Scholes option-pricing model with the following weighted average assumptions:
        
 
2016 Grants
 
2015 Grants
Risk-free interest rate
1.22
%
 
1.45
%
Expected volatility
23.76
%
 
23.94
%
Expected life of stock option
4.6 years

 
4.6 years

Dividend yield
1.59
%
 
1.23
%
Requisite service period
4 years

 
4 years

Contractual life
7 years

 
7 years

Weighted average fair value of options granted (per option)
$
9.30

 
$
12.39

The expected life of the options and volatility are based on historical data which is believed to be indicative of future exercise patterns or actual volatility. Historical volatility is calculated based on a period that corresponds to the expected term of the stock option. The dividend yield and the risk-free rate of return are calculated on the grant date based on the then current dividend rate and the risk-free rate of return for the period corresponding to the expected life of the stock option. Compensation expense related to the fair value of these awards is recognized straight-line over the requisite service period based on those awards that ultimately vest.
The aggregate intrinsic value of the stock options outstanding and exercisable at March 31, 2016 was $26.7 million and $21.4 million, respectively. The total intrinsic value of options exercised during the three months ended March 31, 2016 and 2015 was approximately $4.4 million and $8.5 million, respectively.
The Company received approximately $4.1 million and $5.6 million in proceeds from the exercise of 190,830 and 228,963 employee stock options during the three months ended March 31, 2016 and 2015, respectively.
Restricted Stock
The following table is a summary of activity related to restricted stock grants: 
 
Three Months Ended
 
March 31,
 
2016
 
2015
Restricted share grants
125,110

 
85,792

Weighted average grant date fair value per share
$
51.49

 
$
63.46

Aggregate grant date fair value ($000)
$
6,442

 
$
5,445

Restricted shares forfeited
4,272

 
4,778

Vesting service period of shares granted
3-4 years

 
3-4 years

Fair value of shares vested ($000)
$
6,303

 
$
10,684

Compensation expense related to the fair value of these awards is recognized straight-line over the requisite service period based on those restricted stock grants that ultimately vest. The fair value of grants is measured by the market price of the Company’s stock on the date of grant. Restricted stock awards generally vest ratably over the service period beginning with the first anniversary of the grant date. Awards granted to retirement eligible non-employee directors are recognized over the shorter of the requisite service period or the length of time until retirement since the terms of the grant provide that the awards will vest upon retirement.
Performance Vested Restricted Stock Units
The Company has granted performance vested restricted stock units ("PVRSU") to certain employees. The fair value is measured by the market price of the Company's common stock on the date of the grant. The vesting of these stock awards is contingent upon the Company achieving performance targets at the end of specified performance periods and the employees' continued employment. The performance conditions affect the number of shares that will ultimately vest. The range of possible stock-based award vesting is generally between 0% and 200% of the initial target. If minimum performance targets are not attained, then no awards will vest under the terms of the various PVRSU agreements. Compensation expense related to these awards is recognized over the requisite service period based on the Company's estimate of the achievement of the various performance targets. The Company has currently estimated that between 0% and 175% of the various award targets will be

17
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achieved. Compensation expense is recognized ratably over the requisite service period only on those PVRSUs that ultimately vest.
The following table is a summary of activity related to PVRSU grants:
 
Three Months Ended
 
 
March 31,
 
 
2016
 
2015
 
Performance vested restricted stock units granted at target
35,033

 
30,353

 
Weighted average grant date fair value per share
$
51.49

 
$
63.47

 
Aggregate grant date fair value ($000)
$
1,804

 
$
1,927

 
Stock units forfeited
28,193

 
—

 
Requisite service period
3 years

 
3 years

 
During the three months ended March 31, 2016, PVRSU grants totaling 22,062 vested at a grant date fair value of $0.8 million. These PVRSU grants were initially granted at a target of 44,118 units. However, since the Company achieved only 50% of the targeted performance conditions contained in the stock awards granted in prior periods, 22,056 shares were forfeited. In addition, during the three months ended March 31, 2016, PVRSU grants totaling 6,126 vested at a grant date fair value of $0.2 million. These PVRSU grants were initially granted at a target of 4,083 units. However, since the Company achieved 150% of the targeted performance conditions contained in the stock awards granted in prior periods, an additional 2,043 shares were earned and issued.
During the three months ended March 31, 2015, a total of 42,326 PVRSU grants vested at a grant date fair value of $1.5 million. These PVRSU grants were initially granted at a target of 38,476 units. However, since the Company achieved 110% of the targeted performance conditions contained in the stock awards granted in prior periods, an additional 3,850 shares were earned and issued.
A summary of stock-based award activity as of March 31, 2016 and changes during the three months ended are presented below:
 
Stock Options
 
Restricted Stock
 
Performance Vested
Restricted Stock Units
 
Options
 
Weighted
Average
Exercise
Price
 
Weighted
Average
Remaining
Contractual
Term
 
Shares
 
Weighted
Average
Grant Date
Fair Value
 
Shares
 
Weighted
Average
Grant Date
Fair Value
Outstanding at January 1, 2016
2,084,201

 
$
41.36

 
 
 
384,490

 
$
47.40

 
226,737

 
$
45.09

Granted
745,769

 
$
51.49

 
 
 
125,110

 
$
51.49

 
35,033

 
$
51.49

Performance based leveraging (1)
—

 
$
—

 
 
 
—

 
$
—

 
2,043

 
$
36.76

Exercised/Vested
(190,830
)
 
$
21.68

 
 
 
(128,061
)
 
$
42.48

 
(28,188
)
 
$
36.76

Expired
—

 
$
—

 
 
 
—

 
$
—

 
—

 
$
—

Forfeited
(10,104
)
 
$
54.92

 
 
 
(4,272
)
 
$
52.69

 
(28,193
)
 
$
35.85

Outstanding at March 31, 2016
2,629,036

 
$
45.61

 
4.9 years
 
377,267

 
$
50.37

 
207,432

 
$
48.48

Options exercisable at March 31, 2016
1,168,969

 
$
36.69

 
3.2 years
 
 
 
 
 
 
 
 
_________________________________ 
(1)PVRSU units outstanding have been increased by 2,043 units due to the Company exceeding the targeted performance conditions contained in PVRSUs granted in prior periods during the three months ended March 31, 2016.

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The components of the Company’s pretax share-based compensation expense and associated income tax benefits are as follows for the three months ended March 31, 2016 and 2015:
 
Three Months Ended
 
March 31,
(in millions)
2016
 
2015
Stock options
$
1.1

 
$
0.7

Restricted stock
1.8

 
1.8

Performance vested restricted stock units
0.6

 
0.3

Total
$
3.5

 
$
2.8

Income tax benefits
$
1.3

 
$
1.0

Dividends
The Company currently pays a quarterly dividend on its common stock of $0.205 per share, however the declaration of future dividends is subject to the discretion of the board of directors. During the three months ended March 31, 2016, the Company's board of directors declared dividends totaling $0.205 per share or approximately $11.6 million in the aggregate.
  
In addition, during the three months ended March 31, 2016 and 2015, the Company recorded dividends totaling $0.1 million and $0.5 million, respectively, related to previously declared dividends that were contingent upon the vesting of performance vested restricted stock units.

Share Repurchases and Redemptions
The Company purchased 0.1 million shares of common stock under the share repurchase program at a total cost of $3.6 million during the three months ended March 31, 2016.
During the three months ended March 31, 2016, the Company redeemed 116,223 shares of common stock at a total cost of approximately $5.3 million from employees to satisfy the option exercise price and statutory minimum tax-withholding requirements related to the exercising of stock options and vesting of performance vested restricted stock units and restricted stock grants. These redemptions were outside the share repurchase program.


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14. Earnings Per Share
The computation of basic and diluted earnings per common share is as follows:    
 
Three Months Ended
 
March 31,
(In thousands, except per share amounts)
2016
 
2015
 
 
 
 
Computation of Basic Earnings Per Share:
 
 
 
Numerator:
 
 
 
Net income
$
19,598

 
$
21,594

Income allocated to participating securities
(131
)
 
(164
)
Net income available to common shareholders
$
19,467

 
$
21,430

Denominator:
 
 
 
Weighted average common shares outstanding – basic
56,025

 
57,003

 
 
 
 
Basic earnings per share
$
0.35

 
$
0.38

 
 
 
 
Computation of Diluted Earnings Per Share:
 
 
 
Numerator:
 
 
 
Net income
$
19,598

 
$
21,594

Income allocated to participating securities
(131
)
 
(164
)
Net income available to common shareholders
$
19,467

 
$
21,430

Denominator:
 
 
 
Weighted average common shares outstanding – basic
56,025

 
57,003

Diluted effect of stock options and PVRSUs
282

 
583

Weighted average common shares outstanding – diluted
56,307

 
57,586

 
 
 
 
Diluted earnings per share
$
0.35

 
$
0.37


The Company's unvested restricted shares contain rights to receive non-forfeitable dividends, and thus are participating securities requiring the two-class method of computing earnings per share ("EPS"). The calculation of EPS for common stock shown above excludes the income attributable to the unvested restricted share awards from the numerator and excludes the dilutive impact of those awards from the denominator.
At March 31, 2016 and 2015, the Company had 2.6 million and 2.2 million outstanding stock options, respectively. Stock options are included in the diluted earnings per share calculation using the treasury stock method and average market prices during the period, unless the stock options would be anti-dilutive. For the three months ended March 31, 2016, the Company excluded 1.2 million of anti-dilutive stock options from the diluted earnings per share calculation. For the three months ended March 31, 2015, the Company excluded 0.5 million of anti-dilutive stock options from the diluted earnings per share calculation.
PVRSUs are also included in the diluted earnings per share calculation when the performance conditions have been met at the reporting date. However, at March 31, 2016 and 2015, PVRSUs totaling 207,432 and 192,163, respectively, were excluded from the computation since the performance conditions had not been met.

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15. Condensed Consolidating Financial Statements
The Company’s 2010 and 2012 Senior Notes are guaranteed jointly, severally, fully and unconditionally, subject to certain customary limitations, by certain of the Company’s 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 March 31, 2016
(Unaudited, in thousands)
 
 
Parent
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
REVENUES:
 
 
 
 
 
 
 
 
 
 
Royalty fees
 
$
60,274

 
$
32,418

 
$
10,915

 
$
(38,748
)
 
$
64,859

Initial franchise and relicensing fees
 
5,056

 
—

 
100

 
—

 
5,156

Procurement services
 
5,622

 
—

 
174

 
—

 
5,796

Marketing and reservation
 
116,143

 
135,224

 
3,426

 
(128,432
)
 
126,361

Other
 
2,999

 
74

 
2,057

 
(184
)
 
4,946

Total revenues
 
190,094

 
167,716

 
16,672

 
(167,364
)
 
207,118

OPERATING EXPENSES:
 
 
 
 
 
 
 
 
 
 
Selling, general and administrative
 
39,227

 
28,762

 
6,062

 
(38,932
)
 
35,119

Marketing and reservation
 
121,978

 
129,443

 
3,372

 
(128,432
)
 
126,361

Depreciation and amortization
 
302

 
1,902

 
561

 
—

 
2,765

Total operating expenses
 
161,507

 
160,107

 
9,995

 
(167,364
)
 
164,245

Operating income
 
28,587

 
7,609

 
6,677

 
—

 
42,873

OTHER INCOME AND EXPENSES, NET:
 
 
 
 
 
 
 
 
 
 
Interest expense
 
10,948

 
1

 
143

 
—

 
11,092

Equity in earnings of consolidated subsidiaries
 
(9,729
)
 
807

 
—

 
8,922

 
—

Other items, net
 
(446
)
 
1,282

 
567

 
—

 
1,403

Total other income and expenses, net
 
773

 
2,090

 
710

 
8,922

 
12,495

Income before income taxes
 
27,814

 
5,519

 
5,967

 
(8,922
)
 
30,378

Income taxes
 
8,216

 
3,001

 
(437
)
 
—

 
10,780

Net income
 
$
19,598

 
$
2,518

 
$
6,404

 
$
(8,922
)
 
$
19,598


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Table of Contents

Choice Hotels International, Inc.
Condensed Consolidating Statement of Income
For the Three Months Ended March 31, 2015
(Unaudited, in thousands)
 
 
Parent
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
REVENUES:
 
 
 
 
 
 
 
 
 
 
Royalty fees
 
$
57,587

 
$
31,240

 
$
11,155

 
$
(37,551
)
 
$
62,431

Initial franchise and relicensing fees
 
5,496

 
—

 
221

 
—

 
5,717

Procurement services
 
4,666

 
—

 
141

 
—

 
4,807

Marketing and reservation
 
88,236

 
90,385

 
3,621

 
(83,529
)
 
98,713

Other
 
3,102

 
—

 
475

 
—

 
3,577

Total revenues
 
159,087

 
121,625

 
15,613

 
(121,080
)
 
175,245

OPERATING EXPENSES:
 
 
 
 
 
 
 
 
 
 
Selling, general and administrative
 
38,699

 
28,052

 
3,238

 
(37,551
)
 
32,438

Marketing and reservation
 
92,024

 
86,811

 
3,407

 
(83,529
)
 
98,713

Depreciation and amortization
 
774

 
1,705

 
211

 
—

 
2,690

Total operating expenses
 
131,497

 
116,568

 
6,856

 
(121,080
)
 
133,841

Operating income
 
27,590

 
5,057

 
8,757

 
—

 
41,404

OTHER INCOME AND EXPENSES, NET:
 
 
 
 
 
 
 
 
 
 
Interest expense
 
10,032

 
—

 
147

 
—

 
10,179

Equity in earnings of consolidated subsidiaries
 
(11,332
)
 
138

 
—

 
11,194

 
—

Other items, net
 
(292
)
 
297

 
186

 
—

 
191

Total other income and expenses, net
 
(1,592
)
 
435

 
333

 
11,194

 
10,370

Income before income taxes
 
29,182

 
4,622

 
8,424

 
(11,194
)
 
31,034

Income taxes
 
7,588

 
2,284

 
(432
)
 
—

 
9,440

Net income
 
$
21,594

 
$
2,338

 
$
8,856

 
$
(11,194
)
 
$
21,594



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Table of Contents

Choice Hotels International, Inc.
Condensed Consolidating Statement of Comprehensive Income
For the Three Months Ended March 31, 2016
(Unaudited, in thousands)
 
Parent
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Net income
$
19,598

 
$
2,518

 
$
6,404

 
$
(8,922
)
 
$
19,598

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

 
—

 
—

 
—

 
215

Foreign currency translation adjustment
1,528

 
—

 
1,528

 
(1,528
)
 
1,528

Other comprehensive income, net of tax
1,743

 
—

 
1,528

 
(1,528
)
 
1,743

Comprehensive income
$
21,341

 
$
2,518

 
$
7,932

 
$
(10,450
)
 
$
21,341


23
Table of Contents

Choice Hotels International, Inc.
Condensed Consolidating Statement of Comprehensive Income
For the Three Months Ended March 31, 2015
(Unaudited, in thousands)

 
Parent
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Net income
$
21,594

 
$
2,338

 
$
8,856

 
$
(11,194
)
 
$
21,594

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

 
—

 
—

 
—

 
215

Foreign currency translation adjustment
(1,447
)
 
—

 
(1,447
)
 
1,447

 
(1,447
)
Other comprehensive income (loss), net of tax
(1,232
)
 
—

 
(1,447
)
 
1,447

 
(1,232
)
Comprehensive income
$
20,362

 
$
2,338

 
$
7,409

 
$
(9,747
)
 
$
20,362



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Table of Contents

Choice Hotels International, Inc.
Condensed Consolidating Balance Sheet
As of March 31, 2016
(Unaudited, in thousands)
 
 
Parent
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
4,006

 
$
97

 
$
189,969

 
$
—

 
$
194,072

Receivables, net
92,653

 
1,383

 
8,900

 
(150
)
 
102,786

Other current assets
36,443

 
21,060

 
7,739

 
(23,984
)
 
41,258

Total current assets
133,102

 
22,540

 
206,608

 
(24,134
)
 
338,116

Property and equipment, at cost, net
43,000

 
28,611

 
16,734

 
—

 
88,345

Goodwill
60,620

 
5,193

 
14,169

 
—

 
79,982

Franchise rights and other identifiable intangibles, net
2,983

 
1,013

 
8,029

 
—

 
12,025

Notes receivable, net of allowances
23,110

 
41,767

 
27,600

 
—

 
92,477

Investments, employee benefit plans, at fair value
—

 
17,802

 
—

 
—

 
17,802

Investment in affiliates
486,286

 
60,316

 
—

 
(546,602
)
 
—

Advances to affiliates
17,579

 
215,709

 
3,032

 
(236,320
)
 
—

Deferred income taxes
—

 
47,252

 
—

 
(10,716
)
 
36,536

Other assets
15,646

 
46,928

 
59,485

 
(79
)
 
121,980

Total assets
$
782,326

 
$
487,131

 
$
335,657

 
$
(817,851
)
 
$
787,263

LIABILITIES AND SHAREHOLDERS’ DEFICIT
 
 
 
 
 
 
 
 
 
Accounts payable
$
7,995

 
$
48,376

 
$
4,398

 
$
(150
)
 
$
60,619

Accrued expenses and other current liabilities
19,876

 
43,009

 
7,610

 
(23,879
)
 
46,616

Deferred revenue
13,887

 
97,013

 
1,281

 
(105
)
 
112,076

Current portion of long-term debt
—

 
247

 
769

 
—

 
1,016

Total current liabilities
41,758

 
188,645

 
14,058

 
(24,134
)
 
220,327

Long-term debt
878,921

 
3,712

 
9,814

 
—

 
892,447

Deferred compensation and retirement plan obligations
—

 
22,404

 
11

 
—

 
22,415

Advances from affiliates
224,436

 
10,054

 
1,830

 
(236,320
)
 
—

Deferred income taxes
8,632

 
—

 
2,863

 
(10,716
)
 
779

Other liabilities
14,444

 
15,979

 
6,816

 
(79
)
 
37,160

Total liabilities
1,168,191

 
240,794

 
35,392

 
(271,249
)
 
1,173,128

Total shareholders’ (deficit) equity
(385,865
)
 
246,337

 
300,265

 
(546,602
)
 
(385,865
)
Total liabilities and shareholders’ deficit
$
782,326

 
$
487,131

 
$
335,657

 
$
(817,851
)
 
$
787,263



25
Table of Contents

Choice Hotels International, Inc.
Condensed Consolidating Balance Sheet
As of December 31, 2015
(in thousands)
 
 
Parent
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
ASSETS