Comfort Inn 2013 Annual Report Download

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Table of Contents
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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No
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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months. Yes No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s
knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
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 definitions of “large
accelerated filer, accelerated filer and smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):
Large accelerated filer x
Accelerated filer o
Smaller reporting company o
Non-accelerated filer o
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act) Yes ¨ No
The aggregate market value of common stock of Choice Hotels International, Inc. held by non-affiliates was $1,126,592,712 as of June 30, 2013 based upon a closing price of
$39.69 per share.
The number of shares outstanding of Choice Hotels International, Inc.’s common stock at February 14, 2014 was 58,627,712.
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Table of contents

  • Page 1
    ... is a shell company (as defined in Rule 12b-2 of the Act) Yes ¨ No  The aggregate market value of common stock of Choice Hotels International, Inc. held by non-affiliates was $1,126,592,712 as of June 30, 2013 based upon a closing price of $39.69 per share. The number of shares outstanding...

  • Page 2
    Table of Contents Certain portions of our definitive proxy statement, to be filed with the Securities and Exchange Commission pursuant to Regulation 14A in connection with the Annual Meeting of Shareholders to be held on May 8, 2014 , are incorporated by reference under Part III of this Form 10-K.

  • Page 3
    ... 14. Directors, Executive Officers and Corporate Governance Executive Compensation Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Certain Relationships and Related Transactions and Director Independence Principal Accounting Fees and Services 122 122...

  • Page 4
    ... United States. Choice franchises lodging properties under the following proprietary brand names: Comfort Inn ®, Comfort Suites ®, Quality®, Clarion®, Sleep Inn ®, Econo Lodge ®, Rodeway Inn ®, MainStay Suites ®, Suburban Extended Stay Hotel ®, Cambria Suites ® and Ascend Hotel Collection...

  • Page 5
    ...to manage costs. The number of rooms at franchised properties and occupancy and room rates at those properties significantly affect the Company's results because our fees are based upon room revenues or the number of rooms at franchised hotels. The key industry standard for measuring hotel-operating...

  • Page 6
    ... standards. Under a typical franchise agreement, the hotel owner pays the franchisor an initial fee, a percentage-of-revenue royalty fee and a marketing/reservation fee. A franchisor's revenues are dependent on the number of rooms in its system and the top-line performance of those hotels. Earnings...

  • Page 7
    ...Lodging Industry Trends: 1999 - 2013 Tverage Daily Room Change in TDR Versus Prior Change in CPI Versus Prior Revenue Per Tvailable Room (RevPTR) New Rooms Year Occupancy Rates Rates (TDR) Tdded (Gross) Year Year 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013...

  • Page 8
    .... The large franchise lodging chains, including us, generally provide a number of support services to hotel operators designed to improve the financial performance of their properties including central reservation and property management systems, marketing and advertising programs, training and...

  • Page 9
    ... within the lodging industry. Our Cambria Suites, Comfort Inn, Comfort Suites, Sleep Inn, Suburban Extended Stay Hotel and MainStay Suites are primarily new build brands which offer hotel developers an array of choices at various price points for transient and extended stay business during periods...

  • Page 10
    ... of the agreement, before the 20 th (or 10th, as applicable) year. Our franchisees operate domestically under one of eleven Choice brand names: Comfort Inn, Comfort Suites, Cambria Suites, Quality, Clarion, Ascend Hotel Collection, Sleep Inn, Econo Lodge, Rodeway Inn, MainStay Suites and Suburban...

  • Page 11
    ...and microwave. Comfort Suites hotels offer a complimentary hot breakfast and free high-speed internet access, as well as a marketplace with snacks, mini-meals and beverages for purchase. The brand competes with Hampton and Fairfield Inn. Sleep Inn: Sleep Inn is a new construction brand that operates...

  • Page 12
    ...the Year Ended December 31, 2009 2010 2011 2012 2013 1,302 101,673 COMFORT INN DOMESTIC SYSTEM Number of properties, end of period Number of rooms, end of period 1,447 113,633 1,435 112,169 1,399 109,330 1,349 105,471 Royalty fees ($000) Average occupancy percentage Average daily room rate...

  • Page 13
    ... 74.94 37.03 75.20 RevPAR SLEEP INN DOMESTIC SYSTEM Number of properties, end of period Number of rooms, end of period 32.86 398 28,957 38.30 382 27,623 387 28,087 $ $ $ 17,114 Royalty fees ($000) Average occupancy percentage Average daily room rate (ADR) $ $ $ 15,050 $ $ $ 15,838 53.6% 69...

  • Page 14
    ... open at both December 31, 2013 and 2012 , respectively. In some territories outside the United States hotel franchising is less prevalent, and many markets are served primarily by independent operators. We believe that chain and franchise affiliation will increase in certain international markets...

  • Page 15
    ... lodging organizations in Canada with 310 of our franchised properties open and operating as of December 31, 2013. The Company conducts direct franchising operations for its extended stay and Cambria Suites brands in Canada through its wholly-owned subsidiary, Choice Hotels International Licensing...

  • Page 16
    ... International, Ltd. ("Atlantica"). As of December 31, 2013 , Atlantica had 62 open properties in its development territory. The Company's master franchise agreement with Atlantica grants rights to the Comfort, Quality, Sleep and Clarion brands. The agreement was executed in 2001 and has a term...

  • Page 17
    Table of Contents The following table summarizes Choice's non-domestic franchise system as of December 31, 2013 : Comfort Comfort Econo Suites Quality Clarion Sleep Tscend Mainstay Suburban Lodge Rodeway Total Tustralia Canada Czech Republic France Germany India 122 - - 71 18 10 - - - ...

  • Page 18
    ... of and for the year ended December 31, 2013 : Tpproved for Development Hotels Open and Operational Units Rooms Hotels Rooms Tdditions Repositionings Terminations Comfort Comfort Suites Quality Ascend Hotel Collection Clarion Sleep Inn MainStay Suites Econo Lodge Rodeway Inn 1,824 604 141...

  • Page 19
    ..., one-time affiliation fee; a royalty fee; and a marketing and reservation system fee. Our standard franchise fees are as follows: QUOTED FEES BY BRTND TS OF DECEMBER 31, 2013 Marketing and Reservation System Royalty Fees Fee Brand Initial Fee Per Room/Minimum Cambria Suites Comfort Inn Comfort...

  • Page 20
    ... lower cost, more targeted marketing campaigns to our consumers, deliver incremental business to our franchised hotels and are an important selling point for our franchise sales personnel. Choice Privileges members contribute approximately a third of the Company's domestic gross room revenues and...

  • Page 21
    ...We also design our marketing campaigns to drive reservation traffic directly to our proprietary channels to minimize the impact that third party reservation sites may have on the pricing of our inventory. In addition, we have introduced programs such as our Best Internet Rate Guarantee program which...

  • Page 22
    ... International, Comfort Inn, Comfort Suites, Quality, Clarion, Sleep Inn, Econo Lodge, Rodeway Inn, MainStay Suites, Cambria Suites, Suburban Extended Stay Hotel, Ascend Hotel Collection, Choice Privileges, SkyTouch Technology and related marks and logos are material to our business. We, directly...

  • Page 23
    ... that have several hotel related software products, as well as companies that offer a single product or service aimed at a particular niche. In addition, our products and services compete with room reservation systems developed and marketed by major hotel chains for their corporate-owned operations...

  • Page 24
    ...material occupations, positions, offices and employment of each of the executive officers of the Company as of December 31, 2013 are set forth below. The business address of each executive officer is 1 Choice Hotels Circle, Suite 400, Rockville, Maryland 20850. Name Tge Position Stewart W. Bainum...

  • Page 25
    ... from fees based on room revenues at hotels franchised under our brands. As such, our business is subject, directly or through our franchisees, to the following risks common in the lodging and franchising industry, among others: • changes in the number of hotels operating under franchised brands...

  • Page 26
    ...the number of hotels franchised under the Choice brands. We compete with other lodging companies for franchisees. As a result, the terms of new franchise agreements may not be as favorable as our current franchise agreements. For example, competition may require us to reduce or change fee structures...

  • Page 27
    ...brands that gain market acceptance; our dependence on our independent franchisees' skills and access to financial resources necessary to open the desired number of hotels; and our ability to attract and retain qualified domestic and international franchisees. In addition, we are currently planning...

  • Page 28
    ... new owners will choose to affiliate with our brands. The hotel industry is highly competitive. Competition for hotel guests is based primarily on the level of service, quality of accommodations, convenience of locations and room rates. Our franchisees compete for guests with other hotel properties...

  • Page 29
    ... the operating results and financial condition of our franchisees and result in declines in the number of franchised properties and/or franchise fees and other revenues derived from our franchising business. In addition, at times, the Company provides financial support to our franchisees via notes...

  • Page 30
    ... of non-United States entities to pay dividends and remit earnings to affiliated companies unless specified conditions have been met. In addition, revenues from international jurisdictions typically are earned in local currencies, which subjects us to risks associated with currency fluctuations...

  • Page 31
    ...malfunction in our information systems could adversely affect our business. The lodging industry depends upon the use of sophisticated technology and systems including those utilized for reservations, property management, procurement, operation of our customer loyalty programs and our administrative...

  • Page 32
    ... and/or subject us to costs, fines or lawsuits. Our business requires the collection and retention of large volumes of internal and customer data, including credit card numbers and other personally identifiable information of our employees and customers as such information is entered into, processed...

  • Page 33
    ... 2. Properties. Our principal executive offices are located at 1 Choice Hotels Circle, Suite 400, Rockville, Maryland 20850 and are leased from a third party. We lease one office building and own a second office building in Phoenix, AZ, which houses our reservation and property systems' information...

  • Page 34
    ... II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. The shares of the Company's common stock are listed and traded on the New York Stock Exchange. The following table sets forth information on the high and low sales prices of the...

  • Page 35
    ...of Choice Hotels International, Inc. common stock made by the Company during the year ended December 31, 2013 . Total Number of Shares Purchased as Part of Publicly Tnnounced Plans or Programs(1),(2) Maximum Number of Shares that may yet be Purchased Under the Plans or Programs, End of Period Month...

  • Page 36
    ... the cumulative 5-year total return of holders of Choice Hotels International, Inc.'s common stock with the cumulative total returns of the NYSE Composite index and the S&P Hotels, Resorts & Cruise Lines index. The graph tracks the performance of a $100 investment in our common stock and in each...

  • Page 37
    ... information included elsewhere in this annual report. Company results (in millions, except per share data) Ts of and for the year ended December 31, 2009 2010 2011 2012 2013 Total Revenues Operating Income Net Income Basic Earnings per Share Diluted Earnings per Share Total Assets Long-Term...

  • Page 38
    ...names include Comfort Inn, Comfort Suites, Quality, Clarion, Ascend Hotel Collection, Sleep Inn, Econo Lodge, Rodeway Inn, MainStay Suites, Suburban Extended Stay Hotel and Cambria Suites (collectively, the "Choice brands"). The Company's domestic franchising operations are conducted through direct...

  • Page 39
    ... sales and relicensing activity; and our ability to manage costs. The number of rooms at franchised properties and occupancy and room rates at those properties significantly affect the Company's results because our fees are based upon room revenues at franchised hotels. The key industry standard...

  • Page 40
    ... year ended December 31, 2013 , the Company paid cash dividends totaling approximately $32.8 million . We expect to continue to pay dividends in the future, subject to declaration by our board of directors as well as future business performance, economic conditions, changes in income tax regulations...

  • Page 41
    ... Company's ownership of three MainStay Suites hotels. SkyTouch is a division of the Company that develops and markets cloud-based technology products, including inventory management, pricing and connectivity to third party channels, to hoteliers not under franchise agreements with the Company. Hotel...

  • Page 42
    ... EBITDT Year Ended December 31, ($ amounts in thousands) 2013 2012 2011 Net Income Income taxes Interest expense Interest income Loss on extinguishment of debt $ 112,601 $ 44,317 42,537 (2,547) - (1,780) (634) 9,469 Other (gains) and losses Equity in net income of affiliates Depreciation...

  • Page 43
    ... Results Summarized financial results for the years ended December 31, 2013 and 2012 are as follows: 2013 2012 (In thousands, except per share amounts) REVENUES: Royalty fees Initial franchise and relicensing fees Procurement services Marketing and reservation Hotel operations Other $ 267,229 18...

  • Page 44
    ... basis point increase in occupancy rates and a 1.6% increase in average daily rates. A summary of the Company's domestic franchised hotels operating information for the years ending December 31, 2013 and 2012 is as follows: 2013* Tverage Daily Rate Comfort Inn $ 2012* RevPTR $ 49.87 Change RevPTR...

  • Page 45
    ... 226 for the year ended December 31, 2012 to 243 for the year ended December 31, 2013. The increase in net terminations is primarily related to the removal of hotels for non-compliance with the Company's rules, regulations and standards as well as non-payment of franchise fees partially offset by...

  • Page 46
    ... sales for the Company's Comfort, Econo Lodge and Ascend Hotel Collection brands. The number of franchise applications received and the number of franchise agreements executed are dependent on the availability of hotel financing, cost of capital and the presence of an active real estate market...

  • Page 47
    ... of the Company that develops and markets cloud-based technology products to hoteliers not under franchise agreements with the Company. The new division was announced to the public in March 2013 and the increase in expenses primarily relate to business development, sales and marketing and continued...

  • Page 48
    ... costs. The increase in excess fees collected in 2013 compared to 2012 primarily reflects increased revenues related to growth in the number of units, RevPAR in the franchise system and the size of the Company's loyalty program. The decline in cumulative advances for marketing and reservation...

  • Page 49
    ... expense or benefits in SG&A related to changes in the fair value of investments held in the Non-Qualified Plan and a portion of the investments held in the EDCP Plan, excluding investments in the Company's stock. As a result, during the year ended December 31, 2013 and 2012, the Company's SG...

  • Page 50
    ...Results Summarized financial results for the years ended December 31, 2012 and 2011 are as follows: 2012 (In thousands, except per share amounts) 2011 REVENUES: Royalty fees Initial franchise and relicensing fees Procurement services Marketing and reservation Hotel operations Other $ 260,782 14...

  • Page 51
    ... point increase in occupancy rates and a 2.5% increase in average daily rates. A summary of the Company's domestic franchised hotels operating information for the years ending December 31, 2012 and 2011 is as follows: 2012* Tverage Daily Rate Comfort Inn $ 81.55 85.47 2011* RevPTR $ 48.42 Change...

  • Page 52
    ... 31, 2012 and 2011 by brand is as follows: December 31, December 31, 2012 Hotels 2011 Rooms Hotels Variance Rooms Hotels % Rooms % Comfort Inn Comfort Suites Sleep Quality Clarion Econo Lodge Rodeway MainStay Suburban Ascend Hotel Collection Cambria Suites Total Domestic Franchises 1,349...

  • Page 53
    ... to lower average fees charged per property. As of December 31, 2012, the Company had 394 franchised hotels with 31,118 rooms under construction, awaiting conversion or approved for development in its domestic system as compared to 408 hotels and 32,586 rooms at December 31, 2011. The number of new...

  • Page 54
    ... franchise agreements require the payment of franchise fees, which include marketing and reservation system fees. The fees, which are primarily based on a percentage of the franchisees' gross room revenues, are used exclusively by the Company for expenses associated with providing franchise services...

  • Page 55
    ..., 2011 to 2012 primarily reflects increased revenues related to the growth of the number of units and RevPAR in the franchise system as well as the Company's strategy to recover prior year advances for marketing and reservation activities in future periods. Costs incurred in excess of fees collected...

  • Page 56
    ...expected to be advanced in the next twelve months. In addition, during the year ended December 31, 2013, the Company announced a property improvement incentive program for its domestic Comfort Inn and Comfort Suites hotels to incent hotel owners to renovate their properties to accelerate improvement...

  • Page 57
    ... next twelve months provided certain conditions are met by its franchisees. During the year ended December 31, 2013 , 2012 and 2011, the Company invested $5.7 million , $20.3 million and $5.0 million in joint ventures accounted for under the equity method of accounting. The Company's investment in...

  • Page 58
    ... 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 the average daily unused amount of the...

  • Page 59
    ... a portion of the corporate headquarter relocation and tenant improvement costs in consideration of the employment of permanent, full-time employees within the jurisdictions. At December 31, 2013 , the Company had been advanced approximately $3.4 million pursuant to these agreements and expects to...

  • Page 60
    ... conditions, changes in tax regulations and other matters. Based on our present dividend rate and outstanding share count, aggregate annual regular dividends for 2014, would be approximately $43.1 million. Special Cash Dividend On July 26, 2012, the Company's board of directors declared a special...

  • Page 61
    ... issues with regards to the property. On November 15, 2013, the Company entered into a limited payment guaranty with regards to a VIE's $46.2 million bank loan for the construction of a hotel franchised under one of the Company's brands in the United States. Under the terms of the limited guaranty...

  • Page 62
    ... the terms of the franchise agreements, the Company may advance capital and incur costs as necessary for marketing and reservation activities and recover such advances through future fees. Our current assessment is that the credit risk associated with the cumulative cost advances for marketing and...

  • Page 63
    ...We provide Choice Privileges as a marketing program to franchised hotels and collect a percentage of program members' room revenue from franchises to operate the program. Revenues are deferred in an amount equal to the estimated fair value of the future redemption obligation. The Company develops an...

  • Page 64
    ... its senior notes receivable by comparing the market value of the underlying assets to the carrying value of the outstanding notes. In addition, the Company evaluates the property's operating performance, the borrower's compliance with the terms of the loan and franchise agreements, and all related...

  • Page 65
    ... of the Company's common stock with a market value of $1.4 million and $1.0 million at December 31, 2013 and 2012 , respectively. The Company is subject to risk from changes in debt and equity prices from our non-qualified retirement savings plan investments in debt securities and common stock. The...

  • Page 66
    ..., but are not limited to, changes to general, domestic and foreign economic conditions; operating risks common in the lodging and franchising industries; changes to the desirability of our brands as viewed by hotel operators and customers; changes to the terms or termination of our contracts with...

  • Page 67
    ... and Supplementary Data. TTBLE OF CONTENTS Report of Independent Registered Public Accounting Firm 68 69 70 Consolidated Statements of Income Consolidated Statements of Comprehensive Income Consolidated Balance Sheets Consolidated Statements of Cash Flows Consolidated Statements of Shareholders...

  • Page 68
    ...position of Choice Hotels International, Inc. and its subsidiaries at December 31, 2013 and 2012 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2013 in conformity with accounting principles generally accepted in the United States...

  • Page 69
    ...CHOICE HOTELS INTERNTTIONTL, INC. TND SUBSIDITRIES CONSOLIDTTED STTTEMENTS OF INCOME Years Ended December 31, 2013 2012 (In thousands, except per share amounts) 2011 REVENUES: Royalty fees Initial franchise and relicensing fees Procurement services Marketing and reservation Hotel... affiliates ...

  • Page 70
    ... STTTEMENTS OF COMPREHENSIVE INCOME Years Ended December 31, 2013 2012 2011 (In thousands) Net income Other comprehensive income (loss), net of tax: Amortization of loss on cash flow hedge Foreign currency translation adjustment Amortization of pension related costs, net of tax: Actuarial...

  • Page 71
    ...,270 2,732 4,136 3,486 36,669 233,470 Total current assets Property and equipment, at cost, net Goodwill Franchise rights and other identifiable intangibles, net Advances, marketing and reservation activities Investments, employee benefit plans, at fair value Deferred income taxes Other assets 66...

  • Page 72
    ... sales of investments, employee benefit plans Proceeds from sale of assets (2,676) 4,168 644 1,654 (564) 243 (728) (27,549) - (433) (47,101) Other items, net Net cash used in investing activities (20,329) 75 (200) CTSH FLOWS FROM FINTNCING TCTIVITIES Proceeds from the issuance of long-term...

  • Page 73
    ...- 739 - - 6,500 Debt issuance costs Issuance of restricted shares of common stock 9,517 - - - Issuance of performance vested restricted stock units 1,298 Issuance of treasury stock to employee stock purchase plan Investment in property and equipment acquired in accounts payable - $ $ 658 The...

  • Page 74
    ...awards Change in excess tax benefits on equity awards Dividends declared - - - (22,580) (361) 1,239 - - $ - 110,246 - - 3,486 (9,798) 1,239 (643,374) (22,586) (361) Treasury purchases Other Balance as of December 31, 2012 Net income Other comprehensive income Exercise of stock options $ - 582...

  • Page 75
    ... Tccounting Policies Organization Choice Hotels International, Inc., a Delaware corporation, and subsidiaries ("the Company") is primarily in the business of hotel franchising. As of December 31, 2013 , the Company had franchise agreements representing 6,340 open hotels and 503 hotels under...

  • Page 76
    ... services' revenues related to upfront fees. Such upfront fees are generally recognized over a period corresponding to the Company's estimate of the life of the arrangement. Marketing and Reservation Revenues and Expenses The Company's franchise agreements require the payment of certain marketing...

  • Page 77
    ...when earned to reimburse the Company for costs incurred to operate the program, including administrative costs, marketing, promotion, and performing member services. Accounts Receivable and Credit Risk Accounts receivable consist primarily of franchise and related fees due from hotel franchises and...

  • Page 78
    ... Deposit Insurance Corporation. In addition, the Company also maintains cash balances in international banks which do not provide deposit insurance. Capitalization Policies Property and equipment are recorded at cost and depreciated using the straight-line method over the estimated useful lives of...

  • Page 79
    ... not record any impairment of long-lived assets during the years ended December 31, 2013 and 2011. Significant management judgment is involved in developing these projections, and they include inherent uncertainties. If different projections had been used in the current period, the balances for non...

  • Page 80
    ... for the years ended December 31, 2013, 2012 and 2011 were a $0.4 million loss, $0.1 million gain and a $1.4 million loss, respectively. Derivatives The Company periodically uses derivative instruments as part of its overall strategy to manage exposure to market risks associated with fluctuations...

  • Page 81
    ... 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 has acquired this real estate with the intent to resell it to third-party developers for the construction of hotels operated under...

  • Page 82
    ... of interest income on impaired loans during the years ended December 31, 2013 and 2012 , respectively, on the cash basis. The Company provided loan reserves on non-impaired loans totaling $1.6 million and $0.6 million at December 31, 2013 and 2012 , respectively Past due balances of mezzanine and...

  • Page 83
    ... 582 Balance, End of Year $ Forgivable Notes Receivable In conjunction with brand and development programs, the Company may provide financing to franchisees for property improvements and other purposes in the form of forgivable unsecured promissory notes which bear interest at market rates. Under...

  • Page 84
    ...summarizes the activity related to the Company's Forgivable Notes Receivable and Mezzanine & Other Notes Receivable allowance for losses for the years ended December 31, 2013 and 2012 : Year Ended December 31, 2013 Forgivable Notes Receivable Year Ended December 31, 2012 Forgivable Notes Receivable...

  • Page 85
    ... 31, 2013 and 2012 totaled $1.4 million and $1.0 million , respectively. 5. Goodwill Goodwill relates to (i) the purchase price of a minority interest in the Company for consideration in excess of the recorded minority interest and (ii) the acquisition of 100% of the stock of Suburban Franchise...

  • Page 86
    ... purchase price assigned to acquire long-term franchise contracts. As of December 31, 2013 and 2012 , the unamortized balance relates primarily to the Econo Lodge, Suburban Extended Stay Hotel and Choice Hotels Australasia franchise rights. The franchise rights are being amortized over lives...

  • Page 87
    ... 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...

  • Page 88
    ... in Canada for all brands except Cambria Suites, Mainstay Suites and Suburban Extended Stay Hotel through Choice Hotels Canada, Inc. ("CHC"), a joint venture in which the Company has a 50% interest. During 2013, 2012 and 2011, the Company recorded equity method income related to this investment in...

  • Page 89
    ... revenue consists of the following: December 31, 2013 (In thousands) 2012 Loyalty programs Initial, relicensing and franchise fees Procurement services fees Other Total $ 53,875 5,354 1,504 455 $ $ 61,188 $ 64,636 4,994 1,225 299 71,154 11. Other Non-Current Liabilities Other non-current...

  • Page 90
    ... 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 borrowings under the Company's senior credit facility, to pay a special cash dividend totaling...

  • Page 91
    ...% 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 offering, to pay during 2012 a special cash dividend of approximately $600.7 million in...

  • Page 92
    ... 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...

  • Page 93
    ... of the advances that it expects to repay. The Company was in compliance with all current performance conditions as of December 31, 2013 . 13. Pension Plan The Company sponsored an unfunded non-qualified defined benefit plan ("SERP") for certain senior executives. The Company accounted for the...

  • Page 94
    ... common stock with a market value of $0.2 million and $0.1 million at December 31, 2013 and 2012 , respectively which were recorded as a component of shareholders' deficit. In 1997, the Company adopted the Choice Hotels International, Inc. Non-Qualified Retirement Savings and Investment Plan ("Non...

  • Page 95
    ... deferred compensation obligation related to earnings credited to participants as well as changes in the fair value of diversified investments. The net increase (decrease) in compensation expense recorded in SG&A for the years ended December 31, 2013, 2012 and 2011 were $1.7 million , $0.7 million...

  • Page 96
    92

  • Page 97
    ... The provision for income taxes, classified by the timing and location of payment, was as follows: Years ended December 31, 2013 2012 (in thousands) 2011 Current tax expense Federal State Foreign Deferred tax (benefit) expense Federal State Foreign Income taxes $ 47,124 $ 4,902 1,914 (8,683...

  • Page 98
    ...to the effective income tax rates as follows: Years ended December 31, 2013 2012 2011 Statutory U.S. federal income tax rate State income taxes, net of federal tax benefit Benefits and taxes related to foreign operations Unrecognized tax positions Adjustment to current and deferred taxes, prior...

  • Page 99
    ...rate if resolved in the Company's favor. The following table presents a reconciliation of the beginning and ending amounts of unrecognized tax benefits: 2013 2012 (In thousands) 2011 Balance, January 1 Changes for tax positions of prior years Increases for tax positions related to the current year...

  • Page 100
    ... 31, 2013 . The Company's policy allows the issuance of new or treasury shares to satisfy stock-based awards. Restricted stock, stock options, stock appreciation rights and performance share awards may be granted to officers, key employees and non-employee directors with contractual terms set by...

  • Page 101
    ...: Risk-free interest rate Expected volatility Expected life of stock option Dividend yield Requisite service period Contractual life Weighted average fair value of options granted (per option) 2013 0.73% 38.14% 4.5 years 2.01% 4 years 7 years $ 9.89 $ 2012 0.78% 40.15% 4.4 years 2.08% 4 years...

  • Page 102
    ... options immediately before and after the payment of the Special Cash Dividend was substantially equal. Restricted Stock The following table is a summary of activity related to restricted stock grants for the year ended December 31: 2013 2012 2011 Restricted shares granted Weighted average grant...

  • Page 103
    ... the Company did not achieve the minimum performance conditions contained in the stock awards and 4,109 were terminated related to employee terminations. A summary of stock-based award activity as of December 31, 2013, 2012 and 2011 and the changes during the years are presented below: 2013 Stock...

  • Page 104
    ... costs related to these PVRSUs has been decreased by $0.3 million for the year ended December 31, 2013 and increased by $0.5 million and $0.1 million during the years ended December 31, 2012 and 2011 , respectively. In conjunction with the termination of certain Company officers, stock option...

  • Page 105
    ... set at market interest rates. The interest rate swap agreement was designated as a cash flow hedge under the guidance for derivatives and hedging. In August 2010, upon issuance of the related fixed-rate debt, the Company terminated and settled the interest rate swap agreement for a cash payment of...

  • Page 106
    ... stock method and average market prices during the period, unless the stock options would be anti-dilutive. For the year ended December 31, 2013 , no anti-dilutive stock options were excluded from the diluted earnings per share calculation. For the years ended December 31, 2012 and 2011, the Company...

  • Page 107
    ... for the years ended December 31, 2013, 2012 and 2011, respectively. The Company received sublease rental income related to real estate leased to third-parties totaling $0.3 million during the each of the years ended December 31, 2013, 2012 and 2011. Future minimum lease payments are as follows...

  • Page 108
    ...of Contents Year Ended December 31, 2011 Parent Guarantor (In thousands) Ts Previously Reported Tdjustment Ts Revised Ts Previously Reported Tdjustment Ts Revised Net cash provided by operating activities $ 120,964 $ (114) $ 120,850 $ (7,122) $ (3,361) $ (10,483) Investing Activities...

  • Page 109
    ...Choice Hotels International, Inc. Condensed Consolidating Statement of Income For the Year Ended December 31, 2013 (In thousands) Guarantor Subsidiaries Non-Guarantor Subsidiaries Parent Eliminations Consolidated REVENUES: Royalty fees Initial franchise and relicensing fees Procurement services...

  • Page 110
    ...Choice Hotels International, Inc. Condensed Consolidating Statement of Income For the Year Ended December 31, 2012 (In thousands) Guarantor Subsidiaries Non-Guarantor Subsidiaries Parent Eliminations Consolidated REVENUES: Royalty fees Initial franchise and relicensing fees Procurement services...

  • Page 111
    ...Choice Hotels International, Inc. Condensed Consolidating Statement of Income For the Year Ended December 31, 2011 (In thousands) Guarantor Subsidiaries Non-Guarantor Subsidiaries Parent Eliminations Consolidated REVENUES: Royalty fees Initial franchise and relicensing fees Procurement services...

  • Page 112
    Table of Contents Choice Hotels International, Inc. Condensed Consolidating Statement of Comprehensive Income For the Year Ended December 31, 2013 (In thousands) Parent Guarantor Subsidiaries Non-Guarantor Subsidiaries Eliminations Consolidated Net income Other comprehensive income (loss), ...

  • Page 113
    ...Choice Hotels International, Inc. Condensed Consolidating Statement of Comprehensive Income For the Year Ended December 31, 2012... of loss on cash flow hedge Foreign currency translation adjustment Amortization of pension related costs, net of tax: Actuarial loss Settlement of pension plan $ 120,687...

  • Page 114
    Table of Contents Choice Hotels International, Inc. Condensed Consolidating Statement of Comprehensive Income For the Year Ended December 31, 2011 (In thousands) Parent Guarantor Subsidiaries Non-Guarantor Subsidiaries Eliminations Consolidated Net income Other comprehensive income (loss), ...

  • Page 115
    ... $ Other current assets Total current assets Property and equipment, at cost, net Goodwill Franchise rights and other identifiable intangibles, net Investments, employee benefit plans, at fair value Investment in affiliates Advances to affiliates Advances, marketing and reservation activities...

  • Page 116
    ...407 $ Other current assets Total current assets Property and equipment, at cost, net Goodwill Franchise rights and other identifiable intangibles, net Investments, employee benefit plans, at fair value Investment in affiliates Advances to affiliates Advances, marketing and reservation activities...

  • Page 117
    ... from sales of investments, employee benefit plans Advances to and investments in affiliates Other items, net (2,676) 4,168 - (485) Net cash used in investing activities CTSH FLOWS FROM FINTNCING TCTIVITIES: Net repayments pursuant to revolving credit facilities Principal payments on long-term...

  • Page 118
    ... from sales of investments, employee benefit plans Advances to and investments in affiliates Other items, net - - - (433) (28,303) Net cash used in investing activities CTSH FLOWS FROM FINTNCING TCTIVITIES: Net borrowings pursuant to revolving credit facilities Principal payments on long-term debt...

  • Page 119
    ... employee benefit plans Other items, net (1,602) 644 (564) Net cash used in investing activities CTSH FLOWS FROM FINTNCING TCTIVITIES: Net repayments pursuant to revolving credit facilities Principal payments on long-term debt Proceeds from the issuance of long-term debt Purchase of treasury stock...

  • Page 120
    ... Company is obligated under its franchise agreements to provide marketing and reservation services appropriate for the operation of its systems. These services do not represent separate reportable segments as their operations are directly related to the Company's franchising business. The revenues...

  • Page 121
    ... by foreign operations, including royalty, marketing and reservations system fees and other revenues for the years ended December 31, 2013, 2012 and 2011 were $57.1 million , $55.4 million and $54.6 million respectively. Long-lived assets related to international operations were $5.7 million...

  • Page 122
    ... their costs of transitioning to new office space. The Company maintained a lease agreement on behalf of a family member of the Company's largest shareholder for 1,950 square feet of office space located in Chevy Chase, Maryland. The lease had a 5 year term ending in 2013 with annual lease payments...

  • Page 123
    ... year ended December 31, 2012 , the Company recorded a $2.9 million charge in SG&A and marketing and reservation expenses related to salary and benefit continuation termination benefits provided to employees separating from service with the Company. During the years ended December 31, 2013 and 2012...

  • Page 124
    ..., related to the construction of various hotels to be operated under the Company's Cambria Suites brand. These commitments are expected to be funded in the next twelve months. • The Company has a property improvement incentive program for its domestic Comfort Inn and Comfort Suites hotels to...

  • Page 125
    ...reflects gains and losses related to the Company's investments held in non-qualified retirement plans and are subject to market conditions. Year Ended December 31, 2012 results: • Loss on Settlement of a Pension Plan: During the fourth quarter of 2012, the Company recorded a $1.8 million loss on...

  • Page 126
    ...during the fourth quarter of 2013 that materially affected, or is reasonably likely to materially affect the Company's internal control over financial reporting. Management's Report on Internal Control Over Financial Reporting The management of Choice Hotels International, Inc. and its subsidiaries...

  • Page 127
    ...be directed to General Counsel, 1 Choice Hotels Circle, Suite 400, Rockville, MD 20850 (telephone number (301) 592-5026). Item 11. Executive Compensation. The required information will be set forth under "Executive Compensation" and "Board Compensation and Management Development Committee Report on...

  • Page 128
    ...The following table sets forth information regarding the number of shares of the Company's common stock that were subject to outstanding stock options at December 31, 2013 . Number of shares remaining available for future issuance under equity compensation plans (excluding shares reflected in column...

  • Page 129
    ... Choice Hotels International, Inc. 2006 Long-Term Incentive Plan, dated April 25, 2013 Choice Hotels International, Inc. Executive Incentive Compensation Plan 10.03B(i) 10.03C(c) 10.04(c) 10.05(n) 10.07(q) 10.07A(g) Office Lease, dated July 11, 2011, between Choice Hotels International Services...

  • Page 130
    ... 2012 Amendment to Non-Competition, Non-Solicitation and Severance Benefit Agreement between the Company and Simone Wu, dated March 25, 2013 12.1* 13.01* Computation of Ratio of Earnings to Fixed Charges Valuation and Qualifying Accounts 21.01* 23.01* Subsidiaries of Choice Hotels International...

  • Page 131
    ... to Choice Hotels International, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2002, filed March 31, 2003. (r) Incorporated by reference to the identical document filed as an exhibit to Choice Hotels International, Inc.'s Current Report on Form 8-K dated June 22, 2012, filed...

  • Page 132
    ...(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CHOICE HOTELS INTERNATIONAL, INC. By: /s/ STEPHEN P. JOYCE Stephen P. Joyce President and Chief Executive Officer Dated: March 3, 2014...

  • Page 133
    ...Smith Director /s/ JOHN TAGUE John Tague /s/ DAVID L. WHITE David L. White Director February 28, 2014 March 3, 2014 Senior Vice President, Chief Financial Officer & Treasurer (Principal Financial Officer) /s/ SCOTT E. OAKSMITH Scott E. Oaksmith Controller (Principal Accounting Officer) March...

  • Page 134
    ... (except ratios) (1) Year Ended December 31, 2010 2011 2012 2009 2013 Earnings: Pre-tax income from...positions as a component of income taxes. The Company has excluded these costs from both the earnings and fixed charges calculation. (4) The Company utilized one-third of rental expenses relating...

  • Page 135
    Exhibit 13.01 CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS (In thousands of dollars) Balance at Beginning of Description Accounts Receivable: Year ended December 31, 2013 Allowance for Doubtful Accounts Year ended December 31, 2012 Allowance for ...

  • Page 136
    ... Choice Hotels International Licensing ULC Canada Choice Hotels Franchise GmbH Germany Choice Hotels France S.A.S. France Netherlands Choice Hotels International Holding Company C.V. Choice Hotels International Licensing ULC Choice Hotels International Services Corp. Canada Delaware Choice...

  • Page 137
    Quality Hotels Limited Suburban Franchise Holding Company, Inc. United Kingdom Georgia Georgia Suburban Franchise Systems, Inc., a Georgia corporation

  • Page 138
    Exhibit 23.01 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We hereby consent to the ...Choice Hotels International, Inc. of our report dated March 3, 2014 relating to the financial statements, financial statement schedule and the effectiveness of internal control over financial reporting...

  • Page 139
    ... financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 3, 2014 /S/ STEPHEN P. JOYCE Stephen P. Joyce President and Chief Executive Officer

  • Page 140
    ... information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 3, 2014 /S / DAVID L. WHITE David L. White Senior Vice President, Chief Financial Officer...

  • Page 141
    ...EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER The undersigned hereby cerdify dhad dhe Annual Repord on Form 10-K for dhe year ended December 31, 2013 filed by Choice...JOYCE Stephen P. Joyce President and Chief Executive Officer /S/ DAVID L. WHITE David L. White Senior Vice President, Chief Financial...

  • Page 142