Edgar Filing: CHOICE HOTELS INTERNATIONAL INC /DE

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Form 10-Q

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, 2011

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

COMMISSION FILE NO. 001-13393

CHOICE HOTELS INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

DELAWARE

52-1209792

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

10750 COLUMBIA PIKE

SILVER SPRING, MD. 20901

(Address of principal executive offices)

(Zip Code)

(301) 592-5000

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

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 ¨

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.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x


CLASS		SHARES OUTSTANDING AT MARCH 31, 2011
Common Stock, Par Value $0.01 per share		59,807,015

CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES

INDEX


	PAGE NO.

PART I. FINANCIAL INFORMATION:

Item 1—Financial Statements (Unaudited)		3
Consolidated Statements of Income—For the three months ended March 31, 2011 and March 31, 2010		3
Consolidated Balance Sheets—As of March 31, 2011 and December 31, 2010		4
Consolidated Statements of Cash Flows—For the three months ended March 31, 2011 and 2010		5
Notes to Consolidated Financial Statements		6
Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations		25
Item 3—Quantitative and Qualitative Disclosures About Market Risk		40
Item 4—Controls and Procedures		40

PART II. OTHER INFORMATION:

Item 1—Legal Proceedings		41
Item 1A—Risk Factors		41
Item 2—Unregistered Sales of Equity Securities and Use of Proceeds		41
Item 3—Defaults Upon Senior Securities		41
Item 4—(Removed and Reserved)		42
Item 5—Other Information		42
Item 6—Exhibits		42

SIGNATURES		43

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,
	2011			2010
REVENUES:
Royalty fees	$	44,240		$	41,021
Initial franchise and relicensing fees		2,614			1,912
Procurement services		3,165			3,245
Marketing and reservation		62,967			58,840
Hotel operations		864			867
Other		1,431			1,536

Total revenues		115,281			107,421


OPERATING EXPENSES:
Selling, general and administrative		23,847			21,816
Depreciation and amortization		1,955			2,172
Marketing and reservation		62,967			58,840
Hotel operations		833			756

Total operating expenses		89,602			83,584


Operating income		25,679			23,837


OTHER INCOME AND EXPENSES, NET:
Interest expense		3,224			621
Interest income		(210	)		(60	)
Other gains and losses		1,043			(1,017	)
Equity in net income of affiliates		(301	)		(353	)

Total other income and expenses, net		3,756			(809	)


Income before income taxes		21,923			24,646
Income taxes		6,193			8,853

Net income		15,730		$	15,793


Basic earnings per share	$	0.26		$	0.27

Diluted earnings per share	$	0.26		$	0.26

Cash dividends declared per share	$	0.185		$	0.185

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

CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(UNAUDITED, IN THOUSANDS, EXCEPT SHARE AMOUNTS)


	March 31, 2011			December 31, 2010
ASSETS
Current assets
Cash and cash equivalents	$	76,405		$	91,259
Receivables (net of allowance for doubtful accounts of $10,251 and $9,159, respectively)		48,279			47,638
Deferred income taxes		429			429
Other current assets		22,755			24,256

Total current assets		147,868			163,582

Property and equipment, at cost, net		54,296			55,662
Goodwill		66,042			66,041
Franchise rights and other identifiable intangibles, net		19,962			20,825
Receivable – marketing and reservation fees		54,719			42,507
Investments, employee benefit plans, at fair value		24,728			23,365
Deferred income taxes		24,460			24,435
Other assets		20,298			15,305

Total assets	$	412,373		$	411,722


LIABILITIES AND SHAREHOLDERS’ DEFICIT

Current liabilities
Accounts payable	$	38,730		$	41,168
Accrued expenses		28,963			47,818
Deferred revenue		72,039			67,322
Current portion of long-term debt		508			420
Deferred compensation and retirement plan obligations		2,573			2,552
Revolving credit facility		0			200
Income taxes payable		6,928			5,778

Total current liabilities		149,741			165,258

Long-term debt		260,007			251,554
Deferred compensation and retirement plan obligations		34,660			35,707
Other liabilities		16,995			17,274

Total liabilities		461,403			469,793


Commitments and Contingencies

SHAREHOLDERS’ DEFICIT
Common stock, $0.01 par value, 160,000,000 shares authorized; 95,345,362 shares issued at March 31, 2011 and December 31, 2010 and 59,807,015 and 59,583,770 shares outstanding at March 31, 2011 and December 31, 2010, respectively		598			596
Additional paid-in capital		92,019			92,774
Accumulated other comprehensive loss		(6,482	)		(7,192	)
Treasury stock (35,538,347 and 35,761,592 shares at March 31, 2011 and December 31, 2010, respectively), at cost		(867,960	)		(872,306	)
Retained earnings		732,795			728,057

Total shareholders’ deficit		(49,030	)		(58,071	)

Total liabilities and shareholders’ deficit	$	412,373		$	411,722

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

CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED, IN THOUSANDS)


	Three Months Ended March 31,
	2011			2010
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	15,730		$	15,793
Adjustments to reconcile net income to net cash provided (used) by operating activities:
Depreciation and amortization		1,955			2,172
Provision for bad debts		778			856
Non-cash stock compensation and other charges		4,513			2,670
Non-cash interest and other income		(350	)		(987	)
Equity in net income of affiliates		(301	)		(353	)
Changes in assets and liabilities, net of acquisitions:
Receivables		(1,250	)		(435	)
Receivable – marketing and reservation fees, net		(8,979	)		(10,909	)
Accounts payable		(1,775	)		3,294
Accrued expenses		(18,931	)		(10,611	)
Income taxes payable/receivable		1,182			4,667
Deferred income taxes		(12	)		(65	)
Deferred revenue		4,709			9,138
Other assets		(1,147	)		(6,898	)
Other liabilities		(1,339	)		(1,352	)

Net cash provided (used) by operating activities		(5,217	)		6,980

CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in property and equipment		(1,835	)		(4,558	)
Equity method investments		(1,600	)		0
Acquisitions, net of cash acquired		0			(466	)
Issuance of notes receivable		(1,477	)		(534	)
Collections of notes receivable		7			10
Purchases of investments, employee benefit plans		(897	)		(1,104	)
Proceeds from sale of investments, employee benefit plans		310			522
Other items, net		(95	)		(124	)

Net cash used in investing activities		(5,587	)		(6,254	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings pursuant to revolving credit facilities		7,900			16,200
Repayments of long-term debt		(5	)		0
Purchase of treasury stock		(2,207	)		(8,936	)
Dividends paid		(10,950	)		(10,945	)
Excess tax benefits from stock-based compensation		834			49
Debt issuance costs		(2,207	)		0
Proceeds from exercise of stock options		2,238			648

Net cash used in financing activities		(4,397	)		(2,984	)

Net change in cash and cash equivalents		(15,201	)		(2,258	)
Effect of foreign exchange rate changes on cash and cash equivalents		347			(19	)
Cash and cash equivalents at beginning of period		91,259			67,870

Cash and cash equivalents at end of period		76,405		$	65,593


Supplemental disclosure of cash flow information:
Cash payments during the period for:
Income taxes, net of refunds	$	3,756		$	3,748
Interest	$	7,309		$	646
Non-cash investing and financing activities:
Declaration of dividends	$	10,992		$	10,971
Capital lease obligation	$	430		$	0
Issuance of restricted shares of common stock	$	7,452		$	8,163
Issuance of performance vested restricted stock units	$	0		$	256
Issuance of treasury stock to employee stock purchase plan	$	185		$	151

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

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”). In the opinion of management, all adjustments (which include any normal recurring adjustments) considered necessary for a fair presentation have been included. Certain information and footnote disclosures normally included in financial statements presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been omitted. The year end balance sheet information was derived from audited financial statements, but does not include all disclosures required by GAAP. The Company believes the disclosures made are adequate to make the information presented not misleading. The consolidated financial statements should be read in conjunction with the consolidated financial statements for the year ended December 31, 2010 and notes thereto included in the Company’s Form 10-K, filed with the SEC on March 1, 2011 (the “10-K”). Interim results are not necessarily indicative of the entire year results because of seasonal variations. All intercompany transactions and balances between Choice Hotels International, Inc. and its subsidiaries have been eliminated in consolidation.

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Certain amounts in the prior year’s financial statements have been reclassified to conform to the current year presentation with no effect on previously reported net income or shareholders’ deficit.

Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with a maturity of three months or less at the date of purchase to be cash equivalents. As of March 31, 2011 and December 31, 2010, $2.6 million and $2.8 million, respectively, of book overdrafts representing outstanding checks in excess of funds on deposit are included in accounts payable in the accompanying consolidated balance sheets.

The Company maintains cash balances in domestic banks, which at times, may exceed the limits of amounts insured by the Federal Deposit Insurance Corporation. In addition, the Company also maintains cash balances in international banks which do not provide deposit insurance.

Recently Adopted Accounting Guidance

In September 2009, the Financial Accounting Standards Board (“FASB”) ratified Emerging Issues Task Force (“EITF”) Issue No. 08-1, “Revenue Arrangements with Multiple Deliverables” (“EITF 08-1”). EITF 08-1 updates the current guidance pertaining to multiple-element revenue arrangements included in Accounting Standards Codification (“ASC”) Subtopic 605-25, which originated primarily from EITF 00-21, also titled “Revenue Arrangements with Multiple Deliverables.” EITF 08-1 was effective for annual reporting periods beginning January 1, 2011 for calendar year entities with earlier adoption permitted. The adoption of these provisions did not have a material impact on our consolidated financial statements.

In July 2010, the FASB issued Accounting Standards Update (“ASU”) No. 2010-20, which updates the guidance in ASC Topic 310, Receivables, related to disclosures about the credit quality of financing receivables and the allowance for credit losses. The new disclosures require disaggregated information related to financing receivables and will include for each class of financing receivables, among other things: a roll forward for the allowance for credit losses, credit quality information, impaired loan information, modification information, non-accrual and past-due information. The disclosures as of the end of a reporting period are effective for interim and annual reporting periods ending on or after December 15, 2010. Disclosures of reporting period activity (i.e. allowance roll-forward) are required for interim and annual periods beginning after December 15, 2010. The Company has updated its disclosures as appropriate.

2. Other Current Assets

Other current assets consist of the following:


	March 31, 2011		December 31, 2010
	(In thousands)
Land held for sale	$	8,103	$	11,089
Prepaid expenses		8,782		8,070
Notes receivable (See Note 3)		3,950		3,966
Other current assets		1,920		1,131


Total	$	22,755	$	24,256

Land held for sale represents the Company’s purchase of various parcels of real estate as part of its program to incent franchise development in top markets for certain brands. The Company has acquired this real estate with the intent to resell it to third-party developers for the construction of hotels operated under the Company’s brands. During the three months ended March 31, 2011, the Company determined that one parcel of land no longer met the criteria to be classified as a current asset held for sale since it was no longer probable that the parcel would be sold within one year. As a result, the Company has reclassified this land to other long-term assets on the Company’s consolidated balance sheet at the lower of its carrying amount or fair value. The Company has determined that the carrying amount of the land exceeded its estimated fair value by approximately $1.8 million based on comparable sales. As a result, the Company has reduced the carrying amount of the land to its estimated fair value and recognized a $1.8 million loss in other gains and losses in the consolidated statements of income.


	Fair Value Measurements Using
	($ in millions)
Description	March 31, 2011		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Gains (Losses)

Land held for sale⁽¹⁾	$	1.3		—	$	1.3		—	($	1.8	)

⁽¹⁾	Included in Other Assets

3. Notes Receivable and Allowance for Losses

The Company segregates its notes receivable for the purposes of evaluating allowances for credit losses between two categories: Mezzanine and Other Notes Receivable and Forgivable Notes Receivable. The Company utilizes the level of security it has in the various notes receivable as its primary credit quality indicator (i.e. senior, subordinated or unsecured) when determining the appropriate allowances for uncollectible loans within these categories.

The following table shows the composition of our notes receivable balances:


	March 31, 2011						December 31, 2010
	($ in thousands)						($ in thousands)
Credit Quality Indicator	Forgivable Notes Receivable		Mezzanine & Other Notes Receivable		Total		Forgivable Notes Receivable		Mezzanine & Other Notes Receivable		Total
Senior	$	—	$	3,872	$	3,872	$	—	$	3,846	$	3,846
Subordinated		—		14,616		14,616		—		14,494		14,494
Unsecured		7,709		—		7,709		7,753		—		7,753

Total notes receivable		7,709		18,488		26,197		7,753		18,340		26,093


Allowance for losses on non-impaired loans		769		624		1,393		775		613		1,388
Allowance for losses on receivables specifically evaluated for impairment		—		8,638		8,638		—		8,638		8,638

Total loan reserves		769		9,262		10,031		775		9,251		10,026

Net carrying value	$	6,940	$	9,226	$	16,166	$	6,978	$	9,089	$	16,067

Current portion, net	$	109	$	3,841	$	3,950	$	114	$	3,852	$	3,966
Long-term portion, net		6,831		5,385		12,216		6,864		5,237		12,101

Total	$	6,940	$	9,226	$	16,166	$	6,978	$	9,089	$	16,067

The Company classifies notes receivable due within one year as other current assets and notes receivable with a maturity greater than one year as other assets in the Company’s consolidated balance sheets.

The following table summarizes the activity related to the Company’s Forgivable Notes Receivable and Mezzanine and & Other Notes Receivable allowance for losses from December 31, 2010 through March 31, 2011:


	Forgivable Notes Receivable			Mezzanine & Other Notes Receivable
	(In thousands)
Balance, December 31, 2010	$	775		$	9,251
Provisions		58			11
Recoveries		2			—
Write-offs		—			—
Other ⁽¹⁾		(66	)		—


Balance, March 31, 2011	$	769		$	9,262

⁽¹⁾	Consists of default rate assumption changes

Forgivable Notes Receivable

From time to time, the Company provides financing to franchisees for property improvements and other purposes in the form of forgivable promissory notes. The terms of the notes typically range from 3 to 10 years, bearing market interest rates, and are forgiven and amortized over that time period if the franchisee remains in the system in good standing. Franchisees are not required to repay the forgivable notes provided that the respective hotels remain in the system and in good standing throughout the term of their note. The Company fully reserves all defaulted notes in addition to recording a reserve on the estimated uncollectible portion of the remaining notes. For those notes not in default, the Company calculates an allowance for losses and determines the ultimate collectability on these forgivable notes based on the historical default rates for those unsecured notes that are not forgiven but are required to be repaid. The Company records bad debt expense in SG&A expenses in the accompanying consolidated statements of income in the quarter when the note is deemed uncollectible.

As of March 31, 2011 and December 31, 2010, the unamortized balance of these notes totaled $7.7 million and $7.8 million, respectively. The Company recorded an allowance for credit losses on these forgivable notes receivable of $0.8 million at both March 31, 2011 and December 31, 2010. Amortization expense included in the accompanying consolidated statements of income related to the notes was $0.5 million for both the three months ended March 31, 2011 and 2010. At March 31, 2011, the Company had commitments to extend an additional $6.6 million in forgivable notes receivable provided certain commitments are met by its franchisees, of which $3.2 is expected to be advanced in the next twelve months.

Mezzanine and Other Notes Receivable

The Company has provided financing to franchisees in support of the development of properties in key markets. These notes include non-interest bearing receivables as well as notes bearing market interest and are due upon maturity. Non-interest bearing notes are recorded net of their unamortized discounts. At March 31, 2011 and December 31, 2010, all discounts were fully amortized. Interest income associated with these note receivable is reflected in the accompanying consolidated statements of income under the caption of interest income.

The Company expects the owners to repay the loans in accordance with the loan agreements, or earlier as the hotels mature and capital markets permit. The Company estimates the collectability and records an allowance for loss on its mezzanine and other notes receivable when recording the receivables in the Company’s financial statements. These estimates are updated quarterly based on available information.

The Company considers a loan to be impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. All amounts due according to the contractual terms means that both the contractual interest payments and the contractual principal payments of a loan will be collected as scheduled in the loan agreement. The Company measures loan impairment based on the present value of expected future cash flows discounted at the loan’s original effective interest rate or the estimated fair value of the collateral. For impaired loans, the Company establishes a specific impairment reserve for the difference between the recorded investment in the loan and the present value of the expected future cash flows or the estimated fair value of the collateral. The Company applies its loan impairment policy individually to all mezzanine and other notes receivable in the portfolio and does not aggregate loans for the purpose of applying such policy. For impaired loans, the Company recognizes interest income on a cash basis. If it is likely that a loan will not be collected based on financial or other business indicators it is the Company’s policy to charge off these loans to SG&A expenses in the accompanying consolidated statements of income in the quarter when it is deemed uncollectible.

The Company assesses the collectability of its senior notes receivable by comparing the market value of the underlying assets to the carrying value of the outstanding notes. In addition, the Company evaluates the property’s operating performance, the borrower’s compliance with the terms of the loan and franchise agreements, and all related personal guarantees that have been provided by the borrower. For subordinated or unsecured receivables, the Company assesses the property’s operating performance, the subordinated equity available to the Company, the borrower’s compliance with the terms of loan and franchise agreements, and the related personal guarantees that have been provided by the borrower.

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.

Notes receivable totaling $10.8 million was determined to be impaired at both March 31, 2011 and December 31, 2010. The Company has recorded an $8.6 million allowance for credit losses on these impaired loans at both March 31, 2011 and December 31, 2010 resulting in a carrying value of $2.2 million. The Company did not recognize interest income on either the accrual or cash basis on its impaired loans during the periods ended March 31, 2011 and 2010. The Company had provided loan reserves on non-impaired loans total $0.6 million at both March 31, 2011 and December 31, 2010, respectively.

At March 31, 2011, the Company had a commitment to extend an additional. $0.4 million in mezzanine and other notes receivables provided certain conditions are met.

Past due balances of mezzanine and other notes receivable by credit quality indicators are as follows:


	30-89 days Past Due		> 90 days Past Due		Total Past Due		Current		Total Receivables
	($ in thousands)
As of March 31, 2011
Senior	$	—	$	—	$	—	$	3,872	$	3,872
Subordinated		—		10,931		10,931		3,685		14,616

	$	—	$	10,931	$	10,931	$	7,557	$	18,488


As of December 31, 2010

Senior	$	—	$	—	$	—	$	3,846	$	3,846
Subordinated		—		10,931		10,931		3,563		14,494

	$	—	$	10,931	$	10,931	$	7,409	$	18,340

4. Receivable – Marketing and Reservation Fees

The marketing fees receivable from cumulative marketing expenses incurred in excess of cumulative marketing fees earned at March 31, 2011 and December 31, 2010 was $21.5 million and $17.0 million, respectively. As of March 31, 2011 and December 31, 2010, the reservation fees receivable related to cumulative reservation expenses incurred in excess of cumulative reservation fees earned was $33.2 million and $25.5 million, respectively. Depreciation and amortization expense attributable to marketing and reservation activities for the three months ended March 31, 2011 and 2010 was $3.2 million and $2.7 million, respectively. Interest expense attributable to reservation activities was $1.0 million and $0.1 million for the three months ended March 31, 2011 and 2010, respectively.

The Company evaluates the receivable for marketing and reservation costs in excess of cumulative marketing and reservation fees earned on a periodic basis for collectability. The Company will record an allowance when, based on current information and events, it is probable that we will be unable to collect all amounts due for marketing and reservation activities according to the contractual terms of the franchise agreements. The receivables are considered to be uncollectible if the expected net, undiscounted cash flows from marketing and reservation activities are less than the carrying amount of the asset.

5. Other Assets

Other assets consist of the following:


	March 31, 2011		December 31, 2010
	(In thousands)
Notes receivable (see Note 3)	$	12,216	$	12,101
Deferred financing fees		3,886		2,102
Equity method investments		2,170		251
Other		2,026		851


Total	$	20,298	$	15,305

6. Deferred Revenue

Deferred revenue consists of the following:


	March 31, 2011		December 31, 2010
	(In thousands)
Loyalty programs	$	61,548	$	61,604
Initial, relicensing and franchise fees		4,178		4,631
Procurement service fees		2,065		1,052
Other		4,248		35


Total	$	72,039	$	67,322

7. Debt

Debt consists of the following at:


	December 31,
	March 31, 2011		December 31, 2010
	(In thousands)
$300 million senior unsecured revolving credit facility with an effective interest rate of 1.72% at March 31, 2011	$	8,100	$	—
$250 million senior notes with an effective interest rate of 6.19% at March 31, 2011 and December 31, 2010		249,395		249,379
$350 million senior unsecured revolving credit facility with an effective interest rate of 0.675% at December 31, 2010		—		200
Capital lease obligations due 2016 with an effective interest rate of 4.66% at March 31, 2011 and December 31, 2010		2,968		2,538
Other notes payable		52		57

Total debt	$	260,515	$	252,174
Less current portion		508		620

Total long-term debt	$	260,007	$	251,554

On February 24, 2011, the Company entered into a new $300 million senior unsecured revolving credit agreement (the “Revolver”) with Wells Fargo Bank, National Association, as administrative agent and a syndicate of lenders. Simultaneously with the closing of the Revolver, the $350 million unsecured revolving credit agreement dated as of June 2006 (the “Old Revolver”) was terminated. The Revolver provides for a $300 million unsecured revolving credit facility with a final maturity date on February 24, 2016. Up to $30 million of borrowings under the Revolver may be used for letters of credit and up to $20 million of borrowings under the Revolver may be used for swing-line loans.

The Revolver is unconditionally guaranteed, jointly and severally, on a senior unsecured basis by all of the Company’s subsidiaries that currently guaranty the obligations under the Company’s Indenture governing the terms of its 5.70% senior notes due 2020.

The Company may elect to have borrowings under the Revolver bear interest at (i) a base rate plus a margin ranging from 5 to 80 basis points based on the Company’s credit rating or (ii) LIBOR plus a margin ranging from 105 to 180 basis points based on the Company’s credit rating. In addition, the Revolver requires the Company to pay a quarterly facility fee on the

full amount of the commitments under the Revolver (regardless of usage) ranging from 20 to 45 basis points based upon the credit rating of the Company.

The Revolver requires that the Company and its restricted subsidiaries comply with various covenants, including with respect to restrictions on liens, incurring indebtedness, making investments and effecting mergers and/or asset sales. In addition, the Revolver imposes financial maintenance covenants requiring the Company to maintain a total leverage ratio of not more than 3.5 to 1.0 and an interest coverage ratio of at least 3.5 to 1.0. The Revolver includes customary events of default, the occurrence of which, following any applicable cure period, would permit the lenders to, among other things, declare the principal, accrued interest and other obligations of the Company under the Revolver to be immediately due and payable.

The proceeds of the Revolver are used for general corporate purposes, including working capital, debt repayment, stock repurchases, dividends, investments and other permitted uses.

Debt issuance costs incurred in connection with the Revolver totaled $2.4 million and are being amortized, on a straight-line basis, which is not materially different than the effective interest method, through the maturity of the Revolver. Amortization of these costs is included in interest expense in the accompanying statements of income.

On August 25, 2010, the Company completed a $250 million senior unsecured note offering (“the Senior Notes”) at a discount of $0.6 million, bearing a coupon of 5.7% with an effective rate of 6.19%. The Senior Notes will mature on August 28, 2020, with interest on the Senior Notes to be paid semi-annually on February 28^th and August 28^th. The Company used the net proceeds from the offering, after deducting underwriting discounts and other offering expenses, to repay outstanding borrowings under the Old Revolver and other general corporate purposes. The Company’s Senior Notes are guaranteed jointly, severally, fully and unconditionally by eight 100%-owned domestic subsidiaries.

8. Pension Plan

The Company sponsors an unfunded non-qualified defined benefit plan (“SERP”) for certain senior executives. No assets are held with respect to the SERP, therefore benefits are funded as paid to participants. For the three months ended March 31, 2011 and 2010, the Company recorded $0.1 million and $0.1 million, respectively for expenses related to the SERP which are included in SG&A expense in the accompanying consolidated statement of income. Benefit payments totaling $0.4 million are currently scheduled to be remitted within the next twelve months.

The following table presents the components of net periodic benefit costs for the three months ended March 31, 2011 and 2010:


	Three Months Ended March 31,
(In thousands)	2011		2010
Components of net periodic pension cost:
Interest cost		135		135

Net periodic pension cost	$	135	$	135

The 2011 monthly net periodic pension costs are approximately $0.5 million. The components of projected pension costs for the year ended December 31, 2011 are as follows:


(in thousands)
Components of net periodic pension cost:
Interest cost	$	541


Net periodic pension cost	$	541

The following is a reconciliation of the changes in the projected benefit obligation for the three months ended March 31, 2011:


(in thousands)
Projected benefit obligation, December 31, 2010	$	10,034
Interest cost		135
Actuarial loss		16
Benefit payments		(111	)


Projected benefit obligation, March 31, 2011	$	10,074

The amounts in accumulated other comprehensive income (loss) that have not yet been recognized as components of net periodic benefit costs at March 31, 2011 are as follows:


(in thousands)
Transition asset (obligation)	$	—
Prior service cost		—
Accumulated loss		(657	)


Total	$	(657	)

9. Non-Qualified Retirement, Savings and Investment Plans

The Company sponsors two non-qualified retirement savings and investment plans for certain employees and senior executives. Employee and Company contributions are maintained in separate irrevocable trusts. Legally, the assets of the trusts remain those of the Company; however, access to the trusts’ assets is severely restricted. The trusts’ cannot be revoked by the Company or an acquirer, but the assets are subject to the claims of the Company’s general creditors. The participants do not have the right to assign or transfer contractual rights in the trusts.

In 2002, the Company adopted the Choice Hotels International, Inc. Executive Deferred Compensation Plan (“EDCP”) which became effective January 1, 2003. Under the EDCP, certain executive officers may defer a portion of their salary into an irrevocable trust. Prior to January 1, 2010, participants could elect an investment return of either the annual yield of the Moody’s Average Corporate Bond Rate Yield Index plus 300 basis points, or a return based on a selection of available diversified investment options. Effective January 1, 2010, the Moody’s Average Corporate Bond Rate Yield Index plus 300 basis points is no longer an investment option for salary deferrals made on compensation earned after December 31, 2010. As of March 31, 2011 and December 31, 2010, the Company recorded a deferred compensation liability of $16.1 million and $17.6 million, respectively related to these deferrals and credited investment returns. Compensation expense is recorded in SG&A expense on the Company’s consolidated statements of income based on the change in the deferred compensation obligation related to earnings credited to participants as well as changes in the fair value of diversified investments. Compensation expense recorded in SG&A for the three months ended March 31, 2011 and 2010 were $0.3 million and $0.2 million, respectively.

The Company has invested the employee salary deferrals in diversified long-term investments which are intended to provide investment returns that partially offset the earnings credited to the participants. The diversified investments held in the trusts totaled $14.6 million and $13.6 million as of March 31, 2011 and December 31, 2010, respectively, and are recorded at their fair value, based on quoted market prices. These investments are considered trading securities and therefore the changes in the fair value of the diversified assets is included in other gains and losses in the accompanying statements of income. The Company recorded investment gains during the three months ended March 31, 2011 and 2010 of $0.4 million and $0.5 million, respectively.

In 1997, the Company adopted the Choice Hotels International, Inc. Nonqualified Retirement Savings and Investment Plan (“Non-Qualified Plan”). The Non-Qualified Plan allows certain employees who do not participate in the EDCP to defer a portion of their salary and invest these amounts in a selection of available diversified investment options. As of March 31, 2011 and December 31, 2010, the Company had recorded a deferred compensation liability of $11.1 million and $10.6 million, respectively related to these deferrals. Compensation expense is recorded in SG&A expense on the Company’s consolidated statements of income based on the change in the deferred compensation obligation related to earnings credited to participants as well as changes in the fair value of diversified investments. The net increase in compensation expense recorded in SG&A for the three months ended March 31, 2011 and 2010 was $0.4 million for both periods.

The diversified investments held in the trusts were $10.2 million and $9.7 million as of March 31, 2011 and December 31, 2010, respectively, and are recorded at their fair value, based on quoted market prices. These investments are considered trading securities and therefore the changes in the fair value of the diversified assets is included in other gains and losses in the accompanying statements of income. The Company recorded investment gains during the three months ended March 31, 2011 and 2010 of $0.3 million for both periods. In addition, the Non-Qualified Plan held shares of the Company’s common stock with a market value of $0.9 million at both March 31, 2011 and December 31, 2010.

10. Fair Value Measurements

The Company estimates the fair value of our financial instruments utilizing a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. There have been no significant transfers into or out of Level 1 or Level 2 inputs during the three months ended March 31, 2011. The following summarizes the three levels of inputs, as well as the assets that the Company values using those levels of inputs.

Level 1: Quoted prices in active markets for identical assets and liabilities. The Company’s Level 1 assets consist of marketable securities (primarily mutual funds) held in the Company’s EDCP and Non-Qualified Plan deferred compensation plans.

Level 2: Observable inputs, other than quoted prices in active markets for identical assets and liabilities, such as quoted prices for similar assets and liabilities; quoted prices in markets that are not active; or other inputs that are observable. The Company’s Level 2 assets consist of money market funds held in the Company’s EDCP and Non-Qualified Plan deferred compensation plans and those recorded in cash and cash equivalents.

Level 3: Unobservable inputs, supported by little or no market data available, where the reporting entity is required to develop its own assumptions to determine the fair value of the instrument. The Company does not currently have any assets whose fair value was determined using Level 3 inputs.


	Fair Value Measurements at Reporting Date Using
	Total		Level 1		Level 2		Level 3
Assets (in thousands)
As of March 31, 2011
Money market funds, included in cash and cash equivalents	$	10,001	$	—	$	10,001	$	—
Mutual funds⁽¹⁾		22,183		22,183		—		—
Money market funds⁽¹⁾		2,545		—		2,545		—

	$	34,729	$	22,183	$	12,546	$	—

As of December 31, 2010
Money market funds, included in cash and cash equivalents	$	10,001	$	—	$	10,001	$	—
Mutual funds⁽¹⁾		20,917		20,917		—		—
Money market funds⁽¹⁾		2,448		—		2,448		—

	$	33,366	$	20,917	$	12,449	$	—

⁽¹⁾	Included in Investments, employee benefit plans, fair value on the consolidated balance sheets.

The Company believes that the fair values of its current assets and current liabilities approximate their reported carrying amounts due to the short-term nature of these items. In addition, the interest rates of the Company’s Revolver adjust frequently based on current market rates; accordingly its carrying amount approximates fair value.

The Company estimates the fair value of its senior notes, using quoted market prices. At March 31, 2011, the senior notes had an approximate fair value of $245.2 million.

11. Income Taxes

The effective income tax rate was 28.2% and 35.9% for the three months ended March 31, 2011 and March 31, 2010, respectively.

adjustment is not material to its financial statements for prior annual or interim periods, the three months ended March 31, 2011 or the Company’s expected annual results for the year ended December 31, 2011. The rate was also impacted by the effect of foreign operations, partially offset by state income taxes.

12. Share-Based Compensation and Capital Stock

Stock Options

The Company granted 0.2 million options to certain employees of the Company at fair value of $2.1 million during the three months ended March 31, 2011 and 0.2 million options with a fair value of $2.5 million during the three months ended March 31, 2010. The stock options granted by the Company had an exercise price equal to the market price of the Company’s common stock on the date of grant. The fair value of the options granted was estimated on the grant date using the Black-Scholes option-pricing model with the following weighted average assumptions:


	2011 Grants			2010 Grants
Risk-free interest rate		2.10	%		2.18	%
Expected volatility		39.51	%		41.92	%
Expected life of stock option		4.4 years			4.4 years
Dividend yield		1.79	%		2.27	%
Requisite service period		4 years			4 years
Contractual life		7 years			7 years
Weighted average fair value of options granted	$	12.42		$	9.98

The expected life of the options and volatility are based on historical data and are not necessarily indicative of exercise patterns or actual volatility that may occur. Historical volatility is calculated based on a period that corresponds to the expected life of the stock option. The dividend yield and the risk-free rate of return are calculated on the grant date based on the then current dividend rate and the risk-free rate of return for the period corresponding to the expected life of the stock option. Compensation expense related to the fair value of these awards is recognized straight-line over the requisite service period based on those awards that ultimately vest.

The aggregate intrinsic value of the stock options outstanding and exercisable at March 31, 2011 was $12.1 million and $7.3 million, respectively. The total intrinsic value of options exercised during the three months ended March 31, 2011 and 2010 was approximately $1.7 million and $0.8 million, respectively.

The Company received approximately $2.2 million and $0.6 million in proceeds from the exercise of approximately 0.1 million and 0.04 million employee stock options during the three month periods ended March 31, 2011 and 2010, respectively.

Restricted Stock

The following table is a summary of activity related to restricted stock grants:


	Three Months Ended March 31,
	2011		2010
Restricted share grants		180,645		250,390
Weighted average grant date fair value per share	$	41.25	$	32.60
Aggregate grant date fair value ($000)	$	7,452	$	8,163
Restricted shares forfeited		5,806		8,194
Vesting service period of shares granted		3-4 years		3-4 years
Grant date fair value of shares vested ($000)	$	4,831	$	4,406

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.

Performance Vested Restricted Stock Units

The Company has granted performance vested restricted stock units (“PVRSU”) to certain employees. 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 between 0% and 200% of the initial target. If a minimum of 50% of the performance target is not attained then no awards will vest under the terms of the PVRSU agreements. Compensation expense related to these awards will be recognized over the requisite service period regardless of whether the performance targets have been met based on the Company’s estimate of the achievement of the various performance targets. The Company has currently estimated that between 0% and 100% of the various award targets will be achieved. The fair value is measured by the market price of the Company’s common stock on the date of grant. Compensation expense is recognized ratably over the requisite service period based on those PVRSUs that ultimately vest.

The following table is a summary of activity related to PVRSU grants:


	Three Months Ended March 31,
	2011		2010
Performance vested restricted stock units granted at target		25,036		33,517
Weighted average grant date fair value per share	$	41.25	$	32.60
Aggregate grant date fair value ($000)	$	1,033	$	1,093
Stock units forfeited		39,070		9,650
Requisite service period		3 years		3 years

During the three months ended March 31, 2011, no PVRSU grants vested. PVRSU grants totaling 39,070 units were forfeited since the Company did not achieve the minimum performance conditions contained in the stock awards. During the three months ended March 31, 2010, PVRSU grants totaling 10,880 vested at a fair value of $0.3 million. These PVRSU grants were initially granted at a target of 15,541 units; however, since the Company achieved only 70% of the targeted performance during the three months ended March 31, 2010, 4,989 units were forfeited since the performance targets of the applicable PVRSU grant were not achieved.

A summary of stock-based award activity as of March 31, 2011 and changes during the three months ended are presented below:


	Three Months Ended March 31, 2011
	Stock Options							Restricted Stock					Performance Vested Restricted Stock Units
	Shares			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, 2011		1,732,674		$	31.43				592,131		$	31.81		127,912		$	33.43
Granted		166,306			41.25				180,645			41.25		25,036			41.25
Exercised/Vested		(98,936	)		22.62				(151,016	)		31.99		—			—
Forfeited/Expired		(26,212	)		29.55				(5,806	)		31.26		(39,070	)		31.85


Outstanding at March 31, 2011		1,773,832		$	32.87		5.0 years		615,954		$	34.54		113,878		$	35.70


Options exercisable at March 31, 2011		966,264		$	32.48		4.5 years

The components of the Company’s pretax stock-based compensation expense and associated income tax benefits are as follows for the three months ended March 31, 2011 and 2010:


	Three Months Ended March 31,
(in millions)	2011		2010
Stock options	$	0.6	$	0.6
Restricted stock		1.7		1.7
Performance vested restricted stock units		0.1		0.1

Total	$	2.4	$	2.4

Income tax benefits	$	0.9	$	0.9

Dividends

On February 21, 2011, the Company’s board of directors declared a cash dividend of $0.185 per share (or approximately $11.0 million in the aggregate), which was paid on April 15, 2011 to shareholders of record as of April 1, 2011.

On February 16, 2010, the Company’s board of directors declared a quarterly cash dividend of $0.185 per share (or approximately $11.0 million in the aggregate), which was paid on April 16, 2010 to shareholders of record as of April 5, 2010.

Stock Repurchase Program

No shares of common stock were purchased by the Company under the share repurchase program during the three months ended March 31, 2011. During the three months ended March 31, 2010, the Company purchased 0.2 million of shares of common stock under the share repurchase program at a total cost of $6.9 million.

During the three months ended March 31, 2011 and 2010, the Company redeemed 55,295 and 65,133 shares of common stock at a total cost of approximately $2.2 million and $2.1 million, respectively, from employees to satisfy statutory minimum tax requirements from the vesting of restricted stock and PVRSU grants. These redemptions were outside the share repurchase program initiated in March 1998.

13. Comprehensive Income

The components of accumulated other comprehensive income (loss) is as follows:


(In thousands)	March 31, 2011			December 31, 2010
Foreign currency translation adjustments	$	2,045		$	1,540
Deferred loss on cash flow hedge		(8,116	)		(8,331	)
Changes in pension benefit obligation recognized in other comprehensive income (loss)		(411	)		(401	)

Total accumulated other comprehensive income (loss)	$	(6,482	)	$	(7,192	)

The differences between net income and comprehensive income are described in the following table:


	Three Months Ended March 31,
(In thousands)	2011			2010
Net income	$	15,730		$	15,793
Other comprehensive income, net of tax:
Amortization of loss on cash flow hedge		215			—
Foreign currency translation adjustment, net		505			6
Actuarial pension loss, net of tax		(10	)		—

Other comprehensive income, net of tax		710			6

Comprehensive income	$	16,440		$	15,799

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)	2011			2010
Computation of Basic Earnings Per Share:
Net income	$	15,730		$	15,793
Income allocated to participating securities		(156	)		(157	)

Net income available to common shareholders	$	15,574		$	15,636


Weighted average common shares outstanding – basic		59,081			58,924

Basic earnings per share	$	0.26		$	0.27


Computation of Diluted Earnings Per Share:
Net income	$	15,730		$	15,793
Income allocated to participating securities		(156	)		(157	)

Net income available to common shareholders	$	15,574		$	15,636


Weighted average common shares outstanding – basic		59,081			58,924
Diluted effect of stock options and PVRSUs		151			86

Weighted average shares outstanding-diluted		59,232			59,010

Diluted earnings per share	$	0.26		$	0.26

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 both March 31, 2011 and 2010, the Company had 1.8 million outstanding stock options. 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, 2011 and 2010, the Company excluded 0.4 million and 0.7 million of anti-dilutive stock options from the diluted earnings per share calculation, respectively.

PVRSUs are also included in the diluted earnings per share calculation assuming the performance conditions have been met at the reporting date. However, at March 31, 2011 and 2010, PVRSUs totaling 113,878 and 131,372, respectively were excluded from the computation since the performance conditions had not been met.

15. Condensed Consolidating Financial Statements

Effective August 2010, the Company’s Senior Notes are guaranteed jointly, severally, fully and unconditionally by eight 100%-owned domestic subsidiaries. There are no legal or regulatory restrictions on the payment of dividends to Choice Hotels International, Inc. from subsidiaries that do not guarantee the Senior Notes. As a result of the guarantee arrangements, the following condensed consolidating financial statements are presented. Investments in subsidiaries are accounted for under the equity method of accounting.

Choice Hotels International, Inc.

Condensed Consolidating Statement of Income

For the Three Months Ended March 31, 2011

(Unaudited, in Thousands)


	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
REVENUES:
Royalty fees	$	38,501		$	27,107		$	6,667		$	(28,035	)	$	44,240
Initial franchise and relicensing fees		2,614			—			—			—			2,614
Procurement services		3,165			—			—			—			3,165
Marketing and reservation		50,171			68,794			3,901			(59,899	)		62,967
Other items, net		1,247			864			184			—			2,295


Total revenues		95,698			96,765			10,752			(87,934	)		115,281


OPERATING EXPENSES:
Selling, general and administrative		56,872			23,871			4,408			(61,304	)		23,847
Marketing and reservation		19,503			66,055			4,039			(26,630	)		62,967
Other items, net		708			1,864			216			—			2,788


Total operating expenses		77,083			91,790			8,663			(87,934	)		89,602


Operating income		18,615			4,975			2,089			—			25,679
OTHER INCOME AND EXPENSES, NET:
Interest expense		4,173			(951	)		2			—			3,224

Equity in earnings of consolidated subsidiaries		(5,073	)		—			—			5,073			—

Other items, net		(198	)		(723	)		1,453			—			532


Total other income and expenses, net		(1,098	)		(1,674	)		1,455			5,073			3,756


Income before income taxes		19,713			6,649			634			(5,073	)		21,923
Income taxes (benefit)		3,983			2,534			(324	)		—			6,193


Net income	$	15,730		$	4,115		$	958		$	(5,073	)	$	15,730

Choice Hotels International, Inc.

Condensed Consolidating Statement of Income

For the Three Months Ended March 31, 2010

(Unaudited, in Thousands)


	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
REVENUES:
Royalty fees	$	35,852		$	24,298		$	6,399		$	(25,528	)	$	41,021
Initial franchise and relicensing fees		1,912			—			—			—			1,912
Procurement services		3,245			—			—			—			3,245
Marketing and reservation		47,980			65,123			3,447			(57,710	)		58,840
Other items, net		1,424			867			112			—			2,403

Total revenues		90,413			90,288			9,958			(83,238	)		107,421


OPERATING EXPENSES:
Selling, general and administrative		21,734			21,855			3,755			(25,528	)		21,816
Marketing and reservation		50,203			62,706			3,641			(57,710	)		58,840
Other items, net		984			1,745			199			—			2,928


Total operating expenses		72,921			86,306			7,595			(83,238	)		83,584


Operating income		17,492			3,982			2,363			—			23,837
OTHER INCOME AND EXPENSES, NET:
Interest expense		704			(84	)		1			—			621
Equity earnings of consolidated subsidiaries		(5,389	)		—			—			5,389			—
Other items, net		(61	)		(789	)		(580	)		—			(1,430	)

Total other income and expenses, net		(4,746	)		(873	)		(579	)		5,389			(809	)

Income before income taxes		22,238			4,855			2,942			(5,389	)		24,646
Income taxes		6,445			2,051			357			—			8,853


Net income	$	15,793		$	2,804		$	2,585		$	(5,389	)	$	15,793

Choice Hotels International, Inc.

Condensed Consolidating Balance Sheet

As of March 31, 2011

(Unaudited, in thousands)


	Parent			Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Eliminations			Consolidated
ASSETS

Cash and cash equivalents	$	3,847		$	259	$	72,299		—		$	76,405
Receivables		40,822			1,449		6,008		—			48,279
Other current assets		5,485			18,970		3,580		(4,851	)		23,184

Total current assets		50,154			20,678		81,887		(4,851	)		147,868
Property and equipment, at cost, net		10,500			42,444		1,352		—			54,296
Goodwill		60,620			5,193		229		—			66,042
Franchise rights and other identifiable intangibles, net		12,708			3,797		3,457		—			19,962
Receivable – marketing and reservation fees		54,719			—		—		—			54,719
Investment in and advances to affiliates		261,787			197,685		6,508		(465,980	)		—
Investments, employee benefit plans, at fair value		—			24,728		—		—			24,728
Deferred income taxes		4,572			19,751		137		—			24,460
Other assets		9,271			7,201		3,826		—			20,298

Total assets	$	464,331		$	321,477	$	97,396	$	(470,831	)	$	412,373


LIABILITIES AND SHAREHOLDERS’ DEFICIT
Accounts payable	$	8,867		$	25,484	$	4,379	$	—		$	38,730
Accrued expenses		13,805			13,922		1,236		—			28,963
Deferred revenue		10,913			60,235		891		—			72,039
Current portion of long-term debt		—			494		14		—			508
Income taxes payable		9,579			—		1,546		(4,197	)		6,928
Other current liabilities		—			3,227		—		(654	)		2,573

Total current liabilities		43,164			103,362		8,066		(4,851	)		149,741
Long-term debt		257,495			2,476		36		—			260,007
Deferred compensation & retirement plan obligations		—			34,654		6		—			34,660
Advances from affiliates		203,544			505		12,411		(216,460	)		—
Other liabilities		9,158			7,794		43		—			16,995

Total liabilities		513,361			148,791		20,562		(221,311	)		461,403

Total shareholders’ (deficit) equity		(49,030	)		172,686		76,834		(249,520	)		(49,030	)

Total liabilities and shareholders’ deficit	$	464,331		$	321,477	$	97,396	$	(470,831	)	$	412,373

Choice Hotels International, Inc.

Condensed Consolidating Balance Sheet

As of December 31, 2010

(In Thousands)


	Parent			Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Eliminations			Consolidated
ASSETS

Cash and cash equivalents	$	4,849		$	18,659	$	67,751	$	—		$	91,259
Receivables		40,160			2,055		5,423		—			47,638
Other current assets		5,193			19,616		6,444		(6,568	)		24,685

Total current assets		50,202			40,330		79,618		(6,568	)		163,582

Property and equipment, at cost, net		11,586			42,678		1,398		—			55,662
Goodwill		60,620			5,193		228		—			66,041
Franchise rights and other identifiable intangibles, net		13,315			3,953		3,557		—			20,825
Investments, employee benefit plans, at fair value		—			23,365		—		—			23,365
Investment in and advances to affiliates		251,245			186,045		7,338		(444,628	)		—
Receivable, marketing and reservation fees		42,507			—		—		—			42,507
Deferred income taxes		4,560			19,745		130		—			24,435
Other assets		7,339			7,366		600		—			15,305


Total assets	$	441,374		$	328,675	$	92,869	$	(451,196	)	$	411,722


LIABILITIES AND SHAREHOLDERS’ DEFICIT

Accounts payable	$	5,700		$	31,475	$	3,993		—		$	41,168
Accrued expenses		19,257			26,890		1,671		—			47,818
Deferred revenue		14,070			52,256		996		—			67,322
Revolving credit facility		200			—		—		—			200
Current portion of long-term debt		—			403		17		—			420
Income taxes payable		9,395			—		2,297		(5,914	)		5,778
Other current liabilities		—			3,206		—		(654	)		2,552

Total current liabilities		48,622			114,230		8,974		(6,568	)		165,258

Long-term debt		249,379			2,137		38		—			251,554
Deferred compensation & retirement plan obligations		—			35,707		—		—			35,707
Advances from affiliates		192,077			1,097		10,137		(203,311	)		—
Other liabilities		9,367			7,880		27		—			17,274


Total liabilities		499,445			161,051		19,176		(209,879	)		469,793


Total shareholders’ (deficit) equity		(58,071	)		167,624		73,693		(241,317	)		(58,071	)


Total liabilities and shareholders’ deficit	$	441,374		$	328,675	$	92,869	$	(451,196	)	$	411,722

Choice Hotels International, Inc.

Condensed Consolidating Statement of Cash Flows

For the Three Months ended March 31, 2011

(Unaudited, in thousands)


	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations		Consolidated
Net cash provided (used) from operating activities	$	4,590		$	(15,659	)	$	5,852			—	$	(5,217	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in property and equipment		(205	)		(1,601	)		(29	)		—		(1,835	)
Equity method investments		—			—			(1,600	)		—		(1,600	)
Issuance of notes receivable		(49	)		(1,406	)		(22	)		—		(1,477	)
Collection of notes receivable		—			7			—			—		7
Purchases of investments, employee benefit plans		—			(897	)		—			—		(897	)
Proceeds from the sales of investments, employee benefit plans		—			310			—			—		310
Other items, net		(113	)		13			5			—		(95	)

Net cash provided (used) in investing activities		(367	)		(3,574	)		(1,646	)		—		(5,587	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings pursuant to revolving credit facilities		7,900			—			—			—		7,900
Repayments of long-term debt		—			—			(5	)		—		(5	)
Purchase of treasury stock		(2,207	)		—			—			—		(2,207	)
Debt issuance costs		(2,207	)		—			—			—		(2,207	)
Excess tax benefits from stock-based compensation		1			833			—			—		834
Dividends paid		(10,950	)		—			—			—		(10,950	)
Proceeds from exercise of stock options		2,238			—			—			—		2,238

Net cash provided (used) in financing activities		(5,225	)		833			(5	)		—		(4,397	)

Net change in cash and cash equivalents		(1,002	)		(18,400	)		4,201			—		(15,201	)
Effect of foreign exchange rate changes on cash and cash equivalents		—			—			347			—		347
Cash and cash equivalents at beginning of period		4,849			18,659			67,751			—		91,259


Cash and cash equivalents at end of period	$	3,847		$	259		$	72,299			—	$	76,405

Choice Hotels International, Inc.

Condensed Consolidating Statement of Cash Flows

For the Three Months ended March 31, 2010

(Unaudited, in thousands)


	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations		Consolidated
Net cash provided (used) from operating activities	$	4,108		$	4,088		$	(1,216	)		—	$	6,980

CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in property and equipment		(1,167	)		(3,320	)		(71	)		—		(4,558	)
Acquisitions, net of cash acquired		—			—			(466	)		—		(466	)

Issuance of notes receivable		(213	)		(321	)		—			—		(534	)
Collection of notes receivable		—			10			—			—		10
Purchases of investments, employee benefit plans		—			(1,104	)		—			—		(1,104	)
Proceeds from the sales of investments, employee benefit plans		—			522			—			—		522
Other items, net		(124	)		—			—			—		(124	)

Net cash used in investing activities		(1,504	)		(4,213	)		(537	)		—		(6,254	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings pursuant to revolving credit facility		16,200			—			—			—		16,200
Purchase of treasury stock		(8,936	)		—			—			—		(8,936	)
Excess tax benefits from stock-based compensation		—			49			—			—		49
Dividends paid		(10,945	)		—			—			—		(10,945	)
Proceeds from exercise of stock options		648			—			—			—		648

Net cash (used in) provided by financing activities		(3,033	)		49			—			—		(2,984	)

Net change in cash and cash equivalents		(429	)		(76	)		(1,753	)		—		(2,258	)
Effect of foreign exchange rate changes on cash and cash equivalents		—			—			(19	)		—		(19	)
Cash and cash equivalents at beginning of period		4,281			303			63,286			—		67,870


Cash and cash equivalents at end of period	$	3,852		$	227		$	61,514			—	$	65,593

16. Reportable Segment Information

The Company has a single reportable segment encompassing its franchising business. Revenues from the franchising business include royalty fees, initial franchise and relicensing fees, marketing and reservation system fees, procurement services revenue and other revenue. The Company is obligated under its franchise agreements to provide marketing and reservation services appropriate for the operation of its systems. These services do not represent separate reportable segments as their operations are directly related to the Company’s franchising business. The revenues received from franchisees that are used to pay for part of the Company’s ongoing operations are included in franchising revenues and are offset by the related expenses paid for marketing and reservation activities to calculate franchising operating income. Corporate and other revenue consists of hotel operations. Except as described in Note 4, the Company does not allocate interest income, interest expense or income taxes to its franchising segment.

The following table presents the financial information for the Company’s franchising segment:


	Three Months Ended March 31, 2011							Three Months Ended March 31, 2010
(In thousands)	Franchising		Corporate & Other			Consolidated		Franchising		Corporate & Other			Consolidated
Revenues	$	114,417	$	864		$	115,281	$	106,554	$	867		$	107,421
Operating income (loss)	$	36,077	$	(10,398	)	$	25,679	$	33,068	$	(9,231	)	$	23,837
Income (loss) before income taxes	$	34,611	$	(12,688	)	$	21,923	$	33,421	$	(8,775	)	$	24,646

17. Commitments and Contingencies

The Company is a defendant in a number of lawsuits arising in the ordinary course of business. In the opinion of management and the Company’s legal counsel, the ultimate outcome of any such lawsuit individually will not have a material adverse effect on the Company’s business, financial position, results of operations or cash flows.

In June 2008, the Company guaranteed $1 million of a bank loan funding a franchisee’s construction of a Cambria Suites in Columbus, Ohio. The guaranty will terminate on the earlier of (i) the repayment of all outstanding obligations under the bank loan that it supports (the current initial loan term runs through June 2013), or (ii) when the franchisee achieves certain debt service coverage ratios outlined in the underlying bank loan agreement. The Company has received a pledge of an equity interest in the entity constructing the property as well as personal guarantees from several of the franchisee’s principal owners related to the repayment of any amounts the Company may be required to pay under this guaranty.

In July 2008, the Company guaranteed $1 million of a bank loan funding a franchisee’s construction of a Cambria Suites in Noblesville, Indiana. The guaranty will terminate on the earlier of (i) the repayment of all outstanding obligations under the bank loan that it supports (the current initial loan term runs through September 2011), or (ii) when the franchisee achieves certain debt service coverage ratios outlined in the underlying bank loan agreement. The Company has received a pledge of an equity interest in the entity constructing the property as well as personal guarantees from several of the franchisee’s principal owners related to the repayment of any amounts the Company may be required to pay under this guaranty.

The Company occasionally provides financing to franchisees for property improvements, hotel development efforts and other purposes. At March 31, 2011, the Company had commitments to extend an additional $7.0 million for these purposes provided certain conditions are met by its franchisees, of which $3.6 million is expected to be advanced in the next twelve months.

The Company has invested $1.6 million in a joint venture and has a commitment to invest an additional $3.4 million which is expected to be funded completely in 2011.

In the ordinary course of business, the Company enters into numerous agreements that contain standard indemnities whereby the Company indemnifies another party for breaches of representations and warranties. Such indemnifications are granted under various agreements, including those governing (i) purchases or sales of assets or businesses, (ii) leases of real estate, (iii) licensing of trademarks, (iv) access to credit facilities, (v) issuances of debt or equity securities, and (vi) certain operating agreements. The indemnifications issued are for the benefit of the (i) buyers in sale agreements and sellers in purchase agreements, (ii) landlords in lease contracts, (iii) franchisees in licensing agreements, (iv) financial institutions in credit facility arrangements, (v) underwriters in debt or equity security issuances and (vi) parties under certain operating agreements. In addition, these parties are also generally indemnified against any third party claim resulting from the transaction that is contemplated in the underlying agreement. While some of these indemnities extend only for the duration of the underlying agreement, many survive the expiration of the term of the agreement or extend into perpetuity (unless subject to a legal statute of limitations). There are no specific limitations on the maximum potential amount of future payments that the Company could be required to make under these indemnities, nor is the Company able to develop an estimate of the maximum potential amount of future payments to be made under these indemnifications as the triggering events are not subject to predictability. With respect to certain of the aforementioned indemnities, such as indemnifications of landlords against third party claims for the use of real estate property leased by the Company, the Company maintains insurance coverage that mitigates potential liability.

18. Termination Charges

During three months ended March 31, 2011, the Company recorded one-time employee termination charges totaling $0.3 million in SG&A and marketing and reservation expenses. These charges related to salary and benefits continuation payments for employees separating from service with the Company. At March 31, 2011, the Company had approximately $0.2 million of these salary and benefits continuation payments remaining to be remitted. During the three months ended March 31, 2011, the Company remitted $1.9 million of termination benefits related to employee termination charges recorded in prior periods and had approximately $2.1 million of these benefits remaining to be paid.

At March 31, 2011 and December 31, 2010, approximately $2.4 million and $4.0 million of termination benefits remained and were included in current and noncurrent liabilities in the Company’s consolidated financial statements. The Company expects $2.0 million of benefits to be paid in the next twelve months.

19. Subsequent Events

On May 5, 2011, the Company’s Board of Directors declared a quarterly cash dividend of $0.185 per share of common stock. The dividend is payable on July 15, 2011 to shareholders of record as of July 1, 2011. Based on the Company’s share count at March 31, 2011, the total dividends to be paid is approximately $11 million.

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following Management’s Discussion and Analysis (“MD&A”) is intended to help the reader understand Choice Hotels International, Inc. and subsidiaries (together the “Company”). MD&A is provided as a supplement to—and should be read in conjunction with—our consolidated financial statements and the accompanying notes.

Overview

We are a hotel franchisor with franchise agreements representing 6,128 hotels open and 606 hotels under construction, awaiting conversion or approved for development as of March 31, 2011, with 492,733 rooms and 49,908 rooms, respectively, in 49 states, the District of Columbia and over 40 countries and territories outside the United States. Our brand names include Comfort Inn®, Comfort Suites®, Quality®, Clarion®, Ascend Collection®, Sleep Inn®, Econo Lodge®, Rodeway Inn®, MainStay Suites®, Suburban Extended Stay Hotel®, and Cambria Suites® (collectively, the “Choice brands”).

The Company conducts its international franchise operations through a combination of direct franchising and master franchising relationships. Master franchising relationships allow the use of our brands by third parties in foreign countries. These relationships are governed by master franchising agreements which generally provide the master franchise with the right to use our brands in a specific geographic region, usually for a fee. As a result of our use of master franchising relationships and international market conditions, total revenues from international franchising operations comprised only 10% and 9% of our total revenues for the three months ended March 31, 2011 and 2010, while representing approximately 19% of hotels open at both March 31, 2011 and 2010.

Our Company generates revenues, income and cash flows primarily from initial, relicensing and continuing royalty fees attributable to our franchise agreements. Revenues are also generated from qualified vendor arrangements, hotel operations and other sources. The hotel industry is seasonal in nature. For most hotels, demand is lower in December through March than during the remainder of the year. Our principal source of revenues is franchise fees based on the gross room revenues of our franchised properties. The Company’s franchise fee revenues and operating income reflect the industry’s seasonality and historically have been lower in the first quarter than in the second, third or fourth quarters.

With a focus on hotel franchising instead of ownership, we benefit from the economies of scale inherent in the franchising business. The fee and cost structure of our business provides opportunities to improve operating results by increasing the number of franchised hotel rooms and effective royalty rates of our franchise contracts resulting in increased initial fee and relicensing revenue, ongoing royalty fees and procurement services revenues. In addition, our operating results can also be improved through our company-wide efforts related to improving property level performance. The Company currently estimates that based on its current domestic portfolio of hotels under franchise that a 1% change in revenue per available room (“RevPAR”) or rooms under franchise would increase or decrease annual domestic royalty revenues by approximately $2.2 million and a 1 basis point change in the Company’s effective royalty rate would increase or decrease annual domestic royalties by approximately $0.5 million. In addition to these revenues, we also collect marketing and reservation system fees to support centralized marketing and reservation activities for the franchise system. As a lodging franchisor, the Company currently has relatively low capital expenditure requirements.

The principal factors that affect the Company’s results are: the number and relative mix of franchised hotel rooms; growth in the number of hotel rooms under franchise; occupancy and room rates achieved by the hotels under franchise; the effective royalty rate achieved; the level of franchise sales and relicensing activity; and our ability to manage costs. The number of rooms at franchised properties and occupancy and room rates at those properties significantly affect the Company’s results because our fees are based upon room revenues at franchised hotels. The key industry standard for measuring hotel-operating performance is RevPAR, which is calculated by multiplying the percentage of occupied rooms by the average daily room rate realized. Our variable overhead costs associated with franchise system growth have historically been less than incremental royalty fees generated from new franchises. Accordingly, continued growth of our franchise business should enable us to realize benefits from the operating leverage in place and improve operating results.

We are contractually required by our franchise agreements to use the marketing and reservation system fees we collect for system-wide marketing and reservation activities. These expenditures, which include advertising costs and costs to maintain our central reservations system, help to enhance awareness and increase consumer preference for our brands. Greater awareness and preference promotes long-term growth in business delivery to our franchisees, which ultimately increases franchise fees earned by the Company.

Our Company articulates its mission as a commitment to our franchisees’ profitability by providing them with hotel franchises that strive to generate the highest return on investment of any hotel franchise. We have developed an operating

system dedicated to our franchisees’ success that focuses on delivering guests to our franchised hotels and reducing costs for our hotel owners.

We believe that executing our strategic priorities creates value for our shareholders. Our Company focuses on two key value drivers:

Profitable Growth. We believe our success is dependent on improving the performance of our hotels, increasing our system size by selling additional hotel franchises, effective royalty rate improvement and maintaining a disciplined cost structure. We attempt to improve our franchisees’ revenues and overall profitability by providing a variety of products and services designed to increase business delivery to and/or reduce operating and development costs for our franchisees. These products and services include national marketing campaigns, a central reservation system, property and yield management systems, quality assurance standards and qualified vendor relationships. We believe that healthy brands, which deliver a compelling return on investment for franchisees, will enable us to sell additional hotel franchises and raise royalty rates. We have established multiple brands that meet the needs of many types of guests, and can be developed at various price points and applied to both new and existing hotels. This ensures that we have brands suitable for creating growth in a variety of market conditions. Improving the performance of the hotels under franchise, growing the system through additional franchise sales and improving franchise agreement pricing while maintaining a disciplined cost structure are the keys to profitable growth.

Maximizing Financial Returns and Creating Value for Shareholders. Our capital allocation decisions, including capital structure and uses of capital, are intended to maximize our return on invested capital and create value for our shareholders. We believe our strong and predictable cash flows create a strong financial position that provides us a competitive advantage. Currently, our business does not require significant capital to operate and grow. Therefore, we can maintain a capital structure that generates high financial returns and use our excess cash flow to increase returns to our shareholders.

Historically, we have returned value to our shareholders in two primary ways: share repurchases and dividends. In 1998, we instituted a share repurchase program which has generated substantial value for our shareholders. During the three months ended March 31, 2011, the Company repurchased no shares of its common stock under the share repurchase program. Since the program’s inception through March 31, 2011, we have repurchased 43.2 million shares (including 33.0 million prior to the two-for-one stock split effected in October 2005) of common stock at a total cost of $1.0 billion. Considering the effect of the two-for-one stock split, the Company has repurchased 76.2 million shares at an average price of $13.35 per share. We currently believe that our cash flows from operations will support our ability to complete the current board of directors repurchase authorization of approximately 3.6 million shares remaining as of March 31, 2011. Upon completion of the current authorization, our board of directors will evaluate the advisability of additional share repurchases.

During the three months ended March 31, 2011, we paid cash dividends totaling approximately $11.0 million and we presently expect to continue to pay dividends in the future, subject to future business performance, economic conditions, changes in income tax regulations and other factors. Based on our present dividend rate and outstanding share count, aggregate annual dividends for 2011 would be approximately $44.0 million.

Our board of directors previously authorized us to enter into programs which permit us to offer investment, financing and guaranty support to qualified franchisees as well as to acquire and resell real estate to incent franchise development for certain brands in top markets. Recent market conditions have resulted in an increase in opportunities to incentivize development under these programs.

Over the next several years, we expect to deploy capital opportunistically pursuant to these programs to promote growth of our emerging brands. The amount and timing of the investment in these programs will be dependent on market and other conditions. Our current expectation is that our annual investment in these programs will range from $20 million to $40 million. Notwithstanding these programs, the company expects to continue to return value to its shareholders through a combination of share repurchases and dividends, subject to business performance, economic conditions, changes in income tax regulations and other factors.

We believe these value drivers, when properly implemented, will enhance our profitability, maximize our financial returns and continue to generate value for our shareholders. The ultimate measure of our success will be reflected in the items below.

Results of Operation: Royalty fees, operating income, net income and diluted earnings per share (“EPS”) represent key measurements of these value drivers. In the three months ended March 31, 2011, royalty fees revenue totaled $44.2 million, an 8% increase from the same period in 2010. Operating income totaled $25.7 million for the three months ended March 31, 2011, a $1.8 million or 8% increase from the same period in 2010. Net income decreased $0.1 million from the same period of the prior year to $15.7 million. Diluted earnings per share for the quarter ended March 31, 2011 were $0.26 compared to

$0.26 for the three months ended March 31, 2010. These measurements will continue to be a key management focus in 2011 and beyond.

Refer to MD&A heading “Operations Review” for additional analysis of our results.

Liquidity and Capital Resources: Historically, the Company has generated significant cash flows from operations. Since our business does not currently require significant reinvestment of capital, we utilize cash in ways that management believes provide the greatest returns to our shareholders, which include share repurchases and dividends. We believe the Company’s cash flow from operations and available financing capacity is sufficient to meet the expected future operating, investing, and financing needs of the business.

Refer to MD&A heading “Liquidity and Capital Resources” for additional analysis.

Operations Review

Comparison of Operating Results for the Three-Month Periods Ended March 31, 2011 and 2010

The Company recorded net income of $15.7 million for the three month period ended March 31, 2011, a $0.1 million decrease from the $15.8 million for the quarter ended March 31, 2010. The decrease in net income for the three months ended March 31, 2011, is primarily attributable to the Company recording a $1.8 million loss on assets held for sale as well as an increase in effective borrowing rates due to the issuance of fixed rate long-term debt in August 2010. The increases in these items were partially offset by an 8% increase in operating income and a lower effective income tax rate compared to the prior year period.

Summarized financial results for the three months ended March 31, 2011 and 2010 are as follows:


(in thousands, except per share amounts)	2011			2010
REVENUES:
Royalty fees	$	44,240		$	41,021
Initial franchise and relicensing fees		2,614			1,912
Procurement services		3,165			3,245
Marketing and reservation		62,967			58,840
Hotel operations		864			867
Other		1,431			1,536

Total revenues		115,281			107,421


OPERATING EXPENSES:
Selling, general and administrative		23,847			21,816
Depreciation and amortization		1,955			2,172
Marketing and reservation		62,967			58,840
Hotel operations		833			756

Total operating expenses		89,602			83,584

Operating income		25,679			23,837


OTHER INCOME AND EXPENSES, NET:
Interest expense		3,224			621
Interest income		(210	)		(60	)
Other gains and losses		1,043			(1,017	)
Equity in net income of affiliates		(301	)		(353	)

Total other income and expenses, net		3,756			(809	)

Income before income taxes		21,923			24,646
Income taxes		6,193			8,853

Net income	$	15,730		$	15,793

Diluted earnings per share	$	0.26		$	0.26

The Company utilizes certain measures such as adjusted net income, adjusted diluted EPS, adjusted selling, general and administrative (“SG&A”) expense, adjusted operating income and franchising revenues which do not conform to generally accepted accounting principles in the United States (“GAAP”) when analyzing and discussing its results with the investment community. This information should not be considered as an alternative to any measure of performance as promulgated under

GAAP, such as net income, diluted EPS, SG&A, operating income and total revenues. The Company’s calculation of these measurements may be different from the calculations used by other companies and therefore comparability may be limited. We have included below a reconciliation of these measures to the comparable GAAP measurement as well as our reason for reporting these non-GAAP measures.

Franchising Revenues: The Company utilizes franchising revenues which exclude marketing and reservation system revenues and hotel operations rather than total revenues when analyzing the performance of the business. Marketing and reservation activities are excluded from revenues since the Company is contractually required by its franchise agreements to use these fees collected for marketing and reservation activities; as such, no income or loss to the Company is generated. Cumulative marketing and reservation system fees not expended are recorded as a payable on the Company’s financial statements and are carried over to the next fiscal year and expended in accordance with the franchise agreements. Cumulative marketing and reservation expenditures in excess of fees collected for marketing and reservation activities are recorded as a receivable on the Company’s financial statements. Hotel operations are excluded since they do not reflect the most accurate measure of the Company’s core franchising business. This non-GAAP measure is a commonly used measure of performance in our industry and facilitates comparisons between the Company and its competitors.

Calculation of Franchising Revenues


	Three Months Ended March 31,
	($ amounts in thousands)
	2011			2010
Franchising Revenues:

Total Revenues	$	115,281		$	107,421
Adjustments:
Marketing and reservation system revenues		(62,967	)		(58,840	)
Hotel operations		(864	)		(867	)

Franchising Revenues	$	51,450		$	47,714

Adjusted Net Income, Adjusted Diluted EPS, Adjusted SG&A and Adjusted Operating Income: We also use adjusted net income, adjusted diluted EPS, adjusted SG&A and adjusted operating income all of which exclude employee termination benefits for the three months ended March 31, 2011 and 2010. Adjusted net income and adjusted diluted EPS for the three months ended March 31, 2011 also exclude a $1.8 million loss on assets held for sale resulting from the Company reducing the carrying amount of a parcel of land held for sale to its estimated fair value. The Company utilizes these non-GAAP measures to enable investors to perform meaningful comparisons of past, present and future operating results and as a means to emphasize the results of on-going operations.

Calculation of Adjusted Operating Income


	Three Months Ended March 31,
	($ amounts in thousands)
	2011		2010

Operating Income	$	25,679	$	23,837
Adjustments:
Employee termination benefits		70		352

Adjusted Operating Income	$	25,749	$	24,189

Calculation of Adjusted SG&A


	Three Months Ended March 31,
	($ amounts in thousands)
	2011			2010

SG&A	$	23,847		$	21,816
Adjustments:
Employee termination benefits		(70	)		(352	)

Adjusted SG&A	$	23,777		$	21,464

Calculation of Adjusted Net Income and Adjusted Diluted EPS


	Three Months Ended March 31,
	(In thousands, except per share amounts)
	2011		2010

Net Income	$	15,730	$	15,793
Adjustments, net of tax:
Loss on land held for sale		1,111		—
Employee termination benefits		44		220

Adjusted Net Income	$	16,885	$	16,013


Weighted average shares outstanding – diluted		59,825		59,600

Diluted EPS	$	0.26	$	0.26
Adjustments:
Loss on land held for sale		0.02		—
Employee termination benefits		—		0.01

Adjusted Diluted EPS	$	0.28	$	0.27

The Company recorded adjusted net income of $16.9 million for the three months ended March 31, 2011 a $0.9 million increase compared to an adjusted net income of $16.0 million for the three months ended March 31, 2010. The increase in adjusted net income for the three months ended March 31, 2011 is primarily attributable to a $1.6 million increase in adjusted operating income and a lower effective income tax rate, partially offset by $2.6 million increase in interest expense due to the issuance of $250 million of senior notes in August 2010 which carry a higher effective interest rate than the Company’s revolving credit facility. Adjusted operating income increased $1.6 million as the Company’s franchising revenues for the three months ended March 31, 2011 increased $3.7 million or 8% from the same period of the prior year partially offset by a $2.3 million increase adjusted SG&A expenses.

Franchising Revenues: Franchising revenues were $51.5 million for the three months ended March 31, 2011 compared to $47.7 million for the three months ended March 31, 2010. The increase in franchising revenues is primarily due to an 8% increase in royalty revenues and a 37% increase in initial franchise and relicensing fees.

Domestic royalty fees for the three months ended March 31, 2011 increased $2.7 million to $38.7 million from $36.0 million in the three months ended March 31, 2010, an increase of 7%. The increase in royalties is attributable to a combination of factors including a 5.5% increase in RevPAR, a 0.8% increase in the number of domestic franchised hotel rooms and an increase in the effective royalty rate of the domestic hotel system from 4.32% to 4.35%. System-wide RevPAR increased due to a 190 basis point increase in occupancy and a 0.7% increase in average daily rates.

A summary of the Company’s domestic franchised hotels operating information is as follows:


	For the Three Months Ended March 31, 2011*							For the Three Months Ended March 31, 2010*							Change
	Average Daily Rate		Occupancy			RevPAR		Average Daily Rate		Occupancy			RevPAR		Average Daily Rate			Occupancy		RevPAR
Comfort Inn	$	72.21		44.3	%	$	32.00	$	71.02		42.8	%	$	30.36		1.7	%		150 bps		5.4	%
Comfort Suites		79.08		47.0	%		37.18		79.21		43.7	%		34.64		(0.2	%)		330 bps		7.3	%
Sleep		64.94		42.2	%		27.43		64.76		41.2	%		26.67		0.3	%		100 bps		2.8	%
Quality		61.58		38.6	%		23.80		61.59		37.0	%		22.77		(0.0	%)		160 bps		4.5	%
Clarion		67.72		36.6	%		24.75		69.45		33.6	%		23.32		(2.5	%)		300 bps		6.1	%
Econo Lodge		49.61		37.3	%		18.49		49.58		35.6	%		17.65		0.1	%		170 bps		4.8	%
Rodeway		45.77		38.6	%		17.65		45.44		36.3	%		16.51		0.7	%		230 bps		6.9	%
MainStay		60.97		53.9	%		32.85		63.11		52.1	%		32.86		(3.4	%)		180 bps		(0.0	%)
Suburban		38.29		60.7	%		23.24		37.22		58.8	%		21.89		2.9	%		190 bps		6.2	%
Ascend Collection		98.46		49.9	%		49.09		97.33		42.3	%		41.21		1.2	%		760 bps		19.1	%

Total	$	65.69		42.0	%	$	27.58	$	65.22		40.1	%	$	26.13		0.7	%		190 bps		5.5	%

*	Operating statistics represent hotel operations from December through February

The number of domestic rooms on-line increased to 390,407 as of March 31, 2011 from 387,246 as of March 31, 2010, an increase of 0.8%. The total number of domestic hotels on-line grew 1.3% to 4,970 as of March 31, 2011 from 4,905 as of March 31, 2010.

A summary of domestic hotels and rooms on-line at March 31, 2011 and 2010 by brand is as follows:


	March 31, 2011				March 31, 2010				Variance
	Hotels		Rooms		Hotels		Rooms		Hotels			Rooms			%			%
Comfort Inn		1,422		110,932		1,445		113,266		(23	)		(2,334	)		(1.6	%)		(2.1	%)
Comfort Suites		621		48,096		620		48,180		1			(84	)		0.2	%		(0.2	%)
Sleep		397		28,895		389		28,377		8			518			2.1	%		1.8	%
Quality		1,015		88,967		976		88,394		39			573			4.0	%		0.6	%
Clarion		192		28,259		168		24,336		24			3,923			14.3	%		16.1	%
Econo Lodge		779		48,245		786		48,519		(7	)		(274	)		(0.9	%)		(0.6	%)
Rodeway		381		20,940		373		21,118		8			(178	)		2.1	%		(0.8	%)
MainStay		38		2,943		36		2,797		2			146			5.6	%		5.2	%
Suburban		63		7,543		62		7,474		1			69			1.6	%		0.9	%
Ascend Collection		42		3,259		30		2,459		12			800			40.0	%		32.5	%
Cambria Suites		20		2,328		20		2,326		—			2			0.0	%		0.1	%

Total Domestic Franchises		4,970		390,407		4,905		387,246		65			3,161			1.3	%		0.8	%

International available rooms increased 2.3% to 102,326 as of March 31, 2011 from 100,018 as of March 31, 2010. The total number of international hotels increased 2.8% from 1,127 as of March 31, 2010 to 1,158 as of March 31, 2011.

As of March 31, 2011, the Company had 508 franchised hotels with 41,475 rooms under construction, awaiting conversion or approved for development in its domestic system as compared to 657 hotels and 52,483 rooms at March 31, 2010. The number of new construction franchised hotels in the Company’s domestic pipeline decreased 27% to 352 at March 31, 2011 from 482 at March 31, 2010. The number of conversion franchised hotels in the Company’s domestic pipeline declined by 19 units or 11% from March 31, 2010 to 156 hotels at March 31, 2011. The domestic system hotels under construction, awaiting conversion or approved for development declined 23% from the prior year primarily due to the decline in new executed franchise agreements over the trailing twelve months due to the current economic environment coupled with the opening of 291 franchised units over the twelve months ending March 31, 2011. The Company had an additional 98 franchised hotels with 8,433 rooms under construction, awaiting conversion or approved for development in its international system as of March 31, 2011 compared to 102 hotels and 8,221 rooms at March 31, 2010. While the Company’s hotel pipeline provides a

strong platform for growth, a hotel in the pipeline does not always result in an open and operating hotel due to various factors.

A summary of the domestic franchised hotels under construction, awaiting conversion or approved for development at March 31, 2011 and 2010 by brand is as follows:


													Variance
	March 31, 2011 Units						March 31, 2010 Units						Conversion						New Construction						Total
	Conversion		New Construction		Total		Conversion		New Construction		Total		Units			%			Units			%			Units			%
Comfort Inn		31		58		89		43		81		124		(12	)		(28	%)		(23	)		(28	%)		(35	)		(28	%)
Comfort Suites		3		117		120		—		154		154		3			NM			(37	)		(24	%)		(34	)		(22	%)
Sleep Inn		—		70		70		1		115		116		(1	)		(100	%)		(45	)		(39	%)		(46	)		(40	%)
Quality		47		6		53		39		13		52		8			21	%		(7	)		(54	%)		1			2	%
Clarion		20		2		22		16		6		22		4			25	%		(4	)		(67	%)		—			0	%
Econo Lodge		35		2		37		39		4		43		(4	)		(10	%)		(2	)		(50	%)		(6	)		(14	%)
Rodeway		14		2		16		33		3		36		(19	)		(58	%)		(1	)		(33	%)		(20	)		(56	%)
MainStay		2		39		41		—		39		39		2			NM			—			0	%		2			5	%
Suburban		—		20		20		—		26		26		—			NM			(6	)		(23	%)		(6	)		(23	%)
Ascend Collection		4		4		8		4		4		8		—			0	%		—			0	%		—			0	%
Cambria Suites		—		32		32		—		37		37		—			NM			(5	)		(14	%)		(5	)		(14	%)

Total		156		352		508		175		482		657		(19	)		(11	%)		(130	)		(27	%)		(149	)		(23	%)

Domestic hotels open and operating declined by 23 hotels during the three months ended March 31, 2011 compared to a decline of one domestic hotel open and operating during the three months ended March 31, 2010. Gross domestic franchise additions declined from 78 for the three months ended March 31, 2010 to 42 for the same period of 2011. New construction hotels represented 4 of the gross domestic additions during three months ended March 31, 2011 compared to 28 hotels in the same period of the prior year. Gross domestic additions for conversion hotels during the three months ended March 31, 2011 declined by 12 to 38 hotels from 50 hotels in the same period of the prior year. The decline in new hotel openings in the current period reflects the lack of new hotel construction financing, a decline in the real estate market for hotel transactions and retention efforts implemented by other hotel brand companies have negatively impacted the Company’s pipeline of new franchises. The Company expects the number of new franchise additions that will open during 2011 to decline from 327 in 2010 to approximately 277 hotels. This decline is expected to be driven by new construction hotels which are projected to decline by 48 hotels from 78 in 2010 to 30 hotels in 2011 due to the impact the tight credit markets have had on the number of new construction franchise agreements executed in 2009 and 2010 as well as the availability of capital to commence construction on existing projects.

Net domestic franchise terminations declined from 79 in the three months ended March 31, 2010 to 65 for the three months ended March 31, 2011 primarily due to fewer terminations related to the removal of hotels related to the non-payment of franchise fees.

International royalties increased by $0.6 million or 12% from $5.0 million in the first quarter of 2010 to $5.6 million for the same period of 2011 primarily due to foreign currency fluctuations and global RevPAR increases.

New domestic franchise agreements executed in the three months ended March 31, 2011 totaled 56 representing 5,158 rooms compared to 55 agreements representing 4,511 rooms executed in the first quarter of 2010. During the first quarter of 2011, 6 of the executed agreements were for new construction hotel franchises representing 572 rooms compared to 10 contracts representing 709 rooms for the same period a year ago. Conversion hotel executed franchise agreements totaled 50 representing 4,586 rooms for the three months ended March 31, 2011 compared to 45 agreements representing 3,802 rooms for the same period a year ago. Domestic initial fee revenue, included in the initial franchise and relicensing fees caption above, generated from executed franchise agreements increased 69% to $2.2 million for the three months ended March 31, 2011 from $1.3 million for the three months ended March 31, 2010. Initial fee revenue increased $0.9 million from the same period of the prior year despite executing approximately the same number of new franchise agreements in both periods due to an increase in average initial fees and the recognition of revenue during 2011 related to franchise agreements containing developer incentives executed in prior periods. Revenues associated with agreements including incentives are deferred and recognized when the incentive criteria are met or the agreement is terminated, whichever occurs first.

A summary of executed domestic franchise agreements by brand for the three months ended March 31, 2011 and 2010 is as follows:


	For the Three Months Ended March 31, 2011						For the Three Months Ended March 31, 2010						% Change
	New Construction		Conversion		Total		New Construction		Conversion		Total		New Construction			Conversion			Total
Comfort Inn		2		7		9		1		8		9		100	%		(13	%)		0	%
Comfort Suites		—		2		2		2		—		2		(100	%)		NM			0	%
Sleep		2		—		2		2		—		2		0	%		NM			0	%
Quality		—		24		24		1		11		12		(100	%)		118	%		100	%
Clarion		—		5		5		—		3		3		NM			67	%		67	%
Econo Lodge		—		6		6		—		10		10		NM			(40	%)		(40	%)
Rodeway		—		5		5		1		11		12		(100	%)		(55	%)		(58	%)
MainStay		1		—		1		2		—		2		(50	%)		NM			(50	%)
Suburban		—		—		—		1		—		1		(100	%)		NM			(100	%)
Ascend Collection		—		1		1		—		2		2		NM			(50	%)		(50	%)
Cambria Suites		1		—		1		—		—		—		NM			NM			NM


Total Domestic System		6		50		56		10		45		55		(40	%)		11	%		2	%

Relicensing fees include fees charged to the new owners of a franchised property whenever an ownership change occurs and the property remains in the franchise system as well as fees required to renew expiring franchise contracts. Relicensing and renewal contracts declined 22% from 18 in the first quarter of 2010 to 14 for the three months ended March 31, 2011. As a result of the decline in contracts, relicensing revenues declined $0.1 million from $0.6 million for the three months ended March 31, 2010 to $0.5 million for the three months ended March 31, 2011. The Company’s relicensing activity in 2011 and beyond is dependent on the availability and cost of capital as well as the presence of an active real estate market for hotel transactions.

Selling, General and Administrative Expenses: The cost to operate the franchising business is reflected in SG&A on the consolidated statements of income. SG&A expenses were $23.8 million for the three months ended March 31, 2011, a $2.0 million or 9% increase from the three months ended March 31, 2010. Adjusted SG&A costs, which exclude certain items described above, increased $2.3 million to $23.8 million for the three months ended March 31, 2011 from $21.5 million for the same period of 2010. Adjusted SG&A for the three months ended March 31, 2011 increased from 11% over the same period of the prior year primarily due to increases in variable franchise sales commissions related to agreements executed with developer incentives in prior periods, an increase in quality assurance inspection fees as well as higher variable management incentive compensation.

Marketing and Reservations: The Company’s franchise agreements require the payment of franchise fees, which include marketing and reservation system fees. The fees, which are primarily based on a percentage of the franchisees’ gross room revenues, are used exclusively by the Company for expenses associated with providing franchise services such as central reservation systems, national marketing and media advertising. The Company is contractually obligated to expend the marketing and reservation system fees it collects from franchisees in accordance with the franchise agreements; as such, no income or loss to the Company is generated.

Total marketing and reservation system fees were $63.0 million and $58.8 million for the three months ended March 31, 2011 and 2010, respectively. Depreciation and amortization attributable to marketing and reservation activities was $3.2 million and $2.7 million for the three month periods ended March 31, 2011 and 2010, respectively. Interest expense attributable to marketing and reservation activities was approximately $1.0 million and $0.1 million for the three month periods ended March 31, 2011 and 2010, respectively. As of March 31, 2011 and December 31, 2010, the Company’s balance sheet includes a receivable of $54.7 million and $42.5 million, respectively from cumulative marketing and reservation expenses incurred in excess of cumulative marketing and reservations system fee revenues earned. These receivables are recorded as an asset in the financial statements as the Company has the contractual authority to require that the franchisees in the system at any given point repay the Company for any deficits related to marketing and reservation activities. The Company’s current franchisees are legally obligated to pay any assessment the Company imposes on its franchisees to obtain reimbursement of such deficit regardless of whether those constituents continue to generate gross room revenue and whether or not they joined the system following the deficit’s occurrence. The Company has no present intention to accelerate repayment of the deficit from current franchisees. Conversely, cumulative marketing and reservation system

fees not expended are recorded as a payable in the financial statements and are carried over to the next fiscal year and expended in accordance with the franchise agreements.

Our ability to recover these receivables may be adversely impacted by certain factors, including, among others, declines in the ability of our franchisees to generate revenues at properties they franchise from us, lower than expected franchise system growth of certain brands and/or lower than expected international franchise system growth. An extended period of occupancy or room rate declines or a decline in the number of hotel rooms in our franchise system could result in the generation of insufficient funds to recover marketing and reservation advances as well as meet the ongoing marketing and reservation needs of the overall system.

Other Income and Expenses, Net: Other income and expenses, net, declined $4.6 million to $3.8 million for the three months ended March 31, 2011 compared to income of $0.8 million in the same period of the prior year primarily due to the following items.

Interest expense increased from $0.6 million for the three months ended March 31, 2010 to $3.2 million for the same period of 2011 due to the issuance of the Company’s $250 million senior notes with an effective rate of 6.19% on August 25, 2010. The proceeds were utilized to repay outstanding borrowings under the Company’s $350 million revolving line of credit which had an effective interest rate of approximately 0.7%.

Other gains and losses declined $2.1 million from income of $1.1 million to a loss of $1.0 million for the three months ended March 31, 2011. The loss in the current period primarily reflects a $1.8 million loss on assets held for sale resulting from the Company reducing the carrying amount of a parcel of land held for sale to its estimated fair value.

Other gains and losses also reflect the fluctuations in the fair value of investments held in the Company’s non-qualified employee benefit plans. Other gains and losses increased $0.8 million due to fluctuations in these investments during both the three months ended March 31, 2011 and March 31, 2010. As discussed in the accompanying critical accounting policies, the Company sponsors two non-qualified retirement and savings plans: the Non-Qualified Plan and the EDCP plan. The fair value of the Non-Qualified Plan investments increased $0.3 million during both of the three months ended March 31, 2011 and 2010. The fair value of the Company’s investments held in the EDCP plan increased $0.4 million during the three months ended March 31, 2011 compared to an increase in fair value of $0.5 million during the same period of the prior year.

The Company accounts for the Non-Qualified Plan in accordance with accounting for deferred compensation arrangements when investments are held in a rabbi trust and invested. As a result, the Company also recognizes compensation expense in SG&A related to changes in the fair value of investments held in the Non-Qualified Plan, excluding investments in the Company’s stock. Therefore, during both of the three months ended March 31, 2011 and 2010, the Company’s SG&A expense was increased by $0.4 million due to the increase in the fair value of these investments.

Income Taxes: The effective income tax rate was 28.2% and 35.9% for the three months ended March 31, 2011 and March 31, 2010, respectively.

The effective income tax rates for the three months ended March 31, 2011 differed from the U.S. federal statutory rate of 35% primarily due to a $1.4 million adjustment that reduced our current federal taxes payable. The Company believes that this adjustment is not material to its financial statements for prior annual or interim periods, the three months ended March 31, 2011 or the Company’s expected annual results for the year ended December 31, 2011. The rate was also impacted by the effect of foreign operations, partially offset by state income taxes.

Net income: Net income for the three months ended March 31, 2011 decreased by $0.1 million to $15.7 million from $15.8 million in the same period of the prior year. Adjusted net income, as adjusted for certain items described above, increased by $0.9 million to $16.9 million for the three months ended March 31, 2011 from $16.0 million for the same period of the prior year.

Diluted EPS: Diluted EPS were $0.26 for both the three months ended March 31, 2011 and 2010. Adjusted diluted EPS, which excludes certain items described above, totaled $0.28 for the three months ended March 31, 2011 compared to $0.27 for the same period of the prior year.

Liquidity and Capital Resources

Operating Activities

During the three months ended March 31, 2011, net cash used by operating activities totaled $5.2 million as compared to net cash provided by operating activities totaling $7.0 million for the same period of the prior year. The decline in cash flows from operating activities primarily reflects semi-annual interest payments on the Company’s senior notes which were issued in August 2010 are a payable on February 28^th and August 28^th, management incentive compensation payments and the timing of other working capital items.

Net cash advanced for marketing and reservations activities totaled $9.0 million and $10.9 million during the three months ended March 31, 2011 and 2010, respectively. Cash advances during the three months ended March 31, 2011 related primarily due to planned advertising and promotional cost spending in excess of fees collected and investments in information technology initiatives. Based on the current economic conditions, the Company expects marketing and reservation activities to be a net use of cash ranging between $2 million and $6 million in 2011.

Investing Activities

Cash utilized for investing activities totaled $5.6 million for the three months ended March 31, 2011 compared to a $6.3 million of cash for the three months ended March 31, 2010. The decline in cash utilized for investing activities was primarily due to lower capital expenditures than the prior year, partially offset by equity method investments and an increase in financing provided to franchisees. During the three months ended March 31, 2011 and 2010, capital expenditures totaled $1.8 million and $4.6 million, respectively. Capital expenditures for 2011 primarily include upgrades of system-wide property and yield management systems, upgrades to information systems infrastructure and the purchase of computer software and equipment.

The Company occasionally provides financing to franchisees for property improvements, hotel development efforts and other purposes. During the three months ended March 31, 2011 and 2010, the Company advanced $1.5 million and $0.5 million, respectively for these purposes. At March 31, 2011, the Company had commitments to extend an additional $7.0 million for these purposes provided certain conditions are met by its franchisees, of which $3.6 million is expected to be advanced in the next twelve months.

Financing Activities

Financing cash flows relate primarily to the Company’s borrowings, treasury stock purchases and dividends.

Debt

The Company may at any time prior to the final maturity date increase the amount of the Revolver by up to an additional $150 million to the extent that any one or more lenders commit to being a lender for the additional amount and certain other customary conditions are met. The Company may elect to have borrowings under the Revolver bear interest at (i) a base rate plus a margin ranging from 5 to 80 basis points based on the Company’s credit rating or (ii) LIBOR plus a margin ranging from 105 to 180 basis points based on the Company’s credit rating. In addition, the Revolver requires the Company to pay a quarterly facility fee on the full amount of the commitments under the Revolver (regardless of usage) ranging from 20 to 45 basis points based upon the credit rating of the Company.

Revolver imposes financial maintenance covenants requiring the Company to maintain a total leverage ratio of not more than 3.5 to 1.0 and an interest coverage ratio of at least 3.5 to 1.0. At March 31, 2011, the Company maintained a total leverage ratio of approximately 1.5x and an interest ratio coverage of approximately 16.4x. At March 31, 2011, the Company was in compliance with all covenants under the Revolver.

The proceeds of the Revolver are used for general corporate purposes, including working capital, debt repayment, stock repurchases, dividends, investments and other permitted uses. As of March 31, 2011, the Company had $8.1 million of revolving loans outstanding pursuant to the Revolver.

The Company may redeem the Senior Notes at its option at a redemption price equal to the greater of (a) 100% of the principal amount of the notes to be redeemed and (b) the sum of the present values of the remaining scheduled principal and interest payments from the redemption date to the date of maturity discounted to the redemption date on a semi-annual basis at the Treasury rate, plus 45 basis points.

As a result of the issuance of the Senior Notes in August 2010 and the Revolver in February 2011, the Company’s borrowing costs have increased as the Company’s Old Revolver carried an interest rate of LIBOR plus approximately 50 basis points which has been lower than the effective rate of the Senior Notes and well as the borrowings under the Revolver.

Dividends

The Company currently maintains the payment of a quarterly dividend on its common shares outstanding, however, the declaration of future dividends are subject to the discretion of our board of directors. On February 21, 2011, the Company’s board of directors declared a cash dividend of $0.185 per share (or approximately $11.0 million in the aggregate), which was paid on April 15, 2011 to shareholders of record as of April 1, 2011. The Company’s quarterly dividend rate remained unchanged from the previous quarterly declaration. We expect that cash dividends will continue to be paid in the future, subject to future business performance, economic conditions, changes in tax regulations and other matters. Based on our present dividend rate and outstanding share count, aggregate annual dividends for 2011 would be approximately $44.0 million.

Share Repurchases

During the three months ended March 31, 2011, the Company repurchased no shares of its common stock under the share repurchase program. Since the program’s inception through March 31, 2011, we have repurchased 43.2 million shares (including 33.0 million prior to the two-for-one stock split effected in October 2005) of common stock at a total cost of $1.0 billion. Considering the effect of the two-for-one stock split, the Company has repurchased 76.2 million shares at an average price of $13.35 per share through March 31, 2011. At March 31, 2011 the Company had approximately 3.6 million shares remaining under the current stock repurchase authorization. Upon completion of the current authorization, our board of directors will evaluate the advisability of additional share repurchases.

Other items

Our Board previously authorized us to enter into programs which permit us to offer financing, investment and guaranty support to qualified franchisees as well as to acquire and resell real estate to incent franchise development for certain brands in top markets. Recent market conditions have resulted in an increase in opportunities to incentivize development under these programs. Over the next several years, we expect to continue to deploy capital opportunistically pursuant to these programs to promote growth of our emerging brands. The amount and timing of the investment in these programs will be dependent on market and other conditions. Our current expectation is that our annual investment in these programs will range from $20 million to $40 million. Notwithstanding these programs, the Company expects to continue to return value to its shareholders through a combination of share repurchases and dividends, subject to market and other conditions.

Approximately $72.3 million of the Company’s cash and cash equivalents at March 31, 2011 pertains to undistributed earnings of the Company’s consolidated foreign subsidiaries. Since the Company’s intent is for such earnings to be reinvested by the foreign subsidiaries, the Company has not provided additional United States income taxes on these amounts. While the Company has no intention to utilize these cash and cash equivalents in its domestic operations, any change to this policy would result in the Company incurring additional United States income taxes on any amounts utilized domestically.

At March 31, 2011 approximately $2.4 million of termination benefits remained to be paid and the Company expects $2.0 million of these benefits to be paid in the next twelve months. In addition, the Company expects to satisfy approximately $2.6 million of deferred compensation and retirement plan obligations during the next twelve months.

The Company believes that cash flows from operations and available financing capacity are adequate to meet the expected future operating, investing and financing needs of the business.

Critical Accounting Policies

Our accounting policies comply with principles generally accepted in the United States. We have described below those policies that we believe are critical or require the use of complex judgment or significant estimates in their application. Additional discussion of these policies is included in Note 1 to our consolidated financial statements as of and for the year ended December 31, 2010 included in our Annual Report on Form 10-K.

Revenue Recognition.

We recognize continuing franchise fees, including royalty, marketing and reservations system fees, when earned and receivable from our franchisees. Franchise fees are typically based on a percentage of gross room revenues of each franchisee. Our estimate of the allowance for uncollectible royalty fees is charged to SG&A expense and to marketing and reservation expenses for uncollectible marketing and reservation system fees.

Initial franchise and relicensing fees are recognized, in most instances, in the period the related franchise agreement is executed because the initial franchise and relicensing fees are non-refundable and the Company is not required to provide initial services to the franchisee prior to hotel opening. We defer the initial franchise and relicensing fee revenue related to franchise agreements which include incentives until the incentive criteria are met or the agreement is terminated, whichever occurs first.

The Company may also enter into master development agreements (“MDAs”) with developers that grant limited exclusive development rights and preferential franchise agreement terms for one-time, non-refundable fees. When these fees are not contingent upon the number of agreements executed under the MDA, the Company recognizes the up-front fees over the MDA’s contractual life. Fees that are contingent upon the execution of franchise agreements under the MDA are recognized upon execution of the franchise agreement.

The Company recognizes procurement services revenues from qualified vendors when the services are performed or the product delivered, evidence of an arrangement exists, the fee is fixed and determinable and collectability is probable. We defer the recognition of procurement services revenues related to certain upfront fees and recognize them over a period corresponding to the Company’s estimate of the life of the arrangement.

Marketing and Reservation Revenues and Expenses.

The Company’s franchise agreements require the payment of certain marketing and reservation system fees, which are used exclusively by the Company for expenses associated with providing franchise services such as national marketing, media advertising, central reservation systems and technology services. The Company is contractually obligated to expend the marketing and reservation system fees it collects from franchisees in accordance with the franchise agreements; as such, no income or loss to the Company is generated. In accordance with our contracts, we include in marketing and reservation expenses an allocation of costs for certain activities, such as human resources, facilities, legal, accounting, etc., required to carry out marketing and reservation activities.

The Company records marketing and reservation revenues and expenses on a gross basis since the Company is the primary obligor in the arrangement, maintains the credit risk, establishes the price and nature of the marketing or reservation services and retains discretion in supplier selection. In addition, net advances to and repayments from the franchise system for marketing and reservation activities are presented as cash flows from operating activities.

Marketing and reservation system fees not expended in the current year are carried over to the next fiscal year and expended in accordance with the franchise agreements. Shortfall amounts are similarly recovered in subsequent years. Cumulative excess or shortfall amounts from the operation of these programs are recorded as a marketing and reservation system fee payable or receivable. Under the terms of the franchise agreements, the Company may advance capital as necessary for marketing and reservation activities and recover such advances through future fees. Our current assessment is that the credit risk associated with the marketing and reservation system fees receivable is mitigated due to our contractual right to recover these amounts from a large geographically dispersed group of franchisees. However, our ability to recover these receivables may be adversely impacted by certain factors, including, among others, declines in the ability of our franchisees to generate revenues at properties they franchise from us, lower than expected franchise system growth of certain brands and/or lower than expected international franchise system growth. An extended period of occupancy or room rate declines or a decline in the number of hotel rooms in our franchise system could result in the generation of insufficient funds to recover marketing and reservation advances as well as meet the ongoing marketing and reservation needs of the overall system.

The Company evaluates the receivable for marketing and reservation costs in excess of cumulative marketing and reservation system fees earned on a periodic basis for collectability. The Company will record an allowance when, based on current information and events, it is probable that we will be unable to collect all amounts due for marketing and reservation activities according to the contractual terms of the franchise agreements. The receivables are considered to be uncollectible if the expected net, undiscounted cash flows from marketing and reservation activities are less than the carrying amount of the asset.

Choice Privileges is our frequent guest incentive marketing program. Choice Privileges enables members to earn points based on their spending levels with our franchisees and, to a lesser degree, through participation in affiliated partners’ programs, such as those offered by credit card companies. The points, which we accumulate and track on the members’ behalf, may be redeemed for free accommodations or other benefits.

We provide Choice Privileges as a marketing program to franchised hotels and collect a percentage of program members’ room revenue from franchises to operate the program. Revenues are deferred in an amount equal to the estimated fair value of the future redemption obligation. A third-party actuary estimates the eventual redemption rates and point values using various actuarial methods. These judgmental factors determine the required liability attributable to outstanding points. Upon redemption of points, the Company recognizes the previously deferred revenue as well as the corresponding expense relating to the cost of the awards redeemed. Revenues in excess of the estimated future redemption obligation are recognized when earned to reimburse the Company for costs incurred to operate the program, including administrative costs, marketing, promotion and performing member services. Costs to operate the program, excluding estimated redemption values, are expensed when incurred.

Valuation of Intangibles and Long-Lived Assets

The Company evaluates the potential impairment of property and equipment and other long-lived assets, including franchise rights and other definite-lived intangibles, on an annual basis or whenever an event or other circumstances indicates that we may not be able to recover the carrying value of the asset. Recoverability is measured based on net, undiscounted expected cash flows. Assets are considered to be impaired if the net, undiscounted expected cash flows are less than the carrying amount of the assets. Impairment charges are recorded based upon the difference between the carrying value and the fair value of the asset. Significant management judgment is involved in developing these projections, and they include inherent uncertainties. If different projections are used in the current period, the balances for non-current assets could be materially impacted. Furthermore, if management uses different projections or if different conditions occur in future periods, future-operating results could be materially impacted.

The Company evaluates the impairment of goodwill and trademarks with indefinite lives on an annual basis, or during the year if an event or other circumstance indicates that we may not be able to recover the carrying amount of the asset. Since the Company has one reporting unit, the fair value of the Company’s net assets is used to determine if goodwill may be impaired. Indefinite life trademarks are considered to be impaired if the net, undiscounted expected cash flows associated with the trademark are less than their carrying amount.

Loan Loss Reserves

Mezzanine, and Other Notes Receivables

The Company has provided financing to franchisees in support of the development of properties in key markets. The Company expects the owners to repay the loans in accordance with the loan agreements, or earlier as the hotels mature and capital markets permit. The Company estimates the collectability and records an allowance for loss on its mezzanine and other notes receivable when recording the receivables in the Company’s financial statements. These estimates are updated quarterly based on available information.

Forgivable Notes Receivable

From time to time, the Company provides unsecured financing to franchisees for property improvements and other purposes in the form of forgivable promissory notes. The notes bear market interest rates, and are forgiven and amortized over that time period if the franchisee remains in the system in good standing.

Franchisees are not required to repay the forgivable notes provided that the respective hotels remain in the system and in good standing throughout the term of their note. The Company fully reserves all defaulted notes in addition to recording a reserve on the estimated uncollectible portion of the remaining notes. For those notes not in default, the Company calculates an allowance for losses and determines the ultimate collectability on these forgivable notes based on the historical default rates for those unsecured notes that are not forgiven but are required to be repaid. The Company records bad debt expense in SG&A expenses in the accompanying consolidated statements of income in the quarter when the note is deemed uncollectible.

Stock Compensation.

The Company’s policy is to recognize compensation cost related to share-based payment transactions in the financial statements based on the fair value of the equity or liability instruments issued. Compensation expense related to the fair value of share-based awards is recognized over the requisite service period based on an estimate of those awards that will

ultimately vest. The Company estimates the share-based compensation expense for awards that will ultimately vest upon inception of the grant and adjusts the estimate of share-based compensation for those awards with performance and/or service requirements that will not be satisfied so that compensation cost is recognized only for awards that ultimately vest.

Income Taxes.

Income taxes are recorded using the asset and liability method of accounting for income taxes. Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A valuation allowance is provided for deferred tax assets if it is more likely than not such assets will be unrealized. Deferred U.S. income taxes have not been recorded for temporary differences related to investments in certain foreign subsidiaries and corporate affiliates. The temporary differences consist primarily of undistributed earnings that are considered permanently reinvested in operations outside the U.S. If management’s intentions change in the future, deferred taxes may need to be provided.

With respect to uncertain income tax positions, a tax liability is now recorded in full when management determines that the position does not meet the more likely than not threshold of being sustained on examination. A tax liability may also be recognized for a position that meets the more likely than not threshold, based upon management’s assessment of the position’s probable settlement value. The Company records interest and penalties on unrecognized tax benefits in the provision for income taxes.

Pension, Profit Sharing and Incentive Plans

the accompanying statements of income. The Company recorded investment gains during the three months ended March 31, 2011 and 2010 of $0.3 million for both periods. In addition, the Non-Qualified Plan held shares of the Company’s common stock with a market value of $0.9 million at both March 31, 2011 and December 31, 2010.

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 diversified investments held in the Non-Qualified Plan and EDCP include investments primarily in equity and debt securities, and cash and cash equivalents.

New Accounting Standards

See Footnote No. 1 “Recently Adopted Accounting Guidance” of the Notes to our Financial Statements for information related to our adoption of new accounting standards in 2011 and for information on our anticipated adoption of recently issued accounting standards.

FORWARD-LOOKING STATEMENTS

Certain matters discussed in this quarterly report constitute forward-looking statements within the meaning of federal securities law. Generally, our use of words such as “expect,” “estimate,” “believe,” “anticipate,” “will,” “forecast,” “plan,” “project,” “assume” or similar words of futurity identify statements that are forward-looking and that we intend to be included within the Safe Harbor protections provided by Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934. Such forward-looking statements are based on management’s current beliefs, assumptions and expectations regarding future events, which in turn are based on information currently available to management. Such statements may relate to projections of the Company’s revenue, earnings and other financial and operational measures, Company debt levels, payment of stock dividends, and future operations or other matters. We caution you not to place undue reliance on any forward-looking statements, which are made as of the date of this quarterly report. Forward-looking statements do not guarantee future performance and involve known and unknown risks, uncertainties and other factors.

Several factors could cause actual results, performance or achievements of the Company to differ materially from those expressed in or contemplated by the forward-looking statements. Such risks include, but are not limited to, changes to general, domestic and foreign economic conditions; operating risks common in the lodging and franchising industries; changes to the desirability of our brands as viewed by hotel operators and customers; changes to the terms or termination of our contracts with franchisees; our ability to keep pace with improvements in technology utilized for reservations systems and other operating systems; fluctuations in the supply and demand for hotels rooms; and our ability to manage effectively our indebtedness, among other factors. These and other risk factors are discussed in detail in Item 1A “Risk Factors” of the Company’s Form 10-K for the year ended December 31, 2010, filed with the Securities and Exchange Commission on March 1, 2011. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except as may be required by law.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is exposed to market risk from changes in interest rates and the impact of fluctuations in foreign currencies on the Company’s foreign investments and operations. The Company manages its exposure to these market risks through the monitoring of its available financing alternatives including in certain circumstances the use of derivative financial instruments. We are also subject to risk from changes in debt and equity prices from our non-qualified retirement savings plan investments in debt securities and common stock, which have a carrying value of $24.7 million and $23.4 million at March 31, 2011 and December 31, 2010, respectively which we account for as trading securities. The Company will continue to monitor the exposure in these areas and make the appropriate adjustments as market conditions dictate.

At March 31, 2011 and December 31, 2010, the Company had $8.1 million and $0.2 million of debt with variable interest rates outstanding at a weighted average effective interest rate of 1.7% and 0.7%, respectively. A hypothetical change of 10% in the Company’s effective interest rate from March 31, 2011 levels would increase or decrease interest expense by approximately fourteen thousand dollars. The Company expects to refinance its long-term debt obligations prior to their scheduled maturities.

The Company does not presently have any derivative financial instruments.

ITEM 4.

CONTROLS AND PROCEDURES

The Company has a disclosure review committee whose membership includes the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), among others. The CEO and CFO consider the disclosure review committee’s procedures in performing their evaluations of the Company’s disclosure controls and procedures (as such term is defined in Rule 13a-15(e)

under the Securities Exchange Act of 1934) and in assessing the accuracy and completeness of the Company’s disclosures.

An evaluation was performed under the supervision and with the participation of the Company’s CEO and CFO of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on that evaluation, the Company’s management, including the CEO and CFO, concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2011.

There has been no change in the Company’s internal controls over financial reporting that occurred during the quarter ended March 31, 2011, that materially affected, or is reasonably likely to materially affect the Company’s internal controls over financial reporting.

PART II. OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

In December 2010, a class action lawsuit was filed against the Company in the United States District Court for the Central District of Florida by several current and former franchisees. The lawsuit relates to certain Company practices in connection with its Choice Privileges guest rewards program. The plaintiffs’ complaint alleges breach of contract, unjust enrichment and unfair and deceptive trade practices under Florida law.

On April 4, 2011, the Company’s Motion to Dismiss or for Stay Pending Arbitration was granted by the court and the action was stayed pending arbitration. The Company, thus far, is unaware of any arbitration actions filed by the plaintiffs.

ITEM 1A.

RISK FACTORS

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2010, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Issuer Purchases of Equity Securities

The following table sets forth purchases and redemptions of Choice Hotels International, Inc. common stock made by the Company during the three months ended March 31, 2011:


Month Ending	Total Number of Shares Purchased or Redeemed		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs^(1),(2)		Maximum Number of Shares that may yet be Purchased Under the Plans or Programs, End of Period
January 31, 2011		—	$	—		—		3,570,460
February 28, 2011		50,681		39.82		—		3,570,460
March 31, 2011		4,614		38.86		—		3,570,460

Total		55,295	$	39.74		—		3,570,460

⁽¹⁾	The Company’s share repurchase program was initially approved by the board of directors on June 25, 1998. The program has no fixed dollar amount or expiration date.

⁽²⁾	During the three months ended March 31, 2011, the Company redeemed 55,295 shares of common stock from employees to satisfy minimum tax-withholding requirements related to the vesting of restricted stock grants. These redemptions were not part of the board repurchase authorization.

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.

(REMOVED AND RESERVED)

ITEM 5.

OTHER INFORMATION

None.

ITEM 6.

EXHIBITS

Exhibit Number and Description


Exhibit Number		Description

3.01(a)		Restated Certificate of Incorporation of Choice Hotels Franchising, Inc. (renamed Choice Hotels International, Inc.)

3.02(b)		Amended and Restated Bylaws of Choice Hotels International, Inc.

10.01(c)		Senior Unsecured Revolving Credit Agreement, dated February 24, 2011 among Choice Hotels International, Inc., Wells Fargo Bank National Association, as administrative agent and a syndicate of lenders.

31.1*		Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) or Rule 15d-14(a)

31.2*		Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) or Rule 15d-14(a)

32*		Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350

101*		The following statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2011, filed on May 9, 2011, formatted in XBRL: (i) Consolidated Statements of Income, (ii) Consolidated Balance Sheets, (iii) Consolidated Statements of Cash Flows, (iv) Notes to Financial Statements, tagged as blocks of text.

*	Filed herewith

(a)	Incorporated by reference to the identical document filed as an exhibit to Choice Hotels International, Inc.’s Registration Statement on Form S-4, filed August 31, 1998 (Reg. No. 333-62543).

(b)	Incorporated by reference to the identical document filed as an exhibit to Choice Hotels international, Inc.’s Current Report on Form 8-K filed February 16, 2010.

(c)	Incorporated by reference to the identical document filed as an exhibit to Choice Hotels International, Inc.’s Current Report on Form 8-K filed March 2, 2011.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.