-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OIpSVbChZLNGUI7jO/zVhKPXwVwQe/rd4cEEWp/w0pwjbFUM8FZNRpezVnL1cjcS Hgt3ofVmGKhmT6DUwMmyfg== 0000928385-97-000654.txt : 19970415 0000928385-97-000654.hdr.sgml : 19970415 ACCESSION NUMBER: 0000928385-97-000654 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970228 FILED AS OF DATE: 19970414 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CHOICE HOTELS INTERNATIONAL INC CENTRAL INDEX KEY: 0001018146 STANDARD INDUSTRIAL CLASSIFICATION: HOTELS & MOTELS [7011] IRS NUMBER: 521985619 STATE OF INCORPORATION: DE FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-11915 FILM NUMBER: 97579821 BUSINESS ADDRESS: STREET 1: 10750 COLUMBIA PIKE CITY: SILVER SPRING STATE: MD ZIP: 20901 BUSINESS PHONE: 3015935600 FORMER COMPANY: FORMER CONFORMED NAME: CHOICE HOTELS HOLDINGS INC DATE OF NAME CHANGE: 19960705 10-Q 1 FORM 10-Q 4/10/9:00 a.m. 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 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED FEBRUARY 28, 1997 COMMISSION FILE NO. 1-11915 CHOICE HOTELS INTERNATIONAL, INC. 10750 COLUMBIA PIKE SILVER SPRING, MD. 20901 (301) 979-5000 Delaware 53-1985619 ------------------------ ------------------------- (STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NUMBER) ------------------------------------------- (Former name, 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 ----- ----- SHARES OUTSTANDING CLASS AT FEBRUARY 28, 1997 - ----------------------- ------------------------ Common Stock, $0.01 par value per share 62,803,711 ---------- ================================================================================ CHOICE HOTELS INTERNATIONAL, INC. INDEX ----- PAGE NO. -------- PART I. FINANCIAL INFORMATION: Consolidated Balance Sheets - February 28, 1997 (Unaudited) and May 31, 1996 3 Consolidated Statements of Income - Three months ended February 28, 1997 and February 29, 1996 (Unaudited) and nine months ended February 28, 1997 and February 29, 1996 (Unaudited) 5 Consolidated Statements of Cash Flows - Nine months ended February 28, 1997 and February 29, 1996 (Unaudited) 6 Notes to Consolidated Financial Statements (Unaudited) 7 Management's Discussion and Analysis of Results of Operations and Financial Condition 9 PART II. OTHER INFORMATION AND SIGNATURE 14 2 PART I. FINANCIAL INFORMATION CHOICE HOTELS INTERNATIONAL, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
FEBRUARY 28, 1997 MAY 31, ASSETS (UNAUDITED) 1996 ----------- -------- CURRENT ASSETS Cash and cash equivalents $ 3,331 $ 4,142 Receivables (net of allowance for doubtful accounts of $7,059 and $4,825, respectively) 27,491 30,619 Inventories 666 757 Prepaid expenses 2,005 3,003 Current deferred income tax benefit 1,776 1,266 Other assets 1,471 1,215 -------- -------- Total current assets 36,740 41,002 PROPERTY AND EQUIPMENT, AT COST, NET OF ACCUMULATED DEPRECIATION 339,800 299,527 GOODWILL, NET OF ACCUMULATED AMORTIZATION 61,137 59,839 LODGING FRANCHISE RIGHTS, NET OF ACCUMULATED AMORTIZATION 56,509 58,676 OTHER ASSETS 42,297 32,260 -------- -------- Total assets $536,483 $491,304 ======== ========
The accompanying notes are an integral part of these Consolidated Balance Sheets. 3 CHOICE HOTELS INTERNATIONAL, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
FEBRUARY 28, MAY 31, LIABILITIES & STOCKHOLDERS' EQUITY 1997 1996 ------------ --------- (UNAUDITED) CURRENT LIABILITIES Current portion long-term debt $ 595 $ 669 Accounts payable 37,928 24,473 Accrued expenses 12,607 21,656 Income taxes payable -- 1,810 -------- -------- Total current liabilities 51,130 48,608 -------- -------- MORTGAGES AND OTHER LONG-TERM DEBT 95,727 68,469 NOTES PAYABLE TO MANOR CARE, INC. 225,723 225,723 DEFERRED INCOME TAXES AND OTHER LIABILITIES 1,718 945 -------- -------- Total liabilities 374,298 343,745 -------- -------- STOCKHOLDERS' EQUITY Common stock 638 -- Additional paid-in-capital 178,507 -- Investment and advances from Manor Care, Inc. -- 149,309 Retained earnings 5,655 -- Cumulative translation adjustment (6,704) (1,750) Treasury stock, at cost, 1,048,124 shares (15,911) -------- -------- Total Stockholders' equity 162,185 147,559 -------- -------- Total liabilities & stockholders' equity $536,483 $491,304 ======== ========
The accompanying notes are an integral part of these Consolidated Balance Sheets. 4 CHOICE HOTELS INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED NINE MONTHS ENDED FEB 28, FEB 29, FEB 28, FEB 29, ------------------ ----------------- 1997 1996 1997 1996 ------- -------- -------- -------- REVENUES Franchise operations $50,986 $44,306 $185,206 $159,213 Hotel operations 39,703 33,551 134,306 107,957 ------- ------- -------- -------- Total revenues 90,689 77,857 319,512 267,170 ------- ------- -------- -------- OPERATING EXPENSES Franchise operations 27,841 22,761 92,413 78,721 Hotel operations 29,018 26,815 90,338 79,588 Selling, general and administrative 13,728 12,566 46,053 35,957 Depreciation and amortization 7,640 6,419 22,042 19,161 ------- ------- -------- -------- Total operating expenses 78,227 68,561 250,846 213,427 ------- ------- -------- -------- INCOME BEFORE OTHER EXPENSES AND INCOME TAXES 12,462 9,296 68,666 53,743 ------- ------- -------- -------- OTHER EXPENSES Interest expense on Notes Payable to Manor Care, Inc. 5,079 5,079 15,236 14,595 Other interest and expenses, net 1,335 1,339 3,370 3,746 ------- ------- -------- -------- Total other expenses 6,414 6,418 18,606 18,341 ------- ------- -------- -------- INCOME BEFORE INCOME TAXES 6,048 2,878 50,060 35,402 PROVISION FOR INCOME TAXES 2,600 1,487 20,600 14,966 ------- ------- -------- -------- NET INCOME $ 3,448 $ 1,391 $ 29,460 $ 20,436 ======= ======= ======== ======== Pro forma weighted average common shares outstanding 63,339 62,644 63,116 62,592 ======= ======= ======== ======== Pro forma earnings per share $0.05 $0.02 $0.47 $0.33 ======= ======= ======== ========
The accompanying notes are an integral part of these Consolidated Statements of Income. 5 CHOICE HOTELS INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED, IN THOUSANDS) NINE MONTHS ENDED
FEBRUARY 28, FEBRUARY 29, 1997 1996 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 29,460 $ 20,436 Reconciliation of net income to net cash provided by operating activities: Depreciation and amortization 22,064 19,171 Provision for bad debts 2,773 1,945 Loss(Gain) on asset sale 220 (528) Increase in deferred taxes 2,795 182 Changes in assets and liabilities (excluding sold hotels and acquisitions) Change in receivables 355 (5,027) Change in inventories and other current assets 2,886 686 Change in current liabilities 4,184 (234) Change in income taxes payable (3,446) (240) Change in other liabilities -- (1,409) -------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES 61,291 34,982 -------- -------- CASH FLOW FROM INVESTING ACTIVITIES Investment in property and equipment (58,726) (28,148) Acquisition of operating hotels (5,550) (49,879) Proceeds from asset sales 2,742 3,689 Purchase of minority interest (2,494) (27,367) Other items, net (11,659) (1,246) -------- -------- NET CASH UTILIZED BY INVESTING ACTIVITIES (75,687) (102,951) -------- -------- CASH FLOW FROM FINANCING ACTIVITIES Proceeds from mortgages and other long-term debt 78,802 -- Principal payments of debt (51,640) (1,985) Issuance of common stock 3,371 -- Purchases of treasury stock (15,689) -- Proceeds from Notes Payable to Manor Care, Inc. -- 27,201 Cash transfers (to) from Manor Care, Inc., net (1,259) 42,221 -------- -------- NET CASH PROVIDED BY FINANCING ACTIVITIES 13,585 67,437 -------- -------- Net change in cash and cash equivalents (811) (532) Cash and cash equivalents, beginning of period 4,142 2,088 -------- -------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 3,331 $ 1,556 ======== ========
The accompanying notes are an integral part of these Consolidated Statements of Cash Flows. 6 CHOICE HOTELS INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. The accompanying consolidated financial statements of Choice Hotels International, Inc. and subsidiaries (the "Company") have been prepared by the Company without audit. Certain information and footnote disclosures normally included in financial statements presented in accordance with generally accepted accounting principles have been condensed or omitted. The Company believes the disclosures made are adequate to make the information presented not misleading. The consolidated financial statements should be read in conjunction with the consolidated financial statements for the fiscal year ended May 31, 1996 and notes thereto included in the Company's Form 10 Registration Statement, including the Information Statement, dated October 15, 1996. Certain reclassifications have been made to the prior year amounts to conform to current year presentation. In the opinion of the Company, the accompanying unaudited consolidated financial statements reflect all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position of Choice Hotels International, Inc. and subsidiaries as of February 28, 1997 and May 31, 1996, and the results of operations for the three months and nine months ended February 28, 1997 and February 29, 1996, respectively, and cash flows for the nine months ended February 28, 1997 and February 29, 1996, respectively. Interim results are not necessarily indicative of fiscal year performance because of the impact of seasonal and short-term variations. 2. On March 7, 1996, Manor Care, Inc. ("Manor Care") announced its intention to proceed with the separation of its lodging business from its health care business via a spin-off of its lodging business (the "Distribution"). On September 30, 1996 the Board of Directors of Manor Care declared a special dividend to its shareholders of one share of common stock of the Company for each share of Manor Care Stock, and the Board set the Record Date and the Distribution Date. The Stock Distribution was made on November 1, 1996 to holders of record of Manor Care's Common Stock on October 10, 1996. The Distribution separated the lodging and health care businesses of Manor Care into two public corporations. The operations of the Company consist principally of the hotel franchise operations and the owned and managed hotel operations formerly conducted by Manor Care, Inc. directly or through its subsidiaries (the "Lodging Business"). On November 1, 1996, concurrent with the Distribution, the Company changed its name from Choice Hotels Holdings, Inc. to Choice Hotels International, Inc. and the Company's franchising subsidiary, formerly named Choice Hotels International, Inc., changed its name to Choice Hotels Franchising, Inc. 3. The consolidated financial statements present the financial position of the Company as of February 28, 1997 and May 31, 1996, the results of operations of the Company for the three months and nine months ended February 28, 1997 and February 29, 1996, respectively, and the cash flows of the Company for the nine months ended February 28, 1997 and February 29, 1996, respectively, as if it were formed as a separate entity of Manor Care conducting the Lodging Business through October 31, 1996. Manor Care, Inc.'s historical basis in the assets and liabilities of the Company has been carried over to the consolidated financial statements. All material intercompany transactions and balances between the Company and its subsidiaries have been eliminated. The Investments and advances from Manor Care, Inc. represents the cumulative income of the Company plus the net change in cash transferred between the Company and Manor 7 Care, Inc. At the Distribution, this amount was converted to the equity of the Company and allocated to common stock, additional paid-in capital and cumulative translation adjustment. The amounts recorded as Common stock, Additional paid-in capital and Cumulative translation adjustment were $631,000, $171,225,000, and $(5,449,000), respectively. The amounts so allocated were determined based, to some extent, on estimates as of the Distribution and may be subject to adjustment in the future. In the opinion of the Company, such adjustments, if any, will not have a material impact on the Company's financial position. The pro forma weighted average number of outstanding common shares is based on Manor Care's weighted average number of outstanding common shares. Pro forma income per share is computed by dividing net income by the pro forma weighted average number of outstanding common shares. 4. During August 1996, Manor Care, Inc. transferred to the Company title to a building, related land and furniture and fixtures with a book value of $4,917,000. The property will be converted to an operating hotel. 5. As of February 28, 1997, the Company had franchise agreements with 3,280 hotels with 278,364 rooms operating in 33 countries principally under the following brand names: Comfort, Clarion, Sleep, Quality, MainStay, Rodeway and Econo Lodge. The Company also owns and manages, under its seven principal brand names, 82 hotels with 11,017 rooms in 25 states, as well as in Germany, France and England. 8 CHOICE HOTELS INTERNATIONAL, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATING RESULTS AND FINANCIAL CONDITION On March 7, 1996, Manor Care announced the Distribution and, on September 30, 1996, the Board of Directors of Manor Care declared a dividend to effect the Distribution and set the Record Date and the Distribution Date. The Distribution was effected on November 1, 1996 to holders of record of Manor Care's Common Stock on October 10, 1996. The Distribution separated the lodging and health care businesses of Manor Care into two public corporations. Included herein are the historical results of operations of the Lodging Business for the three months and nine months ended February 28, 1997 and 1996, as if it had been a separate entity for all periods presented. The operations of the Company now consist principally of the hotel franchise operations and the owned and managed hotel operations formerly conducted by Manor Care directly or through Manor Care's subsidiaries. The Distribution resulted in the division of certain of Manor Care's existing corporate functions between the two resulting entities. Historically, Manor Care allocated to its operating units all corporate overhead expenses specifically identified with such units' operations. These allocations have been discontinued and responsibility for these support functions have been substantially assumed by the Company or are provided to the Company in accordance with various service agreements entered into in conjunction with the Distribution. The Company has established its own accounting, finance, cash management, human resources and legal departments separate from Manor Care's. Accordingly, selling, general and administrative expenses in the historical financial statements may not be indicative of such costs in the future. The Company expects selling, general and administrative expenses to increase $4.1 million for the fiscal year as a result of the additional functions now performed directly by the Company. The principal factors that affect the Company's results are: growth in the number of hotels; occupancies and room rates achieved by the Company's brands; the number and relative mix of owned, managed and franchised hotels; and the Company's ability to manage costs. The number of rooms at franchised properties and occupancies and room rates significantly affect the Company's results because franchise royalty fees are based upon room revenues at franchised hotels. Increases in franchise and management fee revenues have a disproportionate impact on the Company's operating margins due to the lower incremental costs associated with these revenues. COMPARISON OF RESULTS FOR THE THREE MONTHS ENDED FEBRUARY 28, 1997 AND FEBRUARY 29, 1996 - -------------------------------------------------------------------------------- Net income was $3.4 million for the quarter ended February 28, 1997, an increase of $2.1 million, or 147.9%, over the same period of the prior fiscal year. Revenues for the three months ended February 28, 1997 increased $12.8 million, or 16.5%, to $90.7 million compared to the quarter ended February 29, 1996. Operating expenses for the three months ended February 28, 1997 increased $9.7 million, or 14.1%, to $78.2 million, resulting in a $3.2 million, or 34.1%, increase in operating profits. Franchise revenues for the three months ended February 28, 1997 increased $6.7 million, or 15.1%, when compared to the same period of the prior fiscal year. Franchise revenues principally included base royalty fees, marketing funds assessments, fees charged for utilization of the Company's centralized hotel reservation system and product sales made to franchisees through the Company's group purchasing program. Except for product sales, fees and assessments are generally calculated based on a percentage of the franchise hotels' total revenues and reservation call volume. Revenues from franchise hotels increased as a result of increases in the number of franchise hotels and increased averaged daily room rates at 9 those hotels. The Company's domestic franchise hotels increased by 280 properties, or 11.5%, to 2,712 properties at February 28, 1997, from 2,432 properties as of February 29, 1996. Average daily room rates of domestic franchise hotels increased by approximately 5.1% for the quarter ended February 28, 1997 compared to the same period of the prior fiscal year while average occupancies of domestic franchise hotels were 48.5% and 46.1% for the three months ended February 28, 1997 and February 29, 1996, respectively. Revenues from hotel operations for the quarter ended February 28, 1997 increased $6.2 million, or 18.3%, compared to the same period of the prior fiscal year. The increase in revenue was principally achieved through the acquisition and development of 9 operating hotels containing over 1,000 rooms since February 29, 1996. Additionally, revenue improvements resulted from increases in overall occupancies and average daily room rates. Overall average occupancies increased to 59.9% for the quarter ended February 28, 1997 compared to 57.2% for the quarter ended February 29, 1996. Overall average daily room rates increased 10.2% for the three months ended February 28, 1997 compared to the same period of the prior fiscal year. These occupancy and rate increases were the result of marketing efforts in both new and existing markets as well as the general strengthening of lodging industry fundamentals. Franchise operating expenses consists of marketing and reservation expenses as well as the cost of products sold to licensees under the Company's group purchasing program for franchisees. Franchise operations expenses increased $5.1 million, or 22.3%, for the three months ended February 28, 1997 compared to the three months ended February 29, 1996. Increases in franchise marketing and reservation expenses accounted for $3.4 million of the increase in franchise operating expenses. Hotel operating expenses increased $2.2 million, or 8.2%, for the three months ended February 28, 1997 compared to the three months ended February 29, 1996. Hotel operating margins increased 6.8% to 26.9% for the quarter ended February 28, 1997 compared to the quarter ended February 29, 1996 primarily due to the stabilization of hotels acquired during the prior three years as well as operational efficiencies achieved at other owned hotels. Selling, general and administrative expenses increased $1.2 million, or 9.2%, for the three months ended February 28, 1997 compared to the same period last year. As a percent of total revenues, selling, general and administrative expenses decreased from 16.1% for the quarter ended February 29, 1996 to 15.1% for the quarter ended February 28, 1997. Selling, general and administrative expenses increased primarily as a result of additional costs and personnel assumed in conjunction with the Distribution and increases in corporate personnel added to support new company initiatives, offset by savings achieved by the consolidation of European operations in France. Depreciation and amortization expense increased 19.0% for the quarter ended February 28, 1997 compared to the same period last year. Increases were principally due to the acquisition, development and renovation of hotels built or acquired during the preceding year. COMPARISON OF RESULTS FOR THE NINE MONTHS ENDED FEBRUARY 28, 1997 AND FEBRUARY 29, 1996 - -------------------------------------------------------------------------------- Net income was $29.5 million for the nine months ended February 28, 1997, an increase of $9.0 million, or 44.2%, over the same period of the prior fiscal year. Revenues for the nine months ended February 28, 1997 increased $52.3 million, or 19.6%, to $319.5 million compared to the nine months ended February 29, 1996. Operating expenses for the nine months ended February 28, 1997 increased $37.4 million, or 17.5%, to $250.8 million, resulting in a $14.9 million, or 27.8%, increase in operating profits. 10 Franchise revenues for the nine months ended February 28, 1997 increased $25.9 million, or 16.3%, when compared to the same period of the prior fiscal year. The increase in franchise revenues was largely the result of fees generated from franchisees. Revenues from franchise hotels increased as a result of increases in the number of franchise hotels and increased averaged daily room rates at franchise hotels. The Company's domestic franchise hotels increased by 280 properties, or 11.5%, to 2,712 properties at February 28, 1997, from 2,432 properties as of February 29, 1996. Average daily room rates of domestic franchise hotels increased by approximately 4.8% for the nine months ended February 28, 1997 compared to the same period of the prior fiscal year. Average occupancies of domestic franchise hotels were 63.1% and 64.2% for the nine months ended February 28, 1997 and February 29, 1996, respectively. Revenues from hotel operations for the nine months ended February 28, 1997 increased $26.3 million, or 24.4%, compared to the same period of the prior fiscal year. The increase in revenue was principally achieved through the acquisition and development of 9 operating hotels containing over 1,000 rooms since February 29, 1996. Additionally, revenue improvements resulted from increases in overall occupancies and average daily room rates. Overall average occupancies increased to 67.9% for the nine months ended February 28, 1997 compared to 65.1% for the nine months ended February 29, 1996. Overall average daily room rates increased 6.6% for the nine months ended February 28, 1997 compared to the same period of the prior fiscal year. These occupancy and rate increases were the result of marketing efforts in both new and existing markets as well as the general strengthening of lodging industry fundamentals. Franchise operating expenses consists of marketing and reservation expenses as well as the cost of products sold to licensees under the Company's group purchasing program for franchisees. Franchise operations expenses increased $13.7 million, or 17.4%, for the nine months ended February 28, 1997 compared to the nine months ended February 29, 1996. Increases in franchise marketing and reservation expenses accounted for $10.2 million of the increase in franchise operating expenses. Hotel operating expenses increased $10.8 million, or 13.5%, for the nine months ended February 28, 1997 compared to the nine months ended February 29, 1996 principally due to the addition of 9 hotels. Approximately 6.5% of the increase is due to increased food and beverage costs. Hotel operating margins for the nine months ended February 28, 1997 increased to 32.7% from 26.3% for the nine months ended February 29, 1996 primarily due to the stabilization of hotels acquired during the prior three years as well as operational efficiencies achieved at other owned hotels. Selling, general and administrative expenses increased $10.1 million, or 28.1%, for the nine months ended February 28, 1997 compared to the same period last year. As a percent of total revenues, selling, general and administrative expenses increased from 13.5% for the nine months ended February 29, 1996 to 14.4% for the nine months ended February 28, 1997. The increase is due primarily to additional costs and personnel assumed in conjunction with the Distribution and increases in corporate personnel added to support new company initiatives, offset by savings achieved by the consolidation of European operations in France. Depreciation and amortization expense increased 15.0% for the nine months ended February 28, 1997 compared to the same period last year. Increases were principally due to acquisition, development and renovation of the hotels built or acquired during the preceding year. 11 LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- Historically, all cash received by the Company has been deposited in or combined with Manor Care's corporate funds as part of Manor Care's cash management system. Subsequent to the Distribution, the Company has maintained its own cash balances and has implemented an internal cash management system. The Company plans to realize cash proceeds from, or "monetize," its capital investment in Company-owned hotels at values that reflect their improved operating performance. The Company is exploring a variety of transactions, including, among others, asset securitization, sale/leasebacks, joint ventures with third parties, debt financing and asset divestitures. The Company intends to retain management and franchise agreements relating to these properties. The Company is structuring a transaction which involves the public offering of multiclass mortgage pass-through certificates by a special purpose entity, a wholly-owned subsidiary of Boulevard Motel Corp., a wholly-owned subsidiary of Choice, whose principal assets consist of thirty-six (36) hotels. The proceeds are expected to net approximately $110 million and will be used to repay the Notes Payable to Manor Care. Completion of this transaction is subject to market conditions. As of February 28, 1997, Notes Payable to Manor Care, Inc. totaling $225.7 million were outstanding. Interest on the amount of the loan will be payable quarterly at a rate of 9% per annum. The loan will mature on November 1, 1999 and may be prepaid in whole or in part, together with accrued interest, at the Company's option. If the loan is prepaid prior to November 1, 1997, the Company will be required to reimburse Manor Care on demand for any actual loss incurred or to be incurred by Manor Care (for the period up to and including November 1, 1997) in the redeployment of the funds released by any prepayment of the loan. The Notes Payable to Manor Care, Inc. are expected to be repaid with the proceeds from the planned monetization of the Company's owned hotels or with third-party financing. On October 30, 1996, the Company entered into a Competitive Advance and Multi- currency Revolving Credit Facility Agreement ("Credit Facility") with a group of banks. The Credit Facility provides for advances of amounts up to $100 million at varying market rates of interest, which can be fixed or variable at the Company's option, and is to be repaid within three years of the date of the agreement. During the month of November 1996, the Company repaid its portion of the Manor Care Multi-currency Credit Facility, $50.1 million, with the advances against the Company's newly acquired Credit Facility. On December 3, 1996, the Company announced that its Board of Directors authorized a repurchase of up to six million of its outstanding common shares. The Company expects to repurchase shares from time to time in the open market, subject to market conditions and limitations within the Company's Credit Facility. Any repurchased shares will be held in treasury and may be used for general corporate purchases, including future acquisitions and the Company's stock-based employee and director benefit plans. As of February 28, 1997, the Company had repurchased 1.05 million shares at a total cost of $15.7 million. Management believes cash flows from operations, third party financing sources and the proceeds from the planned monetization of the Company's owned hotels will be adequate to support on-going operations, capital expenditures, the stock repurchase program and meet debt service requirements for the foreseeable future. If the Company is unable to successfully implement its monetization strategy with respect to Company-owned hotels, the Company will need to secure additional sources of financing to repay the Notes Payable to Manor Care, Inc. on November 1, 1999. 12 Net cash provided by operating activities for the nine months ended February 28, 1997 was $61.3 million compared to $34.9 million provided by operating activities during the same period of the prior fiscal year. Improved cash flow resulted primarily from improved net income and improved working capital management. The Company's working capital ratio at February 28, 1997 and May 31, 1996 was .72 and .84, respectively. The Company attempts to minimize its investments in net current assets. The Company utilizes its Credit Facility to meet seasonal fluctuations in working capital requirements. The change in the working capital ratio primarily results from an increase in accounts payable and reduction in accounts receivable; the working capital ratio at February 29, 1996 was .83. Investment in property and equipment includes routine capital expenditures for renovation of the Company's owned hotels as well as new developments and enhancements of reservations and finance systems related to franchise operations. During the nine months ended February 28, 1997, capital expenditures totaled $58.7 million and related primarily to the development and construction of nine hotels and ongoing renovations at existing hotels. Long term debt and Notes Payable to Manor Care, Inc. totaled $321.5 million at February 28, 1997 and $294.2 million at May 31, 1996, an increase of $27.3 million. FORWARD-LOOKING INFORMATION IS SUBJECT TO RISK AND UNCERTAINTY - -------------------------------------------------------------- Certain statements contained in this Form 10-Q, including those in the section entitled "Management's Discussion and Analysis of Operating Results and Financial Condition," contain forward-looking information that involves risk and uncertainties, including the Company's plans to monetize its capital investment in owned hotels. Actual future results and trends may differ materially depending on a variety of factors discussed in the "Risk Factors" section included in the Company's Form 10 Registration Statement, including the Information Statement, dated October 15, 1996 including (a) the Company's success in implementing its business strategy, including its success in arranging financing where required, (b) the nature and extent of future competition, and (c) political, economic and demographic developments in countries where the Company does business or in the future may do business. 13 PART II OTHER INFORMATION ------------------------- ITEM 1. LEGAL PROCEEDINGS ----------------- The Company is not party to any litigation, other than routine litigation incidental to the business of the Company. None of such litigation, either individually or in the aggregate, is expected to be material to the business, financial condition or results of operations of the Company. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K -------------------------------- (a) Exhibits Exhibit 10.01 - Employment Agreement dated as of February 10, 1997 between the Company and Thomas Mirgon Exhibit 27.01 - Financial Data Schedule - February 28, 1997 (b) During the quarter ended February 28, 1997, no reports were filed on Form 8-K. 14 SIGNATURE Pursuant to the requirements of the Securities Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CHOICE HOTELS INTERNATIONAL, INC. Date: April 14, 1997 /s/ James A. MacCutcheon --------------- ----------------------------- By: James A. MacCutcheon Executive Vice President, Chief Financial Officer 15 EX-10.01 2 EMPLOYMENT AGREEMENT Exhibit 10.01 EMPLOYMENT AGREEMENT -------------------- This Agreement ("Agreement") dated this 10th day of February, 1997 among Choice Hotels International, Inc. the "Employer"), a Delaware corporation with principal offices at 10750 Columbia Pike, Silver Spring, Maryland 20901, and Thomas Mirgon ("Employee"), sets forth the terms and conditions governing the employment relationship between Employee and Employer. 1. Employment. During the term of this Agreement, as hereinafter defined, ---------- Employer hereby employs Employee as Senior Vice President -- Human Resources. Employee hereby accepts such employment upon the terms and conditions hereinafter set forth and agrees to faithfully and to the best of his ability perform such duties as are consistent with his position, and which may be from time to time assigned by Employer, its Board of Directors or its designees, such duties to be rendered at the principal office of Employer or at such other place or places as Employer shall require. Employee also agrees to perform his duties in accordance with policies established by Employer's Board of Directors, which may be changed from time to time. 2. Term. Subject to the provisions for termination hereinafter provided, ---- the term of this Agreement shall begin on March 3, 1997 ("Effective Date") and shall terminate five (5) years thereafter (the "Termination Date"). The Termination Date shall automatically be extended for successive one year terms unless either party gives written notice no less than nine (9) months prior to the Termination Date that it elects not to extend the Termination Date. 3. Compensation. For all services rendered by Employee under this ------------ Agreement during the term thereof, Employer shall pay Employee the following compensation: (a) Salary. A base salary of Two Hundred Thirty Thousand Dollars ------ ($230,000) per annum payable in accordance with Employee's standard payroll practices from time to time in effect. Such salary shall be reviewed on the first anniversary of the Effective Date and thereafter after the end of each fiscal year and may be increased at the discretion of Employer. (b) Incentive Bonus. Employee shall have the opportunity to earn up to a --------------- maximum of Fifty Percent (50%) per annum of the base salary set forth in subparagraph 3(a) above in Employer's bonus plans as adopted from time to time by Employer's Board of Directors. For the Employer's 1997 fiscal year, the Employee's bonus shall be calculated on a pro rata basis from the Effective Date. Additionally, the Employer shall pay the Employee a one- time cash payment of $50,000, payable in two installments, $25,000 payable within thirty days of the Effective Date and $25,000 payable within thirty days of the first anniversary of the Effective Date. (c) Automobile. Employer shall provide Employee with an allowance for ---------- automobile expenses of $850 per month subject to withholding of usual taxes. 1 (d) Stock Options. Employee shall be eligible to receive options under the ------------- Choice Hotels International, Inc. 1996 Long Term Incentive Plan ("LTIP"), or similar plan, to purchase Common Stock in accordance with the policy of the Choice Hotels Board of Directors as in effect from time to time. Additionally, Employer shall recommend to the Compensation Committee and to the Board of Directors at its next regularly scheduled meeting that the Employee be granted, as of the date of such Board approval, or as of his first day of employment with Employer, whichever is later, in accordance with the LTIP, 30,000 non-qualified stock options and 10,000 incentive stock options. Any such award shall be subject to (i) the approval of the Board of Directors and (ii) Employee executing Employer's standard stock option agreement in effect from time to time. Employee shall be eligible for additional grants in accordance with the policies specified in the LTIP. (e) Other Benefits. Employee shall, when eligible, be entitled to -------------- participate in all other fringe benefits accorded headquarters employees of similar status by Employer as are in effect from time to time excluding incentive compensation or other programs not designed for a senior executive. (f) Relocation Expenses. Employee shall be entitled to all benefits under -------------------- the Relocation Policy of Employer, as adopted in November 1996. Notwithstanding Section VII of the Relocation Policy, Employer will reimburse Employee for the reasonable costs of temporary lodging for a period of 90 days from the Effective Date and two return trips (economy class) per month until the earlier to occur of (i) the expiration of one (1) year from the Effective Date or (ii) the sale of Employee's home in Florida. Notwithstanding the foregoing, if, despite Employee's reasonable efforts, he is unable to sell his primary residence in Florida within 90 days from the Effective Date, Employer will reimburse Employee the reasonable costs of temporary lodging for up to an additional 90 days. 4. Extent of Services. Employee shall devote his full professional time, ------------------ attention, and energies to the business of Employer, and shall not during the term of this Agreement be engaged in any other business activity whether or not such business activity is pursued for gain, profit, or other pecuniary advantage; but the foregoing shall not be construed as preventing Employee from investing in the securities of a company that is listed on a national securities exchange or is regularly traded by national securities dealers, if such holdings are passive investments of one percent (1%) or less of the market value of the outstanding securities of such company and Employee does not hold positions of director, officer, employee or general partner. Employee warrants and represents that he has no contracts or obligations to others which would materially inhibit the performance of his services under this Agreement. 5. Disclosure and Use of Information. Employee recognizes and --------------------------------- acknowledges that Employer's and affiliates' present and prospective clients, franchises, contracts, development and marketing plans, acquisitions, operating data, policies and personnel, as they may exist from time to time, are valuable, special and unique assets of Employer's business. Throughout the term of this Agreement and for a period of two (2) years after its termination or expiration for whatever 2 cause or reason, Employee shall not directly or indirectly, or cause others to, (i) make use of or disclose to others any information relating to the business of Employer that has not otherwise been made public, including but not limited to Employer's present or prospective clients, franchises, contracts, development and marketing plans, acquisitions, operating data and policies, or (ii) without Employer's prior written consent, offer employment to or employ on behalf of Employee or any other person, any person who at any time is or has been within the preceding one (1) year an employee of Employer or any parent, subsidiary or affiliate of Employer or induce such person, directly or indirectly, to leave his or her employment. In the event of an actual or threatened breach by Employee of the provisions of this paragraph, Employer shall be entitled to injunctive relief restraining Employee from committing such breach or threatened breach. Nothing herein stated shall be construed as preventing Employer from pursuing any other remedies available to Employer for such breach or threatened breach, including the recovery of damages from Employee. 6. Notices. Any notice, request or demand required or permitted to be ------- given under this Agreement shall be in writing, and shall be delivered personally to the recipient or, if sent by certified or registered mail to his residence in the case of Employee, or to its principal office in the case of the Employer. Such notice shall be deemed given when delivered if personally delivered or within three days of mailing if sent certified or registered mail. 7. Elective Positions; Constructive Termination. -------------------------------------------- (a) Nothing contained in this Agreement is intended to nor shall be construed to abrogate, limit or affect the powers, rights and privileges of the Board of Directors or stockholders to remove Employee from the positions set forth in Section 1, with or without Cause (as defined in Section 10 below), during the term of this Agreement or to elect someone other than Employee to those positions, as provided by law and the By-Laws of Employer. (b) If Employee is Constructively Terminated (as defined in Section 7(b) below) it is expressly understood and agreed that Employee's rights under this Agreement shall in no way be prejudiced, Employee shall not, thereafter, be required to perform any services under this Agreement and Employee shall be entitled to receive compensation referred to in Section 3 above, except any rights to receive new stock option grants or rights to ungranted and unvested stock options. Employee upon removal shall not be required to mitigate damages but nevertheless shall be entitled to pursue other employment, and Employer shall be entitled to receive as an offset and thereby reduce its payment by the amount received by Employee from any other employment. As a condition to Employee receiving his compensation from Employer, Employee agrees to permit verification of his employment records and income tax returns by an independent attorney or accountant, selected by Employer but reasonably acceptable to Employee, who agrees to preserve the confidentiality of the information disclosed by Employee except to the extent required to permit Employer to verify the amount received by Employee from other active employment. Employer shall receive 3 credit for unemployment insurance benefits, social security insurance or like amounts actually received by Employee. (c) For purposes of this Section 7, "Constructively Terminated" shall mean removal or termination of Employee other than in accordance with Section 10, assignment of duties by the Employer inconsistent with Section 1, a change in Employee's title or the line of reporting set forth in Section 1 or any other material breach of this Agreement by Employer provided Employer shall be given fourteen days advance written notice of such claim of material breach, which written notice shall specify in reasonable detail the grounds of such claim of material breach. Except in the case of bad faith, Employer shall have an opportunity to cure the basis for Constructive Termination during the fourteen day period after written notice. 8. Waiver of Breach. The waiver of either party of a breach of any ---------------- provision of this Agreement shall not operate or be construed as a waiver of any subsequent breach. 9. Assignment. The rights and obligations of Employer under this ---------- Agreement shall inure to the benefit of and shall be binding upon the successors and assigns of Employer. The obligations of Employee hereunder may not be assigned or delegated. 10. Termination of Agreement. This Agreement shall terminate upon the ------------------------ following events and conditions: (a) Upon expiration of its term. (b) For Cause which means, refusal to carry out material duties and instructions of the Employer's Board of Directors consistent with the position, material dishonesty, a material violation or a willful breach of this Agreement, conviction of a felony involving moral turpitude, fraud or misappropriation of corporate funds or any willful acts or omissions inimical to or contrary to material policies of Employer not arbitrarily applied in the case of Employee. Employee shall be entitled to fourteen (14) days of advance written notice of any such termination, except where the basis for the termination constitutes conduct on the part of Employee involving dishonesty or bad faith, and in such latter cases, the termination shall be effective upon the sending of notice. Such written notice shall specify in reasonable detail the grounds for Cause. Except in the case of material dishonesty, bad faith, conviction of a felony or fraud, Employee shall have an opportunity to cure the basis for termination during the fourteen (14) day period after written notice. (c) Subject to state and federal laws, if Employee is unable to perform the essential functions of the services described herein for more than 180 days (whether or not consecutive) in any period of 365 consecutive days, Employer shall have the right to terminate this Agreement by written notice to Employee. In the event of such termination, all non-vested obligations of Employer to Employee pursuant to this Agreement shall terminate. 4 (d) In the event of Employee's death during the term of this Agreement, the Agreement shall terminate as of the date thereof. 11. Entire Agreement. This instrument contains the entire agreement of ---------------- the parties. It may be changed only by an agreement in writing signed by the party against whom enforcement of any waiver, change, modification, extension, or discharge is sought. This Agreement shall be governed by the laws of the State of Maryland, and any disputes arising out of or relating to this Agreement shall be brought and heard in any court of competent jurisdiction in the State of Maryland. 12. Board Approval. Notwithstanding any other provision to the --------------- contrary, this Agreement and all of its term are subject to the approval of the Employer's Board of Directors and shall not be valid, binding or enforceable prior to such approval being given. IN WITNESS WHEREOF, the parties have executed this Agreement on the date first set forth above. Employer: ATTEST: CHOICE HOTELS INTERNATIONAL, INC. __________________________ By: ______________________________ William R. Floyd Vice Chairman and Chief Executive Officer WITNESS: Employee: __________________________ __________________________________ Thomas Mirgon 5 EX-27 3 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEETS, THE CONSOLIDATED STATEMENTS OF INCOME AND THE CONSOLIDATED STATEMENTS OF CASH FLOWS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS AND THE NOTES THERETO. 1,000 9-MOS FEB-28-1997 JUN-01-1996 FEB-28-1997 3,331 0 34,550 7,059 666 36,740 408,153 68,353 536,483 51,130 322,045 0 0 638 161,547 536,483 0 319,512 0 250,846 18,606 2,773 18,606 50,060 20,600 29,460 0 0 0 29,460 0.47 0.47
-----END PRIVACY-ENHANCED MESSAGE-----