-----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, MLQyGrOjBBnELWPwn87yIfNJyh9AwaphlrHioXjssQmLIpp4N3DbqtaSNQb7Qp/O fbDmixS7pUSLHvfu2v9Wlw== /in/edgar/work/20000811/0000928385-00-002176/0000928385-00-002176.txt : 20000921 0000928385-00-002176.hdr.sgml : 20000921 ACCESSION NUMBER: 0000928385-00-002176 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000811 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CHOICE HOTELS INTERNATIONAL INC /DE CENTRAL INDEX KEY: 0001046311 STANDARD INDUSTRIAL CLASSIFICATION: [7011 ] IRS NUMBER: 521209792 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-13393 FILM NUMBER: 692837 BUSINESS ADDRESS: STREET 1: 10770 COLUMBIA PIKE CITY: SILVER SPRING STATE: MD ZIP: 60563 BUSINESS PHONE: 3015925000 MAIL ADDRESS: STREET 1: 10770 COLUMBIA PIKE CITY: SILVER SPRING STATE: MD ZIP: 60563 FORMER COMPANY: FORMER CONFORMED NAME: CHOICE HOTELS FRANCHISING INC DATE OF NAME CHANGE: 19971118 FORMER COMPANY: FORMER CONFORMED NAME: CHOICE HOTELS INTERNATIONAL INC/ DATE OF NAME CHANGE: 19971022 10-Q 1 0001.txt FORM 10-Q 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 JUNE 30, 2000 COMMISSION FILE NO. 1-11915 CHOICE HOTELS INTERNATIONAL, INC. 10750 COLUMBIA PIKE SILVER SPRING, MD. 20901 (301) 592-5000 Delaware 52-1209792 ------------------------ ------------------------- (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 JUNE 30, 2000 - ----------------------- ------------------------ Common Stock, $0.01 par value per share 52,795,907 ---------- ============================================================================== CHOICE HOTELS INTERNATIONAL, INC. INDEX -----
PAGE NO. -------- PART I. FINANCIAL INFORMATION: Condensed Consolidated Balance Sheets - June 30, 2000 (Unaudited) and December 31, 1999 3 Consolidated Statements of Income - Three months ended June 30, 2000 and June 30, 1999 and Six months ended June 30, 2000 and June 30, 1999 (Unaudited) 5 Consolidated Statements of Cash Flows - Six months ended June 30, 2000 and June 30, 1999 (Unaudited) 6 Notes to Consolidated Financial Statements (Unaudited) 7 Management's Discussion and Analysis of Operations and Financial Condition 9 Quantitative and Qualitative Analysis of Market Risk 11 PART II. OTHER INFORMATION AND SIGNATURE 12
2 PART I. FINANCIAL INFORMATION CHOICE HOTELS INTERNATIONAL, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
June 30, 2000 December 31, 1999 ------------- ----------------- (Unaudited) ASSETS CURRENT ASSETS Cash and cash equivalents $ 17,573 $ 11,850 Receivables (net of allowance for doubtful accounts of $8,012 and $6,691, respectively) 28,969 30,035 Income taxes receivable and other 1,989 37 --------- -------- Total current assets 48,531 41,922 PROPERTY AND EQUIPMENT, AT COST, NET OF ACCUMULATED DEPRECIATION 60,701 58,255 GOODWILL, NET OF ACCUMULATED AMORTIZATION 63,684 64,706 FRANCHISE RIGHTS, NET OF ACCUMULATED AMORTIZATION 41,153 43,101 INVESTMENT IN FRIENDLY HOTELS, PLC 39,017 41,195 ADVANCES TO MARKETING AND RESERVATION FUNDS 58,326 32,807 OTHER ASSETS 38,879 40,819 NOTE RECEIVABLE FROM SUNBURST HOSPITALITY CORP. (net of reserve of $4,100 and $0, respectively) 145,421 141,853 --------- -------- Total assets $495,712 $464,658 ======== ========
The accompanying notes are an integral part of these condensed consolidated balance sheets. 3 CHOICE HOTELS INTERNATIONAL, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS) June 30, 2000 December 31, 1999 ------------- ----------------- (Unaudited) LIABILITIES & EQUITY CURRENT LIABILITIES Current portion of long-term debt $ 49,446 $ 44,646 Accounts payable 16,219 21,362 Accrued expenses 17,311 22,283 Income taxes payable - 1,367 -------- -------- Total current liabilities 82,976 89,658 -------- -------- LONG TERM DEBT 286,719 262,710 -------- -------- DEFERRED INCOME TAXES ($38,038 and $30,648, respectively) AND OTHER LIABILITIES 54,466 46,674 -------- -------- Total liabilities 424,161 399,042 -------- -------- SHAREHOLDERS' EQUITY Common stock, $.01 par value 615 614 Additional paid-in-capital 54,702 52,386 Accumulated other comprehensive income 613 1,205 Deferred compensation (1,703) (1,937) Treasury stock (124,835) (108,370) Retained earnings 142,159 121,718 -------- -------- Total shareholders' equity 71,551 65,616 -------- -------- Total liabilities & shareholders' equity $495,712 $464,658 ======== ======== The accompanying notes are an integral part of these condensed consolidated balance sheets. 4 CHOICE HOTELS INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Three Months Ended Six Months Ended June 30, June 30, June 30, June 30, 2000 1999 2000 1999 ---- ---- ---- ---- (Unaudited) (Unaudited) REVENUES Royalty fees $34,328 $31,274 $59,213 $55,073 Initial franchise and relicensing fees 3,435 3,744 6,782 6,593 Partner service revenue 2,088 2,092 4,386 3,808 Other 1,314 1,565 2,429 2,147 ------- ------- ------- ------- Total revenues 41,165 38,675 72,810 67,621 ------- ------- ------- ------- OPERATING EXPENSES Selling, general and administrative 14,071 12,637 26,299 23,614 Depreciation and amortization 3,053 1,625 5,555 3,303 ------- ------- ------- ------- Total operating expenses 17,124 14,262 31,854 26,917 ------- ------- ------- ------- OPERATING INCOME 24,041 24,413 40,956 40,704 OTHER Interest and dividend income (5,219) (5,141) (10,119) (9,842) Interest expense and other 5,917 5,179 11,568 10,063 Equity loss - Friendly Hotels, PLC 164 95 1,889 190 Loss on early prepayment of note 4,100 - 4,100 - Gain on sale of stock - - - (1,260) ------- ------- ------- ------- Total other 4,962 133 7,438 (849) ------- ------- ------- ------- INCOME BEFORE INCOME TAXES 19,079 24,280 33,518 41,553 INCOME TAXES 7,441 9,749 13,072 16,744 ------- ------- ------- ------- NET INCOME $11,638 $14,531 $20,446 $24,809 ======= ======= ======= ======= WEIGHTED AVERAGE SHARES OUTSTANDING 53,092 54,998 53,038 55,449 ------- ------- ------- ------- DILUTED SHARES OUTSTANDING 53,534 55,809 53,688 56,153 ------- ------- ------- ------- BASIC EARNINGS PER SHARE $ 0.22 $ 0.26 $ 0.39 $ 0.45 ======= ======= ======= ======= DILUTED EARNINGS PER SHARE $ 0.22 $ 0.26 $ 0.38 $ 0.44 ======= ======= ======= =======
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)
Six Months Ended June 30, 2000 June 30, 1999 ------------- ------------- (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $20,446 $24,809 Reconciliation of net income to net cash by operating activities: Depreciation and amortization 10,943 7,026 Provision for doubtful accounts (433) 408 Increase in deferred income taxes 7,498 7,171 Non cash interest and dividend income (7,668) (8,118) Equity loss - Friendly Hotels, PLC 1,889 190 Loss on early prepayment of note 4,100 - Changes in assets and liabilities: Change in receivables 1,499 (3,195) Change in income taxes payable/receivable and other (2,417) 6,318 Change in accounts payable and accrued expenses (10,115) 459 ------- ------- NET CASH PROVIDED BY OPERATING ACTIVITIES 25,742 35,068 ------- ------- CASH FLOW FROM INVESTING ACTIVITIES: Investment in property and equipment (9,321) (10,781) Advances to marketing and reservation funds, net (25,519) (22,385) Other items, net 1,370 (1,908) ------- ------- NET CASH UTILIZED BY INVESTING ACTIVITIES (33,470) (35,074) ------- ------- CASH FLOW FROM FINANCING ACTIVITIES: Proceeds from long-term borrowings 60,300 56,230 Principal payments of long-term borrowings (31,585) (24,174) Proceeds from exercise of stock options 1,200 3,702 Purchase of treasury stock (16,465) (31,496) Proceeds from issuance of common stock 1 6 ------- ------- NET CASH PROVIDED BY FINANCING ACTIVITIES 13,451 4,268 ------- ------- Net change in cash and cash equivalents 5,723 4,262 Cash and cash equivalents, beginning of period 11,850 1,692 ------- ------- CASH AND CASH EQUIVALENTS, END OF PERIOD $17,573 $ 5,954 ======= =======
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. (the "Company") and subsidiaries 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 year ended December 31, 1999 and notes thereto included in the Company's Form 10-K, dated March 30, 2000. In the opinion of management, all adjustments (which include any normal recurring adjustments) considered necessary for a fair presentation have been included. Interim results are not necessarily indicative of fiscal year performance because of seasonal and short-term variations. All intercompany transactions and balances between Choice Hotels International, Inc. and its subsidiaries have been eliminated. Certain reclassifications have been made to the prior year financial statements to conform to the current year presentation. 2. Comprehensive Income - During the six months ended June 30, 2000, the Company's comprehensive income (consisting of net income plus/minus foreign currency translation adjustments and unrealized gains/losses on available for sale securities) was lower than net income by approximately $592,000. 3. Marketing and Reservation Funds - The Company presents marketing and reservation fees such that the fees collected and associated expenses are reported net. The total marketing and reservation fees received by the Company were $41.0 million and $35.8 million for the three months ended June 30, 2000 and 1999, respectively, and $71.2 million and $63.8 million for the six months ended June 30, 2000 and 1999, respectively. Depreciation and amortization expense incurred by the marketing and reservation funds was $2.3 million and $1.8 million for the three months ended June 30, 2000 and 1999, respectively, and $5.1 million and $3.6 million for the six months ended June 30, 2000 and 1999, respectively. Interest expense incurred by the reservation fund was $1.3 million and $1.0 million for the three months ended June 30, 2000 and 1999, respectively, and $2.4 million and $1.6 million for the six months ended June 30, 2000 and 1999, respectively. Reservation fees and marketing 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. Excess or shortfall amounts from the operation of these programs are recorded as a payable or receivable from the particular fund. The Company advances capital as necessary to the marketing and reservation funds to support the development and ongoing operations of the franchise system. As of June 30, 2000, the Company's balance sheet includes a receivable of $58.3 million related to advances made to the marketing ($26.0 million) and reservation ($32.3 million) funds. As of December 31, 1999, the Company's balance sheet includes a receivable of $32.8 million related to advances made to the marketing ($12.5 million) and reservation ($20.3 million) funds. The $13.5 million increase in the marketing advance for the six months ended June 30, 2000 was due to planned accelerated media spending in the calendar year. The Company projects the marketing advance to decline over the remainder of the year to approximately $17.5 million from the current $26.0 million amount. The reservation advance is forecasted to increase approximately $10.0 million for the remaining six months to $42.0 million. This increase is associated with the continued deployment of property and yield management systems to franchisees. The Company has the ability under existing franchise agreements and expects to recover these advances through future marketing, reservation and technology fees. 4. Income Taxes - The income tax provision for the period is based on the effective tax rate expected to be applicable for the full year. The 2000 six month rate of 39% differs from the statutory rate primarily because of state income taxes. 5. Earnings Per Share - Basic earnings per share (EPS) amounts are computed by dividing earnings applicable to common shareholders by the weighted average number of common shares outstanding. Diluted EPS amounts assume the issuance of common stock for all potentially dilutive equivalents outstanding. 7 6. Reportable Segment Information - The Company has a single reportable segment encompassing its franchising business. Franchising revenues are comprised of royalty fees, initial franchise and relicensing fees, and partner services revenue and other. Marketing and reservation fees and expenses are excluded from reportable segment information as such fees and associated expenses are reported net. The following table presents the financial information for the Company's franchising segment. Three Months Ended June 30, 2000 (In thousands) Franchising Corporate & Other Consolidated ------------------------------------------------------- Revenues $41,165 $ - $41,165 Operating income (loss) 34,685 (10,644) 24,041 Three Months Ended June 30, 1999 Franchising Corporate & Other Consolidated ------------------------------------------------------- Revenues $38,675 $ - $38,675 Operating income (loss) 31,386 (6,973) 24,413 Six Months Ended June 30, 2000 Franchising Corporate & Other Consolidated ------------------------------------------------------- Revenues $72,810 $ - $72,810 Operating income (loss) 59,910 (18,954) 40,956 Six Months Ended June 30, 1999 Franchising Corporate & Other Consolidated ------------------------------------------------------- Revenues $67,621 $ - $67,621 Operating income (loss) 53,330 (12,626) 40,704 7. Put/Call Agreement - In March 2000, the Company and Sunburst Hospitality Corporation ("Sunburst")entered into a "put/call" agreement related to three MainStay properties for a period ending June 30, 2000. During this period, the Company could "call" any or all specified properties for purchase at Sunburst's original cost (approximately $16.3 million in the aggregate) and at the end of this period Sunburst may "put" any or all specified properties at such cost. The Company and Sunburst exercised their rights under the "put/call" agreement. Sunburst will transfer title to these properties, in the third quarter, to the Company as consideration for $16.3 million of the $149 million amount due to Choice under Sunburst's subordinated note. The fair market value of these assets is approximately $12.2 million. Accordingly, the Company has recognized a pre-tax loss on early prepayment of note of $4.1 million in the quarter ended June 30, 2000. 8. Friendly Investment - The Company is continuing to review its strategic options with respect to its investment in Friendly Hotels, PLC ("Friendly"), the Company's master franchisor for the United Kingdom, Ireland and Continental Europe. Such options may include discussions with the board of Friendly, which may lead to a capital restructuring of Friendly and amendments to the master franchise agreement with the Company. It is possible that such actions could result in a write-down or deferral of certain amounts due the Company and other Company assets related to Friendly, which currently represent a total net investment of approximately $48 million. Any write down or deferral so made is not expected to be material to the Company's cash flow or financial condition. 8 MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL CONDITION - -------------------------------------------------------------------------- Comparison of Three Month Period Ended June 30, 2000 Operating Results and Three - -------------------------------------------------------------------------------- Month Period Ended June 30, 1999 Operating Results - -------------------------------------------------- The Company reported net income of $11.6 million, or $0.22 per diluted share, for the quarter ended June 30, 2000, compared to net income for the same period of 1999 of $14.5 million, or $0.26 per diluted share. The decrease in net income for the period is attributable to a $4.1 million loss on early prepayment of a Sunburst subordinated note that is due to the Company. The Company and Sunburst exercised their rights under a previously negotiated "put/call" agreement related to three of Sunburst's MainStay Suites hotels as described in the notes to consolidated financial statements. Franchise Revenues - ------------------ The Company's net franchise revenues were $41.2 million for the three months ended June 30, 2000 and $38.7 million for the three months ended June 30, 1999. Royalties increased $3.0 million to $34.3 million in 2000 from $31.3 million in 1999, an increase of 9.8%. The increase in royalties is attributable to a net increase of 215 franchised hotels during the twelve month period between June 30, 1999 and June 30, 2000 (representing an additional 16,006 rooms) and an increase in domestic RevPAR of 5.6% from $35.47 in second quarter 1999 to $37.47 in 2000. Initial and relicensing fee revenue generated from domestic franchise contracts signed decreased to $3.4 million from $3.7 million in 1999 as a result of a decrease in total franchise agreements signed to 67, as compared to 84 for second quarter of 1999. The total number of domestic hotels online increased to 3,176 from 3,057, an increase of 3.9% for the period ending June 30, 2000. This represents an increase in the number of rooms open of 3.5% from 253,251 as of June 30, 1999 to 262,045 as of June 30, 2000. As of June 30, 2000, the Company had 508 hotels under development in its domestic hotel system representing 40,429 rooms. The total number of international hotels online increased to 1,127 from 1,031, an increase of 9.3% as of June 30, 2000. International rooms open increased 9.7% from 74,254 as of June 30, 1999 to 81,466 as of June 30, 2000. The total number of international hotels and rooms under development was 177 and 17,762, respectively, as of June 30, 2000. International net franchise revenues represented $1.4 million of the Company's total net franchise revenues for both quarters ended June 30, 2000 and 1999. Franchise Expenses - ------------------ The cost to operate the franchising business is reflected in selling, general and administrative expenses. Selling, general and administrative expenses increased 11.3% between years. This increase was driven by spending for the Company's various internet initiatives (approximately $0.6 million for the three months), as well as, severance costs (approximately $0.5 million for the three months) incurred in connection with the Company's recent outsourcing of the corporate technology function. As a percentage of total net franchising revenues, total selling, general and administrative expenses increased to 34.2% for 2000 as compared to 32.7% for 1999. Other - ----- For the three months ended June 30, 2000 and June 30, 1999, the Company recognized approximately $3.9 million and $3.5 million, respectively, of interest income from its subordinated term note to Sunburst. The Company recognized a $4.1 million loss on early prepayment of a Sunburst subordinated note related to a previously negotiated "put/call" agreement as described in the notes to consolidated financial statements. The Company received three operating MainStay Suites hotels as consideration for $16.3 million of the note receivable from Sunburst. Comparison of Six Month Period Ended June 30, 2000 Operating Results and Six - ---------------------------------------------------------------------------- Month Period Ended June 30, 1999 Operating Results - -------------------------------------------------- 9 The Company reported net income of $20.4 million, or $0.38 per diluted share, for the six months ended June 30, 2000, compared to net income for the same period of 1999 of $24.8 million, or $0.44 per diluted share. The decrease in net income for the period is attributable to a $4.1 million loss on early prepayment of a Sunburst subordinated note that is due to the Company, as well as a $1.9 million equity loss from the Company's investment in Friendly. Franchise Revenues - ------------------ The Company's net franchise revenues were $72.8 million for the six months ended June 30, 2000 and $67.6 million for the six months ended June 30, 1999. Royalties increased $4.1 million to $59.2 million in 2000 from $55.1 million in 1999, an increase of 7.5%. The increase in royalties is attributable to a net increase of 215 franchised hotels during the twelve month period between June 30, 1999 and June 30, 2000 (representing an additional 16,006 rooms) and an increase in domestic RevPAR of 3.3% from $31.23 in 1999 to $32.27 in 2000. Initial and relicensing fee revenue generated from domestic franchise contracts signed increased to $6.8 million from $6.6 million in 1999 as a result of 319 franchise agreements signed in 2000, as compared to 281 for 1999. Revenues generated from partner service relationships increased 15.2% from $3.8 million in 1999 to $4.4 million in 2000. Franchise Expenses - ------------------ The cost to operate the franchising business is reflected in selling, general and administrative expenses. Selling, general and administrative expenses increased 11.4% between years. This increase was driven by spending for the Company's various internet initiatives (approximately $1.0 million for the six months), as well as, severance costs (approximately $0.5 million for the six months) incurred in connection with the Company's recent outsourcing of the corporate technology function. As a percentage of total net franchising revenues, total selling, general and administrative expenses increased to 36.1% for 2000 as compared to 34.9% for 1999. Other - ----- For the six months ended June 30, 2000 and June 30, 1999, the Company recognized approximately $7.7 million and $6.9 million, respectively, of interest income from its subordinated term note to Sunburst. The Company recognized an equity loss of $1.9 million in its financial statements for the six months ended June 30, 2000, representing the Company's 5.3% interest in Friendly's common shares. The Company recognized a $4.1 million loss on early prepayment of a Sunburst subordinated note related to a previously negotiated "put/call" agreement as described in the notes to consolidated financial statements. LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- Net cash provided by operating activities was $25.7 million for the six months ended June 30, 2000, a decrease of approximately $9.4 million from $35.1 million for 1999. The decrease primarily resulted from timing differences in payments of accounts payable and accrued expenses. At June 30, 2000, the total long-term debt outstanding for the Company was $336.2 million, $49.4 million of which matures in the next twelve months. The Company made advances to the marketing and reservation funds totaling $25.5 million for the six months ended June 30, 2000. The advances are associated with a system-wide property and yield management systems implementation and the timing of expenditures associated with specific brand initiatives of the marketing fund. The Company has the ability under existing franchise agreements and expects to recover these advances through future marketing and reservation fees. The Company expects approximately $1.5 million of increases in advances to the marketing and reservation funds for the remainder of 2000 due to the continued property and yield management systems implementation and expenditures associated with specific brand initiatives, partially offset by reduced marketing expenditures. For the first six months of 2000, the Company has repurchased 1.2 million shares of its common stock at a total cost of $16.5 million as of July 27, 2000. The Company has authorization from its Board of Directors to repurchase up to an additional 5.0 million shares. 10 The Company believes that cash flows from operations and available financing capacity is adequate to meet the expected operating, investing, financing and debt service requirements for the business for the immediate future. Year 2000 Compliance - -------------------- The Company has materially remedied the Year 2000 computer problem shared by virtually all companies and businesses. Initially, this Year 2000 problem was associated with two-digit date codes used in many computer programs and embedded chip systems. As an on-going effort, the Company continues to monitor its systems as well as third party vendors and franchisees. While the Company has not experienced any material non-compliance issues to date, it is not in a position to guarantee the performance of others with respect to their Year 2000 compliance or predict whether any of the assurances that others provide regarding Year 2000 compliance may prove later to be inaccurate or overly optimistic. FORWARD-LOOKING STATEMENTS - -------------------------- When used throughout this report, the words "believes," "anticipates," "expects," "intends," "estimates," "projects," and other similar expressions, which are predictions of or indicate future events and trends, identify forward-looking statements. Such statements are subject to a number of risks and uncertainties which could cause actual results to differ materially from those projected, including: competition within each of our business segments; business strategies and their intended results; the balance between supply of and demand for hotel rooms; our ability to obtain new franchise agreements; our ability to develop and maintain positive relations with current and potential hotel owners; the effect of international, national and regional economic conditions; the availability of capital to allow us and potential hotel owners to fund investments; unexpected marketing costs or lower than expected marketing revenues with respect to projected decreases in the marketing advances; and other risks described from time to time in our filings with the Securities and Exchange Commission, including those set forth under the heading "Risk Factors" in our Report on Form 10-Q for the Period ended June 30, 1999. Given these uncertainties, you are cautioned not to place undue reliance on such statements. We also undertake no obligation to publicly update or revise any forward-looking statement to reflect current or future events or circumstances. ITEM 3. QUANTITATIVE AND QUALITATIVE ANALYSIS OF 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 revenues. The Company manages its exposure to this market risk through the monitoring of its available financing alternatives including in certain circumstances the use of derivative financial instruments. The Company's strategy to manage exposure to changes in interest rates and foreign currencies remains unchanged from 1997. Furthermore, the Company does not foresee any significant changes in exposure in these areas or in how such exposure is managed in the near future. At June 30, 2000 and December 31, 1999, the Company had $336.2 million and $307.4 million of debt outstanding at an effective interest rate of 7.2% and 6.6%, respectively, after the impact of interest rate swaps at December 31, 1999 is taken into account. A hypothetical change of 10% in the Company's effective interest rate from quarter-end 2000 levels would increase or decrease interest expense by $1.7 million. The Company will refinance the $150 million variable rate term loan as it amortizes throughout the expected maturity dates. Upon expiration of the Credit Facility in 2002, the Company expects to refinance its obligations. For more information related to the Company's use of interest rate instruments, see Long-Term Debt and Notes Payable, Interest Rate Hedges and Fair Value of Financial Instruments in the Notes to the Consolidated Financial Statements in the Company's December 31, 1999 Form 10-K. The Company is also exposed to fluctuations in foreign currency relating to its preferred stock investment in Friendly that is denominated in British Pounds. The Company does not have any derivative financial instruments related to its foreign investments. 11 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS --------------------------------------------------- The Company held its Annual Meeting of Shareholders on May 3, 2000. At the meeting, the following Directors were re-elected to a three-year term: Barbara Bainum Charles A. Ledsinger, Jr. Lawrence R. Levitan The terms of the following Directors, who were not up for re-election, continued after the meeting: Stewart Bainum, Jr. William L. Jews Gerald W. Pettit Jerry E. Robertson Raymond E. Schultz Also at the meeting, shareholders approved an amendment to the Choice Hotels International Long-Term Incentive Plan which increased the number of shares of the Company's common stock available for issuance under the plan. The following votes were cast: For: 38,868,586 Against: 12,137,393 Abstain: 99,285 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ---------------------------------- (a) Exhibits Exhibit 27.01 - Financial Data Schedule - June 30, 2000 (b) The following reports were filed pertaining to the period ended June 30, 2000. None 12 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: August 11, 2000 /s/ Charles A. Ledsinger,Jr. ------------------ ----------------------------- By: Charles A. Ledsinger, Jr. President and Chief Executive Officer 13 EX-27 2 0002.txt 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 6-MOS DEC-31-1999 JAN-01-2000 JUN-30-2000 17,573 0 36,981 8,012 0 48,531 91,474 30,773 495,712 82,976 286,719 0 0 615 70,936 495,712 0 72,810 0 31,854 (4,130) (433) 11,568 33,518 13,072 20,446 0 0 0 20,446 0.39 0.38
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