<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
_____________________
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED, EFFECTIVE OCTOBER 7, 1996].
For the fiscal year ended December 31, 1999
-----------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED].
For the transition period from ___________________ to ____________________
Commission file number 001-13393
-----------------
CHOICE HOTELS INTERNATIONAL, INC.
--------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<CAPTION>
<S> <C>
DELAWARE 52-1209792
- -------------------------------------------------------- --------------------
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
10750 Columbia Pike, Silver Spring, Maryland 20901
- ------------------------------------------------------------- --------------
(Address of Principal Executive Offices) Zip Code
Registrant's telephone number, including area code (301) 592-5000
--------------
</TABLE>
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
------------------- ---------------------------------------------
Common Stock, Par Value $.01 per share New York Stock Exchange
- -------------------------------------- ----------------------------
Preferred Stock Purchase Rights New York Stock Exchange
- ------------------------------- ----------------------------
Securities registered pursuant to Section 12(g) of the Act:
- -------------------------------------------------------------------------------
(Title of Class)
- -------------------------------------------------------------------------------
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed in Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months as for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ No ___
<PAGE>
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of the Form 10-K or any amendment to this
Form 10-K. [_]
The aggregate market value of voting stock of Choice Hotels International,
Inc. held by non-affiliates was $531,353,144 as of March 10, 2000 based upon a
closing price of $16.375 per share.
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes ___ No ___
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
The number of shares outstanding of Choice Hotels International, Inc.'s
Common Stock at March 10, 2000 was 53,408,415.
DOCUMENTS INCORPORATED BY REFERENCE.
PART I 1999 Annual Report to Stockholders
Proxy Statement dated March 29, 2000
PART II 1999 Annual Report to Stockholders
Proxy Statement dated March 29, 2000
PART III Proxy Statement dated March 29, 2000
2
<PAGE>
PART I
Forward-Looking Statements
- --------------------------
Certain statements in this report that are not historical facts
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act. Words such as "believes," "anticipates,"
"expects," "intends," "estimates," "projects," and other similar expressions,
which are predictions of or indicate future events and trends, typically
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 an 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 and construction of hotels; the cost and other
effects of legal proceedings; and other risks described from time to time in our
filings with the Securities and exchange Commission, including those set forth
under the hearing "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 1. Business
Overview
Choice Hotels International, Inc. (the "Company" or "Choice") is the
world's second largest franchisor of hotel properties with 4,248 hotels open and
operating in 35 countries at December 31, 1999. In addition, at December 31,
1999, we had 761 franchise properties currently under development representing a
total of 64,095 rooms. Choice franchises lodging properties under one of our
proprietary brand names (the "Choice brands"): Comfort(R), Quality(R),
Clarion(R), Sleep(R), Rodeway(R), Econo Lodge(R) and MainStay(SM). We have over
2,300 franchisees in the franchise system with no single franchisee accounting
for more than 5% of its royalty or total revenues. We franchise hotels in all
50 states, Puerto Rico and the District of Columbia and 34 additional countries,
with 95% of its franchising revenue generated from hotels franchised in the
United States. With recognized brands and a diverse and growing franchisee
base, we believe we have a strong foundation for continued growth.
Choice is a "pure-play" lodging franchisor with limited real estate
exposure and low capital expenditure requirements. With a focus on hotel
franchising versus ownership, we benefit from the economies of scale inherent
in the franchising business. The fee and cost structure of our business
provides significant opportunities to increase profits by increasing the number
of franchise properties. We derive substantially all of our revenues from
franchise fees which consist of an initial fee and ongoing royalty, marketing,
and reservation fees that are based as a percentage of the franchisees' gross
room revenues.
The principal factors that affect our results are: (i) growth in the
number of hotels under franchise; (ii) occupancies and room rates achieved by
the hotels under franchise; (iii) the number and relative mix of franchised
hotels; (iv) effective royalty rates achieved; and (v) our ability to manage
costs. The number of rooms at franchised properties and occupancies and room
rates at those properties significantly affect our results because royalty fees
are based upon room revenues at franchised hotels. The variable overhead costs
associated with franchise system growth are substantially less than incremental
royalty fees generated from new franchisees, therefore we are able to capture a
significant portion of these royalty fees as operating income. Continued growth
of our franchise business should enable us to capture increasing benefits from
the operating leverage in place which would improve operating margins. Our
franchising operating margins(1) have improved from 50.9% as of May 31, 1995 to
64.6% as of December 31, 1999. We have also generated steady royalty fee income
from our increasing franchisee base -- growing from $50.9 million for the year
ended May 31, 1992 to $128.7 million for the year ended December 31, 1999.
Earnings before interest, taxes, depreciation and amortization has grown from
$32.2 million for the year ended May 31, 1992 to $101.8 million for the year end
December 31, 1999.
- ---------------------
/1/ Franchising operating margin is calculated by deducting selling, general and
administrative expenses from net franchising revenues.
3
<PAGE>
Company History
Prior to becoming a separate, publicly-held company on October 15,
1997 pursuant to the Company Spin-off (as defined below), the Company was known
as Choice Hotels Franchising, Inc. and was a wholly-owned subsidiary of Choice
Hotels International, Inc. ("Former Choice"). On October 15, 1997, Former
Choice distributed to its stockholders its hotel franchising business (which had
previously been primarily conducted by the Company) and its European hotel
ownership and franchising business through a pro rata distribution to its
stockholders of all of the stock of the Company (the "Company Spin-off"). At
the time of the Company Spin-off, the Company changed its name to "Choice Hotels
International, Inc.," and Former Choice changed its name to "Sunburst
Hospitality Corporation." References herein to the Company's former parent
corporation prior to the Company Spin-off are to "Former Choice," and reference
to such corporation after the Company Spin-off are to "Sunburst."
Prior to November 1996, Former Choice was a subsidiary of Manor Care,
Inc. ("Manor Care") which, directly and through its subsidiaries, engaged in the
hotel franchising business currently conducted by the Company as well as the
ownership and management of hotels (together with the hotel franchising
business, the "Lodging Business") and the health care business. On November 1,
1996, Manor Care separated the Lodging Business from its health care business
through a pro rata distribution to the holders of Manor Care's common stock of
all of the stock of Former Choice (the "Former Choice Spin-off"). In connection
with the Former Choice Spin-off, the Company became a wholly-owned subsidiary of
Former Choice and remained as such until consummation of the Company Spin-off.
The Lodging Industry/1/
As of December 31, 1999, there were approximately 3.9 million hotel
rooms in the United States in hotels/motels containing twenty or more rooms. Of
those rooms, approximately 1.2 million rooms were not affiliated with a national
or regional brand, while the remaining approximately 2.7 million rooms were
affiliated with a brand either through franchise or the ownership/management of
a national or regional chain.
During the late 1980s, the industry added approximately 500,000 hotel
rooms to its inventory due largely to a favorable hotel lending environment, the
ability of hotel operators to regularly increase room rates and the
deductibility of passive tax losses, which encouraged hotel development. As a
result, the lodging industry saw an oversupply of rooms and a decrease in
industry performance.
The lodging industry in recent years has recovered, demonstrating
strong performance, based on year-to-year increases in room revenues, average
daily rates, revenue per available room ("RevPAR"), and lodging industry
profitability. RevPAR is calculated by multiplying the percentage of occupied
rooms by the average daily room rate realized. Since 1993, the lodging industry
has been able to increase its average daily rate ("ADR") at a pace faster than
the increase in the Consumer Price Index ("CPI"), a common measure of inflation
published by the US Department of Labor. The following chart demonstrates the
recent trends:
- -----------------
/1/ Source: Smith Travel Research
4
<PAGE>
The US Lodging Industry's Growth Trends Since 1995
<TABLE>
<CAPTION>
Increases in Average
Room Daily Increase Increase Revenue Per
Revenue Room in ADR in CPI Available New
Versus Occupancy Rates Versus Versus Room Profits Rooms
Year Prior Year Rates (ADR) Prior Year Prior Year (RevPAR) (in billions) Added
- ---- ------------- ---------- ------- ---------- ---------- ----------- ------------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1995......... 6.7% 65.1% $65.81 4.7% 2.9% $42.83 $ 8.5 64,000
1996......... 8.9% 65.0% $70.81 7.6% 2.9% $46.06 $12.5 101,000
1997......... 8.8% 64.5% $75.16 6.1% 1.9% $48.50 $17.0 128,000
1998......... 7.7% 64.0% $78.62 4.4% 2.3% $50.29 $22.0 143,000
1999......... 7.4% 63.3% $81.27 4.0% 2.7% $51.44 $23.0 143,148
</TABLE>
We believe the lodging industry can be divided into three price
categories: luxury or upscale, mid-scale and economy. Typically, the luxury
category generally has room rates above $80 per night, the mid-scale category
generally has room rates between $50 and $79 per night and the economy category
generally has room rates less than $50 per night. Additionally, a new category
has emerged of extended-stay hotels that primarily serve guests who stay at a
hotel five consecutive nights. These hotels span the industry's three price
categories.
Service is a distinguishing characteristic in the lodging industry.
Generally, there are three levels of service: full-service hotels (which offer
food and beverage services, meeting rooms, room service and similar guest
services); limited-service hotels (which offer amenities such as swimming pools,
continental breakfast, or similar services); and all-suites hotels (which
usually have limited public areas, but offer guests two rooms or one room with
distinct areas, and which may or may not offer food and beverage services).
The Company's Econo Lodge(R), Rodeway(R) and Sleep(R) brands compete
primarily in the limited-service economy market; the Company's Comfort(R) and
Quality(R) brands compete primarily in the limited-service middle-market. The
Company's MainStaySM Suites brand competes primarily in the all-suites middle-
market. The Company's Clarion(R) brand competes primarily in the full-service
upscale market.
New hotels opened in recent years typically have been hotels without
on-premise food and beverage, as these hotels are less costly to develop, enjoy
higher gross margins, and tend to have better access to financing. These hotels
typically operate in the economy and mid-scale categories and are located in
suburban or highway locations. From 1991 to 1999, the average room count in new
hotels declined from 122 to 104 primarily because hotel developers found it
difficult to obtain financing of more than $3 million from their primary lending
sources (local banks and Small Business Administration-guaranteed loan
programs).
In recent years, operators of hotels not owned or managed by major
lodging companies have increasingly joined national hotel franchise chains as a
means of remaining competitive with hotels owned by or affiliated with national
lodging companies. Because the costs of owning and operating a hotel are
generally fixed, increases in revenues generated by affiliation with a franchise
lodging chain can improve a hotel's financial performance. Of approximately
1,188 hotel properties that changed their affiliation in 1999, and 79% converted
from independent status to affiliation with a chain or converted from one chain
to another. A total of 379 independent properties switched to a franchise chain
in 1999.
5
<PAGE>
The large franchise lodging chains, including the Company, generally
provide a number of services to hotel operators to improve the financial
performance of their properties including national reservation systems,
marketing and advertising programs, and direct sales programs. The Company
believes that national franchise chains with a larger number of hotels enjoy
greater brand awareness among potential guests than those with fewer numbers of
hotels, and that greater brand awareness can increase the desirability of a
hotel to its potential guests.
We believe that hotel operators choose lodging franchisors based
primarily on the perceived value and quality of each franchisor's brand and its
services, and the extent to which affiliation with that franchisor may increase
the franchisee's reservations and profits.
Franchise Business
Economics of Franchise Business. The fee and cost structure of the Company's
business provides significant opportunities for us to increase profits by
increasing the number of franchised properties. As a hotel franchisor, we derive
substantially all of our revenue from franchise fees. The Company's franchise
fees consist of an initial fee and ongoing royalty, marketing and reservation
fees which are based on a percentage of the franchisee's gross room revenues.
The royalty portion of the franchise fee is intended to cover our operating
expenses, such as expenses incurred in quality assurance, administrative support
and other franchise services and to provide the Company with operating profits.
The marketing and reservation portion of the franchise fee is intended to
reimburse the Company for the expenses associated with providing such franchise
services as the central reservation system and national marketing and media
advertising.
Much of the variable costs associated with our activities are
reimbursed by the franchisees through the initial fees, and marketing and
reservation fees. The royalty fees generated from franchisees more than cover
the fixed costs of the business at its current level. The variable overhead
costs associated with franchise system growth are substantially less than
incremental royalty fees generated from new franchisees, therefore we are able
to capture a significant portion of these royalty fees as operating income.
Strategy. Our business strategy is designed to maximize the value of our
extensive distribution channels (which include the hotels under
franchise and the hotel guests) by expanding and enhancing those
relationships. The strategy is effectuated through an emphasis on
the following key components: (1) optimizing the brand portfolio,
(2) strategically growing the franchise system, (3) leveraging the
franchise system, (4) improving its and its franchisees' margins,
(5) growing profitability internationally, and (6) pursuing
complementary business opportunities.
o Optimizing the Brand Portfolio. Each of our brands has particular attributes
and strengths. Our strategy is to leverage the strengths of each brand for
profit growth and for identifying new niches into which the Company may
expand. This will be effectuated through a raising of the Company's brand
standards strictly enforced through consumer-driven quality assurance.
6
<PAGE>
o Increasing Market Penetration on a Strategic Basis. We are taking advantage
of our regional structure to analyze key markets in the U.S. and, in
conjunction with our franchisees, identifying the best opportunities for new
development or conversion to one of our brands.
o Expanding Partner Services Programs. There is significant opportunity to
leverage its size by entering into arrangements with national and multi-
national companies that want to gain exposure to our franchised hotels and to
the millions of guests who patronize our franchised hotels each year. In
practice, the guest enjoys brand-name products and services that help build
guest loyalty and the franchisee benefits from competitively priced products.
Vendor partners gain access to a critical mass of franchisees, which in turn
generates residual income for us.
o Improving Margins Through Increased Productivity. We address the
competitiveness of our own and our franchisees' profitability by initiating
revenue generating programs and improving cost productivity. A key component
of this strategy is the roll out of the Company's proprietary property and
yield management system "Profit Manager by Choice", which we believe will
improve the RevPAR of our franchisees. This is supplemented by continued
enforcement of our contracts (including licensee audits).
o Growing Profitably Internationally. During the eleven fiscal years ended
December 31, 1999, the number of properties (including those under
construction) in our international franchise system increased to 1,290
properties with 97,565 rooms, from 81 properties with 8,330 rooms. Our
international franchise system includes hotels in 39 countries outside the
United States. We plan to continue to profitably grow our brands
internationally through a strategic pursuit of joint ventures, master
franchising agreements and brand specific area development agreements.
o Pursuing Complementary Business Opportunities. Our acquisition strategy
includes the potential purchase of lodging brands that would enhance the
offerings we currently make to our franchisees and hotel consumers as well as
the purchase or partnering with businesses that are complementary to our core
business and unique operating skills.
Franchise System
Our franchise hotels operate under one of the Choice brand names:
Comfort(R), Quality(R), Clarion(R), Sleep(R), Rodeway(R), Econo Lodge(R) and
MainStaySM. The following table presents key statistics relative to our domestic
franchise system over the three fiscal years ended May 31, 1997, for the seven-
month period ended December 31, 1997 and for the three fiscal years ended
December 31, 1999.
Combined Domestic Franchise System
<TABLE>
<CAPTION>
As of and for the
As of and for the Seven Months Ended As of and for the
Year Ended May 31, December 31, Year Ended December 31,
---------------------------------------------------------------------------------
1995 1996 1997 1997 1997 1998 1999
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Number of properties, end of period..... 2,311 2,495 2,781 2,880 2,880 3,039 3,123
Number of rooms, end of period.......... 200,792 214,613 235,431 242,161 242,161 252,357 258,120
Royalty fees ($000)..................... $ 71,665 $ 82,239 $ 91,724 $ 65,271 $ 99,144 $109,240 $120,932
Average Royalty Rate(1)................. 3.2% 3.3% 3.4% 3.5% 3.5% 3.6% 3.7%
Average occupancy percentage............ 63.8% 63.9% 62.6% 66.2% 62.3% 61.0% 60.5%
Average daily room rate (ADR)........... $ 47.13 $ 49.49 $ 51.92 $ 54.97 $ 53.89 $ 56.23 $ 58.42
RevPAR(2)............................... $ 30.08 $ 31.60 $ 32.52 $ 36.39 $ 33.56 $ 34.30 $ 35.33
</TABLE>
7
<PAGE>
(1) Represents domestic royalty fees as a percentage of aggregate gross room
revenues of all of the domestic Choice brand franchised hotels.
(2) The Company's RevPAR figure for each fiscal year is an average of the
RevPAR calculated for each month in the fiscal year. The Company
calculates RevPAR each month based on information actually reported by
franchisees on a timely basis to the Company.
We have over 2,300 domestic franchisees and operate in all 50 states
and the District of Columbia. Approximately 95% of the total royalty income is
generated from domestic franchise operations. Consequently, our analysis of our
franchise system is focused on the domestic operations. Currently, no master
franchisee or other franchisee accounts for 5% or more of Choice's royalty
revenues or total revenues. Sunburst is our largest franchisee with a portfolio
of 83 hotels containing 11,266 rooms located in 25 states as of December 31,
1999.
Brand Positioning
Our brands offer consumers a wide range of choices from economy hotels to
upscale, full service properties.
Comfort. Our largest brand is Comfort. Comfort Inns offer rooms in the mid-
scale without food and beverage category and is targeted to business and leisure
travelers. Principal competitor brands include Baymont, Fairfield Inn, Hampton
Inn, Holiday Express and LaQuinta. Comfort Suites offer business and leisure
guests a large room with separate living and sleeping areas. This product
competes in the upper portion of the midscale without food and beverage market
against brands such as AmeriSuites, Hampton Inn and Suites and Spring Hill. At
December 31, 1999, there were 1,584 Comfort Inn properties and 231 Comfort
Suites properties with a total of 121,291, and 18,796 rooms, respectively, open
and operating worldwide. An additional 330 Comfort Inn and Comfort Suites
properties with a total of 25,713 rooms were under development. During 1999, we
added 123 Comfort properties while terminating 47.
Comfort properties are located in the United States and in Argentina,
Australia, the Bahamas, Belgium, Brazil, Canada, Denmark, France, Germany,
India, Italy, Jamaica, Japan, Lebanon, Norway, Portugal, Puerto Rico, Sweden,
Switzerland, Thailand, Turks & Caicos, the United Kingdom and the United Arab
Emirates. The following chart summarizes the Comfort system in the United
States:
Comfort Domestic System
<TABLE>
<CAPTION>
As of and for the
As of and for the Seven Months Ended As of and for the
Year Ended May 31, December 31, Year Ended December 31,
----------------------------------------------------------------------------------------
1995 1996 1997 1997 1997 1998 1999
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Number of properties, end of period........ 1,015 1,129 1,255 1,304 1,304 1,394 1,470
Number of rooms, end of period............. 87,551 94,160 102,722 105,384 105,384 110,682 112,727
Royalty fees ($000s)....................... $37,635 $44,657 $ 50,758 $ 36,446 $ 55,261 $ 61,153 $ 68,177
Average occupancy percentage............... 69.5% 68.7% 67.2% 71.3% 66.6% 65.4% 64.8%
Average daily room rate (ADR).............. $ 48.24 $ 51.13 $ 54.17 $ 57.15 $ 55.74 $ 58.19 $ 60.57
RevPAR..................................... $ 33.54 $ 35.11 $ 36.39 $ 40.75 $ 37.15 $ 38.03 $ 39.26
</TABLE>
8
<PAGE>
Sleep Inn. Established in 1988, Sleep Inn is a new-construction hotel brand in
the lower portion of the mid-scale without food and beverage segment. Sleep Inns
are targeted to the business and leisure traveler. Principal competitor brands
include Fairfield Inn, Holiday Express, LaQuinta and Red Roof.
At December 31, 1999 there were 228 Sleep Inn properties with a total
of 17,523 rooms open and operating worldwide. An additional 156 properties with
a total of 11,917 rooms were under development. During 1999, 35 Sleep Inn
properties were added while 8 were terminated. The properties are located in
the United States, Brazil, Canada and the Cayman Islands. The following chart
summarizes the Sleep system in the United States:
Sleep Domestic System
<TABLE>
<CAPTION>
As of and for the
As of and for the Seven Months Ended As of and for the
Year Ended May 31, December 31, Year Ended December 31,
----------------------------------------------------------------------------------------
1995 1996 1997 1997 1997 1998 1999
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Number of properties, end of period...... 51 87 131 156 156 197 224
Number of rooms, end of period........... 3,672 6,396 9,635 11,538 11,538 14,924 17,199
Royalty fees ($000s)..................... $2,080 $2,108 $3,343 $ 2,630 $ 3,926 $ 5,337 $ 7,241
Average occupancy percentage............. 65.3% 65.5% 63.9% 66.5% 63.0% 62.0% 60.6%
Average daily room rate (ADR)............ $41.89 $45.11 $48.11 $ 50.54 $ 49.41 $ 51.32 $ 53.91
RevPAR................................... $27.37 $29.56 $30.75 $ 33.60 $ 31.11 $ 31.82 $ 32.66
</TABLE>
Quality. Certain Quality Inns, Quality Inns and Suites, and Quality Suites
hotels compete in the midscale with food and beverage segment. Quality Inns,
Quality Inns and Suites, and Quality Suites are targeted to business and leisure
travelers. Principal competitor brands include Best Western, Holiday Inn,
Howard Johnson and Ramada Inn. At December 31, 1999, there were 686 Quality Inn
and Quality Inns and Suites properties with a total of 73,442 rooms, and 45
Quality Suites properties with a total of 17,352 rooms open worldwide. An
additional 145 Quality Inn, Quality Inns and Suites and Quality Suites
properties with a total of 15,573 rooms were under development. During 1999, a
total of 46 Quality properties were added while 45 were terminated.
Quality properties are located in the United States and in Argentina,
Australia, Brazil, Canada, Chile, Costa Rica, the Czech Republic, Denmark,
France, Germany, India, Indonesia, Ireland, Italy, Jamaica, Malaysia, New
Zealand, Norway, Portugal, Russia, Sweden, Thailand, the United Kingdom and the
United Arab Emirates. The following chart summarizes the Quality system in the
United States:
Quality Domestic System
<TABLE>
<CAPTION>
As of and for the
As of and for the Seven Months Ended As of and for the
Year Ended May 31, December 31, Year Ended December 31,
----------------------------------------------------------------------------------------
1995 1996 1997 1997 1997 1998 1999
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Number of properties, end of period........ 341 362 409 419 419 430 431
Number of rooms, end of period............. 43,281 45,967 50,487 50,674 50,674 50,151 49,331
Royalty fees ($000s)....................... $15,632 $16,606 $17,623 $14,459 $18,488 $20,187 $21,034
Average occupancy percentage............... 63.1% 62.5% 61.3% 63.8 % 60.2% 58.9% 58.0%
Average daily room rate (ADR).............. $ 50.94 $ 52.90 $ 54.61 $ 57.58 $ 56.79 $ 60.02 $ 61.89
RevPAR..................................... $ 32.16 $ 33.08 $ 33.46 $ 36.73 $ 34.19 $ 35.35 $ 35.90
</TABLE>
9
<PAGE>
Clarion. Clarion Inns, Clarion Hotels, Clarion Resorts and Clarion Suites
hotels are full-service properties with on-premise food and beverage facilities
and operate in the upscale category. Clarion properties are targeted to
business and leisure travelers. Principal competitor brands include Crowne
Plaza, Four Points by Sheraton, Radisson, Courtyard by Marriott and Doubletree.
At December 31, 1999, there were 142 Clarion properties with a total
of 22,519 rooms open and operating worldwide and an additional 32 properties
with a total of 4,479 rooms under development. During 1999, 20 Clarion
properties were added while 13 were terminated. The properties are located in
the United States, Argentina, Australia, the Bahamas, Canada, Chile, France,
Germany, Guatemala, Indonesia, Ireland, Italy, Japan, Norway, the United Kingdom
and Uruguay. The following chart summarizes the Clarion system in the United
States:
Clarion Domestic System
<TABLE>
<CAPTION>
As of and for the
As of and for the Seven Months Ended As of and for the
Year Ended May 31, December 31, Year Ended December 31,
----------------------------------------------------------------------------------------
1995 1996 1997 1997 1997 1998 1999
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Number of properties, end of period........ 63 75 92 96 96 105 112
Number of rooms, end of period............. 10,420 12,817 14,721 16,161 16,161 17,878 18,815
Royalty fees ($000s)....................... $ 2,995 $ 3,602 $ 4,081 $ 2,957 $ 5,061 $ 5,447 $ 6,491
Average occupancy percentage............... 63.7% 63.3% 63.3% 64.7 % 62.3% 60.5% 59.0%
Average daily room rate (ADR).............. $ 63.71 $ 64.36 $ 67.76 $ 71.53 $ 70.67 $ 72.25 $ 74.17
RevPAR..................................... $ 40.58 $ 40.74 $ 42.86 $ 46.29 $ 44.05 $ 43.73 $ 43.74
</TABLE>
Econo Lodge. Econo Lodge hotels operate in the economy category of the lodging
industry. Econo Lodges are primarily targeted to senior citizens and rely to a
large extent on strong roadside name recognition. Principal competitor brands
include Days Inn, Motel 6, Ramada Limited, Red Carpet Inn, Super 8 and
Travelodge.
At December 31, 1999, there were 722 Econo Lodge properties with a
total of 45,193 rooms open and operating in the United States and Canada, and an
additional 54 properties with a total of 3,231 rooms under development in those
two countries. During 1999, 57 Econo Lodge properties were added while 64 were
terminated. The following chart summarizes the Econo Lodge system in the United
States:
Econo Lodge Domestic System
<TABLE>
<CAPTION>
As of and for the
As of and for the Seven Months Ended As of and for the
Year Ended May 31, December 31, Year Ended December 31,
----------------------------------------------------------------------------------------
1995 1996 1997 1997 1997 1998 1999
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Number of properties, end of period......... 633 641 682 692 692 698 691
Number of rooms, end of period.............. 42,801 42,726 44,636 45,050 45,050 44,458 43,754
Royalty fees ($000s)........................ $12,021 $12,760 $13,288 $ 8,991 $13,687 $13,975 $14,313
Average occupancy percentage................ 57.5% 58.0% 56.4% 60.7 % 56.1% 54.3% 54.0%
Average daily room rate (ADR)............... $ 38.31 $ 39.97 $ 41.33 $ 43.86 $ 42.35 $ 43.55 $ 45.01
RevPAR...................................... $ 22.04 $ 23.17 $ 23.30 $ 26.63 $ 23.75 $ 23.65 $ 24.32
</TABLE>
10
<PAGE>
Rodeway. The Rodeway brand competes in the economy category and is primarily
targeted to senior citizens. Principal competitor brands include Ho-Jo Inn,
Ramada Limited, Red Roof Inn, Shoney's Inn, Super 8 and Motel 6. At December
31, 1999, there were 171 Rodeway Inn properties with a total of 10,991 rooms,
open and operating in the United States and Canada, and an additional 23
properties with a total of 1,481 rooms under development in those two countries.
During 1999, 10 Rodeway properties were added while 40 were terminated. The
following chart summarizes the Rodeway system in the United States:
Rodeway Domestic System
<TABLE>
<CAPTION>
As of and for the
As of and for the Seven Months Ended As of and for the
Year Ended May 31, December 31, Year Ended December 31,
----------------------------------------------------------------------------------------
1995 1996 1997 1997 1997 1998 1999
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Number of properties, end of period......... 208 201 217 209 209 196 166
Number of rooms, end of period.............. 13,067 12,547 13,509 12,997 12,997 12,447 10,613
Royalty Fees ($000s)........................ $ 2,302 $ 2,506 $ 2,631 $ 1,756 $ 2,671 $ 2,678 $ 2,552
Average occupancy percentage................ 50.5% 52.7% 52.7% 54.7 % 51.4% 50.1% 50.7%
Average daily room rate (ADR)............... $ 38.93 $ 40.66 $ 41.15 $ 44.11 $ 43.15 $ 44.03 $ 45.57
RevPAR...................................... $ 19.64 $ 21.48 $ 21.68 $ 24.13 $ 22.20 $ 22.04 $ 23.09
</TABLE>
MainStay Suites. MainStay Suites, our newest hotel brand, is a midscale
extended-stay lodging product targeted to travelers who book hotel rooms for
five nights or more. The first MainStay Suites hotel, which Sunburst owns and
manages, opened in Plano, Texas, in November 1996. As of December 31, 1999,
there were 29 open hotels with 2,681 rooms and an additional 21 properties with
1,701 rooms under development. During 1999, 10 MainStay Suites properties were
added.
The MainStaySM Suites brand is designed to fill the gap in the
midscale category between existing upscale and economy extended-stay lodging
products. Principal competitors brands include Candlewood Suites, Homestead
Village, Sierra Suites and TownePlace Suites.
International Franchise Operations
Our international franchise operations are primarily conducted through
master franchise arrangements. These agreements provide the master franchisee
the right to develop Choice branded hotels in a specific geographic region,
usually for a fee. The agreements govern the relationship between the Company
and the master franchisee, who share the royalties generated by the underlying
franchised hotels. At December 31, 1999, we had 1,125 franchise hotels open in
34 countries outside the United States. The following table illustrates the
growth of our international franchise system over the three fiscal years ended
May 31, 1997 for the seven-month period ended December 31, 1997 and the three
fiscal years ended December 31, 1999.
11
<PAGE>
Combined International Franchise System(1)
<TABLE>
<CAPTION>
As of and for the
As of and for the Seven Months Ended As of and for the
Year Ended May 31, December 31, Year Ended December 31,
----------------------------------------------------------------------------------------
1995 1996 1997 1997 1997 1998 1999
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Number of properties, end of period......... 524 557 563 605 605 632 1,125
Number of rooms, end of period.............. 44,877 46,843 47,603 50,639 50,639 53,095 80,134
Royalty fees ($000s)....................... $ 1,998 $ 1,586 $ 1,672 $ 958 $ 2,303 $ 4,902 $ 6,949
</TABLE>
(1) Master franchise contracts do not currently require the reporting of
operating statistics (e.g. average occupancy percentage and average daily
room rate) of the underlying hotels, thus RevPAR is not calculated for
foreign hotels.
Europe. The Company is the second-largest international franchised hotel chain
in Europe, with 394 hotels open in thirteen countries at December 31, 1999.
On May 31, 1996, the Company invested approximately $17.1 million in
the capital stock of Friendly Hotels, PLC ("Friendly"). In exchange for the
$17.1 million investment, the Company received 750,000 shares of common stock
and 10 million newly issued immediately convertible preferred shares. In
addition, the company granted to Friendly a Master Franchise Agreement for the
United Kingdom and Ireland in exchange for 333,333 additional shares of common
stock. The preferred shares carry a 5.75% dividend payable in cash or in stock,
at the Company's option. The dividend accrues annually with the first dividend
paid on the earlier of the third anniversary of completion or on a conversion
date. As a condition to the investment, the Company has the right to appoint
three directors to the board of Friendly. Given the Company's ability to
exercise significant influence over the operations of Friendly, the equity
method of accounting is applied.
In January 1998, Friendly acquired European hotels owned by the
Company for $26.2 million in convertible preferred shares and cash. In exchange
for 10 hotels in France, two in Germany and one in the United Kingdom, the
Company received $22.2 million in new unlisted 5.75% convertible preferred
shares in Friendly at par, convertible for one new Friendly ordinary share for
every 150p nominal of the preferred convertible shares.
In 1998, the Company granted Friendly the master franchise rights for
Choice's Comfort, Quality and Clarion brand hotels throughout Europe (with the
exception of Scandinavia) for a 10 year period. In exchange, the Company will
receive from Friendly $8.0 million, payable in eight equal annual installments.
The master franchise payment is being recognized over the life of the agreement.
The Company owned approximately 5.3%, 5.2% and 4.95% of Friendly's
outstanding ordinary shares at December 31, 1999, 1998 and 1997, respectively.
The fair market value of the ordinary shares at December 31, 1999 and 1998 was
$2.0 million and $1.9 million, respectively.
There is also a master franchise arrangement in Scandinavia that has
90 open properties as of December 31, 1999.
Canada. Choice Hotels Canada is Canada's largest lodging organization with 226
properties open at December 31, 1999. Choice Hotels Canada is a joint venture,
owned 50% by the Company and 50% by W-westmont, a subsidiary of Westmont
Hospitality, which was formed in 1993 when W-westmont converted substantially
all of its controlled hotels to Choice's brands and Choice contributed its
operations in Canada to form Choice Hotels Canada.
12
<PAGE>
Other International Relationships. The Company has master franchise
arrangements with developers in various countries, including Australia, New
Zealand, India and Brazil. At December 31, 1999, 541 hotels were open and
operating under these master franchise arrangements (exclusive of Europe and
Canada), generating annual royalty fees to the Company of approximately $2.5
million.
In July 1998, the Company and Flag International Limited ("Flag"),
Australia's largest lodging chain, formed a strategic alliance. Flag Choice
Hotels, a wholly-owned subsidiary of Flag, acquired a 20-year master franchise
from the Company. Under the agreement, a number of Flag properties were re-
branded with Company brands which best serve their market segment. The
agreement also provides the Company with the opportunity to acquire, within the
first four years of the agreement, up to 30 percent of the equity of Flag Choice
Hotels with proportionate board representation.
Franchise Sales
We have identified key market areas for hotel development based on
supply/demand relationships and strategic objectives. Development opportunities
are first offered; (i) to existing franchisees; and then to (ii) developers of
hotels; (iii) owners of independent hotels and motels; (iv) owners of hotels
affiliated with other franchisors' brands; and; (v) contractors who construct
any of the foregoing. In considering hotels for conversion to one of the Choice
brands, or sites for development of new hotels, We consider locations which are
close to major highways, airports, tourist attractions and business centers that
attract travelers.
At December 31, 1999, we employed approximately 40 sales directors,
each of whom is responsible for a particular region or geographic area. Sales
directors contact potential franchisees directly and receive compensation based
on sales generated. Franchise sales efforts emphasize the benefits of
affiliating with one of the Choice brands, our commitment to improving RevPAR,
our television, radio and print brand advertising campaigns, the Choice
reservation system, our training and support systems, and our history of growth
and profitability. Because the Choice brands cover a broad spectrum of the
lodging marketplace, we are able to offer each prospective franchisee a brand
that fits its needs, lessening the chances that the prospective franchisee would
need to consider a competing franchise system.
Because retention of existing franchisees is important to our growth
strategy, we created a formal Impact Policy in 1992, which was revised in July
1999, which offers existing franchisees the right to object to a same-brand
property within a 15 mile radius. The Impact Policy protects franchisees from
the opening of a same-brand property within a specific distance, which can range
from one to seven miles, depending upon the market in which the property is
located. We believe that it is the only major franchise company to routinely
offer such territorial protection to its franchisees.
During fiscal 1999, Choice received 788 franchise applications, signed
473 franchise agreements and placed 301 new properties into operation in the
United States under the Choice brands. Of those placed into operations, 184
were newly constructed hotels. By comparison, during the twelve month period
ended December 31, 1998, we received 919 franchise applications, signed 619
franchise agreements and added 318 new properties into
13
<PAGE>
operation in the U.S. An application received may not always result in a signed
franchise agreement during the year received or at all due to an applicant being
unable to obtain financing or because the Company and the applicant are unable
to agree on the financial terms of the franchise agreement.
In 1999, we continued to place great focus on enforcing quality
standards. Terminations for properties that failed to meet quality assurance
standards and contractual obligations were 217 properties (including properties
not yet open) in 1999 and 258 properties (including properties not yet open) in
1998.
Franchise Agreements
Our standard franchise agreement grants a franchisee the right to non-
exclusive use of our franchise system in the operation of a single hotel at a
specified location, typically for a period of 20 years, with certain rights to
each of the franchisor and franchisee to terminate the franchise agreement
before the twentieth year. When the responsibility for development is sold to a
master franchisee, that party has the responsibility to sell to local
franchisees the Choice brands and the master franchisee generally must manage
the delivery of necessary services (such as quality assurance, reservations and
marketing) to support the franchised hotels in the master franchise area. The
master franchisee collects the fees paid by the local franchisee and remits an
agreed share to us. Master franchise agreements generally have a term of at
least 10 years. We have only entered into master franchise agreements with
respect to franchise hotels outside the United States.
Either party to a franchise agreement, other than master franchise
agreements, can terminate a franchise agreement prior to the conclusion of their
term under certain circumstances, such as at certain anniversaries of the
agreement or if a franchisee fails to bring properties into compliance with
contractual quality standards within specified periods of time. Early
termination options give us flexibility in eliminating or re-branding properties
which become weak performers for reasons other than contractual failure by the
franchisee. Master franchise agreements typically contain provisions permitting
us to terminate the agreement for failure to meet a specified development
schedule.
Franchise fees vary among the different Choice brands, but generally
are competitive with the industry average within their market group. Franchise
fees usually have four components: an initial, one-time affiliation fee; a
royalty fee; a marketing fee; and a reservation fee. Proceeds from the marketing
fee and reservation fee are used exclusively to fund marketing programs and the
Company's central reservation system, respectively. Most marketing fees support
brand-specific marketing programs, although we occasionally contribute a portion
of such fees to marketing programs designed to support all of the Choice brands.
Royalty fees and affiliation fees are the principal sources of profits for us.
The standard franchise agreements typically require our franchisees to
pay the following fees:
14
<PAGE>
Quoted Fees by Brand
<TABLE>
<CAPTION>
Initial Fee On-Going Fees as a Percentage of Gross Room Revenues
Per Room/ --------------------------------------------------------------------
Brand Minimum Royalty Fees Marketing Fees Reservation Fees
----- -------------- ---------------- -------------------- ----------------------
<S> <C> <C> <C> <C>
Comfort Inn.................... $300/$50,000 5.25% 2.1% 1.75%
Comfort Suites................. $300/$50,000 5.25% 2.1% 1.75%
Quality Inn.................... $300/$35,000 4.0% 2.1% 1.75%
Quality Suites................. $300/$50,000 4.0% 2.1% 1.25%
Sleep Inn...................... $300/$40,000 4.5% 2.1% 1.75%
Clarion........................ $300/$40,000 3.75% 1.0% 1.25%
Econo Lodge.................... $250/$25,000 4.0% 3.5%(1) --
MainStay Suites................ $300/$30,000 4.5% 2.5%(1) --
Rodeway........................ $250/$25,000 3.5% 1.25% 1.25%
</TABLE>
- ---------------------
(1) Fee includes both Marketing and Reservation Fees.
For a description of the franchising agreements between the Company
and Sunburst, see "Relationship Between the Company and Sunburst--Franchise
Agreements," on the Proxy Statement dated March 29, 2000, incorporated herein by
reference.
We have increased our average royalty rate since fiscal year 1993,
primarily by raising the quoted royalty fee for Comfort Inn franchisees to 5.25%
of annual gross room revenues ("GRR") from 4.0% of GRR in 1993, and by
increasing the number of higher royalty fee contracts in the franchise system.
For the twelve months ended December 31, 1999, our average royalty rate for all
Choice domestic brand hotels was 3.7%. We believe that our average royalty rate
will continue to increase as new franchisees are added and as older franchise
agreements expire, terminate or are amended.
Franchise Operations
Our operations are designed to improve RevPAR for our franchisees, as
this is the measure of performance that most directly impacts franchisee
profitability. We believe that by helping our franchisees to become more
profitable we will enhance our ability to both retain our existing franchisees
and attract new franchisees. The key aspects of our franchise operations are:
Central Reservation System. On average, approximately 30.0% of the room nights
booked at franchisees' properties are reserved through the toll-free telephone
reservation system which we operate. Our reservation system consists of a
computer reservation system known as CHOICE 2001, five reservation centers in
North America and several international reservation centers run by us or our
master franchisees. Operators trained on the CHOICE 2001 system can match each
caller with a Choice-branded hotel meeting the caller's needs. It provides an
instant data link to our franchised properties as well as to the Amadeus,
Galileo, SABRE and Worldspan airline reservation systems that facilitates the
reservation process for travel agents. We also offers our rooms for sale on our
own proprietary Internet site as well as those of other travel companies.
To define more sharply the market and image for each of our brands, we
began advertising separate toll-free reservation numbers for all of our brands
in fiscal year 1995, although we allow our reservation agents to cross-sell the
Choice brands. If a room in the Choice
15
<PAGE>
hotel brand requested by a customer is not available in the location or price
range that the customer desires, the agent may offer the customer a room in
another Choice-branded hotel that meets the customer's needs. Cross-selling
enables Choice and its franchisees to capture additional business.
On-line reports generated by the CHOICE 2001 system enable franchisees
to analyze their reservation patterns over time. In addition, we provide a yield
management product for our franchisees to allow them to improve the management
of their mix of rates and occupancy based on current and forecasted demand on a
property-by-property basis. We also market to our franchisees a property
management product. Such products are designed to manage the financial and
operations information of an individual hotel and improve its efficiency.
Property Management System; Technical Services Program. Our proprietary
property and yield management system, Profit Manager by Choice Hotels, is
designed to help franchisees maximize profitability and compete more effectively
by managing their rooms inventory, rates and reservations. The Profit Manager
system synchronizes each hotel's inventory with the CHOICE 2001 system, giving
reservation sales agents last room sell capabilities at every hotel. Profit
Manager includes a revenue management feature that calculates and suggests
optimum rates and length of stays based on each hotel's past performance and
projected occupancy.
As of March 1, 2000, 1,812 hotels in the United States and Canada are
using Profit Manager, with 925 of those hotels utilizing the revenue management
function.
Brand Name Marketing and Advertising. Our marketing and advertising programs are
designed to heighten consumer awareness of the Choice brands. Marketing and
advertising efforts are focused primarily in the United States and include
national television and radio advertising, print advertising in consumer and
trade media and promotional events, including joint marketing promotions with
vendors and corporate partners. In fiscal year 1996, we began using brand-
specific marketing and largely discontinued the strategy of advertising our
multiple brands under the Choice umbrella. As a result, each brand has
established a unique identity and now employs a more focused approach to its
target audiences.
Numerous marketing programs are conducted which target specific
groups, including senior citizens, motorist club members, families, government
and military employees, and meeting planners. Other marketing efforts include
domestic and international trade show
16
<PAGE>
programs, publication of group and tour rate directories, direct-mail programs,
discounts to holders of preferred credit cards, centralized commissions for
travel agents, fly-drive programs in conjunction with major airlines, and twice-
yearly publication of a Travel and Vacation Directory.
In 1998, we launched a program called Guest Privileges at four of our
brands (Comfort, Clarion, Quality and Sleep) to attract/retain frequent
travelers.
Marketing and advertising programs are directed by our marketing
department, which utilizes the services of independent advertising agencies. We
also employ sales personnel at our Silver Spring, Maryland, headquarters and in
our Phoenix, Arizona office. These sales personnel use telemarketing to target
specific customer groups, such as potential corporate clients in areas where our
franchised hotels are located, the motor coach market, and meeting planners.
Most of these sales personnel sell reservations and services for all of the
Choice brands.
Our franchise service directors work with franchisees to maximize
RevPAR. These directors advise franchisees on topics such as marketing their
hotels, improving quality and maximizing the benefits offered by the Choice
reservations system.
Quality Assurance Programs. Consistent quality standards are critical to the
success of a hotel franchise. We have established quality standards for all of
our franchised brands which cover housekeeping, maintenance, brand
identification and level of services offered. We inspect properties for
compliance with our quality standards when application is made for admission to
the franchise system. The compliance of existing franchisees with quality
standards is monitored through scheduled and unannounced Quality Assurance
Reviews conducted at least once per year at each property. Properties which fail
to maintain a minimum score are reinspected on a more frequent basis until
deficiencies are cured, or until such properties are terminated.
To encourage compliance with quality standards, various brand-specific
incentives are offered to franchisees who maintain consistent quality standards.
We identify franchisees whose properties operate below minimum quality standards
and assist them in complying with brand specifications. Franchisees who fail to
improve on identified quality matters may be subject to consequences ranging
from written warnings to termination of the franchisee's franchise agreement.
During the twelve months ended December 31, 1999, 83 domestic properties were
terminated for failure to maintain minimum quality assurance scores.
Training. We maintain a training department which conducts mandatory training
programs for all franchisees and their employees. Regularly scheduled regional
and national training meetings are also conducted for both property-level staff
and managers. Training programs teach franchisees how to take advantage of the
Choice reservation system and marketing programs, and fundamental hotel
operations such as housekeeping, maintenance, and inventory yield management.
Training is conducted by a variety of methods, including group
instruction seminars and video programs. We are developing an interactive
computer-based training system that will train hotel employees at their own
pace. Franchisees will be required to purchase hardware to operate the training
system, and will use software developed by us.
17
<PAGE>
Purchasing. The Company's product services department negotiates volume
purchases of various products needed by franchisees to run their hotels,
including furniture, fixtures, carpets and bathroom amenities. The department
also helps to ensure consistency in such products across its exclusively new-
construction brands, Sleep Inn and MainStaySM Suites brands. Sales to
franchisees by the Company were approximately $3.9 million during the twelve
months ended December 31, 1999. The group purchasing program utilizes our bulk
purchases to obtain favorable pricing from third-party vendors for franchisees
ordering similar products. We act as a clearinghouse between the franchisee and
the vendor, and most orders are shipped directly to the franchisee. In the
fourth quarter of 1998, the Company discontinued the group purchasing program as
previously operated.
Design and Construction. We maintain a design and construction department to
assist franchisees in refurbishing, renovating, or constructing their properties
prior to or after joining the system. Department personnel assist franchisees in
meeting our brand specifications by providing technical expertise and cost-
savings suggestions.
Financial Assistance Programs. From time to time, we establish programs or help
franchisees obtain financing through; (i) a wholly owned subsidiary; (ii)
strategic partnerships with hotel lenders; and (iii) by referral to hotel
lenders for hotel refinancing, acquisition, renovation and development.
Some of the past programs include: (i) a Second Mortgage Financing
program under which the Company offered second mortgage financing for the
development and construction of Quality Inn, Quality Suites, Quality Inn and
Suites, Main Stay Suites and Sleep Inns; (ii) an Econo Lodge exterior renovation
program under which forgivable loans up to an amount of $17,500 per property
were given to qualified Econo Lodge franchisees for standardized exterior
renovation; and (iii) a "Construction to Permanent Financing" program under
which Salomon Smith Barney together with Suburban Capital Markets Inc. offered
$100 million in financing per year to qualified franchises and the Company
guaranteed such loans with a maximum guarantee amount of $10 million. At
December 31, 1999, loans outstanding under the above programs were $2.2 million,
$4.2 million and $14.3 million, respectively, and the Company's guarantee
covered $7.2 million in loans.
Competition
Competition among franchise lodging chains is intense, both in
attracting potential franchisees to the system and in generating reservations
for franchisees.
We believe that hotel operators choose lodging franchisors based
primarily on the perceived value and quality of each franchisor's brand and
services, and the extent to which affiliation with that franchisor may increase
the franchisee's reservations and profits. We believe that hotel operators
select a franchisor in part based on the franchisor's reputation among other
franchisees, and the success of its existing franchisees.
18
<PAGE>
Choice is the second largest hotel franchisor in the world. The
largest, Cendant Corporation (formerly HFS, Inc.), has over 6,100 franchised
hotels. Bass Hotels & Resorts has 2,097, Promus/Hilton has 1,680, Marriott
International, Inc. has 1,543, Accor has 1,127, Carlson Hospitality has 417,
Starwood Hotels and Resorts has 354, and Hospitality International has 119.
Our prospects for growth are largely dependent upon the ability of our
franchisees to compete in the lodging market, since our franchise system
revenues are based on franchisees' gross room revenues.
The ability of a hotel to compete may be affected by a number of
factors, including the location and quality of its property, the number and
quality of competing properties nearby, its affiliation with a recognized name
brand, and general regional and local economic conditions. The effect of local
economic conditions on our results is substantially reduced by the geographic
diversity of our franchised properties, which are located in all 50 states and
in 34 other countries, as well as its range of products and room rates.
Service Marks and Other Intellectual Property
The service marks Quality, Comfort, Clarion, Sleep, Econo Lodge,
Rodeway, MainStay and related marks and logos are material to our business. We,
directly and through our franchisees, actively uses these marks. All of the
material marks are registered with the United States Patent and Trademark
Office. In addition, we have registered certain of our marks with the
appropriate governmental agencies in over 100 countries where we are doing
business or anticipate doing business in the foreseeable future. We seek to
protect our brands and marks throughout the world, although the strength of
legal protection available varies from country to country.
Seasonality
Our principal sources of revenues are franchise fees based on the
gross room revenues of its franchised properties. We experience seasonal revenue
patterns similar to those of the lodging industry in general. This seasonality
can be expected to cause quarterly fluctuations in our revenues, profit margins
and net income.
Regulation
Our franchisees are responsible for compliance with all laws and
government regulations applicable to the hotels they own or operate. The lodging
industry is subject to numerous federal, state and local government regulations,
including those relating to the preparation and sale of food and beverage (such
as health and liquor license laws), building and zoning requirements and laws
governing employee relations, including minimum wage requirements, overtime,
working conditions and work permit requirements.
The Federal Trade Commission (the "FTC"), various states and certain
other foreign jurisdictions (including France, Province of Alberta, Canada, and
Mexico) regulate the sale of franchises. The FTC requires franchisors to make
extensive disclosure to prospective
19
<PAGE>
franchisees but does not require registration. A number of states in which our
franchises operate require registration or disclosure in connection with
franchise offers and sales. In addition, several states have "franchise
relationship laws" or "business opportunity laws" that limit the ability of the
franchisor to terminate franchise agreements or to withhold consent to the
renewal or transfer of these agreements. While our franchising operations have
not been materially adversely affected by such regulation, we cannot predict the
effect of future regulation or legislation.
Impact of Inflation and Other External Factors
Our principal sources of revenues are franchise fees. Franchise fees
can be impacted by external factors, including, in particular: the supply of
hotel rooms within the lodging industry relative to the demand for rooms by
travelers, and inflation.
Although we believe industry-wide supply and demand for hotel rooms
recently has been fairly balanced, any excess in supply that might develop in
the future could unfavorably impact room revenues at our franchised hotels
either by reducing the number of rooms reserved at such franchised properties or
by restricting the rates hotel operators can charge for their rooms. In
addition, an excess supply of hotel rooms may discourage potential franchisees
from opening new hotels, reducing the franchise fees received by us. However,
we benefit from an increasing supply of hotels as it serves to increase
franchise fees.
Although we believe that increases in the rate of inflation will
generally result in comparable increases in hotel room rates, severe inflation
could contribute to a slowing of the national economy. Such a slowdown could
result in reduced travel by both business and leisure travelers, potentially
resulting in less demand for hotel rooms, which could result in a temporary
reduction in room rates and fewer room reservations, negatively impacting our
revenues. A weak economy could also reduce demand for new hotels, negatively
impacting the franchise fees received by us.
Among the other unpredictable external factors which may affect our
fee stream are wars, airline strikes, gasoline shortages and severe weather.
Employees
We employ domestically approximately 2,100 people as of December 31,
1999. None of our employees are represented by unions or covered by collective
bargaining agreements. We consider our relations with our employees to be
satisfactory.
Item 2. Properties
Our principal executive offices are located at 10750 Columbia Pike,
Silver Spring, Maryland 20901. Prior to May, 1998, the offices were leased from
Sunburst; they are currently leased from a third party. We own our reservation
system offices in Phoenix, AZ and Minot, ND. In 1998, one of our subsidiaries
acquired a call center in Grand Junction, CO, which we had previously leased.
We also lease one additional reservation system office in Grand Junction, CO,
pursuant to a lease that expires in 2000, and occupy additional space in
Toronto, Canada, on a
20
<PAGE>
month-to-month basis. In addition, we lease 12 sales offices across the United
States. Management believes that its executive, reservation systems and sales
offices are sufficient to meet its present needs and does not anticipate any
difficulty in securing additional or alternative space, as needed, on terms
acceptable to the Company.
Item 3. Legal Proceedings
The Company is not a party to any litigation, other than routine
litigation incidental to its business. 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
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year ended December 31, 1999.
EXECUTIVE OFFICERS OF CHOICE HOTELS INTERNATIONAL, INC.
The name, age, title, present principal occupation, business address and
other material occupations, positions, offices and employment of each of the
executive officers of the Company are set forth below. The business address of
each executive officer is 10750 Columbia Pike, Silver Spring, Maryland 20901,
unless otherwise indicated.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Stewart Bainum, Jr........................ 53 Chairman of the Board of Directors
Charles A. Ledsinger, Jr.................. 50 Chief Executive Officer and President
Steven T. Schultz......................... 53 Executive Vice President, Franchise Operations
Thomas Mirgon............................. 43 Senior Vice President, Administration
Bruno Geny................................ 40 Senior Vice President, International
Michael J. DeSantis....................... 41 Senior Vice President, General Counsel and Secretary
Joseph M. Squeri.......................... 34 Senior Vice President, Chief Financial Officer and Treasurer
</TABLE>
Background of Executive Officers:
Stewart Bainum, Jr., Chairman of the Board of the Company from March 1987
to November 1996 and since October 1997; Director of the Company since 1977;
Chairman of the Board of Sunburst since November 1996; Chairman of the Board of
Manor Care, Inc. since September, 1998; Chairman of the Board and Chief
Executive Officer of Manor Care, Inc. from March 1987 to September, 1998; Chief
Executive Officer of Manor Care, Inc. and its subsidiary ManorCare Health
Services, Inc. ("MCHS") from March 1987 to September, 1998 and President from
June 1989 to September, 1998; Vice Chairman of the Board of Vitalink Pharmacy
Services, Inc. ("Vitalink") from December 1994 to September, 1998; Vice Chairman
of the Board of Manor Care and subsidiaries from June 1982 to March 1987;
Director of Manor Care from August 1981 to September 1998, of Vitalink from
September 1991 to September, 1998, of MCHS from 1976 to September 1998; Chairman
of the Board and Chief Executive Officer of
21
<PAGE>
Vitalink from September 1991 to February 1995 and President and Chief Executive
Officer from March 1987 to September 1991.
Charles A. Ledsinger, Jr., President, Chief Executive Officer and Director
of the Company since August, 1998; President and Chief Operating Officer of St.
Joe Company from February 1998 to August 1998, Senior Vice President and Chief
Financial Officer of St. Joe Company from May 1997 to February 1998; Senior Vice
President and Chief Financial Officer of Harrah's Entertainment, Inc. from June
1995 to May 1997; Senior Vice President and Chief Financial Officer of Promus
Companies Incorporated from August 1990 to June 1995. Director: FelCor Lodging
Trust, Inc., Friendly's Ice Cream Corporation and TBC.
Steven T. Schultz. Executive Vice President, Franchise Operations of
the Company since May 1999; Executive Vice President and Chief Development
Officer of La Quinta Inns, Inc. from 1997 to April 1999; Senior Vice President-
Development of La Quinta Inns, Inc. from 1992 to 1997.
Bruno Geny, Senior Vice President, International of the Company since
November 1997; Executive Director, Mergers & Acquisitions of Union Bank
Switzerland from July 1997 to November 1997; Executive Director, Mergers &
Acquisitions of SBC Walberg from March 1992 to June 1997.
Thomas Mirgon. Senior Vice President, Administration since April 1998;
Senior Vice President, Human Resources of the Company from March 1997 to April
1998 and of Former Choice from March 1997 to October 1997; Vice President,
Administration of Interim Services from August 1993 to February 1997; employed
by Taco Bell Corp. from January 1986 to August 1993, last serving as Senior
Director, Field Human Resources from February 1992 to August 1993.
Michael J. DeSantis. Senior Vice President, General Counsel and Secretary
of the Company since June 1997 and of Former Choice from June 1997 to October
1997; Senior Attorney for Former Choice from November 1996 to June 1997; Senior
Attorney for Manor Care from January 1996 to October 1996; Vice President,
Associate General Counsel and Assistant Secretary for Caterair International
Corporation from April 1994 to December 1995; Assistant General Counsel of
Caterair International from May 1990 to March 1994. Director: Friendly Hotels,
plc.
Joseph M. Squeri. Senior Vice President and Chief Financial Officer of the
Company since June 1999; Treasurer of the Company since April 1998; Vice
President, Finance and Controller of the Company from March 1997 to June 1999
and of Former Choice from March 1997 to October 1997; Director of Investment
Funds, The Carlyle Group, from November 1994 to February 1997; various positions
with Arthur Andersen LLP from July 1987 to November 1994, most recently as
Manager.
22
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.
Prior to the Spin-off, the Company was a wholly-owned subsidiary of
Former Choice. In the Spin-off, Former Choice distributed to its shareholders
all of its interest in the Company on the basis of one share of Company common
stock for each share of Former Choice common stock. The Spin-off resulted in
approximately 60 million shares of Company common stock outstanding as of
October 16, 1997.
The shares of the Company's Common Stock are listed and traded on the
New York Stock Exchange. The following table sets forth information on the high
and low prices of the Company's Common Stock since October 16, 1997.
QUARTERLY MARKET PRICE RANGE OF COMMON STOCK
(Unaudited)
Quarters Ended Market Price Per Share
- ------------------------------------------------------------
High Low
- ------------------------------------------------------------
FISCAL 1999
March $14 3/8 $12 5/6
June 19 3/4 13 3/16
September 17 1/2 15 1/8
December 17 3/16 13 11/16
FISCAL 1998
March $18 1/2 $14 5/16
June 18 7/16 12
September 14 7/16 11 5/8
December 13 5/16 9 5/8
FISCAL 1997(1)
October 16 --
November 30 $18 $17
CALENDER 1997(1)
October 16 -
December 31 $18 $15 7/8
- -----------------
(1) On September 16, 1997, the Company changed its fiscal year end from May 31
to December 31. The Spinoff occurred on October 15, 1997, no trading
occurred prior to that date.
The Company paid no dividends during the twelve month period ended December
31, 1999. The Company does not anticipate the payment of any cash dividends on
its common stock in the foreseeable future. Payment of dividends on Company
common stock will also be subject to limitations as may be imposed by the
Company's credit facilities from time to time. The declaration of dividends
will be subject to
23
<PAGE>
the discretion of the Board of Directors.
As of March 10, 2000, there were 4,037 record holders of Company common stock.
Item 6. Selected Financial Data.
The required information is included on page 1 of the 1999 Annual
Report and is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Conditions and
Results of Operations.
The required information is included on pages 26-33 of the 1999 Annual
Report and is incorporated herein by reference.
Item 7A. 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. 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 December 31, 1999 and 1998, the Company had $307.4 million and $279.2 million
of debt outstanding at effective interest rates of 6.6% and 6.4%, respectively,
after the impact of interest rate swaps is taken into account. A hypothetical
change of 10% in the Company's effective interest rate from year-end 1999 levels
would increase or decrease interest expense by $1.3 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.
The Company is also exposed to fluctuations in foreign currency relating to its
preferred stock investment in Friendly Hotels, PLC which is denominated in
British Pounds. The Company does not have any derivative financial instruments
related to its foreign investments.
Item 8. Financial Statements and Supplementary Data.
The required information is included on page(s) 35-52 of the 1999
Annual Report and is incorporated herein by reference. See Item 14 for the
Index to Financial Statements and Schedules.
24
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
The required information on directors is included on pages 5-7 of the
Proxy Statement dated March 29, 2000 and is incorporated herein by reference.
The required information on executive officers is set forth in Part I of this
Form 10-K under an unnumbered item captioned "Executive Officers of Choice
Hotels International, Inc."
Item 11. Executive Compensation.
The required information is included on pages 11-14 of the Proxy
Statement dated March 30, 2000 and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The required information is included on pages 9-10 of the Proxy
Statement dated March 29, 2000 and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
The required information is included on pages 20-25 of the Proxy
Statement dated March 29, 2000 and is incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) List of Documents Filed as Part of this Report
1. Financial Statements
The following information is included on the corresponding pages of
the 1999 Annual Report:
Consolidated Statements of Income........................ p. 35
Consolidated Balance Sheets.............................. p. 36
Consolidated Statements ofShareholders' Equity
and Comprehensive Income................................ p. 38
Consolidated Statements of Cash Flows.................... p. 37
Report of Independent Public Accountants................. p. 34
Notes to Consolidated Financial Statements............... pp. 39-52
25
<PAGE>
2. Financial Statement Schedules
The following reports are filed herewith.
Report of Independent Public Accountants on Schedule.....
Consent of Independent Public Accountants................
Schedule II: Valuation and Qualifying Accounts..........
All other schedules are not applicable.
3. Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
3.01(a) Restated Certificate of Incorporation of Choice Hotels Franchising, Inc.
3.02(a) Amended and Restated Bylaws of Choice Hotels International, Inc.
4.01(c) Credit Agreement dated October 15, 1997 among Choice Hotels International, Inc., Chase
Manhattan Bank, as Agent and certain Lenders
4.02(c) First Amendment to Credit Agreement dated February 13, 1998 among Choice Hotels
International, Inc., Chase Manhattan Bank, as Agent, and certain Lenders.
4.03(j) Second Amendment to Credit Agreement, dated as of March 30, 1998 among Choice Hotels
International, Inc., Chase Manhattan Bank, as agent, and certain Lenders.
4.04 (j) Third Amendment to Credit Agreement, dated as of April 9, 1998 among Choice Hotels
International, Inc., Chase Manhattan Bank, as agent, and certain Lenders.
4.05(j) Fourth Amendment to Credit Agreement, dated as of December 16, 1998, among Choice Hotels
International, Inc., Chase Manhattan Bank, as agent, and certain Lenders.
4.06(k) Fifth Amendment to Credit Agreement dated March 19, 1999 among Choice Hotels International,
Inc., Chase Manhattan Bank as agent, and certain lenders.
4.07(h) Registration Agreement dated April 28, 1998 between Choice Hotels International, Inc. and
Salomon Brothers, Inc., Bear Stearns & Co. Inc. and Lehman Brothers Inc.
4.08(h) Indenture dated as of May 4, 1998, by and among the Company, Quality Hotels Europe, Inc., QH
Europe Partnership and Marine Midland Bank, as Trustee, with respect to the 7.125% Senior
Notes due 2008 of the Company.
4.09(h) Specimen certificate of 7.125% Senior Note due 2008 (Original Note) (Attached as an exhibit
to the Indenture set forth as Exhibit 4.08)
4.10(h) Specimen certificate of 7.125% Senior Note due 2008 (Exchange Note) (Attached as an exhibit
to the Indenture set forth as Exhibit 4.08)
4.11(b) Guarantee Agreement dated October 15, 1997 between Quality Hotels Europe, Inc. and The Chase
Manhattan Bank.
4.12(b) Supplement No. 1 to the guarantee Agreement dated April 28, 1998 among Choice Hotels
International, Inc., Quality Hotels Europe, Inc., QH Europe Partnership and The Chase
Manhattan Bank.
4.13(b) Indemnity, Subrogation and Contribution Agreement, dated April 28, 1998 among Choice Hotels
International, Inc., Quality Hotels Europe, Inc., QH Europe Partnership and The Chase
Manhattan Bank.
4.14(g) Rights Agreement, dated as of February 19, 1998, between Choice Hotels International, Inc.
and ChaseMellon Shareholder Services, L.L.C., as Rights Agent.
10.01(l) Amended and Restated Employment Agreement between Choice Hotels International, Inc. and
Charles A. Ledsinger, Jr. dated April 13, 1999.
10.02(d) Distribution Agreement dated as of October 15, 1997 by and between Choice Hotels
International, Inc. (renamed Sunburst Hospitality Corporation) and Choice Hotels
Franchising, Inc. (renamed Choice Hotels International, Inc.)
</TABLE>
26
<PAGE>
<TABLE>
<S> <C>
10.03(d) Employee Benefits Administration Agreement dated as of October 15, 1997 by and between
Choice Hotels International, Inc. (renamed Sunburst Hospitality Corporation) and Choice
Hotels Franchising, Inc. (renamed Choice Hotels International, Inc.)
10.04(d) Tax Administration Agreement dated as of October 15, 1997 by and between Choice Hotels
International, Inc. (renamed Sunburst Hospitality Corporation) and Choice Hotels
Franchising, Inc. (renamed Choice Hotels International, Inc.
10.05(d) Tax Sharing Agreement dated as of October 15, 1997 by and between Choice Hotels
International, Inc. (renamed Sunburst Hospitality Corporation) and Choice Hotels
Franchising, Inc. (renamed Choice Hotels International, Inc.)
10.09(d) Employee Benefits Allocation Agreement dated as of October 15, 1997 by and between Choice
Hotels International, Inc. (renamed Sunburst Hospitality Corporation) and Choice Hotels
Franchising, Inc. (renamed Choice Hotels International, Inc.)
10.10(d) Strategic Alliance Agreement dated as of October 15, 1997 by and between Choice Hotels
International, Inc. (renamed Sunburst Hospitality Corporation) and Choice Hotels
Franchising, Inc. (renamed Choice Hotels International, Inc.)
10.11(d) Omnibus Amendment and Guaranty dated as of October 15, 1997 by and among Choice Hotels
International, Inc. (renamed Sunburst Hospitality Corporation), Choice Hotels Franchising,
Inc. (renamed Choice Hotels International, Inc.) and Manor Care, Inc.
10.12(d) Amended and Restated Employment Agreement dated as of October 15, 1997 by and between Choice
Hotels Franchising, Inc. (renamed Choice Hotels International, Inc.) and Stewart Bainum, Jr.
10.13(l) Amended and Restated Employment Agreement dated April 13, 1999 by and between Choice Hotels
International, Inc. and Thomas Mirgon
10.14(j) Omnibus Amendment Agreement dated December 28, 1998 between Choice Hotels International,
Inc. and Sunburst Hospitality Corporation.
10.15 * Second Omnibus Amendment Agreement dated February 29, 2000 between Choice Hotels
International, Inc. and Sunburst Hospitality Corporation.
10.16(f) Choice Hotels International, Inc. Non-Employee Director Stock Option and Deferred
Compensation Stock Purchase Plan.
10.17(f) Choice Hotels International, Inc. 1997 Non-Employee Director Stock Compensation Plan.
10.18(f) Choice Hotels International, Inc. 1997 Long-Term Incentive Plan.
10.20(l) Second Amended and Restated Employment Agreement dated April 13, 1999 between Choice Hotels
International, Inc. and Michael J. DeSantis.
10.22(j) Commercial Lease dated May 29, 1998 among Columbia Pike I, LLC and Colesville Road, LLC
(each an assignee of Manor Care, Inc.) and Choice Hotels International, Inc.
10.23(l) Employment Agreement dated May 13, 1999 between Choice Hotels International, Inc. and Steven
T. Schultz.
10.24(l) Employment Agreement dated June 3, 1999 between Choice Hotels International, Inc. and Joseph
M. Squeri.
13.01 * Annual Report to Shareholders
21.01 * Subsidiaries of Choice Hotels International, Inc.
23.01 * Consent of Arthur Andersen LLP
27.01 * Financial Data Schedule
</TABLE>
- ------------------
* 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 Amendment No. 1 to Registration
Statement on Form S-4, filed October 14, 1998 (Reg. No. 333-62543).
27
<PAGE>
(c) Incorporated by reference to the identical document filed as an exhibit to
Choice Hotels International, Inc.'s Transitional Report on Form 10-K dated
June 1, 1997, to December 31, 1997, filed on March 31, 1998.
(d) Incorporated by reference to the identical document filed as an exhibit to
Choice Hotels International, Inc.'s Current Report on Form 8-K dated
October 15, 1997, filed on October 29, 1997.
(e) Incorporated by reference to the identical document filed as an exhibit to
Choice Hotels International, Inc.'s Current Report on Form 8-K dated
October 15, 1997, filed on December 16, 1997.
(f) Incorporated by reference to the identical document filed as an exhibit to
Choice Hotels International, Inc.'s Registration Statement filed on Form S-
8, filed on December 2, 1997 (Reg. No. 333-41357).
(g) Incorporated by reference to the identical document filed as an exhibit to
Choice Hotels International, Inc.'s Current Report on Form 8-K dated
February 19, 1998, filed on March 11, 1998.
(h) Incorporated by reference to the identical document filed as an exhibit to
Choice Hotels International, Inc.'s Quarterly Report on Form 10-Q filed for
the quarterly period ended March 31, 1998, filed on May 15, 1998.
(i) Incorporated by reference to the identical document filed as an exhibit to
Choice Hotels International, Inc.'s Quarterly Report on Form 10-Q filed for
the quarter ended June 30, 1998, filed on August 11, 1998.
(j) Incorporated by reference to the identical document filed as an exhibit to
Choice Hotels International, Inc.'s Annual Report on Form 10-K for the year
ended December 31, 1998, filed on March 30, 1999.
(k) Incorporated by reference to the identical document filed as an exhibit to
Choice Hotels International, Inc.'s Quarterly Report on Form 10-Q for the
quarter ended March 31, 1999, filed on May 4, 1999.
(l) Incorporated by reference to the identical document filed as an exhibit to
Choice Hotels International, Inc.'s Quarterly Report on Form 10-Q for the
quarter ended June 30, 1999, filed on August 16, 1999.
(b) No reports on Form 8-K were filed during the last quarter of the fiscal
year ended December 31, 1999.
28
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CHOICE HOTELS INTERNATIONAL, INC.
By: /s/ Charles A. Ledsinger, Jr.
---------------------------------------
Charles A. Ledsinger, Jr.
President and Chief Executive Officer
Dated: March 30, 2000
29
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Stewart Bainum, Jr. Chairman, Director March 30, 2000
- ------------------------------------
Stewart Bainum, Jr.
/s/ Charles P. Ledsinger, Jr. President, Chief Executive March 30, 2000
- ------------------------------------ Officer & Director
Charles P. Ledsinger, Jr.
/s/ Barbara Bainum Director March 30, 2000
- ------------------------------------
Barbara Bainum
/s/ James H. Rempe Director March 30, 2000
- ------------------------------------
James H. Rempe
/s/ Larry R. Levitan Director March 30, 2000
- ------------------------------------
Larry R. Levitan
/s/ William L. Jews Director March 30, 2000
- ------------------------------------
William L. Jews
/s/ Gerald W. Petitt Director March 30, 2000
- ------------------------------------
Gerald W. Petitt
/s/ Raymond E. Schultz Director March 30, 2000
- ------------------------------------
Raymond E. Schultz
/s/ Jerry E. Robertson Director March 30, 2000
- ------------------------------------
Jerry E. Robertson
/s/ Joseph M. Squeri Senior Vice President and March 30, 2000
- ------------------------------------ Chief Financial Officer
Joseph M. Squeri
</TABLE>
30
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Choice Hotels International, Inc.:
We have audited in accordance with auditing standards generally accepted in the
United States, the consolidated financial statements included in Choice Hotels
International, Inc.'s ("the Company") annual report to shareholders incorporated
by reference in this Form 10-K, and have issued our opinion thereon dated
January 28, 2000. Our audit was made for the purpose of forming an opinion on
those consolidated financial statements taken as a whole. The schedule listed in
the index under Item 14(a)2 is the responsibility of the Company's management
and is presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic consolidated financial
statements. This schedule has been subjected to the auditing procedures applied
in the audit of the basic consolidated financial statements and, in our opinion,
fairly states in all material respects the financial data required to be set
forth therein in relation to the basic consolidated financial statements taken
as a whole.
Arthur Andersen LLP
Vienna, Virginia
January 28, 2000
31
<PAGE>
CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(In thousands of dollars)
<TABLE>
<CAPTION>
Balance at Charges to Balance at
Beginning of Profit End
Description Period and Loss Write-offs Of Period
----------- ------ -------- ---------- ----------
<S> <C> <C> <C> <C>
Year ended December 31, 1999
Allowance for doubtful accounts $8,082 $ 588 $(2,467) $6,203
====== ====== ======= ======
Year ended December 31, 1998
Allowance for doubtful accounts $7,608 $1,473 $ (999) $8,082
====== ====== ======= ======
Seven months ended December 31, 1997
Allowance for doubtful accounts $6,159 $2,274 $ (825) $7,608
====== ====== ======= ======
Year ended May 31, 1997
Allowance for doubtful accounts $4,515 $2,238 $ (594) $6,159
====== ====== ======= ======
</TABLE>
32
<PAGE>
EXHIBIT 10.15
SECOND OMNIBUS AMENDMENT AGREEMENT
THIS SECOND OMNIBUS AMENDMENT AGREEMENT (this "Agreement") is made
this 29th day of February, 2000 by and between CHOICE HOTELS INTERNATIONAL,
INC., a Delaware corporation ("Choice"), and SUNBURST HOSPITALITY CORPORATION, a
Delaware corporation ("Sunburst").
WHEREAS, in connection with the spin-off of Choice by Sunburst (the
"Spin-off"), Choice and Sunburst entered into a Strategic Alliance Agreement
(the "Strategic Alliance Agreement") dated October 15, 1997 pursuant to which,
among other things, the parameters of the operating relationship between Choice
and Sunburst with regard to matters of mutual interest are set forth;
WHEREAS, in connection with the Spin-off, Choice and Sunburst also
entered into a Noncompetition Agreement dated October 15, 1997 (the
"Noncompetition Agreement");
WHEREAS, in connection with the Spin-off, Choice and Sunburst entered
into a Distribution Agreement dated October 15, 1997 pursuant to which, among
other things, Choice agreed to loan to Sunburst $115,000,000 which was evidenced
by a subordinated note (the "Term Note") with an aggregate principal amount of
$115,000,000 and a maturity date of five years;
WHEREAS, the Strategic Alliance Agreement contains a form of
Franchising Agreement (the "Franchising Agreement") as Exhibit A to be entered
---------
into by and between Choice and Sunburst whenever Choice is to brand any hotel or
lodging property of any kind that Sunburst develops or acquires and intends to
franchise during the term of the Strategic Alliance Agreement;
WHEREAS, Choice and Sunburst have entered into numerous franchising
agreements substantially in the form of the Franchising Agreement;
WHEREAS, Choice and Sunburst entered into an Omnibus Amendment
Agreement (the "First Omnibus Amendment Agreement" and, together with this
Agreement, the Strategic Alliance
<PAGE>
-2-
Agreement, the Noncompetition Agreement, the Term Note and the franchising
agreements entered into between Franchising and Realco prior to, on or after the
date hereof, the "Transaction Documents") dated December 28, 1998, pursuant to
which, among other things, Choice and Sunburst agreed to amend the Strategic
Alliance Agreement, the Term Note and the aforementioned franchising agreements;
WHEREAS, Choice and Sunburst desire to further amend the Strategic
Alliance Agreement, the aforementioned franchising agreements and the Term Note;
and
WHEREAS, Choice and Sunburst desire to terminate the Noncompetition
Agreement;
NOW, THEREFORE, Choice and Sunburst agree as follows:
ARTICLE ONE
AMENDMENTS TO STRATEGIC ALLIANCE AGREEMENT
AND FRANCHISING AGREEMENTS
Section 1.1. Definitions. Any capitalized term used within this
-----------
Article One and not defined within this Agreement, will have the meaning
ascribed to such term in the Strategic Alliance Agreement.
Section 1.2. Term. Section 2.1 of the Strategic Alliance Agreement
----
is hereby amended and restated as follows:
This Agreement shall go into effect on the date of the Distribution
(the "Effective Date") and shall continue in force until October 15, 2002
(the "Expiration Date"), except for Section 7.2 and Sections 1.6 and 1.7 of
the Second Omnibus Amendment Agreement which shall survive so long as any
franchising agreements between Realco and Franchising are in effect. This
Agreement may be renewed upon the mutual consent of the Parties.
<PAGE>
-3-
Section 1.3. Elimination of Right to First Refusal in Strategic
--------------------------------------------------
Alliance Agreement. The Strategic Alliance Agreement is hereby amended such
- ------------------
that Sections 3.2, 3.3, 3.4, 3.5 and 3.6 are deleted in their entirety and the
following new Section 3.2 is hereby inserted as follows:
3.2 Until the Expiration Date, Realco shall give Franchising written
notice at least fourteen days prior to executing a franchise application
with a third party with respect to the franchising of a hotel or lodging
property. Such written notice shall include a summary term sheet of the
proposed arrangement with the third party. Franchising shall have the
opportunity to present Realco with a plan to brand the hotel or lodging
property with one of its brands provided that Realco shall have no
obligation to enter into an agreement with Franchising to use any of its
brands on the hotel or lodging property.
Section 1.4. Development. Section 4 of the Strategic Alliance
-----------
Agreement is hereby amended and restated in its entirety as follows:
4. Development
-----------
4.1. Realco and Franchising are currently in the midst of a program
under which Realco has developed the twenty-one MainStay Suite Hotels
listed on Appendix I to the Second Omnibus Amendment Agreement and which
----------
are franchised by Franchising. Realco agrees that it will continue to
develop at least four additional MainStay Suite Hotels so that it will have
opened and continue to operate no fewer than a total of twenty-five
MainStay Suite Hotels prior to the Expiration Date (the "MainStay Quota").
For purposes of Sections 4.1 and 4.2, the following shall be included in
the MainStay Quota notwithstanding Realco's transfer of such hotels prior
to the Expiration Date:
(a) The three MainStay Suites properties (the "Put Call Properties")
which are subject to a Put Call Agreement between Realco and Franchising;
<PAGE>
-4-
(b) The two MainStay Suites properties identified in Appendix III to
------------
the Second Omnibus Amendment Agreement; and
(c) Any MainStay Suite property sold, transferred or conveyed by
Realco if such property is relicensed by the new owner or transferee as a
MainStay Suites under market terms acceptable to Franchising.
4.2. Until the MainStay Suite Hotels subject to the MainStay Quota
are Developed(as defined below), expenditures by Realco (or any of its
subsidiaries or affiliates) of cash or other assets, or agreements,
understandings or commitments for the same (whether binding, contingent,
conditional or otherwise), in connection with or related to the development
of any hotel or lodging property other than a MainStay Suite Hotel,
including without limitation, by way of acquisition of any property or any
capital stock (but excluding a stock for stock acquisition or merger) or
assets of any person or entity that directly or indirectly owns, operates
or manages a hotel or lodging property (collectively, "Hotels
Expenditures") shall not exceed the aggregate amount spent by Realco in
connection with or related to the development of MainStay Suite Hotels
(collectively, "MainStay Expenditures"). The ratio of Hotel Expenditures
to MainStay Expenditures shall be measured on a bi-annual, cumulative
aggregate basis. Within thirty days after the end of such bi-annual
period, Realco will deliver to Franchising a statement detailing (i) all
Hotel Expenditures made by Realco during such period, (ii) all MainStay
Expenditures made by Realco during such period, and (iii) outstanding
agreements, understandings and commitments for the same. "Developed" shall
mean either: (i) that, on or before April 15, 2001, three of the remaining
four MainStay Suites to be built to satisfy the MainStay Quota are open and
operating and the fourth has commenced construction; or (ii), if the
conditions of clause (i) are not satisfied, then all four of the remain-
<PAGE>
-5-
ing MainStay Suites to be built to satisfy the MainStay Quota are open and
operating.
Section 1.5. Dispute and MainStay Brand Issues Resolution. The
--------------------------------------------
Strategic Alliance Agreement is hereby amended by retitling Section 7 as
"Dispute and Brand Issue Resolution" and amending and restating Sections 7.1 and
7.2 in their entitety as follows:
7.1. Realco and Franchising agree to use their commercially
reasonable best efforts to address the brand issues identified on Appendix
--------
II to the Second Omnibus Amendment Agreement within the time frames set
--
forth therein. Realco and Franchising agree to use their commercially
reasonable best efforts to have their respective designated representatives
meet once every two weeks for six months from February 15, 2000 to discuss
ongoing matters with respect to the MainStay Suite Hotel brand. At the end
of the initial six month period, either party may require such bi-weekly
meetings to continue for an additional six month period and then once a
month for the following year. The representatives shall be the Executive
Vice President, Franchise Operations and the Senior Vice President,
Marketing for Franchising and the Chief Executive Officer for Realco.
7.2. Arbitration. Notwithstanding anything contained in the
-----------
Transaction Documents to the contrary, any claim arising out of or related
to any of the Transaction Documents, which has not been resolved by mutual
agreement of the parties after a written notice of the claim by the
complaining party to the other party and a forty-five (45) day negotiation
period in which the Parties try to resolve the claim, shall be finally
settled by arbitration. Such arbitration shall be conducted in Bethesda,
Maryland in accordance with the Commercial Rules of the American
Arbitration Association then in effect, as modified or supplemented herein,
or as the parties mutually agree otherwise. Notwithstanding the rules of
the arbitral body, the Parties hereto agree (a) that any arbitration shall
be presided over by a single arbitrator, who shall have been ad-
<PAGE>
-6-
mitted to the practice of law, and be in good standing or on retirement
status in any of the fifty United States or the District of Columbia and
have experience in hotel franchise matters, (b) that the arbitrator shall
base his decision on the facts as presented into evidence, and (c) that the
arbitrator shall prepare a written memorandum of decision setting forth the
findings of fact and conclusions of law. The arbitrator shall be selected
by the Parties. If they cannot agree on such selection within a thirty (30)
day period, they shall ask the American Arbitration Association to appoint
an arbitrator. The decision of the arbitrator shall be final, and judgment
may be entered upon it in accordance with the applicable law in any court
having jurisdiction. Any claim for relief made pursuant to this Agreement
shall be made within one (1) year from the date upon which the claim arose.
All costs of the arbitration shall be borne by the Party determined to be
the losing Party by the arbitrator. For purposes of determining the
prevailing and losing Party, the arbitrator may consider offers of
settlement by either Party, or both of them. The Circuit Court of
Montgomery County, Maryland shall have exclusive jurisdiction to enforce
this arbitration provision, for injunctive relief in and of arbitration and
for enforcement of any arbitration award.
Section 1.6. Liquidated Damages Provision in Franchising Agreements.
------------------------------------------------------
Notwithstanding Section 3.1 of the Strategic Alliance Agreement and with
reference to Section 1.3 of the First Omnibus Amendment Agreement, as long as
Sunburst has not defaulted under the Term Note:
(a) Notwithstanding the terms of any and all franchising agreements
entered into prior to, on or after the date hereof by and between Choice
and Sunburst (or any of their respective predecessors or affiliates)
related to the twenty-five MainStay Suite Hotels subject to the MainStay
Quota, Sunburst agrees that it shall not reflag any such MainStay Suite
Hotel, through a sale or otherwise (except as provided in the Put Call
Agreement), or seek termination of any such franchising agreement or fail
to
<PAGE>
-7-
enter into a franchising agreement for any such hotels or allow any
other brand to be flagged to any such hotel prior to October 15, 2002;
provided, however, Sunburst may: (i) reflag, or permit the reflagging of,
-------- --------
up to two of the properties so identified on Appendix III to the Second
------------
Omnibus Amendment Agreement during such three year period or thereafter;
and (ii) sell, transfer or convey any such MainStay Suites hotel if such
property is relicensed by the new owner or transferee as a MainStay Suites
under market terms acceptable to Choice. Upon an event specified in clause
(i) or (ii) of the preceding sentence, Choice shall terminate the
respective franchise agreements and waive any claim for damages against
Sunburst caused by such reflagging, sale, transfer or termination including
the obligation to pay liquidated damages. After October 15, 2002, Sunburst
may reflag, or permit the reflagging of, any MainStay Suite Hotels and
terminate any such franchising agreement and Choice shall waive any claim
against Sunburst for damages caused by such reflagging or termination,
including liquidated damages, if (x) Sunburst gives thirty days prior
written notice to Choice and (y) Sunburst pays Choice $100,000 as a
termination fee for each MainStay Suites Hotel, other than the two
properties referred to in clause (i) above, that is to be reflagged or for
which the franchising agreement is to be terminated. Choice and Sunburst
acknowledge that if any or all of the Put Call Properties are transferred
pursuant to the Put Call Agreement, that Choice shall terminate the
respective franchise agreements and shall waive any claim against Sunburst
for damages, including liquidated damages. Choice and Sunburst agree that
irreparable damage would occur in the event any of the provisions of this
Section 1.6(a) were not performed in accordance with the terms hereof and
that Choice's remedy at law for any breach of Sunburst's obligations
hereunder would be inadequate. Sunburst agrees and consents that temporary
and permanent injunctive relief may be granted in any proceeding which may
be brought to enforce any provision hereof without the necessity of proof
of actual damage.
<PAGE>
-8-
(b) Choice and Sunburst acknowledge that the reference in Section 1.3
of the First Omnibus Amendment Agreement to the liquidated damages
provision applicable to Sleep Inn franchise agreements is intended as a
termination fee such that Sunburst has the right at any time on or after
February 29, 2000 to terminate any such Sleep Inn franchise agreements upon
payment to Choice of $100,000 per agreement and Choice shall waive any
claim against Sunburst for damages caused by such termination, including
liquidated damages.
(c) Choice and Sunburst acknowledge that pursuant to Section 1.3 of
the First Omnibus Amendment Agreement, if Sunburst reflags a hotel or
lodging property that is neither a Sleep Inn nor MainStay Suite Hotel and
that hotel or lodging property is not sold by Sunburst within three years
from the date it was flagged with a non-Choice brand, then on such third
anniversary Sunburst shall pay Choice $100,000 in liquidated damages for
each such reflagged hotel or lodging property and Choice shall waive any
claim against Sunburst for damages caused by such reflagging, including
liquidated damages.
Section 1.7. Franchise Fee Credits. Notwithstanding anything
---------------------
contained in any MainStay Suites franchising agreements entered into prior to,
on or after the date hereof by and between Choice and Sunburst (or any of their
respective predecessors or affiliates) Section 4 of each franchising agreement
is hereby amended to add new subsections as follows:
(h) On the date hereof Franchising shall establish an account to
serve as a mechanism for administering the Shortfall Balance, as defined in
and pursuant to this Section 4. The initial amount credited to the
Shortfall Balance on the date hereof shall be $2,142,887 (the "Shortfall
Amount"), which represents the amount by which an agreed upon target
Cumulative EBITDA for the MainStay Suites hotels subject to the MainStay
Quota (excluding the Put Call Properties) for the period from October 1,
1996 through December 31, 1999 exceeds the actual Cumulative EBITDA for
such period.
<PAGE>
-9-
(i) For each year beginning January 1, 2001 until the Shortfall Freeze
Date (as defined below), the Shortfall Balance shall be adjusted (an
"Adjustment") by 50% of the amount, if any, by which the Target Cumulative
EBITDA (as set forth on Appendix IV) for the preceding year exceeds the
-----------
actual Cumulative EBITDA for the MainStay Suites Hotels subject to the
MainStay Quota (exclusive of the Put Call Properties) for such year as
finally determined pursuant to clause (j) below. Each year, on or prior to
February 15 of such year, Realco shall determine the actual Cumulative
EBITDA for the preceding year in a manner consistent with the calculation
of the Target Cumulative EBITDA and whether an Adjustment is warranted and
shall deliver written notice thereof to Franchising together with the
monthly operating statements for each applicable hotel. From and after the
earlier of February 28, 2010 and the first year in which no Adjustment is
required pursuant to this clause (h) (the "Shortfall Freeze Date"), no
further Adjustments shall be determined pursuant to this paragraph and the
Shortfall Balance shall thereafter never be increased.
(j) The Shortfall Balance, if any, shall be applied by Realco as a
credit against royalty, reservation and marketing fees ("Fees") payable to
Franchising as follows:
(1) First, to Fees payable pursuant to the franchise
agreements related to the MainStay Suites Hotels subject to
the MainStay Quota for each month prior to the tenth
anniversary of the date of each such franchise agreement.
The Fee credit shall be applied no later than the fifteenth
day of each month against Fees payable as of the last day
of the preceding month; and
(2) Second, to Fees payable pursuant to franchise agreements
for MainStay Suite Hotels other
<PAGE>
-10-
than those referred to in (i)(1) above or for any brand
developed by Franchising after the date hereof. The Fee
credit shall be applied no later than the fifteenth day of
each month against Fees payable as of the last day of the
preceding month.
The Shortfall Balance shall immediately be reduced by the amounts used as
Fee credits pursuant to this section. Any remainder of the Shortfall
Balance shall carry forward until used.
(k) Franchising or its representatives shall have the right to review
and audit the books and records of Realco for the purposes of determining
the Shortfall Amount and the Fees payable in any particular month. If
Franchising agrees with the Shortfall Amount determined by Realco, then
that amount shall be deemed finally determined. In the event Franchising
disagrees with the Shortfall Amount or the Fees payable as determined by
Realco, then Franchising shall so notify Realco in writing within 10 days
of receipt of notice from Realco of the Shortfall Amount. If Franchising
and Realco are unable to agree in good faith by the tenth day of any month,
then Franchising shall, within 10 days from its delivery of the notice to
Realco, retain a firm of independent accountants to determine the Shortfall
Amount and/or the Fees payable. The accountant shall deliver its
determination no later than the last day of such month. The cost of such
accountants shall be borne by Franchising unless the accountant's
determination of the Shortfall Amount and/or Fees payable deviates by 5% or
more from the amount determined by Realco, in which case Realco shall bear
the cost. If Franchising and Realco agree with the accountants
determination of the Shortfall Amount and/or the Fees payable, then that
amount shall be deemed finally determined. If Franchising or Realco
disagree with the accountants determination, then the parties shall settle
the disagreement and the Shortfall Amount and/or the Fees payable shall be
finally determined in accordance with the dispute resolution mechanism set
forth in the Strategic Alliance Agreement, as amended. Realco agrees that
it shall cooperate with
<PAGE>
-11-
Franchising and the accountant and provide them reasonable access to its
books records and employees in connection with their review of the
Shortfall Amount and/or the Fees payable.
Section 1.8. Elimination of Right to First Refusal in Franchising
----------------------------------------------------
Agreements. Notwithstanding anything contained in any franchising agreements
- ----------
entered into prior to, on or after the date hereof by and between Choice and
Sunburst (or any of their respective predecessors or affiliates), the provision
regarding the right of first refusal contained in each franchising agreement is
hereby deleted in its entirety.
ARTICLE TWO
AMENDMENTS TO TERM NOTE
Section 2.1. Definitions. Any defined term used within this Article
-----------
Two and not defined within this Agreement shall have the meaning ascribed to
such term in the Term Note (as amended).
Section 2.2. Asset Sale Proceeds. Section 1.6 of the Term Note is
-------------------
hereby amended by deleting the section in its entirety and replacing it with the
following:
Within fourteen (14) calendar days after the consummation of an Asset
Sale involving the Put Call Properties, the Payor will pay to the Payee by
wire transfer to the bank account designated by the Payee such aggregate
principal amount of this Note as equals one hundred percent (100%) of the
Asset Sale Proceeds.
Section 2.3. Event of Default. Section 2 of the Term Note is hereby
----------------
amended by adding the following after paragraph 2(e):
(f) A Change of Control of the Payor. For purposes of this
paragraph, a "Change of Control" shall mean:
<PAGE>
-12-
1. Any "person" as such term is used in Sections 13(d) and 14(d) of
the Securities Exchange Act of 1934, as amended (other than (i) the Payor,
(ii) any trustee or other fiduciary holding securities under an employee
benefit plan of the Payor, (iii) any corporations owned, directly or
indirectly, by the stockholders of the Payor in substantially the same
proportions as their ownership of stock of the Payor, or(iv) Stewart
Bainum, his wife, their lineal descendants and their spouses (so long as
they remain spouses) and the estate of any of the foregoing persons, and
any partnership, trust, corporation or other entity to the extent shares of
common stock (or their equivalent) are considered to be beneficially owned
by any of the persons or estates referred to in the foregoing provisions of
this subsection or any transferee thereof) becomes the "beneficial owner"
(as defined in Rule 13d-3 under the Exchange Act)), directly or indirectly,
of securities of the Payor representing 20% or more of the combined voting
power of the Payor's then outstanding voting securities.
2. Individuals constituting the Board of Directors of the Payor on
the date of this Agreement and the successors of such individuals
("Continuing Directors") cease to constitute a majority of the Board. For
this purpose, a director shall be a successor if and only if he or she was
nominated by a Board (or a Nominating Committee thereof) on which
individuals constituting the Board on February 29, 2000 and their
successors (determined by prior application of this sentence) constituted a
majority;
3. The stockholders of the Payor approve a plan of merger or
consolidation ("Combination") with any other corporation or legal person,
other than a Combination which would result in stockholders of the Payor
immediately prior to the Combination owning, immediately thereafter, more
than sixty-five percent (65%) of the combined voting power of either the
surviving entity or the entity owning directly or indirectly all of the
common stock, or its equivalent, of the surviving entity; provided,
how-
<PAGE>
-13-
ever, that if stockholder approval is not required for such Combination,
the Change in Control shall occur upon the consummation of such
Combination;
4. The Payor or an affiliate of the Payor engages in a "Rule 13e-3
transaction" as defined in the Securities and Exchange Act of 1934, as
amended.
5. The stockholders of the Payor approve a plan of liquidation of the
Payor or an agreement for the sale or disposition (including through a
sale/leaseback) by the Payor of more than 50% of the Payor's stock and/or
assets, or accept a tender offer for more than 50% of the Payor's stock (or
any transaction having a similar effect); provided, however, that if
stockholder approval is not required for such transaction, the Change in
Control shall occur upon consummation of such transaction.
Section 2 shall be further amended by adding the following paragraph
immediately preceding the last paragraph of Section 2:
If an Event of Default specified in Section 2(f) shall have occurred
and be continuing, Payee may, at its option, by written notice to Payor and
to Chase, declare the entire principal amount of this Note and the interest
accrued thereon to be due and payable.
Section 2.4. Representation of Payor. Section 6 of the Term Note is
-----------------------
amended by adding the following new provision:
6.10. Representation and Warranty of Payor. The Payor hereby
------------------------------------
represents and warrants that the Lenders have consented to and approved the
amendments to the Note contained in the Omnibus Amendment Agreement dated
December 28, 1998 (as amended herein) and the Second Omnibus Amendment
Agreement dated February 29, 2000. The Payor further represents and
warrants that the Lenders have waived any default or event of default under
the Credit Agreement or any other Senior Debt Document that may arise as a
result
<PAGE>
-14-
of any payment under this Note in accordance with its terms, including
without limitation pursuant to Section 1.6 hereof.
Section 2.5. Covenant of Payor. Section 3.2 of the Term Note is
-----------------
amended by adding the following new provision:
Payor further covenants and agrees that for so long as any
indebtedness evidenced by this Note remains outstanding, Payor will not,
without the written consent of Payee, enter into any agreement that
restricts or prohibits any payment by Payor to Payee under the terms of
this Note.
ARTICLE THREE
NONCOMPETITION AGREEMENT
Section 3.1. Termination. The Noncompetition Agreement is hereby
-----------
terminated and shall from and after the date hereof be of no further force or
effect.
ARTICLE FOUR
MISCELLANEOUS PROVISIONS
Section 4.1. Conflicts. In the event of any conflict between the
---------
terms of this Agreement and the terms of the Strategic Alliance Agreement, any
franchising agreement entered into by and between Choice and Sunburst referred
to in this Agreement, the Term Note, the Noncompetition Agreement, the First
Omnibus Amendment Agreement and any other documents related thereto and executed
by one or more parties hereto in connection with any of the aforementioned
agreements, the terms and provisions of this Agreement shall control.
Section 4.2. Agreements Remain in Effect. The Strategic Alliance
---------------------------
Agreement, any franchising agreement en-
<PAGE>
-15-
tered into by and between Choice and Sunburst referred to in this Agreement, the
First Omnibus Amendment Agreement and the Term Note shall remain fully effective
and are changed only as specifically provided herein and shall bind the parties
to each in all respects as originally contemplated.
Section 4.3. Counterparts. This Agreement may be executed in one or
------------
more counterparts, all of which taken together shall constitute one instrument.
Section 4.4. Board Approval. This Agreement has been approved by
--------------
the Board of Directors of both Choice and Sunburst.
IN WITNESS WHEREOF, intending to be legally bound hereby, the parties
hereto have executed this Agreement as of the day and year first written above.
CHOICE HOTELS INTERNATIONAL, INC.
/S/ Joseph M. Squeri
- --------------------------
Name: Joseph M. Squeri
Title: Senior Vice President
SUNBURST HOSPITALITY CORPORATION
/s/ Donald J. Landry
- ----------------------------
Name: Donald J. Landry
Title: President
<PAGE>
Exhibit 13.01
Table of Contents
- --------------------------------------------------------------------------------
Management's Discussion & Analysis 26
Report of Independent Public Accountants 34
Consolidated Financial Statements 35
Notes to Consolidated Financial Statements 39
Board of Directors and Corporate Officers 54
Corporate Information 55
<PAGE>
26
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
Choice Hotels International, Inc. and Subsidiaries
The Company is one of the largest hotel franchisors in the world with 4,248
hotels open and 761 hotels under development as of December 31, 1999
representing 338,254 rooms open and 64,095 rooms under development in 40
countries. The Company franchises hotels under the Comfort, Quality, Econo
Lodge, Sleep Inn, Clarion, Rodeway Inn and MainStay Suites brand names. The
Company has over 2,300 franchisees in the franchise system with no single
franchisee accounting for more than 5% of its royalty or total revenues. The
Company operates in all 50 states and the District of Columbia and 34 additional
countries with 95% of its franchising revenue derived from hotels franchised in
the United States.
The principal factors that affect the Company's results are: growth in the
number of hotels under franchise; occupancies and room rates achieved by the
hotels under franchise; the effective royalty rates achieved; the number and
relative mix of franchised hotels; and the Company's ability to manage costs.
The number of rooms at franchised properties and occupancies and room rates at
those properties significantly affect the Company's results because franchise
royalty fees are based upon room revenues at franchised hotels. The key industry
standard for measuring hotel operating performance is revenue per available room
(RevPAR), which is calculated by multiplying the percentage of occupied rooms by
the average daily room rate realized. The variable overhead costs associated
with franchise system growth are substantially less than incremental royalty
fees generated from new franchisees; therefore, the Company is able to capture a
significant portion of those royalty fees as operating income.
During 1997, the Company changed its fiscal year end from May 31 to December 31.
Accordingly, the following discussion includes a discussion of the results of
the seven months ended December 31, 1997, as compared to unaudited results from
the comparable seven-month period in 1996.
Comparison of Calendar Year 1999 Operating Results and Calendar Year 1998
Operating Results
The Company recorded net income of $57.2 million for the year ended December 31,
1999 ("Calendar 1999"), an increase of $1.9 million, compared to net income of
$55.3 million for the year ended December 31, 1998 ("Calendar 1998"). Net income
in Calendar 1998 included a $7.2 million extraordinary gain from the early
extinguishment of debt. The increase in net income for Calendar 1999 was
primarily attributable to an increase in the effective royalty rates achieved,
an increase in franchise revenue as a direct result of improvements in the
operating performance of hotels, and the addition of new franchised hotels to
the system. Lower net interest costs versus Calendar 1998 also contributed
favorably to the Calendar 1999 results.
Summarized financial results for the years ended December 31, 1999 and 1998 are
as follows:
(In thousands) 1999 1998
----------------------------
Revenues:
Royalty fees $ 128,653 $ 115,171
Initial franchise & relicensing fees 13,910 16,571
Partner services revenue 9,055 6,370
Other revenue 6,111 5,516
Product sales 3,871 20,748
European hotel operations -- 1,098
----------------------------
Total revenues 161,600 165,474
----------------------------
Operating Expenses:
Selling, general & administrative 55,860 52,948
Depreciation & amortization 8,023 6,753
Product cost of sales 3,883 19,532
European hotel operations -- 1,133
----------------------------
Total operating expenses 67,766 80,366
----------------------------
Operating income 93,834 85,108
Loss (gain) on sale of investments 68 (2,370)
Interest expense 19,387 19,133
Interest and dividend income (20,092) (14,055)
----------------------------
Income before income taxes
and extraordinary item 94,471 82,400
Income taxes 37,316 34,327
----------------------------
Net income before extraordinary item 57,155 48,073
Gain on early extinguishment of
debt, net of $4,732 of income taxes -- 7,232
----------------------------
Net income $ 57,155 $ 55,305
----------------------------
Franchise Revenues: Management analyzes its business based on net franchise
revenue, which is total revenue excluding product sales and European hotel
operations, and franchise operating expenses which are reflected as selling,
general and administrative expenses.
<PAGE>
27
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
Choice Hotels International, Inc. and Subsidiaries
Net franchise revenues were $157.7 million for Calendar 1999 and $143.6 million
for Calendar 1998. Royalties increased $13.5 million to $128.7 million from
$115.2 million in Calendar 1998, an increase of 11.7 %. The increase in
royalties is attributable to a 2% increase in the number of domestic franchised
hotel rooms, an increase in the effective royalty rate of the domestic hotel
system to 3.7% from 3.6%, and an improvement in domestic RevPAR of 3.0%.
Domestic initial fee revenue generated from franchise contracts signed was $10.1
million down from $13.1 million in Calendar 1998. Total franchise agreements
signed in Calendar 1999 were 318, a decline from the 440 total agreements
executed in Calendar 1998. An increasingly competitive hotel franchising
environment, coupled with stricter hotel brand standards being enforced by the
Company contributed to the decline in the total franchise agreements signed in
the period. Revenues generated from partner service relationships increased to
$9.1 million from $6.4 million in Calendar 1998. Under the partner services
program, the Company generates revenue from hotel industry vendors (who have
been designated as preferred providers) based on the level of goods or services
purchased from the vendors by hotel owners and hotel guests who stay in the
Company's franchised hotels.
The number of domestic rooms on-line increased to 258,120 from 252,357, an
increase of 2% for the year ended December 31, 1999. For 1999, the total number
of domestic hotels online grew 3% to 3,123 from 3,039 for 1998. The total number
of international hotels on-line increased to 1,125 from 632, an increase of 78%
for the year ended December 31, 1999. International rooms on-line increased to
80,134 as of December 31, 1999 from 53,095, an increase of 51%. As of December
31, 1999, the Company had 596 franchised hotels with 46,664 rooms either in
design or under construction in its domestic system. The Company has an
additional 165 franchised hotels with 17,431 rooms under development in its
international system as of December 31, 1999.
Franchise Expenses: The cost to operate the franchising business is reflected in
selling, general and administrative expenses. Selling, general and
administrative expenses were $55.9 million for Calendar 1999, an increase of
$3.0 million from the Calendar 1998 total of $52.9 million. As a percentage of
net franchise revenues, selling, general and administrative expenses declined to
35.4% in Calendar 1999 from 36.8% in Calendar 1998. The improvement in the
franchising margins relates to the economies of scale generated from operating a
larger franchisee base and improvements in franchised hotel performance.
Marketing and Reservations: The Company's franchise agreements require the
payment of franchise fees which include marketing and reservation fees. These
fees, which are based on a percentage of the franchisees' gross room revenues,
are used exclusively to reimburse the Company for expenses associated with
providing such franchise services as central reservation and yield management
systems, national marketing and media advertising. The Company is contractually
obligated to expend the reservation and marketing fees it collects from
franchisees in accordance with the franchise agreements; as such, no income or
loss to the Company is generated. During the second quarter of 1998, the Company
changed its presentation of marketing and reservation fees such that the fees
collected and associated expenses are reported net. All prior periods have been
reclassified to conform to the new presentation.
The total marketing and reservation fees received by the Company (previously
reported as revenue) were $146.0 million and $127.4 million for the years ended
December 31, 1999 and December 31, 1998, respectively. Depreciation and
amortization charged to the marketing and reservation funds was $9.6 million and
$6.2 million for the years ended December 31, 1999 and December 31, 1998,
respectively. Interest expense incurred by the reservation fund was $3.3 million
and $1.8 million for the years ended December 31, 1999 and 1998, 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. Under the terms of the
franchise agreements, the Company may advance capital as necessary to the
marketing and reservation funds and recover such advances through future fees.
As of December 31, 1999, the Company's balance sheet includes a receivable of
$37.7 million related to advances made to the marketing ($12.5 million) and
reservation ($25.2 million) funds. As of December 31, 1998, the Company's
balance sheet includes a receivable of $ 18.7 million related to advances made
to the marketing ($7.8 million) and reservation ($10.9 million) funds. The
Company has the ability under existing franchise agreements and expects to
recover these advances through future marketing and reservation fees.
Product Sales: The group purchasing program utilizes bulk purchases to obtain
favorable pricing from third party vendors for franchisees ordering similar
products. The Company acts as a clearinghouse between the franchisee and
<PAGE>
28
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
Choice Hotels International, Inc. and Subsidiaries
the vendor, and orders are shipped directly to the franchisee. Sales made to
franchisees through the Company's group purchasing program declined $16.8
million to $3.9 million in Calendar 1999 from $20.7 million in Calendar 1998.
Similarly, product cost of sales decreased $15.6 million to $3.9 million from
Calendar 1998. In the fourth quarter of 1998, the Company discontinued this
group purchasing program as previously operated.
European Hotel Operations: In January 1998, Friendly Hotels, PLC ("Friendly")
acquired from the Company ten hotels in France, two in Germany and one in the
United Kingdom in exchange for $22.2 million in 5.75% convertible preferred
shares in Friendly.
Depreciation and Amortization: Depreciation and amortization increased to $8.0
million in Calendar 1999 from $6.8 million in Calendar 1998. This increase was
primarily attributable to new computer systems installations and corporate
office renovations.
Interest Expense and Interest and Dividend Income: Interest expense of $19.4
million in Calendar 1999 is up slightly from $19.1 million in Calendar 1998 due
to higher interest rates and increased debt financing. Included in Calendar 1999
and Calendar 1998 results is approximately $14.2 million and $10.4 million,
respectively, of interest income earned on the note receivable from Sunburst
Hospitality Corporation. The Company's investment in Friendly resulted in $2.2
million and $2.1 million in dividend income in Calendar 1999 and Calendar 1998,
respectively.
Extraordinary Item: During 1998, the Company recorded an extraordinary gain from
the early extinguishment of debt. The Company retired $13.7 million in debt and
removed related assets of $1.8 million from the consolidated balance sheets. The
extraordinary gain was $7.2 million, after income tax expense of $4.7 million,
or $0.12 per diluted share.
Comparison of Calendar Year 1998 Operating Results and Calendar Year 1997
Operating Results
The Company recorded net income of $55.3 million for the year ended December 31,
1998 ("Calendar 1998"), an increase of $16.6 million compared to net income of
$38.7 million for the year ended December 31, 1997 ("Calendar 1997"). The
increase in net income for Calendar 1998 was primarily attributable to an
increase in franchise revenue as a direct result of the addition of new
franchised hotels to the system, improvements in the operating performance of
hotels and an increase in the effective royalty rates achieved. Additionally, in
Calendar 1998 the Company recognized an extraordinary gain on early
extinguishment of debt of $7.2 million.
Summarized financial results for the years ended December 31, 1998 and 1997 are
as follows:
1998 1997
(In thousands) (unaudited)
----------------------------
Revenues:
Royalty fees $ 115,171 $ 106,299
Initial franchise & relicensing fees 16,571 16,096
Partner services revenue 6,370 7,079
Other revenue 5,516 4,833
Product sales 20,748 23,806
European hotel operations 1,098 17,303
----------------------------
Total revenues 165,474 175,416
----------------------------
Operating Expenses:
Selling, general & administrative 52,948 50,782
Depreciation & amortization 6,753 9,173
Product cost of sales 19,532 22,769
European hotel operations 1,133 15,624
----------------------------
Total operating expenses 80,366 98,348
----------------------------
Operating income 85,108 77,068
Gain on sale of investments (2,370) --
Interest expense 19,133 13,295
Interest and dividend income (14,055) (2,503)
----------------------------
Income before income taxes
and extraordinary item 82,400 66,276
Income taxes 34,327 27,604
----------------------------
Net income before extraordinary item 48,073 38,672
Gain on early extinguishment of
debt, net of $4,732 of income taxes 7,232 --
----------------------------
Net income $ 55,305 $ 38,672
----------------------------
Franchise Revenues: Net franchise revenues were $143.6 million for Calendar 1998
and $134.3 million for Calendar 1997. Royalties increased $8.9 million to $115.2
million from $106.3 million in Calendar 1997, an increase of 8.4%. The increase
in royalties is attributable to a net increase of 159 franchised hotels during
the period representing an additional 10,196 rooms added to the system, an
improvement in domestic RevPAR of 2.3% and an increase in the effective royalty
rate of the domestic hotel system to 3.6% from 3.5%. Domestic initial fee
revenue generated from franchise contracts signed increased 4.0% to $13.1
million from $12.6 million in Calendar 1997. Total franchise agreements signed
in Calendar 1998 were 440, up 4.5% from the total contracts
<PAGE>
29
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
Choice Hotels International, Inc. and Subsidiaries
signed in Calendar 1997 of 421. Revenues generated from partner service
relationships decreased to $6.4 million from $7.1 million in Calendar 1997.
The number of domestic rooms under development increased to 75,232 from 62,384,
an increase of 20.6% for the year ended December 31, 1998. The total number of
international hotels on-line increased to 632 from 605, an increase of 4.5% for
the year ended December 31, 1998. International rooms on-line increased to
53,095 as of December 31, 1998 from 50,639, an increase of 4.9%. The total
number of international hotels under development increased to 611 from 119 for
the year ended December 31, 1998. The number of international rooms under
development increased to 40,375 as of December 31, 1998 from 12,029 as of
December 31, 1997. These increases are primarily attributable to a strategic
alliance in June 1998 with Flag International Limited.
Franchise Expenses: Selling, general and administrative expenses were $52.9
million for Calendar 1998, an increase of $2.1 million from the Calendar 1997
total of $50.8 million. As a percentage of net franchise revenues, selling,
general and administrative expenses declined to 36.9% in Calendar 1998 from
37.8% in Calendar 1997. The improvement in the franchising margins relates to
the economies of scale generated from operating a larger franchisee base, cost
control initiatives, and improvements in franchised hotel performance.
Marketing and Reservations: The total marketing and reservation fees received by
the Company (previously reported as revenue) were $127.4 million and $110.2
million for the years ended December 31, 1998 and December 31, 1997,
respectively. Depreciation and amortization charged to the marketing and
reservation funds was $6.2 million and $2.9 million for the years ended December
31, 1998 and December 31, 1997, respectively. As of December 31, 1998 the
Company's balance sheet includes a receivable of $18.7 million related to
advances made to the marketing ($7.8 million) and reservation ($10.9 million)
funds. As of December 31, 1997, the Company's balance sheet includes a
receivable of $5.2 million related to advances made to the marketing fund and a
current liability in accounts payable of $4.5 million related to excess monies
in the reservation fund.
Product Sales: Sales made to franchisees through the Company's group purchasing
program declined $3.1 million to $20.7 million in Calendar 1998 from $23.8
million in Calendar 1997. Similarly, product cost of sales decreased $3.2
million (or 14.2%) from Calendar 1997. The product services margins increased
for the year ended December 31, 1998 to 5.9% from 4.4% in Calendar 1997.
Depreciation and Amortization: Depreciation and amortization decreased to $6.8
million in Calendar 1998 from $9.2 million in Calendar 1997. This decrease was
primarily attributable to the sale of the Company's European hotels.
Interest Expense and Interest and Dividend Income:
The increase in interest expense of $5.8 million in Calendar 1998 from $13.3
million in Calendar 1997 resulted from additional debt incurred in connection
with the Sunburst Distribution (as defined in the Notes to the Consolidated
Statements). Included in Calendar 1998 results is approximately $10.4 million of
interest income earned on the note receivable from Sunburst Hospitality
Corporation and $2.1 million in dividend income from the Company's investment in
Friendly.
Extraordinary Item: During 1998, the Company recorded an extraordinary gain from
the early extinguishment of debt. The Company retired $13.7 million in debt and
removed related assets of $1.8 million from the consolidated balance sheets. The
extraordinary gain was $7.2 million, after income tax expense of $4.7 million,
or $0.12 per diluted share.
Comparison of Seven Month Period Ended December 31,1997 Operating Results and
Seven Month Period Ending December 31,1996 Operating Results
The Company recorded net income of $27.3 million for the seven months ended
December 31, 1997, an increase of $4.0 million compared to net income of $23.3
million for the seven months ended December 31, 1996. The increase in net income
for the seven months ended December 31, 1997 was primarily attributable to an
increase in franchise revenue as a direct result of the addition of new
franchised hotels to the system, improvements in the operating performance of
hotels and an increase in the effective royalty rates achieved.
<PAGE>
30
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
Choice Hotels International, Inc. and Subsidiaries
Summarized financial results for the seven months ended December 31, 1997 and
1996 are as follows:
1997 1996
(In thousands) (unaudited)
----------------------------
Revenues:
Royalty fees $ 70,308 $ 61,821
Initial franchise & relicensing fees 8,597 9,304
Partner services revenue 3,510 1,510
Other revenue 1,359 1,651
Product sales 13,524 14,717
European hotel operations 10,541 10,975
----------------------------
Total revenue 107,839 99,978
----------------------------
Operating Expenses:
Selling, general & administrative 29,454 28,132
Depreciation & amortization 3,977 3,153
Product cost of sales 13,031 13,481
European hotel operations 9,203 9,745
----------------------------
Total operating expenses 55,665 54,511
----------------------------
Operating income 52,174 45,467
Interest expense, net 5,791 5,784
----------------------------
Income before income taxes 46,383 39,683
Income taxes 19,096 16,338
----------------------------
Net income $ 27,287 $ 23,345
----------------------------
Franchise Revenues: Net franchise revenues were $83.8 million for the seven
months ended December 31, 1997 and $74.3 million for the seven months ended
December 31, 1996. Royalties increased $8.5 million to $70.3 million from $61.8
million for the seven months ended December 31, 1996, an increase of 13.7%. The
increase in royalties is attributable to a net increase of 264 franchised hotels
during the period representing an additional 19,881 rooms added to the system,
an improvement in domestic RevPAR of 2.4% and an increase in the effective
royalty rate of the domestic hotel system to 3.5% from 3.4%. Domestic initial
fee revenue generated from franchise contracts signed declined to $6.4 million
from $7.8 million for the seven months ended December 31, 1997 as compared to
the seven months ended December 31, 1996. Total franchise agreements signed for
the seven months ended December 31, 1997 were 368, down 14.0% from the total
contracts signed during the seven months ended December 31, 1996 of 428. The
decline in initial fees is partly a result of the Company's sales force
reorganization and the resulting temporary displacement of the sales force. The
reorganization of the regional market management sales and support force was
completed in September 1997. Revenues generated from partner service
relationships increased to $3.5 million from $1.5 million for the seven months
ended December 31, 1996.
The number of domestic rooms under development as of December 31, 1997 increased
to 62,384 from 59,023 at December 31, 1996, an increase of 5.7%. The total
number of international hotels on-line increased to 605 from 548 at December 31,
1996, an increase of 10.4%. International rooms on-line increased 9.0% to 50,639
as of December 31, 1997 from 46,473 as of December 31, 1996. The total number of
international hotels under development decreased to 119 from 143, a decrease of
16.8% from December 31, 1996. The number of international rooms under
development decreased to 12,029 as of December 31, 1997 from 13,906 as of
December 31, 1996, a decrease of 13.5%.
Franchise Expenses: Selling, general and administrative expenses were $29.5
million for the seven months ended December 31, 1997, an increase of $1.3
million from the comparable period in 1996. The increase in selling, general and
administrative expenses was primarily due to additional personnel to support
company growth and new company initiatives. As a percentage of net franchise
revenues, selling, general and administrative expenses declined to 35.2% for the
seven months ended December 31, 1997 from 37.8% for the seven months ended
December 31, 1996. The improvement in the franchising margins relates to the
economies of scale generated from operating a larger franchisee base, cost
control initiatives and improvements in franchised hotel performance.
Marketing and Reservations: The total marketing and reservation fees received by
the Company (previously reported as revenue) were $72.3 million and $66.3
million for the seven months ended December 31, 1997 and December 31, 1996,
respectively. Depreciation and amortization charged to the marketing and
reservation funds was $2.2 million and $1.4 million for the seven months ended
December 31, 1997 and December 31, 1996, respectively.
Product Sales: Sales made to franchisees through the Company's group purchasing
program declined $1.2 million to $13.5 million for the seven months ended
December 31, 1997 from $14.7 million for the seven months ended December 31,
1996. Similarly, product cost of sales decreased $0.4 million (or 3.3%) for the
seven months ended December 31, 1997. The product services margins decreased for
the seven months ended December 31, 1997 to 3.6% from 8.4% for the seven months
ended December 31, 1996.
<PAGE>
31
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
Choice Hotels International, Inc. and Subsidiaries
Depreciation and Amortization: Depreciation and amortization increased to $4.0
million for the seven months ended December 31, 1997 from $3.2 million for the
seven months ended December 31, 1996. The increase was primarily due to capital
improvements to the Company's financial and billing information systems.
Liquidity and Capital Resources
Net cash provided by operating activities was $79.5 million for the year ended
December 31, 1999, an increase of $34.9 million from $44.6 million for the year
ended December 31, 1998. The improvement in cash provided was primarily due to
improvements in operating income and management of working capital. As of
December 31, 1999, the total long-term debt outstanding for the Company was $307
million.
Cash used in investing activities for the years ended December 31, 1999 and
1998, the seven months ended December 31, 1997 and the fiscal year ended May 31,
1997 was $50.5 million, $14.7 million, $149.7 million and $16.9 million,
respectively. Investment in property and equipment includes renovations to the
Company's corporate headquarters (including a fran-chisee learning and training
center) and installation of systemwide property and yield management systems.
During the years ended December 31, 1999 and 1998, the seven months ended
December 31, 1997 and the fiscal year ended May 31, 1997, capital expenditures
totaled $30.6 million, $17.5 million, $7.3 million and $10.6 million,
respectively. Capital expenditures in prior years include amounts for computer
hardware; financial, property and yield management, and reservation systems; and
European hotel capital improvements.
The Company made advances to the marketing and reservation funds totaling $15.1
million in Calendar 1999. The advances are associated with a system-wide
property and yield management systems implementation, the timing of expenditures
associated with specific brand initiatives of the marketing fund and the
recognition of costs and the timing of payments received from franchisees in
conjunction with the Company's frequency stay program. The Company has the
ability under existing franchise agreements and expects to recover these
advances through future marketing and reservation fees. The company expects
$15.0 to $20.0 million of increases in advances to the marketing and reservation
funds in Calendar 2000 due to the continued property and yield management
systems implementation and expenditures associated with specific brand
initiatives.
On October 15, 1997, the Company funded a $115 million, five year Subordinated
Term Note to Sunburst with an initial simple interest rate of 11% per annum. In
connection with the amendment of the strategic alliance agreement (as defined in
the Notes to the Consolidated Financial Statements), effective October 15, 2000
interest payable shall accrue at a rate of 11% per annum compounded daily. The
Company implemented this amendment prospectively beginning on January 1, 1999
and has recognized interest on the outstanding principal and accrued interest
amounts at an effective rate of 10.58%. The note is payable in full, along with
accrued interest, on October 15, 2002. Total interest accrued at December 31,
1999 and 1998 was $27.0 million and $12.8 million, respectively.
Financing cash flows relate primarily to the Company's borrowings under its
credit lines and treasury stock purchases. On October 15, 1997, the Company
entered into a five-year $300 million competitive advance and multi-currency
revolving credit facility. The credit facility provides for a term loan of $150
million and a revolving credit facility of $150 million, $50 million of which is
available in foreign currency borrowings. At the time of the Sunburst
Distribution, the Company borrowed $150 million under the term loan and $140
million under the revolving credit facility, the proceeds of which were used to
fund the $115 million Sunburst note and to refinance existing indebtedness. As
of December 31, 1999, the Company had $112.5 million of term loans outstanding
and $82 million of revolving loans. The term loan is payable over five years,
$32.5 million of which is due in 2000. The credit facility includes customary
financial and other covenants that require the maintenance of certain ratios
including maximum leverage, minimum net worth and interest coverage and restrict
the Company's ability to make certain investments, repurchase stock, incur debt
and dispose of assets. At the Company's option, the interest rate may be based
on LIBOR, a certificate of deposit rate or an alternate base rate (as defined)
plus a facility fee percentage. The rate is determined based on the Company's
consolidated leverage ratio at the time of borrowing.
On May 1, 1998, the Company completed a $100 million senior unsecured note
offering ("the Notes"), bearing a coupon rate of 7.13% with an effective rate of
7.22%. The Notes will mature on May 1, 2008, with interest on the Notes to be
paid semi-annually. The Company used the net proceeds from the offering of
approximately $99 million to repay amounts outstanding under the Company's $300
million competitive advance and multi-currency revolving credit facility.
<PAGE>
32
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
Choice Hotels International, Inc. and Subsidiaries
The Company has entered into an interest rate swap agreement with a notional
amount of $115 million at December 31, 1999, to fix certain of its variable rate
debt in order to reduce the Company's exposure to fluctuations in interest
rates. The interest rate differential to be paid or received on the interest
rate swap agreement is accrued as interest rates change and is recognized as an
adjustment to interest expense. At December 31, 1999, the interest rate swap
agreement had a remaining life of approximately two months with a fixed rate of
5.85% and a variable rate at December 31, 1999 of 6.12%.
As of December 31, 1999, the Company had repurchased 7.5 million shares of its
common stock at a total cost of $107.4 million. On February 7, 2000 the Company
received authorization from its Board of Directors to repurchase up to an
additional 5 million shares.
The Company believes that cash flows from operations and available financing
capacity are 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.
The Company's exposure to potential Year 2000 problems existed in two general
areas: technological operations in the sole control of the Company and
technological operations dependent in some way on one or more third parties.
With respect to the Company's internal systems, no material Year 2000 problems
have occurred. The Company previously conducted Year 2000 compliance testing on
all of its proprietary software, including its reservations and reservations
support systems, its franchise support system and its franchisee property
management support systems. Except for two DOS based systems, the proprietary
software is Year 2000 compliant. The DOS version of ChoiceLINKS is not Year 2000
compliant and the DOS version of the Company's property management system is
only compliant through December 31, 2000. The Company has communicated this to
franchisees using these systems and has recommended that they migrate to the
Windows based versions of these systems, which are Year 2000 compliant. As of
February 7, 2000, 100% have migrated to the Windows version of ChoiceLINKS and
100% have migrated to the Windows version of the Company's property management
system.
The Company's inventory of third party software, including PC operating systems
and word processing and other commercial software, did not disclose any material
compliance issues.
During 1999, the Company's Year 2000 Compliance Committee identified third party
vendors and service providers whose non-compliant systems could have a material
impact on the Company and undertook an assessment as to such parties' compliant
status. These parties included airline global distribution systems (GDS),
utility providers, telephone service providers, banks and data processing
services. The GDS companies, which provide databases through which travel agents
can book hotel rooms, have assured the Company in writing that they are
compliant and the Company conducted tests with three of the four major GDS
companies. As of February 7, 2000, no material Year 2000 problems have been
experienced with the GDS companies and other third parties. Throughout 2000, the
committee will continue to monitor all of its material vendors.
Costs of addressing potential Year 2000 problems have not been material to date.
The value of employee time devoted to testing and development has been
approximately $400,000 over the past two and one half years. Total costs for
replacement of hardware and operating systems were approximately $600,000 over
the past two and one half years. The replacements to date and on-going
replacements are being implemented primarily as part of the Company's ongoing
technology updating, rather than specifically for Year 2000 compliance reasons.
Year 2000 compliance costs have not had a material adverse impact on the
Company's financial position, results of operations or cash flows.
<PAGE>
33
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
Choice Hotels International, Inc. and Subsidiaries
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.
Impact of Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which requires
recognition of the fair value of derivatives in the statement of financial
position, with changes in the fair value recognized either in earnings or as a
component of other comprehensive income dependent upon the hedging nature of the
derivative. Implementation of SFAS No. 133 is required for Fiscal 2001. SFAS No.
133 is not expected to have a material impact on the Company's earnings or other
comprehensive income.
Forward-Looking Statements
Certain statements contained in this annual report, including those in the
section entitled Management's Discussion and Analysis, contain forward-looking
information that involves risk and uncertainties. Forward-looking statements are
usually identified by the words "believes," "anticipates," "expects," intends,"
"estimates," "projects," and other similar expressions, which are predictions of
or indicate future events and trends. 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; our ability, and that of other parties upon which
our business also rely, to modify or replace on a timely basis, their computer
software and other systems in order to function properly prior to, in and
beyond, the year 2000; 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.
<PAGE>
34
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
- --------------------------------------------------------------------------------
Choice Hotels International, Inc. and Subsidiaries
To Choice Hotels International,Inc.
We have audited the accompanying consolidated balance sheets of Choice Hotels
International, Inc. and sub- sidiaries, as defined under "Background and Basis
of Presentation" in the Notes to Consolidated Financial Statements, as of
December 31, 1999 and 1998, and the related consolidated statements of income
and cash flows for the years ended December 31, 1999 and 1998, the seven months
ended December 31, 1997 and the fiscal year ended May 31, 1997, and the
consolidated statements of shareholders' equity and comprehensive income for the
period from October 15, 1997 (inception) to December 31, 1997 and the years
ended December 31, 1998 and 1999. These consolidated financial statements are
the responsibility of Choice Hotels International, Inc.'s management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Choice
Hotels International, Inc. and subsidiaries as of December 31, 1999 and 1998,
and the consolidated results of their operations and their consolidated cash
flows for the years ended December 31, 1999 and 1998, the seven months ended
December 31, 1997 and the fiscal year ended May 31, 1997, and the consolidated
statements of shareholders' equity and comprehensive income for the period from
October 15, 1997 (inception) to December 31, 1997 and the years ended December
31, 1998 and 1999, in conformity with accounting principles generally accepted
in the United States.
/s/ Arthur Andersen LLP
Vienna, Virginia
January 28, 2000
<PAGE>
35
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
- --------------------------------------------------------------------------------
Choice Hotels International, Inc. and Subsidiaries
<TABLE>
<CAPTION>
Seven months Fiscal year
Years ended ended ended
December 31, December 31, May 31,
(In thousands) 1999 1998 1997 1997
------------------------------------------------
<S> <C> <C> <C> <C>
Revenues
Royalty fees $128,653 $115,171 $ 70,308 $ 97,215
Initial franchise and relicensing fees 13,910 16,571 8,597 16,802
Partner services revenue 9,055 6,370 3,510 4,175
Other revenue 6,111 5,516 1,359 8,467
Product sales 3,871 20,748 13,524 23,643
European hotel operations -- 1,098 10,541 17,737
------------------------------------------------
Total revenues 161,600 165,474 107,839 168,039
Operating Expenses
Selling, general and administrative 55,860 52,948 29,454 51,102
Depreciation and amortization 8,023 6,753 3,977 7,643
Product cost of sales 3,883 19,532 13,031 22,766
European hotel operations -- 1,133 9,203 16,166
------------------------------------------------
Total operating expenses 67,766 80,366 55,665 97,677
------------------------------------------------
Operating income 93,834 85,108 52,174 70,362
------------------------------------------------
Other
Loss (gain) on sale of investments 68 (2,370) -- --
Interest on notes payable to Manor Care -- -- -- 7,083
Interest expense 19,387 19,133 8,788 4,647
Interest and dividend income (including interest
income on Sunburst Note of $14.2 million,
$10.4 million and $2.7 million for December 31,
1999, 1998 and 1997, respectively) (20,092) (14,055) (2,997) (943)
------------------------------------------------
Total other (637) 2,708 5,791 10,787
------------------------------------------------
Income before income taxes and extraordinary item 94,471 82,400 46,383 59,575
Income taxes 37,316 34,327 19,096 24,845
------------------------------------------------
Net income before extraordinary item 57,155 48,073 27,287 34,730
Gain on early extinguishment of debt (net of taxes of $4,732) -- 7,232 -- --
------------------------------------------------
Net income $ 57,155 $ 55,305 $ 27,287 $ 34,730
------------------------------------------------
Weighted average shares outstanding 54,859 58,717 59,798 62,680
------------------------------------------------
Diluted shares outstanding 55,667 59,548 61,300 62,680
------------------------------------------------
Basis EPS:
Income before extraordinary item $ 1.04 $ 0.82 $ 0.46 $ 0.55
Extraordinary item -- 0.12 -- --
------------------------------------------------
Net income $ 1.04 $ 0.94 $ 0.46 $ 0.55
------------------------------------------------
Diluted EPS:
Income before extraordinary item $ 1.03 $ 0.81 $ 0.45 $ 0.55
Extraordinary item -- 0.12 -- --
------------------------------------------------
Net income $ 1.03 $ 0.93 $ 0.45 $ 0.55
------------------------------------------------
</TABLE>
See notes to consolidated statements.
<PAGE>
36
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
Choice Hotels International, Inc. and Subsidiaries
(In thousands) December 31, December 31,
Assets 1999 1998
---------------------------
Current assets
Cash and cash equivalents $ 11,850 $ 1,692
Receivables (net of allowance for doubtful
accounts of $6,203 and $8,082, respectively) 30,035 28,117
Income taxes receivable -- 5,427
Other current assets 37 425
---------------------------
Total current assets 41,922 35,661
Property and equipment, at cost, net 58,255 37,556
Goodwill, net 64,706 66,749
Franchise rights, net 43,101 44,981
Investment in Friendly Hotels 41,195 41,576
Advances to marketing and reservation funds 37,668 18,653
Other assets 35,958 25,200
Note receivable from Sunburst Hospitality 141,853 127,849
---------------------------
Total assets $ 464,658 $ 398,225
---------------------------
Liabilities and Shareholders' Equity
Current liabilities
Current portion of long-term debt $ 44,646 $ 28,846
Accounts payable 21,362 16,216
Accrued expenses 22,283 19,606
Income taxes payable 1,367 --
---------------------------
Total current liabilities 89,658 64,668
Long-term debt 262,710 250,364
Deferred income taxes ($30,648 and $19,569,
respectively) and other liabilities 46,674 26,683
---------------------------
Total liabilities 399,042 341,715
---------------------------
Shareholders' Equity
Common stock, $ .01 par value, 160,000,000
shares authorized; 53,833,911 and
56,726,917 shares issued and outstanding at
December 31, 1999 and 1998, respectively 614 607
Additional paid-in-capital 52,386 45,097
Accumulated other comprehensive income 1,205 2,112
Deferred compensation (1,937) (1,665)
Treasury stock (108,370) (54,204)
Retained earnings 121,718 64,563
---------------------------
Total shareholders' equity 65,616 56,510
---------------------------
Total liabilities and shareholders' equity $ 464,658 $ 398,225
---------------------------
See notes to consolidated financial statements.
<PAGE>
37
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
Choice Hotels International, Inc. and Subsidiaries
<TABLE>
<CAPTION>
Seven Months Fiscal Year
Years Ended Ended Ended
December 31, December 31, May 31,
1999 1998 1997 1997
- ----------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Cash Flows From Operating Activities
Net income $ 57,155 $ 55,305 $ 27,287 $ 34,730
Reconciliation of net income to net cash provided
by operating activities:
Depreciation and amortization 17,576 13,067 6,159 10,438
Provision for bad debts 588 1,473 2,274 2,238
Increase (decrease) in deferred income taxes and other 10,216 14,852 (4,828) 3,171
Non cash interest and dividend income (16,259) (12,364) (2,997) (943)
Gain on extinguishment of debt -- (11,964) -- --
Changes in assets and liabilities:
Receivables (4,006) (4,311) (10,606) (4,835)
Prepaid expenses and other current assets 1,355 (1,849) 2,403 1,615
Current liabilities 6,086 (6,180) 11,226 (2,145)
Income taxes payable/receivable 6,794 (3,411) 2,689 1,061
Other liabilities -- -- -- 175
------------------------------------------------------
Net cash provided by operating activities 79,505 44,618 33,607 45,505
------------------------------------------------------
Cash Flows From Investing Activities
Investment in property and equipment (30,633) (17,488) (7,329) (10,630)
Purchase of minority interest -- -- -- (2,494)
Repayments from/advances to Sunburst Hospitality -- 8,145 (25,066) --
Note receivable from Sunburst Hospitality -- -- (115,000) --
Advances to marketing and reservation funds, net (15,098) (4,154) (4,487) --
Other items, net (4,762) (1,225) 2,143 (3,804)
------------------------------------------------------
Net cash utilized in investing activities (50,493) (14,722) (149,739) (16,928)
------------------------------------------------------
Cash Flows From Financing Activities
Proceeds from mortgages and other long term debt 88,630 194,901 236,509 31,107
Principal payments of debt (59,458) (184,300) (78,851) (51,260)
Purchase of treasury stock (53,166) (54,015) (189) --
Cash transfers to Manor Care, net -- -- (35,222) (8,069)
Proceeds from issuance of common stock 5,140 4,928 -- --
------------------------------------------------------
Net cash (utilized in) provided by financing activities (18,854) (38,486) 122,247 (28,222)
------------------------------------------------------
Net change in cash and cash equivalents 10,158 (8,590) 6,115 355
Cash and cash equivalents at beginning of period 1,692 10,282 4,167 3,812
------------------------------------------------------
Cash and cash equivalents at end of period $ 11,850 $ 1,692 $ 10,282 $ 4,167
======================================================
</TABLE>
See notes to consolidated statements.
<PAGE>
38
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
- --------------------------------------------------------------------------------
Choice Hotels International, Inc. and Subsidiaries
<TABLE>
<CAPTION>
(In thousands, except share amounts)
Accumulated Other
Common Stock Additional Comprehensive Deferred Treasury
Shares Amount Paid-in-Capital Income (Loss) Compensation Stock
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Initial capitalization
October 15, 1997 59,767,716 $598 $ 48,064 $(8,662) $ -- $ --
Comprehensive income
Net income -- -- -- -- -- --
Other comprehensive income:
Foreign translation adjustments -- -- -- 346 -- --
Comprehensive income
Exercise of stock options/grants, net 71,876 -- (157) -- -- --
Treasury purchases (10,714) -- -- -- -- (189)
Transfers of net income to Sunburst
prior to the distribution -- -- -- -- -- --
-------------------------------------------------------------------------------
Balance as of December 31, 1997 59,828,878 $598 $ 47,907 $(8,316) $ -- $ (189)
-------------------------------------------------------------------------------
Comprehensive income
Net Income -- -- -- -- -- --
Other comprehensive income:
Foreign translation adjustments -- -- -- -- -- --
Unrealized gain on securities, net of
reclassification adjustment -- -- -- -- -- --
Other comprehensive income -- -- -- 10,428 -- --
Comprehensive income
Exercise of stock options/grants, net 667,227 7 5,058 -- -- --
Issuance of restricted stock 160,212 2 2,272 -- (2,274) --
Amortization of deferred compensation -- -- -- -- 609 --
Treasury purchases (3,929,400) -- -- -- -- (54,015)
Purchase of MainStay brand
from Sunburst -- -- (10,140) -- -- --
-------------------------------------------------------------------------------
Balance as of December 31, 1998 56,726,917 $607 $ 45,097 $ 2,112 $(1,665) $ (54,204)
-------------------------------------------------------------------------------
Comprehensive income
Net Income -- -- -- -- -- --
Other comprehensive income:
Foreign translation adjustments -- -- -- -- -- --
Unrealized loss on securities, net
of taxes, net of reclassification
adjustment -- -- -- -- -- --
Other comprehensive income -- -- -- (907) -- --
Comprehensive income
Exercise of stock options/grants, net 623,647 6 6,275 -- -- --
Issuance of restricted stock 70,260 1 1,014 -- (1,015) --
Amortization of deferred compensation -- -- -- -- 743 --
Treasury purchases (3,586,913) -- -- -- -- (54,166)
-------------------------------------------------------------------------------
Balance as of December 31, 1999 53,833,911 $614 $ 52,386 $ 1,205 $(1,937) $(108,370)
-------------------------------------------------------------------------------
<CAPTION>
Comprehensive Retained
Income Earnings Total
--------------------------------------
<S> <C> <C>
Initial capitalization
October 15, 1997 $ -- $ 40,000
Comprehensive income
Net income $ 27,287 27,287 27,287
Other comprehensive income:
Foreign translation adjustments 346 -- 346
---
Comprehensive income $ 27,633
========
Exercise of stock options/grants, net -- (157)
Treasury purchases -- (189)
Transfers of net income to Sunburst
prior to the distribution (18,029) (18,029)
--------------------------------------
Balance as of December 31, 1997 $ 9,258 $ 49,258
--------------------------------------
Comprehensive income
Net Income 55,305 55,305 55,305
Other comprehensive income:
Foreign translation adjustments 10,048 -- 10,048
Unrealized gain on securities, net of
reclassification adjustment 380 -- 380
---
Other comprehensive income 10,428 -- --
------
Comprehensive income $ 65,733
========
Exercise of stock options/grants, net -- 5,065
Issuance of restricted stock -- --
Amortization of deferred compensation -- 609
Treasury purchases -- (54,015)
Purchase of MainStay brand
from Sunburst -- (10,140)
--------------------------------------
Balance as of December 31, 1998 $ 64,563 $ 56,510
--------------------------------------
Comprehensive income
Net Income 57,155 57,155 57,155
Other comprehensive income:
Foreign translation adjustments (108) -- (108)
Unrealized loss on securities, net
of taxes, net of reclassification
adjustment (799) -- (799)
-----
Other comprehensive income (907) -- --
-----
Comprehensive income $ 56,248
========
Exercise of stock options/grants, net
-- 6,281
Issuance of restricted stock
-- --
Amortization of deferred compensation
-- 743
Treasury purchases -- (54,166)
--------------------------------------
Balance as of December 31, 1999 $121,718 $ 65,616
--------------------------------------
</TABLE>
See notes to consolidated statements.
<PAGE>
39
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Choice Hotels International, Inc. and Subsidiaries
Background and Basis of Presentation
On March 7, 1996, Manor Care, Inc. ("Manor Care") announced its intention to
proceed with the separation of its lodging business ("Choice Hotels Holdings,
Inc." or "Holdings") from its health care business via a spin-off of its lodging
business (the "Manor Care 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 Holdings for each share of Manor Care stock, and the
Board set the record date and the distribution date. The Manor Care Distribution
was made on November 1, 1996 to holders of record of Manor Care's common stock
on October 10, 1996. Choice Hotels International, Inc. (the "Company"), which
was a subsidiary of Manor Care became a wholly-owned subsidiary of Holdings.
The Manor Care Distribution separated the lodging and health care businesses of
Manor Care into two public corporations. The operations of Holdings consisted
principally of the hotel franchise operations and the owned and managed hotel
operations formerly conducted by Manor Care directly or through its subsidiaries
(the "Lodging Business").
On November 1, 1996, concurrent with the Manor Care Distribution, Holdings
changed its name from Choice Hotels Holdings, Inc. to Choice Hotels
International, Inc. ("CHI") and the Company changed its name to Choice Hotels
Franchising, Inc.
On April 29, 1997, CHI's Board of Directors announced its intention to separate
CHI's franchising business from its owned hotel business (referred to as the
"Sunburst Distribution"). On September 16, 1997, the Board of Directors and
shareholders of CHI approved the separation of the business via a spin-off of
the Company, along with CHI's European hotel and franchising operations, to its
shareholders. The Board set October 15, 1997 as the date of distribution and on
that date, CHI shareholders received one share in the Company (renamed "Choice
Hotels International, Inc." and referred to hereafter as the "Company") for
every share of CHI stock held on October 7, 1997 (the date of record).
Concurrent with the October 15, 1997 distribution date, CHI changed its name to
Sunburst Hospitality Corporation, (referred to hereafter as "Sunburst") and
effected a one-for-three reverse stock split of its common stock.
The Company is in the business of hotel franchising. As of December 31, 1999,
the Company had franchise agreements with 4,248 hotels open and 761 hotels under
development in 40 countries under the following brand names: Comfort, Quality,
Econo Lodge, Sleep, Clarion, Rodeway, and MainStay Suites.
The consolidated financial statements present the financial position, results of
operations and cash flows and equity of the Company as if it were formed as a
separate entity of its parent (Manor Care prior to Manor Care Distribution and
Sunburst prior to Sunburst Distribution) which conducted the hotel franchising
business and European hotel operations and as if the Company were a separate
company for all periods presented. The Parent'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. Changes in the
investments and advances from parent represent the net income of the Company
plus the net change in transfers between the Company and Manor Care through
November 1, 1996 and Sunburst through October 15, 1997.
An analysis of the activity in the investments and advances from parent account
for the fiscal year ended May 31, 1997 and the period June 1, 1997 through
October 15, 1997 is as follows:
(In thousands)
--------------
Balance, May 31, 1996 $ 30,532
Transfers to Parent, net (8,069)
Net income 34,730
--------------
Balance, May 31, 1997 57,193
Transfers to Parent, net through
October 15, 1997 (35,222)
Net income from June 1, 1997
through October 15, 1997 18,029
Initial capitalization (40,000)
--------------
Balance, October 15, 1997 $ --
--------------
The average balance of the investments and advances from parent was $48.6
million and $43.9 million for the period June 1, 1997 through October 15, 1997
and the fiscal year ended May 31, 1997, respectively.
Reclassifications
Certain reclassifications have been made to the prior year consolidated
financial statements to conform to the current year presentation.
<PAGE>
40
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Choice Hotels International, Inc. and Subsidiaries
Significant Accounting Policies
Fiscal Year
During October 1997, the Company changed its fiscal year from a May 31 year end
to a December 31 year end.
Consolidation Policy
The consolidated financial statements include Choice Hotels International, Inc.
and its subsidiaries. All significant inter-company accounts and transactions
have been eliminated in consolidation.
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.
Capitalization Policies
Major renovations and replacements are capitalized to appropriate property and
equipment accounts. Upon sale or retirement of property, the cost and related
accumulated depreciation are eliminated from the accounts and the related gain
or loss is taken into income. Maintenance, repairs and minor replacements are
charged to expense.
Impairment Policy
The Company evaluates the recoverability of long lived assets, including
franchise rights and goodwill, whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
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 of the asset and
the expected net cash flows, discounted at an appropriate interest rate.
Deferred Financing Costs
Debt financing costs are deferred and amortized, using the interest method, over
the term of the related debt.
Investment Policy
The Company accounts for its investments in common stock in accordance with
Statements of Financial Accounting Standards ("SFAS") No. 115 "Accounting for
Certain Investments in Debt and Equity Securities" and SFAS No. 130 "Reporting
Comprehensive Income." The Company accounts for its investment in unincorporated
joint ventures in accordance with Accounting Principles Board Opinion ("APB")
No. 18 "The Equity Method of Accounting for Investments in Common Stock."
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from these estimates.
Property and Equipment
The components of property and equipment in the consolidated balance sheets are:
December 31,
(In thousands) 1999 1998
------------------------
Land $ 1,227 $ 1,603
Facilities in progress 1,838 1,600
Building and improvements 18,458 8,023
Furniture, fixtures and equipment 60,629 40,486
------------------------
82,152 51,712
Less: Accumulated depreciation (23,897) (14,156)
------------------------
$ 58,255 $ 37,556
------------------------
Depreciation has been computed for financial reporting purposes using the
straight-line method. A summary of the ranges of estimated useful lives upon
which depreciation rates have been based follows:
Building and improvements 10-40 years
Furniture, fixtures and equipment 3-20 years
Goodwill
Goodwill primarily represents an allocation of the excess purchase price of the
stock of the Company over the recorded minority interest. Goodwill is amortized
on a straight-line basis over 40 years. Such amortization amounted to $2.0
million, $2.0 million, $1.1 million, and $1.9 million for the years ended
December 31, 1999 and 1998, the seven months ended December 31, 1997, and the
fiscal year ended May 31, 1997, respectively. Goodwill is net of accumulated
amortization of $10.1 million and $8.1 million at December 31, 1999 and 1998,
respectively.
Franchise Rights
Franchise rights are intangible assets and represent an allocation in purchase
accounting for the value of long-term franchise contracts. The majority of the
balance results from the Econo Lodge and Rodeway acquisitions made in fiscal
year 1991. Franchise rights acquired are amortized over an average life of 15
years. Amortization expense for the years
<PAGE>
41
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Choice Hotels International, Inc. and Subsidiaries
ended December 31, 1999 and 1998, the seven months ended December 31, 1997 and
the fiscal year ended May 31, 1997 amounted to $4.3 million, $3.8 million, $1.7
million and $2.9 million, respectively. Franchise rights are net of accumulated
amortization of $23.0 million and $18.7 million at December 31, 1999 and 1998,
respectively.
The Company periodically assesses the amortization lives of its franchise
rights. Effective January 1, 1998, the Company changed its estimate of the
useful life of Econo Lodge franchise rights to a 17 year period and Rodeway
franchise rights to a 3 year period to more closely match the remaining
estimated contract lives of franchise contracts acquired in 1991. The effect of
this change in estimate was to increase depreciation and amortization expense by
approximately $900,000 and decrease net income by $0.01 per dilutive share for
the years ended December 31, 1999 and 1998.
Investment in Friendly Hotels
On May 31, 1996, the Company invested approximately $17.1 million in the capital
stock of Friendly Hotels, PLC ("Friendly"). In exchange for the $17.1 million
investment, the Company received 750,000 shares of common stock and 10 million
newly issued immediately convertible preferred shares. In addition, the Company
granted to Friendly a Master Franchise Agreement for the United Kingdom and
Ireland in exchange for 333,333 additional shares of common stock. The preferred
shares carry a 5.75% dividend payable in cash or in stock, at the Company's
option. The dividend accrues annually with the first dividend paid on the
earlier of the third anniversary of completion or on a conversion date. As a
condition to the investment, the Company has the right to appoint three
directors to the board of Friendly. Given the Company's ability to exercise
significant influence over the operations of Friendly, the equity method of
accounting is applied.
In January 1998, Friendly acquired European hotels owned by the Company for
$26.2 million in convertible preferred shares and cash. In exchange for 10
hotels in France, two in Germany and one in the United Kingdom, the Company
received $22.2 million in new unlisted 5.75% convertible preferred shares in
Friendly at par, convertible for one new Friendly ordinary share for every 150p
nominal of the preferred convertible shares.
In 1998, the Company granted Friendly the master franchise rights for Choice's
Comfort, Quality and Clarion brand hotels throughout Europe (with the exception
of Scandinavia) for a 10 year period. In exchange, the Company will receive from
Friendly $8.0 million, payable in eight equal annual installments. The master
franchise payment is being recognized over the life of the agreement.
The Company recognized $2.2 million, $2.1 million, $0.6 million and $0.9 million
in preferred dividend income from the Friendly investment for the years ended
December 31, 1999 and 1998, the seven months ended December 31, 1997 and the
fiscal year ended May 31, 1997, respectively. As of December 31, 1999 and 1998,
accrued but unpaid preferred dividends were $5.8 million and $3.7 million,
respectively. The Company also recognized $2.2 million and $1.4 million in
royalty revenue from Friendly for the years ended December 31, 1999 and 1998,
respectively.
The Company owned approximately 5.3%, 5.2% and 4.95% of Friendly's outstanding
ordinary shares at December 31, 1999, 1998 and 1997, respectively. The fair
market value of the ordinary shares at December 31, 1999 and 1998 was $2.0
million and $1.9 million, respectively. Summarized unaudited balance sheet data
for Friendly is as follows:
(Unaudited)
December 31,
(In thousands) 1999 1998
---------------------------
Current assets $ 43,616 $ 52,197
Non-current assets 207,299 237,654
Current liabilities 49,622 60,696
Non-current liabilities 91,984 85,919
Redeemable preferred stock 37,800 31,558
Shareholders' equity 174,382 205,880
Summarized unaudited income statement data for Friendly is as follows:
(Unaudited)
December 31,
(In thousands) 1999 1998 1997
----------------------------------------
Net revenues $ 150,332 $130,028 $100,970
Gross profit 84,852 73,447 60,184
Income from continuing
operations 8,809 12,778 11,956
Net (loss) income
after preferred dividends (4,113) 18,984 7,684
<PAGE>
42
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Choice Hotels International, Inc. and Subsidiaries
Revenue Recognition
The Company enters into numerous franchise agreements committing to provide
franchisees with various marketing services, a centralized reservation system
and limited rights to utilize the Company's registered tradenames. These
agreements are typically for a period of twenty years, with certain rights to
the franchisee to terminate after five, 10, or 15 years. Initial franchise fees
are recognized upon sale because the initial franchise fee is non-refundable and
the Company has no continuing obligations related to the franchisee. Royalty
fees, primarily based on gross room revenues of each franchisee, are recorded
when earned. Reserves for uncollectible accounts are charged to bad debt expense
and included in selling, general and administrative expenses in the accompanying
consolidated statements of income.
The Company's franchise agreements require the payment of franchise fees which
include marketing and reservation fees. These fees, which are based on a
percentage of the franchisees' gross room revenues, are used exclusively to
reimburse the Company for expenses associated with providing such franchise
services as central reservation systems, property and yield management systems,
national marketing, and media advertising. The Company is contractually
obligated to expend the reservation and marketing fees it collects from
franchisees in accordance with the franchise agreements; as such, no income or
loss to the Company is generated. During the second quarter of 1998, the Company
changed its presentation of marketing and reservation fees such that the fees
collected and associated expenses are reported net. All prior periods have been
reclassified to conform to the new presentation.
The total marketing and reservation fees received by the Company (previously
reported as revenue) for the years ended December 31, 1999 and 1998, the seven
months ended December 31, 1997, and the fiscal year ended May 31, 1997 amounted
to $146.0 million, $127.4 million, $72.3 million, and $104.2 million,
respectively. Depreciation and amortization charged to the marketing and
reservation funds for the years ended December 31, 1999 and 1998, the seven
months ended December 31, 1997, and the fiscal year ended May 31, 1997 amounted
to $9.6 million, $6.2 million, $2.2 million, and $2.8 million, respectively.
Under the terms of the franchise agreements 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,
respectively, from the particular fund. As of December 31, 1999 and 1998, the
Company's balance sheet includes advances to marketing and reservation funds of
$37.7 million and $18.7 million, respectively. The advances made are composed of
1999 and 1998 marketing ($12.5 million and $7.8 million, respectively) and 1999
and 1998 reservation ($25.2 million and $10.9 million, respectively) funds. The
Company has the ability under existing franchise agreements and expects to
recover these advances through future marketing and reservation fees.
Transactions with Sunburst
Subsequent to the Manor Care Distribution, the Company participated in a cash
concentration system with Sunburst and as such maintained no significant cash
balances or banking relationships. Substantially all cash received by the
Company was immediately deposited in and combined with Sunburst's corporate
funds through its cash management system. Similarly, operating expenses, capital
expenditures and other cash requirements of the Company have been paid by
Sunburst and charged to the Company. The net result of all of these intercompany
transactions were reflected in Investments and advances from Parent.
As part of the Sunburst Distribution, Sunburst and the Company have entered into
a strategic alliance agreement. Among other things, the agreement provides for:
(i) a right of first refusal to the Company to franchise any lodging properties
to be acquired or developed by Sunburst; (ii) certain commitments by Sunburst
for the development of Sleep Inn and MainStay Suites hotels; (iii) continued
cooperation of both parties with respect to matters of mutual interest, such as
new product and concept testing; (iv) continued cooperation with respect to
third party vendor arrangements; and (v) certain limitations on competition in
each others' line of business. The strategic alliance agreement extends for a
term of 20 years with mutual rights of termination on the fifth, 10th and 15th
anniversaries. In December 1998, the parties amended the strategic alliance
agreement: (i) to eliminate Sunburst's option to acquire the MainStay Suites
brand; (ii) to amend Sunburst's development commitments; and (iii) to provide
certain global amendments to Sunburst's franchise agreements.
In connection with the Sunburst Distribution, the Company borrowed $115 million
under its Credit Facility in order to fund a Subordinated Term Note to Sunburst.
The Subordinated Term Note of $115 million accrues interest monthly at an
initial simple rate of 11% per annum through October 14, 2000. In connection
with the amendment of the strategic alliance agreement discussed above,
effective October 15, 2000 interest shall accrue at a rate of 11% per
<PAGE>
43
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Choice Hotels International, Inc. and Subsidiaries
annum compounded daily. On January 1, 1999, the Company began recognizing
interest on the outstanding principal and accrued interest amounts at an
effective rate of 10.58%. The note is payable in full, along with accrued
interest, on October 15, 2002. Total interest accrued as of December 31, 1999
and 1998 was $27.0 million and $12.8 million, respectively.
For purposes of providing an orderly transition after the Sunburst Distribution,
Sunburst and the Company entered into various agreements, including, among
others, a Distribution Agreement, a Tax Sharing Agreement, a Corporate Services
Agreement and an Employee Benefits Allocation Agreement. Effective as of October
15, 1997, these agreements provide, among other things, that Sunburst: (i) will
receive human resources for certain corporate and support services, such as
accounting, tax and computer systems support; (ii) will provide to the Company
certain services including asset management, and payables processing; (iii) will
adjust outstanding options to purchase shares of Company common stock held by
Company employees, Sunburst employees, and employees of Manor Care; (iv) is
responsible for filing and paying the related taxes on consolidated federal tax
returns and consolidated or combined state tax returns for itself and any of its
affiliates (including the Company) for the periods of time that the affiliates
were members of the consolidated group; (v) will be reimbursed by the Company
for the portion of income taxes paid that relate to the Company and its
subsidiaries; and (vi) guarantees that the Company will, at the date of
distribution, have a specified minimum level of net worth. These agreements were
to extend for a maximum period of 30 months from the Distribution date or until
such time as the Company and Sunburst have arranged to provide such services
in-house or through another unrelated provider of such services. As of March 31,
1999, all services provided by each party under the Corporate Services
Agreement, except for human resources and tax services provided by the Company,
were terminated. As of December 31, 1999, the human resources and tax services
provided by the Company, were terminated. Costs associated with the Corporate
Services Agreement as well as costs of services provided by Sunburst to the
Company or provided by the Company to Sunburst have been allocated between the
entity providing the services and the entity receiving the services in the
accompanying financial statements. As a result, future administrative and
corporate expenses are expected to vary from historical results. However, the
Company has estimated that general and administrative expenses incurred annually
will not materially change.
During the periods presented, Sunburst operated substantially all of its hotels
pursuant to franchise agreements with the Company. Total fees paid to the
Company included in the accompanying consolidated financial statements for
franchising royalty, marketing and reservation fees were $9.1 million and $11.2
million for the years ended December 31, 1999 and 1998, respectively, $6.2
million for the seven months ended December 31, 1997, and $9.5 million for the
fiscal year ended May 31, 1997.
In accordance with the Sunburst Distribution Agreement, the Company agreed to
assume and pay certain liabilities of Sunburst, subject to the Company
maintaining a minimum net worth of $40 million, at the date of Distribution. As
of December 31, 1997, the Company reflected a $25 million receivable due from
Sunburst on the consolidated balance sheet. In 1998, net payments of
approximately $8 million were collected from Sunburst in cash. On December 28,
1998, the Company and Sunburst amended the strategic alliance agreement entered
into in connection with the Sunburst Distribution. As part of that amendment,
the Company exchanged the remaining $17 million balance in return for, among
other things, the exclusive rights to the MainStay Suites brand from Sunburst.
The $17 million, net of income taxes of approximately $7 million, was recorded
as an adjustment to additional paid-in-capital as it represents an adjustment to
the accounting for the Sunburst Distribution.
<PAGE>
44
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Choice Hotels International, Inc. and Subsidiaries
Accrued Expenses
Accrued expenses were as follows as of December 31:
(In thousands) 1999 1998
---------------------------
Accrued salaries & benefits $12,813 $10,611
Accrued interest 2,911 3,302
Other 6,559 5,693
---------------------------
Total $22,283 $19,606
---------------------------
Long-Term Debt and Notes Payable
As of December 31, debt consisted of the following:
(In thousands) 1999 1998
---------------------------
$300 million competitive advance
and multi-currency revolving
credit facility with an average rate
of 6.81% and 5.91% at December
31, 1999 and 1998, respectively $194,500 $172,000
$100 million senior note offering
with an average rate of 7.22% at
December 31, 1999 and 1998 99,382 99,382
$15 million line of credit with a rate
of 6.90% and 6.10% at December
31, 1999 and 1998 12,000 6,200
Other notes with an average rate
of 5.90% and 5.85% at December
31, 1999 and 1998 1,474 1,628
---------------------------
Total indebtedness $307,356 $279,210
---------------------------
Maturities of debt as of December 31, 1999 were as follows:
Year (In thousands)
2000 $ 44,646
2001 42,646
2002 119,646
2003 146
2004 146
Thereafter 100,126
-----------
Total $307,356
-----------
On October 15, 1997, the Company entered into a $300 million competitive advance
and multi-currency revolving credit facility (the "Credit Facility") provided by
a group of 13 banks. The Credit Facility provides for a term loan of $150
million and a revolving credit facility of $150 million, $50 million of which is
available for borrowings in foreign currencies. The Credit Facility includes
customary financial and other covenants that require the maintenance of certain
ratios including maximum leverage, minimum net worth and interest coverage and
restricts the Company's ability to make certain investments, repurchase stock,
incur debt and dispose of assets. The term loan ($112.5 million of which is
outstanding at December 31, 1999) is payable over five years, $32.5 million of
which is due in 2000. Borrowings under the facility are, at the option of the
borrower, at one of several rates including LIBOR plus 20.0 to 87.5 basis
points, based upon a defined financial ratio and the loan type. In addition, the
Company has the option to request participating banks to bid on loan
participation at lower rates than those contractually provided by the facility.
The Credit Facility requires the Company to pay annual fees of 1/10 of 1% to 1/3
of 1%, based upon a defined financial ratio of the total loan commitment. The
Credit Facility will terminate on October 15, 2002.
On May 1, 1998, the Company issued $100 million of senior unsecured notes (the
"Notes") at a discount of $0.6 million, bearing a coupon rate of 7.13% with an
effective rate of 7.22%. The Notes will mature on May 1, 2008, with interest on
the Notes to be paid semi-annually. The Company used the net proceeds from the
offering of approximately $99 million to repay amounts outstanding under the
Company's Credit Facility.
During April 1999, the Company renewed its $15 million revolving line of credit
in order to finance short term working capital requirements and other short term
general corporate goals. The line of credit is due to expire on April 30, 2000
and bears interest at 6.90%. Interest accrues monthly on the outstanding
balance. The line of credit contains essentially the same covenants as the
Credit Facility and is prepayable without penalty.
Cash paid for interest was $19.4 million, $19.2 million, $7.9 million and $11.6
million for the years ended December 31, 1999 and 1998, the seven months ended
December 31, 1997, and the fiscal year ended May 31, 1997, respectively.
Interest Rate Hedges
The Company has entered into an interest rate swap agreement with a notional
amount of $115 million at December 31, 1999 to fix certain of its variable rate
debt in order to reduce the Company's exposure to fluctuations in interest
rates. The interest rate differential to be paid or received on the interest
rate swap agreement is accrued as interest rates change and is recognized as an
adjustment to interest expense. As of December 31, 1999, the interest rate swap
agreement has a life of two months with a fixed rate of 5.85% and variable rate
of 6.12%. As of December 31, 1999 and 1998, the interest rate swap agreements
<PAGE>
45
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Choice Hotels International, Inc. and Subsidiaries
have a fair market valuation of approximately $0.1 million and $(2.8) million,
respectively.
Foreign Operations
The Company accounts for foreign currency translation in accordance with SFAS
No. 52, "Foreign Currency Translation." Revenues generated by foreign operations
for the years ended December 31, 1999 and 1998, the seven months ended December
31, 1997 and the fiscal year ended May 31, 1997 were $6.9 million, exclusive of
$2.5 million of foreign dividends; $5.8 million, exclusive of $2.1 million of
foreign dividends; $16.2 million, exclusive of $0.6 million of foreign
dividends; and $27.5 million, exclusive of $0.9 million of foreign dividends,
respectively. The Company's foreign operations had net income (loss) of $1.0
million, $0.0 million, $0.5 million, and $(3.1 million) for the years ended
December 31, 1999 and 1998, the seven months ended December 31, 1997 and the
fiscal year ended May 31, 1997.
Pension, Profit Sharing and Incentive Plans
Bonuses accrued for key executives of the Company under incentive compensation
plans were $1.0 million and $0.8 million at December 31, 1999 and 1998,
respectively.
During 1999 and 1998, employees of the Company participated in 401(k) retirement
plans sponsored by the Company. For the years ended December 31, 1999 and 1998,
the Company recorded compensation expense of $1.3 million and $1.2 million,
respectively, related to the plans. Prior to the Manor Care Distribution and
Sunburst Distribution, employees participated in retirement plans sponsored by
Manor Care and Sunburst. Costs allocated to the Company under those plans were
based on the size of its payroll relative to the sponsor's payroll. Costs
allocated to the Company were approximately $1.2 million and $1.4 million for
the seven months ended December 31, 1997 and the fiscal year ended May 31, 1997,
respectively.
- --------------------------------------------------------------------------------
Income Taxes
The Company was included in the consolidated federal income tax returns of Manor
Care and Sunburst prior to October 15, 1997. Subsequent to October 15, 1997, the
Company is required to make its own filings. The income tax provision included
in these consolidated financial statements reflects the historical income tax
provision and temporary differences attributable to the operations of the
Company on a separate return basis. Deferred taxes are recorded for the tax
effect of temporary differences between book and tax income.
Income before income taxes were derived from the following:
<TABLE>
<CAPTION>
Years ended Seven months Fiscal year
December 31, ended December 31, ended May 31,
(In thousands) 1999 1998 1997 1997
---------------------------------------------------------
<S> <C> <C> <C> <C>
Income before income taxes and extraordinary item:
Domestic operations $92,058 $82,400 $ 45,866 $ 62,641
Foreign operations 2,413 -- 517 (3,066)
---------------------------------------------------------
Income before income taxes and extraordinary item $94,471 $82,400 $ 46,383 $ 59,575
---------------------------------------------------------
The provisions for income taxes follow:
Current tax expense
Federal $22,038 $15,918 $ 15,946 $ 18,208
State 2,723 3,482 3,475 3,950
Foreign 1,422 2 -- --
Deferred tax (benefit) expense
Federal 10,515 12,420 (223) 2,293
State 618 2,505 (102) 394
---------------------------------------------------------
$37,316 $34,327 $ 19,096 $ 24,845
---------------------------------------------------------
</TABLE>
Deferred tax assets (liabilities) are comprised of the following:
December 31,
(In thousands) 1999 1998
---------------------------
Depreciation and amortization $(16,582) $(16,013)
Prepaid expenses (17,542) (3,975)
Other (6,175) (5,316)
---------------------------
Gross deferred tax liabilities (40,299) (25,304)
---------------------------
Foreign operations 223 2,211
Accrued expenses 9,112 5,035
Net operating losses 99 187
Other 3,979 1,860
---------------------------
Gross deferred tax assets 13,413 9,293
---------------------------
Net deferred tax liability $(26,886) $(16,011)
---------------------------
<PAGE>
46
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Choice Hotels International, Inc. and Subsidiaries
A reconciliation of income tax expense at the statutory rate to income tax
expense included in the accompanying consolidated statements of income follows:
<TABLE>
<CAPTION>
Years ended Seven months Fiscal year
December 31, ended December 31, ended May 31,
(In thousands, except Federal income tax rate) 1999 1998 1997 1997
------------------------------------------------------------
<S> <C> <C> <C> <C>
Federal income tax rate 35% 35% 35% 35%
Federal taxes at statutory rate $33,065 $28,856 $16,234 $20,853
State income taxes, net of federal tax benefit 2,172 3,892 2,192 2,824
Other 2,079 1,579 670 1,168
------------------------------------------------------------
Income tax expense $37,316 $34,327 $19,096 $24,845
------------------------------------------------------------
</TABLE>
Cash paid for state income taxes was $2.3 million, $3.4 million, $0.2 million
and $1.3 million for the years ended December 31, 1999 and 1998, the seven
months ended December 31, 1997 and the fiscal year ended May 31, 1997,
respectively. Federal income taxes were paid by Manor Care for the period ending
October 31, 1996. Federal income taxes were paid by Sunburst for the period
beginning November 1, 1996 through October 15, 1997. The Company paid $15.5
million, $18.9 million, and $9.1 million for the years ended December 31, 1999
and 1998 and for the seven months ended December 31, 1997, respectively.
Capital Stock
In 1999, the Company granted key employees and non-employee directors 70,260
restricted shares of common stock with a value of $1.0 million on the grant
date. The restricted stock vests over a three to five year period with 11,016
shares of the restricted stock vesting over a three year period, 32,180 shares
vesting over a four year period and 27,064 shares vesting over a five year
period. In 1998, the Company granted key employees and non-employee directors
160,212 restricted shares of common stock with a value of $2.3 million on the
grant date. These restricted shares vest over a one to five year period with
22,665 shares of the restricted stock vesting over a one year period, 78,547
shares vesting over a three year period, 40,250 shares vesting over a four year
period, and 18,750 shares vesting over a five year period. A total of 46,275
shares of restricted stock were forfeited in 1999 and 1998.
On February 19, 1998, the Board of Directors adopted a shareholder rights plan
under which a dividend of one preferred stock purchase right was distributed for
each outstanding share of the Company's common stock to shareholders of record
on April 3, 1998. Each right will entitle the holder to buy 1/100th of a share
of a newly issued series of a junior participating preferred stock of the
Company at an exercise price of $75 per share. The rights will be exercisable,
subject to certain exceptions, 10 days after a person or a group acquires
beneficial ownership of 10% or more of the Company's common stock. Shares owned
by a person or group on February 19, 1998, and held continuously thereafter are
exempt for purposes of determining beneficial ownership under the rights plan.
The rights will be non-voting and will expire on January 31, 2008, unless
exercised or previously redeemed by the Company for $.001 each. If the Company
is involved in a merger or certain other business combinations not approved by
the Board of Directors, each right will entitle its holder, other than the
acquiring person or group, to purchase common stock of either the Company or the
acquiror or having a value of twice the exercise price of the right.
The Company has stock option plans for which it is authorized to grant options
to purchase up to 7.1 million shares of the Company's common stock, of which 0.8
million shares remain available for grant. Stock options may be granted to
officers, key employees and non-employee directors with an exercise price not
less than the fair market value of the common stock on the date of grant. In
connection with the Sunburst Distribution, the outstanding options held by
current and former employees of the Company were redenominated in stock of the
newly separated companies and the number and exercise prices of the options were
adjusted based on the relative trading prices of the common stock of the two
companies in order to retain the intrinsic value of the options.
<PAGE>
47
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Choice Hotels International, Inc. and Subsidiaries
A summary of the option activity under the above plans is as follows as of
December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
---------------------------------------------------------------
Fixed Options Shares Weighted-Option Shares Weighted-Option
(000) Price (000) Price
---------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 3,969,309 $10.13 4,167,045 $ 8.62
Granted 732,372 13.19 933,263 13.37
Exercised (695,228) 7.06 (738,318) 4.75
Cancelled (99,127) 12.85 (392,681) 11.88
-------- ----- --------- -----
Outstanding at end of year 3,907,326 $11.19 3,969,309 $10.13
---------------------------------------------------------------
Options exercisable at year end 1,727,748 1,813,541
Weighted-average fair value of
options granted during the year $ 6.20 $ 7.81
---------------------------------------------------------------
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ------------------------------------------------------------------------------------------------------------------
Range of Number Weighted-Average Weighted Number Weighted
Exercise Prices Outstanding at Remaining Average Exercisable at Average
12/31/99 Contractual Life Exercise Price 12/31/99 Exercise Price
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 3.01 to 5.00 480,992 1.6 years $4.01 452,363 $3.95
5.00 to 9.00 388,412 3.7 years 7.03 271,387 6.89
9.00 to 13.00 2,033,777 7.8 years 12.11 721,093 11.59
13.00 to 17.65 1,004,145 8.1 years 14.36 282,905 13.97
- ------------------------------------------------------------------------------------------------------------------
3,907,326 1,727,748
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
SFAS No. 123, "Accounting for Stock-Based Compensation," requires companies to
provide additional disclosures about employee stock-based compensation plans
based on a fair value based method of accounting. As permitted by this
accounting standard, the Company continues to account for these plans under APB
Opinion 25, under which no compensation cost has been recognized.
For purposes of the proforma disclosure, compensation cost for the Company's
stock option plan was determined based on the fair value at the grant dates for
awards under those plans consistent with the method of SFAS No. 123. The fair
value of each option grant has been estimated on the date of grant using an
option-pricing model with the following weighted average assumptions used for
grants in 1999 and 1998:
1999 1998
---------------------------------
Risk-free interest rate 6.45% 4.70%
Volatility 38.0% 36.7%
Expected Lives 10 years 10 years
Dividend Yield 0% 0%
If options had been reported as compensation expense based on their fair value,
pro forma net income would have been $56.4 million and $54.0 million for the
years ended December 31, 1999 and December 31, 1998, and pro forma diluted
earnings per share would have been $1.01 and $0.90, respectively. Since this
methodology has not been applied to options granted prior to the Sunburst
distribution date, the resulting pro forma compensation cost is not likely to be
representative of that to be expected in future years.
Comprehensive Income
As of January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income," which establishes new rules for the reporting and display
of comprehensive income and its components; however, the adoption of SFAS No.
130 had no impact on the Company's net income or shareholders' equity. SFAS No.
130 requires unrealized gains or losses on the Company's available-for-sale
securities and the foreign currency translation adjustments, which prior to
adoption were reported separately in shareholders' equity, to be included in
other comprehensive income. Prior year financial statements have been
reclassified to conform to the requirements of SFAS No. 130.
<PAGE>
48
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Choice Hotels International, Inc. and Subsidiaries
The components of total accumulated other comprehensive income in the
consolidated balance sheets are as follows:
<TABLE>
<CAPTION>
December 31,
(In thousands) 1999 1998 1997
----------------------------------------------
<S> <C> <C> <C>
Unrealized losses on securities available for sale $ (419) $ 380 $ --
Foreign currency translation adjustments 1,624 1,732 (8,316)
----------------------------------------------
Total accumulated other comprehensive income (loss) $ 1,205 $2,112 $(8,316)
----------------------------------------------
</TABLE>
The related income tax effect allocated to each component of other comprehensive
income (loss) is as follows:
<TABLE>
<CAPTION>
Amount Before Income Tax Amount Net
(In thousands) Taxes (Expense)/Benefit of Taxes
----------------------------------------------
<S> <C> <C> <C>
Calendar year 1999
Net unrealized losses $(1,024) $ 225 $ (799)
Foreign currency translation adjustments, net (108) -- (108)
----------------------------------------------
Total other comprehensive income $(1,132) $ 225 $ (907)
----------------------------------------------
Calendar year 1998
Net unrealized gains $ 585 $(205) $ 380
Foreign currency translation adjustments, net 10,048 -- 10,048
----------------------------------------------
Total other comprehensive income $10,633 $(205) $10,428
----------------------------------------------
Fiscal year 1997
Foreign currency translation adjustments, net $(1,298) $ -- $(1,298)
----------------------------------------------
Total other comprehensive income $(1,298) $ -- $(1,298)
----------------------------------------------
</TABLE>
Below represents the detail of other comprehensive income:
1999 1998
------------------------------
Foreign currency translation adjustments $ (108) $ 1,916
Plus: reclassification of loss on
liquidation of foreign subsidiaries -- 8,132
------------------------------
Foreign currency translation
adjustments, net $ (108) $10,048
------------------------------
Unrealized holding gains arising during
the period, net $ 601 $ 380
Less: reclassification adjustments for
gains included in net income (1,400) --
------------------------------
Net unrealized holding losses arising
during the period $ (799) $ 380
------------------------------
Earnings Per Share
The Company adopted SFAS No. 128, "Earnings Per Share," in 1997. The following
table illustrates the reconciliation of the earnings and number of shares used
in the basic and diluted earnings per share calculations.
Years ended
December 31,
(In millions, except per share amounts) 1999 1998
-----------------------
Computation of Basic Earnings Per Share:
Net income $57.2 $55.3
Weighted average shares outstanding 54.9 58.7
Basic earnings per share $1.04 $0.94
Computation of Diluted Earnings Per Share:
Net income for diluted earnings per share $57.2 $55.3
Weighted average shares outstanding 54.9 58.7
Effect of Dilutive Securities:
Employee stock option plan 0.8 0.8
-----------------------
Shares for diluted earnings per share 55.7 59.5
-----------------------
Diluted earning per share $1.03 $0.93
<PAGE>
49
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Choice Hotels International, Inc. and Subsidiaries
The effect of dilutive securities is computed using the treasury stock method
and average market prices during the period. In 1999 and 1998, the Company
excluded 206,031 and 497,864, respectively, anti-dilutive options from the
computation of diluted earnings per share.
The weighted average number of common shares outstanding is based on the
Company's weighted average number of outstanding common shares for the period
October 15, 1997 through December 31, 1999, Sunburst's weighted average number
of outstanding common shares for the period November 1, 1996 through October 15,
1997 and Manor Care's weighted average number of outstanding common shares prior
to November 1, 1996.
Leases
Rental expense under non-cancelable operating leases was approximately $5.5
million, $1.7 million, $181,000 and $171,000 for the years ended December 31,
1999 and 1998, the seven months ended December 31, 1997 and the fiscal year
ended May 31, 1997, respectively. The Company paid office rent of $51,662,
$977,500 and $1.1 million to Sunburst for the years ended December 31, 1999 and
1998 and the seven months ended December 31, 1997 based on the portion of total
space occupied by the Company. Future minimum lease payments are as follows:
Year (In thousands)
2000 $ 3,606
2001 3,374
2002 3,332
2003 3,259
2004 3,347
Thereafter 30,610
-----------
Total $47,528
-----------
During 1998, the Company recorded an extraordinary gain from the early
extinguishment of debt associated with a capitalized lease obligation. The
Company retired $13.7 million in debt and removed related assets of $1.8 million
from the consolidated balance sheets. Accordingly, an extraordinary gain of $7.2
million was recognized, after income tax expense of $4.7 million, or $0.12 per
diluted share.
Prior to May 31, 1998, the Company was a guarantor of Sunburst's obligations
under leases between Sunburst and Manor Care. Additionally, Sunburst and Choice
had entered into a sublease agreement with respect to the Company's principal
executive offices. On May 31, 1998, the Company and Manor Care entered into a
new lease for the Silver Spring, Maryland corporate headquarters and the
Company's guarantees of Sunburst lease obligations and the sublease were
cancelled. The new lease has a fifteen year term and was subsequently assigned
from Manor Care to an unrelated party.
Related Party Transactions
During 1998, the Company entered into an interest free bridge loan agreement
with a Company executive approximating $754,000, which is reflected as a
receivable at December 31, 1998. The bridge loan was repaid in March 1999.
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. Corporate and other
revenue consists of product sales and European hotel operations. 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
<PAGE>
50
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Choice Hotels International, Inc. and Subsidiaries
<TABLE>
<CAPTION>
Year ended December 31, 1999
(In thousands) Franchising Corporate & Other Consolidated
-----------------------------------------------
<S> <C> <C> <C>
Revenues $157,729 $ 3,871 $161,600
Operating income (loss) 124,293 (30,459) 93,834
Depreciation and amortization 730 7,293 8,023
Capital expenditures 16,515 14,118 30,633
Total assets 248,028 216,630 464,658
<CAPTION>
Year ended December 31, 1998
Franchising Corporate & Other Consolidated
-----------------------------------------------
<S> <C> <C> <C>
Revenues $143,628 $ 21,846 $165,474
Operating income (loss) 113,175 (28,067) 85,108
Depreciation and amortization 221 6,532 6,753
Capital expenditures 15,500 1,988 17,488
Total assets 208,096 190,129 398,225
<CAPTION>
Seven months ended December 31, 1997
Franchising Corporate & Other Consolidated
-----------------------------------------------
<S> <C> <C> <C>
Revenues $ 83,774 $ 24,065 $107,839
Operating income (loss) 67,889 (15,715) 52,174
Depreciation and amortization 24 3,953 3,977
Capital expenditures 5,535 1,794 7,329
Total assets 182,210 204,185 386,395
<CAPTION>
Fiscal year ended May 31, 1997
Franchising Corporate & Other Consolidated
-----------------------------------------------
<S> <C> <C> <C>
Revenues $126,659 $ 41,380 $168,039
Operating income (loss) 92,774 (22,412) 70,362
Depreciation and amortization 331 7,312 7,643
Capital expenditures 7,727 2,903 10,630
Total assets 165,766 55,707 221,473
</TABLE>
Company's franchising segment.
The Company's international operations had revenues of $6.9 million, $5.8
million, $16.2 million and $27.5 million for the years ended December 31, 1999
and 1998, the seven months ended December 31, 1997 and the fiscal year ended May
31, 1997, respectively. Long-lived assets related to international operations
were $20.6 million and $16.4 million as of December 31, 1999 and 1998,
respectively. All other long-lived assets of the Company are associated with
domestic activities. In addition, the Company had a $41.2 million and $41.6
million investment in Friendly as of December 31, 1999 and 1998, respectively.
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 general counsel to the
Company, the ultimate outcome of such litigation will not have a material
adverse effect on the Company's business, financial position, results of
operations or cash flows.
Fair Value of Financial Instruments
The balance sheet carrying amount of cash and cash equivalents and receivables
approximate fair value due to the short term nature of these items. Long-term
debt consists of bank loans and senior notes. Interest rates on bank loans
adjust frequently based on current market rates; accordingly, the carrying
amount of bank loans is equivalent to fair value.
The Note Receivable from Sunburst has an approximate fair value of $135.0
million and $127.5 million at December 31, 1999 and 1998, respectively, based on
its current yield to maturity. The $100 million unsecured senior notes have an
approximate fair value at December 31, 1999 and 1998 of $93.9 million and $97.6
million, respectively, based on their
<PAGE>
51
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Choice Hotels International, Inc. and Subsidiaries
current yield to maturity.
Impact of Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which requires
recognition of the fair value of derivatives in the statement of financial
position, with changes in the fair value recognized either in earnings or as a
component of other comprehensive income dependent upon the hedging nature of the
derivative. Implementation of SFAS No. 133 is required for Fiscal 2001. SFAS No.
133 will not have a material impact on the Company's earnings or other
comprehensive income.
Selected Quarterly Financial Data - (Unaudited)
<TABLE>
<CAPTION>
(In thousands, except per share data)
- --------------------------------------------------------------------------------------------------------------------
Total
1999 First Second Third Fourth Year
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $30,805 $39,763 $48,016 $43,016 $161,600
Operating income 16,166 24,198 30,206 23,264 93,834
Income before income taxes 17,272 24,280 30,381 22,538 94,471
Net income 10,277 14,531 18,338 14,009 57,155
Per basic share:
Net income $ 0.18 $ 0.26 $ 0.34 $ 0.26 $ 1.04
Per diluted share:
Net income $ 0.18 $ 0.26 $ 0.33 $ 0.26 $ 1.03
<CAPTION>
Total
1998 First Second Third Fourth Year
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $ 33,171 $ 44,436 $ 46,731 $ 41,136 $ 165,474
Operating income 14,133 23,519 26,736 20,720 85,108
Income before income taxes and extraordinary item 13,961 22,258 25,224 20,957 82,400
Net income before extraordinary item 8,146 12,988 14,718 12,221 48,073
Net income 8,146 12,988 21,950 12,221 55,305
Per basic share:
Net income before extraordinary item $ 0.14 $ 0.22 $ 0.25 $ 0.21 $ 0.82
Extraordinary item $ 0.00 $ 0.00 $ 0.12 $ 0.00 $ 0.12
Net income $ 0.14 $ 0.22 $ 0.37 $ 0.21 $ 0.94
Per diluted share:
Net income before extraordinary item $ 0.13 $ 0.22 $ 0.25 $ 0.21 $ 0.81
Extraordinary item $ 0.00 $ 0.00 $ 0.12 $ 0.00 $ 0.12
Net income $ 0.13 $ 0.22 $ 0.37 $ 0.21 $ 0.93
</TABLE>
<PAGE>
52
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Choice Hotels International, Inc. and Subsidiaries
Subsequent Event (Unaudited)
In February 2000, the Company and Sunburst entered into a second amendment of
the strategic alliance agreement which had the effect of: (i) finalizing
outstanding operational issues with respect to the MainStay brand; (ii)
modifying the royalty payment schedule payable by Sunburst to the Company on the
MainStay portfolio; and (iii) ensuring that Sunburst keeps at least 20 MainStay
hotels in the franchise system for the period ending October 2002.
In addition, the parties entered into a put call agreement related to three
MainStay properties in Pittsburgh, Pennsylvania, Greenville, South Carolina, and
Brentwood, Tennessee for a period ending June 30, 2000. During this period, the
Company can "call" any property for purchase at Sunburst's original cost
(approximately $15 million) and at the end of this period Sunburst may "put" any
property at such cost.
Management believes that entering into these agreements will have the effect of
solidifying the strategic relationship, particularly with respect to development
of MainStay hotels, and ensure that Sunburst will complete its development quota
of 25 MainStay hotels.
<PAGE>
54
Board of Directors & Corporate Officers
- --------------------------------------------------------------------------------
Board Of Directors
Stewart Bainum, Jr.
Chairman of the Board:
. Manor Care Inc.
. Sunburst Hospitality Corporation
Barbara Bainum
President, Secretary and Director:
. Commonweal Foundation
Secretary and Director:
. Realty Investment Company
William L. Jews
President and Chief Executive Officer:
. CareFirst BlueCross BlueShield
Director:
. Crown Central Petroleum Corp.
. Ryland Group, Inc.
Charles A. Ledsinger, Jr.
President and Chief Executive Officer:
. Choice Hotels International
Director:
. FelCor Lodging Trust, Inc.
. Friendly's Ice Cream Corporation
. TBC Corporation
Larry R. Levitan
Retired Managing Partner:
. Andersen Consulting's Worldwide Communications Industry Group
Gerald W. Pettit
President & Chief Executive Officer:
. Creative Hotel Associates LLC
James H. Rempe
Retired Senior Vice President,
General Counsel & Secretary:
. Manor Care Inc.
Jerry E. Robertson, Ph.D.
Retired Executive Vice President:
. 3M Life Sciences Sector and Corporate Services
Director:
. Coherent Inc.
. Steris Corp.
Raymond E. Schultz
Chairman:
. RES Investments, L.L.C.
Director:
. Equity Inns, Inc.
. TBC Corporation
Stewart Bainum
Chairman Emeritus
Corporate Executive Officers
Stewart Bainum, Jr.
Chairman of the Board
Charles A. Ledsinger, Jr.
President and Chief Executive Officer
Steven T. Schultz
Executive Vice President, Franchise Operations
Michael J. DeSantis
Senior Vice President, General Counsel and Secretary
Bruno Geny
Senior Vice President, International
Thomas Mirgon
Senior Vice President, Administration
Joseph M. Squeri
Senior Vice President, Chief Financial Officer and Treasurer
Corporate Officers
Eric Bauer
Vice President, Strategy and Business Development
Brendan M. Ebbs
Senior Vice President, Franchise Operations
Daniel Rothfeld
Vice President, Partner Services
Kevin M. Rooney
Associate General Counsel and Assistant Secretary
William Weatherford
Senior Vice President, Franchise
Operations
Market Area Vice
Presidents
Brendan M. Ebbs
Senior Vice President, Franchise Operations, Northeast Market Area
William Weatherford
Senior Vice President, Franchise Operations, Southeast Market Area
Michael Barnard
Vice President, Franchise Operations, West Market Area
Gary Decatur
Vice President, Franchise Operations, North Central Market Area
Brent Russell
Vice President, Franchise Operations, South Central Market Area
Brand Management
Michael Cothran
Vice President & Brand Manager Rodeway Inn
Peter Jordan
Vice President & Brand Manager Quality
Donald Kolodz
Vice President & Brand Manager Clarion
Dan Shoen
Vice President & Brand Manager Comfort
Tim Shuy
Vice President & Brand Manager Econo Lodge & MainStay Suites
<PAGE>
55
C o r p o r a t e I n f o r m a t i o n
- --------------------------------------------------------------------------------
Stock Listing
Choice Hotels International common stock trades on the New York Stock Exchange
under the ticker symbol CHH.
Transfer Agent & Registrar
ChaseMellon
Shareholder Services LLC
Overpeck Centre
85 Challenger Road
Ridgefield, NJ 07660
www.chasemellon.com
Independent Auditors
Arthur Andersen LLP
Vienna, Virginia
Annual Meeting Date
Choice Hotels International will hold its Annual Meeting of Stockholders on
Wednesday, May 3, 2000, at 9 a.m. in The Chesapeake Room of the Learning Center,
10720 Columbia Pike, Silver Spring, Maryland.
Form 10-K
A stockholder may receive without charge a copy of the Form 10-K Annual Report
filed with the Securities and Exchange Commission by written request to the
Corporate Secretary at the corporate headquarters.
Corporate Headquarters
Choice Hotels International
10750 Columbia Pike
Silver Spring, MD 20901
General Inquiries:
(301) 592-5000
Franchise Sales:
(800) 547-0007
Investor Inquiries:
(301) 592-5026
e-mail: [email protected]
Media Relations:
(301) 592-5032
Corporate Web Site:
www.choicehotels.com
[LOGO]
(C)2000 Choice Hotels International, Inc.
Quality, Comfort, Clarion, Sleep Inn, Econo Lodge, Rodeway Inn and MainStay are
registered trademarks, service marks and trade names owned by Choice Hotels
International, Inc. Choice Hotels also owns and uses common law marks, including
Guest Privileges and Profit Manager.
Design: Choice Graphic Design & Corporate Identity
Principal Photographer: Cameron Davidson
Printer: GraphTec
<PAGE>
Exhibit 21.01
SUBSIDIARIES
Choice Capital Corp. (Lending subsidiary)
Choice Hotels Australia Pty. Ltd. (90% owned)
Choice Hotels Canada Inc. (50% owned)
Choice Hotels del Plata
Choice Hotels Brazil (Cayman) Ltd. (10%)
Choice Hotels International Asia Pacific Pty. Ltd.
Choice Hotels Australia Pty. Ltd.
Choice Hotels International Foundation, Inc.
Choice Hotels International Services Corp.
Choice Hotels Japan, Inc. (Formerly Quality Hotels Japan, Inc.)
Choice Hotels Limited
Choice Hotels Systems, Inc.
Choice Hotels Thailand (Del.) Inc.
Quality Hotels Europe, Inc.
Quality Hotels and Resorts, Inc.
Schuyler Properties Ltd. (Bahamian)
<PAGE>
Exhibit 23.01
------------
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to the incorporation of our
reports incorporated by reference into or included in this Form 10-K, into the
Company's previously filed Registration Statements File No. 333-36819,
No. 333-41355, No. 333-41357 and No. 333-67737.
Arthur Andersen LLP
Vienna, Virginia
March 30, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
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.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> $11,850
<SECURITIES> 0
<RECEIVABLES> 36,238
<ALLOWANCES> 6,203
<INVENTORY> 6
<CURRENT-ASSETS> 41,922
<PP&E> 82,152
<DEPRECIATION> 23,897
<TOTAL-ASSETS> 464,658
<CURRENT-LIABILITIES> 89,658
<BONDS> 262,710
0
0
<COMMON> 614
<OTHER-SE> 65,002
<TOTAL-LIABILITY-AND-EQUITY> 464,658
<SALES> 0
<TOTAL-REVENUES> 161,600
<CGS> 0
<TOTAL-COSTS> 67,766
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 588
<INTEREST-EXPENSE> (637)
<INCOME-PRETAX> 94,471
<INCOME-TAX> 37,316
<INCOME-CONTINUING> 57,155
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 57,155
<EPS-BASIC> 1.04
<EPS-DILUTED> 1.03
<FN>
(1) 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.
</FN>
</TABLE>
