<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 2000 COMMISSION FILE NO. 1-11915
CHOICE HOTELS INTERNATIONAL, INC.
10750 COLUMBIA PIKE
SILVER SPRING, MD. 20901
(301) 592-5000
Delaware 52-1209792
------------------------ -------------------------
(STATE OF INCORPORATION) (I.R.S. EMPLOYER
IDENTIFICATION NUMBER)
-------------------------------------------
(Former name, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
--- ---
SHARES OUTSTANDING
CLASS AT SEPTEMBER 30, 2000
----------------------- ------------------------
Common Stock, $0.01
par value per share 52,465,014
----------
==============================================================================
<PAGE>
CHOICE HOTELS INTERNATIONAL, INC.
INDEX
-----
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
PART I. FINANCIAL INFORMATION:
Condensed Consolidated Balance Sheets -
September 30, 2000 (Unaudited) and December 31, 1999 3
Consolidated Statements of Income -
Three months ended September 30, 2000 and September 30, 1999 and Nine
months ended September 30, 2000 and September 30, 1999 (Unaudited) 5
Consolidated Statements of Cash Flows -
Nine months ended September 30, 2000 and September 30, 1999 (Unaudited) 6
Notes to Consolidated Financial Statements (Unaudited) 7
Management's Discussion and Analysis of Operations and Financial Condition 9
Quantitative and Qualitative Analysis of Market Risk 12
PART II. OTHER INFORMATION AND SIGNATURE 13
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
CHOICE HOTELS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
------------------ -----------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 14,181 $ 11,850
Receivables (net of allowance for doubtful
accounts of $7,361 and $6,691, respectively) 35,495 30,035
Income taxes receivable and other 13 37
-------- --------
Total current assets 49,689 41,922
PROPERTY AND EQUIPMENT, AT COST, NET OF
ACCUMULATED DEPRECIATION 72,922 58,255
GOODWILL, NET OF ACCUMULATED AMORTIZATION 63,174 64,706
FRANCHISE RIGHTS, NET OF ACCUMULATED AMORTIZATION 40,158 43,101
INVESTMENT IN FRIENDLY HOTELS, PLC 39,126 41,195
ADVANCES TO MARKETING AND RESERVATION FUNDS 53,745 32,807
OTHER ASSETS 38,580 40,819
NOTE RECEIVABLE FROM SUNBURST HOSPITALITY CORP. 137,032 141,853
-------- --------
Total assets $494,426 $464,658
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
balance sheets.
3
<PAGE>
CHOICE HOTELS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
------------------ -----------------
(Unaudited)
<S> <C> <C>
LIABILITIES & EQUITY
CURRENT LIABILITIES
Current portion of long term debt $ 50,846 $ 44,646
Accounts payable 12,413 21,362
Accrued expenses 21,514 21,368
Income taxes payable 11,266 1,367
-------- --------
Total current liabilities 96,039 88,743
-------- --------
LONG TERM DEBT 256,699 262,710
-------- --------
DEFERRED INCOME TAXES ($36,310 and $30,648,
respectively) AND OTHER LIABILITIES 54,036 47,589
-------- --------
Total liabilities 406,774 399,042
-------- --------
SHAREHOLDERS' EQUITY
Common stock, $.01 par value 615 614
Additional paid-in-capital 55,300 52,386
Accumulated other comprehensive income 387 1,205
Deferred compensation (1,501) (1,937)
Treasury stock (128,785) (108,370)
Retained earnings 161,636 121,718
-------- --------
Total shareholders' equity 87,652 65,616
-------- --------
Total liabilities & shareholders' equity $494,426 $464,658
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
balance sheets.
4
<PAGE>
CHOICE HOTELS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
------- ------- -------- --------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
REVENUES
Royalty fees $43,390 $40,472 $102,603 $ 95,545
Initial franchise and relicensing fees 3,279 3,300 10,061 9,893
Partner service revenue 2,131 2,354 6,517 6,162
Other 1,313 1,001 3,742 3,148
------- ------- -------- --------
Total revenues 50,113 47,127 122,923 114,748
------- ------- -------- --------
OPERATING EXPENSES
Selling, general and administrative 14,482 15,192 40,782 38,808
Depreciation and amortization 2,830 1,690 8,385 4,993
------- ------- -------- --------
Total operating expenses 17,312 16,882 49,167 43,801
------- ------- -------- --------
OPERATING INCOME 32,801 30,245 73,756 70,947
OTHER
Interest and dividend income (3,908) (4,412) (11,684) (12,668)
Interest expense 4,897 4,261 14,121 12,736
Equity (gain)/loss - Friendly Hotels, PLC (109) 15 1,780 205
Loss on early prepayment of note - - 4,100 -
Gain on sale of stock - - - (1,260)
------- ------- -------- --------
Total other 880 (136) 8,317 (987)
------- ------- -------- --------
INCOME BEFORE INCOME TAXES 31,921 30,381 65,439 71,934
INCOME TAXES 12,449 12,043 25,521 28,787
------- ------- -------- --------
NET INCOME $19,472 $18,338 $ 39,918 $ 43,147
======= ======= ======== ========
WEIGHTED AVERAGE SHARES OUTSTANDING 52,768 54,619 52,874 55,174
------- ------- -------- --------
DILUTED SHARES OUTSTANDING 53,119 55,501 53,324 55,898
------- ------- -------- --------
BASIC EARNINGS PER SHARE $ 0.37 $ 0.34 $ 0.75 $ 0.78
======= ======= ======== ========
DILUTED EARNINGS PER SHARE $ 0.37 $ 0.33 $ 0.75 $ 0.77
======= ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements of
income.
5
<PAGE>
CHOICE HOTELS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
2000 1999
-------- --------
(Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $39,918 $43,147
Reconciliation of net income to net cash provided
by operating activities:
Depreciation and amortization 8,766 5,245
Provision for doubtful accounts (349) 551
Increase in deferred income taxes 6,184 8,785
Non cash interest and dividend income (11,512) (12,414)
Equity loss - Friendly Hotels, PLC 1,780 205
Loss on early prepayment of note 4,100 -
Changes in assets and liabilities:
Change in receivables (5,111) (4,459)
Change in income taxes payable/receivable and other 11,321 5,874
Change in accounts payable and accrued expenses (9,718) 7,212
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 45,379 54,146
-------- --------
CASH FLOW FROM INVESTING ACTIVITIES:
Investment in property and equipment (12,812) (16,509)
Advances to marketing and reservation funds, net (13,160) (13,129)
Other items, net 1,947 (5,533)
-------- --------
NET CASH UTILIZED BY INVESTING ACTIVITIES (24,025) (35,171)
-------- --------
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from long term borrowings 65,800 73,230
Principal payments of long term borrowings (65,721) (43,918)
Proceeds from exercise of stock options 1,313 4,455
Purchase of treasury stock (20,415) (45,702)
-------- --------
NET CASH UTILIZED BY FINANCING ACTIVITIES (19,023) (11,935)
-------- --------
Net change in cash and cash equivalents 2,331 7,040
Cash and cash equivalents, beginning of period 11,850 1,692
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $14,181 $ 8,732
======== ========
</TABLE>
The Company received title to three MainStay properties valued at $12,233 as
consideration for $16,333 of the amount due to Choice under the Sunburst
subordinated note (See Note 7).
The accompanying notes are an integral part of these consolidated statements of
cash flows.
6
<PAGE>
CHOICE HOTELS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. The accompanying consolidated financial statements of Choice Hotels
International, Inc. (the "Company") and subsidiaries have been prepared by the
Company without audit. Certain information and footnote disclosures normally
included in financial statements presented in accordance with generally accepted
accounting principles have been condensed or omitted. The Company believes the
disclosures made are adequate to make the information presented not misleading.
The consolidated financial statements should be read in conjunction with the
consolidated financial statements for the year ended December 31, 1999 and notes
thereto included in the Company's Form 10-K, dated March 30, 2000. In the
opinion of management, all adjustments (which include any normal recurring
adjustments) considered necessary for a fair presentation have been included.
Interim results are not necessarily indicative of fiscal year performance
because of seasonal and short-term variations. All intercompany transactions
and balances between Choice Hotels International, Inc. and its subsidiaries have
been eliminated. Certain reclassifications have been made to the prior year
financial statements to conform to the current year presentation.
2. Comprehensive Income - During the nine months ended September 30, 2000, the
Company's comprehensive income (consisting of net income plus/minus foreign
currency translation adjustments and unrealized gains/losses on available for
sale securities) was lower than net income by approximately $818,000.
3. Marketing and Reservation Funds - The Company presents marketing and
reservation fees such that the fees collected and associated expenses are
reported net. The total marketing, reservation, and property and yield
management systems fees received by the Company were $48.5 million and $41.9
million for the three months ended September 30, 2000 and 1999, respectively,
and $119.7 million and $105.8 million for the nine months ended September 30,
2000 and 1999, respectively. Depreciation and amortization expense incurred by
the marketing and reservation funds was $2.7 million and $1.9 million for the
three months ended September 30, 2000 and 1999, respectively, and $7.8 million
and $5.4 million for the nine months ended September 30, 2000 and 1999,
respectively. Interest expense incurred by the reservation fund was $1.2
million and $0.9 million for the three months ended September 30, 2000 and 1999,
respectively, and $3.6 million and $2.5 million for the nine months ended
September 30, 2000 and 1999, respectively.
Reservation fees and marketing fees not expended in the current year are carried
over to the next fiscal year and expended in accordance with the franchise
agreements. Shortfall amounts are similarly recovered in subsequent years.
Excess or shortfall amounts from the operation of these programs are recorded as
a payable or receivable from the particular fund. The Company advances capital
as necessary to the marketing and reservation funds to support the development
and ongoing operations of the franchise system. As of September 30, 2000, the
Company's balance sheet includes a receivable of $53.8 million related to
advances made to the marketing ($21.1 million) and reservation ($32.7 million)
funds. As of December 31, 1999, the Company's balance sheet includes a
receivable of $32.8 million related to advances made to the marketing ($13.8
million) and reservation ($19.0 million) funds.
The $21.0 million increase in advances to marketing and reservations funds for
the nine months ended September 30, 2000 was due to planned media spending,
coupled with the continued deployment of property and yield management systems
to franchisees. The Company has the ability under existing franchise agreements
and expects to recover these advances through future marketing, reservation and
technology fees.
4. Income Taxes - The income tax provision for the period is based on the
effective tax rate expected to be applicable for the full year. The 2000 nine
month rate of 39% differs from the statutory rate primarily because of state
income taxes.
7
<PAGE>
5. Earnings Per Share - Basic earnings per share (EPS) amounts are computed by
dividing earnings applicable to common shareholders by the weighted average
number of common shares outstanding. Diluted EPS amounts assume the issuance of
common stock for all potentially dilutive equivalents outstanding.
6. Reportable Segment Information - The Company has a single reportable
segment encompassing its franchising business. Franchising revenues are
comprised of royalty fees, initial franchise and relicensing fees, and partner
services revenue and other. Marketing and reservation fees and expenses are
excluded from reportable segment information as such fees and associated
expenses are reported net.
The following table presents the financial information for the Company's
franchising segment.
<TABLE>
<CAPTION>
Three Months Ended September 30, 2000
(In thousands) Franchising Corporate & Other Consolidated
-----------------------------------------------------------------
<S> <C> <C> <C>
Revenues $ 49,779 $ 334 $ 50,113
Operating income (loss) 42,871 (10,070) 32,801
Three Months Ended September 30, 1999
Franchising Corporate & Other Consolidated
-----------------------------------------------------------------
<S> <C> <C> <C>
Revenues $ 47,127 $ - $ 47,127
Operating income (loss) 39,863 (9,618) 30,245
Nine Months Ended September 30, 2000
Franchising Corporate & Other Consolidated
-----------------------------------------------------------------
<S> <C> <C> <C>
Revenues $122,589 $ 334 $122,923
Operating income (loss) 102,781 (29,025) 73,756
Nine Months Ended September 30, 1999
Franchising Corporate & Other Consolidated
-----------------------------------------------------------------
<S> <C> <C> <C>
Revenues $114,748 $ - $114,748
Operating income (loss) 93,193 (22,246) 70,947
</TABLE>
7. Put/Call Agreement - In March 2000, the Company and Sunburst Hospitality
Corporation ("Sunburst")entered into a "put/call" agreement related to three
MainStay properties for a period ending June 30, 2000. During this period, the
Company could "call" any or all specified properties for purchase at Sunburst's
original cost (approximately $16.3 million in the aggregate) and at the end of
this period Sunburst could "put" any or all specified properties at such cost.
The Company and Sunburst exercised their rights under the "put/call" agreement.
Sunburst transferred title to these properties on September 1, 2000 to the
Company as consideration for $16.3 million of the $149 million amount due to
Choice under Sunburst's subordinated note. The fair market value of these
assets is approximately $12.2 million. Accordingly, the Company has recognized
a pre-tax loss on early prepayment of note of $4.1 million in the quarter ended
June 30, 2000.
8. Note Receivable From Sunburst - On September 20, 2000, the Company
announced that it had reached agreement on the terms of a proposed restructuring
of the existing $136 million note receivable with Sunburst. The Company will
receive a cash payment of approximately $76 million plus additional interest
accruing from the date of the agreement to closing. In addition, the Company
will receive a newly issued 11 3/8% seven year senior subordinated note in the
amount of $60 million, which will contain
8
<PAGE>
standard and customary high-yield loan terms and conditions. This new note will
contain, among other things, a cash pay feature that begins 18 months from
issuance. The transaction is expected to close no later than the first quarter
of 2001.
9. Friendly Investment - The Company is continuing to review its strategic
options with respect to its investment in Friendly Hotels, PLC ("Friendly"), the
Company's master franchisor for the United Kingdom, Ireland and Continental
Europe. Such options may include discussions with the board of Friendly, which
may lead to a capital restructuring of Friendly and amendments to the master
franchise agreement with the Company. It is possible that such actions could
result in a write down or deferral of certain amounts due the Company and other
Company assets related to Friendly, which currently represent a total net
investment of approximately $45 million. Any write-down or deferral so made is
not expected to be material to the Company's cash flow or financial condition.
10. Recent Accounting Pronouncements - In December 1999, the SEC released Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements," which provides guidance on the recognition, presentation and
disclosure of revenue in financial statements filed with the SEC. Subsequently,
the SEC released SAB 101A, which delayed the implementation date of SAB 101 for
registrants with fiscal years that begin between December 16, 1999 and March 15,
2000. In June 2000, the SEC issued SAB 101B, further delaying the required
implementation of SAB 101 by the Company until the fourth quarter of fiscal year
2000. The Company adopted the application of SAB 101 in the first quarter of
2000 and it did not have a material impact on the Company's financial position
or results of operations.
In March 2000, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation ("FIN") No. 44, "Accounting for Certain Transactions Involving
Stock Compensation - An Interpretation of APB Opinion No. 25." FIN 44 clarifies
the application of APB Opinion No. 25 and, among other issues, clarifies the
following: the definition of an employee for purposes of applying APB Opinion
No. 25; the criteria for determining whether a plan qualifies as a non-
compensatory plan; the accounting consequence of various modifications to the
terms of previously fixed stock options or awards; and the accounting for an
exchange of stock compensation awards in a business combination. FIN 44 was
effective July 1, 2000, but certain conclusions in FIN 44 cover specific events
that occurred after either December 15, 1998 or January 12, 2000. The Company
adopted the application of FIN 44 effective July 1, 2000. The adoption did not
have a material impact on the Company's financial position or results of
operations.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL CONDITION
--------------------------------------------------------------------------
Comparison of Three Month Period Ended September 30, 2000 Operating Results and
-------------------------------------------------------------------------------
Three Month Period Ended September 30, 1999 Operating Results
-------------------------------------------------------------
The Company reported net income of $19.5 million, or $0.37 per diluted share,
for the quarter ended September 30, 2000, compared to net income for the same
period of 1999 of $18.3 million, or $0.33 per diluted share. The increase in
net income for the period is attributable to an increase in royalty fees as a
direct result of the addition of new franchised hotels to the franchise system,
improved RevPar and increases in the effective royalty rate achieved for the
domestic hotel system.
Franchise Revenues
------------------
The Company's net franchise revenues were $50.1 million for the three months
ended September 30, 2000 and $47.1 million for the three months ended September
30, 1999. Royalties increased $2.9 million to $43.4 million in 2000 from $40.5
million in 1999, an increase of 7.2%. The increase in royalties is attributable
to a net increase of 192 franchised hotels during the twelve month period
between September 30, 1999 and September 30, 2000 (representing an additional
13,868 rooms) and an increase in domestic RevPAR of 5.6% from $43.42 in third
quarter 1999 to $45.85 in 2000.
The total number of domestic hotels online increased to 3,234 from 3,121, an
increase of 3.6% for the period ending September 30, 2000. This represents an
increase in the
9
<PAGE>
number of rooms open of 2.7% from 258,892 as of September 30, 1999 to 265,906 as
of September 30, 2000. As of September 30, 2000, the Company had 488 hotels
under development in its domestic hotel system representing 39,530 rooms.
The total number of international hotels online increased to 1,137 from 1,058,
an increase of 7.5% as of September 30, 2000. International rooms open
increased 8.9% from 76,632 as of September 30, 1999 to 83,486 as of September
30, 2000. The total number of international hotels and rooms under development
was 206 and 21,714, respectively, as of September 30, 2000.
Franchise Expenses
------------------
The cost to operate the franchising business is reflected in selling, general
and administrative expenses. Selling, general and administrative expenses
decreased 4.7% between years. As a percentage of total net franchising
revenues, total selling, general and administrative expenses declined to 28.9%
for the third quarter of 2000 as compared to 32.2% for 1999. The improvement in
the franchising margins relates to the economies of scale generated from
operating a larger franchisee base and cost control initiatives.
Other
------
For the three months ended September 30, 2000 and September 30, 1999, the
Company recognized approximately $3.8 million and $3.6 million, respectively, of
interest income from its subordinated term note to Sunburst.
Comparison of Nine Month Period Ended September 30, 2000 Operating Results and
--------------------------------------------------------------------------------
Nine Month Period Ended September 30, 1999 Operating Results
------------------------------------------------------------
The Company reported net income of $39.9 million, or $0.75 per diluted share,
for the nine months ended September 30, 2000, compared to net income for the
same period of 1999 of $43.1 million, or $0.77 per diluted share. The decrease
in net income for the period is attributable to a $4.1 million loss on early
prepayment of a portion of the Sunburst subordinated note that is due to the
Company, as well as a $1.8 million equity loss from the Company's investment in
Friendly.
Franchise Revenues
------------------
The Company's net franchise revenues were $122.9 million for the nine months
ended September 30, 2000 and $114.7 million for the nine months ended September
30, 1999. Royalties increased $7.1 million to $102.6 million in 2000 from $95.5
million in 1999, an increase of 7.4%. The increase in royalties is attributable
to a net increase of 192 franchised hotels during the twelve month period
between September 30, 1999 and September 30, 2000 (representing an additional
13,868 rooms) and an increase in domestic RevPAR of 4.3% from $35.24 in 1999 to
$36.76 in 2000. Initial and relicensing fee revenue generated from domestic
franchise contracts signed increased to $10.1 million from $9.9 million in 1999
as a result of 460 franchise agreements signed in 2000, as compared to 428 for
1999. Revenues generated from partner service relationships increased 5.8% from
$6.2 million in 1999 to $6.5 million in 2000.
Franchise Expenses
------------------
Selling, general and administrative expenses increased 5.1% between years. This
increase was driven by spending for the Company's various internet initiatives
(approximately $2.1 million for the nine months) as well as severance costs
(approximately $0.5 million for the nine months) incurred in connection with the
Company's recent outsourcing of the corporate technology function. As a
percentage of total net franchising revenues, total selling, general and
administrative expenses declined to 33.2% for 2000 as compared to 33.8% for
1999.
10
<PAGE>
Other
-----
For the nine months ended September 30, 2000 and September 30, 1999, the Company
recognized approximately $11.5 million and $10.5 million, respectively, of
interest income from its subordinated term note to Sunburst.
The Company recognized an equity loss of $1.8 million in its financial
statements for the nine months ended September 30, 2000, representing the
Company's 5.3% interest in Friendly's common shares.
The Company recognized a $4.1 million loss on early prepayment of a Sunburst
subordinated note related to a previously negotiated "put/call" agreement as
described in the notes to consolidated financial statements.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
Net cash provided by operating activities was $45.4 million for the nine months
ended September 30, 2000, a decrease of approximately $8.7 million from $54.1
million for 1999. The decrease primarily resulted from timing differences in
payments of accounts payable and accrued expenses. At September 30, 2000, the
total long term debt outstanding for the Company was $307.5 million, $50.8
million of which matures in the next twelve months.
The Company made cash advances to the marketing and reservation funds totaling
$13.2 million for the nine months ended September 30, 2000. The advances are
associated with a system-wide property and yield management systems
implementation and the timing of expenditures associated with specific brand
initiatives of the marketing fund. The Company has the ability under existing
franchise agreements and expects to recover these advances through future
marketing, reservation and property and yield management systems fees.
On September 20, 2000, the Company entered into an agreement with Sunburst to
restructure the existing $136 million outstanding note receivable (see footnote
8 to the financial statements). Expected cash proceeds of $76 million plus
accrued interest are intended to be used for share repurchases, to pursue the
existing business strategy and to repay existing bank indebtedness.
For the first nine months of 2000, the Company has repurchased 1.5 million
shares of its common stock at a total cost of $20.4 million as of September 30,
2000. The Company has authorization from its Board of Directors to repurchase
up to an additional 4.8 million shares.
The Company believes that cash flows from operations and available financing
capacity is adequate to meet the expected operating, investing, financing and
debt service requirements for the business for the immediate future.
Year 2000 Compliance
--------------------
The Company has materially remedied the Year 2000 computer problem shared by
virtually all companies and businesses. Initially, this Year 2000 problem was
associated with two-digit date codes used in many computer programs and embedded
chip systems. As an on-going effort, the Company continues to monitor its
systems as well as third party vendors and franchisees.
While the Company has not experienced any material non-compliance issues to
date, it is not in a position to guarantee the performance of others with
respect to their Year 2000 compliance or predict whether any of the assurances
that others provide regarding Year 2000 compliance may prove later to be
inaccurate or overly optimistic.
FORWARD-LOOKING STATEMENTS
--------------------------
When used throughout this report, the words "believes," "anticipates,"
"expects," "intends," "estimates," "projects," and other similar expressions,
which are predictions of or indicate future events and trends, identify forward-
looking statements. Such statements are subject to a number of risks and
uncertainties which could cause actual results to differ materially from those
projected, including: competition within each of our business segments; business
strategies and their
11
<PAGE>
intended results; the balance between supply of and demand for hotel rooms; our
ability to obtain new franchise agreements; our ability to develop and maintain
positive relations with current and potential hotel owners; the effect of
international, national and regional economic conditions; the availability of
capital to allow us and potential hotel owners to fund investments; unexpected
marketing costs or lower than expected marketing revenues with respect to
projected decreases in the marketing advances; and other risks described from
time to time in our filings with the Securities and Exchange Commission,
including those set forth under the heading "Risk Factors" in our Report on Form
10-Q for the Period ended June 30, 1999. Given these uncertainties, you are
cautioned not to place undue reliance on such statements. We also undertake no
obligation to publicly update or revise any forward-looking statement to reflect
current or future events or circumstances.
ITEM 3. QUANTITATIVE AND QUALITATIVE ANALYSIS OF MARKET RISK
-----------------------------------------------------
The Company is exposed to market risk from changes in interest rates and the
impact of fluctuations in foreign currencies on the Company's foreign
investments and revenues. The Company manages its exposure to this market risk
through the monitoring of its available financing alternatives including in
certain circumstances the use of derivative financial instruments. The
Company's strategy to manage exposure to changes in interest rates and foreign
currencies remains unchanged from 1997. Furthermore, the Company does not
foresee any significant changes in exposure in these areas or in how such
exposure is managed in the near future.
At September 30, 2000 and December 31, 1999, the Company had $307.5 million and
$307.4 million of debt outstanding at an effective interest rate of 7.2% and
6.6%, respectively, after the impact of interest rate swaps at December 31, 1999
is taken into account. A hypothetical change of 10% in the Company's effective
interest rate from quarter-end 2000 levels would increase or decrease interest
expense by $1.5 million. The Company will refinance the $150 million variable
rate term loan as it amortizes throughout the expected maturity dates. Upon
expiration of the Credit Facility in 2002, the Company expects to refinance its
obligations. For more information related to the Company's use of interest rate
instruments, see Long-Term Debt and Notes Payable, Interest Rate Hedges and Fair
Value of Financial Instruments in the Notes to the Consolidated Financial
Statements in the Company's December 31, 1999 Form 10-K.
The Company is also exposed to fluctuations in foreign currency relating to its
preferred stock investment in Friendly that is denominated in British Pounds.
The Company does not have any derivative financial instruments related to its
foreign investments.
12
<PAGE>
PART II OTHER INFORMATION
-------------------------
ITEM 1. LEGAL PROCEEDINGS
-----------------
The Company is not party to any litigation, other than routine litigation
incidental to the business of the Company. None of such litigation, either
individually or in the aggregate, is expected to be material to the business,
financial condition or results of operations of the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
----------------------------------
(a) Exhibits
Exhibit 10.1 - Employment Agreement dated May 3, 2000 between Choice Hotels
International, Inc. and Daniel Rothfeld.
Exhibit 10.2 - Employment Agreement dated August 18, 2000 between Choice
Hotels International, Inc. and Wayne Wielgus.
Exhibit 27.01 - Financial Data Schedule - September 30, 2000
(b) The following reports were filed pertaining to the period ended September
30, 2000.
None
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SIGNATURE
Pursuant to the requirements of the Securities Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
CHOICE HOTELS INTERNATIONAL, INC.
Date: November 1, 2000 /s/ Charles A. Ledsinger,Jr.
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By: Charles A. Ledsinger, Jr.
President and Chief Executive Officer
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