<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 JUNE 30, 2000 COMMISSION FILE NO. 1-11915
CHOICE HOTELS INTERNATIONAL, INC.
10750 COLUMBIA PIKE
SILVER SPRING, MD. 20901
(301) 592-5000
Delaware 52-1209792
------------------------ -------------------------
(STATE OF INCORPORATION) (I.R.S. EMPLOYER
IDENTIFICATION NUMBER)
-------------------------------------------
(Former name, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
----- -----
SHARES OUTSTANDING
CLASS AT JUNE 30, 2000
----------------------- ------------------------
Common Stock, $0.01
par value per share 52,795,907
----------
==============================================================================
<PAGE>
CHOICE HOTELS INTERNATIONAL, INC.
INDEX
-----
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
PART I. FINANCIAL INFORMATION:
Condensed Consolidated Balance Sheets -
June 30, 2000 (Unaudited) and December 31, 1999 3
Consolidated Statements of Income -
Three months ended June 30, 2000 and June 30, 1999 and Six months
ended June 30, 2000 and June 30, 1999 (Unaudited) 5
Consolidated Statements of Cash Flows -
Six months ended June 30, 2000 and June 30, 1999 (Unaudited) 6
Notes to Consolidated Financial Statements (Unaudited) 7
Management's Discussion and Analysis of Operations and Financial Condition 9
Quantitative and Qualitative Analysis of Market Risk 11
PART II. OTHER INFORMATION AND SIGNATURE 12
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
CHOICE HOTELS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
------------- -----------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 17,573 $ 11,850
Receivables (net of allowance for doubtful
accounts of $8,012 and $6,691, respectively) 28,969 30,035
Income taxes receivable and other 1,989 37
--------- --------
Total current assets 48,531 41,922
PROPERTY AND EQUIPMENT, AT COST, NET OF
ACCUMULATED DEPRECIATION 60,701 58,255
GOODWILL, NET OF ACCUMULATED AMORTIZATION 63,684 64,706
FRANCHISE RIGHTS, NET OF ACCUMULATED AMORTIZATION 41,153 43,101
INVESTMENT IN FRIENDLY HOTELS, PLC 39,017 41,195
ADVANCES TO MARKETING AND RESERVATION FUNDS 58,326 32,807
OTHER ASSETS 38,879 40,819
NOTE RECEIVABLE FROM SUNBURST HOSPITALITY CORP.
(net of reserve of $4,100 and $0, respectively) 145,421 141,853
--------- --------
Total assets $495,712 $464,658
======== ========
</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)
June 30, 2000 December 31, 1999
------------- -----------------
(Unaudited)
LIABILITIES & EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $ 49,446 $ 44,646
Accounts payable 16,219 21,362
Accrued expenses 17,311 22,283
Income taxes payable - 1,367
-------- --------
Total current liabilities 82,976 89,658
-------- --------
LONG TERM DEBT 286,719 262,710
-------- --------
DEFERRED INCOME TAXES ($38,038 and $30,648,
respectively) AND OTHER LIABILITIES 54,466 46,674
-------- --------
Total liabilities 424,161 399,042
-------- --------
SHAREHOLDERS' EQUITY
Common stock, $.01 par value 615 614
Additional paid-in-capital 54,702 52,386
Accumulated other comprehensive income 613 1,205
Deferred compensation (1,703) (1,937)
Treasury stock (124,835) (108,370)
Retained earnings 142,159 121,718
-------- --------
Total shareholders' equity 71,551 65,616
-------- --------
Total liabilities & shareholders' equity $495,712 $464,658
======== ========
The accompanying notes are an integral part of these condensed consolidated
balance sheets.
4
<PAGE>
CHOICE HOTELS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
---- ---- ---- ----
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
REVENUES
Royalty fees $34,328 $31,274 $59,213 $55,073
Initial franchise and
relicensing fees 3,435 3,744 6,782 6,593
Partner service revenue 2,088 2,092 4,386 3,808
Other 1,314 1,565 2,429 2,147
------- ------- ------- -------
Total revenues 41,165 38,675 72,810 67,621
------- ------- ------- -------
OPERATING EXPENSES
Selling, general and administrative 14,071 12,637 26,299 23,614
Depreciation and amortization 3,053 1,625 5,555 3,303
------- ------- ------- -------
Total operating expenses 17,124 14,262 31,854 26,917
------- ------- ------- -------
OPERATING INCOME 24,041 24,413 40,956 40,704
OTHER
Interest and dividend income (5,219) (5,141) (10,119) (9,842)
Interest expense and other 5,917 5,179 11,568 10,063
Equity loss - Friendly Hotels, PLC 164 95 1,889 190
Loss on early prepayment of note 4,100 - 4,100 -
Gain on sale of stock - - - (1,260)
------- ------- ------- -------
Total other 4,962 133 7,438 (849)
------- ------- ------- -------
INCOME BEFORE INCOME TAXES 19,079 24,280 33,518 41,553
INCOME TAXES 7,441 9,749 13,072 16,744
------- ------- ------- -------
NET INCOME $11,638 $14,531 $20,446 $24,809
======= ======= ======= =======
WEIGHTED AVERAGE SHARES OUTSTANDING 53,092 54,998 53,038 55,449
------- ------- ------- -------
DILUTED SHARES OUTSTANDING 53,534 55,809 53,688 56,153
------- ------- ------- -------
BASIC EARNINGS PER SHARE $ 0.22 $ 0.26 $ 0.39 $ 0.45
======= ======= ======= =======
DILUTED EARNINGS PER SHARE $ 0.22 $ 0.26 $ 0.38 $ 0.44
======= ======= ======= =======
</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>
Six Months Ended
June 30, 2000 June 30, 1999
------------- -------------
(Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $20,446 $24,809
Reconciliation of net income to net cash
by operating activities:
Depreciation and amortization 10,943 7,026
Provision for doubtful accounts (433) 408
Increase in deferred income taxes 7,498 7,171
Non cash interest and dividend income (7,668) (8,118)
Equity loss - Friendly Hotels, PLC 1,889 190
Loss on early prepayment of note 4,100 -
Changes in assets and liabilities:
Change in receivables 1,499 (3,195)
Change in income taxes payable/receivable and other (2,417) 6,318
Change in accounts payable and accrued expenses (10,115) 459
------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 25,742 35,068
------- -------
CASH FLOW FROM INVESTING ACTIVITIES:
Investment in property and equipment (9,321) (10,781)
Advances to marketing and reservation funds, net (25,519) (22,385)
Other items, net 1,370 (1,908)
------- -------
NET CASH UTILIZED BY INVESTING ACTIVITIES (33,470) (35,074)
------- -------
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from long-term borrowings 60,300 56,230
Principal payments of long-term borrowings (31,585) (24,174)
Proceeds from exercise of stock options 1,200 3,702
Purchase of treasury stock (16,465) (31,496)
Proceeds from issuance of common stock 1 6
------- -------
NET CASH PROVIDED BY FINANCING ACTIVITIES 13,451 4,268
------- -------
Net change in cash and cash equivalents 5,723 4,262
Cash and cash equivalents, beginning of period 11,850 1,692
------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD $17,573 $ 5,954
======= =======
</TABLE>
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 six months ended June 30, 2000, the
Company's comprehensive income (consisting of net income plus/minus foreign
currency translation adjustments and unrealized gains/losses on available for
sale securities) was lower than net income by approximately $592,000.
3. Marketing and Reservation Funds - The Company presents marketing and
reservation fees such that the fees collected and associated expenses are
reported net. The total marketing and reservation fees received by the Company
were $41.0 million and $35.8 million for the three months ended June 30, 2000
and 1999, respectively, and $71.2 million and $63.8 million for the six months
ended June 30, 2000 and 1999, respectively. Depreciation and amortization
expense incurred by the marketing and reservation funds was $2.3 million and
$1.8 million for the three months ended June 30, 2000 and 1999, respectively,
and $5.1 million and $3.6 million for the six months ended June 30, 2000 and
1999, respectively. Interest expense incurred by the reservation fund was $1.3
million and $1.0 million for the three months ended June 30, 2000 and 1999,
respectively, and $2.4 million and $1.6 million for the six months ended June
30, 2000 and 1999, respectively.
Reservation fees and marketing fees not expended in the current year are carried
over to the next fiscal year and expended in accordance with the franchise
agreements. Shortfall amounts are similarly recovered in subsequent years.
Excess or shortfall amounts from the operation of these programs are recorded as
a payable or receivable from the particular fund. The Company advances capital
as necessary to the marketing and reservation funds to support the development
and ongoing operations of the franchise system. As of June 30, 2000, the
Company's balance sheet includes a receivable of $58.3 million related to
advances made to the marketing ($26.0 million) and reservation ($32.3 million)
funds. As of December 31, 1999, the Company's balance sheet includes a
receivable of $32.8 million related to advances made to the marketing ($12.5
million) and reservation ($20.3 million) funds.
The $13.5 million increase in the marketing advance for the six months ended
June 30, 2000 was due to planned accelerated media spending in the calendar
year. The Company projects the marketing advance to decline over the remainder
of the year to approximately $17.5 million from the current $26.0 million
amount. The reservation advance is forecasted to increase approximately $10.0
million for the remaining six months to $42.0 million. This increase is
associated with the continued deployment of property and yield management
systems to franchisees. The Company has the ability under existing franchise
agreements and expects to recover these advances through future marketing,
reservation and technology fees.
4. Income Taxes - The income tax provision for the period is based on the
effective tax rate expected to be applicable for the full year. The 2000 six
month rate of 39% differs from the statutory rate primarily because of state
income taxes.
5. Earnings Per Share - Basic earnings per share (EPS) amounts are computed by
dividing earnings applicable to common shareholders by the weighted average
number of common shares outstanding. Diluted EPS amounts assume the issuance of
common stock for all potentially dilutive equivalents outstanding.
7
<PAGE>
6. Reportable Segment Information - The Company has a single reportable segment
encompassing its franchising business. Franchising revenues are comprised of
royalty fees, initial franchise and relicensing fees, and partner services
revenue and other. Marketing and reservation fees and expenses are excluded from
reportable segment information as such fees and associated expenses are reported
net.
The following table presents the financial information for the Company's
franchising segment.
Three Months Ended June 30, 2000
(In thousands) Franchising Corporate & Other Consolidated
-------------------------------------------------------
Revenues $41,165 $ - $41,165
Operating income (loss) 34,685 (10,644) 24,041
Three Months Ended June 30, 1999
Franchising Corporate & Other Consolidated
-------------------------------------------------------
Revenues $38,675 $ - $38,675
Operating income (loss) 31,386 (6,973) 24,413
Six Months Ended June 30, 2000
Franchising Corporate & Other Consolidated
-------------------------------------------------------
Revenues $72,810 $ - $72,810
Operating income (loss) 59,910 (18,954) 40,956
Six Months Ended June 30, 1999
Franchising Corporate & Other Consolidated
-------------------------------------------------------
Revenues $67,621 $ - $67,621
Operating income (loss) 53,330 (12,626) 40,704
7. Put/Call Agreement - In March 2000, the Company and Sunburst Hospitality
Corporation ("Sunburst")entered into a "put/call" agreement related to three
MainStay properties for a period ending June 30, 2000. During this period, the
Company could "call" any or all specified properties for purchase at Sunburst's
original cost (approximately $16.3 million in the aggregate) and at the end of
this period Sunburst may "put" any or all specified properties at such cost. The
Company and Sunburst exercised their rights under the "put/call" agreement.
Sunburst will transfer title to these properties, in the third quarter, to the
Company as consideration for $16.3 million of the $149 million amount due to
Choice under Sunburst's subordinated note. The fair market value of these assets
is approximately $12.2 million. Accordingly, the Company has recognized a
pre-tax loss on early prepayment of note of $4.1 million in the quarter ended
June 30, 2000.
8. Friendly Investment - The Company is continuing to review its strategic
options with respect to its investment in Friendly Hotels, PLC ("Friendly"), the
Company's master franchisor for the United Kingdom, Ireland and Continental
Europe. Such options may include discussions with the board of Friendly, which
may lead to a capital restructuring of Friendly and amendments to the master
franchise agreement with the Company. It is possible that such actions could
result in a write-down or deferral of certain amounts due the Company and other
Company assets related to Friendly, which currently represent a total net
investment of approximately $48 million. Any write down or deferral so made is
not expected to be material to the Company's cash flow or financial condition.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL CONDITION
--------------------------------------------------------------------------
Comparison of Three Month Period Ended June 30, 2000 Operating Results and Three
--------------------------------------------------------------------------------
Month Period Ended June 30, 1999 Operating Results
--------------------------------------------------
The Company reported net income of $11.6 million, or $0.22 per diluted share,
for the quarter ended June 30, 2000, compared to net income for the same period
of 1999 of $14.5 million, or $0.26 per diluted share. The decrease in net income
for the period is attributable to a $4.1 million loss on early prepayment of a
Sunburst subordinated note that is due to the Company. The Company and Sunburst
exercised their rights under a previously negotiated "put/call" agreement
related to three of Sunburst's MainStay Suites hotels as described in the notes
to consolidated financial statements.
Franchise Revenues
------------------
The Company's net franchise revenues were $41.2 million for the three months
ended June 30, 2000 and $38.7 million for the three months ended June 30, 1999.
Royalties increased $3.0 million to $34.3 million in 2000 from $31.3 million in
1999, an increase of 9.8%. The increase in royalties is attributable to a net
increase of 215 franchised hotels during the twelve month period between June
30, 1999 and June 30, 2000 (representing an additional 16,006 rooms) and an
increase in domestic RevPAR of 5.6% from $35.47 in second quarter 1999 to $37.47
in 2000. Initial and relicensing fee revenue generated from domestic franchise
contracts signed decreased to $3.4 million from $3.7 million in 1999 as a result
of a decrease in total franchise agreements signed to 67, as compared to 84 for
second quarter of 1999.
The total number of domestic hotels online increased to 3,176 from 3,057, an
increase of 3.9% for the period ending June 30, 2000. This represents an
increase in the number of rooms open of 3.5% from 253,251 as of June 30, 1999 to
262,045 as of June 30, 2000. As of June 30, 2000, the Company had 508 hotels
under development in its domestic hotel system representing 40,429 rooms. The
total number of international hotels online increased to 1,127 from 1,031, an
increase of 9.3% as of June 30, 2000. International rooms open increased 9.7%
from 74,254 as of June 30, 1999 to 81,466 as of June 30, 2000. The total number
of international hotels and rooms under development was 177 and 17,762,
respectively, as of June 30, 2000. International net franchise revenues
represented $1.4 million of the Company's total net franchise revenues for both
quarters ended June 30, 2000 and 1999.
Franchise Expenses
------------------
The cost to operate the franchising business is reflected in selling, general
and administrative expenses. Selling, general and administrative expenses
increased 11.3% between years. This increase was driven by spending for the
Company's various internet initiatives (approximately $0.6 million for the three
months), as well as, severance costs (approximately $0.5 million for the three
months) incurred in connection with the Company's recent outsourcing of the
corporate technology function. As a percentage of total net franchising
revenues, total selling, general and administrative expenses increased to 34.2%
for 2000 as compared to 32.7% for 1999.
Other
-----
For the three months ended June 30, 2000 and June 30, 1999, the Company
recognized approximately $3.9 million and $3.5 million, respectively, of
interest income from its subordinated term note to Sunburst.
The Company recognized a $4.1 million loss on early prepayment of a Sunburst
subordinated note related to a previously negotiated "put/call" agreement as
described in the notes to consolidated financial statements. The Company
received three operating MainStay Suites hotels as consideration for $16.3
million of the note receivable from Sunburst.
Comparison of Six Month Period Ended June 30, 2000 Operating Results and Six
----------------------------------------------------------------------------
Month Period Ended June 30, 1999 Operating Results
--------------------------------------------------
9
<PAGE>
The Company reported net income of $20.4 million, or $0.38 per diluted share,
for the six months ended June 30, 2000, compared to net income for the same
period of 1999 of $24.8 million, or $0.44 per diluted share. The decrease in net
income for the period is attributable to a $4.1 million loss on early prepayment
of a Sunburst subordinated note that is due to the Company, as well as a $1.9
million equity loss from the Company's investment in Friendly.
Franchise Revenues
------------------
The Company's net franchise revenues were $72.8 million for the six months ended
June 30, 2000 and $67.6 million for the six months ended June 30, 1999.
Royalties increased $4.1 million to $59.2 million in 2000 from $55.1 million in
1999, an increase of 7.5%. The increase in royalties is attributable to a net
increase of 215 franchised hotels during the twelve month period between June
30, 1999 and June 30, 2000 (representing an additional 16,006 rooms) and an
increase in domestic RevPAR of 3.3% from $31.23 in 1999 to $32.27 in 2000.
Initial and relicensing fee revenue generated from domestic franchise contracts
signed increased to $6.8 million from $6.6 million in 1999 as a result of 319
franchise agreements signed in 2000, as compared to 281 for 1999. Revenues
generated from partner service relationships increased 15.2% from $3.8 million
in 1999 to $4.4 million in 2000.
Franchise Expenses
------------------
The cost to operate the franchising business is reflected in selling, general
and administrative expenses. Selling, general and administrative expenses
increased 11.4% between years. This increase was driven by spending for the
Company's various internet initiatives (approximately $1.0 million for the six
months), as well as, severance costs (approximately $0.5 million for the six
months) incurred in connection with the Company's recent outsourcing of the
corporate technology function. As a percentage of total net franchising
revenues, total selling, general and administrative expenses increased to 36.1%
for 2000 as compared to 34.9% for 1999.
Other
-----
For the six months ended June 30, 2000 and June 30, 1999, the Company recognized
approximately $7.7 million and $6.9 million, respectively, of interest income
from its subordinated term note to Sunburst.
The Company recognized an equity loss of $1.9 million in its financial
statements for the six months ended June 30, 2000, representing the Company's
5.3% interest in Friendly's common shares.
The Company recognized a $4.1 million loss on early prepayment of a Sunburst
subordinated note related to a previously negotiated "put/call" agreement as
described in the notes to consolidated financial statements.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
Net cash provided by operating activities was $25.7 million for the six months
ended June 30, 2000, a decrease of approximately $9.4 million from $35.1 million
for 1999. The decrease primarily resulted from timing differences in payments of
accounts payable and accrued expenses. At June 30, 2000, the total long-term
debt outstanding for the Company was $336.2 million, $49.4 million of which
matures in the next twelve months.
The Company made advances to the marketing and reservation funds totaling $25.5
million for the six months ended June 30, 2000. The advances are associated with
a system-wide property and yield management systems implementation and the
timing of expenditures associated with specific brand initiatives of the
marketing fund. The Company has the ability under existing franchise agreements
and expects to recover these advances through future marketing and reservation
fees. The Company expects approximately $1.5 million of increases in advances to
the marketing and reservation funds for the remainder of 2000 due to the
continued property and yield management systems implementation and expenditures
associated with specific brand initiatives, partially offset by reduced
marketing expenditures.
For the first six months of 2000, the Company has repurchased 1.2 million shares
of its common stock at a total cost of $16.5 million as of July 27, 2000. The
Company has authorization from its Board of Directors to repurchase up to an
additional 5.0 million shares.
10
<PAGE>
The Company believes that cash flows from operations and available financing
capacity is adequate to meet the expected operating, investing, financing and
debt service requirements for the business for the immediate future.
Year 2000 Compliance
--------------------
The Company has materially remedied the Year 2000 computer problem shared by
virtually all companies and businesses. Initially, this Year 2000 problem was
associated with two-digit date codes used in many computer programs and embedded
chip systems. As an on-going effort, the Company continues to monitor its
systems as well as third party vendors and franchisees.
While the Company has not experienced any material non-compliance issues to
date, it is not in a position to guarantee the performance of others with
respect to their Year 2000 compliance or predict whether any of the assurances
that others provide regarding Year 2000 compliance may prove later to be
inaccurate or overly optimistic.
FORWARD-LOOKING STATEMENTS
--------------------------
When used throughout this report, the words "believes," "anticipates,"
"expects," "intends," "estimates," "projects," and other similar expressions,
which are predictions of or indicate future events and trends, identify
forward-looking statements. Such statements are subject to a number of risks and
uncertainties which could cause actual results to differ materially from those
projected, including: competition within each of our business segments; business
strategies and their intended results; the balance between supply of and demand
for hotel rooms; our ability to obtain new franchise agreements; our ability to
develop and maintain positive relations with current and potential hotel owners;
the effect of international, national and regional economic conditions; the
availability of capital to allow us and potential hotel owners to fund
investments; unexpected marketing costs or lower than expected marketing
revenues with respect to projected decreases in the marketing advances; and
other risks described from time to time in our filings with the Securities and
Exchange Commission, including those set forth under the heading "Risk Factors"
in our Report on Form 10-Q for the Period ended June 30, 1999. Given these
uncertainties, you are cautioned not to place undue reliance on such statements.
We also undertake no obligation to publicly update or revise any forward-looking
statement to reflect current or future events or circumstances.
ITEM 3. QUANTITATIVE AND QUALITATIVE ANALYSIS OF MARKET RISK
-----------------------------------------------------
The Company is exposed to market risk from changes in interest rates and the
impact of fluctuations in foreign currencies on the Company's foreign
investments and revenues. The Company manages its exposure to this market risk
through the monitoring of its available financing alternatives including in
certain circumstances the use of derivative financial instruments. The Company's
strategy to manage exposure to changes in interest rates and foreign currencies
remains unchanged from 1997. Furthermore, the Company does not foresee any
significant changes in exposure in these areas or in how such exposure is
managed in the near future.
At June 30, 2000 and December 31, 1999, the Company had $336.2 million and
$307.4 million of debt outstanding at an effective interest rate of 7.2% and
6.6%, respectively, after the impact of interest rate swaps at December 31, 1999
is taken into account. A hypothetical change of 10% in the Company's effective
interest rate from quarter-end 2000 levels would increase or decrease interest
expense by $1.7 million. The Company will refinance the $150 million variable
rate term loan as it amortizes throughout the expected maturity dates. Upon
expiration of the Credit Facility in 2002, the Company expects to refinance its
obligations. For more information related to the Company's use of interest rate
instruments, see Long-Term Debt and Notes Payable, Interest Rate Hedges and Fair
Value of Financial Instruments in the Notes to the Consolidated Financial
Statements in the Company's December 31, 1999 Form 10-K.
The Company is also exposed to fluctuations in foreign currency relating to its
preferred stock investment in Friendly that is denominated in British Pounds.
The Company does not have any derivative financial instruments related to its
foreign investments.
11
<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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
The Company held its Annual Meeting of Shareholders on May 3, 2000. At the
meeting, the following Directors were re-elected to a three-year term:
Barbara Bainum
Charles A. Ledsinger, Jr.
Lawrence R. Levitan
The terms of the following Directors, who were not up for re-election, continued
after the meeting:
Stewart Bainum, Jr.
William L. Jews
Gerald W. Pettit
Jerry E. Robertson
Raymond E. Schultz
Also at the meeting, shareholders approved an amendment to the Choice Hotels
International Long-Term Incentive Plan which increased the number of shares of
the Company's common stock available for issuance under the plan. The following
votes were cast:
For: 38,868,586
Against: 12,137,393
Abstain: 99,285
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
----------------------------------
(a) Exhibits
Exhibit 27.01 - Financial Data Schedule - June 30, 2000
(b) The following reports were filed pertaining to the period ended June 30,
2000.
None
12
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
CHOICE HOTELS INTERNATIONAL, INC.
Date: August 11, 2000 /s/ Charles A. Ledsinger,Jr.
------------------ -----------------------------
By: Charles A. Ledsinger, Jr.
President and Chief Executive Officer
13
