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 ---------- ==============================================================================
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
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
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
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
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
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
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
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
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
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
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
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 13
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. ------------------ ----------------------------- By: Charles A. Ledsinger, Jr. President and Chief Executive Officer 14