Exhibit 13.01
TABLE OF CONTENTS
MANAGEMENT'S DISCUSSION AND ANALYSIS 24
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS 31
CONSOLIDATED FINANCIAL STATEMENTS 32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 36
BOARD OF DIRECTORS AND CORPORATE OFFICERS 52
CORPORATE INFORMATION 53
MANAGEMENT'S DISCUSSION AND ANALYSIS
Choice Hotels International, Inc. and Subsidiaries
The Company is one of the largest hotel franchisors in the world with 4,392
hotels open and 703 hotels under development as of December 31, 2000,
representing 350,351 rooms open and 60,927 rooms under development in 43
countries. The Company franchises hotels under the Comfort, Quality, Econo
Lodge, Sleep Inn, Clarion, Rodeway Inn and MainStay Suites brand names. The
Company operates in all 50 states and the District of Columbia and 37 additional
countries with 97% of its franchising revenue derived from hotels franchised in
the United States.
The principal factors that affect the Company's results are: growth in the
number of hotels under franchise; occupancies and room rates achieved by the
hotels under franchise; the effective royalty rate achieved; the number and
relative mix of franchised hotels; and the Company's ability to manage costs.
The number of rooms at franchised properties and occupancies and room rates at
those properties significantly affect the Company's results because franchise
royalty fees are based upon room revenues at franchised hotels. The key industry
standard for measuring hotel operating performance is revenue per available room
(RevPAR), which is calculated by multiplying the percentage of occupied rooms by
the average daily room rate realized. The variable overhead costs associated
with franchise system growth are substantially less than incremental royalty
fees generated from new franchisees; therefore, the Company is able to capture a
significant portion of those royalty fees as operating income.
Comparison of Calendar Year 2000 Operating Results
and Calendar Year 1999 Operating Results
The Company recorded net income of $42.4 million for the year ended
December 31, 2000, a decrease of $14.8 million, compared to net income of $57.2
million for the year ended December 31, 1999. Operating income of $92.4 million
in 2000 was $1.8 million under 1999 operating income of $94.2 million due to a
restructuring charge of $5.6 million in 2000. A corporate-wide reorganization
was implemented in 2000 to provide a more consistent service to franchisees,
establish a centralized sales focus and create a more competitive overhead
structure. Net income was further adversely affected in 2000 by a $7.4 million
(net of taxes) equity loss in Friendly Hotels plc ("Friendly") and a $4.6
million (net of taxes) loss on the subordinated term note (the "Note") from
Sunburst Hospitality Corporation ("Sunburst"). The Friendly equity loss was due
to a comprehensive restructuring program at Friendly to strengthen its balance
sheet and improve its operations. The Sunburst loss was attributed to two early
payment transactions as the Company moved to monetize the note receivable.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Choice Hotels International, Inc. and Subsidiaries
Summarized financial results for the years ended December 31, 2000 and 1999
are as follows:
2000 1999
------- -------
(In thousands)
REVENUES:
Royalty fees $137,721 $128,653
Initial franchise and relicensing fees 12,154 13,910
Partner services revenue 10,300 9,055
Other revenue 7,299 6,111
Product sales -- 3,871
-------- --------
Total revenues 167,474 161,600
======== ========
OPERATING EXPENSES:
Selling, general and administrative 57,787 55,860
Restructuring charges 5,637 --
Depreciation and amortization 11,623 7,687
Product cost of sales -- 3,883
-------- --------
Total operating expenses 75,047 67,430
======== ========
Operating income 92,427 94,170
Interest expense 18,490 16,398
Interest and dividend income (15,534) (17,147)
Equity loss on Friendly Hotels 12,071 380
Loss on Sunburst Hospitality note 7,565 --
Other 253 68
-------- --------
Income before income taxes 69,582 94,471
Income taxes 27,137 37,316
-------- --------
Net income $ 42,445 $ 57,155
======== ========
Franchise Revenues: Management analyzes its business based on net franchise
revenue, which is total revenue excluding product sales, and franchise operating
expenses which are reflected as selling, general and administrative expenses.
Net franchise revenues were $167.5 million for 2000 and $157.7 million for
1999. Royalties increased $9.0 million to $137.7 million from $128.7 million in
1999, an increase of 7.0%. The increase in royalties is attributable to a 3.2%
increase in the number of domestic franchised hotel rooms, an increase in the
effective royalty rate of the domestic hotel system to 3.85% from 3.7%, and an
improvement in domestic RevPAR of 4.4%. Domestic initial fee revenue generated
from franchise contracts signed was $6.4 million down from $9.6 million in 1999.
In 2000, ninety-eight franchise agreements were entered into which included
future potential rebates and/or incentive payments. Initial franchise fees of
$3.3 millon were deferred and will be recognized when the incentive criteria are
met or the deal is terminated, whichever occurs first. Total franchise
agreements signed in 2000 were 298, a decline from 318 total agreements executed
in 1999. Despite the continued competitive hotel franchising environment, the
Company believes that its refocused, centralized sales group will complete
approximately 300 new franchise agreements in 2001. Revenues generated from
partner service relationships increased to $10.3 million from $9.1 million in
1999. Under the partner services program, the Company generates revenue from
hotel industry vendors (who have been designated as preferred providers) based
on the level of goods or services purchased from the vendors by hotel owners and
hotel guests who stay in the Company's franchised hotels.
The number of domestic rooms on-line increased to 265,962 from 258,120, an
increase of 3.0% for the year ended December 31, 2000. For 2000, the total
number of domestic hotels on-line grew 3.9% to 3,244 from 3,123 for 1999. The
total number of international hotels on-line increased to 1,148 from 1,125, an
increase of 2.0% for the year ended December 31, 2000. International rooms on-
line increased to 84,389 as of December 31, 2000 from 80,134, an increase of
5.3%. As of December 31, 2000, the Company had 493 franchised hotels with 39,539
rooms either in design or under construction in its domestic system. The
Company had an additional 210 franchised hotels with 21,388 rooms under
development in its international system as of December 31, 2000.
Franchise Expenses: The cost to operate the franchising business is reflected
in selling, general and administrative expenses. Selling, general and
administrative expenses were $57.8 million for 2000, an increase of $1.9 million
from the 1999 total of $55.9 million. As a percentage of net franchise
revenues, selling, general and administrative expenses
MANAGEMENT'S DISCUSSION AND ANALYSIS
Choice Hotels International, Inc. and Subsidiaries
declined to 34.5% in 2000 from 35.4% in 1999. The improvement in the franchising
margins relates to the economies of scale generated from operating a larger
franchisee base and improvements in franchised hotel performance.
Marketing and Reservations: The Company's franchise agreements require the
payment of franchise fees which include marketing and reservation fees. These
fees, which are based on a percentage of the franchisees' gross room revenues,
are used exclusively by the Company's marketing and reservation funds for
expenses associated with providing such franchise services as central
reservation and yield management systems, national marketing and media
advertising. The Company is contractually obligated to expend the marketing and
reservation fees it collects from franchisees in accordance with the franchise
agreements; as such, no income or loss to the Company is generated.
The total marketing and reservation fees received by the Company were
$162.4 million and $146.0 million for the years ended December 31, 2000 and
1999, respectively. Depreciation and amortization incurred by the marketing and
reservation funds was $10.5 million and $9.6 million for the years ended
December 31, 2000 and 1999, respectively. Interest expense incurred by the
reservation fund was $4.8 million and $3.3 million for the years ended December
31, 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. Under the terms of the franchise agreements, the Company may
advance capital as necessary to the marketing and reservation funds and recover
such advances through future fees. As of December 31, 2000, the Company's
balance sheet includes a receivable of $57.8 million related to advances made to
the marketing ($24.9 million) and reservation ($32.9 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 Company has the ability under existing
franchise agreements and expects to recover these advances through future
marketing and reservation fees.
Product Sales: In the fourth quarter of 1998, the Company discontinued its group
purchasing program as previously operated. The group purchasing program utilized
bulk purchases to obtain favorable pricing from third party vendors for
franchisees ordering similar products. The Company acted as a clearinghouse
between the franchisee and the vendor, and orders were shipped directly to the
franchisee. Sales made to franchisees through the Company's group purchasing
program were $3.9 million in 1999, with product cost of sales of $3.9 million.
Depreciation and Amortization: Depreciation and amortization increased to
$11.6 million in 2000 from $7.7 million in 1999. This increase was primarily
attributable to new computer systems installations and corporate office
renovations.
Other: Interest expense of $18.5 million in 2000 is up $2.1 million from $16.4
million in 1999 due to higher interest rates. Included in 2000 and 1999 results
is approximately $15.2 million and $14.2 million, respectively, of interest
income earned on the note receivable from Sunburst. During 1999, the Company
recorded $2.1 million in dividend income from Friendly. The Company's investment
in Friendly resulted in a $12.1 million equity loss in 2000 associated with
Friendly's comprehensive restructuring program. The Company recognized a $7.6
million loss in 2000 associated with the monetization of $137.5 million of the
Sunburst note.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Choice Hotels International, Inc. and Subsidiaries
Comparison of Calendar Year 1999 Operating Results and Calendar Year 1998
Operating Results
The Company recorded net income of $57.2 million for the year ended
December 31, 1999, an increase of $1.9 million, compared to net income of $55.3
million for the year ended December 31, 1998. Net income in 1998 included a $7.2
million extraordinary gain from the early extinguishment of debt. The increase
in net income for 1999 was primarily attributable to an increase in the
effective royalty rates achieved, an increase in franchise revenue as a direct
result of improvements in the operating performance of hotels, and the addition
of new franchisees to the system. Lower net interest costs versus 1998 also
contributed favorably to the 1999 results.
Summarized financial results for the years ended December 31, 1999 and 1998
are as follows:
1999 1998
------- ------
(In thousands)
REVENUES:
Royalty fees $128,653 $115,171
Initial franchise and relicensing fees 13,910 16,571
Partner services revenue 9,055 6,370
Other revenue 6,111 5,516
Product sales 3,871 20,748
European hotel operations -- 1,098
-------- --------
Total revenues 161,600 165,474
======== ========
OPERATING EXPENSES:
Selling, general and administrative 55,860 52,948
Depreciation and amortization 7,687 6,710
Product cost of sales 3,883 19,532
European hotel operations -- 1,133
-------- --------
Total operating expenses 67,430 80,323
======== ========
Operating income 94,170 85,151
Interest expense 16,398 17,757
Interest and dividend income (17,147) (12,636)
Equity loss on Friendly Hotels 380 --
Loss (gain) on sale of investments 68 (2,370)
-------- --------
Income before income taxes and extraordinary item 94,471 82,400
Income taxes 37,316 34,327
-------- --------
Net income before extraordinary item 57,155 48,073
Gain on early extinguishment of debt,
net of $4,732 of income taxes -- 7,232
-------- --------
Net income $ 57,155 $ 55,305
======== ========
Franchise Revenues: Net franchise revenues were $157.7 million for 1999 and
$143.6 million for 1998. Royalties increased $13.5 million to $128.7 million
from $115.2 million in 1998, an increase of 11.7 %. The increase in royalties
is attributable to a 2.3% increase in the number of domestic franchised hotel
rooms, an increase in the effective royalty rate of the domestic hotel system to
3.7% from 3.6%, and an improvement in domestic RevPAR of 3.0%. Domestic initial
fee revenue generated from franchise contracts signed was $10.1 million down
from $13.1 million in 1998. Total franchise agreements signed in 1999 were 318,
a decline from the 440 total agreements executed in 1998. An increasingly
competitive hotel franchising environment, coupled with stricter hotel brand
standards being enforced by the Company, contributed to the decline in the total
franchise agreements signed in the period. Revenues generated from partner
service relationships increased to $9.1 million from $6.4 million in 1998.
The number of domestic rooms on-line increased to 258,120 from 252,357, an
increase of 2.3% for the year ended December 31, 1999. For 1999, the total
number of domestic hotels on-line grew 2.8% to 3,123 from 3,039 for 1998. The
total number of international hotels on-line increased to 1,125 from 632, an
increase of 78.0% for the year ended December 31, 1999. International rooms on-
line increased to 80,134 as of December 31, 1999 from 53,095, an increase of
50.9%. As of December 31, 1999, the Company had 596 franchised hotels with
46,664 rooms either in design or under construction in its domestic system. The
Company had an additional 165 franchised hotels with 17,431 rooms under
development in its international system as of December 31, 1999.
Franchise Expenses: Selling, general and administrative expenses were $55.9
million for 1999, an increase of $3.0 million from the 1998 total of $52.9
million. As a percentage of net franchise revenues, selling, general and
administrative expenses declined to
MANAGEMENT'S DISCUSSION AND ANALYSIS
Choice Hotels International, Inc. and Subsidiaries
35.4% in 1999 from 36.8% in 1998. The improvement in the franchising margins
relates to the economies of scale generated from operating a larger franchisee
base and improvements in franchised hotel performance.
Marketing and Reservations: The total marketing and reservation fees received
by the Company were $146.0 million and $127.4 million for the years ended
December 31, 1999 and 1998, respectively. Depreciation and amortization
incurred by the marketing and reservation funds was $9.6 million and $6.2
million for the years ended December 31, 1999 and 1998, respectively. Interest
expense incurred by the reservation fund was $3.3 million and $1.8 million for
the years ended December 31, 1999 and 1998, respectively. 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. As of December 31, 1998, the Company's balance sheet includes
a receivable of $18.7 million related to advances made to the marketing ($7.8
million) and reservation ($10.9 million) funds.
Product Sales: Sales made to franchisees through the Company's group
purchasing program declined $16.8 million to $3.9 million in 1999 from $20.7
million in 1998. Similarly, product cost of sales decreased $15.6 million to
$3.9 million from 1998. In the fourth quarter of 1998, the Company discontinued
this group purchasing program as previously operated.
European Hotel Operations: In January 1998, Friendly acquired from the Company
ten hotels in France, two in Germany and one in the United Kingdom, in exchange
for $22.2 million in 5.75% convertible preferred shares in Friendly.
Depreciation and Amortization: Depreciation and amortization increased to
$7.7 million in 1999 from $6.7 million in 1998. This increase was primarily
attributable to new computer systems installations and corporate office
renovations.
Interest Expense and Interest Income: Interest expense of $16.4 million in 1999
is down slightly from $17.8 million in 1998. Included in 1999 and 1998 results
is approximately $14.2 million and $10.4 million, respectively, of interest
income earned on the note receivable from Sunburst. The Company's investment in
Friendly resulted in $2.2 million and $2.1 million in dividend income in 1999
and 1998, respectively.
Extraordinary Item: During 1998, the Company recorded an extraordinary gain
from the early extinguishment of debt. The Company retired $13.7 million in
debt and removed related assets of $1.8 million from the consolidated balance
sheets. The extraordinary gain was $7.2 million, after income tax expense of
$4.7 million, or $0.12 per diluted share.
Liquidity and Capital Resources
Net cash provided by operating activities was $67.6 million for the year
ended December 31, 2000, a decrease of $2.4 million from $70.0 million for the
year ended December 31, 1999. The reduction in cash provided was primarily due
to changes in working capital.
Cash used in investing activities for the years ended December 31, 2000,
1999 and 1998, was $30.4 million, $40.9 million and $9.1 million, respectively.
Investment in property and equipment includes installation of system-wide
property and yield management systems and upgrades to financial and reservations
systems. During the years ended December 31, 2000, 1999 and 1998, capital
expenditures totaled $16.6 million, $30.6 million and $17.5 million,
respectively. Capital expenditures in prior years included amounts for
renovations to the Company's corporate headquarters (including a franchisee
learning and training center); computer hardware; and financial, reservation,
and property and yield management systems.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Choice Hotels International, Inc. and Subsidiaries
The Company made net cash advances to the marketing and reservation funds
totaling $14.5 million in 2000. The advances are associated with a system-wide
property and yield management systems implementation, the timing of expenditures
associated with specific brand initiatives of the marketing fund and the
recognition of costs and the timing of payments received from franchisees in
conjunction with the Company's frequency stay program. The Company has the
ability under existing franchise agreements and expects to recover these
advances through future marketing and reservation fees. The Company expects the
marketing and reservation funds to generate positive cash flows of approximately
$10 million in 2001 due to cost reductions associated with restructured
operations, programmed brand initiatives, growth in fees from normal operations
and increases in property and yield management fees.
On September 1, 2000, Sunburst transferred title to three MainStay
properties under a put/call agreement entered into between the Company and
Sunburst in March 2000. These properties were received by the Company as
consideration for $16.3 million of the then $149 million amount due under the
Note. The initial Note carried a simple interest rate of 11% per annum. In
connection with an amendment of the strategic alliance agreement (as defined in
Note 7 to Consolidated Financial Statements), effective October 15, 2000,
interest payable accrued at a rate of 11% per annum compounded daily. The
Company implemented this amendment prospectively beginning on January 1, 1999,
and has recognized interest on the outstanding principal and accrued interest
amounts at an effective rate of 10.58%. Total interest accrued at December 31,
2000 and 1999 was $42.2 million and $27.0 million, respectively. On January 5,
2001, the Company received from Sunburst $101.9 million, a parcel of land valued
at approximately $1.5 million and a new 11 3/8% seven-year senior subordinated
note in the amount of $35 million as consideration for the five-year
subordinated term note.
Financing cash flows relate primarily to the Company's borrowings under its
credit lines and treasury stock purchases. In 1997, the Company entered into a
five-year, $300 million competitive advance and multi-currency revolving credit
facility (as defined in Note 10 to Consolidated Financial Statements). The
Credit Facility provides for a term loan of $150 million and a revolving credit
facility of $150 million, $50 million of which is available in foreign currency
borrowings. As of December 31, 2000, the Company had $80 million of term loans
outstanding and $109 million of revolving loans. The term loan is payable over
five years, $42.5 million of which is due in 2001. The Credit Facility includes
customary financial and other covenants that require the maintenance of certain
ratios including maximum leverage and interest coverage and restrict the
Company's ability to make certain investments, incur debt and dispose of assets.
At the Company's option, the interest rate may be based on LIBOR, a certificate
of deposit rate or an alternate base rate (as defined), plus a facility fee
percentage. The rate is determined based on the Company's consolidated leverage
ratio at the time of borrowing.
In 1998, the Company completed a $100 million senior unsecured note
offering ("the Senior Notes"), bearing a coupon rate of 7.13% with an effective
rate of 7.22%. The Senior Notes will mature on May 1, 2008, with interest on the
Senior Notes to be paid semi-annually. The Company used the net proceeds from
the offering of approximately $99 million to repay amounts outstanding under the
Company's Credit Facility.
In January 2001, the Company provided Friendly, in association with
Friendly's restructuring (see Note 5 to Consolidated Financial Statements), with
a letter of credit in an amount up to (Pounds)7.8 million (approximately US
$11.4 million) to guarantee additional credit facilities from Friendly's banks.
As of March 20, 2001, Friendly had drawn (Pounds)5.5 million on this letter of
credit.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Choice Hotels International, Inc. and Subsidiaries
As of December 31, 2000, the total debt outstanding for the Company was
$297.2 million.
The Company had repurchased 9.1 million shares of its common stock at a
total cost of $129.2 million as of December 31, 2000. On February 8, 2001, the
Company received authorization from its Board of Directors to repurchase up to
an additional 5 million shares. Subsequent to December 31, 2000 and using the
proceeds of the Sunburst note, the Company repurchased 7.3 million shares of
outstanding common stock at a total cost of $105.4 million.
The Company believes that cash flows from operations and available
financing capacity are adequate to meet the expected operating, investing,
financing and debt service requirements of the business for the immediate
future.
Impact of Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board (Board) issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities," which
established accounting and reporting standards for derivative instruments,
including derivative instruments embedded in other contracts, and for hedging
activities. SFAS No. 133 requires the recognition of the fair value of
derivatives in the statement of financial position, with changes in the fair
value recognized either in earnings or as a component of other comprehensive
income dependent upon the hedging nature of the derivative. In June 1999, the
Board issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities--Deferral of the Effective Date of FASB Statement No. 133," which
deferred the effective date of SFAS No. 133 until fiscal years beginning after
June 15, 2000. SFAS No. 133 does not have a material impact on the Company's
earnings or other comprehensive income.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition," which requires
revenues to be recognized when realized and earned. Revenue is generally
realized and earned when all the following criteria are met: (i) persuasive
evidence of an arrangement exists; (ii) delivery has occurred or services have
been rendered; (iii) the selling price must be fixed or determinable; and, (iv)
collectibility is reasonably assured. The Company implemented SAB No. 101 in
2000.
Forward-Looking Statements
Certain statements contained in this annual report, including those in the
section entitled Management's Discussion and Analysis, that are not historical
facts constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act. Words such as "believes," "anticipates,"
"expects," "intends," "estimates," "projects," and other similar expressions,
which are predictions of or indicate future events and trends, typically
identify forward-looking statements. Such statements are subject to a number of
risks and uncertainties which could cause actual results to differ materially
from those projected, including: competition within each of our business
segments; business strategies and their intended results; the balance between
supply of 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 and construction of hotels; the cost and other
effects of legal proceedings; and other risks described from time to time in our
filings with the Securities and Exchange Commission, including those set forth
under the 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. The Company also undertakes no obligation to
publicly update or revise any forward-looking statement to reflect current or
future events or circumstances.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
Choice Hotels International, Inc. and Subsidiaries
To Choice Hotels International, Inc.
We have audited the accompanying consolidated balance sheets of Choice
Hotels International, Inc. and subsidiaries, as defined under "Company
Information and Significant Accounting Policies" in the Notes to Consolidated
Financial Statements, as of December 31, 2000 and 1999, and the related
consolidated statements of income, cash flows, and shareholders' equity and
comprehensive income for the years ended December 31, 2000, 1999 and 1998. These
consolidated financial statements are the responsibility of Choice Hotels
International, Inc.'s management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Choice
Hotels International, Inc. and subsidiaries as of December 31, 2000 and 1999,
and the results of their operations and their cash flows for the years ended
December 31, 2000, 1999 and 1998, in conformity with accounting principles
generally accepted in the United States.
/s/ Arthur Andersen LLP
Vienna, Virginia
February 2, 2001
31
CONSOLIDATED STATEMENTS OF INCOME
Choice Hotels International, Inc. and Subsidiaries
Years ended December 31,
------------------------------------
2000 1999 1998
----------- ---------- --------
(In thousands, except per share amounts)
- ----------------------------------------
REVENUES:
Royalty fees $137,721 $128,653 $115,171
Initial franchise and relicensing fees 12,154 13,910 16,571
Partner services revenue 10,300 9,055 6,370
Other revenue 7,299 6,111 5,516
Product sales -- 3,871 20,748
European hotel operations -- -- 1,098
======== ======== ========
Total revenues 167,474 161,600 165,474
OPERATING EXPENSES:
Selling, general and administrative 57,787 55,860 52,948
Restructuring charges (Note 8) 5,637 -- --
Depreciation and amortization 11,623 7,687 6,710
Product cost of sales -- 3,883 19,532
European hotel operations -- -- 1,133
======== ======== ========
Total operating expenses 75,047 67,430 80,323
-------- -------- --------
Operating income 92,427 94,170 85,151
-------- -------- --------
OTHER:
Interest expense (Note 10) 18,490 16,398 17,757
Interest and dividend income (Notes 5 and 7) (15,534) (17,147) (12,636)
Equity loss on Friendly Hotels (Note 5) 12,071 380 --
Loss on Sunburst Hospitality note (Note 7) 7,565 -- --
Loss (gain) on sale of investments 253 68 (2,370)
======== ======== ========
Total other 22,845 (301) 2,751
-------- -------- --------
Income before income taxes and extraordinary item 69,582 94,471 82,400
Income taxes (Note 14) 27,137 37,316 34,327
======== ======== ========
Income before extraordinary item 42,445 57,155 48,073
Gain on early extinguishment of debt (net of taxes of $4,732) -- -- 7,232
======== ======== ========
Net income $ 42,445 $ 57,155 $ 55,305
======== ======== ========
Weighted-average shares outstanding 52,895 54,859 58,717
======== ======== ========
Diluted shares outstanding 53,253 55,667 59,548
======== ======== ========
Basic EPS: (Note 17)
Income before extraordinary item $ 0.80 $ 1.04 $ 0.82
Extraordinary item -- -- 0.12
-------- -------- --------
Net income $ 0.80 $ 1.04 $ 0.94
-------- -------- --------
Diluted EPS: (Note 17)
Income before extraordinary item $ 0.80 $ 1.03 $ 0.81
Extraordinary item -- -- 0.12
-------- -------- --------
Net income $ 0.80 $ 1.03 $ 0.93
-------- -------- --------
See notes to consolidated financial statements.
CONSOLIDATED BALANCE SHEETS
Choice Hotels International, Inc. and Subsidiaries
December 31, December 31,
2000 1999
------------ ------------
(In thousands)
- -------------
ASSETS
Current assets
Cash and cash equivalents $ 19,701 $ 11,850
Receivables (net of allowance for doubtful accounts of $5,754 and
$6,691, respectively) 31,865 30,035
Income taxes receivable and other current assets (Note 14) 520 37
-------- ---------
Total current assets 52,086 41,922
Property and equipment, at cost, net (Note 2) 72,946 58,255
Goodwill, net (Note 3) 62,663 64,706
Franchise rights, net (Note 4) 39,163 43,101
Investment in Friendly Hotels (Note 5) 34,616 41,195
Advances to marketing and reservation funds (Note 6) 57,824 32,807
Other assets 27,330 40,819
Note receivable from Sunburst Hospitality (Note 7) 137,492 141,853
-------- ---------
Total assets $484,120 $ 464,658
======== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current portion of long-term debt (Note 10) $ 50,046 $ 44,646
Accounts payable 15,964 21,362
Accrued expenses (Notes 8 and 9) 27,818 21,368
Income taxes payable (Note 14) -- 1,367
======== =========
Total current liabilities 93,828 88,743
Long-term debt (Note 10) 247,179 262,710
Deferred income taxes ($39,573 and $30,648, respectively)
and other liabilities (Note 14) 53,020 47,589
-------- --------
Total liabilities 394,027 399,042
======== =========
SHAREHOLDERS' EQUITY
Common stock, $ .01 par value, 160,000,000 shares authorized;
52,561,568 and 53,833,911 shares issued and outstanding at
December 31, 2000 and 1999, respectively (Note 15) 526 538
Additional paid-in-capital 55,245 52,386
Accumulated other comprehensive (loss) income (54) 1,205
Deferred compensation (1,300) (1,937)
Treasury stock (9,102,056 and 7,527,027 shares at December 31, 2000
and 1999, respectively) (129,172) (108,294)
Retained earnings 164,848 121,718
-------- ---------
Total shareholders' equity 90,093 65,616
======== =========
Total liabilities and shareholders' equity $484,120 $ 464,658
======== =========
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Choice Hotels International, Inc. and Subsidiaries
Years ended December 31,
----------------------------------
2000 1999 1998
---------- --------- ---------
(In thousands)
- --------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 42,445 $ 57,155 $ 55,305
Reconciliation of net income to net cash provided
by operating activities:
Depreciation and amortization 12,104 8,023 7,401
Provision for bad debts (585) 588 1,473
Deferred income taxes and other 11,018 10,216 14,852
Non-cash interest and dividend income (15,170) (16,639) (12,364)
Equity loss on Friendly Hotels 12,071 380 --
Loss on early prepayment of Sunburst Hospitality note 6,520 -- --
Gain on early extinguishment of debt -- -- (11,964)
Change in assets and liabilities:
Receivables (2,245) (4,006) (4,311)
Prepaid expenses and other current assets 30 1,355 (1,849)
Current liabilities 1,714 6,086 (6,180)
Income taxes payable/receivable (278) 6,794 (3,411)
--------- -------- ---------
Net cash provided by operating activities 67,624 69,952 38,952
========= ======== =========
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in property and equipment (16,590) (30,633) (17,488)
Advances to/from marketing and reservation funds, net (14,532) (5,545) 1,512
Repayments of advances to Sunburst Hospitality -- -- 8,145
Other items, net 760 (4,765) (1,225)
--------- -------- ---------
Net cash utilized in investing activities (30,362) (40,943) (9,056)
========= ======== =========
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from mortgages and other long-term debt 85,500 88,630 194,901
Proceeds from exercise of stock options 1,736 5,136 4,919
Principal payments of debt (95,757) (59,458) (184,300)
Purchase of treasury stock (20,893) (53,166) (54,015)
Proceeds from issuance of common stock 3 7 9
--------- -------- ---------
Net cash utilized in financing activities (29,411) (18,851) (38,486)
--------- -------- ---------
Net change in cash and cash equivalents 7,851 10,158 (8,590)
Cash and cash equivalents at beginning of period 11,850 1,692 10,282
========= ======== =========
Cash and cash equivalents at end of period $ 19,701 $ 11,850 $ 1,692
========= ======== =========
Supplemental disclosure of cash flow information
Cash payments during the year for:
Interest $ 22,145 $ 19,387 $ 19,200
Income taxes 15,674 17,834 22,278
Non-cash investing activities:
Properties assumed through put/call transaction $ 12,233 -- --
Reduction in Sunburst Hospitality note from put/call transaction 16,333 -- --
========= ======== =========
See notes to consolidated financial statements.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
Choice Hotels International, Inc. and Subsidiaries
Accumulated
Other
Additional Comprehensive
(In thousands, except Common Stock Paid-in Income Deferred Treasury Comprehensive Retained
share amounts) Shares Amount Capital (Loss) Compensation Stock Income Earnings Total
- --------------------- ------ ------ ----------- ----------- ------------ -------- ------------- -------- -----
Balance as of December 31,
1997 59,828,878 $ 598 $ 47,907 $(8,316) $ -- $ (189) $ 9,258 $ 49,258
Comprehensive income
Net income -- -- -- -- -- -- $ 55,305 55,305 55,305
Other comprehensive
income
Foreign translation
adjustments -- -- -- -- -- -- 10,048 -- 10,048
Unrealized gain on
securities, net
of reclassification
adjustment (Note 16) -- -- -- -- -- -- 380 -- 380
-------
Other comprehensive
income -- -- -- 10,428 -- -- 10,428 -- --
-------
Comprehensive income $65,733
=======
Exercise of stock
options/grants, net 667,227 7 5,058 -- -- -- 5,065
Issuance of restricted
stock 160,212 2 2,272 -- (2,274) -- -- --
Amortization of deferred
compensation -- -- -- -- 609 -- -- 609
Treasury purchases (3,929,400) (39) -- -- -- (53,976) (54,015)
Purchase of MainStay brand
option from Sunburst -- -- (10,140) -- -- -- -- (10,140)
---------- ------ --------- -------- --------- -------- --------- --------- --------
Balance as of December 31,
1998 56,726,917 $ 568 $ 45,097 $ 2,112 $ (1,665) $ (54,165) $ 64,563 $ 56,510
========== ====== ========= ======== ========= ========= ========= ========= ========
Comprehensive income
Net income -- -- -- -- -- -- $ 57,155 57,155 57,155
Other comprehensive
income
Foreign translation
adjustments -- -- -- -- -- -- (108) -- (108)
Unrealized loss on
securities,
net of taxes, net of
reclassification
adjustment (Note 16) -- -- -- -- -- -- (799) -- (799)
--------
Other comprehensive
income -- -- -- (907) -- -- (907) -- --
--------
Comprehensive income $56,248
========
Exercise of stock
options/grants, net 623,647 6 6,275 -- -- -- -- 6,281
Issuance of restricted
stock 70,260 1 1,014 -- (1,015) -- -- --
Amortization of deferred
compensation -- -- -- -- 743 -- -- 743
Treasury purchases (3,586,913) (37) -- -- -- (54,129) -- (54,166)
---------- ------ --------- -------- --------- -------- --------- --------- --------
Balance as of December 31,
1999 53,833,911 $ 538 $ 52,386 $ 1,205 $ (1,937) $(108,294) $ 121,718 $ 65,616
========== ====== ========= ======== ========= ========= ========= ========= ========
Comprehensive income
Net income -- -- -- -- -- -- $ 42,445 42,445 42,445
Other comprehensive
income
Foreign translation
adjustments -- -- -- -- -- -- (1,786) -- (1,786)
Unrealized gain on
securities,
net of taxes, net of
reclassification
adjustment (Note 16) -- -- -- -- -- -- 527 -- 527
---------
Other comprehensive
income -- -- -- (1,259) -- -- (1,259) -- --
---------
Comprehensive income $ 41,186
=========
Exercise of stock
options/grants, net 288,634 3 3,362 -- -- -- 3,365
Issuance of restricted
stock 14,052 -- 182 -- (182) -- -- --
Amortization of deferred
compensation -- -- -- -- 819 -- -- 819
Treasury purchases (1,575,029) (15) -- -- -- (20,878) -- (20,893)
Liquidation of foreign
subsidiaries -- -- (685) -- -- -- 685 --
---------- ------ --------- -------- --------- -------- --------- --------- --------
Balance as of December 31,
2000 52,561,568 $ 526 $ 55,245 $ (54) $ (1,300) $(129,172) $ 164,848 $ 90,093
========== ====== ========= ======== ========= ========= ========= ========= ========
See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Choice Hotels International, Inc. and Subsidiaries
1. Company Information and Significant Accounting Policies
Company Information. Choice Hotels International, Inc. ("the Company") is in
the business of hotel franchising. As of December 31, 2000, the Company had
franchise agreements with 4,392 hotels open and 703 hotels under development in
43 countries under the following brand names: Comfort, Quality, Econo Lodge,
Sleep Inn, Clarion, Rodeway Inn, and MainStay Suites.
Principles of Consolidation and Use of Estimates. The consolidated financial
statements include the accounts of Choice Hotels International, Inc. and its
subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation. The consolidated financial statements are prepared
in conformity with accounting principles generally accepted in the United States
and require management to make certain estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from these estimates.
Cash and Cash Equivalents. The Company considers all highly liquid investments
purchased with a maturity of three months or less at the date of purchase to be
cash equivalents.
Capitalization Policies. Major renovations, replacements and interest during
construction are capitalized to appropriate property and equipment accounts.
Upon sale or retirement of property, the cost and related accumulated
depreciation are eliminated from the accounts and the related gain or loss is
taken into income. Maintenance, repairs and minor replacements are charged to
expense.
Impairment Policy. The Company evaluates the recoverability of long-lived
assets, including franchise rights and goodwill, whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability is measured based on net, undiscounted expected cash
flows. Assets are considered to be impaired if the net, undiscounted expected
cash flows are less than the carrying amount of the assets. Impairment charges
are recorded based upon the difference between the carrying value of the asset
and the expected net cash flows, discounted at an appropriate interest rate.
Deferred Financing Costs. Debt financing costs are deferred and amortized,
using the effective interest method, over the term of the related debt.
Investments. The Company accounts for its investments in common stock in
accordance with Statements of Financial Accounting Standards ("SFAS") No. 115
"Accounting for Certain Investments in Debt and Equity Securities" and SFAS No.
130 "Reporting Comprehensive Income." The Company accounts for its investment
in unincorporated joint ventures in accordance with Accounting Principles Board
Opinion ("APB") No. 18 "The Equity Method of Accounting for Investments in
Common Stock."
Revenue Recognition. The Company enters into numerous franchise agreements
committing to provide franchisees with various marketing services, a centralized
reservation system and limited rights to utilize the Company's registered
tradenames. These agreements are typically for a period of twenty years, with
certain rights to the franchisee to terminate after five, ten, or fifteen years.
In most instances, initial franchise fees are recognized upon sale because the
initial franchise fee is non-refundable and the Company has no continuing
obligations related to the franchisee. However, when
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Choice Hotels International, Inc. and Subsidiaries
franchise agreements are entered into which include future potential rebates
and/or incentive payments, the initial franchise fees are deferred and
recognized when the incentive criteria are met or the deal is terminated,
whichever occurs first. In 2000, ninety-eight franchise agreements were entered
into with incentive clauses which resulted in deferred initial franchise fee
revenue of $3.3 million. Royalty fees, primarily based on gross room revenues
of each franchisee, are recorded when earned. Reserves for uncollectible
accounts are charged to bad debt expense and are included in selling, general
and administrative expenses in the accompanying consolidated statements of
income.
The Company's franchise agreements require the payment of franchise fees
which include marketing and reservation fees. These fees, which are based on a
percentage of the franchisees' gross room revenues, are used exclusively by the
Company's marketing and reservation funds for expenses associated with providing
such franchise services as central reservation systems, national marketing and
media advertising. The Company is contractually obligated to expend the
marketing and reservation fees it collects from franchisees in accordance with
the franchise agreements; as such, no income or loss to the Company is
generated. Accordingly, marketing and reservation fees collected and associated
expenses are reported net by the Company.
The Company generates partner services revenue from hotel industry vendors
based on the level of goods or services purchased from the vendors by hotel
owners and hotel guests who stay in the Company's franchised hotels. In
accordance with Staff Accounting Bulletin No. 101, "Revenue Recognition," the
Company recognizes partner services revenues (i) upon the completion of service
or delivery of product, assuming reasonable assurance of collectibility; (ii)
upon completion of a specific event; or, failing the previous two conditions,
(iii) over the life of the contract, regardless of whether monies are received
in advance or in arrears, and regardless of whether the monies are non-
refundable.
Self-Insurance Program. The Company maintains its own health insurance program,
which includes certain levels of retained risk. Estimated costs are accrued at
present values based on actuarial projections for known and anticipated claims.
Reclassifications. Certain reclassifications have been made to the prior year
consolidated financial statements to conform to the current year presentation.
2. Property and Equipment
The components of property and equipment in the consolidated balance sheets are:
December 31,
(In thousands) 2000 1999
-------- --------
Land $ 2,593 $ 1,227
Facilities in progress 4,075 1,838
Building and improvements 29,474 18,458
Furniture, fixtures and equipment 74,812 60,629
-------- --------
110,954 82,152
Less: Accumulated depreciation (38,008) (23,897)
-------- --------
$ 72,946 $ 58,255
======== ========
Depreciation has been computed for financial reporting purposes using the
straight-line method. A summary of the ranges of estimated useful lives upon
which depreciation rates have been based follows:
Building and improvements 10-40 years
Furniture, fixtures and equipment 3-20 years
3. Goodwill
Goodwill primarily represents an allocation of the excess purchase price of the
stock of the Company over the recorded minority interest that was previously
held by members of the Company's former management team. Goodwill is amortized
on a straight-line basis over 40 years. Such amortization amounted to $2.0
million in each of the years
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Choice Hotels International, Inc. and Subsidiaries
ended December 31, 2000, 1999 and 1998, respectively. Goodwill is net of
accumulated amortization of $12.1 million and $10.1 million at December 31, 2000
and 1999, respectively.
4. Franchise Rights
Franchise rights are intangible assets and represent an allocation in purchase
accounting for the value of long-term franchise contracts. As of December 31,
2000, the net balance is associated with the Econo Lodge acquisition made in
fiscal year 1991. Franchise rights acquired are amortized over an average life
of 15 years. Amortization expense for the years ended December 31, 2000, 1999
and 1998 amounted to $3.9 million, $4.3 million and $3.8 million, respectively.
Franchise rights are net of accumulated amortization of $26.9 million and $23.0
million at December 31, 2000 and 1999, respectively.
The Company periodically assesses the amortization lives of its franchise
rights. Effective January 1, 1998, the Company changed its estimate of the
useful life of Econo Lodge franchise rights to a 17 year period and Rodeway
franchise rights to a 3 year period to more closely match the remaining
estimated contract lives of franchise contracts acquired in 1991.
5. Investment in Friendly
As of December 31, 2000, the Company had 1,083,333 shares of common stock
and 23,624,742 shares of 5.75% convertible preferred stock in Friendly Hotels
plc ("Friendly"), the Company's master franchisor for the United Kingdom,
Ireland and continental Europe. The preferred shares were convertible for one
new Friendly common share for every 150p nominal of the preferred convertible
shares.
The Company has the right to appoint three directors to the board of
Friendly. Given the Company's ability to exercise significant influence over the
operations of Friendly, the equity method of accounting is applied.
Friendly holds the master franchise rights for the Company's Comfort,
Quality and Clarion brand hotels in the United Kingdom, Ireland and throughout
Europe (with the exception of Scandinavia) for a 10-year period. In exchange,
the Company received Friendly common stock and was to receive from Friendly,
$8.0 million payable in eight equal annual installments.
On December 21, 2000, Friendly announced a comprehensive restructuring
program to strengthen its balance sheet and improve its operations. Elements of
the restructuring program include a revaluation of its real estate portfolio,
disposal of non-core assets, renegotiations of certain commercial arrangements
with the Company, and a future strategy focused on growth of its franchising
business. To improve Friendly's competitive position in Europe, the Company has
agreed to forgive and waive certain royalty fees due over the next five years,
waive the five remaining annual installments of the master franchise agreement
and to provide Friendly with a letter of credit in an amount up to (Pounds)7.8
million (approximately US $11.4 million) to guarantee additional credit
facilities from Friendly's banks. The Company's letter of credit will be secured
by substantially all of Friendly's assets in France and Germany, valued in
excess of (Pounds)8.2 million (approximately US $12.0 million). In consideration
for this support, Friendly will reduce the conversion rate from 150p for each of
Choice's convertible preferred shares to 60p for each convertible preferred
share. Other modifications to the Company's convertible preferred shares will
include a change in the dividend rate from 5.75% (payable in cash) to 2% per
annum, if payable in additional convertible preferred shares. Friendly may
alternatively elect to pay cash dividends at the rate of 3.5% per annum up until
January 30, 2013 and thereafter at the rate of 5.75%. In addition, accrued
dividends due to the Company as of February 7, 2001 will be converted to
additional convertible preferred shares of Friendly. The effect of this change
in conversion price together with the conversion of dividend arrearage to
additional convertible preferred shares of Friendly is
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Choice Hotels International, Inc. and Subsidiaries
to increase the Company's fully diluted ownership in Friendly from the current
level of 44% to approximately 69%. Friendly will be granted an option to settle
the deferred consideration of $4.0 million pursuant to a January, 1998
transaction, in additional convertible preferred shares. In the event that
Friendly settles this obligation before maturity, the amount payable shall be
discounted at a rate of 10% per annum. Due to the restructuring program, the
Company has recorded an equity loss on Friendly of $12.1 million in accordance
with Emerging Issues Task Force ("EITF") No. 99-10, "Percentage Used to
Determine the Amount of Equity Method Losses." Going forward, the EITF No. 99-10
requires the Company to recognize changes in Friendly's hypothetical liquidated
book value as an equity adjustment to the Company's recorded investment.
Since the closing of the restructuring transaction in January 2001, the
Company continues to closely monitor its strategic options with respect to its
investment in Friendly. In the event that Friendly's financial condition
deteriorates, there may not be sufficient cash from operations and available
credit lines to fund the business. In the event that Friendly cannot secure
additional borrowings or equity, the Company will consider its strategic and
financial options, including, but not limited to i) stand-aside to additional
funding requirements which would likely result in the insolvency of Friendly, a
further or complete write-down of the Company's investment in Friendly and the
Company taking back its franchising rights for the United Kingdom, Ireland and
continental Europe, or ii) conversion of its convertible preferred shares into
ordinary common stock resulting in control of and full consolidation of
Friendly.
The Company recognized $2.2 million and $2.1 million in preferred dividend
income from the Friendly investment for the years ended December 31, 1999 and
1998, respectively. As of December 31, 1999 and 1998, accrued but unpaid
preferred dividends were $5.8 million and $3.7 million, respectively. The
Company also recognized $1.1 million, $2.2 million and $1.4 million in royalty
revenue from Friendly for the years ended December 31, 2000, 1999 and 1998,
respectively.
The Company owned approximately 5.4%, 5.3% and 5.2% of Friendly's
outstanding ordinary shares at December 31, 2000, 1999, and 1998, respectively.
The fair market value of the ordinary shares at December 31, 2000, 1999 and 1998
was $0.7 million, $2.0 million and $1.9 million, respectively.
Summarized unaudited balance sheet data for Friendly is as follows:
Unaudited
December 31,
------------------
(In thousands) 2000 1999
-------- --------
Current assets $ 27,298 $ 33,557
Non-current assets 138,679 193,299
Current liabilities 70,541 55,441
Non-current liabilities 60,820 89,776
Redeemable preferred stock 23,115 37,800
shareholders' equity 34,616 81,639
Summarized unaudited income statement data for Friendly is as follows:
Unaudited
December 31,
------------------------------
(In thousands) 2000 1999 1998
------ ------ ------
Net revenues $138,135 $150,332 $130,028
Gross profit 76,032 84,852 73,447
Income from continuing operations (40,193) (8,584) 12,778
Net (loss) income after preferred dividends (50,640) (31,424) 18,984
6. Advances to Marketing and Reservation Funds
The total marketing and reservation fees received by the Company for the years
ended December 31, 2000, 1999 and 1998 amounted to $162.4 million, $146.0
million and $127.4 million, respectively. Depreciation and amortization
incurred by the marketing and reservation funds for the years ended December 31,
2000, 1999 and 1998 amounted to $10.5 million, $9.6 million and $6.2 million,
respectively. Interest expense incurred by the reservation fund was $4.8
million, $3.3 million and $1.8 million for the years ended December 31, 2000,
1999 and 1998, respectively. Under the terms of the franchise agreements,
reservation fees and marketing fees not expended in the current year are carried
over to the next fiscal year and expended in accordance with the
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Choice Hotels International, Inc. and Subsidiaries
franchise agreements. Shortfall amounts are similarly recovered in subsequent
years. Excess or shortfall amounts from the operation of these programs are
recorded as a payable or receivable, respectively, from the particular fund.
As of December 31, 2000 and 1999, the Company's consolidated balance sheet
includes advances to marketing and reservation funds of $57.8 million
(marketing $24.9 million and reservation $32.9 million) and $32.8 million
(marketing $12.5 million and reservation $20.3 million), respectively. The
Company has the ability under the existing franchise agreements and expects to
recover the remaining receivables through future marketing and reservation fees.
7. Transactions with Sunburst
Effective October 15, 1997, Choice Hotels International, Inc. ("CHI"), which at
that point included both the franchising business and owned hotel business,
separated the businesses via spin-off of the Company (the "Sunburst
Distribution"). CHI changed its name to Sunburst Hospitality Corporation
(referred to hereafter as "Sunburst"). As part of the spin-off, Sunburst and
the Company entered into a strategic alliance agreement, which was amended in
December 1998 and September 2000. Among other things, the strategic alliance
agreement provides for (i) certain commitments by Sunburst for the development
of MainStay Suites hotels; (ii) special procedures associated with liquidated
damages; and (iii) predetermined franchise fee credits based on operating
performance. The amended strategic alliance agreement extends through October
15, 2002 as it relates to development commitments. Liquidated damage and
franchise fee credit provisions extend through the life of existing franchise
agreements.
In connection with the spin-off, the Company borrowed $115 million under
its Credit Facility (as defined in Note 10) in order to fund a subordinated term
note to Sunburst (the "Note"). The Note of $115 million accrues interest monthly
at an initial simple rate of 11% per annum through October 14, 2000. In
connection with an amendment of the strategic agreement discussed above,
effective October 15, 2000, interest shall accrue at a rate of 11% per annum
compounded daily. On January 1, 1999, the Company began recognizing interest on
the outstanding principal and accrued interest amounts at an effective rate of
10.58%. The Note is payable in full, along with accrued interest, on October 15,
2002. Total interest accrued as of December 31, 2000 and 1999 was $42.2 million
and $27.0 million, respectively.
On September 1, 2000, Sunburst transferred title to three MainStay
properties under a put/call agreement entered into between the Company and
Sunburst in March 2000. The properties were received by the Company as
consideration for $16.3 million of the then $149 million amount due under the
Note. The fair market value of the MainStay properties was approximately $12.2
million. Accordingly, the Company recognized a $4.1 million pre-tax loss on the
Note.
On September 20, 2000, the Company and Sunburst reached agreement on the
terms of a proposed restructuring of the then existing $136 million Note. Under
the terms of the agreement, the Company would receive cash and a newly issued 11
3/8% seven-year subordinated note. On January 5, 2001, the Company received
$101.9 million, a parcel of land valued at approximately $1.5 million and a $35
million seven-year senior subordinated note bearing interest at 11 3/8% in
settlement of the balance of the Note. In 2000, the Company recognized a pre-tax
loss of $3.5 million resulting from this transaction.
During the periods presented, Sunburst operated substantially all of its
hotels pursuant to franchise agreements with the Company. Total fees paid to the
Company included in the accompanying consolidated financial statements for
franchising royalty, marketing and reservation fees were $10.3 million, $9.1
million and $11.2 million for the years ended December 31, 2000, 1999 and 1998,
respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Choice Hotels International, Inc. and Subsidiaries
In accordance with the spin-off, the Company agreed to assume and pay certain
liabilities of Sunburst, subject to the Company maintaining a minimum net worth
of $40 million, at the date of the Sunburst Distribution. As of December 31,
1997, the Company reflected a $25 million receivable due from Sunburst on the
consolidated balance sheet. In 1998, net payments of approximately $8 million
were collected from Sunburst in cash. In December 1998, the Company and Sunburst
amended the strategic alliance agreement entered into in connection with the
Sunburst Distribution. As part of that amendment, the Company exchanged the
remaining $17 million balance in return for, among other things, the exclusive
rights to the MainStay Suites brand from Sunburst. The $17 million, net of
income taxes of approximately $7 million, was recorded as an adjustment to
additional paid-in-capital as it represents an adjustment to the accounting for
the Sunburst Distribution.
8. Restructuring Program
During 2000, the Company recognized $5.6 million in restructuring charges. The
restructuring charges include $4.7 million that relates to reorganizing the
Company's operations in order to improve service and support to the Company's
franchisees. Of this $4.7 million, $4.1 million relates to severance and
termination benefits for 176 employees (consisting of property and yield
management system installers, reservation agents and field service
administrative support) and $0.6 million relates to the cancellation of pre-
existing contracts for termination of international leases. The remaining $0.9
million of the $5.6 million is due to the termination of an in-room internet
initiative launched in 1999.
As of December 31, 2000, $0.5 million has been paid related to severance
and termination benefits. The Company expects the remaining $5.1 million
restructuring liability to be paid in 2001.
9. Accrued Expenses
Accrued expenses consisted of the following as of December 31:
(In thousands) 2000 1999
------ ------
Accrued salaries and benefits $13,027 $12,813
Accrued interest 2,606 1,996
Accrued restructuring 5,100 --
Other 7,085 6,559
------- -------
Total $27,818 $21,368
------- -------
10. Long-Term Debt
As of December 31, debt consisted of the following:
(In thousands) 2000 1999
------ ------
$300 million competitive advance
and multi-currency revolving credit
facility with an average rate of
7.31% and 6.81% at December
31, 2000 and 1999, respectively $189,000 $194,500
$100 million senior note offering
with an average rate of 7.22% at
December 31, 2000 and 1999, respectively 99,382 99,382
$15 million line of credit with an average rate
of 7.53% and 6.90% at December 31, 2000
and 1999, respectively 7,400 12,000
Other notes with an average rate
of 6.42% and 5.90% at December
31, 2000 and 1999, respectively 1,443 1,474
======== ========
Total debt $297,225 $307,356
======== ========
Maturities of debt as of December 31, 2000 were as follows:
Year (In thousands)
---- --------------
2001 $ 50,046
2002 146,646
2003 146
2004 146
2005 146
Thereafter 100,095
--------
Total $297,225
========
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Choice Hotels International, Inc. and Subsidiaries
On October 15, 1997, the Company entered into a $300 million competitive
advance and multi-currency revolving credit facility (the "Credit Facility")
provided by a group of 13 banks. The Credit Facility provides for a term loan of
$150 million and a revolving credit facility of $150 million, $50 million of
which is available for borrowings in foreign currencies. The Credit Facility
includes customary financial and other covenants that require the maintenance of
certain ratios including maximum leverage and interest coverage and restricts
the Company's ability to make certain investments, incur debt and dispose of
assets. The term loan ($80 million of which is outstanding at December 31, 2000)
is payable over five years, $42.5 million of which is due in 2001. Borrowings
under the Credit Facility are, at the option of the borrower, at one of several
rates including LIBOR plus 20.0 to 87.5 basis points, based upon a defined
financial ratio and the loan type. In addition, the Company has the option to
request participating banks to bid on loan participation at lower rates than
those contractually provided by the Credit Facility. The Credit Facility
requires the Company to pay annual fees of 1/10 of 1% to 1/3 of 1%, based upon a
defined financial ratio of the total loan commitment. The Credit Facility will
terminate on October 15, 2002.
On May 1, 1998, the Company issued $100 million of senior unsecured notes
(the "Senior Notes") at a discount of $0.6 million, bearing a coupon rate of
7.13% with an effective rate of 7.22%. The Senior Notes will mature on May 1,
2008, with interest on the Senior Notes to be paid semi-annually. The Company
used the net proceeds from the offering of approximately $99 million to repay
amounts outstanding under the Company's Credit Facility.
During June 2000, the Company renewed its revolving line of credit for $15
million. Borrowings on the line of credit are used to finance short-term
working capital requirements and other short-term general corporate goals. The
line of credit is due to expire on May 31, 2001 and bears interest at LIBOR plus
75 basis points. Interest accrues monthly on the outstanding balance. The line
of credit contains essentially the same covenants as the Credit Facility and is
prepayable without penalty.
11. Interest Rate Hedges
On December 3, 1999, the Company entered into an interest rate swap agreement
with a notional amount of $115 million to fix certain of its variable rate debt
in order to reduce the Company's exposure to fluctuations in interest rates.
The interest rate differential to be paid or received on the interest rate swap
agreement is accrued as interest rates change and is recognized as an adjustment
to interest expense. On average at December 31, 1999, the interest rate swap
agreement had a life of two months with a fixed rate of 5.85% and variable rate
of 6.12%, and a fair market valuation of approximately $0.1 million. On March
3, 2000, the interest rate swap agreement was settled for approximately $0.1
million.
12. Foreign Operations
The Company accounts for foreign currency translation in accordance with SFAS
No. 52, "Foreign Currency Translation." Revenues generated by foreign operations
for the years ended December 31, 2000, 1999 and 1998 were $5.3 million, $6.9
million (exclusive of $2.5 million of foreign dividends) and $5.8 million
(exclusive of $2.1 million of foreign dividends), respectively. The Company's
foreign operations had net income (loss) of $(12.3 million), $1.0 million and
$0.0 million for the years ended December 31, 2000, 1999 and 1998, respectively.
13. Pension, Profit Sharing, and Incentive Plans
Bonuses accrued for key executives of the Company under incentive compensation
plans were $1.1 million and $1.0 million at December 31, 2000 and 1999,
respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Choice Hotels International, Inc. and Subsidiaries
During 2000, 1999 and 1998, employees of the Company participated in 401(k)
retirement plans sponsored by the Company. For the years ended December 31,
2000, 1999 and 1998, the Company recorded compensation expense of $1.6 million,
$1.3 million and $1.2 million, respectively, related to the plans.
14. Income Taxes
Income before income taxes were derived from the following:
Years ended December 31,
-------------------------------
(In thousands) 2000 1999 1998
------ ------ ------
Income before income taxes and extraordinary item:
Domestic operations $ 80,982 $92,058 $82,400
Foreign operations (11,400) 2,413 --
-------- -------- --------
Income before income taxes and extraordinary item $ 69,582 $94,471 $82,400
======== ======= =======
The provisions for income taxes follow:
Years ended December 31,
-------------------------------
(In thousands) 2000 1999 1998
------ ------ ------
Current tax expense
Federal $20,707 $22,038 $15,918
State 2,434 2,723 3,482
Foreign 886 1,422 2
Deferred tax (benefit) expense
Federal 3,598 10,515 12,420
State (481) 618 2,505
Foreign (7) -- --
-------- -------- --------
$27,137 $37,316 $34,327
-------- -------- --------
Deferred tax assets (liabilities) are comprised of the following:
December 31,
(In thousands) 2000 1999
------ ------
Depreciation and
amortization $(21,663) $(16,582)
Prepaid expenses (21,247) (17,542)
Other (6,606) (6,175)
-------- --------
Gross deferred tax liabilities (49,516) (40,299)
-------- --------
Foreign operations 4,352 223
Accrued expenses 6,496 9,112
Net operating losses -- 99
Other 1,976 3,979
-------- --------
Gross deferred tax assets 12,824 13,413
-------- --------
Net deferred tax liability $(36,692) $(26,886)
-------- --------
No provision has been made for U.S. federal deferred income taxes on
approximately $4 million of accumulated and undistributed earnings of foreign
subsidiaries at December 31, 2000, since these earnings are considered to be
permanently invested in foreign operations.
A reconciliation of income tax expense at the statutory rate to income tax
expense included in the accompanying consolidated statements of income follows:
Years ended December 31,
-------------------------------
(In thousands, except Federal income tax rate) 2000 1999 1998
------ ------ ------
Federal income tax rate 35% 35% 35%
Federal taxes at statutory rate $24,354 $33,065 $28,856
State income taxes, net of federal tax benefit 1,269 2,172 3,892
Other 1,514 2,079 1,579
------- ------- -------
Income tax expense $27,137 $37,316 $34,327
======= ======= =======
Cash paid for income taxes was $15.7 million, $17.8 million and $22.3
million for the years ended December 31, 2000, 1999 and 1998, respectively.
15. Capital Stock
In 2000, the Company granted key employees and non-employee directors 14,052
restricted shares of common stock with a value of $0.2 million on the grant
date. The shares vest over a three year period. In 1999, the Company granted
key employees and
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Choice Hotels International, Inc. and Subsidiaries
non-employee directors 70,260 restricted shares of common stock with a value of
$1.0 million on the grant date. The shares vest over a three to five year
period with 11,016 shares of the restricted stock vesting over a three year
period, 32,180 shares vesting over a four year period and 27,064 shares vesting
over a five year period. A total of 18,000 shares of restricted stock were
forfeited in 2000 and 1999.
On February 19, 1998, the Board of Directors adopted a shareholder rights
plan under which a dividend of one preferred stock purchase right was
distributed for each outstanding share of the Company's common stock to
shareholders of record on April 3, 1998. Each right will entitle the holder to
buy 1/100th of a share of a newly issued series of a junior participating
preferred stock of the Company at an exercise price of $75 per share. The rights
will be exercisable, subject to certain exceptions, 10 days after a person or a
group acquires beneficial ownership of 10% or more of the Company's common
stock. Shares owned by a person or group on February 19, 1998, and held
continuously thereafter are exempt for purposes of determining beneficial
ownership under the rights plan. The rights will be non-voting and will expire
on January 31, 2008, unless exercised or previously redeemed by the Company for
$.001 each. If the Company is involved in a merger or certain other business
combinations not approved by the Board of Directors, each right will entitle its
holder, other than the acquiring person or group, to purchase common stock of
either the Company or the acquiror or having a value of twice the exercise price
of the right.
The Company has stock option plans for which it is authorized to grant
options to purchase up to 9.0 million shares of the Company's common stock, of
which 2.0 million shares remain available for grant. Stock options may be
granted to officers, key employees and non-employee directors with an exercise
price not less than the fair market value of the common stock on the date of
grant.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Choice Hotels International, Inc. and Subsidiaries
A summary of the option activity under the above plans is as follows as of
December 31, 2000, 1999 and 1998:
2000 1999 1998
--------------------------- ------------------------ -------------------------
Fixed Options Shares Weighted-Option Shares Weighted-Option Shares Weighted-Option
Price Price Price
Outstanding at beginning of year 3,907,326 $ 11.19 3,969,309 $ 10.13 4,167,045 $8.62
Granted 1,187,845 15.71 732,372 13.19 933,263 13.37
Exercised (288,634) 7.22 (695,228) 7.06 (738,318) 4.75
Cancelled (499,953) 15.10 (99,127) 12.85 (392,681) 11.88
========= ========= ========= ========== ========= =========
Outstanding at end of year 4,306,584 $ 12.39 3,907,326 $ 11.19 3,969,309 $ 10.31
========= ========= ========= ========== ========= =========
Options exercisable at year end 2,035,332 1,727,748 1,813,541
Weighted-average fair value of
options granted during the year $ 3.78 $ 6.20 $ 7.81
The following table summarizes information about stock options outstanding at
December 31, 2000:
Options Outstanding Options Exercisable
-------------------------------------------------------------------------------------------------------
Range of Number Weighted-Average Weighted-Average Number Exercisable at Weighted-Average
Exercise Prices Outstanding at Remaining Exercise Price 12/31/00 Exercise Price
12/31/00 Contractual Life
- -------------------- -------------- -------------------- ------------------- --------------------- -------------------
$ 3.01 to 5.00 309,635 1.0 years $ 4.52 309,637 $ 4.52
5.00 to 9.00 395,932 3.9 years 7.19 285,772 6.96
9.00 to 13.00 1,931,593 7.3 years 12.06 1,021,832 11.83
13.00 to 17.65 1,669,424 8.8 years 15.45 418,091 14.08
-------------- -------------------- ------------------- --------------------- -------------------
4,306,584 2,035,332
-------------- -------------------- ------------------- --------------------- -------------------
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Choice Hotels International, Inc. and Subsidiaries
SFAS No. 123, "Accounting for Stock-Based Compensation," requires companies
to provide additional note disclosures about employee stock-based compensation
plans based on a fair value based method of accounting. As permitted by this
accounting standard, the Company continues to account for these plans under APB
Opinion 25.
For purposes of the pro forma disclosure, compensation cost for the
Company's stock option plan was determined based on the fair value at the grant
dates for awards under those plans consistent with the method of SFAS No. 123.
The fair value of each option grant has been estimated on the date of grant
using an option-pricing model with the following weighted-average assumptions
used for grants in 2000, 1999 and 1998:
2000 1999 1998
------ ------ ------
Risk-free interest rate 5.10% 6.45% 4.70%
Volatility 56.6% 38.0% 36.7%
Expected lives 10 years 10 years 10 years
Dividend yield 0% 0% 0%
If options had been reported as compensation expense based on their fair
value, pro forma net income would have been $41.8 million, $56.4 million and
$54.0 million for the years ended December 31, 2000, 1999 and 1998,
respectively, and pro forma earnings per share would have been $0.79, $1.01 and
$0.90, respectively.
16. Comprehensive Income
The components of total accumulated other comprehensive income are as follows:
December 31,
--------------------------------
(In thousands) 2000 1999 1998
------- ------- -------
Unrealized gains (losses) on available-for-sale securities $ 108 $ (419) $ 380
Foreign currency translation adjustments (162) 1,624 1,732
------- ------- -------
Total accumulated other comprehensive income (loss) $ (54) $ 1,205 $ 2,112
======= ======= =======
The related income tax effect allocated to each component of other
comprehensive income (loss) is as follows:
Amount Income Tax Amount Net
Before Taxes (Expense) of Taxes
(In thousands) /Benefit
------------- ----------- ----------
Calendar year 2000
Net unrealized gains $ 844 $ (317) $ 527
Foreign currency translation adjustment, net (1,786) -- (1,786)
--------- ------- -------
Total other comprehensive (loss) $ (942) $ (317) $(1,259)
========= ======= =======
Calendar year 1999
Net unrealized losses $(1,024) $ 225 $ (799)
Foreign currency translation adjustment, net (108) -- (108)
--------- ------- -------
Total other comprehensive (loss) $(1,132) $ 225 $ (907)
========= ======= =======
Calendar year 1998
Net unrealized gains $ 585 $ (205) $ 380
Foreign currency translation adjustment, net 10,048 -- 10,048
--------- ------- -------
Total other comprehensive income $10,633 $ (205) $10,428
========= ======= =======
Below represents the detail of other comprehensive income:
2000 1999 1998
------ ------ ------
Foreign currency translation adjustments $ (291) $ (108) $ 1,916
Plus: reclassification of loss on liquidation
of foreign subsidiaries (1,495) -- 8,132
------ ------ -------
Net foreign currency translation adjustments (1,786) (108) 10,048
====== ====== =======
Unrealized holding gains (losses) arising during
the period, net (176) 601 380
Less: reclassification adjustments for gains
(losses) included in net income 703 (1,400) --
------ ------ -------
Net unrealized holding gains (losses) arising
during the period $ 527 $ (799) $ 380
====== ====== =======
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Choice Hotels International, Inc. and Subsidiaries
17. Earnings Per Share
The following table illustrates the reconciliation of the earnings and number of
shares used in the basic and diluted earnings per share calculations.
Years Ended December 31,
(In millions, except ------------------------
per share amounts) 2000 1999
------ ------
Computation of Basic Earnings Per Share:
Net income $42.4 $57.2
----- -----
Weighted-average shares outstanding 52.9 54.9
----- -----
Basic earnings per share $0.80 $1.04
===== =====
Computation of Diluted Earnings Per Share:
Net income for diluted earnings per share $42.4 $57.2
Weighted-average shares outstanding 52.9 54.9
Effect of Dilutive Securities:
Employee stock option plan 0.4 0.8
----- -----
Shares for diluted earnings per share 53.3 55.7
----- -----
Diluted earning per share $0.80 $1.03
===== =====
The effect of dilutive securities is computed using the treasury stock
method and average market prices during the period. In 2000 and 1999, the
Company excluded 2,725,696 and 206,031, respectively, anti-dilutive options from
the computation of diluted earnings per share.
18. Leases
Rental expense under non-cancelable operating leases was approximately $5.1
million, $3.9 million and $1.7 million for the years ended December 31, 2000,
1999 and 1998, respectively. The Company paid office rent of $51,662 and
$977,500 to Sunburst for the years ended December 31, 1999 and 1998,
respectively, based on the portion of total space occupied by the Company.
Future minimum lease payments are as follows:
Year (In thousands)
2001 $ 3,281
2002 3,255
2003 3,242
2004 3,331
2005 3,422
Thereafter 27,126
-------
Total $43,657
=======
During 1998, the Company recorded an extraordinary gain for the early
extinguishment of debt associated with a capitalized lease obligation. The
Company retired $13.7 million in debt and removed related assets of $1.8 million
from the consolidated balance sheets. Accordingly, an extraordinary gain of
$7.2 million was recognized, after income tax expense of $4.7 million, or $0.12
per diluted share.
19. Reportable Segment Information
The Company has a single reportable segment encompassing its franchising
business. Franchising revenues are comprised of royalty fees, initial franchise
and relicensing fees, and partner services revenue and other. Marketing and
reservation fees and expenses are excluded from reportable segment information
as such fees and associated expenses are reported net. Corporate and other
revenue consists of the operations of three MainStay hotels, product sales and
European hotel operations. The Company does not allocate interest income,
interest expense or income taxes to its franchising segment.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Choice Hotels International, Inc. and Subsidiaries
The following table presents the financial information for the Company's
franchising segment:
Year ended December 31, 2000
Franchising Corporate and Other Consolidated
------------------------------------------------
Revenues $166,222 $ 1,252 $167,474
Operating income (loss) 136,985 (44,558) 92,427
Depreciation and amortization 100 11,523 11,623
Capital expenditures 8,665 7,925 16,590
Total assets 251,586 232,534 484,120
Year ended December 31, 1999
Franchising Corporate and Other Consolidated
--------------------------------------------
Revenues $157,729 $ 3,871 $161,600
Operating income (loss) 124,293 (30,123) 94,170
Depreciation and amortization 730 6,957 7,687
Capital expenditures 16,515 14,118 30,633
Total assets 248,028 216,630 464,658
Year ended December 31, 1998
Franchising Corporate and Other Consolidated
---------------------------------------------
Revenues $143,628 $ 21,846 $165,474
Operating income (loss) 113,175 (28,024) 85,151
Depreciation and amortization 221 6,489 6,710
Capital expenditures 15,500 1,988 17,488
Total assets 208,096 190,129 398,225
The Company's international operations had revenues of $5.3 million, $6.9
million and $5.8 million for the years ended December 31, 2000, 1999 and 1998,
respectively. Long-lived assets related to international operations were $10.9
million and $20.7 million as of December 31, 2000 and 1999, respectively. All
other long-lived assets of the Company are associated with domestic activities.
In addition, the Company had a $34.6 million and $41.2 million investment in
Friendly as of December 31, 2000 and 1999, respectively.
20. Commitments and Contingencies
The Company is a defendant in a number of lawsuits arising in the ordinary
course of business. In the opinion of management and general counsel to the
Company, the ultimate outcome of such litigation will not have a material
adverse effect on the Company's business, financial position, results of
operations or cash flows.
In January 2001, the Company provided Friendly, in association with
Friendly's restructuring (see Note 5 to Consolidated Financial Statements), with
a letter of credit in an amount up to (Pounds)7.8 million (approximately US
$11.4 million) to guarantee additional credit facilities from Friendly's banks.
From time to time, the Company establishes programs or helps franchisees
obtain financing. One of the past programs was a "Construction to Permanent
Financing" program under which Salomon Smith Barney together with Suburban
Capital Markets, Inc. offered $100 million in financing per year to qualified
franchises and the Company guaranteed such loans with a maximum guarantee amount
of $10 million. At December 31, 2000 and 1999, loans outstanding under this
program were $6.0 million and $14.3 million, respectively, and the Company's
guarantee covered $3.0 million and $7.2 million, respectively, of these loans.
In 2001, the $6.0 million loan was settled, removing the Company's open
guarantee of $3.0 million.
21. Fair Value of Financial Instruments
The balance sheet carrying amount of cash and cash equivalents and receivables
approximate fair value due to the short-term nature of these items. Long-term
debt consists of bank loans and senior notes. Interest rates on bank loans
adjust frequently based on current market rates; accordingly, the carrying
amount of bank loans is equivalent to fair value.
The Note from Sunburst has an approximate fair value of $139.4 million and
$135.0 million at December 31, 2000 and 1999, respectively, based on its
current yield to maturity. The $100 million unsecured senior notes have an
approximate fair value at
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Choice Hotels International, Inc. and Subsidiaries
December 31, 2000 and 1999 of $97.9 million and $93.9 million, respectively,
based on their current yield to maturity.
22. Impact of Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board (Board) issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," which
established accounting and reporting standards for derivative instruments,
including derivative instruments embedded in other contracts, and for hedging
activities. SFAS No. 133 requires the recognition of the fair value of
derivatives in the statement of financial position, with changes in the fair
value recognized either in earnings or as a component of other comprehensive
income dependent upon the hedging nature of the derivative. In June 1999, the
Board issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities--Deferral of the Effective Date of FASB Statement No. 133," which
deferred the effective date of SFAS No. 133 until fiscal years beginning after
June 15, 2000. SFAS No. 133 does not have a material impact on the Company's
earnings or other comprehensive income.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition," which requires
revenues to be recognized when realized and earned. Revenue is generally
realized and earned when all of the following criteria are met: (i) persuasive
evidence of an arrangement exists; (ii) delivery has occurred or services have
been rendered; (iii) the selling price must be fixed or determinable; and, (iv)
collectibility is reasonably assured. The Company implemented SAB No. 101 in
2000.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Choice Hotels International, Inc. and Subsidiaries
23. Selected Quarterly Financial Data -- (Unaudited)
(In thousands, except per share data)
Total
2000 First Second Third Fourth Year
- ---- ----- ------ ----- ------ -----
Revenue $31,647 $41,165 $50,113 $44,549 $167,474
Operating income 16,916 24,041 32,797 18,673 92,427
Income before income taxes 14,439 19,079 31,921 4,143 69,582
Net income 8,808 11,638 19,472 2,527 42,445
Per basic share:
Net income $ 0.16 $ 0.22 $ 0.37 $ 0.05 $ 0.80
Per diluted share:
Net income $ 0.16 $ 0.22 $ 0.37 $ 0.05 $ 0.80
Total
1999 First Second Third Fourth Year
- ---- ----- ------ ----- ------ -----
Revenues $30,805 $39,763 $48,016 $43,016 $161,600
Operating income 16,250 24,282 30,290 23,348 94,170
Income before income taxes 17,272 24,280 30,381 22,538 94,471
Net income 10,277 14,531 18,338 14,009 57,155
Per basic share:
Net income $ 0.18 $ 0.26 $ 0.34 $ 0.26 $ 1.04
Per diluted share:
Net income $ 0.18 $ 0.26 $ 0.33 $ 0.26 $ 1.03
CHOICE ENHANCES DIVERSITY PROGRAMS
Choice has embarked on an aggressive drive to recruit new minority franchisees,
with special emphasis on African-Americans.
Indicative of the types of franchisees the company seeks are James and
Saundra Roath of Marco Island, Florida, who are building a Quality Inn & Suites
hotel in nearby Naples, and Sandra Spears of Detroit, who is developing a
Quality Suites hotel in Pontiac, Michigan. James Roath was one of the first
African-American franchisees for McDonald's and founded Perfection Industrial
Distributors, one of the largest black-owned services companies in America.
A former high school and college track star from Pontiac, Sandra Spears is
the first black woman to become a Choice franchisee. She founded Spears Global
Marketing, a sales consulting firm, and has been active as a member of the
Michigan Minority Business Development Council.
The company has increased its presence at such conventions as the annual
meeting of the NAACP, the Black Enterprise Conference and regional trade shows
aimed at promoting minority franchising. In addition, Choice has started a
program of seminars on franchising for minority entrepreneurs at The Learning
Center in its Silver Spring headquarters complex. Assisting in the program,
entitled "Exploring the Potential of Franchising," are the U.S. Chamber of
Commerce, the International Association of Black Hotel Owners & Developers, and
the U.S. Department of Commerce Minority Business Development Agency.
Board of Directors and Corporate Officers
Choice Hotels International, Inc. and Subsidiaries
BOARD OF DIRECTORS
Stewart Bainum, Jr.
Chairman of the Board:
HCR Manor Care Inc.
Sunburst Hospitality Corporation
Barbara Bainum
Vice Chairman:
Commonweal Foundation
Realty Investment Company, Inc.
William L. Jews
President and Chief Executive Officer:
CareFirst BlueCross BlueShield
Director:
Ecolab, Inc.
MBNA
Ryland Group, Inc.
Charles A. Ledsinger, Jr.
President and Chief Executive Officer:
Choice Hotels International, Inc.
Director:
FelCor Lodging Trust, Inc.
Friendly's Ice Cream Corporation
TBC Corporation
Lawrence R. Levitan
Chairman:
IRS Oversight Board
Retired Managing Partner:
Andersen Consulting's
Worldwide Communications Industry Group
Gerald W. Petitt*
President and Chief Executive Officer:
Creative Hotel Associates LLC
*Mr. Petitt will retire from the Board at the May 2001 Annual Meeting.
Jerry E. Robertson, Ph.D.
Retired Executive Vice President:
3M Life Sciences Sector and Corporate Services
Director:
Coherent Inc,
Steris Corp.
Raymond E. Schultz
Chairman
RES Investments, L.L.C.
Director:
Equity Inns, Inc.
TBC Corporation
CORPORATE EXECUTIVE OFFICERS
Stewart Bainum, Jr.
Chairman of the Board
Charles A. Ledsinger, Jr.
President and Chief Executive Officer
Steven T. Schultz
Executive Vice President, Domestic Hotels
Michael J. DeSantis
Senior Vice President, General Counsel and Secretary
Bruce N. Haase
Senior Vice President, International
Thomas Mirgon
Senior Vice President, Administration
Daniel Rothfeld
Senior Vice President,
E-commerce and Emerging Business Opportunities
Joseph M. Squeri
Senior Vice President,
Chief Financial Officer and Treasurer
Gary Thomson
Senior Vice President and Chief Information Officer
Wayne W. Wielgus
Senior Vice President, Marketing
CORPORATE OFFICERS
Don Brockway
Vice President, Reservations Operations
Gregory A. Bublitz
Vice President, Finance and Controller
Brendan M. Ebbs
Senior Vice President, Franchise Operations
Janna Morrison
Vice President, Property Systems
Kevin M. Rooney
Associate General Counsel and Assistant Secretary
William Weatherford
Senior Vice President, Franchise Operations
BOARD OF DIRECTORS AND CORPORATE OFFICERS
MARKET AREA VICE PRESIDENTS
Brendan M. Ebbs
Senior Vice President, Franchise Operations
North Market Area
Brent Russell
Vice President, Franchise Operations
West Market Area
William Weatherford
Senior Vice President, Franchise Operations
South Market Area
BRAND MANAGEMENT
Thomas Hall
Vice President and Brand Manager
Emerging Brands
Peter Jordan
Vice President and Brand Manager
Core Brands
Tim Shuy
Vice President and Brand Manager
Economy Brands
Corporate Information
Stock Listing
Choice Hotels International common stock trades on
the New York Stock Exchange under the ticker symbol CHH.
Transfer Agent & Registrar
Mellon Investor Services LLC
Overpeck Centre
85 Challenger Road
Ridgefield, NJ 07660
www.chasemellon.com
Independent Auditors
Arthur Andersen LLP
Vienna, Virginia
Annual Meeting Date
Choice Hotels International will hold its Annual
Meeting of Stockholders on Tuesday, May 15, 2001, at
8:30 a.m. in The Chesapeake Room of the Learning
Center, 10720 Columbia Pike, Silver Spring, Maryland.
Form 10-K
A stockholder may receive without charge a copy of the
Form 10-K Annual Report filed with the Securities and
Exchange Commission by written request to the
Corporate Secretary at the corporate headquarters.
Corporate Headquarters
Choice Hotels International
10750 Columbia Pike
Silver Spring, MD 20901
General Inquiries:
(301) 592-5000
Franchise Sales:
(800) 547-0007
Investor Inquiries:
(800) 404-5050, ext. 5026 or
(301) 592-5026
e-mail: investor_relations@choicehotels.com
Media Relations:
(301) 592-5032
(C)2001 Choice Hotels International, Inc.
Quality, Comfort, Clarion, Sleep Inn, Econo Lodge, Rodeway Inn, MainStay, Guest
Privileges and ChoiceBuys.com are registered trademarks, service marks and trade
names owned by Choice Hotels International, Inc. Choice Hotels also owns and
uses common law marks, including Profit Manager.