4/10/9:00 a.m.
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 FEBRUARY 28, 1997 COMMISSION FILE NO. 1-11915
CHOICE HOTELS INTERNATIONAL, INC.
10750 COLUMBIA PIKE
SILVER SPRING, MD. 20901
(301) 979-5000
Delaware 53-1985619
------------------------ -------------------------
(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 FEBRUARY 28, 1997
- ----------------------- ------------------------
Common Stock, $0.01
par value per share 62,803,711
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CHOICE HOTELS INTERNATIONAL, INC.
INDEX
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PAGE NO.
--------
PART I. FINANCIAL INFORMATION:
Consolidated Balance Sheets -
February 28, 1997 (Unaudited) and May 31, 1996 3
Consolidated Statements of Income -
Three months ended February 28, 1997 and February 29, 1996
(Unaudited) and nine months ended February 28, 1997
and February 29, 1996 (Unaudited) 5
Consolidated Statements of Cash Flows -
Nine months ended February 28, 1997 and February 29, 1996 (Unaudited) 6
Notes to Consolidated Financial Statements (Unaudited) 7
Management's Discussion and Analysis of Results of
Operations and Financial Condition 9
PART II. OTHER INFORMATION AND SIGNATURE 14
2
PART I. FINANCIAL INFORMATION
CHOICE HOTELS INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
FEBRUARY 28,
1997 MAY 31,
ASSETS (UNAUDITED) 1996
----------- --------
CURRENT ASSETS
Cash and cash equivalents $ 3,331 $ 4,142
Receivables (net of allowance
for doubtful accounts of
$7,059 and $4,825, respectively) 27,491 30,619
Inventories 666 757
Prepaid expenses 2,005 3,003
Current deferred income tax benefit 1,776 1,266
Other assets 1,471 1,215
-------- --------
Total current assets 36,740 41,002
PROPERTY AND EQUIPMENT, AT COST, NET OF
ACCUMULATED DEPRECIATION 339,800 299,527
GOODWILL, NET OF ACCUMULATED AMORTIZATION 61,137 59,839
LODGING FRANCHISE RIGHTS, NET OF
ACCUMULATED AMORTIZATION 56,509 58,676
OTHER ASSETS 42,297 32,260
-------- --------
Total assets $536,483 $491,304
======== ========
The accompanying notes are an integral part of these Consolidated Balance
Sheets.
3
CHOICE HOTELS INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
FEBRUARY 28, MAY 31,
LIABILITIES & STOCKHOLDERS' EQUITY 1997 1996
------------ ---------
(UNAUDITED)
CURRENT LIABILITIES
Current portion long-term debt $ 595 $ 669
Accounts payable 37,928 24,473
Accrued expenses 12,607 21,656
Income taxes payable -- 1,810
-------- --------
Total current liabilities 51,130 48,608
-------- --------
MORTGAGES AND OTHER LONG-TERM DEBT 95,727 68,469
NOTES PAYABLE TO MANOR CARE, INC. 225,723 225,723
DEFERRED INCOME TAXES AND OTHER
LIABILITIES 1,718 945
-------- --------
Total liabilities 374,298 343,745
-------- --------
STOCKHOLDERS' EQUITY
Common stock 638 --
Additional paid-in-capital 178,507 --
Investment and advances from Manor Care,
Inc. -- 149,309
Retained earnings 5,655 --
Cumulative translation adjustment (6,704) (1,750)
Treasury stock, at cost, 1,048,124 shares (15,911)
-------- --------
Total Stockholders' equity 162,185 147,559
-------- --------
Total liabilities & stockholders'
equity $536,483 $491,304
======== ========
The accompanying notes are an integral part of these Consolidated
Balance Sheets.
4
CHOICE HOTELS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED NINE MONTHS ENDED
FEB 28, FEB 29, FEB 28, FEB 29,
------------------ -----------------
1997 1996 1997 1996
------- -------- -------- --------
REVENUES
Franchise operations $50,986 $44,306 $185,206 $159,213
Hotel operations 39,703 33,551 134,306 107,957
------- ------- -------- --------
Total revenues 90,689 77,857 319,512 267,170
------- ------- -------- --------
OPERATING EXPENSES
Franchise operations 27,841 22,761 92,413 78,721
Hotel operations 29,018 26,815 90,338 79,588
Selling, general and administrative 13,728 12,566 46,053 35,957
Depreciation and amortization 7,640 6,419 22,042 19,161
------- ------- -------- --------
Total operating expenses 78,227 68,561 250,846 213,427
------- ------- -------- --------
INCOME BEFORE OTHER
EXPENSES AND INCOME TAXES 12,462 9,296 68,666 53,743
------- ------- -------- --------
OTHER EXPENSES
Interest expense on Notes Payable to
Manor Care, Inc. 5,079 5,079 15,236 14,595
Other interest and expenses, net 1,335 1,339 3,370 3,746
------- ------- -------- --------
Total other expenses 6,414 6,418 18,606 18,341
------- ------- -------- --------
INCOME BEFORE INCOME TAXES 6,048 2,878 50,060 35,402
PROVISION FOR INCOME TAXES 2,600 1,487 20,600 14,966
------- ------- -------- --------
NET INCOME $ 3,448 $ 1,391 $ 29,460 $ 20,436
======= ======= ======== ========
Pro forma weighted average common shares
outstanding 63,339 62,644 63,116 62,592
======= ======= ======== ========
Pro forma earnings per share $0.05 $0.02 $0.47 $0.33
======= ======= ======== ========
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)
NINE MONTHS ENDED
FEBRUARY 28, FEBRUARY 29,
1997 1996
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 29,460 $ 20,436
Reconciliation of net income to net cash provided by
operating activities:
Depreciation and amortization 22,064 19,171
Provision for bad debts 2,773 1,945
Loss(Gain) on asset sale 220 (528)
Increase in deferred taxes 2,795 182
Changes in assets and liabilities (excluding sold
hotels and acquisitions)
Change in receivables 355 (5,027)
Change in inventories and other current assets 2,886 686
Change in current liabilities 4,184 (234)
Change in income taxes payable (3,446) (240)
Change in other liabilities -- (1,409)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 61,291 34,982
-------- --------
CASH FLOW FROM INVESTING ACTIVITIES
Investment in property and equipment (58,726) (28,148)
Acquisition of operating hotels (5,550) (49,879)
Proceeds from asset sales 2,742 3,689
Purchase of minority interest (2,494) (27,367)
Other items, net (11,659) (1,246)
-------- --------
NET CASH UTILIZED BY INVESTING ACTIVITIES (75,687) (102,951)
-------- --------
CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from mortgages and other long-term debt 78,802 --
Principal payments of debt (51,640) (1,985)
Issuance of common stock 3,371 --
Purchases of treasury stock (15,689) --
Proceeds from Notes Payable to Manor Care, Inc. -- 27,201
Cash transfers (to) from Manor Care, Inc., net (1,259) 42,221
-------- --------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 13,585 67,437
-------- --------
Net change in cash and cash equivalents (811) (532)
Cash and cash equivalents, beginning of period 4,142 2,088
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 3,331 $ 1,556
======== ========
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. and subsidiaries (the "Company") 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 fiscal year ended May 31, 1996 and
notes thereto included in the Company's Form 10 Registration Statement,
including the Information Statement, dated October 15, 1996. Certain
reclassifications have been made to the prior year amounts to conform to current
year presentation.
In the opinion of the Company, the accompanying unaudited consolidated financial
statements reflect all adjustments (which include only normal recurring
adjustments) necessary to present fairly the financial position of Choice Hotels
International, Inc. and subsidiaries as of February 28, 1997 and May 31, 1996,
and the results of operations for the three months and nine months ended
February 28, 1997 and February 29, 1996, respectively, and cash flows for the
nine months ended February 28, 1997 and February 29, 1996, respectively. Interim
results are not necessarily indicative of fiscal year performance because of the
impact of seasonal and short-term variations.
2. On March 7, 1996, Manor Care, Inc. ("Manor Care") announced its intention to
proceed with the separation of its lodging business from its health care
business via a spin-off of its lodging business (the "Distribution"). On
September 30, 1996 the Board of Directors of Manor Care declared a special
dividend to its shareholders of one share of common stock of the Company for
each share of Manor Care Stock, and the Board set the Record Date and the
Distribution Date. The Stock Distribution was made on November 1, 1996 to
holders of record of Manor Care's Common Stock on October 10, 1996.
The Distribution separated the lodging and health care businesses of Manor Care
into two public corporations. The operations of the Company consist principally
of the hotel franchise operations and the owned and managed hotel operations
formerly conducted by Manor Care, Inc. directly or through its subsidiaries (the
"Lodging Business").
On November 1, 1996, concurrent with the Distribution, the Company changed its
name from Choice Hotels Holdings, Inc. to Choice Hotels International, Inc. and
the Company's franchising subsidiary, formerly named Choice Hotels
International, Inc., changed its name to Choice Hotels Franchising, Inc.
3. The consolidated financial statements present the financial position of the
Company as of February 28, 1997 and May 31, 1996, the results of operations of
the Company for the three months and nine months ended February 28, 1997 and
February 29, 1996, respectively, and the cash flows of the Company for the nine
months ended February 28, 1997 and February 29, 1996, respectively, as if it
were formed as a separate entity of Manor Care conducting the Lodging Business
through October 31, 1996.
Manor Care, Inc.'s historical basis in the assets and liabilities of the Company
has been carried over to the consolidated financial statements. All material
intercompany transactions and balances between the Company and its subsidiaries
have been eliminated.
The Investments and advances from Manor Care, Inc. represents the cumulative
income of the Company plus the net change in cash transferred between the
Company and Manor
7
Care, Inc. At the Distribution, this amount was converted to the equity of the
Company and allocated to common stock, additional paid-in capital and cumulative
translation adjustment. The amounts recorded as Common stock, Additional paid-in
capital and Cumulative translation adjustment were $631,000, $171,225,000, and
$(5,449,000), respectively. The amounts so allocated were determined based, to
some extent, on estimates as of the Distribution and may be subject to
adjustment in the future. In the opinion of the Company, such adjustments, if
any, will not have a material impact on the Company's financial position.
The pro forma weighted average number of outstanding common shares is based on
Manor Care's weighted average number of outstanding common shares. Pro forma
income per share is computed by dividing net income by the pro forma weighted
average number of outstanding common shares.
4. During August 1996, Manor Care, Inc. transferred to the Company title to a
building, related land and furniture and fixtures with a book value of
$4,917,000. The property will be converted to an operating hotel.
5. As of February 28, 1997, the Company had franchise agreements with 3,280
hotels with 278,364 rooms operating in 33 countries principally under the
following brand names: Comfort, Clarion, Sleep, Quality, MainStay, Rodeway and
Econo Lodge. The Company also owns and manages, under its seven principal brand
names, 82 hotels with 11,017 rooms in 25 states, as well as in Germany, France
and England.
8
CHOICE HOTELS INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF OPERATING RESULTS AND FINANCIAL CONDITION
On March 7, 1996, Manor Care announced the Distribution and, on September 30,
1996, the Board of Directors of Manor Care declared a dividend to effect the
Distribution and set the Record Date and the Distribution Date. The Distribution
was effected on November 1, 1996 to holders of record of Manor Care's Common
Stock on October 10, 1996. The Distribution separated the lodging and health
care businesses of Manor Care into two public corporations. Included herein are
the historical results of operations of the Lodging Business for the three
months and nine months ended February 28, 1997 and 1996, as if it had been a
separate entity for all periods presented. The operations of the Company now
consist principally of the hotel franchise operations and the owned and managed
hotel operations formerly conducted by Manor Care directly or through Manor
Care's subsidiaries. The Distribution resulted in the division of certain of
Manor Care's existing corporate functions between the two resulting entities.
Historically, Manor Care allocated to its operating units all corporate overhead
expenses specifically identified with such units' operations. These allocations
have been discontinued and responsibility for these support functions have been
substantially assumed by the Company or are provided to the Company in
accordance with various service agreements entered into in conjunction with the
Distribution. The Company has established its own accounting, finance, cash
management, human resources and legal departments separate from Manor Care's.
Accordingly, selling, general and administrative expenses in the historical
financial statements may not be indicative of such costs in the future. The
Company expects selling, general and administrative expenses to increase $4.1
million for the fiscal year as a result of the additional functions now
performed directly by the Company.
The principal factors that affect the Company's results are: growth in the
number of hotels; occupancies and room rates achieved by the Company's brands;
the number and relative mix of owned, managed and franchised hotels; and the
Company's ability to manage costs. The number of rooms at franchised properties
and occupancies and room rates significantly affect the Company's results
because franchise royalty fees are based upon room revenues at franchised
hotels. Increases in franchise and management fee revenues have a
disproportionate impact on the Company's operating margins due to the lower
incremental costs associated with these revenues.
COMPARISON OF RESULTS FOR THE THREE MONTHS ENDED FEBRUARY 28, 1997 AND FEBRUARY
29, 1996
- --------------------------------------------------------------------------------
Net income was $3.4 million for the quarter ended February 28, 1997, an increase
of $2.1 million, or 147.9%, over the same period of the prior fiscal year.
Revenues for the three months ended February 28, 1997 increased $12.8 million,
or 16.5%, to $90.7 million compared to the quarter ended February 29, 1996.
Operating expenses for the three months ended February 28, 1997 increased $9.7
million, or 14.1%, to $78.2 million, resulting in a $3.2 million, or 34.1%,
increase in operating profits.
Franchise revenues for the three months ended February 28, 1997 increased $6.7
million, or 15.1%, when compared to the same period of the prior fiscal year.
Franchise revenues principally included base royalty fees, marketing funds
assessments, fees charged for utilization of the Company's centralized hotel
reservation system and product sales made to franchisees through the Company's
group purchasing program. Except for product sales, fees and assessments are
generally calculated based on a percentage of the franchise hotels' total
revenues and reservation call volume. Revenues from franchise hotels increased
as a result of increases in the number of franchise hotels and increased
averaged daily room rates at
9
those hotels. The Company's domestic franchise hotels increased by 280
properties, or 11.5%, to 2,712 properties at February 28, 1997, from 2,432
properties as of February 29, 1996. Average daily room rates of domestic
franchise hotels increased by approximately 5.1% for the quarter ended February
28, 1997 compared to the same period of the prior fiscal year while average
occupancies of domestic franchise hotels were 48.5% and 46.1% for the three
months ended February 28, 1997 and February 29, 1996, respectively.
Revenues from hotel operations for the quarter ended February 28, 1997 increased
$6.2 million, or 18.3%, compared to the same period of the prior fiscal year.
The increase in revenue was principally achieved through the acquisition and
development of 9 operating hotels containing over 1,000 rooms since February 29,
1996. Additionally, revenue improvements resulted from increases in overall
occupancies and average daily room rates. Overall average occupancies increased
to 59.9% for the quarter ended February 28, 1997 compared to 57.2% for the
quarter ended February 29, 1996. Overall average daily room rates increased
10.2% for the three months ended February 28, 1997 compared to the same period
of the prior fiscal year. These occupancy and rate increases were the result of
marketing efforts in both new and existing markets as well as the general
strengthening of lodging industry fundamentals.
Franchise operating expenses consists of marketing and reservation expenses as
well as the cost of products sold to licensees under the Company's group
purchasing program for franchisees. Franchise operations expenses increased $5.1
million, or 22.3%, for the three months ended February 28, 1997 compared to the
three months ended February 29, 1996. Increases in franchise marketing and
reservation expenses accounted for $3.4 million of the increase in franchise
operating expenses.
Hotel operating expenses increased $2.2 million, or 8.2%, for the three months
ended February 28, 1997 compared to the three months ended February 29, 1996.
Hotel operating margins increased 6.8% to 26.9% for the quarter ended February
28, 1997 compared to the quarter ended February 29, 1996 primarily due to the
stabilization of hotels acquired during the prior three years as well as
operational efficiencies achieved at other owned hotels.
Selling, general and administrative expenses increased $1.2 million, or 9.2%,
for the three months ended February 28, 1997 compared to the same period last
year. As a percent of total revenues, selling, general and administrative
expenses decreased from 16.1% for the quarter ended February 29, 1996 to 15.1%
for the quarter ended February 28, 1997. Selling, general and administrative
expenses increased primarily as a result of additional costs and personnel
assumed in conjunction with the Distribution and increases in corporate
personnel added to support new company initiatives, offset by savings achieved
by the consolidation of European operations in France.
Depreciation and amortization expense increased 19.0% for the quarter ended
February 28, 1997 compared to the same period last year. Increases were
principally due to the acquisition, development and renovation of hotels built
or acquired during the preceding year.
COMPARISON OF RESULTS FOR THE NINE MONTHS ENDED FEBRUARY 28, 1997 AND FEBRUARY
29, 1996
- --------------------------------------------------------------------------------
Net income was $29.5 million for the nine months ended February 28, 1997, an
increase of $9.0 million, or 44.2%, over the same period of the prior fiscal
year.
Revenues for the nine months ended February 28, 1997 increased $52.3 million, or
19.6%, to $319.5 million compared to the nine months ended February 29, 1996.
Operating expenses for the nine months ended February 28, 1997 increased $37.4
million, or 17.5%, to $250.8 million, resulting in a $14.9 million, or 27.8%,
increase in operating profits.
10
Franchise revenues for the nine months ended February 28, 1997 increased $25.9
million, or 16.3%, when compared to the same period of the prior fiscal year.
The increase in franchise revenues was largely the result of fees generated from
franchisees. Revenues from franchise hotels increased as a result of increases
in the number of franchise hotels and increased averaged daily room rates at
franchise hotels. The Company's domestic franchise hotels increased by 280
properties, or 11.5%, to 2,712 properties at February 28, 1997, from 2,432
properties as of February 29, 1996. Average daily room rates of domestic
franchise hotels increased by approximately 4.8% for the nine months ended
February 28, 1997 compared to the same period of the prior fiscal year. Average
occupancies of domestic franchise hotels were 63.1% and 64.2% for the nine
months ended February 28, 1997 and February 29, 1996, respectively.
Revenues from hotel operations for the nine months ended February 28, 1997
increased $26.3 million, or 24.4%, compared to the same period of the prior
fiscal year. The increase in revenue was principally achieved through the
acquisition and development of 9 operating hotels containing over 1,000 rooms
since February 29, 1996. Additionally, revenue improvements resulted from
increases in overall occupancies and average daily room rates. Overall average
occupancies increased to 67.9% for the nine months ended February 28, 1997
compared to 65.1% for the nine months ended February 29, 1996. Overall average
daily room rates increased 6.6% for the nine months ended February 28, 1997
compared to the same period of the prior fiscal year. These occupancy and rate
increases were the result of marketing efforts in both new and existing markets
as well as the general strengthening of lodging industry fundamentals.
Franchise operating expenses consists of marketing and reservation expenses as
well as the cost of products sold to licensees under the Company's group
purchasing program for franchisees. Franchise operations expenses increased
$13.7 million, or 17.4%, for the nine months ended February 28, 1997 compared to
the nine months ended February 29, 1996. Increases in franchise marketing and
reservation expenses accounted for $10.2 million of the increase in franchise
operating expenses.
Hotel operating expenses increased $10.8 million, or 13.5%, for the nine months
ended February 28, 1997 compared to the nine months ended February 29, 1996
principally due to the addition of 9 hotels. Approximately 6.5% of the increase
is due to increased food and beverage costs. Hotel operating margins for the
nine months ended February 28, 1997 increased to 32.7% from 26.3% for the nine
months ended February 29, 1996 primarily due to the stabilization of hotels
acquired during the prior three years as well as operational efficiencies
achieved at other owned hotels.
Selling, general and administrative expenses increased $10.1 million, or 28.1%,
for the nine months ended February 28, 1997 compared to the same period last
year. As a percent of total revenues, selling, general and administrative
expenses increased from 13.5% for the nine months ended February 29, 1996 to
14.4% for the nine months ended February 28, 1997. The increase is due primarily
to additional costs and personnel assumed in conjunction with the Distribution
and increases in corporate personnel added to support new company initiatives,
offset by savings achieved by the consolidation of European operations in
France.
Depreciation and amortization expense increased 15.0% for the nine months ended
February 28, 1997 compared to the same period last year. Increases were
principally due to acquisition, development and renovation of the hotels built
or acquired during the preceding year.
11
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Historically, all cash received by the Company has been deposited in or combined
with Manor Care's corporate funds as part of Manor Care's cash management
system. Subsequent to the Distribution, the Company has maintained its own cash
balances and has implemented an internal cash management system.
The Company plans to realize cash proceeds from, or "monetize," its capital
investment in Company-owned hotels at values that reflect their improved
operating performance. The Company is exploring a variety of transactions,
including, among others, asset securitization, sale/leasebacks, joint ventures
with third parties, debt financing and asset divestitures. The Company intends
to retain management and franchise agreements relating to these properties.
The Company is structuring a transaction which involves the public offering of
multiclass mortgage pass-through certificates by a special purpose entity, a
wholly-owned subsidiary of Boulevard Motel Corp., a wholly-owned subsidiary of
Choice, whose principal assets consist of thirty-six (36) hotels. The proceeds
are expected to net approximately $110 million and will be used to repay the
Notes Payable to Manor Care. Completion of this transaction is subject to
market conditions.
As of February 28, 1997, Notes Payable to Manor Care, Inc. totaling $225.7
million were outstanding. Interest on the amount of the loan will be payable
quarterly at a rate of 9% per annum. The loan will mature on November 1, 1999
and may be prepaid in whole or in part, together with accrued interest, at the
Company's option. If the loan is prepaid prior to November 1, 1997, the Company
will be required to reimburse Manor Care on demand for any actual loss incurred
or to be incurred by Manor Care (for the period up to and including November 1,
1997) in the redeployment of the funds released by any prepayment of the loan.
The Notes Payable to Manor Care, Inc. are expected to be repaid with the
proceeds from the planned monetization of the Company's owned hotels or with
third-party financing.
On October 30, 1996, the Company entered into a Competitive Advance and Multi-
currency Revolving Credit Facility Agreement ("Credit Facility") with a group of
banks. The Credit Facility provides for advances of amounts up to $100 million
at varying market rates of interest, which can be fixed or variable at the
Company's option, and is to be repaid within three years of the date of the
agreement. During the month of November 1996, the Company repaid its portion of
the Manor Care Multi-currency Credit Facility, $50.1 million, with the advances
against the Company's newly acquired Credit Facility.
On December 3, 1996, the Company announced that its Board of Directors
authorized a repurchase of up to six million of its outstanding common shares.
The Company expects to repurchase shares from time to time in the open market,
subject to market conditions and limitations within the Company's Credit
Facility. Any repurchased shares will be held in treasury and may be used for
general corporate purchases, including future acquisitions and the Company's
stock-based employee and director benefit plans. As of February 28, 1997, the
Company had repurchased 1.05 million shares at a total cost of $15.7 million.
Management believes cash flows from operations, third party financing sources
and the proceeds from the planned monetization of the Company's owned hotels
will be adequate to support on-going operations, capital expenditures, the stock
repurchase program and meet debt service requirements for the foreseeable
future. If the Company is unable to successfully implement its monetization
strategy with respect to Company-owned hotels, the Company will need to secure
additional sources of financing to repay the Notes Payable to Manor Care, Inc.
on November 1, 1999.
12
Net cash provided by operating activities for the nine months ended February 28,
1997 was $61.3 million compared to $34.9 million provided by operating
activities during the same period of the prior fiscal year. Improved cash flow
resulted primarily from improved net income and improved working capital
management.
The Company's working capital ratio at February 28, 1997 and May 31, 1996 was
.72 and .84, respectively. The Company attempts to minimize its investments in
net current assets. The Company utilizes its Credit Facility to meet seasonal
fluctuations in working capital requirements. The change in the working capital
ratio primarily results from an increase in accounts payable and reduction in
accounts receivable; the working capital ratio at February 29, 1996 was .83.
Investment in property and equipment includes routine capital expenditures for
renovation of the Company's owned hotels as well as new developments and
enhancements of reservations and finance systems related to franchise
operations. During the nine months ended February 28, 1997, capital expenditures
totaled $58.7 million and related primarily to the development and construction
of nine hotels and ongoing renovations at existing hotels.
Long term debt and Notes Payable to Manor Care, Inc. totaled $321.5 million at
February 28, 1997 and $294.2 million at May 31, 1996, an increase of $27.3
million.
FORWARD-LOOKING INFORMATION IS SUBJECT TO RISK AND UNCERTAINTY
- --------------------------------------------------------------
Certain statements contained in this Form 10-Q, including those in the section
entitled "Management's Discussion and Analysis of Operating Results and
Financial Condition," contain forward-looking information that involves risk and
uncertainties, including the Company's plans to monetize its capital investment
in owned hotels. Actual future results and trends may differ materially
depending on a variety of factors discussed in the "Risk Factors" section
included in the Company's Form 10 Registration Statement, including the
Information Statement, dated October 15, 1996 including (a) the Company's
success in implementing its business strategy, including its success in
arranging financing where required, (b) the nature and extent of future
competition, and (c) political, economic and demographic developments in
countries where the Company does business or in the future may do business.
13
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 10.01 - Employment Agreement dated as of February 10, 1997 between
the Company and Thomas Mirgon
Exhibit 27.01 - Financial Data Schedule - February 28, 1997
(b) During the quarter ended February 28, 1997, no reports were filed on
Form 8-K.
14
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: April 14, 1997 /s/ James A. MacCutcheon
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By: James A. MacCutcheon
Executive Vice President,
Chief Financial Officer
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