SECURITIES AND
EXCHANGE COMMISSION
WASHINGTON, DC 20549
_____________________
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED, EFFECTIVE OCTOBER 7, 1996].
For the fiscal year ended December 31, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED].
For the transition period from ________________ to ______________________
Commission file number 001-13393
CHOICE HOTELS INTERNATIONAL, INC.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 52-1209792
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
10750 Columbia Pike, Silver Spring, Maryland 20901
(Address of Principal Executive Offices) Zip Code
Registrant's telephone number, including area code (301) 592-5000
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
Common Stock, Par Value $.01 per share New York Stock Exchange
Preferred Stock Purchase Rights New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
________________________________________________________________________________
(Title of Class)
________________________________________________________________________________
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed in Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months as for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No___
---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of the Form 10-K or any amendment to this
Form 10-K.
The aggregate market value of voting stock of Choice Hotels International,
Inc. held by non-affiliates was $495,884,280 as of March 10, 1999 based upon a
closing price of $ 14.1875 per share.
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes_______ No_______
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
The number of shares outstanding of Choice Hotels International, Inc.'s
Common Stock at March 10, 1999 was 55,336,553.
DOCUMENTS INCORPORATED BY REFERENCE.
PART I 1998 Annual Report to Stockholders
Proxy Statement dated March 29, 1999
PART II 1998 Annual Report to Stockholders
Proxy Statement dated March 29, 1999
PART III Proxy Statement dated March 29, 1999
2
PART I
ITEM 1. BUSINESS
Overview
Choice Hotels International, Inc. (the "Company" or "Choice") is the
world's second largest franchisor of hotel properties with 3,671 hotels open and
operating in 36 countries at December 31, 1998. In addition, at December 31,
1998, the Company had 1,477 franchise properties currently under development
representing a total of 115,607 rooms. Choice franchises lodging properties
under one of the Company's proprietary brand names (the "Choice brands"):
Comfort(R), Quality(R), Clarion(R), Sleep(R), Rodeway(R), Econo Lodge(R) and
MainStay/SM/. The Company has over 2,300 franchisees in the franchise system
with no single franchisee accounting for more than 5% of its royalty or total
revenues. The Company franchises hotels in all 50 states, Puerto Rico and the
District of Columbia and 35 additional countries, with 95% of its franchising
revenue generated from hotels franchised in the United States. With recognized
brands and a diverse and growing franchisee base, the Company believes it has a
strong foundation for continued growth.
Choice is a "pure-play" lodging franchisor with limited real estate
exposure and low capital expenditure requirements. With a focus on hotel
franchising versus ownership, the Company benefits from the economies of scale
inherent in the franchising business. The fee and cost structure of the
Company's business provides significant opportunities to increase profits by
increasing the number of franchise properties. The Company derives
substantially all of its revenues from franchise fees which consist of an
initial fee and ongoing royalty, marketing, and reservation fees that are based
as a percentage of the franchisees' gross room revenues.
The principal factors that affect the Company's results are: (i)
growth in the number of hotels under franchise; (ii) occupancies and room rates
achieved by the hotels under franchise; (iii) the number and relative mix of
franchised hotels and (iv) 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 royalty fees are
based upon room revenues at franchised hotels. 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 these royalty fees as operating income. The
Company believes that the continued growth of its franchise business should
enable it to capture increasing benefits from the operating leverage in place
thereby improving operating margins. The Company's franchising operating
margins/1/ have improved from 52.5% as of May 31, 1995 to 64.6% as of December
31, 1998. Furthermore, the Company has generated steady royalty fee income from
its increasing franchisee base growing from $50.9 million for the year ended May
31, 1992 to $ 115.4 million for the year ended December 31, 1998. Earnings
before interest, taxes, depreciation and amortization has grown from $32.2
million for the year ended May 31, 1992 to $ 93.8 million for the year end
December 31, 1998.
__________________________
/1/ Franchising operating margin is calculated by deducting selling,
general and administrative expenses from net franchising revenues.
3
Company History
Prior to becoming a separate, publicly-held company on October 15,
1997 pursuant to the Company Spin-off (as defined below), the Company was known
as Choice Hotels Franchising, Inc. and was a wholly-owned subsidiary of Choice
Hotels International, Inc. ("Former Choice"). On October 15, 1997, Former
Choice distributed to its stockholders its hotel franchising business (which had
previously been primarily conducted by the Company) and its European hotel
ownership and franchising business pursuant to a pro rata distribution to its
stockholders of all of the stock of the Company (the "Company Spin-off"). At
the time of the Company Spin-off, the Company changed its name to "Choice Hotels
International, Inc.," and Former Choice changed its name to "Sunburst
Hospitality Corporation." References herein to the Company's former parent
corporation prior to the Company Spin-off are to "Former Choice," and reference
to such corporation after the Company Spin-off are to "Sunburst."
Prior to November 1996, Former Choice was a subsidiary of Manor Care,
Inc. ("Manor Care") which, directly and through its subsidiaries, engaged in the
hotel franchising business currently conducted by the Company as well as the
ownership and management of hotels (together with the hotel franchising
business, the "Lodging Business") and the health care business. On November 1,
1996, Manor Care separated the Lodging Business from its health care business
through a pro rata distribution to the holders of Manor Care's common stock of
all of the stock of Former Choice (the "Former Choice Spin-off"). In connection
with the Former Choice Spin-off, the Company became a wholly-owned subsidiary of
Former Choice and remained as such until consummation of the Company Spin-off.
The Lodging Industry/(1)/
As of December 31, 1998, there were approximately 3.7 million hotel
rooms in the United States in hotels/motels containing twenty or more rooms. Of
those rooms, approximately 1.1 million rooms were not affiliated with a national
or regional brand, while the remaining approximately 2.6 million rooms were
affiliated with a brand either through franchise or the ownership/management of
a national or regional chain.
During the late 1980s, the industry added approximately 500,000 hotel
rooms to its inventory due largely to a favorable hotel lending environment, the
ability of hotel operators to regularly increase room rates and the
deductibility of passive tax losses, which encouraged hotel development. As a
result, the lodging industry saw an oversupply of rooms and a decrease in
industry performance.
The lodging industry in recent years has recovered, demonstrating
strong performance, based on year-to-year increases in room revenues, average
daily rates, revenue per available room ("RevPAR"), and lodging industry
profitability. RevPAR is calculated by multiplying the percentage of occupied
rooms by the average daily room rate realized. Since 1993, the lodging industry
has been able to increase its average daily rate ("ADR") at a pace faster than
the increase in the Consumer Price Index ("CPI"), a common measure of inflation
published by the US Department of Labor. The following chart demonstrates the
recent trends:
________________________
/1/ Source: Smith Travel Research
4
THE US LODGING INDUSTRY'S GROWTH TRENDS SINCE 1991
INCREASES IN AVERAGE
ROOM DAILY INCREASE INCREASE REVENUE PER
REVENUE ROOM IN ADR IN CPI AVAILABLE NEW
VERSUS OCCUPANCY RATES VERSUS VERSUS ROOM PROFITS ROOMS
YEAR PRIOR YEAR RATES (ADR) PRIOR YEAR PRIOR YEAR (REVPAR) (IN BILLIONS) ADDED
- ---- ------------ --------- ------ ---------- ---------- ----------- ------------- -------
1992......... 3.5% 62.6% $58.91 1.4% 2.9% $36.87 break-even 36,000
1993......... 4.6% 63.5% $60.53 2.7% 2.7% $38.42 $ 2.4 40,000
1994......... 7.1% 64.7% $62.86 3.8% 2.7% $40.70 $ 5.5 45,000
1995......... 6.7% 65.1% $65.81 4.7% 2.9% $42.83 $ 8.5 64,000
1996......... 8.9% 65.0% $70.81 7.6% 2.9% $46.06 $12.5 101,000
1997......... 8.8% 64.5% $75.16 6.1% 1.9% $48.50 $17.0 128,000
1998......... 7.7% 64.0% $78.62 4.4% 2.3% $50.29 $22.0 143,000
The Company believes the lodging industry can be divided into three
categories: luxury or upscale, middle-market and economy. The Company believes
the luxury category generally has room rates above $70 per night, the middle-
market category generally has room rates between $46 and $70 per night and the
economy category generally has room rates less than $46 per night.
Service is a distinguishing characteristic in the lodging industry.
Generally, the Company believes there are three levels of service: full-service
hotels (which offer food and beverage services, meeting rooms, room service and
similar guest services); limited-service hotels (which offer amenities such as
swimming pools, continental breakfast, or similar services); and all-suites
hotels (which usually have limited public areas, but offer guests two rooms or
one room with distinct areas, and which may or may not offer food and beverage
services).
The Company's Econo Lodge(R), Rodeway(R) and Sleep(R) brands compete
primarily in the limited-service economy market; the Company's Comfort(R) and
Quality(R) brands compete primarily in the limited-service middle-market. The
Company's MainStay(SM) Suites brand competes primarily in the all-suites middle-
market. The Company's Clarion(R) brand competes primarily in the full-service
upscale market.
New hotels opened in recent years typically have been limited-service
hotels, as limited-service hotels are less costly to develop, enjoy higher gross
margins, and tend to have better access to financing. These hotels typically
operate in the economy and middle-market categories and are located in suburban
or highway locations. From 1991 to 1998, the average room count in new hotels
declined from 122 to 95 primarily because hotel developers found it difficult to
obtain financing of more than $3 million from their primary lending sources
(local banks and Small Business Administration-guaranteed loan programs).
In recent years, operators of hotels not owned or managed by major
lodging companies have increasingly joined national hotel franchise chains as a
means of remaining competitive with hotels owned by or affiliated with national
lodging companies. Because the costs of owning and operating a hotel are
generally fixed, increases in revenues generated by affiliation with a franchise
lodging chain can improve a hotel's financial performance. Of approximately
1,104 hotel properties that changed their affiliation in 1998, 82% converted
from independent status to affiliation with a chain or converted from one chain
to another, while only
5
18% canceled or were required to cancel their chain affiliation. A total of 204
independent properties switched to a franchise chain in 1998.
The large franchise lodging chains, including the Company, generally
provide a number of services to hotel operators to improve the financial
performance of their properties including national reservation systems,
marketing and advertising programs and direct sales programs. The Company
believes that national franchise chains with a larger number of hotels enjoy
greater brand awareness among potential guests than those with fewer numbers of
hotels, and that greater brand awareness can increase the desirability of a
hotel to its potential guests.
The Company believes that hotel operators choose lodging franchisors
based primarily on the perceived value and quality of each franchisor's brand
and its services, and the extent to which affiliation with that franchisor may
increase the franchisee's reservations and profits.
Franchise Business
Economics of Franchise Business. The fee and cost structure of the Company's
business provides significant opportunities for the Company to increase profits
by increasing the number of franchised properties. As a hotel franchisor, the
Company derives substantially all of its revenue from franchise fees. The
Company's franchise fees consist of an initial fee and ongoing royalty,
marketing and reservation fees which are based on a percentage of the
franchisee's gross room revenues. The royalty portion of the franchise fee is
intended to cover the Company's operating expenses, such as expenses incurred in
quality assurance, administrative support and other franchise services and to
provide the Company with operating profits. The marketing and reservation
portion of the franchise fee is intended to reimburse the Company for the
expenses associated with providing such franchise services as the central
reservation system and national marketing and media advertising.
Much of the variable costs associated with the Company's activities
are reimbursed by the franchisees through the initial fees, and marketing and
reservation fees. The royalty fees generated from franchisees more than cover
the fixed costs of the business at its current level. 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 these royalty fees as operating
income.
Strategy. The Company's business strategy is designed to maximize the value of
its extensive distribution channels (which include the hotels under franchise
and the hotel guests) by expanding and enhancing those relationships. The
strategy is effectuated through an emphasis on the following key components: (1)
optimizing the brand portfolio, (2) strategically growing the franchise system,
(3) leveraging the franchise system, (4) improving its and its franchisees'
margins, (5) growing profitability internationally, and (6) pursuing
complementary business opportunities.
. Optimizing the Brand Portfolio. The Company believes that each of its brands
has particular attributes and strengths. The Company's strategy is to leverage
the strengths of each brand for profit growth and for identifying new niches
into which the company may expand. This
6
will be effectuated through a raising of the Company's brand standards
strictly enforced through consumer-driven quality assurance.
. Increasing Market Penetration on a Strategic Basis. The Company is taking
advantage of its regional structure to analyze key markets in the U.S. and, in
conjunction with its franchisees, identifying the best opportunities for new
development or conversion to one of the Company's brands.
. Expanding Partner Services Programs. The Company believes there is significant
opportunity to leverage its size by entering into arrangements with national
and multi-national companies that want to gain exposure to the Company's
franchised hotels and to the millions of guests who patronize the Company's
franchised hotels each year. In practice, the guest enjoys brand-name products
and services that help build guest loyalty and the franchisee benefits from
competitively priced products. Vendor partners gain access to a critical mass
of franchisees, which in turn generates residual income for the Company.
. Improving Margins Through Increased Productivity. The Company addresses the
competitiveness of its own and its franchisees' profitability by initiating
revenue generating programs and improving cost productivity. A key component
of this strategy is the roll out of the Company's proprietary property and
yield management system "Profit Manager by Choice", which the Company believes
will improve the RevPAR of its franchisees. This is supplemented by continued
enforcement of the Company's contracts (including licensee audits).
. Growing Profitably Internationally. During the eleven fiscal years ended
December 31, 1998, the number of properties (including those under
construction) in the Company's international franchise system increased to
1,243 properties with 93,470 rooms, from 81 properties with 8,330 rooms. The
Company's international franchise system includes hotels in 35 countries
outside the United States. The Company plans to continue to profitably grow
its brands internationally through a strategic pursuit of joint ventures,
master franchising agreements and brand specific area development agreements.
. Pursuing Complementary Business Opportunities. The separation of Choice from
Former Choice allows the Company to focus solely on franchising, including
potential acquisition opportunities that are complementary to the Company's
core business and unique operating skills. Choice's acquisition strategy
includes the potential purchase of lodging brands that would enhance the
offerings the Company currently makes to its franchisees and hotel consumers.
Franchise System
The Company's franchise hotels operate under one of the Choice brand
names: Comfort(R), Quality(R), Clarion(R), Sleep(R), Rodeway(R), Econo Lodge(R)
and MainStay(SM). The following table presents key statistics relative to
Choice's domestic franchise system over the three fiscal years ended May 31,
1997, for the seven-month period ended December 31, 1997 and for the two fiscal
years ended December 31, 1998.
7
COMBINED DOMESTIC FRANCHISE SYSTEM
AS OF AND FOR THE YEAR ENDED AS OF AND FOR THE SEVEN
MAY 31, MONTHS ENDED DECEMBER 31,
------------------------------------------------------------
1995 1996 1997 1997
------------------------------------------------------------
Number of properties, end of period.............. 2,311 2,495 2,781 2,880
Number of rooms, end of period................... 200,792 214,613 235,431 242,161
Royalty fees ($000).............................. $ 71,665 $ 82,239 $ 91,724 $ 65,271
Average Royalty Rate(1).......................... 3.2% 3.3% 3.4% 3.5%
Average occupancy percentage..................... 63.8% 63.9% 62.6% 66.2%
Average daily room rate (ADR).................... $ 47.13 $ 49.49 $ 51.92 $ 54.97
RevPAR(2)........................................ $ 30.08 $ 31.60 $ 32.52 $ 36.39
AS OF AND FOR THE YEAR ENDED
DECEMBER 31,
---------------------------------------
1997 1998
---------------------------------------
Number of properties, end of period.............. 2,880 3,039
Number of rooms, end of period................... 242,161 252,357
Royalty fees ($000).............................. $ 99,144 $109,240
Average Royalty Rate(1).......................... 3.5% 3.6%
Average occupancy percentage..................... 62.3% 60.9%
Average daily room rate (ADR).................... $ 53.89 $ 56.39
RevPAR(2)........................................ $ 33.56 $ 34.35
(1) Represents domestic royalty fees as a percentage of aggregate gross room
revenues of all of the domestic Choice brand franchised hotels.
(2) The Company's RevPAR figure for each fiscal year is an average of the RevPAR
calculated for each month in the fiscal year. The Company calculates RevPAR
each month based on information actually reported by franchisees on a timely
basis to the Company.
The Company has over 2,300 domestic franchisees and operates in all 50
states and the District of Columbia. Approximately 95% of the total royalty
income is generated from domestic franchise operations. Consequently, the
Company's analysis of its franchise system is focused on the domestic
operations. Currently, no master franchisee or other franchisee accounts for 5%
or more of Choice's royalty revenues or total revenues. Sunburst is the
Company's largest franchisee with a portfolio of 88 hotels containing 11,911
rooms located in 27 states as of December 31, 1998.
Brand Positioning
The Company's hotels are primarily limited-service hotels (offering
amenities such as swimming pools and continental breakfast) or limited-to-full
service (offering amenities such as food and beverage services, meeting rooms
and room service).
Comfort. The Comfort brand is the Company's largest. Comfort Inns and Comfort
Suites hotels offer rooms in the limited-service, middle market category.
Comfort Inns and Comfort Suites are targeted to business and leisure travelers.
Principal competitor brands include Days Inn, Fairfield Inn, Hampton Inn,
Holiday Express and LaQuinta. At December 31, 1998, there were 1,526 Comfort
Inn properties and 192 Comfort Suites properties with a total of 117,405, and
15,660 rooms, respectively, open and operating worldwide. An additional 385
Comfort Inn and Comfort Suites properties with a total of 33,061 rooms were
under development.
Comfort properties are located in the United States and in Argentina,
Australia, the Bahamas, Belgium, Brazil, Canada, Denmark, France, Germany,
India, Italy, Jamaica, Lebanon, Mexico, Norway, Portugal, Puerto Rico, Sweden,
Switzerland, Thailand, Turks & Caicos, the United Kingdom and the United Arab
Emirates. The following chart summarizes the Comfort system in the United
States:
8
COMFORT DOMESTIC SYSTEM
AS OF AND FOR THE YEAR ENDED AS OF AND FOR THE SEVEN
MAY 31, MONTHS ENDED DECEMBER 31,
--------------------------------------------------------------
1995 1996 1997 1997
--------------------------------------------------------------
Number of properties, end of period.............. 1,015 1,129 1,255 1,304
Number of rooms, end of period................... 87,551 94,160 102,722 105,384
Royalty fees ($000s)............................. $37,635 $44,657 $ 50,758 $ 36,446
Average occupancy percentage..................... 69.5% 68.7% 67.2% 71.3%
Average daily room rate (ADR).................... $ 48.24 $ 51.13 $ 54.17 $ 57.15
RevPAR........................................... $ 33.54 $ 35.11 $ 36.39 $ 40.75
AS OF AND FOR THE YEAR ENDED
DECEMBER 31,
---------------------------------------
1997 1998
---------------------------------------
Number of properties, end of period.............. 1,304 1,394
Number of rooms, end of period................... 105,384 110,682
Royalty fees ($000s)............................. $ 55,261 $ 61,153
Average occupancy percentage..................... 66.6% 65.4%
Average daily room rate (ADR).................... $ 55.74 $ 58.19
RevPAR........................................... $ 37.15 $ 38.03
Sleep Inn. Established in 1988, Sleep Inn is a new-construction hotel brand in
the limited-service, economy category. Sleep Inns are targeted to the business
and leisure traveler. Principal competitor brands include Days Inn, Fairfield
Inn, Holiday Express, LaQuinta Inn, Ho-Jo Inn and Ramada Inn.
At December 31, 1998, there were 200 Sleep Inn properties with a total
of 15,214 rooms open and operating worldwide. An additional 193 properties with
a total of 14,979 rooms were under development. The properties are located in
the United States, Canada, the Cayman Islands and Thailand. The following chart
summarizes the Sleep system in the United States:
SLEEP DOMESTIC SYSTEM
AS OF AND FOR THE YEAR ENDED AS OF AND FOR THE SEVEN
MAY 31, MONTHS ENDED DECEMBER 31,
-----------------------------------------------------------
1995 1996 1997 1997
-----------------------------------------------------------
Number of properties, end of period.............. 51 87 131 156
Number of rooms, end of period................... 3,672 6,396 9,635 11,538
Royalty fees ($000s)............................. $2,080 $2,108 $3,343 $ 2,630
Average occupancy percentage..................... 65.3% 65.5% 63.9% 66.5%
Average daily room rate (ADR).................... $41.89 $45.11 $48.11 $ 50.54
RevPAR........................................... $27.37 $29.56 $30.75 $ 33.60
AS OF AND FOR THE YEAR ENDED
DECEMBER 31,
---------------------------------
1997 1998
---------------------------------
Number of properties, end of period.............. 156 197
Number of rooms, end of period................... 11,538 14,924
Royalty fees ($000s)............................. $ 3,926 $ 5,337
Average occupancy percentage..................... 63.0% 62.0%
Average daily room rate (ADR).................... $ 49.41 $ 51.41
RevPAR........................................... $ 31.11 $ 31.88
Quality. Certain Quality Inns and Quality Suites hotels compete in the limited-
service, middle market category while others compete in the full-service, middle
market category. Quality Inns and Quality Suites are targeted to business and
leisure travelers. Principal competitor brands include Best Western, Holiday
Inn, Howard Johnson, Ramada Inn and Days Inn. At December 31, 1998, there were
554 Quality Inn properties with a total of 61,542 rooms, and 125 Quality Suites
properties with a total of 13,930 rooms open worldwide. An additional 177
Quality Inn and Quality Suites properties with a total of 18,782 rooms were
under development.
Quality properties are located in the United States and in Australia,
Canada, Chile, Costa Rica, the Czech Republic, Denmark, France, Germany, India,
Indonesia, Ireland, Italy, Jamaica, Malaysia, Mexico, New Zealand, Norway,
Portugal, Russia, Spain, Sweden, Thailand, the United Kingdom and the United
Arab Emirates.
The following chart summarizes the Quality system in the United
States:
9
QUALITY DOMESTIC SYSTEM
AS OF AND FOR THE YEAR ENDED AS OF AND FOR THE SEVEN
MAY 31, MONTHS ENDED DECEMBER 31,
--------------------------------------------------------------
1995 1996 1997 1997
--------------------------------------------------------------
Number of properties, end of period.............. 341 362 409 419
Number of rooms, end of period................... 43,281 45,967 50,487 50,674
Royalty fees ($000s)............................. $15,632 $16,606 $17,623 $14,459
Average occupancy percentage..................... 63.1% 62.5% 61.3% 63.8%
Average daily room rate (ADR).................... $ 50.94 $ 52.90 $ 54.61 $ 57.58
RevPAR........................................... $ 32.16 $ 33.08 $ 33.46 $ 36.73
AS OF AND FOR THE YEAR ENDED
DECEMBER 31,
-------------------------------------
1997 1998
-------------------------------------
Number of properties, end of period.............. 419 430
Number of rooms, end of period................... 50,674 50,151
Royalty fees ($000s)............................. $18,488 $20,187
Average occupancy percentage..................... 60.2% 58.7%
Average daily room rate (ADR).................... $ 56.79 $ 60.19
RevPAR........................................... $ 34.19 $ 35.35
Clarion. Clarion Inns, Clarion Hotels, Clarion Resorts and Clarion Suites
hotels are full-service properties which operate in the upscale category.
Clarion properties are targeted to business and leisure travelers. Principal
competitor brands include Holiday Inn, Holiday Select, Crowne Plaza, Four Points
by Sheraton, Radisson, Courtyard by Marriott and Doubletree.
At December 31, 1998, there were 130 Clarion properties with a total
of 21,355 rooms open and operating worldwide and an additional 45 properties
with a total of 7,037 rooms under development. The properties are located in the
United States, Australia, the Bahamas, Canada, Chile, France, Germany,
Guatemala, Indonesia, Ireland, Japan, Mexico, Norway, Russia and Uruguay. The
following chart summarizes the Clarion system in the United States:
CLARION DOMESTIC SYSTEM
AS OF AND FOR THE YEAR ENDED AS OF AND FOR THE SEVEN
MAY 31, MONTHS ENDED DECEMBER 31,
---------------------------------------------------------------
1995 1996 1997 1997
----------------------------------------------------------------
Number of properties, end of period.............. 63 75 92 96
Number of rooms, end of period................... 10,420 12,817 14,721 16,161
Royalty fees ($000s)............................. $ 2,995 $ 3,602 $ 4,081 $ 2,957
Average occupancy percentage..................... 63.7% 63.3% 63.3% 64.7%
Average daily room rate (ADR).................... $ 63.71 $ 64.36 $ 67.76 $ 71.53
RevPAR........................................... $ 40.58 $ 40.74 $ 42.86 $ 46.29
AS OF AND FOR THE YEAR ENDED
DECEMBER 31,
-------------------------------------------
1997 1998
-------------------------------------------
Number of properties, end of period.............. 96 105
Number of rooms, end of period................... 16,161 17,878
Royalty fees ($000s)............................. $ 5,061 $ 5,447
Average occupancy percentage..................... 62.3% 60.4%
Average daily room rate (ADR).................... $ 70.67 $ 72.37
RevPAR........................................... $ 44.05 $ 43.73
Econo Lodge. Econo Lodge hotels operate in the limited-service, economy category
of the lodging industry. Econo Lodges are primarily targeted to senior citizens
and rely to a large extent on strong roadside name recognition. Principal
competitor brands include Days Inn, Ho-Jo Inn, Motel 6, Ramada Limited, Red
Carpet Inn, Red Roof Inn, Super 8 and Travelodge.
At December 31, 1998, there were 723 Econo Lodge properties with
a total of 45,656 rooms open and operating in the United States and Canada, and
an additional 132 properties with a total of 9,636 rooms under development in
those two countries. The following chart summarizes the Econo Lodge system in
the United States:
10
ECONO LODGE DOMESTIC SYSTEM
AS OF AND FOR THE YEAR ENDED AS OF AND FOR THE SEVEN
MAY 31, MONTHS ENDED DECEMBER 31,
-------------------------------------------------------------
1995 1996 1997 1997
--------------------------------------------------------------
Number of properties, end of period.............. 633 641 682 692
Number of rooms, end of period................... 42,801 42,726 44,636 45,050
Royalty fees ($000s)............................. $12,021 $12,760 $13,288 $ 8,991
Average occupancy percentage..................... 57.5% 58.0% 56.4% 60.7%
Average daily room rate (ADR).................... $ 38.31 $ 39.97 $ 41.33 $ 43.86
RevPAR........................................... $ 22.04 $ 23.17 $ 23.30 $ 26.63
AS OF AND FOR THE YEAR ENDED
DECEMBER 31,
--------------------------------------
1997 1998
--------------------------------------
Number of properties, end of period.............. 692 698
Number of rooms, end of period................... 45,050 44,458
Royalty fees ($000s)............................. $13,687 $13,975
Average occupancy percentage..................... 56.1% 54.2%
Average daily room rate (ADR).................... $ 42.35 $ 43.69
RevPAR........................................... $ 23.75 $ 23.70
Rodeway. The Rodeway brand competes in the limited-service, economy category
and is primarily targeted to senior citizens. Principal competitor brands
include Ho-Jo Inn, Ramada Limited, Red Roof Inn, Budgetel, Shoney's Inn, Super 8
and Motel 6. At December 31, 1998, there were 202 Rodeway Inn properties with a
total of 12,873 rooms, open and operating in the United States and Canada, and
an additional 51 properties with a total of 3,532 rooms under development in
those two countries. The following chart summarizes the Rodeway system in the
United States:
RODEWAY DOMESTIC SYSTEM
AS OF AND FOR THE YEAR ENDED AS OF AND FOR THE SEVEN
MAY 31, MONTHS ENDED DECEMBER 31,
---------------------------------------------------------------
1995 1996 1997 1997
----------------------------------------------------------------
Number of properties, end of period.............. 208 201 217 209
Number of rooms, end of period................... 13,067 12,547 13,509 12,997
Royalty Fees ($000s)............................. $ 2,302 $ 2,506 $ 2,631 $ 1,756
Average occupancy percentage..................... 50.5% 52.7% 52.7% 54.7%
Average daily room rate (ADR).................... $ 38.93 $ 40.66 $ 41.15 $ 44.11
RevPAR........................................... $ 19.64 $ 21.48 $ 21.68 $ 24.13
AS OF AND FOR THE YEAR ENDED
DECEMBER 31,
----------------------------------------
1997 1998
----------------------------------------
Number of properties, end of period.............. 209 196
Number of rooms, end of period................... 12,997 12,447
Royalty Fees ($000s)............................. $ 2,671 $ 2,678
Average occupancy percentage..................... 51.4% 49.9%
Average daily room rate (ADR).................... $ 43.15 $ 44.31
RevPAR........................................... $ 22.20 $ 22.12
MainStay Suites. MainStay Suites, the Company's newest hotel brand, is a middle-
market, extended-stay lodging product targeted to travelers who book hotel rooms
for five nights or more. The first MainStay Suites hotel, which Sunburst owns
and manages, opened in Plano, Texas, in November 1996. As of December 31, 1998,
there were 19 open hotels with 1,817 rooms and an additional 22 properties with
1,917 rooms under development.
The MainStay/(SM)/ Suites brand is designed to fill the gap in the
middle-market category between existing upscale and economy extended-stay
lodging products. Principal competitors brands include Candlewood hotels,
TownePlace Suites, as well as competition from all-suite hotel properties and
traditional extended stay operators in both the upscale market (Hawthorne
Suites, Homewood Suites, and Summerfield Suites) and the economy market
(Extended Stay America, Studio Plus and Oakwood).
International Franchise Operations
The Company's international franchise operations are primarily
conducted through master franchise arrangements. These agreements provide the
master franchisee the
11
right to develop Choice branded hotels in a specific geographic region, usually
for a fee. The agreements govern the relationship between the Company and the
master franchisee, who share the royalties generated by the underlying
franchised hotels. At December 31, 1998, the Company had 632 franchise hotels
open in 35 countries outside the United States. The following table illustrates
the growth of the Company's international franchise system over the three fiscal
years ended May 31, 1997 for the seven-month period ended December 31, 1997 and
the two fiscal years ended December 31, 1998.
COMBINED INTERNATIONAL FRANCHISE SYSTEM(1)
AS OF AND FOR THE YEAR ENDED AS OF AND FOR THE SEVEN
MAY 31, MONTHS ENDED DECEMBER 31,
----------------------------------------------------------
1995 1996 1997 1997
----------------------------------------------------------
Number of properties, end of period.............. 524 557 563 605
Number of rooms, end of period................... 44,877 46,843 47,603 50,639
Royalty fees $000s).............................. $ 1,998 $ 1,586 $ 1,672 $ 958
AS OF AND FOR THE YEAR ENDED
DECEMBER 31,
------------------------------------
1997 1998
------------------------------------
Number of properties, end of period.............. 605 632
Number of rooms, end of period................... 50,639 53,095
Royalty fees $000s).............................. $ 2,303 $ 4,902
(1) Master franchise contracts do not currently require the reporting of
operating statistics (e.g. average occupancy percentage and average daily
room rate) of the underlying hotels, thus RevPAR is not calculated for
foreign hotels.
Europe. The Company is the second-largest international franchised hotel chain
in Europe, with 242 hotels open in 10 countries at December 31, 1998.
In order to realign and streamline its European operations, in May
1996, the Company, through its subsidiary, ManorCare Hotels (France) S.A.,
acquired 750,000 ordinary (common) shares and 10,000,000 convertible preferred
shares of Friendly Hotels, PLC ("Friendly") for approximately $17.1 million. The
proceeds from this investment have been used by Friendly to finance the
development of ten new Comfort Inn or Quality Inn hotels in the United Kingdom
and Ireland. Additionally, the Company granted to Friendly a master franchise
for the United Kingdom and Ireland in exchange for an additional 333,333
Friendly ordinary shares. Each 5.75% convertible preferred share is immediately
convertible into one Friendly ordinary share for every 150p nominal value of the
5.75% convertible preferred shares.
In January 1998, the Company and Friendly concluded a second
transaction in which Friendly acquired from the Company the master franchise
rights for the Comfort(R), Quality(R) and Clarion(R) brands for all of Europe
with the exception of Scandinavia for a period of 10 years, for a payment of $8
million, payable in eight equal annual installments. As part of the transaction,
Friendly acquired from the Company 10 hotels in France, two in Germany and one
in the United Kingdom in exchange for 13,624,742 additional 5.75% convertible
preferred shares with a value of $22.2 million. Each such 5.75% convertible
preferred share is convertible on or after the announcement by Friendly of its
1998 financial results (which is expected to occur in April 1999) into one
Friendly ordinary share for each 150p nominal value of the 5.75% convertible
preferred shares. In addition, Friendly will pay the Company deferred
compensation of $4 million in cash, payable by the fifth anniversary of the
transaction or sooner depending on the level of future profits of the hotels
acquired. After consummation of this transaction (and the receipt of additional
ordinary shares resulting from the payment of dividends in ordinary shares), the
Company holds 1,139,888 Friendly ordinary shares and 23,624,742 5.75%
convertible preferred shares of Friendly. Assuming conversion to Friendly
ordinary shares of all Friendly convertible preferred shares (including those
held by the Company), the Company would hold approximately 46.5% of the
outstanding Friendly ordinary shares. Under the terms of its
12
investment, the Company currently has the right to appoint three of the
directors to the Friendly board.
There is also a master franchise arrangement in Scandinavia that has
84 open properties as of December 31, 1998.
Canada. Choice Hotels Canada is Canada's largest lodging organization with 212
properties open at December 31, 1998. Choice Hotels Canada is a joint venture,
owned 50% by the Company and 50% by UniHost Corporation ("UniHost"), which was
formed in 1993 when UniHost converted substantially all of its controlled hotels
to Choice's brands and Choice contributed its operations in Canada to form
Choice Hotels Canada.
Other International Relationships. The Company has master franchise arrangements
with developers in various countries, including Australia, New Zealand, Mexico
and Brazil. At December 31, 1998, 939 hotels were open and operating under these
master franchise arrangements (exclusive of Europe and Canada), generating
annual royalty fees to the Company of approximately $2.5 million.
In July 1998, the Company and Flag International Limited ("Flag"),
Australia's largest lodging chain, formed a strategic alliance. Flag Choice
Hotels, a wholly-owned subsidiary of Flag, acquired a 20-year master franchise
from the Company. Under the agreement, a number of Flag properties were re-
branded with Company brands which best serve their market segment. The agreement
also provides the Company with the opportunity to acquire, within the first four
years of the agreement, up to 30 percent of the equity of Flag Choice Hotels
with proportionate board representation.
Franchise Sales
The Company has identified key market areas for hotel development
based on supply/demand relationships and strategic objectives. Development
opportunities are first offered to existing franchisees and then to (i)
developers of hotels, (ii) owners of independent hotels and motels, (iii) owners
of hotels affiliated with other franchisors' brands, and (iv) contractors who
construct any of the foregoing. In considering hotels for conversion to one of
the Choice brands, or sites for development of new hotels, the Company considers
locations which are close to major highways, airports, tourist attractions and
business centers that attract travelers.
At December 31, 1998, the Company employed approximately 40 sales
directors, each of whom is responsible for a particular region or geographic
area. Sales directors contact potential franchisees directly and receive
compensation based on sales generated. Franchise sales efforts emphasize the
benefits of affiliating with one of the Choice brands, the Company's commitment
to improving RevPAR, the Company's television, radio and print brand advertising
campaigns, the Choice reservation system, the Company's training and support
systems, and the Company's history of growth and profitability. Because the
Choice brands cover a broad spectrum of the lodging marketplace, the Company is
able to offer each prospective franchisee a brand that fits its needs, lessening
the chances that the prospective franchisee would need to consider a competing
franchise system.
13
Because retention of existing franchisees is important to the
Company's growth strategy, existing franchisees are offered the right to object
to a same-brand property within 15 miles, and are protected from the opening of
a same-brand property within a specific distance, generally two to five miles,
depending upon the size of the property and the market size. The Company
believes that it is the only major franchise company to routinely offer such
territorial protection to its franchisees.
During fiscal 1998, Choice received 919 franchise applications,
approved 749 applications, signed 619 franchise agreements and placed 318 new
properties into operation in the United States under the Choice brands. Of
those placed into operations, 198 were newly constructed hotels. By comparison,
during the twelve month period ended December 31, 1997, the Company received 976
franchise applications, approved 807 applications, signed 576 franchise
agreements and added 430 new properties into operation in the U.S. Applications
received or approved may not always result in signed franchise agreements due to
an applicant being unable to obtain financing or because the Company and the
applicant are unable to agree on the financial terms of the franchise agreement.
In 1998, the Company placed greater focus on quality standards, which
were more rigidly enforced. Terminations for properties that failed to meet
quality assurance standards and contractual obligations were 258 properties
(including properties not yet open) in 1998 versus 183 properties in 1997.
Franchise Agreements
The Company's standard franchise agreement grants a franchisee the
right to non-exclusive use of the Company's franchise system in the operation of
a single hotel at a specified location, typically for a period of 20 years, with
certain rights to each of the franchisor and franchisee to terminate the
franchise agreement before the twentieth year. When the responsibility for
development is sold to a master franchisee, that party has the responsibility to
sell to local franchisees the Choice brands and the master franchisee generally
must manage the delivery of necessary services (such as quality assurance,
reservations and marketing) to support the franchised hotels in the master
franchise area. The master franchisee collects the fees paid by the local
franchisee and remits an agreed share to the Company. Master franchise
agreements generally have a term of at least 10 years. The Company has only
entered into master franchise agreements with respect to franchise hotels
outside the United States.
Either party to a franchise agreement, other than master franchise
agreements, can terminate a franchise agreement prior to the conclusion of their
term under certain circumstances, such as at certain anniversaries of the
agreement or if a franchisee fails to bring properties into compliance with
contractual quality standards within specified periods of time. Early
termination options give the Company flexibility in eliminating or re-branding
properties which become weak performers for reasons other than contractual
failure by the franchisee. Master franchise agreements typically contain
provisions permitting the Company to terminate the agreement for failure to meet
a specified development schedule.
Franchise fees vary among the different Choice brands, but generally
are competitive with the industry average within their market group. Franchise
fees usually have four
14
components: an initial, one-time affiliation fee; a royalty fee; a marketing
fee; and a reservation fee. Proceeds from the marketing fee and reservation fee
are used exclusively to fund marketing programs and the Company's central
reservation system, respectively. Most marketing fees support brand-specific
marketing programs, although the Company occasionally contributes a portion of
such fees to marketing programs designed to support all of the Choice brands.
Royalty fees and affiliation fees are the principal sources of profits for the
Company.
The standard franchise agreements typically require the Company's
franchisees to pay the following fees:
QUOTED FEES BY BRAND
INITIAL FEE
PER ROOM/ ON-GOING FEES AS A PERCENTAGE OF GROSS ROOM REVENUES
-----------------------------------------------------------
BRAND MINIMUM ROYALTY FEES MARKETING FEES RESERVATION FEES
----- ------------------- ----------------- -------------------- -----------------
Comfort Inn............................... $300/$45,000 5.25% 2.1% 1.75%
Comfort Suites............................ $300/$50,000 5.25% 2.1% 1.75%
Quality Inn............................... $300/$35,000 4.0% 2.1% 1.75%
Quality Suites............................ $300/$50,000 4.0% 2.1% 1.25%
Sleep Inn................................. $300/$40,000 4.5% 2.1% 1.75%
Clarion................................... $300/$40,000 3.75% 1.0% 1.25%
Econo Lodge............................... $250/$25,000 4.0% 3.5%(1) --
MainStay Suites........................... $300/$30,000 4.5% 2.5%(1) --
Rodeway................................... $250/$25,000 3.5% 1.25% 1.25%
_________________________
(1) Fee includes both Marketing and Reservation Fees.
For a description of the franchising agreements between the Company
and Sunburst, see "Relationship Between the Company and Sunburst--Franchise
Agreements," on the Proxy Statement dated March 29, 1999, incorporated herein by
reference.
The Company has increased its average royalty rate since fiscal year
1993, primarily by raising the quoted royalty fee for Comfort Inn franchisees to
5.25% of annual gross room revenues ("GRR") from 4.0% of GRR in 1993, and by
increasing the number of higher royalty fee contracts in the franchise system.
For the twelve months ended December 31, 1998, the Company's average royalty
rate for all Choice domestic brand hotels was 3.6%. The Company believes that
its average royalty rate will continue to increase as new franchisees are added
and as older franchise agreements expire, terminate or are amended.
At December 31, 1998, the Company had 3,894 franchise agreements in
effect in the United States and 1,253 franchise agreements in effect in other
countries. The average age of the franchise agreements was 4.6 years. Seven
hundred ninety-five of the franchise agreements are scheduled to expire during
the five-year period beginning December 31, 1998; however, franchise agreements
generally contain early termination provisions.
Franchise Operations
The Company's operations are designed to improve RevPAR for its
franchisees, as this is the measure of performance that most directly impacts
franchisee profitability. The Company believes that by helping its franchisees
to become more profitable it will enhance its
15
ability to both retain its existing franchisees and attract new franchisees. The
key aspects of the Company's franchise operations are:
Central Reservation System. On average, approximately 30.0% of the room nights
booked at franchisees' properties are reserved through the toll-free telephone
reservation system operated by the Company. The Company's reservation system
consists of a computer reservation system known as CHOICE 2001, five reservation
centers in North America and several international reservation centers run by
the Company or its master franchisees. Operators trained on the CHOICE 2001
system can match each caller with a Choice-branded hotel meeting the caller's
needs. It provides an instant data link to the Company's franchised properties
as well as to the Amadeus, Galileo, SABRE and Worldspan airline reservation
systems that facilitates the reservation process for travel agents.
To define more sharply the market and image for each of its brands,
the Company began advertising separate toll-free reservation numbers for all of
its brands in fiscal year 1995, although Choice allows its reservation agents to
cross-sell the Choice brands. If a room in the Choice hotel brand requested by a
customer is not available in the location or price range that the customer
desires, the agent may offer the customer a room in another Choice-branded hotel
that meets the customer's needs. The Company believes that cross-selling
enables Choice and its franchisees to capture additional business.
On-line reports generated by the CHOICE 2001 system enable franchisees
to analyze their reservation patterns over time. In addition, the Company
provides and is currently improving a yield management product for its
franchisees to allow them to improve the management of their mix of rates and
occupancy based on current and forecasted demand on a property-by-property
basis. The Company also markets to its franchisees a property management
product. Such products are designed to manage the financial and operations
information of an individual hotel and improve its efficiency.
Property Management System; Technical Services Program. The Company's
proprietary property and yield management system, Profit Manager by Choice
Hotels, is designed to help franchisees maximize profitability and compete more
effectively by managing their rooms inventory, rates and reservations. The
Profit Manager system synchronizes each hotel's inventory with the CHOICE 2001
system, giving reservation sales agents last room sell capabilities at every
hotel. Profit Manager includes a revenue management feature that calculates and
suggests optimum rates and length of stays based on each hotel's past
performance and projected occupancy.
As of March 1, 1999, Profit Manager was installed in 884 hotels in the
United States and Canada, with 225 of those hotels utilizing the revenue
management function.
To encourage the deployment of Profit Manager, the Company has
developed a Technology Support Program ("TSP"), which allows hotels to pay for
all aspects of the Profit Manager system (software, hardware, maintenance,
training and support) with one monthly payment. A core component of the TSP is
a hardware leasing arrangement for Dell Computers equipment under which a
subsidiary of the Company, Choice Hotels International Services Corp.
16
("CHI Services"), leases the hardware and then subleases it to franchisees. The
benefits to franchisees are no initial up-front costs and periodic technology
updating.
Under the leasing arrangement, the Company has provided to Dell
Financial Services, the equipment lessor, a guarantee of up to 25 percent of the
value of the leased equipment and a security interest in management fees payable
by the Company to CHI Services.
Brand Name Marketing and Advertising. The Company's marketing and advertising
programs are designed to heighten consumer awareness of the Choice brands.
Marketing and advertising efforts are focused primarily in the United States and
include national television and radio advertising, print advertising in consumer
and trade media and promotional events, including joint marketing promotions
with vendors and corporate partners. In fiscal year 1996, the Company began
using brand-specific marketing and largely discontinued the strategy of
advertising its multiple brands under the Choice umbrella. As a result, each
brand employs a more focused approach to its target audiences.
The Company conducts numerous marketing programs targeting specific
groups, including senior citizens, motorist club members, families, government
and military employees, and meeting planners. Other marketing efforts include
telemarketing and telesales campaigns, domestic and international trade show
programs, publication of group and tour rate directories, direct-mail programs,
discounts to holders of preferred credit cards, centralized commissions for
travel agents, fly-drive programs in conjunction with major airlines, and twice-
yearly publication of a Travel and Vacation Directory.
Marketing and advertising programs are directed by the Company's
marketing department, which utilizes the services of independent advertising
agencies. The Company also employs sales personnel at its Silver Spring,
Maryland, headquarters and in its Phoenix, Arizona office. These sales personnel
use telemarketing to target specific customer groups, such as potential
corporate clients in areas where the Company's franchised hotels are located,
the motor coach market, and meeting planners. Most of these sales personnel sell
reservations and services for all of the Choice brands.
The Company's regional sales directors work with franchisees to
maximize RevPAR. These directors advise franchisees on topics such as marketing
their hotels and maximizing the benefits offered by the Choice reservations
system.
Quality Assurance Programs. Consistent quality standards are critical to the
success of a hotel franchise. The Company has established quality standards for
all of its franchised brands which cover housekeeping, maintenance, brand
identification and level of services offered. The Company inspects properties
for compliance with its quality standards when application is made for admission
to the franchise system. The compliance of existing franchisees with quality
standards is monitored through scheduled and unannounced Quality Assurance
Reviews conducted at least once per year at each property. Properties which fail
to maintain a minimum score are reinspected on a more frequent basis until
deficiencies are cured, or until such properties are terminated.
17
To encourage compliance with quality standards, the Company offers
various brand-specific incentives to franchisees who maintain consistent quality
standards. The Company identifies franchisees whose properties operate below
minimum quality standards and assists them in complying with brand
specifications. Franchisees who fail to improve on identified quality matters
may be subject to consequences ranging from written warnings to termination of
the franchisee's franchise agreement. During the twelve months ended December
31, 1998, the Company terminated 159 domestic properties for failure to maintain
minimum quality assurance scores.
Training. The Company maintains a training department which conducts mandatory
training programs for all franchisees and their employees. The Company also
conducts regularly scheduled regional and national training meetings for both
property-level staff and managers. Training programs teach franchisees how to
take advantage of the Choice reservation system and marketing programs, and
fundamental hotel operations such as housekeeping, maintenance, and inventory
yield management.
Training is conducted by a variety of methods, including group
instruction seminars and video programs. The Company is developing an
interactive computer-based training system that will train hotel employees at
their own pace. Franchisees will be required to purchase hardware to operate the
training system, and will use software developed by the Company.
Purchasing. The Company's product services department negotiates volume
purchases of various products needed by franchisees to run their hotels,
including furniture, fixtures, carpets and bathroom amenities. The department
also helps to ensure consistency in such products across its exclusively new-
construction brands, Sleep Inn and MainStay/SM/ Suites brands. Sales to
franchisees by the Company were approximately $21.3 million during the twelve
months ended December 31, 1998. The group purchasing program consists of the
Company's utilization of bulk purchases to obtain favorable pricing from third-
party vendors for franchisees ordering similar products. The Company acts as a
clearinghouse between the franchisee and the vendor, and most orders are shipped
directly to the franchisee. In the fourth quarter of 1998, the Company
discontinued the group purchasing program as previously operated.
Design and Construction. The Company maintains a design and construction
department to assist franchisees in refurbishing, renovating, or constructing
their properties prior to or after joining the system. Department personnel
assist franchisees in meeting the Company's brand specifications by providing
technical expertise and cost-savings suggestions.
Financial Assistance Programs. From time to time, the Company establishes
programs or helps franchisees obtain financing through (i) a wholly owned
subsidiary; (ii) strategic partnerships with hotel lenders and (iii) by referral
to hotel lenders for hotel refinancing, acquisition, renovation and development.
In March 1999, the Company established a program that awards a cash incentive of
$125,000 each to the first 100 MainStay Suites projects that meet program
standards. The program, which will expire November 15, 1999, will provide for
cash incentives, taking the form of 10-year development loans forgivable at the
end of the term. To be eligible for the incentive, properties must be in a
predefined target area and franchisees must adhere to all specified brand
standards. Groundbreaking must occur within six months of deal acceptance.
18
Some of the past programs include: (i) a Second Mortgage Financing
program under which the Company offered second mortgage financing for the
development and construction of Quality Inn, Quality Suites, Quality Inn and
Suites, Main Stay Suites and Sleep Inns; (ii) an Econo Lodge exterior renovation
program under which forgivable loans up to an amount of $17,500 per property
were given to qualified Econo Lodge franchisees for standardized exterior
renovation; and (iii) 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, 1998, loans outstanding under the above programs were $2.5 million,
$3.1 million and $18.4 million, respectively, and the Company's guarantee
covered $9.2 million in loans.
Competition
Competition among franchise lodging chains is intense, both in
attracting potential franchisees to the system and in generating reservations
for franchisees.
The Company believes that hotel operators choose lodging franchisors
based primarily on the perceived value and quality of each franchisor's brand
and services, and the extent to which affiliation with that franchisor may
increase the franchisee's reservations and profits. The Company believes that
hotel operators select a franchisor in part based on the franchisor's reputation
among other franchisees, and the success of its existing franchisees.
The Company is the second largest hotel franchisor in the world. The
largest, Cendant Corporation (formerly HFS, Inc.), has over 5,500 franchised
hotels. Bass Hotels & Resorts has 2,621, Accor has 2,577, Marriott
International, Inc. has 1,477, Promus has 1,119, Starwood Hotels and Resorts has
653, Carlson Hospitality has 437, Hilton Hotels has 255 and Hospitality
International has 236. The figures in this paragraph are with respect to U.S.
hotel properties as indicated in the July 1998 issue of Hotels Magazine.
The Company's prospects for growth are largely dependent upon the
ability of its franchisees to compete in the lodging market, since the Company's
franchise system revenues are based on franchisees' gross room revenues.
The ability of a hotel to compete may be affected by a number of
factors, including the location and quality of its property, the number and
quality of competing properties nearby, its affiliation with a recognized name
brand, and general regional and local economic conditions. The effect of local
economic conditions on the Company's results is substantially reduced by the
geographic diversity of the Company's franchised properties, which are located
in all 50 states and in 35 other countries, as well as its range of products and
room rates.
Service Marks and Other Intellectual Property
The service marks Quality, Comfort, Clarion, Sleep, Econo Lodge,
Rodeway, MainStay and related marks and logos are material to the Company's
business. The Company, directly and through its franchisees, actively uses
these marks. All of the material marks are registered with the United States
Patent and Trademark Office. In addition, the Company has
19
registered certain of its marks with the appropriate governmental agencies in
over 100 countries where it is doing business or anticipates doing business in
the foreseeable future. The Company seeks to protect its brands and marks
throughout the world, although the strength of legal protection available varies
from country to country.
Seasonality
The Company's principal sources of revenues are franchise fees based
on the gross room revenues of its franchised properties. The Company experiences
seasonal revenue patterns similar to those of the lodging industry in general.
This seasonality can be expected to cause quarterly fluctuations in the
Company's revenues, profit margins and net income of Choice.
Regulation
The Company's franchisees are responsible for compliance with all laws
and government regulations applicable to the hotels they own or operate. The
lodging industry is subject to numerous federal, state and local government
regulations, including those relating to the preparation and sale of food and
beverage (such as health and liquor license laws), building and zoning
requirements and laws governing with employee relations, including minimum wage
requirements, overtime, working conditions and work permit requirements.
The Federal Trade Commission (the "FTC"), various states and certain
other foreign jurisdictions (including France, Province of Alberta, Canada, and
Mexico) regulate the sale of franchises. The FTC requires franchisors to make
extensive disclosure to prospective franchisees but does not require
registration. A number of states in which the Company franchises operate require
registration or disclosure in connection with franchise offers and sales. In
addition, several states have "franchise relationship laws" or "business
opportunity laws" that limit the ability of the franchisor to terminate
franchise agreements or to withhold consent to the renewal or transfer of these
agreements. While the Company's franchising operations have not been materially
adversely affected by such regulation, the Company cannot predict the effect of
future regulation or legislation.
Impact of Inflation and Other External Factors
The Company's principal sources of revenues are franchise fees.
Franchise fees can be impacted by external factors, including, in particular:
the supply of hotel rooms within the lodging industry relative to the demand for
rooms by travelers, and inflation.
Although the Company believes industry-wide supply and demand for
hotel rooms recently has been fairly balanced, any excess in supply that might
develop in the future could unfavorably impact room revenues at the Company's
franchised hotels either by reducing the number of rooms reserved at such
franchised properties or by restricting the rates hotel operators can charge for
their rooms. In addition, an excess supply of hotel rooms may discourage
potential franchisees from opening new hotels, reducing the franchise fees
received by the Company. However, the Company benefits from an increasing
supply of hotels as it serves to increase franchise fees.
20
Although the Company believes that increases in the rate of inflation
will generally result in comparable increases in hotel room rates, severe
inflation could contribute to a slowing of the national economy. Such a
slowdown could result in reduced travel by both business and leisure travelers,
potentially resulting in less demand for hotel rooms, which could result in a
temporary reduction in room rates and fewer room reservations, negatively
impacting the Company's revenues. A weak economy could also reduce demand for
new hotels, negatively impacting the franchise fees received by the Company.
Among the other unpredictable external factors which may affect the
Company's fee stream are wars, airline strikes, gasoline shortages and severe
weather.
Employees
The Company employed domestically approximately 1,850 people as of
December 31, 1998. None of the Company's employees are represented by unions or
covered by collective bargaining agreements. Choice considers its relations
with its employees to be satisfactory.
ITEM 2. PROPERTIES
The principal executive offices of the Company are located at 10750
Columbia Pike, Silver Spring, Maryland 20901. Prior to May, 1998, the offices
were leased from Sunburst; they are currently leased from a third party. The
Company owns its reservation system offices in Phoenix, AZ and Minot, ND. In
1998, a subsidiary of the Company acquired a call center in Grand Junction, CO,
which the Company had previously leased. The Company leases one additional
reservation system office in Grand Junction, CO, pursuant to a lease that
expires in 2000, and occupies additional space in Toronto, Canada, on a month-
to-month basis. In addition, the Company leases 12 sales offices across the
United States. Management believes that its executive, reservation systems and
sales offices are sufficient to meet its present needs and does not anticipate
any difficulty in securing additional or alternative space, as needed, on terms
acceptable to the Company.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any litigation, other than routine
litigation incidental to its business. None of such litigation, either
individually or in the aggregate, is expected to be material to the business,
financial condition or results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year ended December 31, 1998.
EXECUTIVE OFFICERS OF CHOICE HOTELS INTERNATIONAL, INC.
The name, age, title, present principal occupation, business address and
other material occupations, positions, offices and employment of each of the
executive officers of the Company are set forth below. The business address of
each executive officer is 10750 Columbia Pike, Silver Spring,
21
Maryland 20901, unless otherwise indicated.
NAME AGE POSITION
---- --- --------
Stewart Bainum, Jr........................ 52 Chairman of the Board of Directors
Charles A. Ledsinger, Jr.................. 49 Chief Executive Officer and President
Thomas Mirgon............................. 42 Senior Vice President, Administration
Mark C. Wells............................. 49 Senior Vice President, Marketing
Michael J. DeSantis....................... 40 Senior Vice President, General Counsel and Secretary
Joseph M. Squeri.......................... 33 Vice President, Treasurer and Controller
Background of Executive Officers:
Stewart Bainum, Jr., 52, Chairman of the Board of the Company from March
1987 to November 1996 and since October 1997; Director of the Company since
1977; Chairman of the Board of Sunburst since November 1996; Chairman of the
Board of HCR Manor Care, Inc. since September, 1998; Chairman of the Board and
Chief Executive Officer of Manor Care, Inc. from March 1987 to September, 1998;
Chief Executive Officer of Manor Care, Inc. and its subsidiary ManorCare Health
Services, Inc. ("MCHS") from March 1987 to September, 1998 and President from
June 1989 to September, 1998; Vice Chairman of the Board of Vitalink Pharmacy
Services, Inc. ("Vitalink") from December 1994 to September, 1998; Vice Chairman
of the Board of Manor Care and subsidiaries from June 1982 to March 1987;
Director of Manor Care from August 1981 to September 1998, of Vitalink from
September 1991 to September, 1998, of MCHS from 1976 to September 1998; Chairman
of the Board and Chief Executive Officer of Vitalink from September 1991 to
February 1995 and President and Chief Executive Officer from March 1987 to
September 1991.
Charles A. Ledsinger, Jr., 49, President, Chief Executive Officer and
Director of the Company since August, 1998; President and Chief Operating
Officer of St. Joe Company from February 1998 to August 1998, Senior Vice
President and Chief Financial Officer of St. Joe Company from May 1997 to
February 1998; Senior Vice President and Chief Financial Officer of Harrah's
Entertainment, Inc. from June 1995 to May 1997; Senior Vice President and Chief
Financial Officer of Promus Companies Incorporated from August 1990 to June
1995. Director: FelCor Lodging Trust, Inc., Friendly's Ice Cream Corporation
and TBC.
Thomas Mirgon. Senior Vice President, Administration since April 1998;
Senior Vice President, Human Resources of the Company from March 1997 to April
1998 and of Former Choice from March 1997 to October 1997; Vice President,
Administration of Interim Services from August 1993 to February 1997; employed
by Taco Bell Corp. from January 1986 to August 1993, last serving as Senior
Director, Field Human Resources from February 1992 to August 1993.
Mark C. Wells. Senior Vice President-Marketing of the Company since May
1998; Senior Vice President, Franchise Services of Promus Hotel Corporation from
1996 to March 1998; Senior Vice President, Marketing of Promus Hotel Corporation
from 1994 to 1996.
22
Michael J. DeSantis. Senior Vice President, General Counsel and Secretary
of the Company since June 1997 and of Former Choice from June 1997 to October
1997; Senior Attorney for Former Choice from November 1996 to June 1997; Senior
Attorney for Manor Care from January 1996 to October 1996; Vice President,
Associate General Counsel and Assistant Secretary for Caterair International
Corporation from April 1994 to December 1995; Assistant General Counsel of
Caterair International from May 1990 to March 1994.
Joseph M. Squeri. Treasurer of the Company since April 1998; Vice
President, Finance and Controller of the Company since March 1997 and of Former
Choice from March 1997 to October 1997; Director of Investment Funds, The
Carlyle Group, from November 1994 to February 1997; various positions with
Arthur Andersen LLP from July 1987 to November 1994, most recently as Manager.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Prior to the Spin-off, the Company was a wholly-owned subsidiary of
Former Choice. In the Spin-off, Former Choice distributed to its shareholders
all of its interest in the Company on the basis of one share of Company common
stock for each share of Former Choice common stock. The Spin-off resulted in
approximately 60 million shares of Company common stock outstanding as of
October 16, 1997.
The shares of the Company's Common Stock are listed and traded on the
New York Stock Exchange. The following table sets forth information on the high
and low prices of the Company's Common Stock since October 16, 1997.
QUARTERLY MARKET PRICE RANGE OF COMMON STOCK
(Unaudited)
Quarters Ended MARKET PRICE PER SHARE
---------------------------------------------------------------
HIGH LOW
---------------------------------------------------------------
FISCAL 1998
March 18 1/2 14 5/16
June 18 7/16 12
September 14 7/16 11 5/8
December 13 5/16 9 5/8
FISCAL 1997(1)
October 16 --
November 30 $18 $17
CALENDER 1997(1)
October 16 -
December 31 $18 $15 7/8
23
_________________________
(1) On September 16, 1997, the Company changed its fiscal year end
from May 31 to December 31. The Spin-off occurred on October 15, 1997,
and no trading occurred prior to that date.
The Company paid no dividends during the twelve month period ended December
31, 1998. The Company does not anticipate the payment of any cash dividends on
its common stock in the foreseeable future. Payment of dividends on Company
common stock will also be subject to limitations as may be imposed by the
Company's credit facilities from time to time. The declaration of dividends
will be subject to the discretion of the Board of Directors.
As of March 10, 1999, there were 4,037 record holders of Company common
stock.
ITEM 6. SELECTED FINANCIAL DATA.
The required information is included on page 1 of the 1998 Annual
Report and is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS
AND RESULTS OF OPERATIONS.
The required information is included on pages 20-27 of the 1998
Annual Report and is incorporated herein by reference.
ITEM 7A. The Company is exposed to market risk from changes in interest
rates and the impact of fluctuations in foreign currencies on the Company's
foreign investments. The Company manages its exposure to this market risk
through the monitoring of its available financing alternatives including in
certain circumstances the use of derivative financial instruments. The Company's
strategy to manage exposure to changes in interest rates and foreign currencies
remains unchanged from 1997. Furthermore, the Company does not foresee any
significant changes in exposure in these areas or in how such exposure is
managed in the near future.
The following table summarizes information about derivative
financial information and other financial instruments that are sensitive to
changes in interest rates, including interest rate swap agreements and debt
obligations. For interest rate swap agreements, the table presents notional
amounts and weighted average interest rates by expected (contractual) maturity
date.
24
EXPECTED MATURITY DATE
1999 2000 2001 2002 2003 THEREAFTER TOTAL 1998 FAIR VALUE
---- ---- ---- ---- ---- ---------- ------- ---------------
Liabilities:
Long-term debt(1)
Fixed rate 100,0000 100,000 100,000 100,000 100,000 100,000 100,000 97,561
Average 7.13% 7.13% 7.13% 7.13% 7.13%
interest rate
Variable rate(2) 179,210 179,210 179,210 172,210 179,210 179,210 179,210 179,210
Average interest rate(3) 5.06% 5.45% 5.65% 5.73% 5.81%
INTEREST RATE DERIVATIVES
EXPECTED MATURITY DATE
1999 2000 2001 2002 2003 THEREAFTER TOTAL 1988 FAIR VALUE
---- ---- ---- ---- ---- ---------- ----- ---------------
Notional Amount 115,000 115,000 115,000 115,000
Average interest rate 5.85% 5.85% 5.85% 5.85%
Receivable 0 0 0 0
Payable 909 449 230 138 2,800
(1) A hypothetical one percentage point change in interest rates would
change the fair value of long-term debt by $6.46 million.
(2) The Company will refinance the $150 million variable rate term loan as
it amortizes throughout the expected maturity dates. Upon expiration of
the credit facility in 2002, the Company expects to refinance its
obligations.
(3) Weighted average variable rates are based on implied forward rates in
the yield curve at the reporting date.
The Company is also exposed to fluctuations in foreign currency relating to
its preferred stock investment in Friendly Hotels, PLC which is denominated
in British Pounds. The Company does not have any derivative financial
instruments related to its foreign investments.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The required information is included on page(s) 29-44 of the 1998
Annual Report and is incorporated herein by reference. See Item 14 for the
Index to Financial Statements and Schedules.
25
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The required information on directors is included on pages 3-4 of the Proxy
Statement dated March 29, 1999 and is incorporated herein by reference. The
required information on executive officers is set forth in Part I of this Form
10-K under an unnumbered item captioned "Executive Officers of Choice Hotels
International, Inc."
ITEM 11. EXECUTIVE COMPENSATION.
The required information is included on pages 9-14 of the Proxy
Statement dated March 30, 1999 and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The required information is included on pages 6-8 of the Proxy
Statement dated March 29, 1999 and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The required information is included on pages 18-25 of the Proxy
Statement dated March 29, 1999 and is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(A) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT
1. FINANCIAL STATEMENTS
The following information is included on the corresponding pages of
the 1998 Annual Report:
Consolidated Statements of Income................... p. 29
Consolidated Balance Sheets......................... p. 30
Consolidated Statements of Shareholders' Equity..... p. 32
Consolidated Statements of Cash Flows............... p. 31
Report of Independent Public Accountants............ p. 28
26
Notes to Consolidated Financial Statements.......... pp. 33-44
2. FINANCIAL STATEMENT SCHEDULES
The following reports are filed herewith.
Report of Independent Public Accountants on Schedule..............
Consent of Independent Public Accountants.........................
Schedule II: Valuation and Qualifying Accounts...................
All other schedules are not applicable.
3. EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
3.01(a) Restated Certificate of Incorporation of Choice Hotels Franchising, Inc.
3.02(a) Amended and Restated Bylaws of Choice Hotels International, Inc.
4.01(c) Credit Agreement dated October 15, 1997 among Choice Hotels International, Inc., Chase
Manhattan Bank, as Agent and certain Lenders
4.02(c) First Amendment to Credit Agreement dated February ___, 1998 among Choice Hotels
International, Inc., Chase Manhattan Bank, as Agent, and certain Lenders.
4.03 * Second Amendment to Credit Agreement, dated as of March 30, 1998 among Choice Hotels
International, Inc., Chase Manhattan Bank, as agent, and certain Lenders.
4.04 * Third Amendment to Credit Agreement, dated as of April 9, 1998 among Choice Hotels
International, Inc., Chase Manhattan Bank, as agent, and certain Lenders.
4.05 * Fourth Amendment to Credit Agreement, dated as of December 16, 1998, among Choice Hotels
International, Inc., Chase Manhattan Bank, as agent, and certain Lenders.
4.06(h) Registration Agreement dated April 28, 1998 between Choice Hotels International, Inc. and
Salomon Brothers, Inc., Bear Stearns & Co. Inc. and Lehman Brothers Inc.
4.07(h) Indenture dated as of May 4, 1998, by and among the Company, Quality Hotels Europe, Inc., QH
Europe Partnership and Marine Midland Bank, as Trustee, with respect to the 7.125% Senior
Notes due 2008 of the Company.
4.08(h) Specimen certificate of 7.125% Senior Note due 2008 (Original Note) (Attached as an exhibit
to the Indenture set forth as Exhibit 4.08)
4.09(h) Specimen certificate of 7.125% Senior Note due 2008 (Exchange Note) (Attached as an exhibit
to the Indenture set forth as Exhibit 4.08)
4.10(b) Guarantee Agreement dated October 15, 1997 between Quality Hotels Europe, Inc. and The Chase
Manhattan Bank.
4.11(b) Supplement No. 1 to the guarantee Agreement dated April 28, 1998 among Choice Hotels
International, Inc., Quality Hotels Europe, Inc., QH Europe Partnership and The Chase
Manhattan Bank.
4.12(b) Indemnity, Subrogation and Contribution Agreement, dated April 28, 1998 among Choice Hotels
International, Inc., Quality Hotels Europe, Inc., QH Europe Partnership and The Chase
Manhattan Bank.
4.13(g) Rights Agreement, dated as of February 19, 1998, between Choice Hotels International, Inc.
and ChaseMellon Shareholder Services, L.L.C., as Rights Agent.
10.01(a) Employment Agreement between Choice Hotels International, Inc. and Charles A. Ledsinger, Jr.
dated July 31, 1998.
10.02(d) Distribution Agreement dated as of October 15, 1997 by and between Choice Hotels
International, Inc. (renamed Sunburst Hospitality Corporation) and Choice Hotels
Franchising, Inc. (renamed Choice Hotels International, Inc.)
10.03(d) Employee Benefits Administration Agreement dated as of October 15, 1997 by and between
27
Choice Hotels International, Inc. (renamed Sunburst Hospitality Corporation) and Choice
Hotels Franchising, Inc. (renamed Choice Hotels International, Inc.)
10.04(d) Tax Administration Agreement dated as of October 15, 1997 by and between Choice Hotels
International, Inc. (renamed Sunburst Hospitality Corporation) and Choice Hotels
Franchising, Inc. (renamed Choice Hotels International, Inc.
10.05(d) Tax Sharing Agreement dated as of October 15, 1997 by and between Choice Hotels
International, Inc. (renamed Sunburst Hospitality Corporation) and Choice Hotels
Franchising, Inc. (renamed Choice Hotels International, Inc.)
10.09(d) Employee Benefits Allocation Agreement dated as of October 15, 1997 by and between Choice
Hotels International, Inc. (renamed Sunburst Hospitality Corporation) and Choice Hotels
Franchising, Inc. (renamed Choice Hotels International, Inc.)
10.10(d) Strategic Alliance Agreement dated as of October 15, 1997 by and between Choice Hotels
International, Inc. (renamed Sunburst Hospitality Corporation) and Choice Hotels
Franchising, Inc. (renamed Choice Hotels International, Inc.)
10.11(d) Non-Competition Agreement dated as of October 15, 1997 by and between Choice Hotels
International, Inc. (renamed Sunburst Hospitality Corporation) and Choice Hotels
Franchising, Inc. (renamed Choice Hotels International, Inc.)
10.12(d) Omnibus Amendment and Guaranty dated as of October 15, 1997 by and among Choice Hotels
International, Inc. (renamed Sunburst Hospitality Corporation), Choice Hotels Franchising,
Inc. (renamed Choice Hotels International, Inc.) and Manor Care, Inc.
10.13(d) Amended and Restated Employment Agreement dated as of October 15, 1997 by and between Choice
Hotels Franchising, Inc. (renamed Choice Hotels International, Inc.) and Stewart Bainum, Jr.
10.14(d) Assignment of Employment Agreement dated as of October 15, 1997 by and among Choice Hotels
International, Inc. (renamed Sunburst Hospitality Corporation), Choice Hotels Franchising,
Inc. (renamed Choice Hotels International, Inc.) and Thomas Mirgon
10.15 * Omnibus Amendment Agreement dated December 28, 1998 between Choice Hotels International,
Inc. and Sunburst Hospitality Corporation.
10.16(f) Choice Hotels International, Inc. Non-Employee Director Stock Option and Deferred
Compensation Stock Purchase Plan.
10.17(f) Choice Hotels International, Inc. 1997 Non-Employee Director Stock Compensation Plan.
10.18(f) Choice Hotels International, Inc. 1997 Long-Term Incentive Plan.
10.19(h) Employment Agreement dated April 13, 1998 between Choice Hotels International, Inc. and Mark
Wells.
10.20(I) Employment Agreement dated April 29, 1998 between Choice Hotels International, Inc. and
Michael J. DeSantis.
10.21(i) Agreement and Release dated June 16, 1998 between Choice Hotels International, Inc. and
William R. Floyd.
10.22 * Commercial Lease dated May 29, 1998 among Columbia Pike I, LLC and Colesville Road, LLC
(each an assignee of Manor Care, Inc.) and Choice Hotels International, Inc.
13.01 * Annual Report to Shareholders
21.01 * Subsidiaries of Choice Hotels International, Inc.
23.01 * Consent of Arthur Andersen LLP
27.01 * Financial Data Schedule
99.01 * Proxy Statement dated March 29, 1998.
- -------------------------
* Filed herewith
(a) Incorporated by reference to the identical document filed as an exhibit to
Choice Hotels International, Inc.'s Registration Statement on Form S-4,
filed August 31, 1998 (Reg. No. 333-62543).
(b) Incorporated by reference to the identical document filed as an exhibit to
Choice Hotels International, Inc.'s Amendment No. 1 to Registration
Statement on Form S-4, filed October 14, 1998 (Reg. No. 333-62543).
28
(c) Incorporated by reference to the identical document filed as an exhibit to
Choice Hotels International, Inc.'s "Transitional Report on Form 10-k dated
June 1, 1997, to December 31, 1997, filed on March 31, 1998.
(d) Incorporated by reference to the identical document filed as an exhibit to
Choice Hotels International, Inc.'' Current Report on Form 8-K dated
October 15, 1997, filed on October 29, 1997.
(c) Incorporated by reference to the identical document filed as an exhibit to
Choice Hotels International, Inc.'' Current Report on Form 8-K dated
October 15, 1997, filed on December 16, 1997.
(f) Incorporated by reference to the identical document filed as an exhibit to
Choice Hotels International, Inc.'' Registration Statement filed on Form S-
8, filed on December 2, 1997 (Reg. No. 333-41357).
(g) Incorporated by reference to the identical document filed as an exhibit to
Choice Hotels International, Inc.'s Current Report on Form 8-K dated
February 19, 1998, filed on March 11, 1998.
(h) Incorporated by reference to the identical document filed as an exhibit to
Choice Hotels International, Inc.'' Quarterly Report on Form 10-Q filed for
the quarterly period ended March 31, 1998, filed on May 15, 1998.
(i) Incorporated by reference to the identical document filed as an exhibit to
Choice Hotels International, Inc.'' Quarterly Report on Form 10-Q filed for
the quarter ended June 30, 1998, filed on August 11, 1998.
(B) No reports on Form 8-K were filed during the last quarter of the fiscal
year ended December 31, 1998
29
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange 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.
By: /s/ Charles A. Ledsinger, Jr.
-----------------------------
Charles A. Ledsinger, Jr.
President and Chief Executive Officer
Dated: March 30, 1999
30
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Stewart Bainum, Jr. Chairman, Director March 30, 1999
- ------------------------------
Stewart Bainum, Jr.
/s/ Barbara Bainum Director March 30, 1999
- ------------------------------
Barbara Bainum
/s/ James H. Rempe Director March 30, 1999
- ------------------------------
James H. Rempe
/s/ Larry R. Levitan Director March 30, 1999
- ------------------------------
Larry R. Levitan
/s/ Frederic V. Malek Director March 30, 1999
- ------------------------------
Frederic V. Malek
/s/ Gerald W. Petitt Director March 30, 1999
- ------------------------------
Gerald W. Petitt
/s/ Jerry E. Robertson Director March 30, 1999
- ------------------------------
Jerry E. Robertson
/s/ Joseph M. Squeri Vice President, March 30, 1999
- ------------------------------ Treasurer and Controller
Joseph M. Squeri
31
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
To the Stockholders of Choice Hotels International, Inc.:
We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements included in Choice Hotels International,
Inc.'s annual report to shareholders incorporated by reference in this Form 10-
K, and have issued our opinion thereon dated January 29, 1999. Our audit was
made for the purpose of forming an opinion on those consolidated financial
statements taken as a whole. The schedule listed in the index above under Item
14(a)2 is the responsibility of the Company's management and is presented for
the purpose of complying with the Securities and Exchange Commission's rules and
is not part of the basic consolidated financial statements. This schedule has
been subjected to the auditing procedures applied in the audit of the basic
consolidated financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic consolidated financial statements taken as a whole.
Arthur Andersen LLP
Washington, D.C.
January 29, 1999
CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS OF DOLLARS)
BALANCE AT CHARGES TO BALANCE AT
BEGINNING OF PROFIT END
DESCRIPTION PERIOD AND LOSS WRITE-OFFS OF PERIOD
----------- ------ -------- ---------- ----------
Year ended December 31, 1998
Allowance for doubtful accounts $7,608 $1,473 $ (999) $8,082
====== ====== ======== ======
Seven months ended December 31, 1997
Allowance for doubtful accounts $6,159 $2,274 $ (825) $7,608
====== ====== ======== ======
Year ended December 31, 1997
Allowance for doubtful accounts $4,515 $2,238 $ (594) $6,159
====== ====== ======== ======
Year ended May 31, 1996
Allowance for doubtful accounts $3,976 $ 685 $ (146) $4,515
====== ====== ======== ======
CHOICE HOTELS INTERNATIONAL, INC.
10750 Columbia Pike, Silver Spring, Maryland 20901
PROXY SOLICITED BY THE BOARD OF DIRECTORS
FOR ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD APRIL 29, 1999
The undersigned hereby appoints JERRY E. ROBERTSON and CHARLES A. LEDSINGER, JR.
and each of them, the true and lawful attorneys and proxies, with full power of
substitution, to attend the Annual Meeting of Shareholders of Choice Hotels
International, Inc. (The "Company") to be held on April 29, 1999 at 9:00 a.m. at
the Company's Corporate Headquarters, Choice Centre, 10770 Columbia Pike, Silver
Spring, Maryland and at any adjournment thereof, and to vote all shares of
common stock held of record which the undersigned could vote, with all the
powers the undersigned would possess if personally present at such meeting, as
designated below.
All shares of Company common stock that are represented at the Annual Meeting by
properly executed proxies received prior to or at the Annual Meeting and not
revoked will be voted at the Annual Meeting in accordance with the instructions
indicated herein. If no instructions are indicated for the Election of
Directors, such proxies will be voted in accordance with the Board of Directors'
recommendation as set forth herein with respect to such proposal.
CHOICE HOTELS INTERNATIONAL, INC., ANNUAL MEETING, APRIL 29, 1999 AT 9:00 A.M.
DIRECTIONS TO CHOICE CENTRE
10770 Columbia Pike
Silver Spring, MD 20901
From Washington, DC - 16th Street North to Route 29 (Colesville Road). Pass over
the Beltway (495), at which point Colesville Road becomes Columbia Pike. Choice
Centre is on the left side approximately 2 miles past the Beltway.
From National Airport to Headquarters - Take George Washington Parkway
approximately 8 miles to the Beltway I-495 North. Go North and follow Beltway as
it curves East to (2nd Silver Spring Exit 30 North Colesville Road). Go
approximately 2 1/2 miles to Choice Hotels Headquarters on your left side.
From Dulles Airport to Headquarters - Use Dulles Free Access (stay off toll
road). Go East approximately 18 miles to I-495 North Beltway. Go North and
follow Beltway as it curves east to (2nd Silver Spring Exit 30 North Colesville
Road). Go approximately 2 1/2 miles to Choice Hotels Headquarters on your left
hand side.
From BWI to Headquarters - Take 195 west for 4 miles. The take I-95 south for 14
miles to Highway 198 west toward Burtonsville. Go west 3 miles to Route 29
(Colesville Road). Turn left on Route 29 (south) and go approximately 7 miles to
Choice Hotels Headquarters - next to Mobil gas station.
From Baltimore, MD - Take I-95 South to Highway 198 west toward Burtonsville. Go
west 3 miles to Route 29 (Colesville Road). Turn left on Rte. 29 (south) and go
approximately 7 miles to Choice Centre.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE FOR THE
ELECTION OF THE PROPOSED DIRECTORS
Election of two Directors:
FOR all nominees WITHHOLD
listed below AUTHORITY
(except as marked to vote for all nominees NOMINEES: Stewart Bainum, Jr.
to the contrary) Listed to the right and James H. Rempe
[ ] [ ]
(Instruction: To withhold authority to vote
for any individual nominee, write that
nominee's name in the space provided
below)
__________________________________________
If you plan to attend the Annual
Meeting of Shareholders, please
mark the following box and
promptly return this Proxy Card.
Dated _____________________ 1999
----------------------------------
Signature
----------------------------------
Signature
(Signatures should correspond
exactly with the name or names
appearing above. Attorneys,
trustees, Executors,
administrators, guardians and
others signing in a representative
capacity should designate their
full titles. If the signer is a
corporation, please sign the full
corporate name by a duly
authorized officer.)
FOLD AND DETACH HERE