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<SEC-DOCUMENT>0000928385-01-000963.txt : 20010409
<SEC-HEADER>0000928385-01-000963.hdr.sgml : 20010409
ACCESSION NUMBER: 0000928385-01-000963
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 6
CONFORMED PERIOD OF REPORT: 20001231
FILED AS OF DATE: 20010402
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: CHOICE HOTELS INTERNATIONAL INC /DE
CENTRAL INDEX KEY: 0001046311
STANDARD INDUSTRIAL CLASSIFICATION: HOTELS & MOTELS [7011]
IRS NUMBER: 521209792
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 10-K
SEC ACT:
SEC FILE NUMBER: 001-13393
FILM NUMBER: 1589713
BUSINESS ADDRESS:
STREET 1: 10770 COLUMBIA PIKE
CITY: SILVER SPRING
STATE: MD
ZIP: 60563
BUSINESS PHONE: 3015925000
MAIL ADDRESS:
STREET 1: 10770 COLUMBIA PIKE
CITY: SILVER SPRING
STATE: MD
ZIP: 60563
FORMER COMPANY:
FORMER CONFORMED NAME: CHOICE HOTELS FRANCHISING INC
DATE OF NAME CHANGE: 19971118
FORMER COMPANY:
FORMER CONFORMED NAME: CHOICE HOTELS INTERNATIONAL INC/
DATE OF NAME CHANGE: 19971022
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K
<SEQUENCE>1
<FILENAME>0001.txt
<DESCRIPTION>FORM 10-K
<TEXT>
<PAGE>
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, 2000
-----------------
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)
<TABLE>
<S> <C>
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
</TABLE>
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 ___
---
<PAGE>
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 $303,365,792 as of March 20, 2001 based upon a
closing price of $11.87 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 20, 2001 was 45,311,738.
DOCUMENTS INCORPORATED BY REFERENCE.
Certain portions of Registrant's annual report to stockholders for the fiscal
year ended December 31, 2000 are incorporated by reference under Parts I and II.
Certain portions of Registrant's definitive proxy statement, to be filed with
the Securities and Exchange Commission pursuant to Regulation 14A not later than
120 days after the close of the Registrant's fiscal year, are incorporated by
reference under Part III.
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I..................................................... 6
FORWARD LOOKING STATEMENTS................................. 6
ITEM 1. BUSINESS........................................... 6
Overview................................................... 6
Company History............................................ 7
The Lodging Industry....................................... 8
Franchise Business......................................... 9
Economics of Franchise Business........................... 10
Strategy................................................... 10
Building Strong Brands.................................... 10
Deliver Exceptional Services.............................. 11
Reach More Consumers...................................... 11
Franchise System........................................... 11
Brand Positioning.......................................... 12
Comfort................................................... 12
Sleep Inn................................................. 13
Quality................................................... 13
Clarion................................................... 14
Econo Lodge............................................... 14
Rodeway................................................... 15
MainStay Suites........................................... 15
International Franchise Operations......................... 16
Europe.................................................... 16
Canada.................................................... 18
Australia................................................. 18
Other International Relationships......................... 18
Franchise Sales............................................ 18
Franchise Agreements....................................... 19
Franchise Operations....................................... 20
Central Reservation System................................ 20
Property Management System................................ 21
Brand Name Marketing and Advertising...................... 21
Quality Assurance Programs................................ 22
Training.................................................. 22
Design and Construction................................... 23
Financial Assistance Programs............................. 23
Competition................................................ 23
Service Marks and Other Intellectual Property.............. 24
Seasonality................................................ 24
</TABLE>
3
<PAGE>
<TABLE>
<S> <C>
Regulation...................................................... 24
Impact of Inflation and Other External Factors.................. 25
Employees....................................................... 25
ITEM 2. PROPERTIES............................................. 25
ITEM 3. LEGAL PROCEEDINGS...................................... 26
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS......................................................... 26
Executive Officers of the Company............................... 26
PART II......................................................... 28
ITEM 5. MARKET FOR REGISTRANT'S COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS.......................... 28
ITEM 6. SELECTED FINANCIAL DATA................................ 29
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS...................................................... 29
ITEM 7A. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK................................... 30
ITEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA.............................................. 30
ITEM 9. CHANGES IN AND DISAGREEMENTS
WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE........................................ 30
PART III........................................................ 30
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
OF THE REGISTRANT............................................... 30
ITEM 11. EXECUTIVE COMPENSATION................................. 31
ITEM 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT................................ 31
ITEM 13. CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS............................................ 31
</TABLE>
4
<PAGE>
<TABLE>
<S> <C>
PART IV......................................................... 31
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K......................................... 31
(a) Index to Financial Statements............................... 31
(b) Reports on Form 8-K......................................... 34
(c) Exhibits.................................................... 32
Signatures...................................................... 35
</TABLE>
5
<PAGE>
PART I
Forward-Looking Statements
Certain statements in this report that are not historical facts constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act. Words such as "believes," "anticipates," "expects,"
"intends," "estimates," "projects," and other similar expressions, which are
predictions of or indicate future events and trends, typically identify forward-
looking statements. Such statements are subject to a number of risks and
uncertainties which could cause actual results to differ materially from those
projected, including: competition within each of our business segments; business
strategies and their intended results; the balance between supply of and demand
for hotel rooms; our ability to obtain new franchise agreements; our ability to
develop and maintain positive relations with current and potential hotel owners;
the effect of international, national and regional economic conditions; the
availability of capital to allow us and potential hotel owners to fund
investments and construction of hotels; the cost and other effects of legal
proceedings; and other risks described from time to time in our filings with the
Securities and Exchange Commission, including those set forth under the heading
"Risk Factors" in our Report on Form 10-Q for the period ended June 30, 1999.
Given these uncertainties, you are cautioned not to place undue reliance on such
statements. We also undertake no obligation to publicly update or revise any
forward-looking statement to reflect current or future events or circumstances.
Item 1. Business
Overview
Choice Hotels International, Inc. (the "Company" or "Choice") is the
world's second largest franchisor of hotel properties with 4,392 hotels open and
operating in 38 countries at December 31, 2000. In addition, at December 31,
2000, we had 703 franchise properties currently under development representing a
total of 60,927 rooms. Choice franchises lodging properties under one of our
proprietary brand names (the "Choice brands"): Comfort(R), Quality(R),
Clarion(R), Sleep(R), Rodeway(R), Econo Lodge(R) and MainStaySM. We franchise
hotels in all 50 states, Puerto Rico and the District of Columbia and 37
additional countries, with 97% of our franchising revenue generated from hotels
franchised in the United States. With recognized brands and a diverse and
growing franchisee base, we believe we have a strong foundation for continued
growth.
Choice is a lodging franchisor with limited real estate exposure and
low capital expenditure requirements. With a focus on hotel franchising versus
ownership, we benefit from the economies of scale inherent in the franchising
business. The fee and cost structure of our business provides significant
opportunities to increase profits by increasing the number of franchise
properties. We derive most of our revenues from franchise fees which consist of
an initial fee and ongoing royalty fees that are based as a percentage of the
franchisees' gross room revenues.
6
<PAGE>
The principal factors that affect our 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; (iv) effective royalty rates achieved; and (v) our ability to manage
costs. The number of rooms at franchised properties and occupancies and room
rates at those properties significantly affect our 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 we are able to capture a
significant portion of these royalty fees as operating income. Continued growth
of our franchise business should enable us to capture increasing benefits from
the operating leverage in place which would improve operating margins.
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 through 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
7
<PAGE>
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, 2000, there were approximately 4.1 million hotel
rooms in the United States in hotels/motels containing twenty or more rooms. Of
those rooms, approximately 1.3 million rooms were not affiliated with a national
or regional brand, while the remaining approximately 2.8 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:
The US Lodging Industry's Growth Trends Since 1995
<TABLE>
<CAPTION>
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
- ---- ----------- ---------- -------- ----------- ----------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
1999......... 7.4% 63.3% $81.27 4.0% 2.7% $51.44 $23.0 143,148
2000......... 8.6% 63.5% $85.24 4.7% 3.4% $54.13 $24.0 121,476
</TABLE>
We believe the lodging industry can be divided into three price
categories: luxury or upscale, mid-scale and economy. Typically, the luxury
category generally has room rates above $80 per night, the mid-scale category
generally has room rates between $50 and $79 per night and the economy category
generally has room rates less than $50 per night. Additionally, a new category
has emerged of extended-stay hotels that primarily serve guests who stay at a
hotel five consecutive nights. These hotels span the industry's three price
categories.
________________________
/(1)/ Source: Smith Travel Research
8
<PAGE>
Service is a distinguishing characteristic in the lodging industry.
Generally, 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) and Rodeway(R) brands compete primarily
in the limited-service economy market; the Company's Comfort(R), Quality(R) and
Sleep(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 hotels without
on-premise food and beverage, as these 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 mid-scale categories and are located in
suburban or highway locations. From 1991 to 2000, the average room count in new
hotels declined from 122 to 103 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 976
hotel properties that changed their affiliation in 2000, 70.4% converted from
independent status to affiliation with a chain or converted from one chain to
another, while only 289 converted from affiliation with a chain to independent
status. A total of 223 independent properties switched to a franchise chain in
2000.
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, training and education programs, property
systems, revenue enhancement services, 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.
We believe 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
9
<PAGE>
Economics of Franchise Business. The fee and cost structure of the Company's
business provides significant opportunities for us to increase profits by
increasing the number of franchised properties. As a hotel franchisor, we derive
substantially all of our 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 our 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 are used exclusively
by the Company's marketing and reservation funds 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 our 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 we are able
to capture a significant portion of these royalty fees as operating income.
Strategy. Our business strategy is designed to aggressively grow our core hotel
franchising business by benefiting from Choice's well-known global hotel
products, proven franchise sales capabilities, effective reservations delivery,
many RevPAR enhancing services and technology, and financial strength created by
our significant free cash flow.
Specific elements of our strategy include building strong brands, delivering
exceptional services, and reaching more consumers.
Build Strong Brands - Each of our brands has particular attributes and
strengths. Our strategy is to utilize the strengths of each brand for profit
growth.
. Use Financial Resources to Create Critical Mass in Growth Brands - Although
we intend to rely mainly on hotel franchising versus ownership, we will
strategically invest capital in select Choice-branded hotels, especially in
primary markets where our distribution has been limited. We believe that
investing in hotels to create a presence in these markets will generate
increased brand visibility, higher quality product in key locations, improved
system-wide revenue, increased brand consistency, and improved developer
returns- leading to more guest stays and an ability to sell more franchises.
We will also create new images for brands where necessary in order to create
a more customer-focused and contemporary brand image.
. Protect Mature Brands -- Many Choice brands benefit from their large
distribution and well-known names. These brands, while maintaining a standard
of guest satisfaction and amenities, are not "cookie-cutter" in design or
operations. We will ensure these brands remain appealing to hotel owners and
guests alike by focusing on consumer-driven quality assurance and through
terminating the poorest performing properties that do not meet standards and
lower overall system performance.
10
<PAGE>
Consider New Products and Acquisitions - The Company will continue to
identify new niches into which we may expand, either through new product
development or acquisition.
Deliver Exceptional Services. The Company has successfully created a wide
array of services and local customer touch points to help franchisees improve
performance. Marketing services help create effective positioning for brands and
drive guest stays. Reservations services deliver a high percentage of guests
directly to properties. Our field staff, in combination with strong technology
products, directly helps property owners effectively manage their properties to
improve RevPAR performance. These services create revenue gains for hotel owners
and translate into both higher royalty rates for Choice and improved returns for
owners, leading to further unit growth. These services also make Choice brands
attractive to both experienced hotel owners and owners and developers new to the
industry. We will continue to focus on aligning these services with customer
needs and creating efficient, effective, and coordinated service delivery
systems to create the most benefits for franchisees and ensure our overhead
costs are minimized.
Additionally, the significant number of hotels in our system provides a
compelling opportunity to provide low-cost products and effective purchasing
technology to franchisees through partnerships with endorsed vendors while
creating enhanced cash flows for Choice. We intend to continue to expand this
business, both by increasing penetration internally, creating new vendor
relationships, and identifying opportunities for external growth.
Reach More Consumers. Hotel owners greatly value the large delivery of guests
we provide through corporate and brand marketing, reservations, sales, and Guest
Privileges program. Our strategy is to continue to maximize the effectiveness of
these services and programs to deliver both leisure and business travelers to
Choice-branded hotels.
New advertising campaigns for our company and updated signs and logos for our
Comfort, Sleep and Quality brands are designed to increase the awareness of
Choice Hotels and refresh our image. Our emphasis will be on improving overall
contributions from higher rate business travelers while continuing to stress our
very powerful leisure market. Programs such as 100% Satisfaction Guarantee and
alliances with major consumer groups such as AAA are designed to expand our
distribution. Our continued focus on overall brand quality coupled with these
new initiatives is designed to stimulate room demand for our franchised hotels
through improved guest satisfaction.
Franchise System
Our 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 our
domestic franchise system over the two fiscal years ended May 31, 1997, for the
seven-month period ended December 31, 1997 and for the four fiscal years ended
December 31, 2000.
11
<PAGE>
Combined Domestic Franchise System
<TABLE>
<CAPTION>
As of and for the
As of and for the Year Ended Seven Months Ended As of and for the Year Ended
May 31, December 31, December 31,
------------------------------------------------------------------------------------------
1996 1997 1997 1997 1998 1999 2000
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Number of properties, end of
period........................... 2,495 2,781 2,880 2,880 3,039 3,123 3,244
Number of rooms, end of period.... 214,613 235,431 242,161 242,161 252,357 258,120 265,962
Royalty fees ($000)............... $ 82,239 $ 91,724 $ 65,271 $ 99,144 $ 109,240 $ 120,932 $ 131,702
Average Royalty Rate(1)........... 3.3% 3.4% 3.5% 3.5% 3.6% 3.7% 3.8%
Average occupancy percentage...... 63.9% 62.6% 66.2% 62.3% 61.0% 60.5% 59.8%
Average daily room rate (ADR)..... $ 49.49 $ 51.92 $ 54.97 $ 53.89 $ 56.23 $ 58.42 $ 61.45
RevPAR(2)......................... $ 31.60 $ 32.52 $ 36.39 $ 33.56 $ 34.30 $ 35.33 $ 36.72
</TABLE>
(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.
We have over 2,300 domestic franchisees and operate in all 50 states
and the District of Columbia. Approximately 96% of the total royalty income is
generated from domestic franchise operations. Consequently, our analysis of our
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 our largest franchisee with a portfolio
of 73 hotels containing 9,965 rooms located in 25 states as of December 31,
2000.
Brand Positioning
Our brands offer consumers a wide range of choices from economy hotels to
upscale, full service properties.
Comfort. Our largest brand is Comfort. Comfort Inns offer rooms in the mid-scale
without food and beverage category and is targeted to business and leisure
travelers. Principal competitor brands include Baymont, Fairfield Inn, Hampton
Inn, Holiday Express and LaQuinta. Comfort Suites offer business and leisure
guests a large room with separate living and sleeping areas. This product
competes in the upper portion of the mid-scale without food and beverage
category against brands such as AmeriSuites, Hampton Inn and Suites and Spring
Hill. At December 31, 2000, there were 1,652 Comfort Inn properties and 288
Comfort Suites properties with a total of 126,440, and 22,846 rooms,
respectively, open and operating worldwide. An additional 278 Comfort Inn and
Comfort Suites properties with a total of 22,633 rooms were under development.
During 2000, we added 125 Comfort properties while terminating 24.
Comfort properties are located in the United States and in Argentina,
Australia, the Bahamas, Belgium, Brazil, Canada, Cayman Islands, Czech Republic,
Denmark, Egypt, El Salvador, France, Germany, India, Ireland, Italy, Jamaica,
Japan, Lebanon, 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:
12
<PAGE>
COMFORT DOMESTIC SYSTEM
<TABLE>
<CAPTION>
As of and for the
As of and for the Year Ended Seven Months Ended As of and for the Year Ended
May 31, December 31, December 31,
----------------------------------------------------------------------------------------
1996 1997 1997 1997 1998 1999 2000
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Number of properties, end of
period......................... 1,129 1,255 1,304 1,304 1,394 1,470 1,568
Number of rooms, end of period.. 94,160 102,722 105,384 105,384 110,682 112,727 122,761
Royalty fees ($000s)............ $44,657 $ 50,758 $ 36,446 $ 55,261 $ 61,153 $ 68,177 $ 75,968
Average occupancy percentage.... 68.7% 67.2% 71.3% 66.6% 65.4% 64.8% 63.7%
Average daily room rate (ADR)... $ 51.13 $ 54.17 $ 57.15 $ 55.74 $ 58.19 $ 60.57 $ 63.77
RevPAR.......................... $ 35.11 $ 36.39 $ 40.75 $ 37.15 $ 38.03 $ 39.26 $ 40.60
</TABLE>
Sleep Inn. Established in 1988, Sleep Inn is a new-construction hotel brand in
the lower portion of the mid-scale without food and beverage category. Sleep
Inns are targeted to the business and leisure traveler. Principal competitor
brands include Fairfield Inn, Holiday Express, LaQuinta and Red Roof.
At December 31, 2000 there were 268 Sleep Inn properties with a total
of 20,771 rooms open and operating worldwide. An additional 121 properties with
a total of 8,956 rooms were under development. During 2000, 39 Sleep Inn
properties were added while 2 were terminated. The properties are located in the
United States, Brazil, Canada, Cayman Islands and Japan. The following chart
summarizes the Sleep system in the United States:
SLEEP DOMESTIC SYSTEM
<TABLE>
<CAPTION>
As of and for the
As of and for the Year Ended Seven Months Ended As of and for the Year Ended
May 31, December 31, December 31,
-------------------------------------------------------------------------------------
1996 1997 1997 1997 1998 1999 2000
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Number of properties, end of
period.......................... 87 131 156 156 197 224 261
Number of rooms, end of period... 6,396 9,635 11,538 11,538 14,924 17,199 20,158
Royalty fees ($000s)............. $2,108 $3,343 $ 2,630 $ 3,926 $ 5,337 $ 7,241 $ 8,713
Average occupancy percentage..... 65.5% 63.9% 66.5% 63.0% 62.0% 60.6% 59.6%
Average daily room rate (ADR).... $45.11 $48.11 $ 50.54 $ 49.41 $ 51.32 $ 53.91 $ 55.82
RevPAR........................... $29.56 $30.75 $ 33.60 $ 31.11 $ 31.82 $ 32.66 $ 33.25
</TABLE>
Quality. Certain Quality Inns, Quality Inns and Suites, and Quality Suites
hotels compete in the mid-scale with food and beverage category. Quality Inns,
Quality Inns and Suites, and Quality Suites are targeted to business and leisure
travelers. Principal competitor brands include Best Western, Holiday Inn, Howard
Johnson and Ramada Inn. At December 31, 2000, there were 716 Quality Inn and
Quality Inns and Suites properties with a total of 75,858 rooms, and 50 Quality
Suites properties with a total of 5,419 rooms open worldwide. An additional 167
Quality Inn, Quality Inns and Suites and Quality Suites properties with a total
of 17,912 rooms were under development. During 2000, a total of 45 Quality
properties were added while 41 were terminated.
Quality properties are located in the United States and in Australia,
Brazil, Canada, Chile, Costa Rica, the Czech Republic, Denmark, Egypt, France,
Germany, India, Indonesia, Ireland, Italy, Jamaica, Malaysia, New Zealand,
Norway, Portugal, Russia, Sweden,
13
<PAGE>
Thailand, the United Kingdom and the United Arab Emirates. The following chart
summarizes the Quality system in the United States:
QUALITY DOMESTIC SYSTEM
<TABLE>
<CAPTION>
As of and for the
As of and for the Year Ended Seven Months Ended As of and for the Year Ended
May 31, December 31, December 31,
----------------------------------------------------------------------------------------------
1996 1997 1997 1997 1998 1999 2000
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Number of properties, end of
period........................ 362 409 419 419 430 431 436
Number of rooms, end of period. 45,967 50,487 50,674 50,674 50,151 49,331 49,191
Royalty fees ($000s)........... $16,606 $17,623 $14,459 $18,488 $20,187 $21,034 $21,753
Average occupancy percentage 62.5% 61.3% 63.8% 60.2% 58.9% 58.0% 57.6%
Average daily room rate (ADR).. $ 52.90 $ 54.61 $ 57.58 $ 56.79 $ 60.02 $ 61.89 $ 64.05
RevPAR......................... $ 33.08 $ 33.46 $ 36.73 $ 34.19 $ 35.35 $ 35.90 $ 36.86
</TABLE>
Clarion. Clarion Inns, Clarion Hotels, Clarion Resorts and Clarion Suites hotels
are full-service properties with on-premise food and beverage facilities and
operate in the upscale category. Clarion properties are targeted to business and
leisure travelers. Principal competitor brands include Crowne Plaza, Four Points
by Sheraton, Radisson, Courtyard by Marriott and Doubletree.
At December 31, 2000, there were 153 Clarion properties with a total of
23,872 rooms open and operating worldwide and an additional 26 properties with a
total of 3,892 rooms under development. During 2000, 14 Clarion properties were
added while 15 were terminated. The properties are located in the United States,
Argentina, Australia, the Bahamas, Canada, Chile, China, Denmark, France,
Germany, Guatemala, Indonesia, Ireland, Italy, Japan, Norway, the United Kingdom
and Uruguay. The following chart summarizes the Clarion system in the United
States:
CLARION DOMESTIC SYSTEM
<TABLE>
<CAPTION>
As of and for the
As of and for the Year Ended Seven Months Ended As of and for the Year Ended
May 31, December 31, December 31,
---------------------------------------------------------------------------------------
1996 1997 1997 1997 1998 1999 2000
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Number of properties, end of
period........................... 75 92 96 96 105 112 114
Number of rooms, end of period.... 12,817 14,721 16,161 16,161 17,878 18,815 18,537
Royalty fees ($000s).............. $ 3,602 $ 4,081 $ 2,957 $ 5,061 $ 5,447 $ 6,491 $ 7,796
Average occupancy percentage...... 63.3% 63.3% 64.7% 62.3% 60.5% 59.0% 58.8%
Average daily room rate (ADR)..... $ 64.36 $ 67.76 $ 71.53 $ 70.67 $ 72.25 $ 74.17 $ 81.37
RevPAR............................ $ 40.74 $ 42.86 $ 46.29 $ 44.05 $ 43.73 $ 43.74 $ 47.86
</TABLE>
Econo Lodge. Econo Lodge hotels operate in the 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, Motel 6, Ramada Limited, Red Carpet Inn, Super 8 and
Travelodge.
At December 31, 2000, there were 716 Econo Lodge properties with a
total of 44,220 rooms open and operating in the United States and Canada, and an
additional 57
14
<PAGE>
properties with a total of 3,765 rooms under development in those two countries.
During 2000, 38 Econo Lodge properties were added while 55 were terminated. The
following chart summarizes the Econo Lodge system in the United States:
ECONO LODGE DOMESTIC SYSTEM
<TABLE>
<CAPTION>
As of and for the
As of and for the Year Ended Seven Months Ended As of and for the Year Ended
May 31, December 31, December 31,
----------------------------------------------------------------------------------------
1996 1997 1997 1997 1998 1999 2000
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Number of properties, end of
period.......................... 641 682 692 692 698 691 684
Number of rooms, end of period... 42,726 44,636 45,050 45,050 44,458 43,754 42,611
Royalty fees ($000s)............. $12,760 $13,288 $ 8,991 $13,687 $13,975 $14,313 $14,490
Average occupancy percentage..... 58.0% 56.4% 60.7% 56.1% 54.3% 54.0% 52.9%
Average daily room rate (ADR).... $ 39.97 $ 41.33 $ 43.86 $ 42.35 $ 43.55 $ 45.01 $ 46.33
RevPAR........................... $ 23.17 $ 23.30 $ 26.63 $ 23.75 $ 23.65 $ 24.32 $ 24.51
</TABLE>
Rodeway. The Rodeway brand competes in the economy category and is primarily
targeted to senior citizens. Principal competitor brands include Ho-Jo Inn,
Ramada Limited, Red Roof Inn, Shoney's Inn, Super 8 and Motel 6. At December 31,
2000, there were 151 Rodeway Inn properties with a total of 9,868 rooms, open
and operating in the United States and Canada, and an additional 17 properties
with a total of 1,152 rooms under development in those two countries. During
2000, 8 Rodeway properties were added while 23 were terminated. The following
chart summarizes the Rodeway system in the United States:
RODEWAY DOMESTIC SYSTEM
<TABLE>
<CAPTION>
As of and for the
As of and for the Year Ended Seven Months As of and for the Year Ended
May 31, Ended December 31,
December 31,
---------------------------------------------------------------------------------------
1996 1997 1997 1997 1998 1999 2000
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Number of properties, end of
period......................... 201 217 209 209 196 166 147
Number of rooms, end of period.. 12,547 13,509 12,997 12,997 12,447 10,613 9,605
Royalty fees ($000s)............ $ 2,506 $ 2,631 $ 1,756 $ 2,671 $ 2,678 $ 2,552 $2,391
Average occupancy percentage.... 52.7% 52.7% 54.7% 51.4% 50.1% 50.7% 50.3%
Average daily room rate (ADR)... $ 40.66 $ 41.15 $ 44.11 $ 43.15 $ 44.03 $ 45.57 $48.25
RevPAR.......................... $ 21.48 $ 21.68 $ 24.13 $ 22.20 $ 22.04 $ 23.09 $24.25
</TABLE>
MainStay Suites. MainStay Suites, our newest hotel brand, is a midscale
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, 2000,
there were 34 open hotels with 3,099 rooms and an additional 26 properties with
2,044 rooms under development. During 2000, 5 MainStay Suites properties were
added.
The MainStay/SM/ Suites brand is designed to fill the gap in the
midscale category between existing upscale and economy extended-stay lodging
products. Principal competitors brands include Candlewood Suites, Homestead
Village, Sierra Suites and TownePlace Suites.
15
<PAGE>
International Franchise Operations
We conduct our international business through master franchise
arrangements, direct franchise agreements, and investments in overseas
hospitality companies that are involved with both hotel management and
franchising. The use of our brands by third parties overseas are governed by
master franchising agreements which generally provide the master franchisee with
the right to the brands in a specific geographic region, usually for a fee. As
of December 31, 2000, we had 1,148 franchise hotels in 37 countries outside of
the United States. The following table illustrates the growth of our
international operations over the two fiscal years ended May 31, 1997, for the
seven month period ended December 31, 1997 and for the four fiscal years ended
December 31, 2000.
COMBINED INTERNATIONAL FRANCHISE SYSTEM(1)
<TABLE>
<CAPTION>
As of and for the
As of and for the Year Seven Months Ended As of and for the Year Ended
Ended December 31, December 31,
May 31,
------------------------------------------------------------------------------
1996 1997 1997 1997 1998 1999 2000
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Number of properties, end of
period............................. 557 563 605 605 632 1,125 1,148
Number of rooms, end of period...... 46,843 47,603 50,639 50,639 53,095 80,134 84,389
Royalty fees ($000s)................ $ 1,586 $ 1,672 $ 958 $ 2,303 $ 4,902 $ 6,949 $ 5,286
</TABLE>
(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. Through our relationships with Friendly Hotels, PLC ("Friendly")
and Choice Hotels Scandinavia ("CHS"), we are the second largest branded hotel
chain in Europe. As of December 31, 2000, Friendly's portfolio consisted of 305
properties which were owned, managed or franchised. CHS had 107 open properties
at December 31, 2000.
In May 1996, we granted to Friendly a master franchise agreement for the
United Kingdom and Ireland. In January 1998, we also granted Friendly the master
franchise rights for the Comfort, Quality, Clarion, and Sleep brands throughout
continental Europe (excluding Scandinavia) for a ten-year period. In exchange,
we received shares of common stock and were to receive an $8.0 million payment,
payable in eight equal annual installments.
As of December 31, 2000, we held 1,083,333 shares of common stock and
23,624,742 shares of 5.75% convertible preferred stock in Friendly. The
preferred shares were convertible for one new Friendly common share for every
150 pence nominal of the preferred convertible shares.
We have the right to appoint three directors to the board of Friendly.
Given our ability to exercise significant influence over the operations of
Friendly, the equity method of accounting is applied.
On January 19, 2001, the shareholders of Friendly approved a capital
reorganization and new strategic direction for Friendly. The capital
reorganization is intended to provide Friendly with a stronger financial
structure that will enable it to achieve its new strategic plan and to leverage
its close association with us.
16
<PAGE>
Pursuant to the capital reorganization, we waived all master, royalty, and
marketing fees due from Friendly under the continental European and United
Kingdom and Republic of Ireland master franchise agreements for the period
between December 27, 1999 and December 31, 2005 and provided a 7.8 million
[British Pounds] secured Letter of Credit, in consideration for, among other
things, a reduction in the conversion price of our convertible preferred shares
from 150 pence to 60 pence. Other modifications to our convertible preferred
shares include a change in the dividend rate from 5.75% (payable in cash) to 2%
per annum, if payable in additional convertible preferred shares. Friendly may
alternatively elect to pay cash dividends at the rate of 3.5% per annum up until
January 30, 2013 and thereafter at the rate of 5.75%. In addition, accrued
dividends due to us as of February 7, 2001 were converted to additional
convertible preferred shares of Friendly. Additionally in 2001, Friendly had
drawn down 5.5 million [British Pounds] on the secured Letter of Credit.
The impact of the reduction in the conversion price together with the
conversion of dividend arrearage to additional convertible preferred shares, is
to increase our fully diluted-ownership of Friendly, on a converted basis, from
44% to 69%. Friendly was also granted an option to settle the deferred
consideration of $4.0 million pursuant to the January, 1998 transaction, in
additional convertible preferred shares. In the event that Friendly settles this
obligation before maturity, the amount payable shall be discounted at a rate of
10% per annum.
We do not control Friendly nor have the requirement to consolidate Friendly
for financial reporting purposes. Our fully diluted holding in Friendly is 69%,
but voting rights in that percentage would only be granted to us if we converted
the convertible preferred shares to ordinary shares. Currently we only have 5.4%
of the voting rights. Additionally, we have appointed three of the eight
existing directors to the board of Friendly, and therefore cannot control any
vote. These appointed directors do not have the legal right under English law to
vote on resolutions regarding matters where we are a related party.
In addition to the capital reorganization, Friendly has entered into new
arrangements with its bank group and commenced a non-core real estate asset
disposal program to de-leverage its balance sheet. In order to enable its
disposal program, Friendly revalued its real estate portfolio at December 31,
2000 and recognized a non-cash write-down of 49.1 million [British Pounds]
pursuant to this revaluation. We recognized an equity loss of $(12.1) million
for the year ended December 31, 2000 related to Friendly's revaluation and
capital restructuring.
Since the closing of the restructuring transaction in January 2001, we
continue to closely monitor strategic options with respect to our investment in
Friendly. In the event that Friendly's financial condition deteriorates, there
may not be sufficient cash from operations and available credit lines to fund
the business. In the event that Friendly cannot secure additional borrowings or
equity, we will consider our strategic and financial options, including, but not
limited to, i) stand-aside to additional funding requirements which would likely
result in the insolvency of Friendly, a further or complete write-down of our
investment in Friendly and taking back our franchising rights for the UK,
Ireland and continental Europe, or ii) conversion of our convertible preferred
shares into ordinary equity resulting in control of and full consolidation of
Friendly.
17
<PAGE>
Canada. We conduct our operation in Canada through Choice Hotels Canada, Inc. a
joint venture owned 50% by us and 50% by W-westmont, a subsidiary of Westmont
Hospitality. Choice Hotels Canada is the largest lodging organization in Canada
with 236 franchised properties open as of December 31, 2000.
Australia. In June 1998, we entered into a strategic alliance with Flag
International Limited ("FIL"). Pursuant to the transaction, a subsidiary of FIL,
Flag Choice Hotels ("FCH"), was formed to conduct franchise operations in
Australia. Through July 2002, we are obligated to provide a loan facility to FCH
in an amount up to A$5.0 million, of which A$3.75 million may be converted to an
additional 15% equity holding in FCH. As of December 31, 2000, we held 15% of
FCH through the conversion of A$1.875 million in notes and held one seat on
FCH's board of directors. Upon conversion of the remaining amounts, we will be
entitled to an additional board seat. As of December 31, 2001, FCH had 55
franchised properties opened under the Choice brands and 356 franchised hotels
under the Flag brands. Through ongoing discussions with individual property
owners, FCH will continue its efforts to convert appropriate Flag branded
properties to the appropriate Choice brands.
Other International Relationships. We have various master franchise and area
representative arrangements in place with local hotel management and franchising
companies located in South America, India, New Zealand, Central America, Japan,
Indonesia, and Egypt. In addition, the Company has direct franchise
relationships with six properties in the Caribbean, two properties each in
Thailand, Malaysia, and Lebanon, and one property each in China, Dubai, and
Tunisia.
Franchise Sales
We have identified key market areas for hotel development based on
supply/demand relationships and strategic objectives. Development opportunities
are first offered; (i) to existing franchisees; and then to (ii) developers of
hotels; (iii) owners of independent hotels and motels; (iv) owners of hotels
affiliated with other franchisors' brands; and; (v) 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, We consider locations which are
close to major highways, airports, tourist attractions and business centers that
attract travelers.
At December 31, 2000, we employed approximately 35 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, our commitment to improving RevPAR,
our television, radio and print brand advertising campaigns, the Choice
reservation system, our training and support systems (including our proprietary
property management system) and our history of growth and profitability. Because
the Choice brands cover a broad spectrum of the lodging marketplace, we are 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.
18
<PAGE>
Because retention of existing franchisees is important to our growth
strategy, we created a formal Impact Policy in 1992, which was revised in July,
1999, which offers existing franchisees the right to object to a same-brand
property within a 15 mile radius. The Impact Policy protects franchisees from
the opening of a same-brand property within a specific distance, which can range
from one to seven miles, depending upon the market in which the property is
located. We believe that it is the only major franchise company to routinely
offer such territorial protection to its franchisees.
During fiscal 2000, Choice received 801 franchise applications, signed
298 franchise agreements and placed 274 new properties into operation in the
United States under the Choice brands. Of those placed into operations, 170 were
newly constructed hotels. By comparison, during the twelve month period ended
December 31, 1999, we received 788 franchise applications, signed 318 franchise
agreements and added 279 new properties into operation in the U.S. An
application received may not always result in a signed franchise agreement
during the year received or at all 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 2000, we continued to place great focus on enforcing quality
standards. Terminations for properties on-line that failed to meet quality
assurance standards and contractual obligations were 161 properties in 2000 and
193 properties in 1999.
Franchise Agreements
Our standard franchise agreement grants a franchisee the right to non-
exclusive use of our 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 us. Master franchise agreements generally have a term of at
least 10 years. We have 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 us 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
us to terminate the agreement for failure to meet a specified development
schedule.
19
<PAGE>
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 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 we occasionally contribute 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 us.
The standard franchise agreements typically require our franchisees to
pay the following fees:
Quoted Fees by Brand
<TABLE>
<CAPTION>
Initial Fee
Per Room/ On-Going Fees as a Percentage of Gross Room Revenues
-------------------------------------------------------------
Brand Minimum Royalty Fees Marketing Fees Reservation Fees
----- --------------- ------------------- ---------------- ------------------
<S> <C> <C> <C> <C>
Comfort Inn............................... $300/$50,000 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%
</TABLE>
___________________
(1) Fee includes both Marketing and Reservation Fees.
We have increased our 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, 2000, our average royalty rate for all
Choice domestic brand hotels was 3.85%. We believe that our average royalty rate
will continue to increase by adding new franchisees at higher royalty rates.
Franchise Operations
Our operations are designed to improve RevPAR for our franchisees, as
this is the measure of performance that most directly impacts franchisee
profitability. We believe that by helping our franchisees to become more
profitable we will enhance our ability to both retain our existing franchisees
and attract new franchisees. The key aspects of our franchise operations are:
Central Reservation System.
On average, approximately 37.6% of the room nights booked at
franchisees' properties are reserved through a central reservation system, which
is supported by
20
<PAGE>
our toll-free telephone reservation system, our proprietary Internet site, and
global distribution systems. Our reservation system consists of a computer
reservation system known as CHOICE 2001, three reservation centers in North
America and several international reservation centers run by us or our 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 our franchised properties as well as to the Amadeus, Galileo, SABRE
and Worldspan airline reservation systems that facilitates the reservation
process for travel agents. We also offer our rooms for sale on our own
proprietary Internet site as well as those of other travel companies.
To define more sharply the market and image for each of our brands, we
began advertising separate toll-free reservation numbers for all of our brands
in fiscal year 1995, although we allow our 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. 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, we provide a yield
management product for our 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. We also market to our 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. Our 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. We believe
that Profit Manager provides Choice Hotels with a competitive advantage over
hotels and franchise systems that do not have standardized property and yield
management systems.
As of March 9, 2001, 2,353 hotels in the United States and Canada are
using Profit Manager, with 1,562 of those hotels utilizing the revenue
management function.
Brand Name Marketing and Advertising. Our 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.
Numerous marketing programs are conducted which target specific
groups, including senior citizens, motorist club members, families, government
and military employees, and meeting planners. Other marketing efforts include
domestic and international trade show
21
<PAGE>
programs, publication of group and tour rate directories, direct-mail programs,
centralized commissions for travel agents, fly-drive programs in conjunction
with major airlines, and annual publication of a Travel and Vacation Directory.
In 1998, we launched a program called Guest Privileges at four of our
brands (Comfort, Clarion, Quality and Sleep) to attract and retain frequent
travelers. As of December 31, 2000, the program had 899,200 members. In 2001,
Choice intends to rename the program to Choice Privileges.
Marketing and advertising programs are directed by our marketing
department, which utilizes the services of independent advertising agencies. We
also employ sales personnel at our Silver Spring, Maryland, headquarters and in
our Phoenix, Arizona office. These sales personnel use telemarketing to target
specific customer groups, such as potential corporate clients in areas where our
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.
Our franchise service directors work with franchisees to maximize
RevPAR. These directors advise franchisees on topics such as marketing their
hotels, improving quality 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. We have established quality standards for all of
our franchised brands which cover housekeeping, maintenance, brand
identification and level of services offered. We inspect properties for
compliance with our 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.
To encourage compliance with quality standards, various brand-specific
incentives are offered to franchisees who maintain consistent quality standards.
We identify franchisees whose properties operate below minimum quality standards
and assist 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, 2000, 79 domestic properties were
terminated for failure to maintain minimum quality assurance scores.
Training. We maintain a training department which conducts mandatory training
programs for all franchisees and their employees. Regularly scheduled regional
and national training meetings are also conducted 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. We have developed an interactive
computer-based training system
22
<PAGE>
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 us.
Design and Construction. We maintain 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 our brand specifications by providing technical expertise and cost-
savings suggestions.
Financial Assistance Programs. From time to time, we establish programs or help
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.
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, 2000, loans outstanding under the above programs were $2.2 million,
$4.4 million and $6.0 million, respectively, and the Company's guarantee covered
$3.0 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.
We believe 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. We believe that hotel operators
select a franchisor in part based on the franchisor's reputation among other
franchisees, and the success of its existing franchisees.
Choice is the second largest hotel franchisor in the world in terms of
number of open hotels. In the United States, Cendant Corporation (formerly HFS,
Inc.), with over 6,200 franchised hotels, is the largest franchisor. Bass Hotels
& Resorts has 2,221, Hilton has 1,824, Marriott International, Inc. has 1,777,
Accor has 1,174, Carlson Hospitality has 500, and Starwood Hotels and Resorts
has 396 properties./(1)/
_____________________________
/(1)/ Source: Smith Travel Research
23
<PAGE>
Our prospects for growth are largely dependent upon the ability of our
franchisees to compete in the lodging market, since our 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 our results is substantially reduced by the geographic
diversity of our franchised properties, which are located in all 50 states and
in 37 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 our business. We,
directly and through our franchisees, actively use these marks. All of the
material marks are registered with the United States Patent and Trademark
Office. In addition, we have registered certain of our marks with the
appropriate governmental agencies in over 100 countries where we are doing
business or anticipate doing business in the foreseeable future. We seek to
protect our brands and marks throughout the world, although the strength of
legal protection available varies from country to country.
Seasonality
Our principal sources of revenues are franchise fees based on the
gross room revenues of our franchised properties. We experience seasonal revenue
patterns similar to those of the lodging industry in general. This seasonality
can be expected to cause quarterly fluctuations in our revenues, profit margins
and net income.
Regulation
Our 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 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 our franchises operate require
registration or disclosure in connection with franchise offers and sales. In
addition,
24
<PAGE>
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 our
franchising operations have not been materially adversely affected by such
regulation, we cannot predict the effect of future regulation or legislation.
Impact of Inflation and Other External Factors
Our 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 we believe 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 our 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 us. However, we
benefit from an increasing supply of hotels as it serves to increase franchise
fees.
Although we believe 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 our
revenues. A weak economy could also reduce demand for new hotels, negatively
impacting the franchise fees received by us.
Among the other unpredictable external factors which may affect our
fee stream are wars, airline strikes, gasoline shortages and severe weather.
Employees
We employ domestically approximately 1,915 people as of December 31,
2000. None of our employees are represented by unions or covered by collective
bargaining agreements. We consider our relations with our employees to be
satisfactory.
Item 2. Properties
Our principal executive offices are located at 10750 Columbia Pike,
Silver Spring, Maryland 20901. The offices are leased from a third party. We own
our reservation system offices in Phoenix, AZ, Minot, ND, and two call centers
in Grand Junction, CO, which we had previously leased. We also occupy additional
space in Toronto, Canada, on a month-to-month basis. In addition, we lease 6
sales offices across the United States. Management believes that its executive,
reservation systems and sales offices are sufficient to meet its present needs
and
25
<PAGE>
does not anticipate any difficulty in securing additional or alternative space,
as needed, on terms acceptable to the Company.
In September 2000, we acquired three MainStay Suites hotels from
Sunburst. The hotels are located in Brentwood, TN, Pittsburgh, PA and Greer, SC.
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, 2000.
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, Maryland 20901,
unless otherwise indicated.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Stewart Bainum, Jr........................ 54 Chairman of the Board of Directors
Charles A. Ledsinger, Jr.................. 51 Chief Executive Officer and President
Steven T. Schultz...................... 54 Executive Vice President, Franchise Operations
Thomas Mirgon............................. 44 Senior Vice President, Administration
Bruce N. Haase............................ 40 Senior Vice President, International
Michael J. DeSantis....................... 42 Senior Vice President, General Counsel and Secretary
Joseph M. Squeri.......................... 35 Senior Vice President, Chief Financial Officer and Treasurer
Gary Thomson.............................. 46 Senior Vice President, Chief Information Officer
Wayne Wielgus............................. 46 Senior Vice President, Marketing
Daniel Rothfeld........................... 41 Senior Vice President, E-Commerce & Emerging Business
Gregory Bublitz........................... 45 Vice President, Finance and Controller
</TABLE>
Background of Executive Officers:
Stewart Bainum, Jr., 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
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,
26
<PAGE>
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., 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.
Steven T. Schultz. Executive Vice President, Domestic Hotels of the
Company since May 1999; Executive Vice President and Chief Development Officer
of La Quinta Inns, Inc. from 1997 to April 1999; Senior Vice President-
Development of La Quinta Inns, Inc. from 1992 to 1997.
Bruce N. Haase, Senior Vice President, International of the Company
since October 2000. He was Vice President - Finance and Treasurer from April
2000 until October 2000. He was Vice President, Finance and Treasurer of The
Ryland Group, Inc., in Columbia, Maryland, from August 1999 until March 2000 and
Vice President and Treasurer from October 1995 until August 1999.
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.
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. Director:
Friendly Hotels, plc.
Joseph M. Squeri. Senior Vice President and Chief Financial Officer of
the Company since June 1999; Treasurer of the Company since April 1998; Vice
President, Finance and Controller of the Company from March 1997 to June 1999
and of Former Choice from March 1997 to October 1997; Director of Investment
Funds, The Carlyle Group, from November 1994
27
<PAGE>
to February 1997; various positions with Arthur Andersen LLP from July 1987 to
November 1994, most recently as Manager.
Gary Thomson. Senior Vice President and Chief Information Officer of Choice
since August 2000. He was Vice President - Information Systems Technologies from
November 1993 until August 2000.
Wayne Wielgus. Senior Vice President, Marketing of Choice September 2000.
He was Vice President, Marketing of Best Western International, Inc., in
Phoenix, Arizona, from 1996 until September 2000.
Daniel Rothfeld. Senior Vice President, E-Commerce and Emerging Business
Opportunities since December 2000. He was Vice President - Partner Services from
December 1997 until December 2000 and Vice President of Corporate Services of
Interim Services, Inc., in Ft. Lauderdale, Florida, from January 1987 until
December 1997.
Gregory Bublitz. Vice President, Finance and Controller of Choice since
December 2000. He was Vice President - Finance from January 2000 until December
2000. He was an independent business consultant in Columbia, Maryland, from
February 1999 until December 1999. He was Vice President and CFO of Wise Metals
Co., Inc., in Linthicum, Maryland, from October 1996 until January 1999 and Vice
President, Marketing & Customer Service for Alumax Primary Aluminum Corporation,
in Norcross, Georgia, from August 1995 until September 1996.
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 for the two most recent fiscal
years.
QUARTERLY MARKET PRICE RANGE OF COMMON STOCK
(Unaudited)
Quarters Ended Market Price Per Share
----------------------------------------------------------
28
<PAGE>
High Low
-----------------------------------------------------------
FISCAL 2000
March $ 17.375 $ 13.50
June 15.9375 9.9375
September 11.1875 7.50
December 14.25 8.875
FISCAL 1999
March $ 14 3/8 $ 12 5/6
June 19 3/4 13 3/16
September 17 1/2 15 1/8
December 17 3/16 13 11/16
The Company paid no dividends during the twelve month period ended December
31, 2000. 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 20, 2001, there were 3,436 record holders of Company common
stock.
Item 6. Selected Financial Data.
The required information is included on page 1 of the 2000 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 in the 2000 Annual Report and is
incorporated herein by reference.
29
<PAGE>
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The Company is exposed to market risk from changes in interest rates
and the impact of fluctuations in foreign currencies on the Company's foreign
investments. The Company manages its exposure to this market risk through the
monitoring of its available financing alternatives including in certain
circumstances the use of derivative financial instruments. The Company's
strategy to manage exposure to changes in interest rates and foreign currencies
remains unchanged from 1997. Furthermore, the Company does not foresee any
significant changes in exposure in these areas or in how such exposure is
managed in the near future.
At December 31, 2000 and 1999, the Company had $297.2 million and $307.4 million
of debt outstanding at effective interest rates of 7.3% and 6.6%, respectively,
after the impact of interest rate swaps is taken into account. A hypothetical
change of 10% in the Company's effective interest rate from year-end 2000 levels
would increase or decrease interest expense by $1.4 million. The Company will
refinance the $150 million variable rate term loan as it amortizes throughout
the expected maturity dates. Upon expiration of the Credit Facility in 2002, the
Company expects to refinance its obligations. For more information related to
the Company's use of interest rate instruments, see Long-Term Debt and Notes
Payable, Interest Rate Hedges and Fair Value of Financial Instruments in the
Notes to the Consolidated Financial Statements.
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 in the 2000 Annual Report and is
incorporated herein by reference. See Item 14 for the Index to Financial
Statements and Schedules.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The required information on directors will be contained in the
Company's Proxy Statement, and reference is expressly made to the Proxy
Statement for the specific information incorporated in this Form 10-K. 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."
30
<PAGE>
Item 11. Executive Compensation.
The required information will be set forth under "Executive
Compensation" and "Board Compensation Committee Report on Executive
Compensation--Compensation of the Chief Executive Officer" in the Company's
Proxy Statement, and reference is expressly made to the Proxy Statement for the
specific information incorporated in this Form 10-K.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The required information will be set forth under "Security Ownership
of Certain Beneficial Owners and Executive Officers" and "Board of Directors" in
the Company's Proxy Statement, and reference is expressly made to the Proxy
Statement for the specific information incorporated in this Form 10-K.
Item 13. Certain Relationships and Related Transactions.
The required information will be set forth under "Certain
Relationships and Related Transactions" and "Board of Directors--Compensation
Committee Interlocks and Insider Participation" in the Company's Proxy
Statement, and reference is expressly made to the Proxy Statement for the
specific information incorporated in this Form 10-K.
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 2000 Annual Report:
Report of Independent Public Accountants......... p. 31
Consolidated Statements of Income................ p. 32
Consolidated Balance Sheets...................... p. 33
Consolidated Statements of Cash Flows............ p. 34
Consolidated Statements of
Shareholders' Equity and Comprehensive Income.... p. 35
Notes to Consolidated Financial Statements....... pp. 36-50
2 Financial Statement Schedules
31
<PAGE>
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 13, 1998 among
Choice Hotels International, Inc., Chase Manhattan Bank, as Agent,
and certain Lenders.
4.03(j) 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(j) 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(j) 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(k) Fifth Amendment to Credit Agreement dated March 19, 1999 among Choice
Hotels International, Inc., Chase Manhattan Bank as agent, and
certain lenders.
4.07* Sixth Amendment to Credit Agreement dated February 2, 2001 among
Choice Hotels International, Inc., Chase Manhattan Bank as agent, and
certain lenders.
4.08(h) Registration Agreement dated April 28, 1998 between Choice Hotels
International, Inc. and Salomon Brothers, Inc., Bear Stearns & Co.
Inc. and Lehman Brothers Inc.
4.09(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.
4.10(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)
4.11(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)
4.12(b) Guarantee Agreement dated October 15, 1997 between Quality Hotels
Europe, Inc. and The Chase Manhattan Bank.
4.13(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.
4.14(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.
4.15(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(l) Amended and Restated Employment Agreement between Choice Hotels
International, Inc. and Charles A. Ledsinger, Jr. dated April 13,
1999.
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.)
32
<PAGE>
10.03(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.)
10.04(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.)
10.05(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.)
10.07(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.
10.08(i) Amended and Restated Employment Agreement dated April 13, 1999 by and
between Choice Hotels International, Inc. and Thomas Mirgon
10.09(j) Omnibus Amendment Agreement dated December 28, 1998 between Choice
Hotels International, Inc. and Sunburst Hospitality Corporation.
10.10(m) Second Omnibus Amendment Agreement dated February 29, 2000 between
Choice Hotels International, Inc. and Sunburst Hospitality
Corporation.
10.11(f) Choice Hotels International, Inc. Non-Employee Director Stock Option
and Deferred Compensation Stock Purchase Plan.
10.12(f) Choice Hotels International, Inc. 1997 Non-Employee Director Stock
Compensation Plan.
10.13(f) Choice Hotels International, Inc. 1997 Long-Term Incentive Plan.
10.14(i) Second Amended and Restated Employment Agreement dated April 13, 1999
between Choice Hotels International, Inc. and Michael J. DeSantis.
10.15(j) 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.
10.16(i) Employment Agreement dated May 13, 1999 between Choice Hotels
International, Inc. and Steven T. Schultz.
10.17(i) Employment Agreement dated June 3, 1999 between Choice Hotels
International, Inc. and Joseph M. Squeri.
10.18(n) Employment Agreement dated May 3, 2000 between Choice Hotels
International, Inc. and Daniel Rothfeld.
10.19(n) Employment Agreement dated August 18, 2000 between Choice Hotels
International, Inc. and Wayne Wielgus.
10.20* Amended and Restated Supplemental Executive Retirement Plan.
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
- -----------------------
* 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).
(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.
33
<PAGE>
(d) Incorporated by reference to the identical document filed as an exhibit to
Choice Hotels International, Inc.'s Current Report on Form 8-K dated
October 15, 1997, filed on October 29, 1997.
(e) Incorporated by reference to the identical document filed as an exhibit to
Choice Hotels International, Inc.'s 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.'s 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.'s 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.'s Quarterly Report on Form 10-Q filed for
the quarter ended June 30, 1998, filed on August 11, 1998.
(j) Incorporated by reference to the identical document filed as an exhibit to
Choice Hotels International, Inc.'s Annual Report on Form 10-K for the year
ended December 31, 1998, filed on March 30, 1999.
(k) Incorporated by reference to the identical document filed as an exhibit to
Choice Hotels International, Inc.'s Quarterly Report on Form 10-Q for the
quarter ended March 31, 1999, filed on May 4, 1999.
(l) Incorporated by reference to the identical document filed as an exhibit to
Choice Hotels International, Inc.'s Quarterly Report on Form 10-Q for the
quarter ended June 30, 1999, filed on August 16, 1999.
(m) Incorporated by reference to the identical document filed as an exhibit to
Choice Hotels International, Inc.'s Annual Report on Form 10-k for the year
ended December 31, 1999, filed March 30, 2000.
(n) Incorporated by reference to the identical document filed as an exhibit to
Choice Hotels International, Inc.'s Quarterly Report on Form 10-Q for the
quarter ended September 30, 2000, filed November 14, 2000.
(b) No reports on Form 8-K were filed during the last quarter of the fiscal
year ended December 31, 2000.
34
<PAGE>
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, 2001
35
<PAGE>
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.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Stewart Bainum, Jr. Chairman, Director March 30, 2001
- ------------------------------------
Stewart Bainum, Jr.
/s/ Charles A. Ledsinger, Jr. President, Chief Executive Officer & March 30, 2001
- ------------------------------------
Charles A. Ledsinger, Jr. Director
/s/ Barbara Bainum Director March 30, 2001
- ------------------------------------
Barbara Bainum
/s/ Larry R. Levitan Director March 30, 2001
- ------------------------------------
Larry R. Levitan
/s/ William L. Jews Director March 30, 2001
- ------------------------------------
William L. Jews
/s/ Gerald W. Petitt Director March 30, 2001
- ------------------------------------
Gerald W. Petitt
/s/ Raymond E. Schultz Director March 30, 2001
- ------------------------------------
Raymond E. Schultz
/s/ Jerry E. Robertson Director March 30, 2001
- ------------------------------------
Jerry E. Robertson
/s/ Joseph M. Squeri Senior Vice President, Chief March 30, 2001
- ------------------------------------
Joseph M. Squeri Financial Officer and Treasurer
</TABLE>
36
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Choice Hotels International, Inc.:
We have audited in accordance with auditing standards generally accepted in the
United States, the consolidated financial statements included in Choice Hotels
International, Inc.'s and Subsidiaries ("the Company") annual report to
shareholders incorporated by reference in this Form 10-K, and have issued our
opinion thereon dated February 2, 2001. 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 under Item 14(a)2 is the responsibility of the
Company's management and is presented for purposes 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.
/s/ Arthur Andersen LLP
Vienna, Virginia
February 2, 2001
<PAGE>
CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(In thousands of dollars)
<TABLE>
<CAPTION>
Charges (Credits) to Balance at
Balance at Beginning Profit Write-Offs/ End
Description of Period and Loss Deductions of Period
----------- --------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Accounts Receivable:
Year ended December 31, 2000
Allowance for doubtful accounts $6,691 $ (585) $ (352) $5,754
====== ====== ======= ======
Year ended December 31, 1999
Allowance for doubtful accounts $8,082 $ 588 $(1,979) $6,691
====== ====== ======= ======
Year ended December 31, 1998
Allowance for doubtful accounts $7,608 $1,473 $ (999) $8,082
====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
Charges (Credits) to Balance at
Balance at Beginning Profit Write-Offs/ End
Description of Period and Loss Deductions of Period
----------- --------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Restructuring Liability:
Year ended December 31, 2000
Restructuring allowance $ - $5,637 $ (537) $ 5,100
======== ====== ====== =======
</TABLE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-4.07
<SEQUENCE>2
<FILENAME>0002.txt
<DESCRIPTION>CREDIT AGREEMENT
<TEXT>
<PAGE>
Exhibit 4.07
SIXTH AMENDMENT TO
COMPETITIVE ADVANCE AND MULTI-CURRENCY
CREDIT FACILITIES AGREEMENT
This SIXTH AMENDMENT TO COMPETITIVE ADVANCE AND MULTI-CURRENCY CREDIT
FACILITIES AGREEMENT (this "Amendment") is made as of February 2, 2001 by and
among (a) Choice Hotels International, Inc. (the "Borrower"), (b) The Chase
Manhattan Bank ("Chase"), Allfirst Bank, Bank of America, N.A., The Dai-ichi
Kangyo Bank, Ltd., First Union National Bank, The Fuji Bank, Limited, General
Electric Capital Corp., The Industrial Bank of Japan, Limited, New York Branch,
Mellon Bank, N.A., Morgan Guaranty Trust Company of New York, The Sanwa Bank,
Limited, New York Branch, Summit Bank, Suntrust Bank and the other lending
institutions which may become parties to the Credit Agreement (as defined below)
(collectively, the "Lenders") and (c) Chase, as Agent (in such capacity, the
"Agent") for the Lenders.
WHEREAS, the Borrower, the Lenders and the Agent are parties to a
Competitive Advance and Multi-Currency Credit Facilities Agreement dated as of
October 15, 1997, as amended by a First Amendment dated as of February 13, 1998,
a Second Amendment dated as of March 30, 1998, a Third Amendment dated as of
April 9, 1998, a Fourth Amendment dated as of December 16, 1998, and a Fifth
Amendment dated as of March 19, 1999 (as so amended, the "Credit Agreement"),
pursuant to which the Lenders have agreed to make loans to the Borrower;
WHEREAS, the Borrower has requested that the Lenders and the Agent make
certain amendments to the Credit Agreement and the Lenders and the Agent are
willing to amend certain of the provisions of the Credit Agreement upon the
terms set forth herein;
NOW, THEREFORE, in consideration of the foregoing premises, and for other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, and fully intending to be legally bound by this Amendment, the
parties agree to amend the Credit Agreement as follows:
1. Definitions. Capitalized terms used herein without definition shall
-----------
have the meanings assigned to such terms in the Credit Agreement.
<PAGE>
2. Amendments to the Credit Agreement. Effective as of the Effective Date
----------------------------------
(as hereinafter defined), the Credit Agreement is hereby amended in the
following respects:
2.1. Section 1.01 of the Credit Agreement is amended by inserting the
following new definition of "Alternative Currency Letter of Credit" immediately
after the definition of "Alternative Currency":
"'Alternative Currency Letter of Credit' shall mean a Letter of Credit
-------------------------------------
denominated in an Alternative Currency."
2.2. The definition of "Equivalent Dollar Amount" set forth in Section
1.01 of the Credit Agreement is amended by deleting such definition in its
entirety and substituting the following new definition in place thereof:
"'Equivalent Dollar Amount' shall mean, (a) with respect to an amount
------------------------
of any Alternative Currency on any date, the amount of dollars that
may be purchased with such amount of such Alternative Currency at the
Spot Exchange Rate on such date, and (b) with respect to any amount of
dollars on any date, such amount of dollars."
2.3. The definition of "L/C Exposure" set forth in Section 1.01 of the
Credit Agreement is amended by inserting immediately after the words "the sum
of" on the first line thereof the words "the Equivalent Dollar Amount of".
2.4. Section 2.01 of the Credit Agreement is amended by deleting clause
(ii) of the first sentence thereof in its entirety and substituting in place
thereof the following new clause (ii):
"(ii) at no time shall any Loan be made if, immediately after giving
effect thereto and to the application of the proceeds thereof, the sum
of (A) the aggregate Equivalent Dollar Amount of all outstanding
Eurocurrency Loans plus (B) the aggregate undrawn Equivalent Dollar
Amount of all outstanding Alternative Currency Letters of Credit would
exceed the Eurocurrency Sublimit".
2.5. Section 2.02(e) of the Credit Agreement is amended by inserting
immediately after the words "Pro Rata Percentage of" on the fourteenth line
thereof the words "the Equivalent Dollar Amount of".
-2-
<PAGE>
2.6. Section 2.20(a) of the Credit Agreement is amended by inserting
immediately after the words "denominated in dollars" on the sixth line thereof
the words "or in an Alternative Currency".
2.7. Section 2.20(b) of the Credit Agreement is amended by inserting
immediately before the words "the amount of such Letter of Credit" on the
twelfth line thereof the words "whether such Letter of Credit is to be
denominated in dollars or an Alternative Currency,".
2.8. Section 2.20(b) of the Credit Agreement is further amended by
deleting the amount "$10,000,00" in clause (A) of the second to last sentence
thereof and substituting in place thereof the amount "$20,000,000".
2.9. Section 2.20(b) of the Credit Agreement is further amended by
inserting at the end of the second to last sentence thereof (immediately before
the period) the words "and (C) the sum of (A) the aggregate Equivalent Dollar
Amount of all outstanding Eurocurrency Loans plus (B) the aggregate undrawn
Equivalent Dollar Amount of all outstanding Alternative Currency Letters of
Credit shall not exceed the Eurocurrency Sublimit".
2.10. Section 2.20(d) of the Credit Agreement is amended by inserting
immediately after the words "Pro Rata Percentage of" on the twelfth line thereof
the words "the Equivalent Dollar Amount of".
2.11. Section 2.20(e) of the Credit Agreement is hereby amended by
inserting immediately after the first sentence thereof the following new
sentence:
"Notwithstanding anything contained herein to the contrary, however,
in the case of any Alternative Currency Letter of Credit, the Borrower
shall reimburse any drawing thereunder in the Alternative Currency in which
such Alternative Currency Letter of Credit is denominated; provided,
--------
however, that if (x) any such drawing is made at a time when there exists
-------
an Event of Default or (y) the Borrower shall not have notified the Agent
and the Issuing Bank prior to 11 a.m. (New York time) at least two (2)
Business Days immediately prior to such drawing that the Borrower intends
to reimburse the Issuing Bank in the applicable Alternative Currency, then,
in either such case, such reimbursement shall instead be made by payment in
dollars of the Equivalent Dollar Amount of such drawing and in immediately
available funds."
-3-
<PAGE>
2.12. Section 2.21(a) of the Credit Agreement is amended by inserting
immediately after the words "each Eurocurrency Borrowing" on the fifth line
thereof the words "and each undrawn Alternative Currency Letter of Credit".
2.13. Section 2.21(b) of the Credit Agreement is amended by inserting
immediately after the words "repaid on such date)" on the fifth line thereof the
words "and the undrawn Equivalent Dollar Amount of each outstanding Alternative
Currency Letter of Credit".
2.14. Section 2.21(c) of the Credit Agreement is amended by deleting the
first sentence thereof in its entirety and substituting the following new
sentence in place thereof:
"If on any Reset Date with respect to Eurocurrency Loans and
Alternative Currency Letters of Credit outstanding the sum of (A) the
aggregate Equivalent Dollar Amount of all outstanding Eurocurrency Loans
plus (B) the aggregate undrawn Equivalent Dollar Amount of all outstanding
Alternative Currency Letters of Credit exceeds 110% of the Eurocurrency
Sublimit, the Borrower shall on such date prepay Eurocurrency Loans in an
aggregate amount such that, after giving effect thereto, the sum of (A) the
aggregate Equivalent Dollar Amount of all such outstanding Eurocurrency
Loans plus (B) the aggregate undrawn Equivalent Dollar Amount of all
outstanding Alternative Currency Letters of Credit shall be equal to or
less than the Eurocurrency Sublimit."
2.15. Section 6.13 of the Credit Agreement is amended by deleting such
Section in its entirety and substituting the following in place thereof:
"SECTION 6.13. [Intentionally Omitted.]"
3. Previously Issued Letter of Credit. Each of the Borrower, the Lenders,
----------------------------------
the Agent and the Issuing Bank hereby agrees that, from and after the Effective
Date, the standby letter of credit issued by Chase at the request of the
Borrower on January 22, 2001 in the face amount of (Pounds)4,000,000 shall for
all purposes become and thereafter be a Letter of Credit under the Credit
Agreement.
-4-
<PAGE>
4. Representations and Warranties. The Borrower hereby represents and
------------------------------
warrants as follows:
4.1 Representations in Loan Documents. Each of the representations
---------------------------------
and warranties made by or on behalf of the Borrower in any of the Loan Documents
was true and correct when made and is true and correct on and as of the
Effective Date (except to the extent that such representations and warranties
relate expressly to an earlier date) with the same full force and effect as if
each of such representations and warranties had been made by the Borrower on the
Effective Date and in this Amendment.
4.2. Defaults. No Default or Event of Default exists on the
--------
Effective Date.
4.3. Authorization; No Conflicts; Etc. The execution, delivery and
--------------------------------
performance by the Borrower of this Amendment (a) have been duly authorized by
all requisite action, (b) will not (i) violate (x) any provision of law,
statute, rule or regulation, or of the certificate or articles of incorporation,
bylaws or other constitutive documents of the Borrower or any Subsidiary, (y)
any order of any Governmental Authority, or (z) any provision of any indenture,
agreement or other instrument to which the Borrower or any Subsidiary is a party
or by which any of them or any of their property is or may be bound, (ii) be in
conflict with, or result in a breach of or constitute (alone or with notice or
lapse of time or both) a default under any such indenture, agreement for
borrowed money or other agreement or instrument or (iii) result in the creation
or imposition of any Lien upon or with respect to any property or assets now
owned or hereafter acquired by the Borrower.
4.4. Binding Effect of Documents. This Amendment has been duly
---------------------------
executed and delivered by the Borrower and is in full force and effect as of the
Effective Date, and the respective agreements and obligations of the Borrower
contained herein and therein constitute the legal, valid and binding obligations
of the Borrower enforceable against it in accordance with their respective
terms, subject only to applicable bankruptcy, insolvency, reorganization,
moratorium or other laws relating to or affecting generally the enforcement of
creditors' rights and to the fact that the availability of the remedy of
specific performance or injunctive relief is subject to the discretion of the
court before which any proceeding therefor may be brought.
5. Provisions Of General Application.
---------------------------------
5.1. No Other Changes. Except as otherwise expressly provided or
----------------
contemplated by this Amendment, all of the terms, conditions
-5-
<PAGE>
and provisions of the Credit Agreement and the other Loan Documents remain
unaltered. The Credit Agreement and this Amendment shall be read and construed
as one agreement. The making of the amendments in this Amendment does not imply
any obligation or agreement by the Agent or any Lender to make any other
amendment, waiver, modification or consent as to any matter on any subsequent
occasion.
5.2. Governing Law. This Amendment shall for all purposes be
-------------
construed in accordance with and governed by the laws of the State of New York.
5.3. Assignment. This Amendment shall be binding upon and inure to
----------
the benefit of each of the parties hereto and their respective permitted
successors and assigns.
5.4. Counterparts. This Amendment may be executed in any number of
------------
counterparts, but all such counterparts shall together constitute but one and
the same agreement. In making proof of this Amendment, it shall not be
necessary to produce or account for more than one counterpart thereof signed by
each of the parties hereto.
5.5. Expenses. The Borrower agrees to reimburse the Agent for its
out-of-pocket expenses in connection with this Amendment, including the
reasonable fees and expenses of Agent's counsel.
5.6. Conditions Precedent. The effectiveness of this Amendment is
--------------------
subject to satisfaction of the following conditions precedent (such date on
which such conditions precedent have been satisfied being referred to herein as
the "Effective Date"):
(i) execution and delivery to the Agent by the Borrower, the
Guarantor, and the Required Lenders of this Amendment;
(ii) all legal matters relating to this Amendment shall be
satisfactory to the Required Lenders, the Agent and the Agent's counsel; and
(iii) receipt by the Agent of (A) a certificate from an officer of
the Borrower as to organizational documents, authorizing resolutions and
incumbency of officers of each of the Borrower and the Guarantor, in form and
substance satisfactory to the Agent, and (B) such other documents and
certificates as the Agent may reasonably request.
[Signature pages to follow]
-6-
<PAGE>
-7-
<PAGE>
IN WITNESS WHEREOF, the undersigned have duly executed and delivered this
Amendment as of the date first set forth above.
CHOICE HOTELS INTERNATIONAL, INC.
By:
------------------------------
Name:
Title:
THE CHASE MANHATTAN BANK, individually and as
Issuing Bank and Agent
By:
------------------------------
Name:
Title:
ALLFIRST BANK
By:
------------------------------
Name:
Title:
BANK OF AMERICA, N. A.
By:
------------------------------
Name:
Title:
THE DAI-ICHI KANGYO BANK, LTD.
By:
------------------------------
Name:
Title:
-8-
<PAGE>
FIRST UNION NATIONAL BANK
By:
------------------------------
Name:
Title:
THE FUJI BANK, LIMITED
By:
------------------------------
Name:
Title:
GENERAL ELECTRIC CAPITAL CORP.
By:
------------------------------
Name:
Title:
THE INDUSTRIAL BANK OF JAPAN, LIMITED, NEW YORK
BRANCH
By:
------------------------------
Name:
Title:
MELLON BANK, N.A.
By:
------------------------------
Name:
Title:
-9-
<PAGE>
MORGAN GUARANTY TRUST COMPANY OF NEW YORK
By:
------------------------------
Name:
Title:
THE SANWA BANK, LIMITED, NEW YORK BRANCH
By:
------------------------------
Name:
Title:
SUMMIT BANK
By:
------------------------------
Name:
Title:
SUNTRUST BANK
By:
------------------------------
Name:
Title:
-10-
<PAGE>
The undersigned Guarantor hereby acknowledges the foregoing Amendment and
reaffirms its guaranty of the Obligations under the Credit Agreement and the
other Loan Documents, each as amended hereby or in connection herewith, in
accordance with the Guarantee Agreement.
CHOICE HOTELS EUROPE, INC.
By:
------------------------------
Name:
Title:
-11-
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.20
<SEQUENCE>3
<FILENAME>0003.txt
<DESCRIPTION>SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
<TEXT>
<PAGE>
Exhibit 10.20
CHOICE HOTELS INTERNATIONAL, INC.
AMENDED AND RESTATED SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
Effective as of January 1, 2001, Choice Hotels International, Inc. (the
"Company") has adopted the following Amended and Restated Supplemental Executive
Retirement Plan (the "Plan") for the benefit of eligible employees.
ARTICLE I
DEFINITIONS
As used herein, the following words and phrases shall have the meaning
specified below, unless a different meaning is plainly required by the context:
Section 1.01. "Accrued Benefit" shall mean a benefit, payable monthly in
the form of a single life annuity, and equal to the product of a Participant's
Final Average Salary and the Participant's Applicable Benefit Percentage.
Section 1.02. "Applicable Benefit Percentage" shall mean the percentage
computed by reference to the number of Years of Service, including portions
thereof, performed by a Participant. For these purposes, the Applicable Benefit
Percentage with respect to each month commencing on the Employment Date and
continuing through the end of the 14th Year of Service shall be .0833% and the
Applicable Benefit Percentage for each month between the first day of the 15th
Year of Service and continuing through the end of the 25th Year of Service shall
be .125%.
Section 1.03. "Board of Directors" shall mean the Board of Directors of
the Company (or any designated committee thereof).
Section 1.04. "Early Retirement Date" shall meant the date upon which a
Participant becomes eligible to receive vested benefits hereunder as set forth
in Section 5.01(b).
Section 1.05. "Employer" shall mean the Company, its predecessor,
successors and assigns, any subsidiary authorized by the Board of Directors to
participate in this Plan, and any corporation into which an Employer may be
merged or consolidated or to which all or substantially all of its assets may be
transferred, provided such corporation does not affirmatively disavow this Plan.
Section 1.06. "Employment Date" shall mean the date upon which a
Participant commenced full-time employment with the Employer.
Section 1.07. "Final Average Salary" shall mean the highest average of the
monthly base salary, including any bonuses, earned in a sixty-month period out
of the 120 months of employment immediately prior the Normal Retirement date,
the Early Retirement Date or other date of termination of employment (as the
case may be).
Page 1 of 5
<PAGE>
Section 1.08. "Normal Retirement Date" shall mean the date upon which a
Participant becomes eligible to receive vested benefits hereunder as set forth
in Section 5.01(a).
Section 1.09. "Participant" shall mean any individual who has been
approved as eligible to participate in the Plan pursuant to Article III
hereunder.
Section 1.10. "Termination for Cause" shall mean a termination of
employment with an Employer, with respect to which there has been (i) a
determination by the Board of Directors that the participant has failed on an
ongoing basis to materially perform his duties to an Employer (other than as a
result of his incapacity due to physical or mental illness or injury), (ii) as
determination by the Board of Director's that the Participant has engaged in or
has attempted to engage in conduct materially injurious to an Employee, (iii) a
determination by the Board of Directors that the Participant has been convicted
of or plead guilty or no contest to a felony or (iv) a determination by the
Board of Directors that the Participant has failed to follow reasonable and
appropriate instructions of the Board of Directors.
Section 1.11. "Years of Service" shall mean the number of years and months
between the Employment Date and (i) the Normal Retirement Date, (ii) the Early
Retirement Date, or (iii) any other date of termination of employment, excluding
any period during which a Participant is employed on a part-time basis by an
Employer.
ARTICLE II
ADMINISTRATION OF PLAN
Section 2.01. The Board of Directors shall have responsibility for the
administration of the Plan. Such responsibility shall include, but not be
limited to, approval of individual Participants, interpretation of the Plan, and
the granting of exceptions to the Plan, if any. All such determinations by the
Board of Directors shall be conclusive and binding on all Participants.
ARTICLE III
PARTICIPANT ELIGIBILITY
Section 3.01. Participants shall be the Chief Executive Officer and his
direct reports. Any other Participants must be individually submitted to, and
approved by, the Board of Directors.
Page 2 of 5
<PAGE>
ARTICLE IV
VESTING AND CALCULATION OF BENEFIT
Section 4.01. Participants will become fully vested upon completion of 5
Years of Service. Upon becoming fully vested, Participants will receive a
monthly retirement benefit for life based upon their Accrued Benefit, determined
by reference to Years of Service and Final Average Salary as shown below. The
amount of the monthly benefit will be paid with no offset for benefits a
Participant may receive from Social Security.
<TABLE>
<CAPTION>
Years of Service at Retirement Benefit as %
Normal Retirement Date of Final Average Salary
-------------------------- ---------------------------
<S> <C>
25 or more 30.0%
24 28.5%
23 27.0%
22 25.5%
21 24.0%
20 22.5%
19 21.0%
18 19.5%
17 18.0%
16 16.5%
15 15.0%
14 14.0%
13 13.0%
12 12.0%
11 11.0%
10 10.0%
9 9.0%
8 8.0%
7 7.0%
6 6.0%
5 5.0%
</TABLE>
Section 4.02. Retirement benefits shown in Section 4.01 above are shown as
single life annuity payments. Participants may also elect upon retirement a
joint and 50% survivor annuity or a ten-year certain (120 months guaranteed)
payment. If other than a single life annuity payment is elected, benefit
payments will be adjusted in accordance with standard actuarial tables selected
by the Company.
Page 3 of 5
<PAGE>
ARTICLE V
PAYMENT OF BENEFITS
Section 5.01. Participants are entitled to benefits when their employment
terminates as follows:
(a) Normal Retirement - Participants retiring at age 65 with a minimum of
-----------------
5 Years of Service will start receiving monthly benefits upon the
first day of the month following their retirement.
(b) Early Retirement - Participants with a minimum of 10 Years of Service
----------------
may retire after attainment of age 55 and prior to attainment of age
65. Benefit payments to such Participants shall start upon the first
day of the month following their Early Retirement Date.
(c) Other Employment Termination - Participants with a minimum 5 Years of
----------------------------
Service, who terminate employment from an Employer (for any reason
other than a Termination for Cause) prior to attainment of age 55 and
satisfaction of 10 Years of Service shall be entitled to a monetary
benefit equal to their Accrued Benefit. Benefit payments to such a
Participant shall commence upon the first day of the month following
the Participant's 65th birthday.
(d) Termination for Cause. In the event a Participant incurs a
---------------------
Termination for Cause, such Participant shall forfeit the right to
receive benefits under this Plan, whether or not such benefits are
vested.
(e)
Section 5.02. Participants who desire to work past age 65, and who are
allowed to do so by permission of the Company, may, at their option, be either
(i) paid benefits hereunder in accordance with Section 5.01(a) as if the
Participant had retired, or (ii) have such benefits increased actuarially for
each Year of Service past age 65.
Section 5.03. All Participants at the time of retirement, as a condition
of receiving any benefits hereunder, must agree that they shall not become the
owner of, or an officer, director, employee or consultant of any entity which,
in the opinion of the Board of Directors, is in competition with any business of
the Company.
Section 5.04.
(a) Death of Participant While Employed by an Employer and Death of
---------------------------------------------------------------
Participant Prior to Commencement of Benefit Payment to Participant.
-------------------------------------------------------------------
The designated beneficiary shall receive a monthly lifetime benefit
commencing within 60 days after the death of the Participant. Such
monthly benefit shall be equal to the 50% survivor annuity portion of
the benefit which would have been payable (i) had the Participant
elected to receive his Accrued Benefit in the form of a joint and 50%
survivor annuity and (ii) had the Participant been eligible to
commence and had indeed elected to commence benefit payment on the day
immediately prior to his death. No death benefit shall be payable
hereunder in the event that the Participant had completed less than 5
Years of Service as of the date of Participant's death.
(b) Death After Commencement of Benefit Payment to Participant. Upon the
----------------------------------------------------------
death of a Participant after the commencement of benefit payments to
the Participant hereunder, the death benefit, if any, shall be
determined by reference to the form of benefit payment elected by the
Participant prior to the date of death, in accordance with Section
4.02.
Page 4 of 5
<PAGE>
ARTICLE VI
EFFECTIVE DATE
Section 6.01. The provisions of the original Plan covers Participants
retiring on or after November 1, 1996 and before December 31, 2000. The
provisions of the Amended and Restated Plan covers all Participants retiring on
or after January 1, 2001. All past Years of Service for an Employer and its
predecessor are recognized.
ARTICLE VII
AMENDMENT AND TERMINATION
Section 7.01. The Company retains the right to amend and to terminate the
Plan at any time provided that no such amendment shall reduce a vested Accrued
Benefit otherwise earned by a Participant as of the date of such amendment.
Should the Plan be terminated, Participants with at least 5 Years of Service at
time of Plan termination shall be entitled to their Accrued Benefit, as defined
in Article I and described in Article IV, determined on the basis of their Years
of Service and Final Average Salary at the time of Plan termination. In
addition, Participants who do not have at least 5 Years of Service at the time
of Plan termination but who will have earned at least 5 Years of Service as of
the date of their future date of termination of employment with an Employer,
shall be entitled to receive their Accrued Benefits earned as of the date of the
termination of the Plan. A Participant who has less than 5 Years of Service on
the date of termination of the Plan and who has less than 5 Years of Service as
of his future date of termination of employment with an Employer shall not be
entitled to any benefits under the Plan. Payment of such benefits will not
commence prior to the date such payments would have commenced had the Plan
remained in effect.
ARTICLE VIII
MISCELLANEOUS
Section 8.01. Any rules, regulations, or procedures that may be necessary
for the proper administration or functioning of this Plan may be promulgated and
adopted by the Board of Directors.
Section 8.02. This Plan shall be interpreted and enforced in accordance
with the laws of the State of Maryland, without regard to its conflict of laws
principles.
Section 8.03. This Plan shall not be deemed to constitute an employment
contract between an Employer and any Participant or to be a consideration or an
inducement of the employment of any Participant. Nothing contained in this Plan
shall be deemed to give any Participant the right to be retained in the service
of an Employer or to interfere with the right of an Employer to discharge any
Participant at any time regardless of the effect which such discharge shall have
upon him as a Participant of the Plan.
Page 5 of 5
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-13.01
<SEQUENCE>4
<FILENAME>0004.txt
<DESCRIPTION>ANNUAL REPORT TO SHAREHOLDERS
<TEXT>
<PAGE>
Exhibit 13.01
TABLE OF CONTENTS
MANAGEMENT'S DISCUSSION AND ANALYSIS 24
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS 31
CONSOLIDATED FINANCIAL STATEMENTS 32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 36
BOARD OF DIRECTORS AND CORPORATE OFFICERS 52
CORPORATE INFORMATION 53
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
Choice Hotels International, Inc. and Subsidiaries
The Company is one of the largest hotel franchisors in the world with 4,392
hotels open and 703 hotels under development as of December 31, 2000,
representing 350,351 rooms open and 60,927 rooms under development in 43
countries. The Company franchises hotels under the Comfort, Quality, Econo
Lodge, Sleep Inn, Clarion, Rodeway Inn and MainStay Suites brand names. The
Company operates in all 50 states and the District of Columbia and 37 additional
countries with 97% of its franchising revenue derived from hotels franchised in
the United States.
The principal factors that affect the Company's results are: growth in the
number of hotels under franchise; occupancies and room rates achieved by the
hotels under franchise; the effective royalty rate achieved; the number and
relative mix of franchised hotels; and the Company's ability to manage costs.
The number of rooms at franchised properties and occupancies and room rates at
those properties significantly affect the Company's results because franchise
royalty fees are based upon room revenues at franchised hotels. The key industry
standard for measuring hotel operating performance is revenue per available room
(RevPAR), which is calculated by multiplying the percentage of occupied rooms by
the average daily room rate realized. The variable overhead costs associated
with franchise system growth are substantially less than incremental royalty
fees generated from new franchisees; therefore, the Company is able to capture a
significant portion of those royalty fees as operating income.
Comparison of Calendar Year 2000 Operating Results
and Calendar Year 1999 Operating Results
The Company recorded net income of $42.4 million for the year ended
December 31, 2000, a decrease of $14.8 million, compared to net income of $57.2
million for the year ended December 31, 1999. Operating income of $92.4 million
in 2000 was $1.8 million under 1999 operating income of $94.2 million due to a
restructuring charge of $5.6 million in 2000. A corporate-wide reorganization
was implemented in 2000 to provide a more consistent service to franchisees,
establish a centralized sales focus and create a more competitive overhead
structure. Net income was further adversely affected in 2000 by a $7.4 million
(net of taxes) equity loss in Friendly Hotels plc ("Friendly") and a $4.6
million (net of taxes) loss on the subordinated term note (the "Note") from
Sunburst Hospitality Corporation ("Sunburst"). The Friendly equity loss was due
to a comprehensive restructuring program at Friendly to strengthen its balance
sheet and improve its operations. The Sunburst loss was attributed to two early
payment transactions as the Company moved to monetize the note receivable.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
Choice Hotels International, Inc. and Subsidiaries
Summarized financial results for the years ended December 31, 2000 and 1999
are as follows:
<TABLE>
<CAPTION>
2000 1999
------- -------
(In thousands)
<S> <C> <C>
REVENUES:
Royalty fees $137,721 $128,653
Initial franchise and relicensing fees 12,154 13,910
Partner services revenue 10,300 9,055
Other revenue 7,299 6,111
Product sales -- 3,871
-------- --------
Total revenues 167,474 161,600
======== ========
OPERATING EXPENSES:
Selling, general and administrative 57,787 55,860
Restructuring charges 5,637 --
Depreciation and amortization 11,623 7,687
Product cost of sales -- 3,883
-------- --------
Total operating expenses 75,047 67,430
======== ========
Operating income 92,427 94,170
Interest expense 18,490 16,398
Interest and dividend income (15,534) (17,147)
Equity loss on Friendly Hotels 12,071 380
Loss on Sunburst Hospitality note 7,565 --
Other 253 68
-------- --------
Income before income taxes 69,582 94,471
Income taxes 27,137 37,316
-------- --------
Net income $ 42,445 $ 57,155
======== ========
</TABLE>
Franchise Revenues: Management analyzes its business based on net franchise
revenue, which is total revenue excluding product sales, and franchise operating
expenses which are reflected as selling, general and administrative expenses.
Net franchise revenues were $167.5 million for 2000 and $157.7 million for
1999. Royalties increased $9.0 million to $137.7 million from $128.7 million in
1999, an increase of 7.0%. The increase in royalties is attributable to a 3.2%
increase in the number of domestic franchised hotel rooms, an increase in the
effective royalty rate of the domestic hotel system to 3.85% from 3.7%, and an
improvement in domestic RevPAR of 4.4%. Domestic initial fee revenue generated
from franchise contracts signed was $6.4 million down from $9.6 million in 1999.
In 2000, ninety-eight franchise agreements were entered into which included
future potential rebates and/or incentive payments. Initial franchise fees of
$3.3 millon were deferred and will be recognized when the incentive criteria are
met or the deal is terminated, whichever occurs first. Total franchise
agreements signed in 2000 were 298, a decline from 318 total agreements executed
in 1999. Despite the continued competitive hotel franchising environment, the
Company believes that its refocused, centralized sales group will complete
approximately 300 new franchise agreements in 2001. Revenues generated from
partner service relationships increased to $10.3 million from $9.1 million in
1999. Under the partner services program, the Company generates revenue from
hotel industry vendors (who have been designated as preferred providers) based
on the level of goods or services purchased from the vendors by hotel owners and
hotel guests who stay in the Company's franchised hotels.
The number of domestic rooms on-line increased to 265,962 from 258,120, an
increase of 3.0% for the year ended December 31, 2000. For 2000, the total
number of domestic hotels on-line grew 3.9% to 3,244 from 3,123 for 1999. The
total number of international hotels on-line increased to 1,148 from 1,125, an
increase of 2.0% for the year ended December 31, 2000. International rooms on-
line increased to 84,389 as of December 31, 2000 from 80,134, an increase of
5.3%. As of December 31, 2000, the Company had 493 franchised hotels with 39,539
rooms either in design or under construction in its domestic system. The
Company had an additional 210 franchised hotels with 21,388 rooms under
development in its international system as of December 31, 2000.
Franchise Expenses: The cost to operate the franchising business is reflected
in selling, general and administrative expenses. Selling, general and
administrative expenses were $57.8 million for 2000, an increase of $1.9 million
from the 1999 total of $55.9 million. As a percentage of net franchise
revenues, selling, general and administrative expenses
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
Choice Hotels International, Inc. and Subsidiaries
declined to 34.5% in 2000 from 35.4% in 1999. The improvement in the franchising
margins relates to the economies of scale generated from operating a larger
franchisee base and improvements in franchised hotel performance.
Marketing and Reservations: The Company's franchise agreements require the
payment of franchise fees which include marketing and reservation fees. These
fees, which are based on a percentage of the franchisees' gross room revenues,
are used exclusively by the Company's marketing and reservation funds for
expenses associated with providing such franchise services as central
reservation and yield management systems, national marketing and media
advertising. The Company is contractually obligated to expend the marketing and
reservation fees it collects from franchisees in accordance with the franchise
agreements; as such, no income or loss to the Company is generated.
The total marketing and reservation fees received by the Company were
$162.4 million and $146.0 million for the years ended December 31, 2000 and
1999, respectively. Depreciation and amortization incurred by the marketing and
reservation funds was $10.5 million and $9.6 million for the years ended
December 31, 2000 and 1999, respectively. Interest expense incurred by the
reservation fund was $4.8 million and $3.3 million for the years ended December
31, 2000 and 1999, respectively. Reservation fees and marketing fees not
expended in the current year are carried over to the next fiscal year and
expended in accordance with the franchise agreements. Shortfall amounts are
similarly recovered in subsequent years. Excess or shortfall amounts from the
operation of these programs are recorded as a payable or receivable from the
particular fund. Under the terms of the franchise agreements, the Company may
advance capital as necessary to the marketing and reservation funds and recover
such advances through future fees. As of December 31, 2000, the Company's
balance sheet includes a receivable of $57.8 million related to advances made to
the marketing ($24.9 million) and reservation ($32.9 million) funds. As of
December 31, 1999, the Company's balance sheet includes a receivable of $32.8
million related to advances made to the marketing ($12.5 million) and
reservation ($20.3 million) funds. The Company has the ability under existing
franchise agreements and expects to recover these advances through future
marketing and reservation fees.
Product Sales: In the fourth quarter of 1998, the Company discontinued its group
purchasing program as previously operated. The group purchasing program utilized
bulk purchases to obtain favorable pricing from third party vendors for
franchisees ordering similar products. The Company acted as a clearinghouse
between the franchisee and the vendor, and orders were shipped directly to the
franchisee. Sales made to franchisees through the Company's group purchasing
program were $3.9 million in 1999, with product cost of sales of $3.9 million.
Depreciation and Amortization: Depreciation and amortization increased to
$11.6 million in 2000 from $7.7 million in 1999. This increase was primarily
attributable to new computer systems installations and corporate office
renovations.
Other: Interest expense of $18.5 million in 2000 is up $2.1 million from $16.4
million in 1999 due to higher interest rates. Included in 2000 and 1999 results
is approximately $15.2 million and $14.2 million, respectively, of interest
income earned on the note receivable from Sunburst. During 1999, the Company
recorded $2.1 million in dividend income from Friendly. The Company's investment
in Friendly resulted in a $12.1 million equity loss in 2000 associated with
Friendly's comprehensive restructuring program. The Company recognized a $7.6
million loss in 2000 associated with the monetization of $137.5 million of the
Sunburst note.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
Choice Hotels International, Inc. and Subsidiaries
Comparison of Calendar Year 1999 Operating Results and Calendar Year 1998
Operating Results
The Company recorded net income of $57.2 million for the year ended
December 31, 1999, an increase of $1.9 million, compared to net income of $55.3
million for the year ended December 31, 1998. Net income in 1998 included a $7.2
million extraordinary gain from the early extinguishment of debt. The increase
in net income for 1999 was primarily attributable to an increase in the
effective royalty rates achieved, an increase in franchise revenue as a direct
result of improvements in the operating performance of hotels, and the addition
of new franchisees to the system. Lower net interest costs versus 1998 also
contributed favorably to the 1999 results.
Summarized financial results for the years ended December 31, 1999 and 1998
are as follows:
<TABLE>
<CAPTION>
1999 1998
------- ------
(In thousands)
<S> <C> <C>
REVENUES:
Royalty fees $128,653 $115,171
Initial franchise and relicensing fees 13,910 16,571
Partner services revenue 9,055 6,370
Other revenue 6,111 5,516
Product sales 3,871 20,748
European hotel operations -- 1,098
-------- --------
Total revenues 161,600 165,474
======== ========
OPERATING EXPENSES:
Selling, general and administrative 55,860 52,948
Depreciation and amortization 7,687 6,710
Product cost of sales 3,883 19,532
European hotel operations -- 1,133
-------- --------
Total operating expenses 67,430 80,323
======== ========
Operating income 94,170 85,151
Interest expense 16,398 17,757
Interest and dividend income (17,147) (12,636)
Equity loss on Friendly Hotels 380 --
Loss (gain) on sale of investments 68 (2,370)
-------- --------
Income before income taxes and extraordinary item 94,471 82,400
Income taxes 37,316 34,327
-------- --------
Net income before extraordinary item 57,155 48,073
Gain on early extinguishment of debt,
net of $4,732 of income taxes -- 7,232
-------- --------
Net income $ 57,155 $ 55,305
======== ========
</TABLE>
Franchise Revenues: Net franchise revenues were $157.7 million for 1999 and
$143.6 million for 1998. Royalties increased $13.5 million to $128.7 million
from $115.2 million in 1998, an increase of 11.7 %. The increase in royalties
is attributable to a 2.3% increase in the number of domestic franchised hotel
rooms, an increase in the effective royalty rate of the domestic hotel system to
3.7% from 3.6%, and an improvement in domestic RevPAR of 3.0%. Domestic initial
fee revenue generated from franchise contracts signed was $10.1 million down
from $13.1 million in 1998. Total franchise agreements signed in 1999 were 318,
a decline from the 440 total agreements executed in 1998. An increasingly
competitive hotel franchising environment, coupled with stricter hotel brand
standards being enforced by the Company, contributed to the decline in the total
franchise agreements signed in the period. Revenues generated from partner
service relationships increased to $9.1 million from $6.4 million in 1998.
The number of domestic rooms on-line increased to 258,120 from 252,357, an
increase of 2.3% for the year ended December 31, 1999. For 1999, the total
number of domestic hotels on-line grew 2.8% to 3,123 from 3,039 for 1998. The
total number of international hotels on-line increased to 1,125 from 632, an
increase of 78.0% for the year ended December 31, 1999. International rooms on-
line increased to 80,134 as of December 31, 1999 from 53,095, an increase of
50.9%. As of December 31, 1999, the Company had 596 franchised hotels with
46,664 rooms either in design or under construction in its domestic system. The
Company had an additional 165 franchised hotels with 17,431 rooms under
development in its international system as of December 31, 1999.
Franchise Expenses: Selling, general and administrative expenses were $55.9
million for 1999, an increase of $3.0 million from the 1998 total of $52.9
million. As a percentage of net franchise revenues, selling, general and
administrative expenses declined to
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
Choice Hotels International, Inc. and Subsidiaries
35.4% in 1999 from 36.8% in 1998. The improvement in the franchising margins
relates to the economies of scale generated from operating a larger franchisee
base and improvements in franchised hotel performance.
Marketing and Reservations: The total marketing and reservation fees received
by the Company were $146.0 million and $127.4 million for the years ended
December 31, 1999 and 1998, respectively. Depreciation and amortization
incurred by the marketing and reservation funds was $9.6 million and $6.2
million for the years ended December 31, 1999 and 1998, respectively. Interest
expense incurred by the reservation fund was $3.3 million and $1.8 million for
the years ended December 31, 1999 and 1998, respectively. As of December 31,
1999, the Company's balance sheet includes a receivable of $32.8 million related
to advances made to the marketing ($12.5 million) and reservation ($20.3
million) funds. As of December 31, 1998, the Company's balance sheet includes
a receivable of $18.7 million related to advances made to the marketing ($7.8
million) and reservation ($10.9 million) funds.
Product Sales: Sales made to franchisees through the Company's group
purchasing program declined $16.8 million to $3.9 million in 1999 from $20.7
million in 1998. Similarly, product cost of sales decreased $15.6 million to
$3.9 million from 1998. In the fourth quarter of 1998, the Company discontinued
this group purchasing program as previously operated.
European Hotel Operations: In January 1998, Friendly acquired from the Company
ten hotels in France, two in Germany and one in the United Kingdom, in exchange
for $22.2 million in 5.75% convertible preferred shares in Friendly.
Depreciation and Amortization: Depreciation and amortization increased to
$7.7 million in 1999 from $6.7 million in 1998. This increase was primarily
attributable to new computer systems installations and corporate office
renovations.
Interest Expense and Interest Income: Interest expense of $16.4 million in 1999
is down slightly from $17.8 million in 1998. Included in 1999 and 1998 results
is approximately $14.2 million and $10.4 million, respectively, of interest
income earned on the note receivable from Sunburst. The Company's investment in
Friendly resulted in $2.2 million and $2.1 million in dividend income in 1999
and 1998, respectively.
Extraordinary Item: During 1998, the Company recorded an extraordinary gain
from the early extinguishment of debt. The Company retired $13.7 million in
debt and removed related assets of $1.8 million from the consolidated balance
sheets. The extraordinary gain was $7.2 million, after income tax expense of
$4.7 million, or $0.12 per diluted share.
Liquidity and Capital Resources
Net cash provided by operating activities was $67.6 million for the year
ended December 31, 2000, a decrease of $2.4 million from $70.0 million for the
year ended December 31, 1999. The reduction in cash provided was primarily due
to changes in working capital.
Cash used in investing activities for the years ended December 31, 2000,
1999 and 1998, was $30.4 million, $40.9 million and $9.1 million, respectively.
Investment in property and equipment includes installation of system-wide
property and yield management systems and upgrades to financial and reservations
systems. During the years ended December 31, 2000, 1999 and 1998, capital
expenditures totaled $16.6 million, $30.6 million and $17.5 million,
respectively. Capital expenditures in prior years included amounts for
renovations to the Company's corporate headquarters (including a franchisee
learning and training center); computer hardware; and financial, reservation,
and property and yield management systems.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
Choice Hotels International, Inc. and Subsidiaries
The Company made net cash advances to the marketing and reservation funds
totaling $14.5 million in 2000. The advances are associated with a system-wide
property and yield management systems implementation, the timing of expenditures
associated with specific brand initiatives of the marketing fund and the
recognition of costs and the timing of payments received from franchisees in
conjunction with the Company's frequency stay program. The Company has the
ability under existing franchise agreements and expects to recover these
advances through future marketing and reservation fees. The Company expects the
marketing and reservation funds to generate positive cash flows of approximately
$10 million in 2001 due to cost reductions associated with restructured
operations, programmed brand initiatives, growth in fees from normal operations
and increases in property and yield management fees.
On September 1, 2000, Sunburst transferred title to three MainStay
properties under a put/call agreement entered into between the Company and
Sunburst in March 2000. These properties were received by the Company as
consideration for $16.3 million of the then $149 million amount due under the
Note. The initial Note carried a simple interest rate of 11% per annum. In
connection with an amendment of the strategic alliance agreement (as defined in
Note 7 to Consolidated Financial Statements), effective October 15, 2000,
interest payable accrued at a rate of 11% per annum compounded daily. The
Company implemented this amendment prospectively beginning on January 1, 1999,
and has recognized interest on the outstanding principal and accrued interest
amounts at an effective rate of 10.58%. Total interest accrued at December 31,
2000 and 1999 was $42.2 million and $27.0 million, respectively. On January 5,
2001, the Company received from Sunburst $101.9 million, a parcel of land valued
at approximately $1.5 million and a new 11 3/8% seven-year senior subordinated
note in the amount of $35 million as consideration for the five-year
subordinated term note.
Financing cash flows relate primarily to the Company's borrowings under its
credit lines and treasury stock purchases. In 1997, the Company entered into a
five-year, $300 million competitive advance and multi-currency revolving credit
facility (as defined in Note 10 to Consolidated Financial Statements). The
Credit Facility provides for a term loan of $150 million and a revolving credit
facility of $150 million, $50 million of which is available in foreign currency
borrowings. As of December 31, 2000, the Company had $80 million of term loans
outstanding and $109 million of revolving loans. The term loan is payable over
five years, $42.5 million of which is due in 2001. The Credit Facility includes
customary financial and other covenants that require the maintenance of certain
ratios including maximum leverage and interest coverage and restrict the
Company's ability to make certain investments, incur debt and dispose of assets.
At the Company's option, the interest rate may be based on LIBOR, a certificate
of deposit rate or an alternate base rate (as defined), plus a facility fee
percentage. The rate is determined based on the Company's consolidated leverage
ratio at the time of borrowing.
In 1998, the Company completed a $100 million senior unsecured note
offering ("the Senior Notes"), bearing a coupon rate of 7.13% with an effective
rate of 7.22%. The Senior Notes will mature on May 1, 2008, with interest on the
Senior Notes to be paid semi-annually. The Company used the net proceeds from
the offering of approximately $99 million to repay amounts outstanding under the
Company's Credit Facility.
In January 2001, the Company provided Friendly, in association with
Friendly's restructuring (see Note 5 to Consolidated Financial Statements), with
a letter of credit in an amount up to (Pounds)7.8 million (approximately US
$11.4 million) to guarantee additional credit facilities from Friendly's banks.
As of March 20, 2001, Friendly had drawn (Pounds)5.5 million on this letter of
credit.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
Choice Hotels International, Inc. and Subsidiaries
As of December 31, 2000, the total debt outstanding for the Company was
$297.2 million.
The Company had repurchased 9.1 million shares of its common stock at a
total cost of $129.2 million as of December 31, 2000. On February 8, 2001, the
Company received authorization from its Board of Directors to repurchase up to
an additional 5 million shares. Subsequent to December 31, 2000 and using the
proceeds of the Sunburst note, the Company repurchased 7.3 million shares of
outstanding common stock at a total cost of $105.4 million.
The Company believes that cash flows from operations and available
financing capacity are adequate to meet the expected operating, investing,
financing and debt service requirements of the business for the immediate
future.
Impact of Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board (Board) issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities," which
established accounting and reporting standards for derivative instruments,
including derivative instruments embedded in other contracts, and for hedging
activities. SFAS No. 133 requires the recognition of the fair value of
derivatives in the statement of financial position, with changes in the fair
value recognized either in earnings or as a component of other comprehensive
income dependent upon the hedging nature of the derivative. In June 1999, the
Board issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities--Deferral of the Effective Date of FASB Statement No. 133," which
deferred the effective date of SFAS No. 133 until fiscal years beginning after
June 15, 2000. SFAS No. 133 does not have a material impact on the Company's
earnings or other comprehensive income.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition," which requires
revenues to be recognized when realized and earned. Revenue is generally
realized and earned when all the following criteria are met: (i) persuasive
evidence of an arrangement exists; (ii) delivery has occurred or services have
been rendered; (iii) the selling price must be fixed or determinable; and, (iv)
collectibility is reasonably assured. The Company implemented SAB No. 101 in
2000.
Forward-Looking Statements
Certain statements contained in this annual report, including those in the
section entitled Management's Discussion and Analysis, that are not historical
facts constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act. Words such as "believes," "anticipates,"
"expects," "intends," "estimates," "projects," and other similar expressions,
which are predictions of or indicate future events and trends, typically
identify forward-looking statements. Such statements are subject to a number of
risks and uncertainties which could cause actual results to differ materially
from those projected, including: competition within each of our business
segments; business strategies and their intended results; the balance between
supply of and demand for hotel rooms; our ability to obtain new franchise
agreements; our ability to develop and maintain positive relations with current
and potential hotel owners; the effect of international, national and regional
economic conditions; the availability of capital to allow us and potential hotel
owners to fund investments and construction of hotels; the cost and other
effects of legal proceedings; and other risks described from time to time in our
filings with the Securities and Exchange Commission, including those set forth
under the heading "Risk Factors" in our Report on Form 10-Q for the period ended
June 30, 1999. Given these uncertainties, you are cautioned not to place undue
reliance on such statements. The Company also undertakes no obligation to
publicly update or revise any forward-looking statement to reflect current or
future events or circumstances.
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
Choice Hotels International, Inc. and Subsidiaries
To Choice Hotels International, Inc.
We have audited the accompanying consolidated balance sheets of Choice
Hotels International, Inc. and subsidiaries, as defined under "Company
Information and Significant Accounting Policies" in the Notes to Consolidated
Financial Statements, as of December 31, 2000 and 1999, and the related
consolidated statements of income, cash flows, and shareholders' equity and
comprehensive income for the years ended December 31, 2000, 1999 and 1998. These
consolidated financial statements are the responsibility of Choice Hotels
International, Inc.'s management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Choice
Hotels International, Inc. and subsidiaries as of December 31, 2000 and 1999,
and the results of their operations and their cash flows for the years ended
December 31, 2000, 1999 and 1998, in conformity with accounting principles
generally accepted in the United States.
/s/ Arthur Andersen LLP
Vienna, Virginia
February 2, 2001
31
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
Choice Hotels International, Inc. and Subsidiaries
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------
2000 1999 1998
----------- ---------- --------
(In thousands, except per share amounts)
- ----------------------------------------
<S> <C> <C> <C>
REVENUES:
Royalty fees $137,721 $128,653 $115,171
Initial franchise and relicensing fees 12,154 13,910 16,571
Partner services revenue 10,300 9,055 6,370
Other revenue 7,299 6,111 5,516
Product sales -- 3,871 20,748
European hotel operations -- -- 1,098
======== ======== ========
Total revenues 167,474 161,600 165,474
OPERATING EXPENSES:
Selling, general and administrative 57,787 55,860 52,948
Restructuring charges (Note 8) 5,637 -- --
Depreciation and amortization 11,623 7,687 6,710
Product cost of sales -- 3,883 19,532
European hotel operations -- -- 1,133
======== ======== ========
Total operating expenses 75,047 67,430 80,323
-------- -------- --------
Operating income 92,427 94,170 85,151
-------- -------- --------
OTHER:
Interest expense (Note 10) 18,490 16,398 17,757
Interest and dividend income (Notes 5 and 7) (15,534) (17,147) (12,636)
Equity loss on Friendly Hotels (Note 5) 12,071 380 --
Loss on Sunburst Hospitality note (Note 7) 7,565 -- --
Loss (gain) on sale of investments 253 68 (2,370)
======== ======== ========
Total other 22,845 (301) 2,751
-------- -------- --------
Income before income taxes and extraordinary item 69,582 94,471 82,400
Income taxes (Note 14) 27,137 37,316 34,327
======== ======== ========
Income before extraordinary item 42,445 57,155 48,073
Gain on early extinguishment of debt (net of taxes of $4,732) -- -- 7,232
======== ======== ========
Net income $ 42,445 $ 57,155 $ 55,305
======== ======== ========
Weighted-average shares outstanding 52,895 54,859 58,717
======== ======== ========
Diluted shares outstanding 53,253 55,667 59,548
======== ======== ========
Basic EPS: (Note 17)
Income before extraordinary item $ 0.80 $ 1.04 $ 0.82
Extraordinary item -- -- 0.12
-------- -------- --------
Net income $ 0.80 $ 1.04 $ 0.94
-------- -------- --------
Diluted EPS: (Note 17)
Income before extraordinary item $ 0.80 $ 1.03 $ 0.81
Extraordinary item -- -- 0.12
-------- -------- --------
Net income $ 0.80 $ 1.03 $ 0.93
-------- -------- --------
</TABLE>
See notes to consolidated financial statements.
<PAGE>
CONSOLIDATED BALANCE SHEETS
Choice Hotels International, Inc. and Subsidiaries
<TABLE>
<CAPTION>
December 31, December 31,
2000 1999
------------ ------------
(In thousands)
- -------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 19,701 $ 11,850
Receivables (net of allowance for doubtful accounts of $5,754 and
$6,691, respectively) 31,865 30,035
Income taxes receivable and other current assets (Note 14) 520 37
-------- ---------
Total current assets 52,086 41,922
Property and equipment, at cost, net (Note 2) 72,946 58,255
Goodwill, net (Note 3) 62,663 64,706
Franchise rights, net (Note 4) 39,163 43,101
Investment in Friendly Hotels (Note 5) 34,616 41,195
Advances to marketing and reservation funds (Note 6) 57,824 32,807
Other assets 27,330 40,819
Note receivable from Sunburst Hospitality (Note 7) 137,492 141,853
-------- ---------
Total assets $484,120 $ 464,658
======== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current portion of long-term debt (Note 10) $ 50,046 $ 44,646
Accounts payable 15,964 21,362
Accrued expenses (Notes 8 and 9) 27,818 21,368
Income taxes payable (Note 14) -- 1,367
======== =========
Total current liabilities 93,828 88,743
Long-term debt (Note 10) 247,179 262,710
Deferred income taxes ($39,573 and $30,648, respectively)
and other liabilities (Note 14) 53,020 47,589
-------- --------
Total liabilities 394,027 399,042
======== =========
SHAREHOLDERS' EQUITY
Common stock, $ .01 par value, 160,000,000 shares authorized;
52,561,568 and 53,833,911 shares issued and outstanding at
December 31, 2000 and 1999, respectively (Note 15) 526 538
Additional paid-in-capital 55,245 52,386
Accumulated other comprehensive (loss) income (54) 1,205
Deferred compensation (1,300) (1,937)
Treasury stock (9,102,056 and 7,527,027 shares at December 31, 2000
and 1999, respectively) (129,172) (108,294)
Retained earnings 164,848 121,718
-------- ---------
Total shareholders' equity 90,093 65,616
======== =========
Total liabilities and shareholders' equity $484,120 $ 464,658
======== =========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Choice Hotels International, Inc. and Subsidiaries
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------------
2000 1999 1998
---------- --------- ---------
(In thousands)
- --------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 42,445 $ 57,155 $ 55,305
Reconciliation of net income to net cash provided
by operating activities:
Depreciation and amortization 12,104 8,023 7,401
Provision for bad debts (585) 588 1,473
Deferred income taxes and other 11,018 10,216 14,852
Non-cash interest and dividend income (15,170) (16,639) (12,364)
Equity loss on Friendly Hotels 12,071 380 --
Loss on early prepayment of Sunburst Hospitality note 6,520 -- --
Gain on early extinguishment of debt -- -- (11,964)
Change in assets and liabilities:
Receivables (2,245) (4,006) (4,311)
Prepaid expenses and other current assets 30 1,355 (1,849)
Current liabilities 1,714 6,086 (6,180)
Income taxes payable/receivable (278) 6,794 (3,411)
--------- -------- ---------
Net cash provided by operating activities 67,624 69,952 38,952
========= ======== =========
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in property and equipment (16,590) (30,633) (17,488)
Advances to/from marketing and reservation funds, net (14,532) (5,545) 1,512
Repayments of advances to Sunburst Hospitality -- -- 8,145
Other items, net 760 (4,765) (1,225)
--------- -------- ---------
Net cash utilized in investing activities (30,362) (40,943) (9,056)
========= ======== =========
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from mortgages and other long-term debt 85,500 88,630 194,901
Proceeds from exercise of stock options 1,736 5,136 4,919
Principal payments of debt (95,757) (59,458) (184,300)
Purchase of treasury stock (20,893) (53,166) (54,015)
Proceeds from issuance of common stock 3 7 9
--------- -------- ---------
Net cash utilized in financing activities (29,411) (18,851) (38,486)
--------- -------- ---------
Net change in cash and cash equivalents 7,851 10,158 (8,590)
Cash and cash equivalents at beginning of period 11,850 1,692 10,282
========= ======== =========
Cash and cash equivalents at end of period $ 19,701 $ 11,850 $ 1,692
========= ======== =========
Supplemental disclosure of cash flow information
Cash payments during the year for:
Interest $ 22,145 $ 19,387 $ 19,200
Income taxes 15,674 17,834 22,278
Non-cash investing activities:
Properties assumed through put/call transaction $ 12,233 -- --
Reduction in Sunburst Hospitality note from put/call transaction 16,333 -- --
========= ======== =========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
Choice Hotels International, Inc. and Subsidiaries
<TABLE>
<CAPTION>
Accumulated
Other
Additional Comprehensive
(In thousands, except Common Stock Paid-in Income Deferred Treasury Comprehensive Retained
share amounts) Shares Amount Capital (Loss) Compensation Stock Income Earnings Total
- --------------------- ------ ------ ----------- ----------- ------------ -------- ------------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance as of December 31,
1997 59,828,878 $ 598 $ 47,907 $(8,316) $ -- $ (189) $ 9,258 $ 49,258
Comprehensive income
Net income -- -- -- -- -- -- $ 55,305 55,305 55,305
Other comprehensive
income
Foreign translation
adjustments -- -- -- -- -- -- 10,048 -- 10,048
Unrealized gain on
securities, net
of reclassification
adjustment (Note 16) -- -- -- -- -- -- 380 -- 380
-------
Other comprehensive
income -- -- -- 10,428 -- -- 10,428 -- --
-------
Comprehensive income $65,733
=======
Exercise of stock
options/grants, net 667,227 7 5,058 -- -- -- 5,065
Issuance of restricted
stock 160,212 2 2,272 -- (2,274) -- -- --
Amortization of deferred
compensation -- -- -- -- 609 -- -- 609
Treasury purchases (3,929,400) (39) -- -- -- (53,976) (54,015)
Purchase of MainStay brand
option from Sunburst -- -- (10,140) -- -- -- -- (10,140)
---------- ------ --------- -------- --------- -------- --------- --------- --------
Balance as of December 31,
1998 56,726,917 $ 568 $ 45,097 $ 2,112 $ (1,665) $ (54,165) $ 64,563 $ 56,510
========== ====== ========= ======== ========= ========= ========= ========= ========
Comprehensive income
Net income -- -- -- -- -- -- $ 57,155 57,155 57,155
Other comprehensive
income
Foreign translation
adjustments -- -- -- -- -- -- (108) -- (108)
Unrealized loss on
securities,
net of taxes, net of
reclassification
adjustment (Note 16) -- -- -- -- -- -- (799) -- (799)
--------
Other comprehensive
income -- -- -- (907) -- -- (907) -- --
--------
Comprehensive income $56,248
========
Exercise of stock
options/grants, net 623,647 6 6,275 -- -- -- -- 6,281
Issuance of restricted
stock 70,260 1 1,014 -- (1,015) -- -- --
Amortization of deferred
compensation -- -- -- -- 743 -- -- 743
Treasury purchases (3,586,913) (37) -- -- -- (54,129) -- (54,166)
---------- ------ --------- -------- --------- -------- --------- --------- --------
Balance as of December 31,
1999 53,833,911 $ 538 $ 52,386 $ 1,205 $ (1,937) $(108,294) $ 121,718 $ 65,616
========== ====== ========= ======== ========= ========= ========= ========= ========
Comprehensive income
Net income -- -- -- -- -- -- $ 42,445 42,445 42,445
Other comprehensive
income
Foreign translation
adjustments -- -- -- -- -- -- (1,786) -- (1,786)
Unrealized gain on
securities,
net of taxes, net of
reclassification
adjustment (Note 16) -- -- -- -- -- -- 527 -- 527
---------
Other comprehensive
income -- -- -- (1,259) -- -- (1,259) -- --
---------
Comprehensive income $ 41,186
=========
Exercise of stock
options/grants, net 288,634 3 3,362 -- -- -- 3,365
Issuance of restricted
stock 14,052 -- 182 -- (182) -- -- --
Amortization of deferred
compensation -- -- -- -- 819 -- -- 819
Treasury purchases (1,575,029) (15) -- -- -- (20,878) -- (20,893)
Liquidation of foreign
subsidiaries -- -- (685) -- -- -- 685 --
---------- ------ --------- -------- --------- -------- --------- --------- --------
Balance as of December 31,
2000 52,561,568 $ 526 $ 55,245 $ (54) $ (1,300) $(129,172) $ 164,848 $ 90,093
========== ====== ========= ======== ========= ========= ========= ========= ========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Choice Hotels International, Inc. and Subsidiaries
1. Company Information and Significant Accounting Policies
Company Information. Choice Hotels International, Inc. ("the Company") is in
the business of hotel franchising. As of December 31, 2000, the Company had
franchise agreements with 4,392 hotels open and 703 hotels under development in
43 countries under the following brand names: Comfort, Quality, Econo Lodge,
Sleep Inn, Clarion, Rodeway Inn, and MainStay Suites.
Principles of Consolidation and Use of Estimates. The consolidated financial
statements include the accounts of Choice Hotels International, Inc. and its
subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation. The consolidated financial statements are prepared
in conformity with accounting principles generally accepted in the United States
and require management to make certain estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from these estimates.
Cash and Cash Equivalents. The Company considers all highly liquid investments
purchased with a maturity of three months or less at the date of purchase to be
cash equivalents.
Capitalization Policies. Major renovations, replacements and interest during
construction are capitalized to appropriate property and equipment accounts.
Upon sale or retirement of property, the cost and related accumulated
depreciation are eliminated from the accounts and the related gain or loss is
taken into income. Maintenance, repairs and minor replacements are charged to
expense.
Impairment Policy. The Company evaluates the recoverability of long-lived
assets, including franchise rights and goodwill, whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability is measured based on net, undiscounted expected cash
flows. Assets are considered to be impaired if the net, undiscounted expected
cash flows are less than the carrying amount of the assets. Impairment charges
are recorded based upon the difference between the carrying value of the asset
and the expected net cash flows, discounted at an appropriate interest rate.
Deferred Financing Costs. Debt financing costs are deferred and amortized,
using the effective interest method, over the term of the related debt.
Investments. The Company accounts for its investments in common stock in
accordance with Statements of Financial Accounting Standards ("SFAS") No. 115
"Accounting for Certain Investments in Debt and Equity Securities" and SFAS No.
130 "Reporting Comprehensive Income." The Company accounts for its investment
in unincorporated joint ventures in accordance with Accounting Principles Board
Opinion ("APB") No. 18 "The Equity Method of Accounting for Investments in
Common Stock."
Revenue Recognition. The Company enters into numerous franchise agreements
committing to provide franchisees with various marketing services, a centralized
reservation system and limited rights to utilize the Company's registered
tradenames. These agreements are typically for a period of twenty years, with
certain rights to the franchisee to terminate after five, ten, or fifteen years.
In most instances, initial franchise fees are recognized upon sale because the
initial franchise fee is non-refundable and the Company has no continuing
obligations related to the franchisee. However, when
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Choice Hotels International, Inc. and Subsidiaries
franchise agreements are entered into which include future potential rebates
and/or incentive payments, the initial franchise fees are deferred and
recognized when the incentive criteria are met or the deal is terminated,
whichever occurs first. In 2000, ninety-eight franchise agreements were entered
into with incentive clauses which resulted in deferred initial franchise fee
revenue of $3.3 million. Royalty fees, primarily based on gross room revenues
of each franchisee, are recorded when earned. Reserves for uncollectible
accounts are charged to bad debt expense and are included in selling, general
and administrative expenses in the accompanying consolidated statements of
income.
The Company's franchise agreements require the payment of franchise fees
which include marketing and reservation fees. These fees, which are based on a
percentage of the franchisees' gross room revenues, are used exclusively by the
Company's marketing and reservation funds for expenses associated with providing
such franchise services as central reservation systems, national marketing and
media advertising. The Company is contractually obligated to expend the
marketing and reservation fees it collects from franchisees in accordance with
the franchise agreements; as such, no income or loss to the Company is
generated. Accordingly, marketing and reservation fees collected and associated
expenses are reported net by the Company.
The Company generates partner services revenue from hotel industry vendors
based on the level of goods or services purchased from the vendors by hotel
owners and hotel guests who stay in the Company's franchised hotels. In
accordance with Staff Accounting Bulletin No. 101, "Revenue Recognition," the
Company recognizes partner services revenues (i) upon the completion of service
or delivery of product, assuming reasonable assurance of collectibility; (ii)
upon completion of a specific event; or, failing the previous two conditions,
(iii) over the life of the contract, regardless of whether monies are received
in advance or in arrears, and regardless of whether the monies are non-
refundable.
Self-Insurance Program. The Company maintains its own health insurance program,
which includes certain levels of retained risk. Estimated costs are accrued at
present values based on actuarial projections for known and anticipated claims.
Reclassifications. Certain reclassifications have been made to the prior year
consolidated financial statements to conform to the current year presentation.
2. Property and Equipment
The components of property and equipment in the consolidated balance sheets are:
December 31,
(In thousands) 2000 1999
-------- --------
Land $ 2,593 $ 1,227
Facilities in progress 4,075 1,838
Building and improvements 29,474 18,458
Furniture, fixtures and equipment 74,812 60,629
-------- --------
110,954 82,152
Less: Accumulated depreciation (38,008) (23,897)
-------- --------
$ 72,946 $ 58,255
======== ========
Depreciation has been computed for financial reporting purposes using the
straight-line method. A summary of the ranges of estimated useful lives upon
which depreciation rates have been based follows:
Building and improvements 10-40 years
Furniture, fixtures and equipment 3-20 years
3. Goodwill
Goodwill primarily represents an allocation of the excess purchase price of the
stock of the Company over the recorded minority interest that was previously
held by members of the Company's former management team. Goodwill is amortized
on a straight-line basis over 40 years. Such amortization amounted to $2.0
million in each of the years
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Choice Hotels International, Inc. and Subsidiaries
ended December 31, 2000, 1999 and 1998, respectively. Goodwill is net of
accumulated amortization of $12.1 million and $10.1 million at December 31, 2000
and 1999, respectively.
4. Franchise Rights
Franchise rights are intangible assets and represent an allocation in purchase
accounting for the value of long-term franchise contracts. As of December 31,
2000, the net balance is associated with the Econo Lodge acquisition made in
fiscal year 1991. Franchise rights acquired are amortized over an average life
of 15 years. Amortization expense for the years ended December 31, 2000, 1999
and 1998 amounted to $3.9 million, $4.3 million and $3.8 million, respectively.
Franchise rights are net of accumulated amortization of $26.9 million and $23.0
million at December 31, 2000 and 1999, respectively.
The Company periodically assesses the amortization lives of its franchise
rights. Effective January 1, 1998, the Company changed its estimate of the
useful life of Econo Lodge franchise rights to a 17 year period and Rodeway
franchise rights to a 3 year period to more closely match the remaining
estimated contract lives of franchise contracts acquired in 1991.
5. Investment in Friendly
As of December 31, 2000, the Company had 1,083,333 shares of common stock
and 23,624,742 shares of 5.75% convertible preferred stock in Friendly Hotels
plc ("Friendly"), the Company's master franchisor for the United Kingdom,
Ireland and continental Europe. The preferred shares were convertible for one
new Friendly common share for every 150p nominal of the preferred convertible
shares.
The Company has the right to appoint three directors to the board of
Friendly. Given the Company's ability to exercise significant influence over the
operations of Friendly, the equity method of accounting is applied.
Friendly holds the master franchise rights for the Company's Comfort,
Quality and Clarion brand hotels in the United Kingdom, Ireland and throughout
Europe (with the exception of Scandinavia) for a 10-year period. In exchange,
the Company received Friendly common stock and was to receive from Friendly,
$8.0 million payable in eight equal annual installments.
On December 21, 2000, Friendly announced a comprehensive restructuring
program to strengthen its balance sheet and improve its operations. Elements of
the restructuring program include a revaluation of its real estate portfolio,
disposal of non-core assets, renegotiations of certain commercial arrangements
with the Company, and a future strategy focused on growth of its franchising
business. To improve Friendly's competitive position in Europe, the Company has
agreed to forgive and waive certain royalty fees due over the next five years,
waive the five remaining annual installments of the master franchise agreement
and to provide Friendly with a letter of credit in an amount up to (Pounds)7.8
million (approximately US $11.4 million) to guarantee additional credit
facilities from Friendly's banks. The Company's letter of credit will be secured
by substantially all of Friendly's assets in France and Germany, valued in
excess of (Pounds)8.2 million (approximately US $12.0 million). In consideration
for this support, Friendly will reduce the conversion rate from 150p for each of
Choice's convertible preferred shares to 60p for each convertible preferred
share. Other modifications to the Company's convertible preferred shares will
include a change in the dividend rate from 5.75% (payable in cash) to 2% per
annum, if payable in additional convertible preferred shares. Friendly may
alternatively elect to pay cash dividends at the rate of 3.5% per annum up until
January 30, 2013 and thereafter at the rate of 5.75%. In addition, accrued
dividends due to the Company as of February 7, 2001 will be converted to
additional convertible preferred shares of Friendly. The effect of this change
in conversion price together with the conversion of dividend arrearage to
additional convertible preferred shares of Friendly is
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Choice Hotels International, Inc. and Subsidiaries
to increase the Company's fully diluted ownership in Friendly from the current
level of 44% to approximately 69%. Friendly will be granted an option to settle
the deferred consideration of $4.0 million pursuant to a January, 1998
transaction, in additional convertible preferred shares. In the event that
Friendly settles this obligation before maturity, the amount payable shall be
discounted at a rate of 10% per annum. Due to the restructuring program, the
Company has recorded an equity loss on Friendly of $12.1 million in accordance
with Emerging Issues Task Force ("EITF") No. 99-10, "Percentage Used to
Determine the Amount of Equity Method Losses." Going forward, the EITF No. 99-10
requires the Company to recognize changes in Friendly's hypothetical liquidated
book value as an equity adjustment to the Company's recorded investment.
Since the closing of the restructuring transaction in January 2001, the
Company continues to closely monitor its strategic options with respect to its
investment in Friendly. In the event that Friendly's financial condition
deteriorates, there may not be sufficient cash from operations and available
credit lines to fund the business. In the event that Friendly cannot secure
additional borrowings or equity, the Company will consider its strategic and
financial options, including, but not limited to i) stand-aside to additional
funding requirements which would likely result in the insolvency of Friendly, a
further or complete write-down of the Company's investment in Friendly and the
Company taking back its franchising rights for the United Kingdom, Ireland and
continental Europe, or ii) conversion of its convertible preferred shares into
ordinary common stock resulting in control of and full consolidation of
Friendly.
The Company recognized $2.2 million and $2.1 million in preferred dividend
income from the Friendly investment for the years ended December 31, 1999 and
1998, respectively. As of December 31, 1999 and 1998, accrued but unpaid
preferred dividends were $5.8 million and $3.7 million, respectively. The
Company also recognized $1.1 million, $2.2 million and $1.4 million in royalty
revenue from Friendly for the years ended December 31, 2000, 1999 and 1998,
respectively.
The Company owned approximately 5.4%, 5.3% and 5.2% of Friendly's
outstanding ordinary shares at December 31, 2000, 1999, and 1998, respectively.
The fair market value of the ordinary shares at December 31, 2000, 1999 and 1998
was $0.7 million, $2.0 million and $1.9 million, respectively.
Summarized unaudited balance sheet data for Friendly is as follows:
Unaudited
December 31,
------------------
(In thousands) 2000 1999
-------- --------
Current assets $ 27,298 $ 33,557
Non-current assets 138,679 193,299
Current liabilities 70,541 55,441
Non-current liabilities 60,820 89,776
Redeemable preferred stock 23,115 37,800
shareholders' equity 34,616 81,639
Summarized unaudited income statement data for Friendly is as follows:
Unaudited
December 31,
------------------------------
(In thousands) 2000 1999 1998
------ ------ ------
Net revenues $138,135 $150,332 $130,028
Gross profit 76,032 84,852 73,447
Income from continuing operations (40,193) (8,584) 12,778
Net (loss) income after preferred dividends (50,640) (31,424) 18,984
6. Advances to Marketing and Reservation Funds
The total marketing and reservation fees received by the Company for the years
ended December 31, 2000, 1999 and 1998 amounted to $162.4 million, $146.0
million and $127.4 million, respectively. Depreciation and amortization
incurred by the marketing and reservation funds for the years ended December 31,
2000, 1999 and 1998 amounted to $10.5 million, $9.6 million and $6.2 million,
respectively. Interest expense incurred by the reservation fund was $4.8
million, $3.3 million and $1.8 million for the years ended December 31, 2000,
1999 and 1998, respectively. Under the terms of the franchise agreements,
reservation fees and marketing fees not expended in the current year are carried
over to the next fiscal year and expended in accordance with the
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Choice Hotels International, Inc. and Subsidiaries
franchise agreements. Shortfall amounts are similarly recovered in subsequent
years. Excess or shortfall amounts from the operation of these programs are
recorded as a payable or receivable, respectively, from the particular fund.
As of December 31, 2000 and 1999, the Company's consolidated balance sheet
includes advances to marketing and reservation funds of $57.8 million
(marketing $24.9 million and reservation $32.9 million) and $32.8 million
(marketing $12.5 million and reservation $20.3 million), respectively. The
Company has the ability under the existing franchise agreements and expects to
recover the remaining receivables through future marketing and reservation fees.
7. Transactions with Sunburst
Effective October 15, 1997, Choice Hotels International, Inc. ("CHI"), which at
that point included both the franchising business and owned hotel business,
separated the businesses via spin-off of the Company (the "Sunburst
Distribution"). CHI changed its name to Sunburst Hospitality Corporation
(referred to hereafter as "Sunburst"). As part of the spin-off, Sunburst and
the Company entered into a strategic alliance agreement, which was amended in
December 1998 and September 2000. Among other things, the strategic alliance
agreement provides for (i) certain commitments by Sunburst for the development
of MainStay Suites hotels; (ii) special procedures associated with liquidated
damages; and (iii) predetermined franchise fee credits based on operating
performance. The amended strategic alliance agreement extends through October
15, 2002 as it relates to development commitments. Liquidated damage and
franchise fee credit provisions extend through the life of existing franchise
agreements.
In connection with the spin-off, the Company borrowed $115 million under
its Credit Facility (as defined in Note 10) in order to fund a subordinated term
note to Sunburst (the "Note"). The Note of $115 million accrues interest monthly
at an initial simple rate of 11% per annum through October 14, 2000. In
connection with an amendment of the strategic agreement discussed above,
effective October 15, 2000, interest shall accrue at a rate of 11% per annum
compounded daily. On January 1, 1999, the Company began recognizing interest on
the outstanding principal and accrued interest amounts at an effective rate of
10.58%. The Note is payable in full, along with accrued interest, on October 15,
2002. Total interest accrued as of December 31, 2000 and 1999 was $42.2 million
and $27.0 million, respectively.
On September 1, 2000, Sunburst transferred title to three MainStay
properties under a put/call agreement entered into between the Company and
Sunburst in March 2000. The properties were received by the Company as
consideration for $16.3 million of the then $149 million amount due under the
Note. The fair market value of the MainStay properties was approximately $12.2
million. Accordingly, the Company recognized a $4.1 million pre-tax loss on the
Note.
On September 20, 2000, the Company and Sunburst reached agreement on the
terms of a proposed restructuring of the then existing $136 million Note. Under
the terms of the agreement, the Company would receive cash and a newly issued 11
3/8% seven-year subordinated note. On January 5, 2001, the Company received
$101.9 million, a parcel of land valued at approximately $1.5 million and a $35
million seven-year senior subordinated note bearing interest at 11 3/8% in
settlement of the balance of the Note. In 2000, the Company recognized a pre-tax
loss of $3.5 million resulting from this transaction.
During the periods presented, Sunburst operated substantially all of its
hotels pursuant to franchise agreements with the Company. Total fees paid to the
Company included in the accompanying consolidated financial statements for
franchising royalty, marketing and reservation fees were $10.3 million, $9.1
million and $11.2 million for the years ended December 31, 2000, 1999 and 1998,
respectively.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Choice Hotels International, Inc. and Subsidiaries
In accordance with the spin-off, the Company agreed to assume and pay certain
liabilities of Sunburst, subject to the Company maintaining a minimum net worth
of $40 million, at the date of the Sunburst Distribution. As of December 31,
1997, the Company reflected a $25 million receivable due from Sunburst on the
consolidated balance sheet. In 1998, net payments of approximately $8 million
were collected from Sunburst in cash. In December 1998, the Company and Sunburst
amended the strategic alliance agreement entered into in connection with the
Sunburst Distribution. As part of that amendment, the Company exchanged the
remaining $17 million balance in return for, among other things, the exclusive
rights to the MainStay Suites brand from Sunburst. The $17 million, net of
income taxes of approximately $7 million, was recorded as an adjustment to
additional paid-in-capital as it represents an adjustment to the accounting for
the Sunburst Distribution.
8. Restructuring Program
During 2000, the Company recognized $5.6 million in restructuring charges. The
restructuring charges include $4.7 million that relates to reorganizing the
Company's operations in order to improve service and support to the Company's
franchisees. Of this $4.7 million, $4.1 million relates to severance and
termination benefits for 176 employees (consisting of property and yield
management system installers, reservation agents and field service
administrative support) and $0.6 million relates to the cancellation of pre-
existing contracts for termination of international leases. The remaining $0.9
million of the $5.6 million is due to the termination of an in-room internet
initiative launched in 1999.
As of December 31, 2000, $0.5 million has been paid related to severance
and termination benefits. The Company expects the remaining $5.1 million
restructuring liability to be paid in 2001.
9. Accrued Expenses
Accrued expenses consisted of the following as of December 31:
(In thousands) 2000 1999
------ ------
Accrued salaries and benefits $13,027 $12,813
Accrued interest 2,606 1,996
Accrued restructuring 5,100 --
Other 7,085 6,559
------- -------
Total $27,818 $21,368
------- -------
10. Long-Term Debt
As of December 31, debt consisted of the following:
<TABLE>
<CAPTION>
(In thousands) 2000 1999
------ ------
<S> <C> <C>
$300 million competitive advance
and multi-currency revolving credit
facility with an average rate of
7.31% and 6.81% at December
31, 2000 and 1999, respectively $189,000 $194,500
$100 million senior note offering
with an average rate of 7.22% at
December 31, 2000 and 1999, respectively 99,382 99,382
$15 million line of credit with an average rate
of 7.53% and 6.90% at December 31, 2000
and 1999, respectively 7,400 12,000
Other notes with an average rate
of 6.42% and 5.90% at December
31, 2000 and 1999, respectively 1,443 1,474
======== ========
Total debt $297,225 $307,356
======== ========
</TABLE>
Maturities of debt as of December 31, 2000 were as follows:
Year (In thousands)
---- --------------
2001 $ 50,046
2002 146,646
2003 146
2004 146
2005 146
Thereafter 100,095
--------
Total $297,225
========
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Choice Hotels International, Inc. and Subsidiaries
On October 15, 1997, the Company entered into a $300 million competitive
advance and multi-currency revolving credit facility (the "Credit Facility")
provided by a group of 13 banks. The Credit Facility provides for a term loan of
$150 million and a revolving credit facility of $150 million, $50 million of
which is available for borrowings in foreign currencies. The Credit Facility
includes customary financial and other covenants that require the maintenance of
certain ratios including maximum leverage and interest coverage and restricts
the Company's ability to make certain investments, incur debt and dispose of
assets. The term loan ($80 million of which is outstanding at December 31, 2000)
is payable over five years, $42.5 million of which is due in 2001. Borrowings
under the Credit Facility are, at the option of the borrower, at one of several
rates including LIBOR plus 20.0 to 87.5 basis points, based upon a defined
financial ratio and the loan type. In addition, the Company has the option to
request participating banks to bid on loan participation at lower rates than
those contractually provided by the Credit Facility. The Credit Facility
requires the Company to pay annual fees of 1/10 of 1% to 1/3 of 1%, based upon a
defined financial ratio of the total loan commitment. The Credit Facility will
terminate on October 15, 2002.
On May 1, 1998, the Company issued $100 million of senior unsecured notes
(the "Senior Notes") at a discount of $0.6 million, bearing a coupon rate of
7.13% with an effective rate of 7.22%. The Senior Notes will mature on May 1,
2008, with interest on the Senior Notes to be paid semi-annually. The Company
used the net proceeds from the offering of approximately $99 million to repay
amounts outstanding under the Company's Credit Facility.
During June 2000, the Company renewed its revolving line of credit for $15
million. Borrowings on the line of credit are used to finance short-term
working capital requirements and other short-term general corporate goals. The
line of credit is due to expire on May 31, 2001 and bears interest at LIBOR plus
75 basis points. Interest accrues monthly on the outstanding balance. The line
of credit contains essentially the same covenants as the Credit Facility and is
prepayable without penalty.
11. Interest Rate Hedges
On December 3, 1999, the Company entered into an interest rate swap agreement
with a notional amount of $115 million to fix certain of its variable rate debt
in order to reduce the Company's exposure to fluctuations in interest rates.
The interest rate differential to be paid or received on the interest rate swap
agreement is accrued as interest rates change and is recognized as an adjustment
to interest expense. On average at December 31, 1999, the interest rate swap
agreement had a life of two months with a fixed rate of 5.85% and variable rate
of 6.12%, and a fair market valuation of approximately $0.1 million. On March
3, 2000, the interest rate swap agreement was settled for approximately $0.1
million.
12. Foreign Operations
The Company accounts for foreign currency translation in accordance with SFAS
No. 52, "Foreign Currency Translation." Revenues generated by foreign operations
for the years ended December 31, 2000, 1999 and 1998 were $5.3 million, $6.9
million (exclusive of $2.5 million of foreign dividends) and $5.8 million
(exclusive of $2.1 million of foreign dividends), respectively. The Company's
foreign operations had net income (loss) of $(12.3 million), $1.0 million and
$0.0 million for the years ended December 31, 2000, 1999 and 1998, respectively.
13. Pension, Profit Sharing, and Incentive Plans
Bonuses accrued for key executives of the Company under incentive compensation
plans were $1.1 million and $1.0 million at December 31, 2000 and 1999,
respectively.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Choice Hotels International, Inc. and Subsidiaries
During 2000, 1999 and 1998, employees of the Company participated in 401(k)
retirement plans sponsored by the Company. For the years ended December 31,
2000, 1999 and 1998, the Company recorded compensation expense of $1.6 million,
$1.3 million and $1.2 million, respectively, related to the plans.
14. Income Taxes
Income before income taxes were derived from the following:
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------------
(In thousands) 2000 1999 1998
------ ------ ------
<S> <C> <C> <C>
Income before income taxes and extraordinary item:
Domestic operations $ 80,982 $92,058 $82,400
Foreign operations (11,400) 2,413 --
-------- -------- --------
Income before income taxes and extraordinary item $ 69,582 $94,471 $82,400
======== ======= =======
</TABLE>
The provisions for income taxes follow:
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------------
(In thousands) 2000 1999 1998
------ ------ ------
<S> <C> <C> <C>
Current tax expense
Federal $20,707 $22,038 $15,918
State 2,434 2,723 3,482
Foreign 886 1,422 2
Deferred tax (benefit) expense
Federal 3,598 10,515 12,420
State (481) 618 2,505
Foreign (7) -- --
-------- -------- --------
$27,137 $37,316 $34,327
-------- -------- --------
</TABLE>
Deferred tax assets (liabilities) are comprised of the following:
December 31,
(In thousands) 2000 1999
------ ------
Depreciation and
amortization $(21,663) $(16,582)
Prepaid expenses (21,247) (17,542)
Other (6,606) (6,175)
-------- --------
Gross deferred tax liabilities (49,516) (40,299)
-------- --------
Foreign operations 4,352 223
Accrued expenses 6,496 9,112
Net operating losses -- 99
Other 1,976 3,979
-------- --------
Gross deferred tax assets 12,824 13,413
-------- --------
Net deferred tax liability $(36,692) $(26,886)
-------- --------
No provision has been made for U.S. federal deferred income taxes on
approximately $4 million of accumulated and undistributed earnings of foreign
subsidiaries at December 31, 2000, since these earnings are considered to be
permanently invested in foreign operations.
A reconciliation of income tax expense at the statutory rate to income tax
expense included in the accompanying consolidated statements of income follows:
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------------
(In thousands, except Federal income tax rate) 2000 1999 1998
------ ------ ------
<S> <C> <C> <C>
Federal income tax rate 35% 35% 35%
Federal taxes at statutory rate $24,354 $33,065 $28,856
State income taxes, net of federal tax benefit 1,269 2,172 3,892
Other 1,514 2,079 1,579
------- ------- -------
Income tax expense $27,137 $37,316 $34,327
======= ======= =======
</TABLE>
Cash paid for income taxes was $15.7 million, $17.8 million and $22.3
million for the years ended December 31, 2000, 1999 and 1998, respectively.
15. Capital Stock
In 2000, the Company granted key employees and non-employee directors 14,052
restricted shares of common stock with a value of $0.2 million on the grant
date. The shares vest over a three year period. In 1999, the Company granted
key employees and
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Choice Hotels International, Inc. and Subsidiaries
non-employee directors 70,260 restricted shares of common stock with a value of
$1.0 million on the grant date. The shares vest over a three to five year
period with 11,016 shares of the restricted stock vesting over a three year
period, 32,180 shares vesting over a four year period and 27,064 shares vesting
over a five year period. A total of 18,000 shares of restricted stock were
forfeited in 2000 and 1999.
On February 19, 1998, the Board of Directors adopted a shareholder rights
plan under which a dividend of one preferred stock purchase right was
distributed for each outstanding share of the Company's common stock to
shareholders of record on April 3, 1998. Each right will entitle the holder to
buy 1/100th of a share of a newly issued series of a junior participating
preferred stock of the Company at an exercise price of $75 per share. The rights
will be exercisable, subject to certain exceptions, 10 days after a person or a
group acquires beneficial ownership of 10% or more of the Company's common
stock. Shares owned by a person or group on February 19, 1998, and held
continuously thereafter are exempt for purposes of determining beneficial
ownership under the rights plan. The rights will be non-voting and will expire
on January 31, 2008, unless exercised or previously redeemed by the Company for
$.001 each. If the Company is involved in a merger or certain other business
combinations not approved by the Board of Directors, each right will entitle its
holder, other than the acquiring person or group, to purchase common stock of
either the Company or the acquiror or having a value of twice the exercise price
of the right.
The Company has stock option plans for which it is authorized to grant
options to purchase up to 9.0 million shares of the Company's common stock, of
which 2.0 million shares remain available for grant. Stock options may be
granted to officers, key employees and non-employee directors with an exercise
price not less than the fair market value of the common stock on the date of
grant.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Choice Hotels International, Inc. and Subsidiaries
A summary of the option activity under the above plans is as follows as of
December 31, 2000, 1999 and 1998:
<TABLE>
<CAPTION>
2000 1999 1998
--------------------------- ------------------------ -------------------------
Fixed Options Shares Weighted-Option Shares Weighted-Option Shares Weighted-Option
Price Price Price
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 3,907,326 $ 11.19 3,969,309 $ 10.13 4,167,045 $8.62
Granted 1,187,845 15.71 732,372 13.19 933,263 13.37
Exercised (288,634) 7.22 (695,228) 7.06 (738,318) 4.75
Cancelled (499,953) 15.10 (99,127) 12.85 (392,681) 11.88
========= ========= ========= ========== ========= =========
Outstanding at end of year 4,306,584 $ 12.39 3,907,326 $ 11.19 3,969,309 $ 10.31
========= ========= ========= ========== ========= =========
Options exercisable at year end 2,035,332 1,727,748 1,813,541
Weighted-average fair value of
options granted during the year $ 3.78 $ 6.20 $ 7.81
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 2000:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------------------------------------------------------------------
Range of Number Weighted-Average Weighted-Average Number Exercisable at Weighted-Average
Exercise Prices Outstanding at Remaining Exercise Price 12/31/00 Exercise Price
12/31/00 Contractual Life
- -------------------- -------------- -------------------- ------------------- --------------------- -------------------
<S> <C> <C> <C> <C> <C>
$ 3.01 to 5.00 309,635 1.0 years $ 4.52 309,637 $ 4.52
5.00 to 9.00 395,932 3.9 years 7.19 285,772 6.96
9.00 to 13.00 1,931,593 7.3 years 12.06 1,021,832 11.83
13.00 to 17.65 1,669,424 8.8 years 15.45 418,091 14.08
-------------- -------------------- ------------------- --------------------- -------------------
4,306,584 2,035,332
-------------- -------------------- ------------------- --------------------- -------------------
</TABLE>
45
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Choice Hotels International, Inc. and Subsidiaries
SFAS No. 123, "Accounting for Stock-Based Compensation," requires companies
to provide additional note disclosures about employee stock-based compensation
plans based on a fair value based method of accounting. As permitted by this
accounting standard, the Company continues to account for these plans under APB
Opinion 25.
For purposes of the pro forma disclosure, compensation cost for the
Company's stock option plan was determined based on the fair value at the grant
dates for awards under those plans consistent with the method of SFAS No. 123.
The fair value of each option grant has been estimated on the date of grant
using an option-pricing model with the following weighted-average assumptions
used for grants in 2000, 1999 and 1998:
2000 1999 1998
------ ------ ------
Risk-free interest rate 5.10% 6.45% 4.70%
Volatility 56.6% 38.0% 36.7%
Expected lives 10 years 10 years 10 years
Dividend yield 0% 0% 0%
If options had been reported as compensation expense based on their fair
value, pro forma net income would have been $41.8 million, $56.4 million and
$54.0 million for the years ended December 31, 2000, 1999 and 1998,
respectively, and pro forma earnings per share would have been $0.79, $1.01 and
$0.90, respectively.
16. Comprehensive Income
The components of total accumulated other comprehensive income are as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------------
(In thousands) 2000 1999 1998
------- ------- -------
<S> <C> <C> <C>
Unrealized gains (losses) on available-for-sale securities $ 108 $ (419) $ 380
Foreign currency translation adjustments (162) 1,624 1,732
------- ------- -------
Total accumulated other comprehensive income (loss) $ (54) $ 1,205 $ 2,112
======= ======= =======
</TABLE>
The related income tax effect allocated to each component of other
comprehensive income (loss) is as follows:
<TABLE>
<CAPTION>
Amount Income Tax Amount Net
Before Taxes (Expense) of Taxes
(In thousands) /Benefit
------------- ----------- ----------
<S> <C> <C> <C>
Calendar year 2000
Net unrealized gains $ 844 $ (317) $ 527
Foreign currency translation adjustment, net (1,786) -- (1,786)
--------- ------- -------
Total other comprehensive (loss) $ (942) $ (317) $(1,259)
========= ======= =======
Calendar year 1999
Net unrealized losses $(1,024) $ 225 $ (799)
Foreign currency translation adjustment, net (108) -- (108)
--------- ------- -------
Total other comprehensive (loss) $(1,132) $ 225 $ (907)
========= ======= =======
Calendar year 1998
Net unrealized gains $ 585 $ (205) $ 380
Foreign currency translation adjustment, net 10,048 -- 10,048
--------- ------- -------
Total other comprehensive income $10,633 $ (205) $10,428
========= ======= =======
</TABLE>
Below represents the detail of other comprehensive income:
<TABLE>
<CAPTION>
2000 1999 1998
------ ------ ------
<S> <C> <C> <C>
Foreign currency translation adjustments $ (291) $ (108) $ 1,916
Plus: reclassification of loss on liquidation
of foreign subsidiaries (1,495) -- 8,132
------ ------ -------
Net foreign currency translation adjustments (1,786) (108) 10,048
====== ====== =======
Unrealized holding gains (losses) arising during
the period, net (176) 601 380
Less: reclassification adjustments for gains
(losses) included in net income 703 (1,400) --
------ ------ -------
Net unrealized holding gains (losses) arising
during the period $ 527 $ (799) $ 380
====== ====== =======
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Choice Hotels International, Inc. and Subsidiaries
17. Earnings Per Share
The following table illustrates the reconciliation of the earnings and number of
shares used in the basic and diluted earnings per share calculations.
Years Ended December 31,
(In millions, except ------------------------
per share amounts) 2000 1999
------ ------
Computation of Basic Earnings Per Share:
Net income $42.4 $57.2
----- -----
Weighted-average shares outstanding 52.9 54.9
----- -----
Basic earnings per share $0.80 $1.04
===== =====
Computation of Diluted Earnings Per Share:
Net income for diluted earnings per share $42.4 $57.2
Weighted-average shares outstanding 52.9 54.9
Effect of Dilutive Securities:
Employee stock option plan 0.4 0.8
----- -----
Shares for diluted earnings per share 53.3 55.7
----- -----
Diluted earning per share $0.80 $1.03
===== =====
The effect of dilutive securities is computed using the treasury stock
method and average market prices during the period. In 2000 and 1999, the
Company excluded 2,725,696 and 206,031, respectively, anti-dilutive options from
the computation of diluted earnings per share.
18. Leases
Rental expense under non-cancelable operating leases was approximately $5.1
million, $3.9 million and $1.7 million for the years ended December 31, 2000,
1999 and 1998, respectively. The Company paid office rent of $51,662 and
$977,500 to Sunburst for the years ended December 31, 1999 and 1998,
respectively, based on the portion of total space occupied by the Company.
Future minimum lease payments are as follows:
Year (In thousands)
2001 $ 3,281
2002 3,255
2003 3,242
2004 3,331
2005 3,422
Thereafter 27,126
-------
Total $43,657
=======
During 1998, the Company recorded an extraordinary gain for the early
extinguishment of debt associated with a capitalized lease obligation. The
Company retired $13.7 million in debt and removed related assets of $1.8 million
from the consolidated balance sheets. Accordingly, an extraordinary gain of
$7.2 million was recognized, after income tax expense of $4.7 million, or $0.12
per diluted share.
19. Reportable Segment Information
The Company has a single reportable segment encompassing its franchising
business. Franchising revenues are comprised of royalty fees, initial franchise
and relicensing fees, and partner services revenue and other. Marketing and
reservation fees and expenses are excluded from reportable segment information
as such fees and associated expenses are reported net. Corporate and other
revenue consists of the operations of three MainStay hotels, product sales and
European hotel operations. The Company does not allocate interest income,
interest expense or income taxes to its franchising segment.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Choice Hotels International, Inc. and Subsidiaries
The following table presents the financial information for the Company's
franchising segment:
<TABLE>
<CAPTION>
Year ended December 31, 2000
Franchising Corporate and Other Consolidated
------------------------------------------------
<S> <C> <C> <C>
Revenues $166,222 $ 1,252 $167,474
Operating income (loss) 136,985 (44,558) 92,427
Depreciation and amortization 100 11,523 11,623
Capital expenditures 8,665 7,925 16,590
Total assets 251,586 232,534 484,120
<CAPTION>
Year ended December 31, 1999
Franchising Corporate and Other Consolidated
--------------------------------------------
<S> <C> <C> <C>
Revenues $157,729 $ 3,871 $161,600
Operating income (loss) 124,293 (30,123) 94,170
Depreciation and amortization 730 6,957 7,687
Capital expenditures 16,515 14,118 30,633
Total assets 248,028 216,630 464,658
<CAPTION>
Year ended December 31, 1998
Franchising Corporate and Other Consolidated
---------------------------------------------
<S> <C> <C> <C>
Revenues $143,628 $ 21,846 $165,474
Operating income (loss) 113,175 (28,024) 85,151
Depreciation and amortization 221 6,489 6,710
Capital expenditures 15,500 1,988 17,488
Total assets 208,096 190,129 398,225
</TABLE>
The Company's international operations had revenues of $5.3 million, $6.9
million and $5.8 million for the years ended December 31, 2000, 1999 and 1998,
respectively. Long-lived assets related to international operations were $10.9
million and $20.7 million as of December 31, 2000 and 1999, respectively. All
other long-lived assets of the Company are associated with domestic activities.
In addition, the Company had a $34.6 million and $41.2 million investment in
Friendly as of December 31, 2000 and 1999, respectively.
20. Commitments and Contingencies
The Company is a defendant in a number of lawsuits arising in the ordinary
course of business. In the opinion of management and general counsel to the
Company, the ultimate outcome of such litigation will not have a material
adverse effect on the Company's business, financial position, results of
operations or cash flows.
In January 2001, the Company provided Friendly, in association with
Friendly's restructuring (see Note 5 to Consolidated Financial Statements), with
a letter of credit in an amount up to (Pounds)7.8 million (approximately US
$11.4 million) to guarantee additional credit facilities from Friendly's banks.
From time to time, the Company establishes programs or helps franchisees
obtain financing. One of the past programs was a "Construction to Permanent
Financing" program under which Salomon Smith Barney together with Suburban
Capital Markets, Inc. offered $100 million in financing per year to qualified
franchises and the Company guaranteed such loans with a maximum guarantee amount
of $10 million. At December 31, 2000 and 1999, loans outstanding under this
program were $6.0 million and $14.3 million, respectively, and the Company's
guarantee covered $3.0 million and $7.2 million, respectively, of these loans.
In 2001, the $6.0 million loan was settled, removing the Company's open
guarantee of $3.0 million.
21. Fair Value of Financial Instruments
The balance sheet carrying amount of cash and cash equivalents and receivables
approximate fair value due to the short-term nature of these items. Long-term
debt consists of bank loans and senior notes. Interest rates on bank loans
adjust frequently based on current market rates; accordingly, the carrying
amount of bank loans is equivalent to fair value.
The Note from Sunburst has an approximate fair value of $139.4 million and
$135.0 million at December 31, 2000 and 1999, respectively, based on its
current yield to maturity. The $100 million unsecured senior notes have an
approximate fair value at
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Choice Hotels International, Inc. and Subsidiaries
December 31, 2000 and 1999 of $97.9 million and $93.9 million, respectively,
based on their current yield to maturity.
22. Impact of Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board (Board) issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," which
established accounting and reporting standards for derivative instruments,
including derivative instruments embedded in other contracts, and for hedging
activities. SFAS No. 133 requires the recognition of the fair value of
derivatives in the statement of financial position, with changes in the fair
value recognized either in earnings or as a component of other comprehensive
income dependent upon the hedging nature of the derivative. In June 1999, the
Board issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities--Deferral of the Effective Date of FASB Statement No. 133," which
deferred the effective date of SFAS No. 133 until fiscal years beginning after
June 15, 2000. SFAS No. 133 does not have a material impact on the Company's
earnings or other comprehensive income.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition," which requires
revenues to be recognized when realized and earned. Revenue is generally
realized and earned when all of the following criteria are met: (i) persuasive
evidence of an arrangement exists; (ii) delivery has occurred or services have
been rendered; (iii) the selling price must be fixed or determinable; and, (iv)
collectibility is reasonably assured. The Company implemented SAB No. 101 in
2000.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Choice Hotels International, Inc. and Subsidiaries
23. Selected Quarterly Financial Data -- (Unaudited)
<TABLE>
<CAPTION>
(In thousands, except per share data)
Total
2000 First Second Third Fourth Year
- ---- ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C>
Revenue $31,647 $41,165 $50,113 $44,549 $167,474
Operating income 16,916 24,041 32,797 18,673 92,427
Income before income taxes 14,439 19,079 31,921 4,143 69,582
Net income 8,808 11,638 19,472 2,527 42,445
Per basic share:
Net income $ 0.16 $ 0.22 $ 0.37 $ 0.05 $ 0.80
Per diluted share:
Net income $ 0.16 $ 0.22 $ 0.37 $ 0.05 $ 0.80
<CAPTION>
Total
1999 First Second Third Fourth Year
- ---- ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C>
Revenues $30,805 $39,763 $48,016 $43,016 $161,600
Operating income 16,250 24,282 30,290 23,348 94,170
Income before income taxes 17,272 24,280 30,381 22,538 94,471
Net income 10,277 14,531 18,338 14,009 57,155
Per basic share:
Net income $ 0.18 $ 0.26 $ 0.34 $ 0.26 $ 1.04
Per diluted share:
Net income $ 0.18 $ 0.26 $ 0.33 $ 0.26 $ 1.03
</TABLE>
<PAGE>
CHOICE ENHANCES DIVERSITY PROGRAMS
Choice has embarked on an aggressive drive to recruit new minority franchisees,
with special emphasis on African-Americans.
Indicative of the types of franchisees the company seeks are James and
Saundra Roath of Marco Island, Florida, who are building a Quality Inn & Suites
hotel in nearby Naples, and Sandra Spears of Detroit, who is developing a
Quality Suites hotel in Pontiac, Michigan. James Roath was one of the first
African-American franchisees for McDonald's and founded Perfection Industrial
Distributors, one of the largest black-owned services companies in America.
A former high school and college track star from Pontiac, Sandra Spears is
the first black woman to become a Choice franchisee. She founded Spears Global
Marketing, a sales consulting firm, and has been active as a member of the
Michigan Minority Business Development Council.
The company has increased its presence at such conventions as the annual
meeting of the NAACP, the Black Enterprise Conference and regional trade shows
aimed at promoting minority franchising. In addition, Choice has started a
program of seminars on franchising for minority entrepreneurs at The Learning
Center in its Silver Spring headquarters complex. Assisting in the program,
entitled "Exploring the Potential of Franchising," are the U.S. Chamber of
Commerce, the International Association of Black Hotel Owners & Developers, and
the U.S. Department of Commerce Minority Business Development Agency.
<PAGE>
Board of Directors and Corporate Officers
Choice Hotels International, Inc. and Subsidiaries
BOARD OF DIRECTORS
Stewart Bainum, Jr.
Chairman of the Board:
HCR Manor Care Inc.
Sunburst Hospitality Corporation
Barbara Bainum
Vice Chairman:
Commonweal Foundation
Realty Investment Company, Inc.
William L. Jews
President and Chief Executive Officer:
CareFirst BlueCross BlueShield
Director:
Ecolab, Inc.
MBNA
Ryland Group, Inc.
Charles A. Ledsinger, Jr.
President and Chief Executive Officer:
Choice Hotels International, Inc.
Director:
FelCor Lodging Trust, Inc.
Friendly's Ice Cream Corporation
TBC Corporation
Lawrence R. Levitan
Chairman:
IRS Oversight Board
Retired Managing Partner:
Andersen Consulting's
Worldwide Communications Industry Group
Gerald W. Petitt*
President and Chief Executive Officer:
Creative Hotel Associates LLC
*Mr. Petitt will retire from the Board at the May 2001 Annual Meeting.
Jerry E. Robertson, Ph.D.
Retired Executive Vice President:
3M Life Sciences Sector and Corporate Services
Director:
Coherent Inc,
Steris Corp.
Raymond E. Schultz
Chairman
RES Investments, L.L.C.
Director:
Equity Inns, Inc.
TBC Corporation
CORPORATE EXECUTIVE OFFICERS
Stewart Bainum, Jr.
Chairman of the Board
Charles A. Ledsinger, Jr.
President and Chief Executive Officer
Steven T. Schultz
Executive Vice President, Domestic Hotels
Michael J. DeSantis
Senior Vice President, General Counsel and Secretary
Bruce N. Haase
Senior Vice President, International
Thomas Mirgon
Senior Vice President, Administration
Daniel Rothfeld
Senior Vice President,
E-commerce and Emerging Business Opportunities
Joseph M. Squeri
Senior Vice President,
Chief Financial Officer and Treasurer
Gary Thomson
Senior Vice President and Chief Information Officer
Wayne W. Wielgus
Senior Vice President, Marketing
CORPORATE OFFICERS
Don Brockway
Vice President, Reservations Operations
Gregory A. Bublitz
Vice President, Finance and Controller
Brendan M. Ebbs
Senior Vice President, Franchise Operations
Janna Morrison
Vice President, Property Systems
Kevin M. Rooney
Associate General Counsel and Assistant Secretary
William Weatherford
Senior Vice President, Franchise Operations
<PAGE>
BOARD OF DIRECTORS AND CORPORATE OFFICERS
MARKET AREA VICE PRESIDENTS
Brendan M. Ebbs
Senior Vice President, Franchise Operations
North Market Area
Brent Russell
Vice President, Franchise Operations
West Market Area
William Weatherford
Senior Vice President, Franchise Operations
South Market Area
BRAND MANAGEMENT
Thomas Hall
Vice President and Brand Manager
Emerging Brands
Peter Jordan
Vice President and Brand Manager
Core Brands
Tim Shuy
Vice President and Brand Manager
Economy Brands
Corporate Information
Stock Listing
Choice Hotels International common stock trades on
the New York Stock Exchange under the ticker symbol CHH.
Transfer Agent & Registrar
Mellon Investor Services LLC
Overpeck Centre
85 Challenger Road
Ridgefield, NJ 07660
www.chasemellon.com
Independent Auditors
Arthur Andersen LLP
Vienna, Virginia
Annual Meeting Date
Choice Hotels International will hold its Annual
Meeting of Stockholders on Tuesday, May 15, 2001, at
8:30 a.m. in The Chesapeake Room of the Learning
Center, 10720 Columbia Pike, Silver Spring, Maryland.
Form 10-K
A stockholder may receive without charge a copy of the
Form 10-K Annual Report filed with the Securities and
Exchange Commission by written request to the
Corporate Secretary at the corporate headquarters.
Corporate Headquarters
Choice Hotels International
10750 Columbia Pike
Silver Spring, MD 20901
General Inquiries:
(301) 592-5000
Franchise Sales:
(800) 547-0007
Investor Inquiries:
(800) 404-5050, ext. 5026 or
(301) 592-5026
e-mail: investor_relations@choicehotels.com
Media Relations:
(301) 592-5032
(C)2001 Choice Hotels International, Inc.
Quality, Comfort, Clarion, Sleep Inn, Econo Lodge, Rodeway Inn, MainStay, Guest
Privileges and ChoiceBuys.com are registered trademarks, service marks and trade
names owned by Choice Hotels International, Inc. Choice Hotels also owns and
uses common law marks, including Profit Manager.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-21.01
<SEQUENCE>5
<FILENAME>0005.txt
<DESCRIPTION>SUBSIDIARIES
<TEXT>
<PAGE>
Exhibit 21.01
SUBSIDIARIES
Choice Capital Corp., a Delaware corporation
Choice Hotels Australia Pty. Ltd. (90% owned), an Australian company
Choice Hotels Canada Inc. (50% owned), an Ontario, Canada corporation
Choice Hotels International Services Corp., a Delaware corporation
711 West Development Park, LLC, a Delaware limited liability company
Brentwood Boulevard Hotel Development LLC, a Delaware limited liability
company
Park Lane Drive Hotel Development LLC, a Delaware limited liability company
Dry Pocket Road Hotel Development, LLC, a Delaware limited liability company
1
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-23.01
<SEQUENCE>6
<FILENAME>0006.txt
<DESCRIPTION>CONSENT OF ARTHUR ANDERSEN LLP
<TEXT>
<PAGE>
Exhibit 23.01
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
reports incorporated by reference in or included in this Form 10-K, into the
Company's previously filed Registration Statements File No. 333-36819, No. 333-
41355, No. 333-41357 and No. 333-67737.
/s/ Arthur Andersen LLP
Vienna, Virginia
March 30, 2001
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
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