UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004
OR
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
COMMISSION FILE NO. 001-13393
CHOICE HOTELS INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
| DELAWARE | 52-1209792 | |
| (State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
10750 COLUMBIA PIKE
SILVER SPRING, MD. 20901
(Address of principal executive offices)
(Zip Code)
(301) 592-5000
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No ¨
| CLASS |
SHARES OUTSTANDING AT MARCH 31, 2004 | |
| Common Stock, Par Value $0.01 per share |
34,164,941 | |
| Preferred Stock Purchase Rights |
CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX
| PAGE NO. | ||
| PART I. FINANCIAL INFORMATION: |
||
| Item 1—Financial Statements |
||
| 3 | ||
| Consolidated Balance Sheets—As of March 31, 2004 (Unaudited) and December 31, 2003 |
4 | |
| 6 | ||
| 7 | ||
| Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operation |
11 | |
| Item 3—Quantitative and Qualitative Disclosures about Market Risk |
16 | |
| 17 | ||
| PART II. OTHER INFORMATION: |
||
| 18 | ||
| Item 2—Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities |
18 | |
| 18 | ||
| 18 | ||
| 18 | ||
| 18 | ||
| 22 | ||
2
PART I. FINANCIAL INFORMATION
CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
| Three Months Ended March 31, |
||||||||
| 2004 |
2003 |
|||||||
| REVENUES: |
||||||||
| Royalty fees |
$ | 30,709 | $ | 27,251 | ||||
| Initial franchise and relicensing fees |
3,388 | 2,607 | ||||||
| Partner services |
2,267 | 2,306 | ||||||
| Marketing and reservation |
49,311 | 47,353 | ||||||
| Hotel operations |
813 | 837 | ||||||
| Other |
747 | 1,202 | ||||||
| Total revenues |
87,235 | 81,556 | ||||||
| OPERATING EXPENSES: |
||||||||
| Selling, general and administrative |
15,801 | 13,486 | ||||||
| Depreciation and amortization |
2,534 | 2,759 | ||||||
| Marketing and reservation |
49,311 | 47,353 | ||||||
| Hotel operations |
690 | 726 | ||||||
| Total operating expenses |
68,336 | 64,324 | ||||||
| OPERATING INCOME |
18,899 | 17,232 | ||||||
| OTHER INCOME AND EXPENSES: |
||||||||
| Interest expense |
2,548 | 3,024 | ||||||
| Interest and other investment income |
(312 | ) | (1,354 | ) | ||||
| Equity in net income of affiliates |
(186 | ) | — | |||||
| Total other income and expenses |
2,050 | 1,670 | ||||||
| INCOME BEFORE INCOME TAXES |
16,849 | 15,562 | ||||||
| INCOME TAXES |
6,255 | 5,875 | ||||||
| NET INCOME |
$ | 10,594 | $ | 9,687 | ||||
| WEIGHTED AVERAGE SHARES OUTSTANDING-BASIC |
34,273 | 36,772 | ||||||
| WEIGHTED AVERAGE SHARES OUTSTANDING-DILUTED |
35,639 | 37,513 | ||||||
| BASIC EARNINGS PER SHARE |
$ | 0.31 | $ | 0.26 | ||||
| DILUTED EARNINGS PER SHARE |
$ | 0.30 | $ | 0.26 | ||||
| CASH DIVIDENDS DECLARED PER COMMON SHARE |
$ | 0.20 | $ | — | ||||
The accompanying notes are an integral part of these consolidated financial statements.
3
CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES
(IN THOUSANDS)
| March 31, 2004 |
December 31, 2003 | |||||
| (Unaudited) | ||||||
| ASSETS |
||||||
| CURRENT ASSETS |
||||||
| Cash and cash equivalents |
$ | 19,656 | $ | 20,031 | ||
| Receivables (net of allowance for doubtful accounts of $6,919 and $6,743, respectively) |
33,399 | 33,631 | ||||
| Deferred income taxes |
2,256 | 1,957 | ||||
| Other current assets |
3,710 | 3,613 | ||||
| Total current assets |
59,021 | 59,232 | ||||
| PROPERTY AND EQUIPMENT, AT COST, NET |
52,147 | 54,253 | ||||
| GOODWILL |
60,620 | 60,620 | ||||
| FRANCHISE RIGHTS, NET |
34,556 | 35,383 | ||||
| RECEIVABLE—MARKETING AND RESERVATION FEES |
31,550 | 32,368 | ||||
| OTHER ASSETS |
28,049 | 25,416 | ||||
| Total assets |
$ | 265,943 | $ | 267,272 | ||
The accompanying notes are an integral part of these consolidated balance sheets.
4
CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
| March 31, 2004 |
December 31, 2003 |
|||||||
| (Unaudited) | ||||||||
| LIABILITIES AND SHAREHOLDERS’ DEFICIT |
||||||||
| CURRENT LIABILITIES |
||||||||
| Current portion of long-term debt |
$ | 23,288 | $ | 23,829 | ||||
| Accounts payable |
28,435 | 29,740 | ||||||
| Accrued expenses and other |
45,483 | 46,065 | ||||||
| Income taxes payable |
5,358 | 2,577 | ||||||
| Total current liabilities |
102,564 | 102,211 | ||||||
| LONG-TERM DEBT |
248,050 | 222,823 | ||||||
| DEFERRED INCOME TAXES |
22,019 | 21,562 | ||||||
| OTHER LIABILITIES |
41,738 | 38,863 | ||||||
| Total liabilities |
414,371 | 385,459 | ||||||
| Commitments and Contingencies |
||||||||
| SHAREHOLDERS’ DEFICIT |
||||||||
| Common stock, $.01 par value |
342 | 347 | ||||||
| Additional paid-in-capital |
80,648 | 74,496 | ||||||
| Accumulated other comprehensive income |
1,180 | 1,138 | ||||||
| Deferred compensation |
(9,548 | ) | (2,641 | ) | ||||
| Treasury stock |
(529,794 | ) | (496,510 | ) | ||||
| Retained earnings |
308,744 | 304,983 | ||||||
| Total shareholders’ deficit |
(148,428 | ) | (118,187 | ) | ||||
| Total liabilities and shareholders’ deficit |
$ | 265,943 | $ | 267,272 | ||||
The accompanying notes are an integral part of these consolidated balance sheets.
5
CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
| Three Months Ended March 31, |
||||||||
| 2004 |
2003 |
|||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||
| Net income |
$ | 10,594 | $ | 9,687 | ||||
| Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
| Depreciation and amortization |
2,534 | 2,759 | ||||||
| Provision for bad debts |
119 | 448 | ||||||
| Non-cash stock compensation |
873 | 402 | ||||||
| Non-cash investment income |
(285 | ) | (88 | ) | ||||
| Equity in net income of affiliates |
(186 | ) | — | |||||
| Changes in assets and liabilities: |
||||||||
| Receivables |
131 | (675 | ) | |||||
| Receivable—marketing and reservation fees, net |
3,366 | (3,067 | ) | |||||
| Current liabilities |
(1,803 | ) | 4,575 | |||||
| Income taxes payable/other current assets and accrued expenses |
4,035 | (1,109 | ) | |||||
| Deferred income taxes and other liabilities |
3,145 | 2,771 | ||||||
| NET CASH PROVIDED BY OPERATING ACTIVITIES |
22,523 | 15,703 | ||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||
| Investment in property and equipment |
(1,617 | ) | (2,515 | ) | ||||
| Acquisition of Flag |
— | (1,211 | ) | |||||
| Issuance of notes receivable |
(612 | ) | (1,486 | ) | ||||
| (Purchases) sales of investments, net |
(1,922 | ) | 477 | |||||
| Other items, net |
(279 | ) | (524 | ) | ||||
| NET CASH USED IN INVESTING ACTIVITIES |
(4,430 | ) | (5,259 | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||
| Proceeds from long-term debt |
53,200 | 43,200 | ||||||
| Principal payments of long-term debt |
(28,530 | ) | (22,260 | ) | ||||
| Purchase of treasury stock |
(39,095 | ) | (30,362 | ) | ||||
| Dividends paid |
(6,861 | ) | — | |||||
| Proceeds from exercise of stock options |
2,818 | 1,576 | ||||||
| NET CASH USED IN FINANCING ACTIVITIES |
(18,468 | ) | (7,846 | ) | ||||
| Net change in cash and cash equivalents |
(375 | ) | 2,598 | |||||
| Cash and cash equivalents at beginning of period |
20,031 | 12,227 | ||||||
| CASH AND CASH EQUIVALENTS AT END OF PERIOD |
$ | 19,656 | $ | 14,825 | ||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION |
||||||||
| Cash payments during the period for: |
||||||||
| Income taxes, net of refunds |
$ | 1,314 | $ | 7,005 | ||||
| Interest |
$ | 594 | $ | 1,567 | ||||
| Non-cash financing activities: |
||||||||
| Declaration of dividend |
$ | 6,833 | $ | — | ||||
| Non-cash financing activities related to employee stock options exercised: |
||||||||
| Income tax benefit realized |
$ | 1,407 | $ | 387 | ||||
| Treasury shares received for employee tax withholding obligations |
$ | — | $ | 98 | ||||
| Issuance of restricted shares of common stock |
$ | 7,393 | $ | — | ||||
The accompanying notes are an integral part of these consolidated financial statements.
6
CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Company Information and Signific