CHOICE HOTELS INTERNATIONAL INC /DE - 10-Q Quarterly Report

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 JUNE 30, 2004

¨	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 JUNE 30, 2004

Common Stock, Par Value $0.01 per share

Preferred Stock Purchase Rights

33,383,098

CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES

INDEX


		PAGE NO.
PART I. FINANCIAL INFORMATION:

Item 1—Financial Statements

Consolidated Statements of Income—For the three and six months ended June 30, 2004 and June 30, 2003 (Unaudited)		3

Consolidated Balance Sheets—As of June 30, 2004 (Unaudited) and December 31, 2003		4

Consolidated Statements of Cash Flows—For the six months ended June 30, 2004 and June 30, 2003 (Unaudited)		6

Notes to Consolidated Financial Statements		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		17

Item 4—Controls and Procedures		18

PART II. OTHER INFORMATION:

Item 1—Legal Proceedings		19

Item 2—Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities		19

Item 3—Defaults Upon Senior Securities		19

Item 4—Submission of Matters to a Vote of Security Holders		19

Item 5—Other Information		19

Item 6—Exhibits and Reports on Form 8-K		20

SIGNATURE		23

PART I. FINANCIAL INFORMATION

CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)


	Three Months Ended June 30,						Six Months Ended June 30,
	2004			2003			2004			2003
REVENUES:
Royalty fees	$	41,682		$	37,599		$	72,391		$	64,850
Initial franchise and relicensing fees		5,231			4,652			8,619			7,259
Partner services		3,988			4,371			6,255			6,677
Marketing and reservation		54,418			53,557			103,729			100,910
Hotel operations		931			947			1,744			1,784
Other		925			2,371			1,672			3,573

Total revenues		107,175			103,497			194,410			185,053
OPERATING EXPENSES:
Selling, general and administrative		17,437			17,416			33,238			30,902
Depreciation and amortization		2,502			3,130			5,036			5,889
Marketing and reservation		54,418			53,557			103,729			100,910
Hotel operations		682			727			1,372			1,453

Total operating expenses		75,039			74,830			143,375			139,154
OPERATING INCOME		32,136			28,667			51,035			45,899
OTHER INCOME AND EXPENSES:
Interest expense		2,808			3,068			5,356			6,092
Interest and other investment income		(79	)		(1,734	)		(392	)		(3,088	)
Equity in net income of affiliates		(91	)		(154	)		(276	)		(154	)

Total other income and expenses		2,638			1,180			4,688			2,850

INCOME BEFORE INCOME TAXES		29,498			27,487			46,347			43,049
INCOME TAXES		10,995			10,376			17,250			16,251

NET INCOME	$	18,503		$	17,111		$	29,097		$	26,798

WEIGHTED AVERAGE SHARES OUTSTANDING-BASIC		33,395			35,726			33,834			36,253

WEIGHTED AVERAGE SHARES OUTSTANDING-DILUTED		34,794			36,558			35,196			37,015

BASIC EARNINGS PER SHARE	$	0.55		$	0.48		$	0.86		$	0.74

DILUTED EARNINGS PER SHARE	$	0.53		$	0.47		$	0.83		$	0.72

CASH DIVIDENDS DECLARED PER SHARE	$	0.20		$	—		$	0.40		$	—

The accompanying notes are an integral part of these consolidated financial statements.

CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS)


	June 30, 2004		December 31, 2003
	(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	25,154	$	20,031
Receivables (net of allowance for doubtful accounts of $6,851 and $6,743, respectively)		35,159		33,631
Deferred income taxes		2,256		1,957
Other current assets		3,308		3,613

Total current assets		65,877		59,232

PROPERTY AND EQUIPMENT, AT COST, NET		49,700		54,253
GOODWILL		60,620		60,620
FRANCHISE RIGHTS, NET		33,260		35,383
RECEIVABLE - MARKETING AND RESERVATION FEES		29,226		32,368
OTHER ASSETS		28,636		25,416

Total assets		267,319		267,272

The accompanying notes are an integral part of these consolidated financial statements.

CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)


	June 30, 2004			December 31, 2003
	(Unaudited)
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES
Current portion of long-term debt		8,500			23,829
Accounts payable		28,824			29,740
Accrued expenses and other		44,501			46,065
Income taxes payable		8,736			2,577

Total current liabilities		90,561			102,211
LONG-TERM DEBT		292,423			222,823
DEFERRED INCOME TAXES		17,682			21,562
OTHER LIABILITIES		41,858			38,863

Total liabilities		442,524			385,459

Commitments and Contingencies
SHAREHOLDERS’ DEFICIT
Common stock, $0.01 par value		334			347
Additional paid-in-capital		81,658			74,496
Accumulated other comprehensive income		95			1,138
Deferred compensation		(9,283	)		(2,641	)
Treasury stock		(568,642	)		(496,510	)
Retained earnings		320,633			304,983

Total shareholders’ deficit		(175,205	)		(118,187	)

Total liabilities and shareholders’ deficit	$	267,319		$	267,272

The accompanying notes are an integral part of these consolidated financial statements.

CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED, IN THOUSANDS)


	June 30,
	2004			2003
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	29,097		$	26,798
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		5,036			5,889
Provision for bad debts		93			249
Non-cash stock compensation and other charges		1,835			948
Non-cash interest and other investment income		(335	)		(652	)
Equity in net income of affiliates		(276	)		(154	)
Changes in assets and liabilities, net of acquisitions:
Receivables		(1,583	)		(2,141	)
Receivable -- marketing and reservation fees, net		8,283			(1,689	)
Current liabilities		(2,393	)		4,587
Income taxes payable/receivable and other current assets		8,729			697
Deferred income taxes, other liabilities and other assets		(1,103	)		5,682

NET CASH PROVIDED BY OPERATING ACTIVITIES		47,383			40,214

CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in property and equipment		(2,976	)		(4,972	)
Proceeds from disposition of property		—			498
Acquisition of Flag		—			(1,211	)
Issuances of notes receivable		(1,227	)		(2,450	)
Purchases of investments, net		(2,280	)		(775	)
Other items, net		(994	)		238

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