<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED NOVEMBER 30, 1997 COMMISSION FILE NO. 1-11915
CHOICE HOTELS INTERNATIONAL, INC.
10750 COLUMBIA PIKE
SILVER SPRING, MD. 20901
(301) 979-5000
Delaware 52-1209792
------------------------ ----------------------
(STATE OF INCORPORATION) (I.R.S. EMPLOYER
IDENTIFICATION NUMBER)
Choice Hotels Franchising, Inc.
-------------------------------------------
(Former name, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
----- -----
SHARES OUTSTANDING
CLASS AT NOVEMBER 30, 1997
- ------------------- --------------------
Common Stock, $0.01
par value per share 59,821,965
----------
================================================================================
<PAGE>
CHOICE HOTELS INTERNATIONAL, INC.
INDEX
-----
PAGE NO.
--------
PART I. FINANCIAL INFORMATION:
Consolidated Balance Sheets -
November 30, 1997 (Unaudited) and May 31, 1997 3
Consolidated Statements of Income -
Three months ended November 30, 1997 and 1996 (Unaudited) and
Six months ended November 30, 1997 and 1996 (Unaudited) 5
Consolidated Statements of Cash Flows -
Six months ended November 30, 1997 and 1996 (Unaudited) 6
Notes to Consolidated Financial Statements (Unaudited) 7
Management's Discussion and Analysis of Results of
Operations and Financial Condition 9
PART II. OTHER INFORMATION AND SIGNATURE 14
<PAGE>
PART I. FINANCIAL INFORMATION
CHOICE HOTELS INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NOVEMBER 30, MAY 31,
1997 1997
ASSETS (UNAUDITED)
------------- ----------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 4,845 $ 4,167
Receivables (net of allowance
for doubtful accounts of
$7,322 and $6,159, respectively) 30,194 24,472
Prepaid expenses 147 599
Current deferred taxes receivable 1,069 1,069
Other 33,775 4,008
-------- --------
Total current assets 70,030 34,315
PROPERTY AND EQUIPMENT, AT COST, NET OF
ACCUMULATED DEPRECIATION 46,243 43,377
GOODWILL, NET OF ACCUMULATED AMORTIZATION 69,091 69,939
FRANCHISE RIGHTS, NET OF ACCUMULATED
AMORTIZATION 48,923 50,503
INVESTMENT IN FRIENDLY HOTELS, INC. 17,644 17,161
RECEIVABLE FROM SUNBURST HOSPITALITY, INC. 116,595 --
OTHER ASSETS 7,167 6,178
-------- --------
Total assets $375,693 $221,473
======== ========
</TABLE>
The accompanying notes are an integral part of these Consolidated Balance
Sheets.
<PAGE>
CHOICE HOTELS INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NOVEMBER 30, MAY 31,
1997 1997
(UNAUDITED)
------------ ------------
<S> <C> <C>
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion long-term debt $ 34 $ 36
Accounts payable 26,136 20,412
Accrued expenses 14,247 10,965
Income taxes payable 9,518 3,318
-------- --------
Total current liabilities 49,935 34,731
MORTGAGES AND OTHER LONG-TERM DEBT 278,389 46,427
NOTES PAYABLE TO MANOR CARE, INC. -- 78,700
DEFERRED INCOME TAXES AND OTHER
LIABILITIES 977 4,422
-------- --------
Total liabilities 329,301 164,280
STOCKHOLDERS' EQUITY
Common stock 598 --
Additional paid-in capital 48,643 --
Cumulative translation adjustment (9,241) --
Net advances from Manor Care, Inc. -- 57,193
Retained earnings 6,392 --
-------- --------
Total stockholders' equity 46,392 57,193
-------- --------
Total liabilities & stockholders' equity $375,693 $221,473
======== ========
</TABLE>
The accompanying notes are an integral part of these Consolidated Balance
Sheets.
<PAGE>
CHOICE HOTELS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
NOVEMBER 30, NOVEMBER 30,
-------------------------- ------------------------
1997 1996 1997 1996
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
REVENUES
Royalty fees $31,224 $27,381 $ 62,254 $ 55,099
Marketing and reservation fees 32,635 26,002 63,910 55,117
Product sales 5,155 4,891 10,998 12,984
Initial franchise fees and relicensing fees 3,945 4,003 6,842 7,882
Other, including Partner Services Revenue 1,722 1,957 2,429 3,383
European hotel operations 4,908 5,151 9,230 9,687
------- ------- -------- --------
Total revenue 79,589 69,385 155,663 144,152
OPERATING EXPENSES
Franchise marketing and reservation 31,856 24,591 62,108 53,383
Hotel operations 4,104 4,363 7,935 8,612
Selling, general and administrative 12,965 13,539 23,459 24,101
Product services cost of sales 5,084 4,362 10,547 11,801
Depreciation and amortization 2,008 2,668 5,086 5,220
------- ------- -------- --------
Total operating costs 56,017 49,523 109,135 103,117
Income before interest expense and income taxes 23,572 19,862 46,528 41,035
INTEREST EXPENSE, NET 2,779 2,828 5,095 5,315
------- ------- -------- --------
INCOME BEFORE INCOME TAXES 20,793 17,034 41,433 35,720
INCOME TAXES 8,541 7,013 17,058 14,706
------- ------- -------- --------
NET INCOME $12,252 $10,021 $ 24,375 $ 21,014
======= ======= ======== ========
EARNINGS PER SHARE $ 0.21 $ 0.16 $ 0.41 $ 0.33
======= ======= ======== ========
PRO FORMA WEIGHTED AVERAGE SHARES OUTSTANDING 59,763 63,050 59,961 63,021
======= ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these Consolidated Statements of
Income.
<PAGE>
CHOICE HOTELS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
---------------------
NOVEMBER 30,
1997 1996
(UNAUDITED)
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 24,375 $ 21,014
Reconciliation of net income to net cash provided by
operating activities:
Depreciation and amortization 5,086 5,220
Provision for bad debts (990) (1,808)
(Decrease) increase in deferred taxes (3,445) (1,177)
Changes in assets and liabilities:
Change in receivables (4,732) (3,212)
Change in inventories and other current assets (29,315) (4,572)
Change in current liabilities 9,004 (3,062)
Change in income taxes payable 6,200 (2,256)
Change in other liabilities -- --
--------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 6,183 10,147
--------- --------
CASH FLOW FROM INVESTING ACTIVITIES:
Investment in property and equipment (5,523) (1,255)
Other items, net (3,078) (12,428)
Loan to Sunburst Hospitality (115,000) --
--------- --------
NET CASH UTILIZED BY INVESTING ACTIVITIES (123,601) (13,683)
--------- --------
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from mortgages and other long-term debt 232,111 4,117
Principal payments of debt (78,851) --
Cash transfers to Parent, net (35,164) --
--------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 118,096 4,117
--------- --------
Net change in cash and cash equivalents $ 678 $ 581
Cash and cash equivalents, beginning of period 4,167 3,812
--------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 4,845 $ 4,393
========= ========
</TABLE>
The accompanying notes are an integral part of these Consolidated Statements of
Cash Flows.
<PAGE>
CHOICE HOTELS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. On March 7, 1996, Manor Care, Inc. ("Manor Care") announced its intention to
proceed with the separation of its lodging business from its health care
business via a spin-off of its lodging business (the "Distribution"). On
September 30, 1996 the Board of Directors of Manor Care declared a special
dividend to its shareholders of one share of common stock of the Company for
each share of Manor Care Stock, and the Board set the Record Date and the
Distribution Date. The Stock Distribution was made on November 1, 1996 to
holders of record of Manor Care's Common Stock on October 10, 1996.
The Distribution separated the lodging and health care businesses of Manor Care
into two public corporations. The operations of the Company consist principally
of the hotel franchise operations and the owned and managed hotel operations
formerly conducted by Manor Care, Inc. directly or through its subsidiaries (the
"Lodging Business").
On November 1, 1996, concurrent with the Distribution, the Lodging Business
changed its name from Choice Hotels Holdings, Inc. to Choice Hotels
International, Inc. ("CHI") and CHI's franchising subsidiary, formerly named
Choice Hotels International, Inc., changed its name to Choice Hotels
Franchising, Inc. ("Franchising").
2. On April 29, 1997, CHI's Board of Directors announced its intention to
separate CHI's franchising business from its owned hotel business (commonly
referred to as the "Sunburst Distribution"). On September 16, 1997 the Board of
Directors and shareholders of the Company approved the separation of the
business via a spin-off of the franchising business, along with CHI's European
hotel and franchising operations, to its shareholders. The Board set October
15, 1997 as the date of distribution and on that date, Company shareholders
received one share in Franchising (renamed "Choice Hotels International, Inc."
and referred to hereafter as the "Company") for every share of CHI stock held on
October 7, 1997 (the date of record). Concurrent with the October 15, 1997
distribution date, CHI (renamed "Sunburst Hospitality Corporation") effected a
one-for-three reverse stock split of its common stock.
3. The accompanying consolidated financial statements of Choice Hotels
International, Inc. and subsidiaries have been prepared by the Company without
audit. Certain information and footnote disclosures normally included in
financial statements presented in accordance with generally accepted accounting
principles have been condensed or omitted. The Company believes the disclosures
made are adequate to make the information presented not misleading. The
consolidated financial statements should be read in conjunction with the
consolidated financial statements for the fiscal year ended May 31, 1997 and
notes thereto included in the Form 10 Registration Statement, dated September
28, 1997. Certain reclassifications have been made to the prior year amounts to
conform to current period presentation.
In the opinion of the Company, the accompanying unaudited financial statements
reflect all adjustments necessary to present fairly the financial position of
the Company as of November 30, 1997 and the income for the three months and six
months ended November 30, 1997 and 1996. Interim results are not necessarily
indicative of fiscal year performance because of the impact of seasonal and
short-term variations.
The consolidated financial statements present the financial position, results of
operations and cash flows of the Company as if it were formed as a separate
entity of the Parent which conducted the hotel franchising business and European
hotel operations and as if the Company were a separate company for all periods
presented. The Parent's historical basis in the assets and liabilities of the
Company has been carried over to the consolidated financial statements. All
material inter-company transactions and balances between the Company and its
subsidiaries have been eliminated. Changes in the Investments and advances from
Parent represent the net income of the Company plus the net change in cash
transferred between the Company and Manor Care through November 1, 1996 and
Sunburst through October 15, 1997.
<PAGE>
The Investments and advances from Parent represents the cumulative income of the
Company plus the net change in cash transferred between the Company and Parent.
At the time of the Sunburst Distribution, this amount was converted to the
equity of the Company and allocated to common stock, additional paid-in capital
and cumulative translation adjustment. The amounts so allocated were determined
based, to some extent, on estimates as of the Sunburst Distribution and may be
subject to adjustment in the future. In the opinion of the Company, such
adjustments, if any, will not have a material impact on the Company's financial
position.
4. Earnings per share for the fiscal 1997 periods presented was calculated on a
pro forma basis using the weighted average number of outstanding common shares
for Manor Care through November 1, 1996, Sunburst through October 15, 1997 and
shares outstanding for the Company through November 30, 1997.
5. As of November 30, 1997, the Company had franchise agreements with hotels
with 293,772 rooms operating in 34 countries principally under the following
brand names: Comfort, Clarion, Sleep Inn, Quality, MainStay, Rodeway Inn and
Econo Lodge.
6. Choice Hotels International, Inc. announced it has signed a conditional
agreement with Friendly Hotels, PLC ("Friendly")in which Friendly will assume
the master franchise rights for Choice's Comfort, Quality and Clarion brand
hotels throughout Europe (with the exception of Scandinavia) for the next 10
years. In exchange, the Company will receive from Friendly $8.0 million,
payable in eight equal annual installments.
As part of the transaction, Friendly will also acquire European hotels currently
owned by the Company for a total consideration of approximately $26.2 million in
convertible preferred shares and cash. In exchange for 10 hotels in France, two
in Germany and one in the UK, the Company will receive $22.2 million in new
unlisted 5.75 percent convertible preferred shares in Friendly at par,
convertible for one new Friendly ordinary share for every 150p nominal of the
preferred convertible shares. In addition, Friendly will pay the Company
deferred compensation of $4.0 million in cash, payable by the fifth anniversary
of completion or sooner dependent on the level of future profits of the hotels
acquired. The European hotels included in this transaction have a carrying
value of approximately $22.9 million. The transaction is subject to final
documentation and Friendly shareholder approval and is expected to close in
January of 1998.
7. 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 14 banks. This Credit Facility provides that up to $50
million is available for borrowings in foreign currencies. Interest on the
borrowings under the Credit Facility is calculated, at the option of the
borrower, at one of several rates including LIBOR plus a spread which is
dependent on the leverage of the Company at the time of borrowing. The Credit
Facility will terminate on October 15, 2002.
In connection with the Sunburst Distribution, the Company borrowed $115 million
under its Credit Facility in order to fund a subordinated term loan to Sunburst.
The Subordinated Term Note of $115 million accrues interest monthly at 11% and
is due on October 15, 2002. No interest is payable until maturity. Total
interest accrued at November 30, 1997 was $1,595,000.
In accordance with the Distribution Agreement with Sunburst, 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 Distribution. As
of November 30, 1997, approximately $28 million of estimated receivables are due
to the Company from Sunburst, which are included in other current assets. These
receivables relate to the net worth guarantee, the estimated final allocation of
assets and liabilities and the reimbursement of various expenses, subsequent to
the Distribution Date.
8. The Company enters into interest rate swap agreements to manage its exposure
to interest rate fluctuations. The Company has interest rate swaps with a
notional amount of $115 million which it uses to convert certain variable rate
<PAGE>
borrowings on its revolver to fixed rates. The interest rate agreements have an
average life of three and one-half years with an average fixed rate of 6.05% and
a current variable rate of 5.76%.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL CONDITION
--------------------------------------------------------------------------
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
Company's brands; the number and relative mix of franchised hotels; and the
Company's ability to manage costs. The 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. Increases in franchise operating revenues have a
disproportionate impact on the Company's operating margin due to the lower
incremental costs associated with these revenues.
COMPARISON OF RESULTS FOR THE THREE MONTHS ENDED NOVEMBER 30, 1997 AND 1996
- ---------------------------------------------------------------------------
The Company recorded net income for the three-month period ended November 30,
1997 of $12.3 million, an increase of 23% over November 30, 1996 results of
$10.0 million. The November 30, 1996 and 1997 results are prepared as if the
Company was a separate stand alone subsidiary of Sunburst for all periods
presented. The increase in net income for the period is primarily attributable
to an increase in franchise revenue as a direct result of the addition of new
licensees to the franchise system and improvements in the operating performance
of franchised hotels.
Combined revenues increased $10.2 million (or 14.7%) to $79.6 million for the
period ended November 30, 1997 from $69.4 million at November 30, 1996.
Franchise Operating Revenues
- ----------------------------
In operating the franchise business, the Company collects marketing and
reservation fees and assessments from its franchisees. The Company is
contractually obligated to disburse these fees for marketing and reservation
activities to be provided on behalf of its franchisees. The Company also
provides certain services to its franchisees, specifically a group purchasing
program, where the Company utilizes its bulk purchasing power to obtain
favorable pricing from third-party vendors for franchisees. This program is
provided to the franchisees as a service and is not designed to be a major
component of the Company's profitability. Management therefore analyzes its
franchise business based on revenues net of marketing and reservation fees and
product sales ("net franchise revenues").
Net franchise revenues include base royalty fees, initial fees and relicensing
fees earned on contracts signed and other revenues including strategic vendor
fees. Net franchise revenues are dependent upon additional franchise properties
in the system as well as the underlying performance of the hotels for continued
growth. The key industry standard for measuring operating performance is
revenue per available room, or RevPAR, which is calculated by multiplying the
percentage of occupied rooms by the average daily room rate realized.
The Company's net franchise revenues were $36.9 million for the three months
ended November 30, 1997 and $33.3 million for the three months ended November
30, 1996.
<PAGE>
Total net franchise revenues are computed as follows:
<TABLE>
<CAPTION>
(In millions)
November 30, 1997 November 30, 1996
------------------ ------------------
<S> <C> <C>
Total Franchise revenues $ 74.7 $ 64.2
Less: Marketing and reservation fees (32.6) (26.0)
Product sales (5.2) (4.9)
------ ------
Total net franchise revenues $ 36.9 $ 33.3
====== ======
</TABLE>
Royalties increased $3.8 million to $31.2 million in 1997 from $27.4 million in
1996, an increase of 13.9%. The increase in royalties is attributable to a net
increase of 269 franchise properties representing an additional 21,400
rooms added to the system, an improvement in domestic RevPAR of 2.8% and an
increase in the effective royalty rate of the domestic hotel system to 3.52%
from 3.41%. Initial fee and relicensing fee revenue generated from domestic
franchise contracts signed decreased to $3.9 million from $4.0 million in 1996.
Total franchise agreements signed in the second quarter of fiscal year 1998 were
168, as compared to 198 for the second quarter of fiscal year 1997. The decline
in initial fees is partly a result of the Company's sales force reorganization
effected during the first quarter of fiscal year 1998 and the resulting
temporary displacement of the sales force. The reorganization of the regional
marketing management sales and support force was completed in September of 1997.
The total number of hotels open and under development, however, increased to
4,338 from 3,990, an increase of 8.7% for the period ending November 30, 1997.
This represents an increase in the number of rooms open and under development of
7.5% from 342,221 as of November 30, 1996 to 367,793 as of November 30, 1997.
Franchise Operating Expenses
- ----------------------------
The cost to operate the franchising business is reflected in selling, general
and administrative costs. Total selling, general and administrative expenses of
the franchise business declined from $13.5 million to $12.9 million for November
30, 1997. As a percentage of total net franchising revenues, total franchising
selling, general and administrative expenses declined to 35.2% for the second
quarter of fiscal year 1998 as compared to 40.5% for fiscal year 1997. The
improvement in the franchising margins primarily relates to the 13.9%
growth in franchise royalties, while maintaining operating costs.
Product Sales
- -------------
Sales made to franchisees through the Company's group purchasing program
increased $0.3 million (or 6%) to $5.2 million for the three months ended
November 30, 1997 from $4.9 million at November 30, 1996 due to the elimination
of catalog sales. The group purchasing program utilizes bulk purchases to
obtain favorable pricing from third party vendors for franchisees ordering
similar products. The Company acts as a "clearing-house" between the franchisee
and the vendor, and orders are shipped directly to the franchisee.
Similarly, product cost of sales increased $0.7 million (or 16%) for the three
months ended November 30, 1997. This purchasing program is provided to the
franchisees as a service and is not expected to be a major component of the
Company's profitability.
European Hotel Operations
- -------------------------
The Company owns or operates 14 hotels in Germany, France and Great Britain.
Total revenues at the Company's owned hotel operations in Europe declined to
$4.9 million for the three months ended November 30, 1997 from $5.2 million at
November 30, 1996. Operating margins at the hotels increased to 16.3% at
November 30, 1997 from 13.7% at November 30, 1996. The increase in operating
performance reflects the significant cost cutting measures undertaken during
fiscal 1998.
On October 28, 1997, the Company signed a conditional agreement with Friendly in
which Friendly will assume the master franchise rights for Choice's Comfort,
Quality and Clarion brand hotels throughout Europe (with the exception of
Scandinavia) for the next ten years for consideration of $8.0 million, payable
in eight equal annual installments. In addition, Friendly will acquire
<PAGE>
European hotels currently owned by the Company for a total consideration of
approximately $26.2 million in convertible preferred shares and cash.
Other Expenses
- --------------
For the three months ended November 30, 1997, the Company recognized $277,073 in
dividend income from its investment in Friendly.
COMPARISON OF RESULTS FOR THE SIX MONTHS ENDED NOVEMBER 30, 1997 AND 1996
- -------------------------------------------------------------------------
The Company recorded net income for the six-month period ended November 30, 1997
of $24.4 million, an increase of 16.2% over November 30, 1996 results of $21.0
million. The November 30, 1996 results are prepared as if the Company was a
separate stand alone subsidiary of Manor Care. The November 30, 1997 results
are prepared as if the Company was a separate stand alone subsidiary of
Sunburst. The increase in net income for the period is primarily attributable
to an increase in franchise revenue as a direct result of the addition of new
licensees to the franchise system and improvements in the operating performance
of franchised hotels.
Combined revenues increased $11.5 million (or 8.0%) to $155.7 million for the
period ended November 30, 1997 from $144.2 million at November 30, 1996.
Franchise Operating Revenues
- ----------------------------
The Company's net franchise revenues were $71.5 million for the six months ended
November 30, 1997 and $66.4 million for the six months ended November 30, 1996.
<PAGE>
Total net franchise revenues are computed as follows:
<TABLE>
<CAPTION>
(In millions)
November 30, 1997 November 30, 1996
------------------ ------------------
<S> <C> <C>
Total Franchise revenues $146.4 $134.5
Less: Marketing and reservation fees (63.9) (55.1)
Product sales (11.0) (13.0)
------ ------
Total net franchise revenues $ 71.5 $ 66.4
====== ======
</TABLE>
Royalties increased $7.2 million to $62.3 million in 1997 from $55.1 million in
1996, an increase of 13.1%. The increase in royalties is attributable to a net
increase of 269 franchise properties representing an additional 21,400 rooms
added to the system, an improvement in domestic RevPAR of 2.4% and an increase
in the effective royalty rate of the domestic hotel system to 3.50% from 3.43%.
Initial fee and relicensing fee revenue generated from domestic franchise
contracts signed decreased to $6.8 million from $7.9 million in 1996. Total
franchise agreements signed in the first six months of fiscal year 1998 were
303, as compared to 375 for the first six months of fiscal year 1997.
Franchise Operating Expenses
- ----------------------------
The cost to operate the franchising business is reflected in selling, general
and administrative costs. Total selling, general and administrative expenses of
the franchise business declined from $24.1 million to $23.5 million for November
30, 1997. As a percentage of total net franchising revenues, total franchising
selling, general and administrative expenses declined to 32.9% for the first six
months of fiscal year 1998 as compared to 36.3% for fiscal year 1997. The
improvement in the franchising margins primarily relates to the 13.1% growth in
franchise royalties, while maintaining operating costs.
Product Sales
- -------------
Sales made to franchisees through the Company's group purchasing program
decreased $2.0 million (or 15.4%) to $11.0 million for the six months ended
November 30, 1997 from $13.0 million at November 30, 1996 due to the elimination
of catalog sales. The group purchasing program utilizes bulk purchases to
obtain favorable pricing from third party vendors for franchisees ordering
similar products. The Company acts as a "clearing-house" between the franchisee
and the vendor, and orders are shipped directly to the franchisee.
Similarly, product cost of sales decreased $1.3 million (or 11.0%) for the six
months ended November 30, 1997. This purchasing program is provided to the
franchisees as a service and is not expected to be a major component of the
Company's profitability.
European Hotel Operations
- -------------------------
The Company owns or operates 14 hotels in Germany, France and Great Britain.
Total revenues at the Company's owned hotel operations in Europe declined to
$9.2 million for the six months ended November 30, 1997 from $9.7 million at
November 30, 1996. Operating margins at the hotels increased to 14.0% at
November 30, 1997 from 11.1% at November 30, 1996. The increase in operating
performance reflects the significant cost cutting measures undertaken during
fiscal 1998.
Other Expenses
- --------------
For the six months ended November 30, 1997, the Company recognized $512,823 in
dividend income from its investment in Friendly.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Net cash provided by operating activities was $6.2 million for the six months
ended November 30, 1997, a decrease of $3.9 million from $10.1 million at
November 30, 1996. At November 30, 1997, the total long-term debt outstanding
for the Company was $278.4 million.
The Company has secured a five year $300 million revolving credit facility. The
Credit Facility includes customary financial and other covenants that requires
the maintenance of certain ratios including maximum leverage, minimum net worth
and interest coverage and restricts the Company's ability to make certain
investments, repurchase stock, 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 time of borrowing. Interest on the initial borrowings is expected to
be at one of several rates utilizing the three-month LIBOR rate.
At the time of the Sunburst Distribution, the Company had approximately $140
million of existing indebtedness. On October 15, 1997, the existing debt was
refinanced using borrowings under the new revolver and the Company borrowed an
additional $115 million. The $115 million was used to fund a 5 year, 11%
Subordinated Term Note to Sunburst, which is payable in full, along with accrued
interest on October 15, 2002.
The Company believes that cash flows from operations and available financing
capacity is adequate to meet the expected operating and debt service
requirements for the business for the immediate future.
FORWARD-LOOKING STATEMENTS
- --------------------------
The statements contained in this document that are not historical facts are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995.
A number of important factors could cause the Company's actual results for
future periods to differ materially from those expressed in any forward-looking
statements made by, or on behalf of the Company.
Certain statements contained in this Form 10-Q, including those in the section
entitled "Management's Discussion and Analysis of Operating Results and
Financial Condition," contain forward-looking information that involves risk and
uncertainties. Actual future results and trends may differ materially depending
on a variety of factors discussed in the "Risk Factors" section included in the
Company's Form 10 Registration Statement and various Form 8-K filings, including
the nature and extent of future competition, and political, economic and
demographic developments in countries where the Company does business or in the
future may do business.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof. The Company undertakes no
obligation to revise or update these forward-looking statements.
<PAGE>
PART II OTHER INFORMATION
-------------------------
ITEM 1. LEGAL PROCEEDINGS
-----------------
The Company is not party to any litigation, other than routine litigation
incidental to the business of the Company. None of such litigation, either
individually or in the aggregate, is expected to be material to the business,
financial condition or results of operations of the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits
Exhibit 27.01 - Financial Data Schedule - November 30, 1997
Exhibit 10.1 - Employment Agreement between Choice Hotels International,
Inc. and Donald Dempsey dated December 18, 1997.
Exhibit 10.2 - Consulting Agreement between Choice Hotels International,
Inc. and Barry L. Smith dated December 18, 1997.
(b) The following reports were filed pertaining to the quarter ended November
30,1997.
Form 8-K dated October 1, 1997 - Announcement of both the Company and
Franchising's change in its fiscal year end. Also, an announcement of
the Board's acceptance of the spin-off.
Form 8-K dated October 29, 1997 - Announcement of the completion of the
spin-off. Also, submission of final distribution agreements associated
with the spin-off.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
CHOICE HOTELS INTERNATIONAL, INC.
Date: January 14, 1997 /s/ Michael J. DeSantis
-----------------------------
By: Michael J. DeSantis
Senior Vice President,
General Counsel and Secretary
<PAGE>
Exhibit 10.1
EMPLOYMENT AGREEMENT
--------------------
This Agreement ("Agreement") dated this 18th day of December, 1997 between
Choice Hotels International, Inc. ("Employer"), a Delaware corporation with
principal offices at 10750 Columbia Pike, Silver Spring, Maryland 20901, and
Donald Dempsey ("Employee"), sets forth the terms and conditions governing the
employment relationship between Employee and Employer.
1. Employment. During the term of this Agreement, as hereinafter
----------
defined, Employer hereby employs Employee as Executive Vice President and Chief
Financial Officer. Employee hereby accepts such employment upon the terms and
conditions hereinafter set forth and agrees to faithfully and to the best of his
ability perform such duties as may be from time to time assigned by Employer's
Board of Directors and Chief Executive Officer, such duties to be rendered at
the principal office of Employer, subject to reasonable travel. Employee also
agrees to perform his duties in accordance with policies established by
Employer's Board of Directors, which may be changed from time to time.
2. Term. Subject to the provisions for termination hereinafter provided,
----
the term of this Agreement shall begin on January 12, 1998 ("Effective Date")
and shall terminate five (5) years thereafter (the "Termination Date"). The
Termination Date shall automatically be extended for successive one-year terms
unless either party gives written notice no less than nine months prior to the
Termination Date that it elects not to extend the Termination Date.
3. Compensation. For all services rendered by Employee under this
------------
Agreement during the term thereof, Employer shall pay Employee the following
compensation:
(a) Salary. A base salary of Three Hundred Twenty Five Thousand
------
Dollars ($325,000) per annum payable in equal bi-weekly installments.
Such salary shall be reviewed by the Compensation Committee of the
Board of Directors of Employer at the next annual review of officers
following the Effective Date and may be increased at the discretion of
Employer.
(b) Incentive Bonus. Employee shall have the opportunity to earn up
---------------
to a maximum of Fifty-five Percent (55%) per annum of the base salary
set forth in subparagraph 3(a) above in Employer's bonus plans as
adopted from time to time by Employer's Board of Directors.
(c) Restricted Stock. On the Effective Date, Employer shall issue to
----------------
Employee 17,000 shares of restricted Choice Hotels common stock
("Common Stock"). The restrictions on such shares shall lapse upon
vesting, which shall occur in five equal annual installments beginning
on the first anniversary of the Effective Date.
(d) Automobile. Employer shall provide Employee with an allowance for
----------
<PAGE>
automobile expenses of $850 per month subject to withholding of usual
taxes.
(e) Stock Options. Employee shall be eligible to receive options
-------------
under the Choice Hotels International, Inc. Long Term Incentive Plan
("LTIP"), or similar plan, to purchase Common Stock in accordance with
the policy of the Employer's Board as in effect from time to time.
Additionally, the Employee shall be granted, on the Effective Date,
100,000 options to purchase such number of shares of Common Stock. A
number of the options shall be incentive stock options granted under
the LTIP, which number shall be the maximum number permitted under the
LTIP and Section 422(d) of the Internal Revenue Code of 1986, as
amended, but in no event more than 25% of the total number of options
granted pursuant to this Section 3(e). The remainder of the options
shall be nonqualified stock options. The options shall be exercisable
at an amount per share equal to the average of the high and low
trading price of the Common Stock on the Effective Date and shall vest
in five equal annual installments following the first anniversary of
the Effective Date.
(f) SERP. At the Effective Date, Employee shall participate in the
----
Choice Hotels International, Inc. Supplemental Executive Retirement
Plan ("SERP"), with the amendments identified on Exhibit A.
(g) Other Benefits. Employee shall, when eligible, be entitled to
--------------
participate in all other fringe benefits, including vacation policy,
generally accorded the most senior executive officers of Employer as
are in effect from time to time on the same basis as such other senior
executive officers.
(h) Relocation Expenses. Employee shall be entitled to all benefits
--------------------
under the Relocation Policy of Employer, as adopted in November 1996,
with the following additions:
(1) Notwithstanding Section II(C) of the Relocation Policy, the
Employer will pay up to a maximum of $5,000 for the relocation of
Employee's boat to Annapolis, Maryland;
(2) Notwithstanding Section 2(VII) of the Relocation Policy,
Employer will reimburse Employee for a period of up to twelve
months from the Effective Date for return trips for Employee and
Employee's spouse, children and mother-in-law to and from
Employee's Tennessee home during such period as are reasonably
needed.
(3) Notwithstanding Section 2(VIII) of the Relocation Policy,
Employer shall reimburse Employee for real estate commissions not
to exceed 7% of the sales price.
4. Extent of Services. Employee shall devote his full professional
------------------
time, attention,
2
<PAGE>
and energies to the business of Employer, and shall not during the term of this
Agreement be engaged in any other business activity whether or not such business
activity is pursued for gain, profit, or other pecuniary advantage; but the
foregoing shall not be construed as preventing Employee from investing his
assets in (i) the securities of public companies, or (ii) the securities of
private companies or limited partnerships outside the lodging industry if such
holdings are passive investments of one percent or less of outstanding
securities and Employee does not hold positions of officer, employee or general
partner. Employee shall be permitted to serve as a director of companies outside
of the lodging industry so long as such service does not inhibit his performance
of services to the Employer. Employee shall not be permitted to serve as a
director of any company within the lodging industry unless (i) the Corporate
Compliance officer of the Employer has determined that there is no conflict of
interest and (ii) such service does not inhibit his performance of services to
the Employer. Employee warrants and represents that he has no contracts or
obligations to others which would materially inhibit the performance of his
services under this Agreement.
5. Disclosure and Use of Information. Employee recognizes and
---------------------------------
acknowledges that Employer's and affiliates' present and prospective clients,
franchises, management contracts, acquisitions and personnel, as they may exist
from time to time, are valuable, special and unique assets of Employer's
business. Throughout the term of this Agreement and for a period of two (2)
years after its termination or expiration for whatever cause or reason except as
required by applicable law, Employee shall not directly or indirectly, or cause
others to, make use of or disclose to others any information relating to the
business of Employer that has not otherwise been made public, including but not
limited to Employer's present or prospective clients, franchises, management
contracts or acquisitions. During the term of this Agreement and for a period
of two years thereafter, Employee agrees not to solicit for employment or
contract for services with, directly or indirectly, on his behalf or on behalf
of any other person or entity, any person employed by Employer, or its
subsidiaries or affiliates during such period, unless Employer consents in
writing. In the event of an actual or threatened breach by Employee of the
provisions of this paragraph, Employer shall be entitled to injunctive relief
restraining Employee from committing such breach or threatened breach. Nothing
herein stated shall be construed as preventing Employer from pursuing any other
remedies available to Employer for such breach or threatened breach, including
the recovery of damages from Employee.
6. Notices. Any notice, request or demand required or permitted to be
-------
given under this Agreement shall be in writing, and shall be delivered
personally to the recipient or, if sent by certified or registered mail to his
residence in the case of Employee, or to its principal office in the case of the
Employer. Such notice shall be deemed given when delivered if personally
delivered or within three days of mailing if sent certified or registered mail.
7. Elective Positions; Constructive Termination
--------------------------------------------
(a) Nothing contained in this Agreement is intended to nor shall be
construed to abrogate, limit or affect the powers, rights and
privileges of the Board of Directors or stockholders to remove
Employee from the positions set forth in Section 1,
3
<PAGE>
with or without Cause (as defined in Section 10 below), during the
term of this Agreement or to elect someone other than Employee to
those positions, as provided by law and the By-Laws of Employer.
Nothing in this Agreement is intended to nor shall be construed to
abrogate, limit or affect the Employee's rights and privileges to
terminate this Agreement.
(b) If Employee is Constructively Terminated (as defined in Section
7(c) below) it is expressly understood and agreed that Employee's
rights under this Agreement shall in no way be prejudiced, Employee
shall not, thereafter, be required to perform any services under this
Agreement and Employee shall be entitled to receive compensation
referred to in Section 3 above, including, without limitation, the
continued vesting through the term of this Agreement of stock options
and restricted stock outstanding at the time of the Constructive
Termination. However, Employee shall not be entitled to receive new
stock option grants or rights to ungranted stock options. Employee
upon removal shall not be required to mitigate damages but
nevertheless shall be entitled to pursue other employment, and
Employer shall be entitled to receive as an offset and thereby reduce
its payment by the base salary and bonus received by Employee from any
other employment. As a condition to Employee receiving his
compensation from Employer, Employee agrees to permit verification of
his employment records and income tax returns by an independent
attorney or accountant, selected by Employer but reasonably acceptable
to Employee, who agrees to preserve the confidentiality of the
information disclosed by Employee except to the extent required to
permit Employer to verify the amount received by Employee from other
active employment. Employer shall receive credit for unemployment
insurance benefits, social security insurance or other like amounts
payable during periods of unemployment actually received by Employee.
(c) For purposes of this Section 7, "Constructively Terminated"
shall mean removal or termination of Employee other than in accordance
with Section 10, assignment of duties by the Employer inconsistent
with Section 1, a change in Employee's title or the line of reporting
set forth in Section 1 or any other material breach of this Agreement
by Employer provided Employer shall be given fourteen days advance
written notice of such claim of material breach, which written notice
shall specify in reasonable detail the grounds of such claim of
material breach. Except in the case of bad faith, Employer shall have
an opportunity to cure the basis for Constructive Termination during
the fourteen day period after written notice.
8. Waiver of Breach. The waiver of either party of a breach of any
----------------
provision of this Agreement shall not operate or be construed as a waiver of any
subsequent breach.
9. Assignment. The rights and obligations of Employer under this
----------
Agreement shall
4
<PAGE>
inure to the benefit of and shall be binding upon the successors and assigns of
Employer. The obligations of Employee hereunder may not be assigned or
delegated.
10. Termination of Agreement. This Agreement shall terminate upon the
------------------------
following events and conditions:
(a) Upon expiration of its term;
(b) For Cause which means, including but not limited to, deliberate and
continued refusal to carry out duties and instructions of the Employer's
Board of Directors and Chief Executive Officer consistent with the
position, material dishonesty, a violation or a willful breach of this
Agreement, conviction of a felony involving moral turpitude, fraud or
misappropriation of corporate funds or any willful acts or omissions
inimical to or contrary to material policies of Employer not arbitrarily
applied in the case of Employee.
(c) Subject to state and federal laws, if Employee is unable to perform the
essential functions of the services described herein for more than 180 days
(whether or not consecutive) in any period of 365 consecutive days,
Employer shall have the right to terminate this Agreement by written notice
to Employee. In the event of such termination, all non-vested obligations
of Employer to Employee pursuant to this Agreement shall terminate.
(d) In the event of Employee's death during the term of this Agreement, the
Agreement shall terminate as of the date thereof.
11. Legal Fees. Employer shall reimburse the Employee for all reasonable
-----------
attorneys fees incurred in connection with the negotiation and execution of this
Agreement.
12. Entire Agreement. This instrument contains the entire agreement of
----------------
the parties. It may be changed only by an agreement in writing signed by the
party against whom enforcement of any waiver, change, modification, extension,
or discharge is sought. This Agreement shall be governed by the laws of the
State of Maryland, and any disputes arising out of or relating to this Agreement
shall be brought and heard in any court of competent jurisdiction in the State
of Maryland.
13. Compensation Committee Approval. Notwithstanding any other provision
--------------------------------
to the contrary, this Agreement is subject to the approval of the Employer's
Compensation Committee at its next meeting, which is expected to occur on or
about December 17, 1997, and shall not be valid, binding and enforceable prior
thereto. Prior to such approval, neither party hereto shall make any public
announcement with respect to this Agreement or the employment of Employee by
Employer.
5
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on the date
first set forth above.
Employer:
CHOICE HOTELS INTERNATIONAL, INC.
By:
------------------------------
Michael J. DeSantis
Senior Vice President
Employee:
----------------------------------
Donald Dempsey
6
<PAGE>
Exhibit 10.2
CONSULTING AGREEMENT AND RELEASE
--------------------------------
This CONSULTING AGREEMENT AND RELEASE (the "Agreement and Release") is made
and entered into as of December 18, 1997, by and between Choice Hotels
International, Inc., a Delaware corporation ("Choice") and Barry L. Smith
("Smith").
RECITALS
A. Smith has informed Choice that he intends to retire from Choice upon
the appointment of a successor to his position.
B. Choice desires to retain Smith as a consultant.
NOW, THEREFORE, in consideration of the mutual promises contained herein
and for other good and valuable consideration, the receipt and sufficiency of
are hereby acknowledged, the parties agree as follows:
1. Resignation. Smith shall resign as Senior Vice President, Marketing,
-----------
upon 45 days after a successor has been appointed by the Board of Directors to
the position (or similar position with similar responsibilities), but in no
event later than December 15, 1998 (the "Resignation Date").
2. Consulting Period. During the period from the Resignation Date
-----------------
through December 15, 1998 (assuming the Resignation Date is a date prior to
December 15, 1998), Smith will remain on Choice's payroll and such period will
be referred to as the "Initial Consulting Period". At the mutual election of
Choice and Smith and upon 30 days prior written notice by one party, to be
accepted or rejected by the other in ten (10) days after receipt of notice, the
Initial Consulting Period shall be extended, upon acceptance, for successive one
year periods (the "Additional Consulting Period"); provided, however, that to so
extend, the Additional Consulting Period must still be in effect on the one year
anniversary of the commencement of such term.
3. Consulting Services.
-------------------
3.1 Services to be Rendered. During the Initial Consulting
-----------------------
Period and any Additional Consulting Period, Smith shall provide such consulting
and advisory services to Choice related to marketing issues affecting Choice, as
may be requested by Choice from time to time.
3.2 Report to CEO. During the Initial Consulting Period, Smith
-------------
shall report to the Chief Executive Officer of Choice or to such other officer
as Choice may designate.
4. Compensation.
------------
4.1 Fees. For and in consideration of the continued agreement of
----
Smith to render to Choice the services listed in Section 3, Smith will be
entitled to an Initial Consulting
<PAGE>
Period fee for the period ended December 15, 1998 in an amount equal to
$265,000, or the pro rata portion thereof if the Initial Consulting Period
commences after January 1, 1998. These fees shall be payable in equal bi-weekly
installments with usual deductions taken. During any Additional Consulting
Period, Smith shall be paid for services rendered to Choice at a rate of $200
per hour. Smith shall submit monthly bills to Choice with payment due within 30
days thereof.
4.2 Benefits. Choice and Smith have negotiated the following
--------
undertakings with respect to the amount and payment schedule of certain benefits
to be paid to Smith.
A. During the Initial Consulting Period, Smith shall be
eligible for a bonus under the same bonus plan as in effect as of the date
hereof. The criteria for such bonus shall be agreed to between the parties.
Smith shall remain eligible for a bonus for the fiscal year ended December 31,
1997.
B. No additional vacation or sick leave shall accrue during the
Initial Consulting Period or any Additional Consulting Period.
C. The lump sum relocation expense reimbursement of $2,300 per
month shall cease on the Resignation Date.
D. Reimbursement of reasonable business and travel expenses in
accordance with Choice's policies. No car allowance will be paid after the
Resignation Date.
E. During the Initial Consulting Period and any Additional
Consulting Period, Smith shall have the right to exercise Manor Care, Inc.,
Sunburst Hospitality Corporation and Choice stock options that vest through
December 15, 1998 or the end of any Additional Consulting Period in accordance
with the number of shares shown to vest in the Barry Smith Choice Stock Report
and the Barry Smith Sunburst Stock Report, collectively attached hereto as
Exhibit A. Choice agrees that Smith shall be deemed continuously eligible by
- ----------
Choice throughout the Initial Consulting Period and any Additional Consulting
Period for purposes of participation in such stock option plans; however, Smith
shall not be entitled to receive any future grants under the stock option plans
but he shall be entitled to exercise those previously granted.
F. During the Initial Consulting Period, Smith may continue to
make standard employee payments for medical and life insurance plans (not
including AD&D), if and as maintained by Choice during the Initial Consulting
Period. In connection therewith, Smith shall elect and pay for COBRA coverage
with Choice and shall be reimbursed by Choice for the difference between the
COBRA coverage premium and the standard Choice employee premium.
2
<PAGE>
5. Smith Not to Compete.
---------------------
5.1 Non-Compete. During the Initial Consulting Period, Smith
------------
shall not be employed by or provide consulting services to any other individual,
company, firm or other entity. Smith also agrees that during the Initial
Consulting Period and any Additional Consulting Periods, Smith will not engage,
without first obtaining Choice's prior written consent, directly or indirectly,
in any activities within the Territory (as defined below) whether as employee,
officer, director, partner, joint venturer, stockholder (other than the holder
of less than 5% of the stock of a corporation the securities of which are traded
on a national securities exchange or in the over-the-counter market), consultant
or agent, which involves a business which is in direct competition to the
business in which Choice is engaged at the time of termination of the Initial
Consulting Period.
5.2 Territory. For the purposes of this Section 5, the
----------
"Territory" shall mean any place within the continental United States in which
Choice is, at the time of the termination of the Additional Consulting Period,
engaged in business.
5.3 Enforceability. It is the intent and understanding of each
---------------
party hereto that if, in any action before any court or agency legally empowered
to enforce the covenants contained in this Section 5 any term, restriction,
covenant or promise contained therein is found to be unreasonable and for that
reason unenforceable, then such term, restriction, covenant or promise shall be
deemed modified to the extent necessary to make it enforceable by such court or
agency.
6. Complete Release.
----------------
6.1 Smith. Smith agrees to release Choice, its former parents,
-----
Sunburst Hospitality Corporation (formerly Choice Hotels International, Inc.)
and Manor Care, Inc ., and any related companies, subsidiaries and affiliates,
and the officers, directors, employees and agents of all of them, from all
claims or demands Smith may have based on Smith's employment with Choice or the
termination of that employment except for claims for benefits under this
Agreement. This includes a release of any rights or claims Smith may have under
the Age Discrimination in Employment Act, which prohibits age discrimination in
employment; Title VII of the Civil Rights Act of 1964, which prohibits
discrimination in employment based on race, color, national origin, religion or
sex; the Equal Pay Act, which prohibits paying men and women unequal pay for
equal work; and any other federal, state or local laws or regulations
prohibiting employment discrimination. This also includes a release by Smith of
any claims for personal injuries, wrongful discharge, compensation and benefits,
expenses, bonuses, or any other employee rights or benefits not otherwise being
paid for pursuant to this Agreement. This release does not include a release
of Smith's right, if any, to retirement or profit-sharing benefits or deferred
compensation arrangements under the standard programs of Choice nor release of
his rights under this Agreement.
3
<PAGE>
This Agreement and Release covers both claims Smith knows about and those
he may not know about. Smith assumes the risk of such unknown claims which may
exist at the time he signs this Agreement and agrees that this Agreement shall
apply to any and all known and unknown claims, except the parties agree that
this release does not apply to those claims involving fraud or dishonesty on the
part of Choice..
Smith hereby acknowledges that he has been treated fairly by Choice in the
course of his employment, and in the separation of his employment, and further
acknowledges that he has not suffered any age discrimination or wrongful
termination and has no claims of any kind against Choice or any related
companies, subsidiaries, affiliates, or the officers, directors, employees or
agents of any of them.
6.2 Choice. Choice and any subsidiaries, and the officers,
------
directors, employees and agents of all of them, agree to release Smith from all
claims or demands Choice may have based on Smith's employment with Choice or the
termination of that employment except for any claims involving fraud or
dishonesty on the part of Smith.
This Agreement and Release covers both claims Choice knows about and
those it may not know about. Choice assumes the risk of such unknown claims
which may exist at the time it signs this Agreement and agrees that this
Agreement shall apply to any and all known and unknown claims except as provided
in the previous paragraph.
7. Future Lawsuits or Claims . Each party promises never to file a
--------------------------
lawsuit, administrative proceeding or agency action asserting any claims which
are released in Paragraph 6 of this Agreement except for claims that may arise
out of this Agreement or any stock option plans. Except to the extent otherwise
required by law, each party further agrees not to assist any other person in
bringing any action, claim or demand against the other party with respect to
claims that are released in Paragraph 6. Smith and Choice further agree to keep
confidential all of the events leading up to Smith's separation from Choice.
8. Non-Disparagement. Choice and Smith agree that they respectively
-----------------
shall not disparage the business reputation of the other party hereto and each
shall not communicate to any person any information which would cause injury to
or tend to cause injury to the business reputation of the other.
9. Certificate. Smith acknowledges and agrees that as an additional
------------
precondition to receiving the benefits described herein, Smith must execute the
Certificate (that is attached as Appendix "A" to this Agreement and Release)
after the Resignation Date and return the Certificate to Choice Hotels
International, Inc., 10750 Columbia Pike, Silver Spring, Maryland 20901,
Attention: Senior Vice President, Human Resources. This Certificate must be
received by Choice no later than five business days after the Resignation Date.
4
<PAGE>
10. Business Information of Choice/Non-Solicitation of Choice's Employees.
---------------------------------------------------------------------
Smith agrees not to directly or indirectly, or cause others to make use of or
disclose to others any non-public information relating to the business of Choice
and its affiliates, which information would be considered Trade Secrets under
the Maryland Uniform Trade Secrets Act. For a period of two (2) years from
December 15, 1998, Smith agrees not to solicit for employment or contract for
services with, directly or indirectly, on his behalf or on behalf of any other
person or entity, any person employed by Choice, or its subsidiaries or
affiliates during the twenty-four (24) month period prior to December 15, 1998,
unless Choice consents in writing.
11. Non-Release of Future Claims. This Agreement does not waive or
----------------------------
release any rights or claims that Smith may have under the Age Discrimination in
Employment Act which arise after the date Smith signs this Agreement.
12. Consequences of Violation of Promises. If either party breaks the
-------------------------------------
promises contained in Paragraph 7 of this Agreement and files a lawsuit,
administrative proceeding or agency action based on claims that such party has
released, the breaching party will pay for all costs incurred by the non-
breaching party, including reasonable attorneys' fees, in defending against such
claim. A breaching party shall also pay for all damages and costs incurred by
the non-breaching party in connection with a breach of the provisions of Section
18.
13. Consultation; Revocation. Smith is advised to consult with an
------------------------
attorney prior to executing this Agreement. He may have a period of up to 21
days to consider this Agreement. Smith acknowledges that no deadlines of less
than 21 days have been imposed on him to review or execute this Agreement. In
addition, should he choose to sign the Agreement, he shall have a period of
seven days to revoke such signature. Revocation can be made by delivering a
written notice of revocation to the Senior Vice President, Human Resources,
Choice Hotels International, Inc., 10750 Columbia Pike, Silver Spring, Maryland
20901. For this revocation to be effective, written notice must be received by
the Senior Vice President, Human Resources no later than the close of business
on the seventh (7th) day after Smith signs this Agreement. If Smith revokes
this Agreement it shall not be effective or enforceable and Smith will not
receive the benefits described in Section 4.
14. Encouragement to Consult with Attorney. Smith is strongly encouraged
--------------------------------------
to consult with an attorney before signing this Agreement. Smith understands
that whether or not to do so is Smith's decision.
15. Signing is Voluntary. Smith acknowledges that he has had adequate
--------------------
opportunity to review this Agreement with an attorney, that Smith understands
its terms, that Smith was not coerced into signing, and that Smith signed this
Agreement knowingly and voluntarily.
16. Complete Defense. Each party fully understands and agrees that
----------------
this Agreement may be pleaded by the other as a complete defense to any claim or
entitlement which may be asserted by a party against the other, for or on
account of any matters waived or released in this Agreement.
5
<PAGE>
17. Non-Admission of Liability. The parties each make this Agreement to
--------------------------
avoid the cost of defending against any possible lawsuit. By making this
Agreement, neither party admits that it has done anything wrong.
18. Confidentiality. Smith and Choice agree to preserve the
---------------
confidentiality of this Agreement, except to the extent that disclosure is
required by law, rule or regulation; and except that it is permissible for
either party to disclose the terms of this Agreement to such party's
accountants, attorneys and advisors, financial institution with whom he/it has a
customer relationship and to any third party not otherwise employed by and/or
affiliated with Choice with whom Smith contemplates a business relationship that
is not prohibited by the terms of this Agreement.
19. Entire Agreement. This is the entire Agreement between Smith and
----------------
Choice. Choice has made no promises to Smith other than those in this Agreement.
20. Choice of Law; Jurisdiction. This Agreement shall be construed
---------------------------
exclusively in accordance with the laws of the State of Maryland, without regard
to the principles of conflicts of laws therein. In the event that a dispute
arises under this Agreement and legal action is instituted, the parties agree
that such action shall be maintained exclusively in the Circuit Court for
Montgomery County, Maryland. The parties hereby voluntarily submit to the
jurisdiction of said court.
SMITH HAS HAD AN OPPORTUNITY TO CAREFULLY REVIEW AND CONSIDER THIS
AGREEMENT WITH AN ATTORNEY, AND HE HAS HAD SUFFICIENT TIME TO CONSIDER IT.
AFTER SUCH CAREFUL CONSIDERATION, HE KNOWINGLY AND VOLUNTARILY ENTERS INTO THIS
AGREEMENT WITH FULL UNDERSTANDING OF ITS MEANING.
PLEASE READ THIS AGREEMENT CAREFULLY. IT CONTAINS A RELEASE OF ALL KNOWN
AND UNKNOWN CLAIMS.
CHOICE HOTELS INTERNATIONAL, INC.
ATTEST:
By:
- --------------------- ------------------------------------
Thomas Mirgon, Senior Vice President
WITNESS: -------------------------------------
Barry L. Smith
- ----------------------
6
<PAGE>
APPENDIX A
Certificate
- ------------------------------------------------------------------------------
THIS CERTIFICATE MUST BE SIGNED AFTER THE RESIGNATION DATE AND MUST BE FILED
WITH THE SENIOR VICE PRESIDENT, HUMAN RESOURCES, 10750 COLUMBIA PIKE, SILVER
SPRING, MARYLAND 20901, NO LATER THAN FIVE BUSINESS DAYS AFTER THE RESIGNATION
DATE.
- ------------------------------------------------------------------------------
I entered into an Agreement and Release with Choice Hotels International,
Inc., formerly named Choice Hotels Franchising, Inc. ("Choice") under which my
last day worked with Choice was ___________________________________, 199___ .
I hereby acknowledge that:
(1) A blank copy of this Certificate was attached as an Appendix to the
Agreement and Release when it was given to me for review. I have had more time
to consider signing this Certificate than the ample time I was given to consider
signing the Agreement and Release. I was advised to discuss the Agreement and
Release, including this Certificate, with an attorney before executing either
document.
(2) The discretionary benefits payable under the Agreement and Release
become payable only if I sign this Certificate.
(3) My employment actually terminated before I signed this Certificate and,
in exchange for the discretionary benefits, I hereby agree that this Certificate
will be a part of my Agreement and Release and that my Agreement and Release is
to be construed and applied as if I signed it on the day I signed this
Certificate. This extends my release of claims under the Agreement and Release
to any claims that arose during the remainder of my employment through the last
day of my employment with Choice.
Date
------------------- --------------------------------
Signature
--------------------------------
Print Name
--------------------------------
Social Security Number
7
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS, THE CONSOLIDATED STATEMENTS OF INCOME AND THE
CONSOLIDATED STATEMENTS OF CASH FLOWS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS AND THE NOTES THERETO.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-START> JUN-01-1997
<PERIOD-END> NOV-30-1997
<CASH> 4,845
<SECURITIES> 0
<RECEIVABLES> 37,516
<ALLOWANCES> 7,322
<INVENTORY> 0
<CURRENT-ASSETS> 54,605
<PP&E> 66,481
<DEPRECIATION> 20,238
<TOTAL-ASSETS> 375,693
<CURRENT-LIABILITIES> 49,935
<BONDS> 278,389
0
0
<COMMON> 598
<OTHER-SE> 45,794
<TOTAL-LIABILITY-AND-EQUITY> 375,693
<SALES> 0
<TOTAL-REVENUES> 155,663
<CGS> 0
<TOTAL-COSTS> 109,136
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,095
<INCOME-PRETAX> 41,432
<INCOME-TAX> 17,058
<INCOME-CONTINUING> 24,374
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 24,374
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
