<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 JUNE 30, 1999 COMMISSION FILE NO. 1-11915
CHOICE HOTELS INTERNATIONAL, INC.
10750 COLUMBIA PIKE
SILVER SPRING, MD. 20901
(301) 592-5000
Delaware 52-1209792
------------------------ -------------------------
(STATE OF INCORPORATION) (I.R.S. EMPLOYER
IDENTIFICATION NUMBER)
-------------------------------------------
(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 JUNE 30, 1999
- ----------------------- -----------------------
Common Stock, $0.01
par value per share 54,890,865
----------
==============================================================================
<PAGE>
CHOICE HOTELS INTERNATIONAL, INC.
INDEX
-----
PAGE NO.
--------
PART I. FINANCIAL INFORMATION:
Condensed Consolidated Balance Sheets -
June 30, 1999 (Unaudited) and December 31, 1998 3
Consolidated Statements of Income -
Three months ended June 30, 1999 and June 30, 1998 and Six months
ended June 30, 1999 and June 30, 1998 (Unaudited) 5
Consolidated Statements of Cash Flows -
Six months ended June 30, 1999 and June 30, 1998 (Unaudited) 6
Notes to Consolidated Financial Statements (Unaudited) 7
Management's Discussion and Analysis of Results of
Operations and Financial Condition 8
Quantitative and Qualitative Analysis of Market Risk 12
PART II. OTHER INFORMATION AND SIGNATURE 13
2
<PAGE>
PART I. FINANCIAL INFORMATION
CHOICE HOTELS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS June 30, 1999 December 31, 1998
-------------- -----------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 5,954 $ 1,692
Receivables (net of allowance for doubtful
accounts of $9,020 and $8,082, respectively) 30,628 28,117
Income taxes receivable and other 3,967 5,852
-------- --------
Total current assets 40,549 35,661
PROPERTY AND EQUIPMENT, AT COST, NET OF
ACCUMULATED DEPRECIATION 38,588 32,845
GOODWILL, NET OF ACCUMULATED AMORTIZATION 65,727 66,749
FRANCHISE RIGHTS, NET OF ACCUMULATED AMORTIZATION 45,115 44,981
INVESTMENT IN FRIENDLY HOTELS, INC. 46,146 45,139
OTHER ASSETS 74,482 45,001
NOTE RECEIVABLE FROM SUNBURST HOSPITALITY 134,760 127,849
-------- --------
Total assets $445,367 $398,225
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
balance sheets.
3
<PAGE>
CHOICE HOTELS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
------------- -----------------
(Unaudited)
<S> <C> <C>
LIABILITIES & EQUITY
CURRENT LIABILITIES
Current portion long term debt $ 27,646 $ 22,646
Accounts payable 20,743 16,216
Accrued expenses 18,589 19,606
-------- --------
Total current liabilities 66,978 58,468
-------- --------
LONG TERM DEBT 282,590 256,564
DEFERRED INCOME TAXES AND OTHER LIABILITIES 43,094 26,683
-------- --------
Total liabilities 392,662 341,715
-------- --------
SHAREHOLDERS' EQUITY
Common stock, $.01 par value 614 607
Additional paid-in-capital 47,688 43,432
Accumulated other comprehensive income 961 2,112
Treasury stock (85,930) (54,204)
Retained earnings 89,372 64,563
-------- --------
Total shareholders' equity 52,705 56,510
-------- --------
Total liabilities & shareholders' equity $445,367 $398,225
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
balance sheets.
4
<PAGE>
CHOICE HOTELS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES
Royalty fees $ 31,274 $29,214 $55,073 $50,058
Product sales 1,324 7,218 3,356 12,374
Initial franchise fees and
relicensing fees 3,744 4,235 6,593 7,649
Partner service revenue 2,092 1,337 3,808 2,955
European hotel operations - - - 1,098
Other 1,329 2,432 1,738 3,472
-------- ------- ------- -------
Total revenues 39,763 44,436 70,568 77,606
-------- ------- ------- -------
OPERATING EXPENSES
Selling, general and administrative 12,637 12,430 23,614 23,664
Product cost of sales 1,219 6,878 3,117 11,608
Depreciation and amortization 1,709 1,609 3,471 3,550
European hotel operations - - - 1,133
-------- ------- ------- -------
Total operating expenses 15,565 20,917 30,202 39,955
-------- ------- ------- -------
OPERATING INCOME 24,198 23,519 40,366 37,651
OTHER
Gain on sale of stock - ( 424) (1,260) (2,190)
Interest and dividend income ( 4,074) (2,671) (8,066) (5,425)
Interest expense 3,992 4,356 8,139 9,048
-------- ------- ------- -------
Total other ( 82) 1,261 (1,187) 1,433
-------- ------- ------- -------
INCOME BEFORE INCOME TAXES 24,280 22,258 41,553 36,218
INCOME TAXES 9,749 9,270 16,744 15,085
-------- ------- ------- -------
NET INCOME $ 14,531 $12,988 $24,809 $21,133
======== ======= ======= =======
WEIGHTED AVERAGE SHARES OUTSTANDING 54,998 59,255 55,449 59,522
======== ======= ======= =======
DILUTED SHARES OUTSTANDING 55,809 60,387 56,153 60,757
-------- ------- ------- -------
BASIC EARNINGS PER SHARE $ 0.26 $ 0.22 $ 0.45 $ 0.36
======== ======= ======= =======
DILUTED EARNINGS PER SHARE $ 0.26 $ 0.22 $ 0.44 $ 0.35
======== ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements of
income.
5
<PAGE>
CHOICE HOTELS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Six Months Ended
June 30, 1999 June 30, 1998
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 24,809 $ 21,133
Reconciliation of net income to net cash by
operating activities:
Depreciation and amortization 7,026 5,653
Provision for doubtful accounts 408 553
Increase in deferred income taxes 7,171 2,211
Non cash interest and dividend income (7,928) (5,943)
Changes in assets and liabilities:
Change in receivables (3,195) 926
Change in income taxes payable and other 6,318 (966)
Change in accounts payable and accrued
expenses 459 (6,513)
-------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 35,068 17,054
-------- ---------
CASH FLOW FROM INVESTING ACTIVITIES:
Investment in property and equipment (10,781) (5,593)
Repayments of Sunburst Hospitality advances, net - 5,286
Increase in amounts due from marketing and
reservation funds (22,385) (4,847)
Other items, net (1,956) (3,546)
-------- ---------
NET CASH UTILIZED BY INVESTING ACTIVITIES (35,122) (8,700)
-------- ---------
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from long term borrowings 56,230 118,959
Principal payments of long term borrowings (24,174) (108,061)
Purchase of treasury stock (31,496) (26,840)
Proceeds from issuance of common stock 3,756 3,671
-------- ---------
NET CASH PROVIDED (UTILIZED) BY FINANCING
ACTIVITIES 4,316 (12,271)
-------- ---------
Net change in cash and cash equivalents 4,262 (3,917)
Cash and cash equivalents, beginning of period 1,692 10,282
-------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 5,954 $ 6,365
======== =========
</TABLE>
The accompanying notes are an integral part of these consolidated statements
cash flows.
6
<PAGE>
CHOICE HOTELS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. The accompanying consolidated financial statements of Choice Hotels
International, Inc. (the "Company") 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 year ended December 31, 1998 and notes
thereto included in the Company's Form 10-K, dated March 29, 1999. In the
opinion of management, all adjustments (which include any normal recurring
adjustments) considered necessary for a fair presentation have been included.
Interim results are not necessarily indicative of fiscal year performance
because of seasonal and short-term variations. All intercompany transactions and
balances between Choice Hotels International, Inc. and its subsidiaries have
been eliminated.
2. During the six months ended June 30, 1999, the Company's comprehensive
income (consisting of net income plus foreign currency translation adjustments
and unrealized gains on available for sale securities) exceeded net income by
approximately $890,000.
3. SFAS 128 replaced the calculation of primary and fully diluted earnings per
share pursuant to Accounting Principles Board Opinion ("APB") No. 15, "Earnings
Per Share," with basic and diluted earnings per share. Unlike primary earnings
per share, basic earnings per share excludes any dilutive effects of options,
warrants and convertible securities. Diluted earnings per share is computed
similarly to fully diluted earnings per share. Earnings per share amounts for
all years have been presented in conformity with SFAS 128.
Basic and diluted earnings per common share are computed by dividing net income
by the weighted average number of shares of common stock outstanding. The
weighted average number of shares outstanding was 55,449,015, and 59,521,673 for
basic earnings per share and 56,153,216 and 60,756,864 for earnings per share
assuming dilution for the six months ended June 1999 and 1998, respectively. The
difference between the weighted average number of shares of common stock
outstanding used in the basic and diluted earnings per share computations is
entirely due to the assumed exercise of outstanding stock options for diluted
earnings per common share.
4. Marketing and Reservation Funds
The Company advances capital as necessary to the marketing and reservation funds
to support the development and ongoing operations of the franchise system. The
total marketing and reservation fees received by the Company (previously
reported as revenue) was $35.8 million and $31.7 million for the three months
ended June 30, 1999 and 1998 and $63.8 million and $57.5 million for the six
months ended June 30, 1999 and 1998. Depreciation and amortization incurred by
the marketing and reservation funds was $1.8 million and $1.3 for the three
months ended June 30, 1999 and 1998 and $3.6 million and $2.4 million for the
six months ended June 30, 1999 and 1998. Interest expense incurred by the
marketing and reservation funds was $972,000 and $134,000 for the three months
ended June 30, 1999 and 1998 and $1,600,000 and $535,000 for the six months
ended June 30, 1999 and 1998.
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. As of June 30, 1999 the
Company's balance sheet includes a receivable in amounts due from marketing and
reservation funds of $35.8 million related to shortfalls in the marketing ($17.1
million) and reservation ($18.7 million) funds. As of December 31, 1998, the
Company's balance sheet includes a receivable in amounts due from marketing and
reservation funds of $13.4 million related to shortfalls in the marketing ($7.8
million) and reservation ($5.6 million) funds. The Company expects to recover
these receivables through future marketing and reservation fees.
7
<PAGE>
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL CONDITION
- --------------------------------------------------------------------------
The principal factors that affect the Company's results are: (i) growth in the
number of hotels under franchise, (ii) occupancies and room rates achieved by
the hotels under franchise, (iii) the number and relative mix of franchised
hotels, and (iv) the Company's ability to manage costs. The number of rooms at
franchised properties and occupancy 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 Three Month Period Ended June 30, 1999 Operating Results and Three
- --------------------------------------------------------------------------------
Month Period Ended June 30, 1998 Operating Results
- --------------------------------------------------
The Company reported net income of $14.5 million, or $0.26 per diluted share,
for the second quarter ended June 30, 1999, compared to net income for the same
period of 1998 of $13.0 million, or $0.22 per diluted share. The increase in net
income for the period is attributable to an increase in franchise revenue as a
direct result of the addition of new licensees to the franchise system,
improved RevPar and increases in the effective royalty rate achieved for the
domestic hotel system.
Franchise Revenues
- ------------------
Management analyzes its business based on "net franchise revenue," which is
total revenue excluding product sales and European hotel operations, and
franchise operating expenses which are reflected as selling, general and
administrative expenses.
The Company's net franchise revenues were $38.4 million for the three months
ended June 30, 1999 and $37.2 million for the three months ended June 30, 1998.
Royalties increased $2.1 million to $31.3 million in 1999 from $29.2 million in
1998, an increase of 7.1%. The increase in royalties is attributable to a net
increase of 18 franchisees during the period (representing an additional 894
rooms) an improvement in domestic RevPAR of 4.2% and an increase in the
effective royalty rate of the domestic hotel system to 3.65% from 3.53%. Initial
and relicensing fee revenue generated from domestic franchise contracts signed
decreased to $3.7 million from $4.2 million in 1998 as a result of a decrease in
total franchise agreements signed to 84, as compared to 109 for the second
quarter of 1998. The total number of domestic hotels online increased to 3,057
from 2,951 an increase of 3.6% for the period ending June 30, 1999. This
represents an increase in the number of rooms open of 3.0% from 245,948 as of
June 30, 1998 to 253,251 as of June 30, 1999. As of June 30, 1999, the Company
had 587 hotels under development in its domestic hotel system representing
45,820 rooms. The total number of international hotels online increased to 1,031
from 616 an increase of 67.4% as of June 30, 1999. International rooms open
increased 44.3% from 51,448 as of June 30, 1998 to 74,254 as of June 30, 1999.
The total number of international hotels under development increased to 161 from
94 an increase of 71.3% for the period ending June 30, 1999. The number of
international rooms under development increased to 15,372 as of June 30, 1999
from 7,971 as of June 30, 1998, an increase of 92.8%. These increases are
primarily attributable to the Company's 1998 Strategic Alliance with Flag
International Limited. The master franchise agreement with Flag Choice Hotels
includes several countries including Australia, Papua New Guinea and Fiji.
8
<PAGE>
Franchise Expenses
- ------------------
The cost to operate the franchising business is reflected in selling, general
and administrative expenses. Selling, general and administrative expenses
increased slightly between years. As a percentage of total net franchising
revenues, total selling, general and administrative expenses declined to 32.9%
for the second quarter of 1999 as compared to 33.4% for 1998. The improvement in
the franchising margins relates to the economies of scale generated from
operating a larger franchisee base and cost control initiatives.
Product Sales
- -------------
Sales made to franchisees through the Company's group purchasing program
decreased approximately $5.9 million (or 81.7%) to $1.3 million for the three
months ended June 30, 1999 from $7.2 million for the three months ended June 30,
1998. Product cost of sales decreased $5.7 million (or 82.3%) for the three
months ended June 30, 1999. The product services margins increased for the three
months ended June 30, 1999 to 7.9% from 4.7% at June 30, 1998. 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. 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. In the fourth quarter of 1998, the Company discontinued
the group purchasing program as previously operated.
Other
- ------
For each of the three months ended June 30, 1999, and June 30, 1998 the Company
recognized approximately $0.6 million in dividend income from its investment in
Friendly and approximately $3.5 million and $2.7 million, respectively, of
interest income from its subordinated term note to Sunburst Hospitality, Inc.
Comparison of Six Month Period Ended June 30, 1999 Operating Results and Six
- ----------------------------------------------------------------------------
Month Period Ended June 30, 1998 Operating Results
- --------------------------------------------------
The Company reported net income of $24.8 million, or $0.44 per diluted share,
for the six months ended June 30, 1999, compared to net income for the same
period of 1998 of $21.1 million, or $0.35 per diluted share. The increase in net
income for the period is attributable to an increase in franchise revenue as a
direct result of the addition of new licensees to the franchise system,
improved RevPar and increases in the effective royalty rate achieved for the
domestic hotel system.
Franchise Revenues
- ------------------
The Company's net franchise revenues were $67.2 million for the six months ended
June 30, 1999 and $64.1 million for the six months ended June 30, 1998.
Royalties increased $5.0 million to $55.1 million in 1999 from $50.1 million in
1998, an increase of 10.0%. The increase in royalties is attributable to a net
increase of 32 franchisees during the period (representing an additional 1,643
rooms) an improvement in domestic RevPAR of 3.3% and an increase in the
effective royalty rate of the domestic hotel system to 3.63% from 3.50%. Initial
and relicensing fee revenue generated from domestic franchise contracts signed
decreased to $6.6 million from $7.6 million in 1998 as a result of a decrease in
total franchise agreements signed to 156, as compared to 209 for the six months
ended 1998.
9
<PAGE>
Franchise Expenses
- ------------------
Selling, general and administrative expenses were flat between years. As a
percentage of total net franchising revenues, total selling, general and
administrative expenses declined to 35.1% for the second quarter of 1999 as
compared to 36.9% for 1998. The improvement in the franchising margins relates
to the economies of scale generated from operating a larger franchisee base.
Product Sales
- -------------
Sales made to franchisees through the Company's group purchasing program
decreased approximately $9.0 million (or 72.9%) to $3.4 million for the six
months ended June 30, 1999 from $12.4 million for the six months ended June 30,
1998. Product cost of sales decreased $8.5 million (or 73.1%) for the six months
ended June 30, 1999. The product services margins increased for the six months
ended June 30, 1999 to 7.1% from 6.2% at June 30, 1998. 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. 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. In the fourth quarter of 1998, the Company discontinued
the group purchasing program as previously operated.
Other
- ------
For the six months ended June 30, 1999, and June 30, 1998 the Company recognized
approximately $1.1 million and $1.0 million, respectively, in dividend income
from its investment in Friendly and approximately $6.9 million and $4.9 million,
respectively, of interest income from its subordinated term note to Sunburst
Hospitality, Inc.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Net cash provided by operating activities was $35.1 million for the six months
ended June 30, 1999, an increase of approximately $18.0 million from $17.1
million for 1998. At June 30, 1999, the total long-term debt outstanding for the
Company was $310.2 million, which includes approximately $27.6 million, which
matures in the next twelve months.
In 1999, the Company repurchased 2.4 million shares of its common stock at a
total cost of $33.3 million. The Company has authorization from its Board of
Directors to repurchase up to an additional 2.4 million shares.
The Company believes that cash flows from operations and available financing
capacity is adequate to meet the expected operating, investing, financing and
debt service requirements for the business for the immediate future.
Year 2000 Compliance
- --------------------
The Company is engaged in an ongoing effort to evaluate and remediate the Year
2000 computer problem shared by virtually all companies and businesses. As part
of this effort, a cross-functional Year 2000 Compliance Committee was
established to manage and supervise the efforts to become compliant and a Year
2000 action plan has been developed. The Company has completed the first three
phases of the plan, which include (i) making the Company's internal
organizations aware of the Year 2000 issue and assigning responsibility
internally, (ii) inventorying and initial testing of its proprietary software
and (iii) inventorying and testing secondary internal systems (e.g. employee
PCs). The Company is in the process of completing the remaining phases, which
include: (i) assessing the risk from third party vendors and franchisees (ii)
contingency planning, and (iii) educating the franchise community. Throughout
the process, remedial actions have been or will be taken as warranted.
10
<PAGE>
The Company's exposure to potential Year 2000 problems exists in two general
areas: technological operations in the sole control of the Company, and
technological operations dependent in some way on one or more third parties.
With respect to the Company's internal systems, it has conducted Year 2000
compliance testing on all of its proprietary software, including its
reservations and reservations support systems, its franchise support system and
its franchisee property management support systems. The tests have indicated
that, except for two DOS based systems, the proprietary software is Year 2000
compliant. The DOS version of ChoiceLINKS is not Year 2000 compliant and the DOS
version of the Company's property management system is only compliant through
December 31, 2000. The Company has communicated this to franchisees using these
systems and has recommended that they migrate to the Windows based versions of
these systems. The Company has also been in the process of replacing its
hardware platforms for these systems and a number of smaller support systems and
has kept them updated so that by the end of 1998, all of the Company's large
system computers were less than eighteen months old. Based on manufacturer
specifications, the Company believes that these new hardware platforms are Year
2000 compliant. However, the Company will have to update the operating systems
for several of its servers.
The Company has completed its process of conducting an inventory of third party
software, including PC operating systems and word processing and other
commercial software. For hardware or software systems, which do not appear to
be compliant, the Company is obtaining upgrades or replacement systems.
The Year 2000 Compliance Committee is currently identifying third party vendors
and service providers whose non-compliant systems could have a material impact
on the Company and undertaking an assessment as to such parties' compliant
status. These parties include airline global distribution systems (GDS), utility
providers, telephone service providers, banks and data processing services. The
GDS companies, which provide databases through which travel agents can book
hotel rooms, have assured the Company in writing that they are compliant and the
Company has conducted tests with three of the four major GDS companies. The Year
2000 Compliance Committee is in the process of assessing other third parties as
to their compliance and the consequences in the event they are not compliant.
Vendors who have responded indicated that they are, or expect to be, Year 2000
compliant. Throughout 1999, the committee will continue to seek and assess
responses from all of its material vendors.
In June 1999, the Company initiated an assessment of all of its domestic
franchised hotels. The assessment seeks to determine the level of preparedness
of the domestic franchise system. The assessment attempts to solicit whether the
hotels have undertaken a Year 2000 compliance assessment with respect to
building automation and maintenance systems, hotel management systems (other
than those acquired from the Company), information technology systems and third
party products and services. Upon completion of the assessment, the Company will
be better able to determine risks which may be posed if a significant number of
hotel owners have not addressed the Year 2000 status of such systems. The
Company expects the assessment to be substantially complete by September 1999.
The Company has devised contingency plans for its Phoenix, Arizona reservation
center. These plans include access to alternative power sources and insuring the
availability of key employees. Contingency plans for the Silver Spring, Maryland
corporate headquarters and other Company locations will be developed throughout
the second and third quarters of 1999.
Costs of addressing potential Year 2000 problems have not been material to date.
The value of employee time devoted to testing and development has been
approximately $250,000. Total costs for replacement of hardware and operating
systems are expected to be approximately $700,000. However, these replacements
(as well as replacements undertaken in prior years) are being implemented
primarily as part of the Company's ongoing technology updating, rather than
specifically for Year 2000 compliance reasons. Based upon preliminary
information gathered to date, Year 2000 compliance costs are not currently
expected to have a material adverse impact on the Company's financial position,
results of operations or cash flows. However, if the Company, its vendors or
franchisees are unable to resolve such Year 2000 issues in a timely manner, it
could result in a material financial risk, including loss of revenue,
substantial unanticipated costs and service interruptions.
11
<PAGE>
The Company is not in a position to guarantee the performance of others with
respect to their Year 2000 compliance or predict whether any of the assurances
that others provide regarding Year 2000 compliance may prove later to be
inaccurate or overly optimistic.
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 SEC 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.
ITEM 3 Quantitative and Qualitative Analysis of 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.
The following table summarizes information about derivative financial
information and other financial instruments that are sensitive to changes in
interest rates, including interest rate swap agreements and debt obligations.
For interest rate swap agreements, the table presents notional amounts and
weighted average interest rates by expected (contractual) maturity date.
Expected Maturity Date
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003 Thereafter Total 1999 Fair Value
------- ------- ------- ------- ------- ---------- ------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Liabilities:
Long-term debt(1)
Fixed rate 100,000 100,000 100,000 100,000 100,000 100,000 100,000 97,550
Average interest rate 7.13% 7.13% 7.13% 7.13% 7.13%
Variable rate(2) 210,236 210,236 210,236 210,236 210,236 210,236 210,236 210,236
Average interest rate(3) 5.24% 5.84% 6.24% 6.39% 6.48%
</TABLE>
Interest Rate Derivatives
Expected Maturity Date
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003 Thereafter Total 1999 Fair Value
------- ------- ------- ------- ------- ---------- ------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Notional Amount 115,000 115,000 115,000 115,000
Average interest rate 5.85% 5.85% 5.85% 5.85%
Receivable 0 0 0 0
Payable 909 449 230 138 2,800
</TABLE>
(1) A hypothetical one percentage point change in interest rates would change
the fair value of long-term debt by $6.46 million.
(2) The Company will refinance the $150 million variable rate term loan as it
amortizes throughout the expected maturity dates. Upon expiration of the
credit facility in 2002, the Company expects to refinance its obligations.
(3) Weighted average variable rates are based on implied forward rates in the
yield curve at the reporting date.
The Company is also exposed to fluctuations in foreign currency relating to its
preferred stock investment in Friendly Hotels, PLC which is denominated in
British Pounds. The Company does not have any derivative financial instruments
related to its foreign investments.
12
<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 5. OTHER INFORMATION
-----------------
The Company is subject to various risks which could have a negative effect on
the Company and its financial condition. These risks could cause actual
operating results to differ from those expressed in certain "forward looking
statements" contained in "Management's Discussion and Analysis of Operations and
Financial Conditions" in this Report as well as in other Company communications.
RISK FACTORS
Inherent Risks of the Lodging Industry; Competition
The Company derives a significant portion of its revenues from fees based
upon room revenues at hotels franchised under one of its seven brands ("Choice
Brands"). As such, the Company's business is subject, directly or through its
franchisees, to the risks inherent in the lodging industry. These risks include,
among other things, adverse effects of general and local economic conditions,
changes in local market conditions, oversupply of hotel space, a reduction in
local demand for hotel rooms, changes in travel patterns, changes in
governmental regulations that influence or determine wages, prices or
construction costs, changes in interest rates, the availability of credit and
changes in real estate taxes and other operating expenses. Due in part to the
strong correlation between the lodging industry's performance and economic
conditions, the lodging industry is subject to cyclical changes in revenues and
profits. Downturns or prolonged adverse conditions in real estate or capital
markets or the economy as a whole that affect the Company's franchised hotels
will have a material impact on the Company.
The lodging industry is highly competitive. Competitive factors in the
industry include reasonableness of room rates, quality of accommodations, brand
recognition, service levels and convenience of locations. The Company's
franchised hotels generally operate in areas that contain numerous other
competitors. The Company believes that hotel operators choose lodging
franchisors based primarily on the perceived value and quality of each
franchisor's brand and services, and the extent to which affiliation with that
franchisor may increase the franchisee's reservations and profits. Demographic,
economic or other changes in markets may adversely affect the convenience or
desirability of the Choice Brands and, correspondingly, the number of hotels
franchised under the Choice Brands. The Company primarily franchises hotels that
operate in the limited-service segment of the domestic lodging industry, which
has experienced a significant amount of new hotel construction. There can be no
assurance that, in the markets in which the Company's franchised hotels operate,
competing hotels will not pose greater competition for guests than presently
exists, or that new hotels will not enter such locales. In addition, an excess
supply of hotel rooms may discourage potential franchisees from opening new
hotels, thereby limiting a source of growth of the franchise fees received by
the Company. Such excess supply of hotel rooms may also lead to lower room rates
at the Company's franchised hotels and, correspondingly, a reduction in the
franchise fees received by the Company.
Adverse Impact of External Factors
The Company's principal sources of revenues are franchise fees which can be
negatively impacted by inflation and other external factors. Increases in costs
due to inflation may not be able to be totally offset by increases in hotel room
rates. Moreover, significant increases in inflation could contribute to a
slowing of the national economy. Such a slowdown would likely result in reduced
travel by both business and leisure travelers, less demand for hotel rooms, a
reduction in room rates and fewer room reservations, negatively impacting the
Company's revenues. A weak economy could also reduce demand for new hotels,
negatively impacting the amount of franchise fees received by the Company.
The Company's revenues may also be negatively impacted by certain other
unpredictable external factors which would have an especially significant impact
on the travel and lodging industries. These factors include airline strikes,
gasoline price increases and severe weather, which would likely result in
reduced travel by both business and leisure travelers.
Additionally, the Company funds marketing and reservation activities with
marketing and reservation fees paid by its franchisees. Periodically, the
Company advances capital to these funds to support system development. Any
significant negative impact on the Company's revenue could also impact the
Company's ability to recover amounts due from the Company's marketing and
reservation funds.
Potential Conflict with Sunburst
In October 1997, the Company was spun off ("Spin-Off") from Sunburst
Hospitality Corporation ("Sunburst"). Sunburst is the Company's largest
franchisee.
The ongoing relationship between the Company and Sunburst resulting from
the agreements and arrangements entered into by the companies at the time of the
Spin-Off may give rise to a conflict of interest between the Company and
Sunburst. (These agreements and arrangements are described in the Company's
Proxy Statement, filed as Exhibit 99.01 to the Company's Annual Report on Form
10-K for the year ended 12/31/98, under the heading "Certain Relationships and
Related Transactions -- Relationship with Sunburst"). With respect to the
agreements between the parties, the potential exists for disagreements as to the
quality of the services provided by the parties and as to contract compliance.
Nevertheless, the Company believes that there will be sufficient mutuality of
interest between the two companies to result in a continued productive
relationship.
In addition, Stewart Bainum, Jr. serves as Chairman of the Boards of
Directors of both the Company and Sunburst. As a result of the Spin-Off, Mr.
Bainum, Jr., as well as certain other officers and directors of the Company and
of Sunburst, own shares and/or options or other rights to acquire shares in each
of the Company and Sunburst. Policies and procedures are followed by the Boards
of Directors of the Company and Sunburst to limit the involvement of the
overlapping directors (and, if appropriate, relevant officers of such companies)
in conflict situations, including requiring them to abstain from voting as
directors of either the company or Sunburst on certain matters which present a
conflict between the two companies.
Significant Receivables from Sunburst
In connection with the Spin-Off, Sunburst issued to the Company a note in
an aggregate principal amount of $115.0 million (the "Term Note"). The Term Note
matures on October 15, 2002, is subordinated to all senior indebtedness of
Sunburst and restricts Sunburst's ability to merge or consolidate or dispose of
all or substantially all of its assets. Simple interest accrues at an annual
rate of 11% through October 24, 2000. Effective October 25, 2000, interest shall
accrue at a rate of 11% per annum compounded daily, all of which is payable on
maturity. Total interest accrued on the Term Note through June 30, 1999 was
approximately $19.8 million.
Sunburst is a highly leveraged company whose business is subject to many of
the risks of the lodging industry outlined in this section. Sunburst, The
Company's largest franchisee, owned 87 hotels franchised under the Choice Brands
as of June 30, 1999. A material change in Sunburst's business would adversely
affect its ability to repay its obligations to the Company, which in turn could
have a material adverse effect on the Company.
Regulation
The Federal Trade Commission (the "FTC"), various states and certain
foreign jurisdictions (including France, the Province of Alberta, Canada and
Mexico) regulate the sale of franchises. The FTC requires franchisors to make
extensive disclosure to prospective franchisees but does not require
registration. A number of states in which the Company's franchisees operate
require registration or disclosure in connection with franchise offers and
sales. In addition, several states in which the Company's franchisees operate
have "franchise relationship laws" or "business opportunity laws" that limit the
ability of the franchisor to terminate franchise agreements or to withhold
consent to the renewal or transfer of these agreements. While the Company's
business has not been materially affected by such regulation, there can be no
assurance that this will continue or that future regulation or legislation will
not have such an effect.
Year 2000 Readiness
Along with virtually all companies and governmental agencies, the Company
is engaged in an ongoing effort to evaluate and remediate the Year 2000 computer
problem. While the Company is taking steps to address the issue with respect to
internal, mission-critical systems, the Company is dependent on third parties
such as franchisees and vendors.
Because the Company derives a significant portion of its revenues from fees
based upon room revenues from franchised hotels, prolonged business
interruptions from the Year 2000 problem at a substantial number of hotels would
have a material adverse impact on the Company, including loss of revenue,
substantial unanticipated costs and service interruptions. The Company, however,
cannot predict with certainty the Year 2000 readiness of the property-based
systems and facility systems at its franchised hotels because the decision-
making authority with respect to Year 2000 assessment and remediation, and the
incurrence of costs related thereto, rests with the owners of those hotels.
The Company and all of its franchised hotels depend on numerous
independent, external providers of products and services. These external
businesses include suppliers of electricity, natural gas, telephone service and
other public utilities; financial institutions and credit card companies; and
airlines, air traffic control systems, car rental companies, public
transportation, and gasoline station operators. The Company does not control
these external businesses and cannot ensure that they and their products and
services will be Year 2000 compliant or whether any of the assurances received
from others may prove later to be inaccurate or overly optimistic. The failure
by one or more critical external businesses (e.g., airlines, utilities or credit
card companies) to be ready for Year 2000 could cause disruptions in service or
cause potential hotel guests to postpone or cancel their travel plans or make
claims under the "100% satisfaction guarantee" program available at some of the
Choice Brand hotels.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
----------------------------------
(a) Exhibits
Exhibit 10.1 - Employment Agreement dated May 13, 1999 between Choice
Hotels International, Inc. and Steven T. Schultz
Exhibit 10.2 - Employment Agreement dated June 3, 1999 between Choice
Hotels International, Inc. and Joseph M. Squeri.
Exhibit 27.01 - Financial Data Schedule - June 30, 1999
(b) The following reports were filed pertaining to the period ended June 30,
1999.
Current Report on Form 8-K dated April 21, 1999.
13
<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: August 11, 1999 /s/ Charles A. Ledsinger, Jr.
------------------- -----------------------------
By: Charles A. Ledsinger, Jr.
President and Chief Executive Officer
14
<PAGE>
Exhibit 10.1
EMPLOYMENT AGREEMENT
--------------------
This Agreement ("Agreement") dated this __ day of April, 1999 between
Choice Hotels International, Inc. ("Employer"), a Delaware corporation with
principal offices at 10750 Columbia Pike, Silver Spring, Maryland 20901, and
Steven T. Schultz ("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, Franchise
Operations. 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 the first day that the Employee is
entered into the Employer's payroll system ("Effective Date") and shall
terminate five (5) years thereafter (the "Termination Date"). The Termination
Date shall be automatically 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 base salary shall commence on the Effective Date. Such salary
shall be reviewed by the Compensation Committee of the Board of
Directors of Employer on the next annual review of officers and each
annual review thereafter 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. For the
Employer's 1999 fiscal year, the Employee's bonus shall be calculated
on a pro rata basis from the Effective Date. In addition, to
compensate Employee for the loss of his bonus at LaQuinta Inns &
Suites, the Employer shall pay Employee an amount equal to 50% of
Employee's base salary earned during fiscal year 1999 while employed
at LaQuinta. The payment referred to in the preceding sentence shall
be paid at the same time that Employer's fiscal year 1999 bonuses are
paid.
(c) Restricted Stock. At the Effective Date, Employer shall issue to
----------------
Employee
<PAGE>
restricted Choice Hotels common stock ("Common Stock") in an amount
equal to $400,000 divided by the average of the high and low trading
price of the Common Stock on the Effective Date (or the next trading
day if there is no trading on the Effective Date) (the "Average
Trading Price"). The restrictions on such shares shall lapse upon
vesting, which shall occur in five equal annual installments beginning
one year from the Effective Date.
(d) Automobile. Employer shall provide Employee with an allowance for
----------
automobile expenses of $850 per month, subject to withholding tax,
beginning on the Effective Date.
(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 Choice Hotels Board as in effect from time to time.
At the February 2000 Compensation Committee meeting, Employee shall be
eligible to receive a pro rata award based on the number of days of
Employee's employment in fiscal year 1999. Such pro rata award shall
be calculated on the Employer's Stock Option Guidelines, subject to
the approval of the Compensation Committee. Additionally, the
Employee shall be granted, as of the Effective Date, options to
purchase 110,000 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(f). The remainder of the options shall be nonqualified
stock options. The options shall be exercisable at an amount per share
equal to the Average Trading Price and shall vest in five equal annual
installments beginning one year from the Effective Date.
(f) SERP. At the Commencement Date, Employee shall participate in the
----
Choice Hotels International, Inc. Supplemental Executive Retirement
Plan ("SERP").
(g) Other Benefits. Employee shall, when eligible, be entitled to
--------------
participate in all other fringe benefits 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
--------------------
afforded officers under the Relocation Policy of Employer, except that
in lieu of a home repurchase of Employee's principal residence, Choice
shall pay Employee a housing subsidy in recognition of the higher cost
of living in the Washington, D.C. metropolitan area in the amount of
$100,000, payable 50% upon the Effective Date and 50% upon the one
year anniversary of the Effective Date.
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 Confidential Information. Employee recognizes
----------------------------------------------
and acknowledges that information about Employer's and affiliates' present and
prospective clients, franchises, management contracts, acquisitions and
personnel, as they may exist from time to time, and to the extent it has not
been otherwise disclosed, is a valuable, special and unique asset of Employer's
business ("Confidential Information"). 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 Confidential Information. 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 person or entity, other than on behalf of Employer, 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.
"Affiliate" as used in this Agreement means a person or entity that is directly
or through one or more intermediates controlling, controlled by or under common
control with another person or entity.
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 or
overnight courier service to his residence in the case of Employee, or to its
principal office in the case of the Employer, return receipt requested. Such
notice shall be deemed given when delivered if personally delivered or when
actually received if sent certified or registered mail or overnight courier.
7. Elective Positions; Constructive Termination.
--------------------------------------------
(a) Nothing contained in this Agreement is intended to nor shall be
construed to
3
<PAGE>
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, 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.
(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, and Employee shall be entitled to
receive all forms of compensation referred to in Section 3 above, including
bonuses (calculated based only on the actual payout on the EPS portion of the
bonus as all Choice officers receive in a given year), but except ungranted
stock options (but including the continued vesting of previously granted
restricted stock and 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 offset and thereby
reduce its payment, the amount received by Employee from any other active
employment. As a condition to Employee receiving his compensation from
Employer, Employee agrees to permit verification of his employment records and
Federal 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 like amounts actually received by
Employee.
(c) For purposes of Sections 7 and 11, "Constructively Terminated" shall
mean (i) removal or termination of Employee other than in accordance with
Section 10, (ii) a decrease in Employee's compensation or benefits (unless a
similar decrease is imposed on all senior executive oficers), (iii) a
significant reduction in the scope of Employee's authority, position, duties or
responsibilities, (iv) a significant change in Choice's annual bonus program
which adversely affects Employee, or (v) 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 for 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 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;
4
<PAGE>
(b) For Cause, which means gross negligence, willful misconduct, willful
nonfeasance, 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 or conviction of a felony involving moral
turpitude, fraud or misappropriation of corporate funds. Employee shall be
entitled to fourteen (14) days advance written notice of termination,
except where the basis for termination constitutes wilful conduct on the
part of Employee involving dishonesty or bad faith, in which case the
termination shall be effective upon the sending of notice. Such written
notice shall specify in reasonable detail the grounds for Cause and
Employee shall have an opportunity to contest to the Board of Directors or
cure the basis for termination during the fourteen day period after written
notice.
(c) Subject to state and federal laws, if Employee is unable to perform
the essential functions of the services described herein, after reasonable
accommodation, 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 stock option and other 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.
(e) Upon voluntary resignation of Employee not due to Constructive
Termination, so long as Employee has given Employer thirty days prior
written notice of such resignation.
11. Severance.
---------
(a) If, within twelve months after a Change in Control, as defined in
Section 11(b), the Employer terminates or Constructively Terminates
Employee's employment other than in accordance with Section 10, the amount
of Employee's severance pay will be 200% of his base salary at the rate in
effect at the time of his termination or Constructive Termination, plus
200% of the amount of any full year bonus awarded to Employee in the prior
year (or the maximum target bonus if no bonus was awarded in the prior
year). If Employee's employment is terminated subject to this paragraph,
the Employer will provide the Employee and his family health insurance
coverage, including, if applicable, COBRA reimbursement, and will provide
Employee disability insurance coverage under the applicable Employer plans
for a period of 12 months following termination or until Employee starts
other full time employment, whichever is earlier.
(b) A Change in Control of the Employer shall occur upon the happening of
the earliest to occur of the following:
1. Any "person" as such term is used in Sections 13(d) and 14(d) of
the Securities Exchange Act of 1934, as amended (other than (i) the
Employer,
5
<PAGE>
(ii) any trustee or other fiduciary holding securities under an
employee benefit plan of the Employer, (iii) any corporations owned,
directly or indirectly, by the stockholders of the Employer in
substantially the same proportions as their ownership of stock, (iv)
Stewart Bainum, his wife, their lineal descendants and their spouses (so
long as they remain spouses) and the estate of any of the foregoing
persons, and any partnership, trust, corporation or other entity to the
extent shares of common stock (or their equivalent) are considered to be
beneficially owned by any of the persons or estates referred to in the
foregoing provisions of this subsection 11(b) or any transferee thereof, or
(v) the Baron Entities, unless such entities, in the aggregate,
beneficially own more than 19,715,000 shares of the Employer's common
stock) becomes the "beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act), directly or indirectly, of securities of the Employer
representing 33% or more of the combined voting power of the Employer's
then outstanding voting securities;
2. Individuals constituting the Board on the Effective Date and the
successors of such individuals ("Continuing Directors") cease to constitute
a majority of the Board. For this purpose, a director shall be a successor
if and only if he or she was nominated by a Board (or a Nominating
Committee thereof) on which individuals constituting the Board on the
Effective Date and their successors (determined by prior application of
this sentence) constituted a majority.
3. The stockholders of the Employer approve a plan of merger or
consolidation ("Combination") with any other corporation or legal person,
other than a Combination which would result in stockholders of the Employer
immediately prior to the Combination owning, immediately thereafter, more
than sixty-five percent (65%) of the combined voting power of either the
surviving entity or the entity owning directly or indirectly all of the
common stock, or its equivalent, of the surviving entity; provided,
however, that if stockholder approval is not required for such Combination,
the Change in Control shall occur upon the consummation of such
Combination.
4. The stockholders of the Employer approve a plan of complete
liquidation of the Employer or an agreement for the sale or disposition by
the Employer of all or substantially all of the Employer's stock and/or
assets, or accept a tender offer for substantially all of the Employer's
stock (or any transaction having a similar effect); provided, however, that
if stockholder approval is not required for such transaction, the Change in
Control shall occur upon consummation of such transaction.
(c) For purposes of Section 11(b), Baron Entities shall mean Baron Capital
Group, Inc., BAMCO, Inc., Baron Capital Management, Inc., Baron Asset Fund and
Ronald Baron.
12. Legal Fees. Employer shall reimburse the Employee for all reasonable
-----------
attorneys fees incurred in connection with the negotiation and execution of this
Agreement.
6
<PAGE>
13. Registration Rights. The Employer shall use its reasonable best
-------------------
efforts to register on Form S-8 the nonqualified options issued pursuant to
Section 3(g) of this Agreement. All costs in connection with such registration
shall be borne by the Employer.
14. 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.
15. Excise Taxes.
------------
(a) Anything in this Agreement to the contrary notwithstanding, if it
shall be determined that any payment or distribution to the Employee or for the
Employee's benefit (whether paid or payable or distributed or distributable)
pursuant to the terms of this Agreement or otherwise (the "Payment") would be
subject to the excise tax imposed by section 4999 of the Internal Revenue Code
(the "Excise Tax"), then the Employee shall be entitled to receive from Choice
an additional payment (the "Gross-Up Payment") in an amount such that the net
amount of the Payment and the Gross-Up Payment retained by the Employee after
the calculation and deduction of all Excise Taxes (including any interest or
penalties imposed with respect to such taxes) on the payment and all federal,
state and local income tax, employment tax and Excise Tax (including any
interest or penalties imposed with respect to such taxes) on the Gross-Up
Payment provided for in this Section, and taking into account any lost or
reduced tax deductions on account of the Gross-Up Payment, shall be equal to the
Payment;
(b) All determinations required to be made under this Section,
including whether and when the Gross-Up Payment is required and the amount of
such Gross-Up Payment, and the assumptions to be utilized in arriving at such
determinations shall be made by Accountants which Choice shall request provide
the Employee and Choice with detailed supporting calculations with respect to
such Gross-Up Payment at the time the Employee is entitled to receive the
Payment. For the purposes of this Section, the "Accountants" shall mean
Choice's independent certified public accountants. All fees and expenses of the
Accountants shall be borne solely by Choice. For the purposes of determining
whether any of the Payments will be subject to the Excise Tax and the amount of
such Excise Tax, such Payments will be treated as "parachute payments" within
the meaning of section 280G of the Code, and all "parachute payments" in excess
of the "base amount" (as defined under section 280G(b)(3) of the Code) shall be
treated as subject to the excise Tax, unless and except to the extent that in
the opinion of the Accountants such Payments (in whole or in part) either do not
constitute "parachute payments" or represent reasonable compensation for
services actually rendered (within the meaning of section 280G(b)(4) of the
Code) in excess of the "base amount," or such "parachute payments" are otherwise
not subject to such Excise Tax; for purposes of determining the amount of the
Gross-Up Payment the Employee shall be deemed to pay Federal income taxes at the
highest applicable marginal rate of Federal income taxation for the calendar
year in which
7
<PAGE>
the Gross-Up Payment is to be made and to pay any applicable state and local
income taxes at the highest applicable marginal rate of taxation for the
calendar year in which the Gross-Up Payment is to be made, net of the maximum
reduction in Federal income taxes which could be obtained from the deduction of
such state or local taxes if paid in such year (determined without regard to
limitations on deductions based upon the amount of the Employee's adjusted gross
income); and to have otherwise allowable deductions for Federal, state and local
income tax purposes at least equal to those disallowed because of the inclusion
of the Gross-Up Payment in the Employee's adjusted gross income. Any Gross-Up
Payment with respect to any Payment shall be paid by Choice at the time the
Employee is entitled to receive the Payment. Any determination by the
Accountants shall be binding upon Choice and the Employee. As a result of
uncertainty in the application of section 4999 of the Code at the time of the
initial determination by the Accountants hereunder, it is possible that the
Gross-Up Payment made will have been an amount less than Choice should have paid
pursuant to this Section (the "Underpayment"). In the event that Choice exhausts
its remedies and the Employee is required to make a payment of any Excise Tax,
the Underpayment shall be promptly paid by Choice to or for the Employee's
benefit.
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:
-----------------------------------
Steven T. Schultz
8
<PAGE>
EXHIBIT 10.2
EMPLOYMENT AGREEMENT
--------------------
This Agreement ("Agreement") dated this 3rd day of June, 1999 between
Choice Hotels International, Inc. ("Employer"), a Delaware corporation with
principal offices at 10750 Columbia Pike, Silver Spring, Maryland 20901, and
Joseph M. Squeri ("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 Senior Vice President, Chief
Financial Officer and Treasurer. 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 the date hereof ("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 Two Hundred Thousand Dollars ($200,000)
------
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. Effective January 1, 1999, Employee shall have
---------------
the opportunity to earn up to a maximum of Fifty Percent (50%) 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) Automobile. Employer shall provide Employee with an allowance for
----------
automobile expenses of $850 per month subject to withholding of usual
taxes.
(d) 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, as of the Effective Date,
options to purchase 30,000 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(d). 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
<PAGE>
high and low trading price on the Effective Date and shall vest in
five equal annual installments beginning one year from the Effective
Date.
(e) 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.
4. Extent of Services. Employee shall devote his full professional
------------------
time, attention, 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 or
overnight courier service 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 when actually received if sent
certified or registered mail or overnight courier.
2
<PAGE>
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, 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.
(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 all forms of
compensation referred to in Section 3 above, including, without
limitation, bonuses (calculated based only on the actual payout on the
EPS portion of the bonus as all Choice officers receive in a given
year) and 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 amount received by Employee from any other active
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 and 11, "Constructively
Terminated" shall mean (i) removal or termination of Employee other
than in accordance with Section 10, (ii) a decrease in Employee's
compensation or benefits (unless a similar decrease is imposed on all
senior executive officers), (iii) a significant reduction in the scope
of Employee's authority, position, duties or responsibilities, (iv) a
significant change in Choice's annual bonus program which adversely
affects Employee, or (v) 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
3
<PAGE>
reasonable detail the grounds for 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 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 gross negligence, willful misconduct, willful
nonfeasance, 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 or conviction of a felony involving moral
turpitude, fraud or misappropriation of corporate funds. Employee shall be
entitled to fourteen (14) days advance written notice of termination,
except where the basis for termination constitutes wilful conduct on the
part of Employee involving dishonesty or bad faith, in which case the
termination shall be effective upon the sending of notice. Such written
notice shall specify in reasonable detail the grounds for Cause and
Employee shall have an opportunity to contest to the Board of Directors or
cure the basis for termination during the fourteen day period after written
notice.
(c) Subject to state and federal laws, if Employee is unable to perform
the essential functions of the services described herein, after reasonable
accommodation, 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 stock options and other 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. Severance.
---------
(a) If, within twelve months after a Change in Control, as defined in
Section 11(b), the Employer terminates or Constructively Terminates
Employee's employment other than in accordance with Section 10, the amount
of Employee's severance pay will be 200% of his base salary at the rate in
effect at the time of his termination or Constructive
4
<PAGE>
Termination, plus 200% of the amount of any full year bonus awarded to
Employee in the prior year (or the maximum target bonus if no bonus was
awarded in the prior year). If Employee's employment is terminated subject
to this paragraph, the Employer will provide the Employee and his family
health insurance coverage, including, if applicable, COBRA reimbursement,
and will provide Employee disability insurance coverage under the
applicable Employer plans for a period of 12 months following termination
or until Employee starts other full time employment, whichever is earlier.
(b) A Change in Control of the Employer shall occur upon the happening of
the earliest to occur of the following:
1. Any "person" as such term is used in Sections 13(d) and 14(d) of
the Securities Exchange Act of 1934, as amended (other than (i) the
Employer, (ii) any trustee or other fiduciary holding securities under an
employee benefit plan of the Employer, (iii) any corporations owned,
directly or indirectly, by the stockholders of the Employer in
substantially the same proportions as their ownership of stock, (iv)
Stewart Bainum, his wife, their lineal descendants and their spouses (so
long as they remain spouses) and the estate of any of the foregoing
persons, and any partnership, trust, corporation or other entity to the
extent shares of common stock (or their equivalent) are considered to be
beneficially owned by any of the persons or estates referred to in the
foregoing provisions of this subsection 11(b) or any transferee thereof, or
(v) the Baron Entities, unless such entities, in the aggregate,
beneficially own more than 19,715,000 shares of the Employer's common
stock) becomes the "beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act), directly or indirectly, of securities of the Employer
representing 33% or more of the combined voting power of the Employer's
then outstanding voting securities;
2. Individuals constituting the Board on the Effective Date and the
successors of such individuals ("Continuing Directors") cease to constitute
a majority of the Board. For this purpose, a director shall be a successor
if and only if he or she was nominated by a Board (or a Nominating
Committee thereof) on which individuals constituting the Board on the
Effective Date and their successors (determined by prior application of
this sentence) constituted a majority.
3. The stockholders of the Employer approve a plan of merger or
consolidation ("Combination") with any other corporation or legal person,
other than a Combination which would result in stockholders of the Employer
immediately prior to the Combination owning, immediately thereafter, more
than sixty-five percent (65%) of the combined voting power of either the
surviving entity or the entity owning directly or indirectly all of the
common stock, or its equivalent, of the surviving entity; provided,
however, that if stockholder approval is not required for such Combination,
the Change in Control shall occur upon the consummation of such
Combination.
5
<PAGE>
4. The stockholders of the Employer approve a plan of complete
liquidation of the Employer or an agreement for the sale or disposition by
the Employer of all or substantially all of the Employer's stock and/or
assets, or accept a tender offer for substantially all of the Employer's
stock (or any transaction having a similar effect); provided, however, that
if stockholder approval is not required for such transaction, the Change in
Control shall occur upon consummation of such transaction.
(c) For purposes of Section 11(b), Baron Entities shall mean Baron Capital
Group, Inc., BAMCO, Inc., Baron Capital Management, Inc., Baron Asset Fund
and Ronald Baron.
12. Excise Taxes.
------------
(a) Anything in this Agreement to the contrary notwithstanding, if it
shall be determined that any payment or distribution to the Employee or for the
Employee's benefit (whether paid or payable or distributed or distributable)
pursuant to the terms of this Agreement or otherwise (the "Payment") would be
subject to the excise tax imposed by section 4999 of the Internal Revenue Code
(the "Excise Tax"), then the Employee shall be entitled to receive from Choice
an additional payment (the "Gross-Up Payment") in an amount such that the net
amount of the Payment and the Gross-Up Payment retained by the Employee after
the calculation and deduction of all Excise Taxes (including any interest or
penalties imposed with respect to such taxes) on the payment and all federal,
state and local income tax, employment tax and Excise Tax (including any
interest or penalties imposed with respect to such taxes) on the Gross-Up
Payment provided for in this Section, and taking into account any lost or
reduced tax deductions on account of the Gross-Up Payment, shall be equal to the
Payment;
(b) All determinations required to be made under this Section,
including whether and when the Gross-Up Payment is required and the amount of
such Gross-Up Payment, and the assumptions to be utilized in arriving at such
determinations shall be made by Accountants which Choice shall request provide
the Employee and Choice with detailed supporting calculations with respect to
such Gross-Up Payment at the time the Employee is entitled to receive the
Payment. For the purposes of this Section, the "Accountants" shall mean
Choice's independent certified public accountants. All fees and expenses of the
Accountants shall be borne solely by Choice. For the purposes of determining
whether any of the Payments will be subject to the Excise Tax and the amount of
such Excise Tax, such Payments will be treated as "parachute payments" within
the meaning of section 280G of the Code, and all "parachute payments" in excess
of the "base amount" (as defined under section 280G(b)(3) of the Code) shall be
treated as subject to the excise Tax, unless and except to the extent that in
the opinion of the Accountants such Payments (in whole or in part) either do not
constitute "parachute payments" or represent reasonable compensation for
services actually rendered (within the meaning of section 280G(b)(4) of the
Code) in excess of the "base amount," or such "parachute payments" are otherwise
not subject to such Excise Tax; for purposes of determining the amount of the
Gross-Up Payment the Employee shall be deemed to pay Federal income taxes
6
<PAGE>
at the highest applicable marginal rate of Federal income taxation for the
calendar year in which the Gross-Up Payment is to be made and to pay any
applicable state and local income taxes at the highest applicable marginal rate
of taxation for the calendar year in which the Gross-Up Payment is to be made,
net of the maximum reduction in Federal income taxes which could be obtained
from the deduction of such state or local taxes if paid in such year (determined
without regard to limitations on deductions based upon the amount of the
Employee's adjusted gross income); and to have otherwise allowable deductions
for Federal, state and local income tax purposes at least equal to those
disallowed because of the inclusion of the Gross-Up Payment in the Employee's
adjusted gross income. Any Gross-Up Payment with respect to any Payment shall be
paid by Choice at the time the Employee is entitled to receive the Payment. Any
determination by the Accountants shall be binding upon Choice and the Employee.
As a result of uncertainty in the application of section 4999 of the Code at the
time of the initial determination by the Accountants hereunder, it is possible
that the Gross-Up Payment made will have been an amount less than Choice should
have paid pursuant to this Section (the "Underpayment"). In the event that
Choice exhausts its remedies and the Employee is required to make a payment of
any Excise Tax, the Underpayment shall be promptly paid by Choice to or for the
Employee's benefit.
13. 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.
IN WITNESS WHEREOF, the parties have executed this Agreement on the date
first set forth above.
Employer:
CHOICE HOTELS INTERNATIONAL, INC.
By: ______________________________
Michael DeSantis
Senior Vice President
Employee:
__________________________________
Joseph M. Squeri
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> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 5,954
<SECURITIES> 0
<RECEIVABLES> 39,648
<ALLOWANCES> 9,020
<INVENTORY> 0
<CURRENT-ASSETS> 40,549
<PP&E> 54,915
<DEPRECIATION> 16,327
<TOTAL-ASSETS> 445,367
<CURRENT-LIABILITIES> 66,978
<BONDS> 282,590
0
0
<COMMON> 614
<OTHER-SE> 52,091
<TOTAL-LIABILITY-AND-EQUITY> 445,367
<SALES> 0
<TOTAL-REVENUES> 70,568
<CGS> 0
<TOTAL-COSTS> 30,202
<OTHER-EXPENSES> (1,187)
<LOSS-PROVISION> 408
<INTEREST-EXPENSE> 9,727
<INCOME-PRETAX> 41,553
<INCOME-TAX> 16,744
<INCOME-CONTINUING> 24,809
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 24,809
<EPS-BASIC> 0.45
<EPS-DILUTED> 0.44
</TABLE>
