-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, J69cTWGygkS/hOJumgYQCDzXQ5sezOKdARUWiOiGo/4i+OMqmZw+Xf+/XdWW+ZNt 38KcdHY6sKj0+OCIzf2oQA== 0000928385-98-000064.txt : 19980115 0000928385-98-000064.hdr.sgml : 19980115 ACCESSION NUMBER: 0000928385-98-000064 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19971130 FILED AS OF DATE: 19980114 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CHOICE HOTELS INTERNATIONAL INC /DE CENTRAL INDEX KEY: 0001046311 STANDARD INDUSTRIAL CLASSIFICATION: HOTELS & MOTELS [7011] IRS NUMBER: 521209792 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-13393 FILM NUMBER: 98507015 BUSINESS ADDRESS: STREET 1: 10750 COLUMBIA PIKE CITY: SILVER SPRING STATE: MD ZIP: 20901 BUSINESS PHONE: 3019795000 MAIL ADDRESS: STREET 1: 10750 COLUMBIA PIKE CITY: SILVER SPRING STATE: MD ZIP: 20901 FORMER COMPANY: FORMER CONFORMED NAME: CHOICE HOTELS FRANCHISING INC DATE OF NAME CHANGE: 19971118 FORMER COMPANY: FORMER CONFORMED NAME: CHOICE HOTELS INTERNATIONAL INC/ DATE OF NAME CHANGE: 19971022 10-Q 1 FORM 10-Q 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 ---------- ================================================================================ 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 PART I. FINANCIAL INFORMATION CHOICE HOTELS INTERNATIONAL, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
NOVEMBER 30, MAY 31, 1997 1997 ASSETS (UNAUDITED) ------------- ---------- 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 ======== ========
The accompanying notes are an integral part of these Consolidated Balance Sheets. CHOICE HOTELS INTERNATIONAL, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
NOVEMBER 30, MAY 31, 1997 1997 (UNAUDITED) ------------ ------------ 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 ======== ========
The accompanying notes are an integral part of these Consolidated Balance Sheets. CHOICE HOTELS INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED NOVEMBER 30, NOVEMBER 30, -------------------------- ------------------------ 1997 1996 1997 1996 ------------ ------------ ----------- ----------- 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 ======= ======= ======== ========
The accompanying notes are an integral part of these Consolidated Statements of Income. CHOICE HOTELS INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED, IN THOUSANDS)
SIX MONTHS ENDED --------------------- NOVEMBER 30, 1997 1996 (UNAUDITED) --------- --------- 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 ========= ========
The accompanying notes are an integral part of these Consolidated Statements of Cash Flows. 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. 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 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%. 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. Total net franchise revenues are computed as follows:
(In millions) November 30, 1997 November 30, 1996 ------------------ ------------------ 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 ====== ======
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 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. Total net franchise revenues are computed as follows:
(In millions) November 30, 1997 November 30, 1996 ------------------ ------------------ 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 ====== ======
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. 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. 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. 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 EX-10.1 2 EXHIBIT 10.1 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 ---------- 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 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 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 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 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 EX-10.2 3 EXHIBIT 10.2 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 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 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 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 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 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 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 EX-27 4 FINANCIAL DATA SCHEDULE
5 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. 1,000 6-MOS MAY-31-1998 JUN-01-1997 NOV-30-1997 4,845 0 37,516 7,322 0 54,605 66,481 20,238 375,693 49,935 278,389 0 0 598 45,794 375,693 0 155,663 0 109,136 0 0 5,095 41,432 17,058 24,374 0 0 0 24,374 0 0
-----END PRIVACY-ENHANCED MESSAGE-----